DELAWARE COURT STRESSES STRINGENT PLEADING STANDARD FOR MERGER LAWSUITS

In a recent opinion, the Delaware Court of Chancery reemphasized that shareholders who sue a company’s directors in connection with a merger face significant hurdles during the pleading stage. Houseman v. Sagerman stemmed from a 2011 merger in which HealthPort Technologies, LLC acquired Universata, Inc. Before the merger, Universata’s board informally consulted its lawyers and financial advisors, but decided a formal fairness opinion would be too costly. Two years after the merger, stockholders (including an ex-director) asserted, among other claims, that the other former directors had breached their fiduciary duties by failing to assure shareholders obtained the highest possible merger price.

The court stressed that plaintiffs face a high pleading threshold and must allege facts indicating that the directors “utter[ly] fail[ed]” to attempt to satisfy their fiduciary duties or intentionally acted against the company’s best interests. So long as the directors undertook “some process” to achieve the best price for stockholders, they had not acted in bad faith. In concluding that the plaintiffs had not sufficiently pled that the directors failed to take sufficient steps, the court noted the board spoke with legal counsel, informally consulted a financial advisor who concluded the merger price was fair, investigated whether to obtain a formal fairness opinion, and then decided it was unreasonably expensive relative to the merger’s size. Given that Universata’s directors collectively owned over 50% of the company’s stock, the court was especially skeptical that they would intentionally seek less than top dollar for their shares. Thus, despite acknowledging the merger process was not “perfect,” the court dismissed the plaintiffs’ breach-of-fiduciary-duty allegation for failure to state a claim. Fundamentally, as the court acknowledged, only an “extreme set of facts” would seem to suffice under the Delaware pleading standard.