OM Group, Inc. Stockholder Litigation Dismissed

In In re OM Group, Inc., No. 11216-VCS, 2016 BL 339835 (Del. Ch. Oct. 12, 2016), the Court of Chancery of Delaware granted former members of OM Group, Inc. (“OM” or the “Company”) board of directors’ (“Defendants”) Motion to Dismiss former OM stockholders’ (“Plaintiffs”) Consolidated Amended Certified Class Action Complaint (the “Complaint”) for failure to state a claim on which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).

On behalf of the Company, Plaintiffs sought declarations that the individual former directors of OM breached their fiduciary duties by entering into a merger and an award of post-closing “recessionary damages.” In the Complaint, Plaintiffs alleged Defendants rushed to sell OM to avoid a prolonged proxy fight and wrapped its business units in one package ignoring the Company’s financial advisors’ opinion that separate sales would yield maximum value.

According to the complaint, OM, a Delaware corporation, was a global chemical and technology conglomerate comprised of five diverse business units. After ten years of engaging in a growth strategy favoring acquisitions, OM’s lackluster performance became the focus of several shareholder proposals. Soon thereafter, potential strategic purchasers began expressing interest in OM’s various business lines.

After receiving an indication of acquisition interest, the Company limited its outreach efforts “to financial buyers reasonably likely to consider a transaction involving a sale of the entire company,” despite having been advised that its ability to maximize value through a merger or sale of the whole company would be limited. Prior to approving an offer to acquire all of OM’s outstanding shares, the OM Board reached an agreement with an activist investor. In particular, the Company agreed to include two of the investor’s nominees in the Company’s proxy statement and to expand the Board by one seat to be filled by an additional stockholder nominee. The investor agreed to abide by standstill provisions, which prohibited, among other things, participation in merger proposals or communications in opposition to any merger. The OM Board then held a special stockholder meeting to vote on a merger agreement, resulting in stockholder approval by a margin of 10:1.

Plaintiffs alleged the Defendants acted unreasonably in approving the transaction and breached their fiduciary duties under Revlon. First, Plaintiffs asserted Defendants “deliberately shut out strategic acquirors from the process in favor of a quick deal” to avoid a proxy fight. Second, Plaintiffs asserted Defendants failed to manage conflicts of interest among its investment bankers. Lastly, Plaintiffs asserted Defendants allowed a less-than-reasonable merger price to appear fair to stockholders by including manipulated projections and misleading, incomplete public disclosures in the Company’s proxy materials, which resulted in overwhelming shareholder support to approve the merger. Defendants moved to dismiss on the grounds that the irrebuttable business judgment rule applied because the majority of fully informed, uncoerced, disinterested stockholders voted in favor of the merger.

When considering a breach of fiduciary duties claim in regard to a board of directors’ course of conduct in negotiating and approving a corporate transaction, the court must first determine the applicable standard of review. Where a sale is inevitable, the enhanced Revlon scrutiny applies, and the court considers whether the directors “acted reasonably to pursue the transaction that offered the best value reasonably available to the [company’s] stockholders.” Where the disinterested stockholders approve the transaction through a fully-informed, uncoerced vote, however, the board’s decision to approve the transaction is “insulate[d] . . . from all attacks other than on grounds of waste.” Under the business judgment rule, the entire fairness standard applies. To hold directors liable under this standard, a plaintiff must “(1) demonstrate that the transaction amounted to corporate waste; or (2) demonstrate that the stockholder vote was uninformed or coerced.” A successful challenge to the soundness of the shareholder vote requires showing the directors either omitted material information or made material misrepresentations to stockholders regarding the transaction. For a fact to be considered material, it must present a “substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

The court reasoned the Company’s disclosures with respect to a competing bid, an alleged conflict of interest, and the engagement of a second financial advisor, were adequate. First, the court opined the disclosures regarding a competing proposal obtained during the Go-Shop Period adequately provided stockholders with the necessary information to conclude the “Board, in good faith, had determined that the offer would not be more favorable to stockholders.” Next, the court determined Plaintiffs failed to allege any facts plausibly suggesting an actual conflict of interest existed. Thus, omissions regarding the potential conflict could not be deemed material. Finally, with respect to the financial advisor’s engagement, the court concluded the stockholders were fully informed because the terms and circumstances of that engagement were disclosed in the proxy materials.

Accordingly, because the majority of the disinterested stockholders were uncoerced and fully informed and approved the merger, the court held Plaintiffs failed to overcome the presumption of the business judgment rule. As such, the court granted Defendants’ Motion to Dismiss the Complaint.

Primary materials for this case may be found on the DU Corporate Governance website.