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In re BioClinica: Court of Chancery Dismisses Claims that Well-Shopped Transaction Supported by Allegedly "Weak" Fairness Opinion Constituted Breach of Fiduciary Duty

December 2, 2013

In In re BioClinica, Inc. Shareholder Litigation, 2013 WL 5631233 (Del. Ch. Oct. 16, 2013), Vice Chancellor Glasscock of the Delaware Court of Chancery held that plaintiffs’ amended complaint failed to state a claim against the directors of BioClinica, Inc. (“BioClinica”) for breaches of fiduciary duty, and against JLL Partners, Inc., BioCore Holdings, Inc. and BC Acquisition Corp. (collectively, “JLL”) for aiding and abetting.

In May 2012, the board of directors of BioClinica formed a special committee to explore a sale of the company. During an eight-month process, the financial advisor of the special committee, EP Securities LLC (“Excel”), reached out to 21 potential bidders, and the special committee entered into non-disclosure agreements with fifteen. Initially, the special committee decided to approach only financial sponsors in an effort to avoid disclosing certain confidential information to competitors, but it later approached potential strategic buyers. JLL initially declined to make a bid, but later expressed an interest at $7.00 to $7.25 per share. Then, after the only other serious potential buyer (a strategic buyer) decided not to make a final bid, the special committee agreed, at JLL’s request, to grant exclusivity to JLL, so long as its final offer would be at least $7.25 per share.

Near the end of this process, BioClinica’s projected capital expenditures increased to $11.9 million for 2013 from an earlier estimate of $6-8 million. In light of the change, JLL raised concerns about offering $7.25 per share. Nonetheless, on January 29, 2013, the board of directors of BioClinica approved a transaction with JLL, structured as a tender offer, at a price of $7.25 per share in cash, which represented a 23.2% premium over the stock’s average closing price for the previous 90 days. The merger agreement contained several deal-protection devices, including a no-solicitation provision, a $6.5 million termination fee, information rights and a top-up option.

Several stockholders of BioClinica sued to enjoin the transaction. In February 2013, Vice Chancellor Glasscock denied plaintiffs’ motion to expedite proceedings for failure to state a colorable claim, thus foreclosing their attempt to enjoin the deal. The following month the transaction closed, and thereafter, plaintiffs amended their complaint in an effort to plead a non-exculpated claim for damages.

In considering a motion to dismiss the amended complaint, the Court rejected plaintiffs’ argument that the vesting of stock options meant the directors had a self-interest in the transaction, and noted that Delaware courts have consistently held that stock ownership aligns the interests of directors and stockholders. The Court further found that allegations regarding the claimed interestedness of two of the directors were insufficient because those directors were not on the special committee and they were not alleged to dominate or control the members of that committee.

The Court also rejected the claim that the directors breached the duty of loyalty by failing to act in good faith. The Court found that “without a story of why the directors would artificially inflate expenditures,” such an allegation was “purely conclusory.”

Similarly, plaintiffs failed to allege facts showing that the directors failed to satisfy their Revlon duties in a non-exculpated manner because plaintiffs failed to show that the board of directors “knowingly and completely failed to satisfy those duties.” The board’s strategy to approach financial sponsors before strategic buyers was a reasonable way of protecting BioClinica’s confidential information, especially where strategic buyers were later brought into the process. Moreover, the Court distinguished the case from Koehler v. NetSpend Holdings, Inc., 2013 WL 2181518 (Del. Ch. May 21, 2013), where the Court held that directors were reasonably likely to be found to have breached their fiduciary duties in part because of their reliance on a “weak” fairness opinion. The Court noted that, unlike in NetSpend—where there was no market check, potential bidders were subject to a don’t-ask-don’t-waive provision, and plaintiff sought injunctive relief such that breaches of the duty of care could support viable claims—the board of directors of BioClinica employed a full market check, the board did not agree to don’t-ask-don’t-waive provisions, and plaintiffs were reduced to seeking post-closing money damages. The Court, in response to plaintiffs’ allegations that the board of directors of BioClinica relied on a weak fairness opinion, clarified NetSpend by noting that “[t]he board’s reliance on a ‘weak’ fairness opinion is relevant where the fairness opinion provides the only equivalent of a market check,” and that a purportedly weak fairness opinion “does not create a new basis to challenge every sales process.”

Addressing the disclosure claims, the Court explained that for plaintiffs to recover more than nominal damages on the post-merger claims, they must demonstrate both that the non-disclosures involved a breach of the duty of good faith and causation, i.e., that the vote necessary to approve the merger would not have been obtained had the alleged undisclosed information been disclosed. Relying on its findings in the earlier opinion on the motion to expedite, the Court held that plaintiffs did not plead sufficient facts demonstrating that the failure to disclose why capital expenditure forecasts were adjusted upward or to disclose certain inputs in Excel’s fairness opinion constituted material omissions supporting a finding of bad faith.

Moreover, the Court rejected the claim that the board of directors of BioClinica should have disclosed whether the non-disclosure agreements signed by potential bidders contained don’t-ask-don’t-waive provisions because plaintiffs had not alleged that they did contain such provisions, and “no disclosure could, or should attempt to, describe all clauses not included in NDAs.”

The Court also dismissed plaintiffs’ challenge to the combination of deal-protection devices, including a no-solicitation provision, a selective poison pill exception, a reasonable termination fee, information rights and a top-up option.

Finally, the Court rejected plaintiffs’ aiding and abetting claims against JLL on the grounds that plaintiffs had not pled either a predicate breach of the duty of loyalty or knowing participation in a breach of the duty of care.