[co-author: Aubrey Morin]
In re Edgio, Inc. Stockholder Litigation, C.A. No. 2022-0624-MTZ (Del. Ch. May 1, 2023)
Under Corwin, a fully informed, uncoerced vote of the disinterested stockholders can shift the standard of judicial review for certain transactions from heightened scrutiny to the business judgment rule. But there are some transactions that Corwin cannot cleanse. Here, at the motion to dismiss stage, the Court declined to apply the Corwin doctrine to a Unocal claim seeking to enjoin certain alleged defensive measures taken by the company's board.
Edgio was the resulting entity from a merger between Limelight Network, Inc., an underperforming publicly traded company, and a privately held portfolio company. In conjunction with the merger, Edgio entered a shareholders agreement with Apollo Global Management, which pre-merger was the portfolio company's controller, and post-merger was 35% owner of Edgio. Among other things, the agreement required Apollo’s stock to be voted in conformance with Edgio's board's recommendations with respect to director nominations. Shareholders overwhelmingly approved both the merger and the shareholder's agreement.
After the merger closed, two stockholder plaintiffs sought to enjoin certain aspects of the shareholder's agreement, including the requirements that Apollo vote consistent with the board's recommendations, on the Unocal theory that the provisions acted to entrench the company's board by locking up a 35% voting block. The plaintiffs did not seek monetary damages. The defendants moved to dismiss based upon Corwin and the stockholder's approval.
The Court denied the motion to dismiss, observing that "a careful reading of Corwin precludes its ability to restore the business judgment rule to claims seeking enhanced scrutiny to support injunctive relief.” The Court recognized that it was answering an open-ended question and that there was some tension in the case law. The Court concluded that it was “duty-bound to follow the most recent and specific Delaware Supreme Court authority.” It held that a "claim for injunctive relief under Unocal enhanced scrutiny is not susceptible to restoration of the business judgment rule under Corwin.” Because the plaintiffs were only seeking injunctive relief, the Court ruled Corwin could not apply.
