Court of Chancery Dismisses Post-Closing Challenge to Merger Transaction

Stockholders who believe that a board breached its fiduciary duties in connection with information provided to stockholders asked to vote for a merger transaction can either seek to enjoin the transaction or seek damages post-closing. Of course, the court cannot enjoin a transaction if a stockholder who files a complaint fails to seek injunctive relief, even where that stockholder also alleges disclosure violations. In that circumstance the stockholder post-closing must determine whether to pursue damages, including through quasi-appraisal. In light of the Delaware courts’ jurisprudence post-Corwin, such claims are unlikely to succeed where a majority of the disinterested stockholders have approved the merger unless the plaintiff can demonstrate a material disclosure violation or stockholder coercion to approve the merger for reasons unrelated to its merits. The recent Delaware Court of Chancery decision of In Re Cyan Stockholders Litigation, C. A. No. 11027-CB (May 11), dismissing post-closing plaintiffs’ claims for breach of fiduciary duty demonstrates the risks stockholder plaintiffs run when they do not seek equitable relief to enjoin a merger transaction and are unable to plead a material disclosure violation sufficient to vitiate approval of the merger transaction by a majority of disinterested stockholders.

Background Facts

The Cyan litigation arose from a merger transaction entered into on May 3, 2015, between Cyan Inc. and Ciena Corp. in which Ciena offered the Cyan stockholders merger consideration consisting 89 percent of Ciena stock and 11 percent of cash. Plaintiffs filed a complaint on May 15, 2015. Four other stockholders filed actions as well. On June 23, 2015, the court consolidated the actions and appointed lead counsel. Plaintiffs alleged deficiencies in the proxy disclosures. Cyan did not agree to supplement its disclosures. Plaintiffs failed to pursue injunctive relief and a majority of disinterested stockholders approved the transaction on July 31, 2015. Approximately one year later plaintiffs amended their complaint alleging damages for breach of fiduciary duty based on disclosure violations in the proxy materials issued in connection with the merger vote and also seeking the remedy of quasi-appraisal. Defendants moved to dismiss on the ground that plaintiffs failed either to state a nonexculpated claim for breach of fiduciary duty or to state a basis for the remedy of quasi-appraisal. As set forth below, the Court of Chancery dismissed the complaint in its entirety.

Plaintiffs Fail to Allege Breach of Fiduciary Duty