Document:  In re Synthes, Inc. Shareholder Litig., C.A. No. 6452-CS (Del. Ch. Aug. 17, 2012)

The Delaware Court of Chancery rejected plaintiffs’ invitation to apply the entire fairness standard of review to a transaction between a controlled corporation and an unrelated third party where the controller received the same consideration as the minority stockholders in the merger.

This decision involved a challenged to the acquisition of Synthes, Inc. (“Synthes”) by Johnson and Johnson (“J&J”) for approximately $23 billion in stock and cash. The Chairman and controlling stockholder of Synthes, Hansjoerg Wyss (“Wyss”), received the same consideration in the merger as the minority stockholders of Synthes. During the two year period leading up to the merger with J&J in 2012, Sythnes conducted an active search for a buyer and contacted over a dozen potential buyers consisting of both strategic and private equity firms. A consortium of private equity buyers submitted an all-cash bid for a part of the company during the two-year, pre-signing market search. According to plaintiffs, the board of Synthes rejected the partial bid to accommodate the desire of Wyss to retire and achieve a complete divestiture of his interest in Synthes. Because of this alleged conflict, plaintiffs argued that the transaction should be reviewed under the exacting entire fairness standard. Alternatively, the plaintiffs argued that Revlon’s enhanced scrutiny test should apply to the Court’s review of the transaction. The Court held that the business judgment standard was the applicable standard of review. According to the Court, absent facts suggesting that Wyss forced a sale at below fair market value to meet some immediate need for cash, there was no basis to impose entire fairness review on a transaction between a controlled corporation and an unrelated third party because the controller and the minority stockholders were treated the same with respect to the merger consideration. Further, the Court held Revlon inapplicable to a transaction involving the acquisition of a controlled corporation by a corporation with no controlling stockholder for a mix of 65% stock and 35% cash.
Contractual Agreement May Displace the Implied Covenant of Good Faith and Fair Dealing