A stockholder complaining about a merger transaction materially enhances her prospects of overcoming a motion to dismiss if she can allege self-dealing by a controlling stockholder or that the transaction involves a change of control, thereby invoking the entire fairness standard of review or enhanced scrutiny. Failing that, properly alleging a violation of a statute could also state a claim. In Flannery v. Genomic Health, C.A. No. 2020-0492-JRS (Del. Ch. August 16, 2021), the Delaware Court of Chancery found plaintiffs failed properly to allege that the transaction at issue involved a self-dealing controlling stockholder, or that Revlon duties applied or that the buyer’s entry into a voting agreement with a stockholder with more than a 15% ownership stake after the execution of a merger agreement violated Section 203 of the Delaware General Corporation Law (DGCL). For these reasons, the Court of Chancery granted defendants’ motions to dismiss plaintiff’s attack on Exact Sciences Corp.’s (buyer or Exact) acquisition by merger of Genomic Health Inc. (Genomic or the company) for cash and stock.
Court of Chancery Rejects Plaintiff’s Attempt to Plead That the Merger Involved a Self-Dealing Controller
The court had little trouble disposing of plaintiff’s claim that entities which held a 25% voting interest, with only two of eight board seats and no history of meddling in the Company’s day-to day operations, exercised general control of Genomic. The court found equally unavailing plaintiff’s allegations that that minority stockholder nonetheless controlled the company’s decision-making for the merger. Problematic for the plaintiff was her allegation that the buyer “showed up unsolicited and unannounced,” and therefore not at the behest of the minority stockholder, and the lack of well-pleaded allegations that the minority stockholder thereafter exercised control over the merger negotiations. The court found lacking as well the plaintiff’s attempts to convert relationships the minority stockholder had at other companies with five members of the board into sufficient allegations of dominance and control when the allegations did not suggest unilateral power or even substantial sway over the directors’ livelihoods. Finally, even were that not so, the court found that the plaintiff’s allegations that the minority stockholder wanted, as opposed to needed, to sell insufficient to reflect a divergent interest in liquidity such that the minority stockholder did not share an interest in obtaining the highest possible price in the transaction. Therefore, the court found those allegations insufficient to require an entire fairness standard of review.