M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, November 26, 2018

Corwin, not a 'get out of jail free' card

I've seen some hand-wringing among my fellow corporate law scholars that Corwin represents some sort of free pass for bad directors in the context of a sale - a 'get out of jail free' card as it were. Last week before the Thanksgiving holiday, VC Slights gave us a reminder that Corwin may be many things, but it is not that. No 'get out of jail free' cards.

Remember, under Corwin, the Delaware Supreme Court held that "[t]he business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” 

So, where the litigation involves a challenge to an arm's length sale of the corporation, Corwin is in play, but it requires a fully-informed stockholder vote. In many other situations, including the preliminary injunction phase, courts have shown great deference to the power of an uncoerced, fully-informed stockholder vote to forgive director sins. No difference in the Corwin context. If shareholders know all the facts and accept them by way of an uncoerced 'yes' vote to a deal, courts are loathe to step in and tell shareholders they are wrong. 

That said, there are limits. In Tangoe, the court refused to apply Corwin where the stockholders vote was not fully-informed due to inadequate board disclosures prior to the vote. In Tangoe, the board sought to sell the company following a financial restatement and subsequent delisting by NASDAQ. Shareholders challenged and sought post-closing damages. In refusing the board's motion to dismiss, VC Slights made it clear that getting Corwin protection isn't going to be as easy as all that:

"But, to earn pleading-stage business judgment deference by invoking stockholder approval of a challenged transaction, the directors must demonstrate that they carefully and thoroughly explained all material aspects of the storm to stockholders—how the company sailed into the storm, how the company has been affected by the storm, what alternative courses the company can take to sail out of the storm and the bases for the board’s recommendation that a sale of the company is the best course."

Absent a fully-informed stockholder vote, there is no Corwin protection. And, the burden is going to be on the board to demonstrate that shareholder vote was fully-informed and thus effective. So, fear not. At least for now.



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