MEMORANDUM OPINION

BOUCHARD, C.

In this action, stockholders of MeadWestvaco Corporation seek damages relating to a strategic stock-for-stock merger of equals between MeadWestvaco and Rock-Tenn Company that closed in July 2015. The transaction was the product of on-again, off-again negotiations that occurred over a period of about nine months, and yielded a 9.1% premium for MeadWestvaco's stockholders. Eight of the nine MeadWestvaco directors who approved the merger were outside directors whose independence and disinterestedness are unquestioned. Five months elapsed between the signing of the merger agreement and the stockholder vote, but no other suitor emerged with a superior proposal even though the deal protections in the merger agreement concededly were reasonable. The merger received favorable recommendations from two leading proxy advisory firms, and was approved overwhelmingly by 98% of the MeadWestvaco stockholders who voted — after plaintiffs took some discovery and waived their disclosure claims.

The complaint asserts a claim for breach of fiduciary duty against the members of the MeadWestvaco board, and a second claim for aiding and abetting against Rock-Tenn. The thesis of the complaint is that the directors entered into the merger in bad faith in reaction to a threatened proxy contest by an activist investor. According to plaintiffs, the directors "flew blind" and left behind $3 billion of value in a transaction that impliedly valued MeadWestvaco at $9 billion. Defendants have moved to dismiss both claims for failure to state a claim for relief.

The core issue before the Court is whether the complaint contains factual allegations sufficient to state a reasonably conceivable claim against MeadWestvaco's directors for bad faith in connection with their approval of the merger. For the reasons explained below, I conclude that the complaint does not and thus must be dismissed.

I. BACKGROUND

Unless otherwise noted, the facts recited in this opinion come from the allegations in the Amended Verified Consolidated Class Action Complaint filed on June 21, 2016 (the "Complaint"), documents incorporated therein,1 and additional documents the parties agreed could be considered on a motion to dismiss.2 Any additional facts are either undisputed or subject to judicial notice.

A. The Parties

Before the merger, defendant MeadWestvaco Corporation ("MeadWestvaco" or the "Company") was a publicly-traded Delaware corporation headquartered in Richmond, Virginia. MeadWestvaco was a global packaging company that also produced specialty chemicals for automotive, energy, and infrastructure businesses in a separate operating segment. Defendant Rock-Tenn Company ("RockTenn") was a Georgia corporation with headquarters in Norcross, Georgia. RockTenn was a packaging company that also manufactured containerboard and paperboard.

The Complaint names as defendants the nine members of the MeadWestvaco board of directors during the period leading up to and including its approval of the merger: Michael E. Campbell, James G. Kaiser, Richard B. Kelson, Susan J. Kropf, John A. Luke, Jr., Gracia C. Martore, James E. Nevels, Timothy H. Powers, and Alan D. Wilson. Luke was Chief Executive Officer and Chairman of the Board. The other eight members of the board were outside directors whose independence is not challenged.

Plaintiffs CWA Local 1180 Administrative Fund and CWA Local 1180 Members Annuity Fund allege they held shares of MeadWestvaco at all relevant times.

B. MeadWestvaco Begins to Consider a Transaction with RockTenn

In March 2014, Vertical Research Partners published an analyst note proposing a merger between RockTenn and MeadWestvaco. The note stated that RockTenn, which faced a billion-dollar pension deficit, could benefit from MeadWestvaco's pension surplus, which exceeded $1 billion. That same month, Starboard Value LP, a well-known activist investment firm, began purchasing MeadWestvaco stock.

In April 2014, MeadWestvaco's Chairman and CEO, John Luke, Jr., engaged in preliminary discussions with RockTenn's CEO, Stephen Voorhees, regarding a potential merger. On April 28, Luke presented the idea of a merger to the rest of MeadWestvaco's board, which asked a number of questions, including:

The next day, Luke told a fellow director that "[t]he questions were right on target, and we have or will have all answers shortly."4

C. Starboard Acquires a 5.6% Stake and Sends a Letter to the Board

On June 2, 2014, the MeadWestvaco board received a letter from Starboard stating that it had acquired approximately 5.6% of MeadWestvaco's outstanding common stock, making it one of the Company's largest stockholders. Starboard asserted in the letter that the Company was not operating at its full potential and demanded an overhaul of the Company through cost cutting and the sale of its specialty chemicals business. Starboard also suggested a stock repurchase or an outright sale or merger of the Company. The letter was publicly filed on the day it was sent, putting the market on notice of Starboard's agenda.5

Later on June 2, after receiving Starboard's letter, the MeadWestvaco board convened a telephonic meeting with management. During the meeting, senior management reviewed and discussed with the board relative valuation, potential deal terms, negotiating strategy, and the culture and governance of a combined entity.6 At the end of the meeting, the board directed Luke to explore a potential merger with RockTenn and to engage in negotiations with Voorhees.7

D. Merger Negotiations Proceed Over the Next Six Months but are Terminated Twice by MeadWestvaco

In the two months following the June 2 meeting, Luke and Voorhees met in person at least five times to discuss the terms of a potential transaction.8 On August 20, members of senior management for MeadWestvaco and RockTenn met face-to-face to conduct merger discussions along with the companies' respective financial advisors.9 Bank of America Merrill Lynch and Goldman, Sachs & Co. participated as MeadWestvaco's financial advisors. MeadWestvaco terminated the negotiations and the meeting ended without an agreement because MeadWestvaco refused to accept an exchange ratio below the then-market price of its stock.

On September 29, 2014, Voorhees called Luke to re-engage in merger negotiations. Given the gap that existed between the parties in August, MeadWestvaco would agree to engage in merger discussions only if MeadWestvaco were valued at least at its market price.10 Because RockTenn's overture was sufficiently constructive to meet this minimum condition, the parties re-engaged in merger discussions.

Negotiations with RockTenn continued throughout October 2014, but stalled again in November. On November 16, Luke informed the MeadWestvaco board that RockTenn was unwilling to proceed on terms acceptable to MeadWestvaco. This was the second time over the past several months that MeadWestvaco terminated merger negotiations with RockTenn.

E. MeadWestvaco Decides to Spin-Off its Specialty Chemicals Business as Starboard Signals a Potential Proxy Fight

On October 2, 2014, in the midst of its on-again, off-again merger discussions with RockTenn, the MeadWestvaco board considered a potential spin-off of its specialty chemicals business.

On November 10, 2014, shortly before MeadWestvaco broke off negotiations with RockTenn for a second time, its board met with Starboard, which made a presentation about enhancing the Company's value. One of Starboard's suggestions was to spin-off the Company's specialty chemicals business. During the same meeting, the board and its outside legal and financial advisors discussed the possibility of a spin-off, allegedly as part of a response to the threat that Starboard would run a proxy contest against the MeadWestvaco board,11 and reviewed again the rationale for a combination with RockTenn and the value to stockholders it could create.12

In December 2014, Starboard increased its ownership stake in MeadWestvaco to 6.1%. Also in December, signaling a potential proxy fight, Starboard announced it had entered into advisory agreements with the previous Chief Operating Officer of Smurfit-Stone Container Corp. before it was acquired by RockTenn in 2012, and the Chairman of Soundview Paper Company.

On January 8, 2015, MeadWestvaco issued a press release announcing that the board had approved a plan to spin off the specialty chemicals division into a separate, publicly-traded company. The Company also announced that it was selling off its Europe-based tobacco folding carton business for an undisclosed amount. On the day of the January 8 press release, the Company's stock price rose approximately 5.8% higher on the news to close at $45.59 per share, but fell the next day to close at $44.50.

F. RockTenn Seeks to Resume Merger Discussions, and the Parties Reach an Agreement in Principle on an Exchange Ratio

On January 9, 2015, Luke and Voorhees met for the first time since discussions fell apart in November to resume discussions about a potential merger. During the meeting, Voorhees proposed an "at market" stock-for-stock merger based on the ratio of the market value of MeadWestvaco stock to RockTenn stock at the time, meaning that each share of MeadWestvaco stock would be converted into 0.71 shares of the combined entity.13 Voorhees also proposed that the combined entity would have a twelve-person board, with RockTenn appointing seven directors and MeadWestvaco appointing five directors; that Voorhees would remain as CEO; and that Luke would become Chairman of the combined company.14

On January 13, Luke sent an email to Michael Campbell, MeadWestvaco's lead director, stating: "We have also had out-reach from [RockTenn]. We are working with our advisors to assess the seriousness of their intent. If there is substance worth discussing, I will let you know."15

The next day, on January 14, after Luke informed Voorhees that an at-market transaction would not be acceptable to MeadWestvaco, Luke and Voorhees agreed to proceed on the basis of a 0.78 exchange ratio.16 Two days later, on January 16, Luke and Voorhees further agreed to amend the prior proposal to increase the size of the board for the combined company to fourteen directors, with RockTenn appointing eight directors and MeadWestvaco appointing six directors.

On January 19, the MeadWestvaco board met to discuss the proposed merger terms with their financial and legal advisors. In addition to Bank of America Merrill Lynch and Goldman Sachs, Greenhill & Co., LLC had been added as a third financial advisor. Wachtell, Lipton, Rosen & Katz provided outside legal counsel.

On January 23, in the midst of its deliberations over the proposed merger, the board agreed to extend the deadline for Starboard to nominate a dissident slate to February 27, 2015.

On January 25, the MeadWestvaco board met and unanimously approved an Agreement and Plan of Merger (the "Merger Agreement") under which MeadWestvaco stockholders would receive 0.78 shares of stock in the combined entity for each MeadWestvaco share. The "indicated price" derived from this exchange ratio was $49.13 per share, representing a 9.1% premium over the Company's stock price on the last trading day before the transaction was announced.17 According to the definitive proxy statement (the "Proxy"), MeadWestvaco's stockholders would receive approximately 50.1% of the shares of the combined entity and RockTenn's stockholders would receive the balance. Both parties estimate that the transaction implied a value for the Company of approximately $9 billion.18 All three of MeadWestvaco's financial advisors opined that the transaction was fair to the Company's stockholders.19

The Merger Agreement contained a non-solicitation clause, matching and information rights, a fiduciary-out in case of a superior offer, and a $230 million termination fee20 equating to less than 3% of the value attributed to the Company in the transaction. The Merger Agreement also provided that the spin-off of the specialty chemicals division would occur after the merger closed.21

On May 20, 2015, the Proxy was issued in advance of a MeadWestvaco stockholder meeting scheduled for June 24 to consider the proposed merger. In June 2015, ISS Proxy Advisory Services and Glass Lewis & Co., LLC both issued advisory reports recommending that stockholders vote in favor of the proposed merger.22 On June 24, 2015, MeadWestvaco's stockholders approved the merger, with 83% of the out-standing shares voting, of which 98% were voted in favor of the transaction.23 The transaction closed on July 1, 2015.

II. PROCEDURAL POSTURE

After the transaction was announced, three class action lawsuits were filed, which were consolidated on March 9, 2015. On June 3, 2015, the parties stipulated to entry of an order providing for certain discovery in advance of a preliminary injunction hearing, which was scheduled for June 16. Within a matter of days, plaintiffs abandoned their preliminary injunction motion and agreed to "waive any disclosure claims based on any information available to them" as of that date in exchange for certain additional discovery from defendants, in particular their agreement to make three witnesses available for depositions after the closing.24

In the first half of 2016, plaintiffs deposed MeadWestvaco's CEO and CFO at the time of the merger (John Luke and Mark Rajkowksi) and a representative of one of its financial advisors (Colin Covey of Goldman Sachs). On July 21, 2016, plaintiffs filed the operative Complaint, which contains two claims. Count I asserts a claim for breach of fiduciary duty against the nine members of the MeadWestvaco board who approved the merger. Count II asserts a claim for aiding and abetting against RockTenn.

On September 6, 2016, defendants moved to dismiss the Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted.

III. ANALYSIS

The standards governing a motion to dismiss for failure to state a claim for relief are well settled:

Although this standard is minimal, the Court "will not credit conclusory allegations or draw unreasonable inferences in favor of the Plaintiffs,"26 nor will it "accept every strained interpretation of the allegations proposed by the plaintiff."27

A. The Parties' Contentions

Given that the merger was a strategic combination of two publicly-traded, widely-held companies without any controllers, and that the consideration MeadWestvaco stockholders received consisted entirely of stock of the combined entity, the merger is not subject to entire fairness review ab initio28 or enhanced scrutiny under Revlon.29 Plaintiffs do not contend otherwise. As a result, the MeadWestvaco board's decision to approve the merger presumptively is governed by the business judgment rule.30

Furthermore, given that MeadWestvaco's certificate of incorporation contains a Section 102(b)(7) provision exculpating its directors from personal liability for any breach of the fiduciary duty of care,31 plaintiffs' claim for post-closing damages against the directors for breach of fiduciary duty can survive only if the Complaint alleges facts from which it reasonably can be inferred "that (1) a majority of the Board was not both disinterested and independent or (2) that the [Board] did not act in good faith."32

Although plaintiffs contend that Starboard's presence was the "impetus" for the board's decision to engage in negotiations with RockTenn that led to the merger, they "do not argue that Starboard created a disabling conflict [or] that the looming proxy fight with Starboard prevented the Board from appropriately conducting their duties."33 The Complaint, moreover, is otherwise devoid of any allegations calling into question the disinterestedness or independence of any of the eight non-management directors on MeadWestvaco's nine-member board. Even as to Luke, MeadWestvaco's CEO, who did not obtain a management position in the combined entity, plaintiffs do not contend that he suffered from a disabling conflict of interest. The plaintiffs' case thus rests entirely on the board's alleged failure to discharge its duties in good faith.

Defendants make essentially two arguments in response — that the allegations of the Complaint do not plead a viable claim for bad faith and, even if they did, that the board's decision to approve the merger was cleansed under Corwin v. KKR Fin. Holdings, LLC34 and its progeny by virtue of the stockholders' overwhelming approval of the merger. Because the first issue is dispositive for the reasons discussed below, I do not address the second issue.

C. Count I Fails to State a Claim for Bad Faith

This Court has held on numerous occasions that "to state a bad-faith claim, a plaintiff must show either [1] an extreme set of facts to establish that disinterested directors were intentionally disregarding their duties or [2] that the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith."35 This is a difficult standard to meet. As our Supreme Court explained in Lyondell Chem. Co. v. Ryan, "Directors' decisions must be reasonable, not perfect. In the transactional context, [an] extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties,"36 and even one "plausible and legitimate explanation for the board's decision" would negate a reasonable inference that the decision was "so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith."37

Here, plaintiffs focus on what they refer to as MeadWestvaco's "Four Non-Core Assets:" its specialty chemicals business, its pension surplus, its Brazilian subsidiary (Rigesa), and certain real estate investments in South Carolina. According to plaintiffs, the directors — who approved the merger at an implied valuation for MeadWestvaco of approximately $9 billion — knew these assets were undervalued by the market and "deprived MeadWestvaco's shareholders of at least $3 billion of additional value"38 by "flying blind" and doing "virtually nothing" to meet their fiduciary duties.39

In my opinion, the Complaint's allegations fall far short of pleading the "extreme set of facts" necessary to establish a reasonably conceivable bad-faith claim on the theory that the concededly overwhelming majority of disinterested and independent MeadWestvaco directors (8 of 9) intentionally disregarded their fiduciary duties with respect to the process that led to the merger.

Plaintiffs' own pleading suggests that, far from "flying blind," the board was actively engaged in the process. The board first considered merging with RockTenn in April 2014, about nine months before the transaction ultimately was approved.40 After the April 28 board meeting where Luke first raised the possibility of a combination, the directors asked a series of probing questions regarding a potential transaction with RockTenn — hardly evidence of an intentional disregard of one's duties.41 In total, the board held at least six meetings to consider a potential transaction42 and received numerous valuations of the Company.43 The directors were aided by prominent legal counsel (Wachtell Lipton) and three nationally recognized financial advisors — Bank of America Merrill Lynch, Goldman Sachs, and Greenhill.

The negotiation history between the parties also negates the notion that the directors sanctioned a flawed process in deliberate disregard of their fiduciary obligations. As alleged in the Complaint, it was MeadWestvaco that twice terminated negotiations with RockTenn, first in August 2014 when "MeadWestvaco refused an exchange ratio at anything below the current market price of its stock,"44 and then a few months later in November when "Luke informed the Board that RockTenn was unwilling to proceed on terms acceptable to MeadWestvaco."45 MeadWestvaco also did not accept RockTenn's "one and only offer," as plaintiffs initially charged.46 To the contrary, as plaintiffs later conceded,47 MeadWestvaco agreed to the merger only after rejecting RockTenn's proposal for an "at market" transaction, when RockTenn agreed to increase the exchange ratio from 0.71 to 0.78, yielding a 9.1% premium for MeadWestvaco's stockholders. The Merger Agreement, furthermore, included a fiduciary-out and a concededly reasonable break-up fee of less than 3% to afford stockholders the opportunity to receive a superior proposal.48

Plaintiffs further criticize the term of the Merger Agreement that provided for the specialty chemicals division spin-off to occur after the merger closed. Even if one assumes, arguendo, that the individual defendants failed "to take any specific steps during the sale process," that would not be enough to demonstrate "a conscious disregard of their duties," even "in the Revlon context, which is not the case here."49 More to the point, changing the deal to time the spin-off of the specialty chemicals division to occur before the merger logically would have changed the relative valuations and therefore the exchange ratio obtained in the transaction.

In sum, the facts pled in the Complaint do not support a reasonable inference that the eight concededly independent and disinterested directors on the board, who met numerous times with the aid of legal and financial advisors over a nine-month span, intentionally disregarded their fiduciary duties in connection with their oversight of what plaintiffs describe as "near a year of on-again off-again discussions."50 As this Court recently held: "As long as a board attempts to meet its duties, no matter how incompetently, the directors did not consciously disregard their obligations."51

The allegations in the Complaint also do not support a reasonable inference that the ultimate decision to approve a strategic merger that impliedly valued the Company at approximately $9 billion was itself an act of bad faith. "Delaware law requires that for an allegation of price inadequacy to support a bad faith claim, the Court would need to conclude that the price was so far beyond the bounds of reasonable judgment that it seems inexplicable on any ground other than bad faith."52 Our Supreme Court has equated showing that the substance of a board's decision is an act of bad faith to meeting the onerous burden of proving a waste claim: "To prevail on a waste claim or a bad faith claim, the plaintiff must overcome the general `presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests."53

"Delaware corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting."54 What is relevant is the value of the enterprise as a whole. Even under the deferential motion to dismiss standard, the merger consideration here is nowhere near so "egregious,"55 so "irrational,"56 or "so far beyond the bounds of reasonable judgment" as to be "inexplicable on any ground other than bad faith."57

First, the MeadWestvaco board negotiated an exchange ratio representing a 9.1% premium to its stockholders in a strategic merger between two widely-held companies where MeadWestvaco stockholders obtained 50.1% of the combined entity even though, according to information provided to the board, MeadWestvaco contributed less than 50% of the combined company's revenue, net income, and EBITDA.58 The transaction at issue here did not involve a sale of control. It was a strategic merger, ostensibly of equals. Even if it were true that the premium was low, "[t]here is no rule that a low premium represents a bad deal, much less bad faith."59

Second, three separate, nationally recognized financial advisors, none of which are alleged to be conflicted, opined that the merger was fair to MeadWestvaco's stockholders.60 A "board's receipt of a fairness opinion typically supports a factual inference that the board acted properly when deciding to proceed with a transaction."61

Third, the deal protections in the Merger Agreement, which included a fiduciary-out and a $230 million break-up fee, concededly were reasonable.62 The $3 billion in value that plaintiffs assert was left on the table is approximately thirteen times the size of the break-up fee. Starboard's initial letter to the board stated that "[m]any of MeadWestvaco's U.S. competitors have large underfunded pension plans" and specifically identified a second company other than RockTenn as a potential merger partner with "pension liabilities that exceed $1 billion."63 If the exchange ratio really was so irrational, "one might think some other buyer would emerge to capture this surplus."64 Despite the fact that the transaction did not close for more than five months after the Merger Agreement was signed, none did.

Finally, two major independent proxy advisory firms — ISS and Glass Lewis — recommended that stockholders vote to approve the merger.65 The Company's stockholders did so overwhelmingly — to the tune of 98% of the votes cast at a meeting held after plaintiffs obtained preliminary discovery and elected to waive their disclosure claims. Notably, the Complaint nowhere suggests that Starboard expressed any opposition to the merger price or believed that the MeadWestvaco directors left any additional value behind.

At bottom, plaintiffs' theory that the concededly disinterested and independent directors on MeadWestvaco's board intentionally disregarded their fiduciary obligations to leave $3 billion of additional value on the negotiating table — equating to one-third of the $9 billion implied value of the Company in the merger, or about one-quarter of what plaintiffs apparently believe the Company should have been valued at for purposes of the merger ($12 billion) — is simply not credible. Based on the facts pled in the Complaint and that otherwise may be considered on the present motion, it is not reasonably conceivable that the directors' decision to agree to a strategic merger of equals yielding a 9% premium for MeadWestvaco's stockholders is essentially inexplicable on any ground other than bad faith.

D. Count II Fails to State a Claim for Aiding and Abetting

To adequately plead an aiding and abetting claim, plaintiffs must allege facts demonstrating "(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary's duty, ... (3) knowing participation in that breach by the defendants, and (4) damages proximately caused by the breach."66 Because plaintiffs have failed to state a claim for breach of a fiduciary duty, their aiding and abetting claim fails for lack of a predicate breach.

Count II fails to state a claim for a second reason. The "knowing participation" element of an aiding and abetting claim is a "stringent standard that turn[s] on proof of scienter."67 But the Complaint contains no non-conclusory facts suggesting that RockTenn knew that MeadWestvaco's directors, who oversaw a process in which MeadWestvaco terminated negotiations on at least two occasions and obtained a premium for its stockholders after rejecting an "at market" proposal, had failed to discharge their fiduciary duties.68 To the contrary, the Complaint's allegations paint a picture of genuine arm's-length bargaining that is the antithesis of an aiding and abetting claim.69

IV. CONCLUSION

For the reasons stated above, both claims in the Complaint fail to state a claim for relief. Accordingly, defendants' motions to dismiss are GRANTED.

IT IS SO ORDERED.