In Re Volcano Corporation Stockholder Litigation

143 A.3d 727 (Del. Ch. 2016)

Facts

(This part was not in the O’Kelley 8th edition casebook) Lax (Ps) were common stockholders of Volcano Corporation. Huennekens (Ds) were members of Volcano's board of directors. Huennekens also served as the Company's President and Chief Executive Officer. Goldman served as Volcano's financial advisor in connection with the merger. Volcano was a global leader in intravascular imaging for coronary and peripheral applications and physiology. Philips is an Amsterdam-based Dutch technology company that focuses on healthcare, consumer lifestyle, and lighting products. Philips's stock is listed on the New York Stock Exchange under the symbol PHG. In 2012, Volcano agreed to sell $400 million of 1.75% Convertible Senior Notes due in 2017 and, at the option of the Underwriters, up to an additional $60 million of those Convertible Notes. The Underwriters exercised that option on December 5, 2012, and issued the full $460 million of Convertible Notes. The Convertible Note Issuance closed on December 10, 2012. The Convertible Notes represented approximately 14.01 million shares of Volcano common stock at $32.83 per share under the circumstances described in the Convertible Notes' indenture. Volcano also entered into a series of hedging transactions with the Underwriters to mitigate that equity dilution. Volcano paid $78,085,344 to purchase from the Underwriters call options (the 'Options') for 14.01 million shares of Volcano common stock at an initial strike price of $32.83 (the 'Option Transaction'). This would ensure that the total number of its shares outstanding would remain static. The Underwriters paid $46,683,206 to purchase from Volcano warrants (the 'Warrants') for 14.01 million shares of Volcano common stock at an initial strike price of $37.59 (the 'Warrant Transaction'). This partially offset the cost to Volcano of the Option Transaction and effectively raised the conversion price of the Convertible Notes from $32.83 to $37.59. This is called a Call Spread Transaction, and if you believe Goldman Sachs, the Convertible Notes likely would not have had any dilutive effect until Volcano's common stock reached a price of $37.59 per share. The options were set to expire on December 1, 2017, the same day that the Convertible Notes matured. Both the Options and the Warrants would terminate immediately in a cash-out merger. In the event of such a transaction, the Underwriters would pay Volcano the Options' fair value, and Volcano would pay the Underwriters the Warrants' fair value. (This part was not in the O’Kelley 8th edition casebook). In June 2014, Philips, with which Volcano had a commercial relationship since 2007, expressed to Goldman that it was interested in exploring a strategic acquisition of the Company. On July 25, 2014, when Volcano's common stock closed at a price of $16.18 per share, Philips delivered a non-binding indication of interest to acquire Volcano for $24 per share. There was major concern about the spread transaction. the Board authorized the retention of Goldman as its financial advisor for the potential merger with Philips. Goldman stood to earn a $17 million advisor fee, contingent on the consummation of Volcano's sale. While Philips was proceeding with due diligence, Volcano issued its earnings press release for the second quarter and shared with Philips that it was lowering its revenue guidance for the remainder of 2014 and reducing its projected long-term growth rate. Volcano's common stock closed at $12.56 per share. On September 12, 2014, Philips indicated it could only do the deal at $17 to $18 per share. Volcano stopped due diligence access by Philips. Philips was still interested. Philips presented another non-binding indication of interest to acquire Volcano for $17.25 per share. On November 6, 2014, Volcano announced better-than-expected financial results for the third quarter of 2014 and the Company's turnaround plan. On December 12, 2014, the Transaction Committee discussed the Call Spread Transactions. The Transaction Committee decided that Goldman was not conflicted from serving as Volcano's financial advisor for the proposed transaction. (This part was not in the O’Kelley 8th edition casebook). Philips informed Volcano that its board of directors had approved a cash-out merger with the Company at a price of $18 per share. After Goldman left the meeting, the Board further discussed the Merger and unanimously approved the Merger and the Merger Agreement. The Tender Offer began at years end and on February 17, 2015, the Tender Offer closed, with 89.1% of Volcano's outstanding shares having tendered on the $18 price. Volcano and Philips consummated the Merger without a stockholder vote under Section 251(h). The Merger was valued at $1.2 billion, and Philips financed it with a combination of cash-on-hand and a debt issuance. The Convertible Notes and the Call Spread Transactions were terminated. The Underwriters had to pay Volcano the Options' fair value, and Volcano had to pay the Underwriters the Warrants' fair value. The net result of the termination of the Call Spread Transactions, as between Volcano and Goldman, was a $24.6 million payment from Volcano to Goldman. The Board and Volcano's senior management, collectively, received approximately $8.9 million in Volcano stock options and restricted stock units that were accelerated as a result of the Merger. Ps filed their lawsuits before the Merger closed. Ds filed motions to dismiss the Complaint under Rule 12(b)(6). 

Ps claim that the Board breached its duties of care and loyalty. Ps alleged that the Board acted in an uninformed manner, was motivated by certain benefits-including Huennekens's Consulting Agreement and the other Board members' accelerated vesting of stock options and restricted stock units-that its members stood to receive as a result of the Merger. Ps also claim the Board relied on 'flawed advice' rendered by its 'highly conflicted financial advisor,' Goldman.