In In Re Saba Software, Inc. Stockholder Litigation, the defendants argued that a conflicted merger had been cleansed by a fully informed, uncoerced vote of disinterested shareholders. The Court rejected the defendants’ argument and concluded that the shareholder vote was not informed given the proxy statement contained material omissions. The Court also found that the lack of information in the proxy statement had a coercive effect that left the shareholders with no choice but to approve the merger. As a result, the shareholder vote did not “cleanse” the conflicts of interest that existed.

The Saba decision illustrates the distinction between form and substance. In contrast to Saba, the Delaware Supreme Court held in Corwin v. KKR Financial Holdings LLC that the business judgment standard of review will apply to transactions subject to enhanced scrutiny if a majority of disinterested stockholders approve the transaction and are not coerced unless the challenged transaction involves a conflicted controller. Since that time, the Delaware Court of Chancery has expanded the “Corwin Presumption” to apply to transactions generally subject to entire fairness (except for those involving a conflicted controller) and, on that basis, has dismissed several plaintiff-shareholder lawsuits by applying the business judgment rule. However, the vote itself works only if complete information is provided and there is no coercion.

BOTTOM LINE: The fact that a vote of shareholders was taken will not guarantee application of business judgement rule; substance matters! The facts underlying the vote matter.