In re Netsmart Technologies, Inc. Shareholders Litigation
924 A.2d 171 (Del.Ch. 2007)
The directors of Netsmart had
been entertaining overtures from private equity buyers about a possible
sale. They decided that they were definitely going to sell the company to
The directors decided that
they should not undertake an active search for a strategic buyer, but
instead just put the corporation up for auction.
After the directors decided
on the auction sale method, they established a special committee (aka an independent
committee) to protect the interests
of the shareholders.
After getting some competitive
bids, the directors decided to sell the corporation to a company called
Part of the deal with
Insight was that the directors and management could all keep their jobs.
The deal was at the low end
of Netsmart's estimate of how much they could get for the sale.
In order to make the deal
official, the directors put the sale up for a shareholder vote.
Shareholders that did not want the sale to proceed sued for an injunction
to stop the vote.
The shareholders argued that
the directors used a flawed process to sell Netsmart, and could have
gotten a much better deal if they'd used a different strategy.
The shareholders argued
that the directors breached their duty of loyalty because they were more concerned with their
own jobs than maximizing shareholder value.
The shareholders also argued
that the directors failed to disclose material information with regard to
the sale in the proxy statement asking the shareholders to approve the
The directors argued that
their actions were covered by the business judgment rule.
The Trial Court found mostly
for the directors.
The Trial Court found that
based on Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (506 A.2d 173 (1985)), once the directors
decided to put the corporation up for sale, they were under an obligation
to get the best possible price (aka Revlon duties).
The Court found that the
shareholders were likely to be successful in their claim that the
directors breached their Revlon duties and didn't get the best price because they failed to explore
viable options for how to sell the corporation.
The Court found that the
proxy statement was materially deficient because it did not include the
best estimates of the company's future cash flows at the time the
directors approved the sale.
The Court granted the
injunction, but only until a new proxy statement was sent out and a
fully-informed vote could be taken.
The Court found that it was
up to the shareholders to decide if they should take the Insight offer,
or start again and try to find another buyer (which they might not). As
long as the shareholders had all the information, they could make the
decision with regards to the Insight sale without needing to wait to see
if better competing offers might be found.