“In the last seven deals I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars . . . I am not a destroyer of companies. I am a liberator of them!”[1] Immortalized by Oliver Stone’s 1987 film Wall Street, the words of financier Gordon Gekko in essence summarized the duties that corporate directors owe to their corporations.[2] As fiduciaries, corporate directors are obligated to act in the best interest of the corporation in conducting its business and affairs.[3] In many regards, maximizing profit for the corporation’s shareholders satisfies this obligation.[4] However, in the context of corporate mergers and acquisitions (“M&A”) directors’ business decisions can be subject to enhanced scrutiny based on their fiduciary duties under both statutory and common law.[5] As a result of this enhanced pressure and the increased volume of corporate M&A transactions in recent years, shareholder-initiated litigation against corporate directors is now highly prevalent in the M&A arena.[6]
Corporate Fiduciary Duties
In general, a corporation’s directors are authorized to conduct the business and affairs of the corporation, and their decisions are presumed to be appropriate under the “Business Judgment Rule.”[7] The Business Judgment Rule prevents a court from second-guessing a corporate director’s judgment with respect to business decisions (including the decision to pursue or accept a proposed merger), and assumes that “the directors acted on an informed basis and in the good-faith belief that the action taken was in the best interest of the company.”[8]
Notwithstanding the assumptions of the Business Judgment Rule, corporate directors are subject to two central fiduciary duties: (i) the duty of care, and (ii) the duty of loyalty.[9] The duty of care mandates that a director use reasonable care and act in the best interest of the corporation when conducting a transaction, and that his or her conduct is exercised in good faith.[10] The duty of loyalty concerns conflicts of interest with respect to a corporate transaction, which occurs when a director may have a personal interest in the occurrence or avoidance of a particular transaction or merger.[11] As noted above, the expectations of directors in meeting these duties can be enhanced in the M&A context.[12]
Mergers and Acquisitions, the Revlon Doctrine, and Defensive Measures
With respect to M&A transactions, questions of fiduciary duty depend on the particular transaction at issue.[13] If a corporation seeks to acquire another company, the directors of the acquirer will be expected, among other things, to obtain the best purchase price for the acquired company.[14] If a company is being acquired by another corporation, the directors of the acquired company will be expected to maximize profits for their shareholders.[15]
Under Delaware law, these expectations are incorporated into directors’ fiduciary duties through the Revlon Doctrine, which stemmed from the seminal decision Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.[16] The Revlon Doctrine provides that once a corporation’s directors decide to sell the company through a merger, the directors “must consider all available alternatives” to the sale, and deliver maximum value to its shareholders if the company is sold.[17]
Another important development in M&A case law pertains to the duties of a company’s board when resisting a hostile takeover.[18] Under Unocal v. Mesa Petroleum,[19] directors are permitted to consider preserving corporate policy and continuing the effectiveness of business operations in deciding to resist a merger, even if a sale would be profitable for shareholders.[20] Nevertheless, the board remains subject to heightened duties of the Revlon Doctrine once a decision to sell has been made.[21] The emphasis on heightened fiduciary duties seen in the Revlon Doctrine and Unocal remains prevalent in the M&A context today, and is illustrated in the recent proposed mergers between (i) Qualcomm and Broadcom, and (ii) Kindred Healthcare and Humana, which are discussed below.[22]
Qualcomm and Broadcom
Before it was halted through executive order, the potential merger between Qualcomm and Broadcom presented significant questions of fiduciary duty as Qualcomm attempted to resist the merger.[23] Broadcom, a Singapore semiconductor company that produces chips and computer components for smartphones and laptops, sought to acquire Qualcomm, a semiconductor company based in San Diego.[24] Because Qualcomm desired to remain an independent company, it responded defensively to the hostile takeover by acquiring a third company, NXP Semiconductors, which made an acquisition of Qualcomm more costly.[25]
Qualcomm’s initial offer for NXP was $110 per share, a figure Qualcomm characterized as a “full and fair price.”[26] However, in the face of mounting pressure from Broadcom, Qualcomm subsequently raised its offer to $127.50 per share, which Broadcom attacked as a breach of Qualcomm’s fiduciary duty: “Broadcom believes the price increase demonstrates the Qualcomm board’s disregard for its fiduciary duty to maximize value for Qualcomm stockholders.”[27] The basis for Broadcom’s allegation was that Qualcomm was willing to reduce value for its shareholders in order to resist a potential merger.[28] Although the deal was blocked, it raised questions of whether the acquisition price of NXP increased value for Qualcomm shareholders, or proved a derogation of the Qualcomm directors’ fiduciary duties in resisting the potential merger.[29]
Kindred Healthcare and Humana
The board of Kindred Healthcare, which is set to be acquired by Humana, has also come under fire for alleged breaches of fiduciary duty, and the proposed acquisition has resulted in a lawsuit brought by a major Kindred shareholder, New York private equity firm Brigade Capital.[30] Like the allegations by Broadcom discussed above, the lawsuit alleges that in deciding to acquiesce to the merger, Kindred’s board has undervalued the company to the detriment of Kindred shareholders.[31] Specifically, Brigade alleges that the Kindred board’s decision to decrease a previously projected value of the company provides strong evidence that the board is self-interested, and suggests the directors may personally benefit from the merger.[32] This case, like the now-defunct Broadcom merger, depicts the heightened scrutiny that corporate directors can face when deciding to enter an M&A transaction.[33]
[1] Wall Street (1987), IMDB, https:// www.imdb.com/title/tt0094291/, (Last visited Mar. 24, 2018).
[2] See id.
[3] Laura Anthony, Mergers and Acquisitions: Board of Director Responsibilities, Lawcast (Oct. 6, 2015), http://lawcast.com/2015/10/06/mergers-and-acquisitions-board-of-director-responsibilities/.
[4] See id.
[5] See id.
[6] See Holly J. Gregory, Partner at Sidley Austin LLP, The Board’s Role in M&A Transactions, Practicallaw.com (May 2014), at 32-33, https://www.sidley.com/-/media/files/newsinsights/publications/2014/05/the-boards-role-in-ma-transactions/files/view-article/fileattachment/the-boards-role-in-ma-transactions–may-2014.pdf.
[7] See Anthony, supra, note 3.
[8] See Gregory, supra, note 6.
[9] See id.
[10] See Anthony, supra, note 3.
[11] See Alexanra R. Lajoux, Role of the Board in M&A, Harv. L. F. on Corp. Governance and Fin. Reg. (Sept. 7, 2015), https://corpgov.law.harvard.edu/2015/09/07/role-of-the-board-in-ma/.
[12] See Anthony, supra, note 3.
[13] See Anthony, supra, note 3.
[14] Id.
[15] Id.
[16] 506 A.2d 173 (Del. 1986); See Anthony, supra, note 3.
[17] See Anthony, supra, note 3.
[18] Id.
[19] 493 A.2d 946 (Del. 1985).
[20] See Anthony, supra, note 3.
[21] Id.
[22] See sources cited infra notes 23, 30.
[23] See Cecilia Kang and Alan Rappeport, Trump Blocks Broadcom’s Bid for Qualcomm, N.Y. Times (Mar. 12, 2018), https://www.nytimes.com/2018/03/12/technology/trump-broadcom-qualcomm-merger.html. ; See Kevin Morris, Broadcom, Qualcomm and Call of (Fiduciary) Duty, Electronic Engineering J. (Feb. 20, 2018), https://www.eejournal.com/article/broadcom-qualcomm-and-call-of-fiduciary-duty/.
[24] See Natt Garun, What is Broadcom, and Why is It Trying to Buy Qualcomm?, The Verge (Nov. 6, 2017), https://www.theverge.com/2017/11/6/16612154/what-is-broadcom-qualcomm-acquisition-offer.
[25] See Mike Freeman, Qualcomm Raises Its Bid for NXP to $43 Billion; Broadcom Slams the Move, L.A. Times (Feb. 20, 2018), http://www.latimes.com/business/technology/la-fi-tn-qualcomm-nxp-broadcom-20180220-story.html.
[26] See Broadcom is Evaluating Its Options Following Qualcomm’s Transfer of Value from Qualcomm Stockholders to NXP Stockholders, Cision PR Newswire (Feb. 20, 2018), https://www.prnewswire.com/news-releases/broadcom-is-evaluating-its-options-following-qualcomms-transfer-of-value-from-qualcomm-stockholders-to-nxp-stockholders-300601165.html (internal quotations omitted).
[27] Id.
[28] See Freeman, supra, note 25.
[29] Id.
[30] See Amy Baxter, Major Kindred Shareholder Brigade Capital Sues to Block Acquisitions, Home Health Care News (Mar. 13, 2018), https://homehealthcarenews.com/2018/03/major-kindred-shareholder-brigade-capital-sues-to-block-acquisition/.
[31] See Brigade Continues to Oppose Proposed Acquisition of Kindred Healthcare by Humana, TPG Capital and Welsh, Carson, Anderson & Stowe, Business Wire (Mar. 19, 2018), https://www.businesswire.com/news/home/20180319005881/en/Brigade-Continues-Oppose-Proposed-Acquisition-Kindred-Healthcare.
[32] Id.
[33] See Baxter, supra, note 30.
