929 A.2d 786 (Del. Ch. 2007)
In 1999, Vernon Mercier acquired 100 shares of Inter-Tel, Inc., a company founded over thirty-five years earlier by Steven G. Mihaylo, who continued to own 19% of its shares as its largest stockholder.1 Inter-Tel provides IP and converged voice, video and data business communications platforms and related services.2 Since 2005, Inter-Tel had received expressions of interest from potential acquirors, including Mitel Networks Corporation and Francisco Partners, amid internal board conflicts involving Mihaylo.3
Mihaylo resigned as CEO in February 2006 and as a director in March 2006.4 A Special Committee of eight independent directors, chaired by Alexander Cappello, was formed to consider strategic alternatives.5 After negotiations, the Special Committee recommended and the board approved a merger agreement with Mitel on April 26, 2007, for $25.60 per share in cash, with Mihaylo dissenting.6 The agreement included a no-shop with fiduciary out.7
On May 29, 2007, Inter-Tel noticed a special meeting for June 29, 2007, with a record date of May 25, to vote on the Mitel merger.8 Mihaylo opposed the merger and promoted a leveraged recapitalization proposal.9 Institutional Shareholder Services recommended a no vote on June 19.10 By June 26, over 49.6% of shares had voted against the merger, and it was clear the vote would fail if held as scheduled.11
On the morning of June 29, the Special Committee postponed the meeting, announcing a new date of August 2 with a July 9 record date.12 The committee cited the need for stockholders to consider second quarter results, changes in debt markets, Mihaylo's proxy materials, and Mitel's refusal to increase its bid.13 Inter-Tel announced preliminary second quarter results on July 6 showing shortfalls, and revised projections on July 23.14 ISS changed its recommendation to yes on July 24.15 Mihaylo withdrew his recap proposal on July 25.16
On August 2, 2007, over 62% of outstanding shares voted in favor of the merger.17 Mercier, as plaintiff in a class action, sought to preliminarily enjoin the consummation of the merger, alleging improper motivations by the Special Committee in rescheduling the vote.18
Whether the Inter-Tel Special Committee breached its fiduciary duties by postponing the June 29, 2007 special meeting to vote on the Mitel merger and adopting a new record date?19
Well-motivated, independent directors may reschedule an imminent special meeting at which stockholders are to consider an all-cash, all-shares offer when the directors believe the merger is in the best interests of the stockholders, know that if the meeting proceeds the stockholders will vote down the merger, reasonably fear that in the wake of the merger's rejection the acquiror will walk away and the corporation's stock price will plummet, want more time to communicate with and provide information to the stockholders before the stockholders vote on the merger and risk the irrevocable loss of the pending offer, and reschedule the meeting within a reasonable time period and do not preclude or coerce the stockholders from freely deciding to reject the merger.20
No. The Special Committee of eight independent directors chaired by Alexander Cappello, after receiving indications that over 49.6 percent of shares had voted against the merger by June 26 and knowing the vote would fail if held as scheduled, postponed the June 29 meeting on the morning it was to occur and set a new August 2 date with a July 9 record date.21 The committee acted because it believed the $25.60 Mitel offer was in the stockholders' best interests and would be lost if rejected, as Mitel had refused to increase its bid and Francisco Partners showed no interest in doing so.22 The short delay allowed consideration of second-quarter results showing shortfalls, changes in debt markets, and Mihaylo's finalized proxy materials, after which over 62 percent of outstanding shares approved the merger on August 2 without any preclusion or coercion of the vote.23
The Special Committee did not breach its fiduciary duties by postponing the meeting and adopting a new record date.24
Whether the Blasius compelling justification standard or a Unocal-based reasonableness standard governs review of the board's decision to reschedule the merger vote?25
Director action that affects a stockholder vote touching on corporate control is reviewed under a Unocal-based reasonableness standard. This requires directors to identify a legitimate corporate objective served by their actions, show that their motivations were proper and not selfish, and demonstrate that their actions were reasonable in relation to that objective and did not preclude stockholders from exercising their right to vote or coerce them into voting a particular way.26
Yes. A Unocal-based reasonableness standard governs review of the board's decision to reschedule the merger vote.27 Although the plaintiff urged application of the Blasius compelling justification standard on the ground that the Special Committee acted for the primary purpose of thwarting the opportunity for stockholders to express opposition on June 29, the court reformulated the Blasius standard to align with Unocal for cases involving votes on mergers, recognizing the substantial overlap between the standards and the need for a workable test that preserves skepticism toward inequitable manipulation while allowing directors to pursue stockholder approval through legal means such as adjusting meeting dates.
A Unocal-based reasonableness standard governs review of the board's decision to reschedule the merger vote.
Whether the Special Committee acted with a proper purpose and without precluding or coercing stockholder choice when it postponed the vote to permit additional deliberation?28
Directors fearing that stockholders are about to make an unwise decision that poses the threat that the stockholders will irrevocably lose a unique opportunity to receive a premium for their shares have a compelling justification—the protection of their stockholders' financial best interests—for a short postponement in the merger voting process to allow more time for deliberation, provided the action is not preclusive or coercive.29
Yes. The Special Committee acted with the proper purpose of protecting stockholders' financial best interests when it postponed the vote because it knew the merger would be defeated on June 29 and reasonably feared Mitel would walk away, and the short delay to August 2 with a new record date did not preclude or coerce stockholder choice.30 Stockholders who held shares on both record dates remained free to vote no simply by sticking to their original position, the delay was only about a month, and the eventual vote reflected changed sentiment among long-term holders after they received additional information on company performance and debt markets rather than any manipulation of the electorate.31
The Special Committee acted with a proper purpose and without precluding or coercing stockholder choice when it postponed the vote to permit additional deliberation.32
Whether the Special Committee failed to make adequate disclosures about its motivations for the postponement in the June 29 press release?33
Directors must disclose all material facts when detailing the reasons for their actions, but a press release announcing postponement of a merger vote need not spell out the precise tally of votes or tactical motivations such as facilitating arbitrageur purchases if the primary economic merits of the merger remain the focus and the reality that the prior vote would have failed is obvious to reasonable investors.34
No. The June 29 press release disclosed the factors the Special Committee wished stockholders to consider, including second-quarter results, changes in debt markets, Mihaylo's proxy materials, and Mitel's refusal to increase its bid, and the omission of the precise vote tally and arbitrageur motivation did not constitute a material nondisclosure.35 Any reasonable stockholder, including institutional investors and Mihaylo himself, understood that the merger would have been defeated on June 29, and the change in record date enabling new purchases was obvious and mundane in the M&A context, so the disclosures were adequate for the rescheduled vote.36
The Special Committee did not fail to make adequate disclosures about its motivations for the postponement in the June 29 press release.37