The Court, faced with significant litigation over the proposed merger of two major banks and the validity of deal protection provisions in the approved merger agreement, engaged in a thorough discussion of the underpinnings and evolution of the business judgment rule as well as the development of Delaware law in the area of corporate change of control.  The Court articulated the standard it would apply in reviewing the validity of such provisions.

At the heart of the Court’s discussion is an analysis of the tension between the degree of freedom which corporate boards should have to make decisions, and the level of review which a Court should apply to such decisions.

The Court held that "our system requires: (a) that directors have the power and authority to plan, develop, design, negotiate and contract for mergers and other acquisitions fundamental to the corporation’s business strategy, (b) that shareholders have the right to vote on any such fundamental changes in corporate structure and (c) that their vote results in a free, uncoerced and informed valuation of the proposed corporate action. Exposing a transaction to valuation in the marketplace is the best test of its worth. When corporate law adopts a review process that insures that these structural requirements are met, it promotes corporate value."

The Court held that directors of North Carolina corporations do not have Revlon duties, based on the amendment of N.C.G.S. Sec. 55-8-30(d), which provides that "the duties of a director weighing a change in control situation shall not be any different, nor the standard of care any higher, than otherwise provided in this section."  It determined that the policy of North Carolina demanded deference to the strategic decisions of directors, but at the same time a vigorous preservation of the voting rights of shareholders. 

The Court held that it would apply the following standard in cases seeking injunctive relief against deal protection devices in a stock for stock merger:

In reviewing deal protection measures in a stock-for-stock merger subject to shareholder approval, the court will first review the transaction, including the adoption of deal protection measures, to determine if the directors have complied with their statutory duty of care under N.C.G.S. § 55-8-30. The burden is upon the shareholder challenging their actions to prove that a breach of duty has occurred. If no breach of duty is proven, the action of the directors is entitled to a strong presumption of reasonableness and validity, including noncoercion, and the court should not intervene unless the shareholder can rebut that presumption by clear and convincing evidence that the deal protection provisions were actionably coercive, or that the deal protection provisions prevented the directors from performing their statutory duties. If a breach of duty is established, the burden shifts to the directors to prove that their actions were reasonable and that it is in the best interests of the shareholders that they be permitted to vote on the transaction, and, if at issue, that the deal protection measures were not actionably coercive and did not prevent the directors from performing their statutory duties. Where the court finds that the deal protection measures are coercive or require directors to breach their statutory duties, the court must then weigh the harm to the shareholders in enjoining either the deal protection measures, the vote on the transaction or the merger, if the transaction is approved, against the harm resulting from not entering injunctive relief.

Applying this standard, the Court found no breach of duty on the part of the Wachovia directors.  They had acted with due care, and were entitled in their determination to rely upon the advice of legal counsel, investment bankers, and other professionals in managing the business of the corporation.  They had negotiated a higher price than initially offered, and had obtained a fiduciary out to the no-shop provision in the merger agreement.  In response to SunTrust’s argument that the directors did not fully understand the economic impact of a cross-option agreement which they had approved, the Court held that it made no difference that the directors did not understand the intricacies of the break up fee resulting from that agreement.  The directors understood the bottom line, which was $780 million, and the Court found that sufficient.

The Court found that the deal protection measures before it were not coercive.  It held "they do not force management’s preferred alternative on the shareholders.  There is no preordained result or any structural or situational coercion.  Wachovia shareholders can vote their economic interests.  The Court is convinced that those shareholders have an unfettered, fully informed opportunity to exercise their right to approve or disapprove of the merger their board has proposed to them, and that is the market test our system prefers."

The Court found invalid, however, a provision in the merger agreement which kept the merger agreement in place for five months past the date scheduled for the shareholders meeting at which the merger was to be presented for approval.  It referred to this as "numb hands" for the Wachovia board, and an "impermissible abrogation" of their duties.  The Court held that if the merger were not approved, "this board has impermissibly tied its hand and cannot do the very thing the Delaware Supreme Court found to be of fundamental importance to the shareholders — ‘negotiating a possible sale of the corporation.’"

Full Opinion