Explore a case study where a shareholder could not challenge the target board’s merger approval because the transaction would not result in a change of control. Learn about the legal implications and the application of the Revlon Doctrine in M&A transactions. Stay updated with the latest M&A legal insights.
M&A Stories
January 13, 2021
Introduction:
When a company considers a sale or merger, the board of directors plays a crucial role in managing the process. Sometimes, shareholders may disagree with the decisions made by the board.
The Deal:
In this case, a publicly traded company in Maryland, which operated a community bank in Michigan, was the target of a merger. The board of directors accepted an offer from a larger publicly traded community bank to merge, where each share of the target company, valued at around $42, would be exchanged for $14 in cash and stock of the buying company.
The Lawsuit:
A shareholder of the target company filed a lawsuit in a Michigan state court against the board after they approved the merger and sent a proposal to shareholders for approval. The shareholder argued that the board had failed in its duty to maximize shareholder value because they turned down a higher offer from another potential buyer.
Legal Outcome:
The trial court dismissed the lawsuit, and the shareholder appealed to a Michigan intermediate court. The appeal court affirmed the dismissal, explaining that, according to Maryland law, a shareholder can only sue the directors for not maximizing shareholder value if the proposed merger results in a change of control. However, in this situation, since the target shareholders were receiving 2/3 of their compensation from a publicly traded company, the court ruled that there was no change of control.
This case is referred to as Finke v. Vanderkelen, No. 345621, Court of Appeals of Michigan, (May 21, 2020) unpublished, per curiam.
Key Principle:
The duty of directors to maximize shareholder value was established in 1986 by the Delaware Supreme Court in the Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. case. This principle, known as the “Revlon Doctrine,” is recognized in various states, including California, Delaware, Illinois, Kansas, Maryland, Michigan, Minnesota, Missouri, and New Hampshire. The doctrine applies to transactions involving all-cash deals or stock transactions where there is a change in control. However, it doesn’t apply to stock-for-stock deals where the post-closing entity remains widely held by stockholders.
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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