by Samuel W. Wales, Daniel Koob and Monique Y. Ho – McDermott Will & Emery
In the first quarter of this year, the Delaware Court of Chancery issued a decision that should cause directors to carefully consider whether they have done enough to canvass the market of potential acquirers when their company is up for sale or, in other words, whether they have effectively discharged their Revlon duties.
In In re Netsmart Technologies, Inc. S’holders Litig., the court enjoined a proposed cash-out merger between Netsmart Technologies, Inc. and two private equity firms, Insight Venture Partners and Bessemer Venture Partners. The court held that the Netsmart board of directors and special committee each breached their fiduciary duties “to undertake reasonable efforts to secure the highest price realistically achievable given the market for the company” when they only surveyed potential financial buyers (and no strategic buyers) during the then-present sale process. The court also held that the proxy statement distributed by Netsmart to its stockholders was materially incomplete for failing to disclose the projected future cash flows used by Netsmart’s financial advisor to support its fairness opinion.
However, due to the court’s concern that the buyer would walk away from the deal if it required the Netsmart board to shop the company to a broader audience, the court limited the injunction to delaying the stockholder vote on the merger until Netsmart amended its proxy statement to disclose the reasons for not exploring the market of strategic buyers and the projected future cash flows used by its financial advisor.