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 someone.
    • 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 Insight.
    • 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 sale.
    • 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.