In a significant decision that clarifies the standards for determining controlling stockholder status, the Delaware Court of Chancery dismissed claims against AstraZeneca and Viela Bio’s directors in connection with Viela’s $3 billion sale to Horizon Therapeutics. The case, Sciannella v. AstraZeneca UK Limited et al., addressed whether AstraZeneca, which held a 26.7% stake in Viela, exercised control over the company and whether the merger was subject to business judgment review under Corwin v. KKR Financial Holdings LLC. Vice Chancellor Paul Fioravanti’s opinion, issued on July 2, 2024, provides valuable insights into the Court’s approach to assessing minority stockholder influence and the application of Corwin cleansing in the context of a two-step merger under Section 251(h) of the Delaware General Corporation Law (“DGCL”). This decision offers important guidance for practitioners and companies navigating the complex landscape of corporate control and M&A transactions.
Background
This case arose from the 2021 acquisition of Viela Bio, Inc. by Horizon Therapeutics plc for $53.00 per share. Stephen M. Sciannella, a former Viela stockholder, filed a putative class action against AstraZeneca (which owned 26.7% of Viela’s stock), Viela’s directors, and officers. The plaintiff alleged that AstraZeneca controlled Viela and pushed for a quick sale to facilitate AstraZeneca’s acquisition of Viela’s rival, Alexion Pharmaceuticals. The plaintiff also claimed that Viela’s directors breached their fiduciary duties in approving the merger.
Analysis
The Delaware Court of Chancery, with Vice Chancellor Fioravanti presiding, focused on two key issues. First, the Court considered whether AstraZeneca was a controlling stockholder of Viela. The Court concluded that the complaint failed to plead facts supporting a reasonable inference that AstraZeneca controlled Viela. Vice Chancellor Fioravanti analyzed various factors, including AstraZeneca’s equity stake, board representation, and contractual rights, but found that these elements did not amount to actual control over Viela or its board.
The Court emphasized that AstraZeneca’s effective blocking rights related mostly to stockholder actions rather than board actions. AstraZeneca had designated just two directors on the eight-person board, and its control over management did not indicate control over the board. The court also noted that AstraZeneca had never exercised its blocking rights, and neither it nor its director-designees had sought to dominate the board.
Second, the court examined whether the merger was subject to business judgment review under Corwin v. KKR Financial Holdings LLC. The court determined that the merger was indeed subject to business judgment review because the plaintiff failed to allege that Viela stockholders were not fully informed when tendering their shares. The Court examined the plaintiff’s claims of material omissions and misrepresentations in the Schedule 14D-9 but found them unpersuasive.
The Court analyzed several specific disclosure claims, including AstraZeneca’s alleged threats to terminate support agreements and sell its Viela stock, AstraZeneca’s purported intent to terminate material contracts, the omission of June 2020 financial projections, and disclosures about the CEO’s compensation discussions with Horizon. For each of these claims, the Court concluded that the alleged omissions or misrepresentations were not material or were adequately disclosed in the Schedule 14D-9.
Notably, the Court did not consider AstraZeneca’s January 8, 2021 letter proposing to cease providing support services as a threat to coerce Viela into a quick sale. The Court found that the separation of the companies had been ongoing since Viela’s initial public offering years earlier, and AstraZeneca’s proposal included assurances that it would work with Viela to ensure a smooth transition.
In conclusion, the Court granted the defendants’ motions to dismiss. It found that the complaint failed to allege facts supporting a reasonable inference that AstraZeneca was a controlling stockholder of Viela. Furthermore, the court held that the merger was subject to business judgment review under Corwin because a majority of fully informed, uncoerced stockholders tendered their shares. This decision reinforces Delaware’s approach to analyzing controlling stockholder claims and the application of Corwin cleansing in the context of tender offers followed by mergers under Section 251(h) of the DGCL.
Key Takeaway
A critical takeaway from this decision is the Court’s emphasis on the totality of circumstances when determining whether a minority stockholder exercises control over a company. Despite AstraZeneca’s significant 26.7% stake in Viela, its historical role in creating the company, and its ongoing support through various agreements, the Court did not find these factors sufficient to establish control. The Court’s analysis demonstrates that the mere existence of potential sources of influence does not automatically equate to actual control. Instead, the Court focused on whether the alleged controller could dominate the board’s decision-making process, either generally or with respect to the specific transaction at issue.
This decision serves as a reminder that the determination of control status is highly fact-specific. Minority stockholders with significant stakes or rights should be mindful that their actions and the extent to which they exercise their influence will be scrutinized in any control analysis. Conversely, companies dealing with significant minority stockholders should carefully document board deliberations and decision-making processes to demonstrate the board’s independence and exercise of judgment, particularly in the context of major corporate transactions. Furthermore, this case underscores the importance of thorough and accurate disclosures in transaction documents, as well-prepared disclosures can support the application of business judgment review under Corwin, providing significant protection against post-closing damages claims.