This article discusses the recent New York decision in Badowski v. Corrao that further defined the limitations of applying Revlonduties in stock-for-stock mergers.
The underlying facts of Badowski involved a stock-for-stock merger between Vertro, Inc. (Vertro) and Inuvo, Inc. (Inuvo) that was ultimately challenged by a Vertro stockholder.
Among the plaintiff’s claims was an allegation that the proxy statement omitted underlying financial projections, calculations, and data considered by Vertro and its financial advisor.
Applying Delaware law (based on Vertro’s state of incorporation), the New York court decided whether the actions of the board should be reviewed under the business judgment rule or the less deferential Revlon review.
Under the business judgment rule, directors only needs to show that their decision-making was informed, in good faith, and made in the honest belief that the decisions were in the best interest of the company.
Application of the Revlon standard − an enhanced scrutiny − would require a showing that the directors’ decision-making sought to maximize the company’s value for the stockholder’s benefit.
Central to deciding which standard to review the board’s decision-making by is whether the transaction, in this case, the merger, led to a change of control. This can be accomplished through an outright sale or a showing that the break-up of the company was inevitable.
The plaintiff’s claim that there was a change of control was partially based on the fact that Vertro had actively sought a merger with a party other than Inuvo and because Vertro’s directors’ contracts contained ‘change of control’ provisions in the event of a merger.
After review of the evidence, the New York court found that there had not been a change of control as a result of the Vertro/Inuvo merger.
The court held that Vertro’s initiation of an active bidding process did not triggerRevlon because there was no evidence Vertro was seeking to sell control to the company or break it up.
Further, the court rejected the plaintiff’s ‘change of control’ argument due to a lack of cited authority for such an application of Revlon. With Revlon review being inapplicable, the court found the board’s decision-making reasonable under the deferential business judgment rule.