In C&J Energy Services, Inc. v. City of Miami General Employees' and Sanitation Employees’ Retirement Trust, No. 655/657, 2014 (Del. Dec. 19, 2014), the Delaware Supreme Court reversed the Court of Chancery’s decision to grant an “unusual” 30-day preliminary injunction of the merger between C&J Energy Services, Inc., a Delaware corporation (“C&J”), and a division of Nabors Industries Ltd., a Bermuda company (“Nabors”). As an inversion transaction, the merger was structured such that C&J would acquire a subsidiary of Nabors, with Nabors retaining a majority of the surviving company’s equity. Although it was the buyer, C&J bargained for a passive, post-signing “fiduciary out” to accept a superior proposal and for a relatively low termination fee.
Although the Court of Chancery found that C&J’s board was fully informed as to C&J’s value, and there was no finding that the board was conflicted, the Court of Chancery found it was “plausible” that the board had violated its duties under Revlon to seek the highest immediate value reasonably available, because the board did not engage in an active pre- or post-signing market check. The Court of Chancery enjoined the stockholder vote for 30 days and required C&J to shop itself, stating that the solicitation of proposals during that period would not breach the merger agreement.
The Delaware Supreme Court held that the Court of Chancery had misapplied the standard for issuance of a preliminary injunction, which requires the moving party to establish a “reasonable probability of success on the merits,” and not (as the Court of Chancery formulated its finding) “a plausible showing of a likelihood of success on the merits.” The Supreme Court also ruled that the Court of Chancery’s analysis was based on the incorrect proposition that a company selling itself is required to conduct an active marketing process for its board to satisfy its duties under Revlon. After reiterating that there is no “single blueprint” that a board must follow when conducting a sales process, the Supreme Court stated that “when a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, [the Court] cannot conclude that the board likely violated its Revlon duties.”
Finally, the Supreme Court held that the Court of Chancery’s mandatory preliminary injunction was improper because it was not issued on a factual record made after trial or on undisputed facts and because it stripped an innocent third party (Nabors) of its contractual protections while simultaneously binding that party to consummate the transaction.