A Fully Informed and Disinterested Stockholder Vote Cleanses Transactions Tainted by Board Conflicts

Recently, in In re Merge Healthcare Inc., C.A. No. 11388-VCG, 2017 WL 395981 (Del. Ch. Jan. 30, 2017), the Delaware Court of Chancery dismissed a complaint, which alleged that the board of directors of Merge Healthcare, Inc. breached its fiduciary duties in connection with its approval of a merger with IBM, because a majority of the disinterested, fully informed, and uncoerced stockholders of Merge approved the acquisition. The decision is the latest in a series of opinions from the court in the wake of the Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) and confirms that, where a majority of a corporation’s fully informed, disinterested, and uncoerced stockholders approve a transaction other than with a controlling stockholder, the business judgment rule will apply absent waste even if the transaction was approved by a conflicted board majority. The decision also helps to clarify some uncertainty created by various decisions of the Court of Chancery as to the effect of Corwin on interested director transactions.
Corwin and Interested Director Transactions
In Corwin, the Delaware Supreme Court held that “when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” Because of Corwin’s literal holding, the decision created some uncertainty over whether all transactions subject to the entire fairness standard of review were incapable of being cleansed by a fully informed, uncoerced, and disinterested stockholder vote or whether just controlling stockholder transactions were not capable of being cleansed. Historically, transactions tainted by a conflicted board majority, but not a controlling stockholder, were reviewed under the entire fairness standard of review unless the transaction had been approved by a fully informed and disinterested stockholder vote or a special committee of disinterested and independent directors. The effect of a single cleansing mechanism on controlling stockholder transactions was merely to shift the burden of proof of entire fairness from defendants to plaintiffs because of the inherent coercion deemed present when a controller either stands on both sides of the transaction or extracts personal benefits from the transaction. Thus, there was some reason to believe that not all transactions subject to the entire fairness standard were incapable of being cleansed under Corwin—just transactions subject to the entire fairness standard ab initio because of a controlling stockholder.
Corwin suggested that fully informed, uncoerced, and disinterested stockholder approval of a conflicted board decision should be given cleansing effect, but the issue was not squarely before the court. Specifically, the court did not consider allegations that the entire fairness standard applied to its review of a merger because of a conflicted board majority, but rather whether entire fairness applied to the court’s review because of a controlling stockholder. Nevertheless, the court’s dictum was instructive. The court noted that “[f]or sound policy reasons, Delaware corporate law