C & J Energy Services, Inc. v. City of Miami General Employees'

I. INTRODUCTION

This is an expedited appeal from the Court of Chancery’s imposition of an unusual preliminary injunction. 1 City of Miami General Employees’ and Sanitation Employees’ Retirement Trust (“the plaintiffs”) brought a class action on behalf of itself and other stockholders in C & J Energy Services, Inc. (“C & J”) to enjoin a merger between C & J and a division of its competitor, Nabors Industries Ltd. (“Na-bors”). The proposed transaction is itself unusual in that C & J, a U.S. corporation, will acquire a subsidiary of Nabors, which is domiciled in Bermuda, but Nabors will retain a majority of the equity in the surviving company. To obtain more favorable tax rates, the surviving entity, C & J Energy Services, Ltd. (“New C & J”), will be based in Bermuda, and thus subject to lower corporate tax rates than C & J currently pays.

To temper Nabors’ majority voting control of the surviving company, C & J negotiated for certain protections, including a bye-law 2 guaranteeing that all stockholders would share pro rata in any future sale of New C & J, which can only be repealed by a unanimous stockholder vote. C & J also bargained for a “fiduciary out” if a superior proposal was to emerge during a lengthy passive market check, an unusual request for the buyer in a change of control transaction. And during that market check, a potential competing bidder faced only modest deal protection barriers.

Although the Court of Chancery found that the C & J board harbored no conflict of interest and was fully informed about its own company’s value, the court determined there was a “plausible” violation of the board’s Revlon duties 3 because the board did not affirmatively shop the company either before or after signing. 4 On that basis, the Court of Chancery enjoined the stockholder vote for 80 days, despite finding no reason to believe that C & J stockholders — who must vote to approve the transaction — would not have a fair op *1053 portunity to evaluate the deal for themselves on its economic merits.

The Court of Chancery’s order also required C & J to- shop itself in violation of the merger agreement between C&J and Nabors, which prohibited C&J from soliciting other bids. The order dealt with this issue by stating “[t]he solicitation of proposals consistent with this Order and any subsequent negotiations of any alternative proposal that emerges will not constitute a breach of the Merger Agreement in any respect.” 5

But the Court of Chancery did not rely on undisputed facts showing a reasonable probability that the board had breached its fiduciary duties when it imposed this mandatory, affirmative injunction. Instead, it is undisputed that a deal with Nabors made strategic business sense and offered substantial benefits for C & J’s stockholders. Moreover, the order stripped Nabors of its contractual rights even though the Court of Chancery did not make any finding that Nabors was an aider and abettor, or even a finding that there was a reasonable probability of a breach by C & J’s board that Nabors could have aided and abetted.

We assume for the sake of analysis that Revlon was invoked by the pending transaction because Nabors will acquire a majority of New C & J’s voting shares. But we nonetheless conclude that the Court of Chancery’s injunction cannot stand. A preliminary injunction must be supported by a finding by the Court of Chancery that the plaintiffs have demonstrated a reasonable probability of success on the merits. 6 The Court of Chancery made no such finding here, and the analysis that it conducted rested on the erroneous proposition that a company selling itself in a change of control transaction is required to shop itself to fulfill its duty to seek the highest immediate value. ' But Revlon and its progeny do not set out a specific route that a board must follow when fulfilling its fiduciary duties, and an independent board is entitled to use its business judgment to decide to enter into a strategic transaction that promises great benefit, even when it creates certain risks. 7 When -a board exercises its judgment in good faith, tests the transaction through a viable passive market check, and gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal, we cannot conclude that the board likely violated its Revlon, duties. It is too often forgotten that Revlon, and later eases like QVC, 8 primarily involved board resistance to a competing bid after the board had agreed to a change of control, which threatened to impede the emergence of another higher-priced deal. No hint of such a defensive, entrenching motive emerges from this record.

Furthermore, the Court of Chancery’s unusual injunction cannot stand for other important reasons. Mandatory injunctions should only issue with the confi *1054 dence of findings made after a trial or on undisputed facts. 9 Such an injunction cannot strip an innocent third party of its contractual rights while simultaneously binding that party to consummate the transaction. 10 To blue-pencil a contract as the Court of Chancery did here is not an appropriate exercise of equitable authority in a preliminary injunction order. That is especially true because the Court of Chancery made no finding that Nabors had aided and abetted any breach of fiduciary duty, and the Court of Chancery could not even find that it was reasonably likely such a breach by C & J’s board would be found after trial. Accordingly, the judgment of the Court of Chancery is reversed.

II. FACTS

A The Competing Contentions of the Parties

This expedited case has come before us without a formal opinion from the Court of Chancery making detailed fact findings under the standards that govern a preliminary injunction. We therefore are required to craft our own factual recitation in the first instance as to most aspects of the process. Our recitation will reflect this reality and our reluctance to make initial findings of fact on issues that were not fully developed below and that did not motivate the Court of Chancery to issue an injunction.

To frame our discussion of the facts, it is useful to set forth the basic contending positions of the parties. The plaintiffs argue that C & J’s board entered into a change of control transaction without recognizing that it was doing so. With the mindset that it was acquiring an asset, the board never conducted an active market check to see if there were other buyers for C & J. The plaintiffs argue that the C & J board, despite having five independent members, was overly influenced by the CEO, chairman, and founder, Joshua Com-stock, who was allegedly looking to acquire Nabors CPS to secure a new employment package for himself, and was therefore willing to cause C & J to pay more than it should. Furthermore, the plaintiffs point out that C & J’s banker, Citigroup Global Markets, Inc. (“Citi”), had worked with Nabors previously and was suggested by Anthony Petrello, Nabors’ CEO and board chairman, because Petrello wanted to employ C & J’s preferred banker, Goldman Sachs, as his advisor on the deal. The plaintiffs contend that Citi acted as a banker for a preferred deal between two companies that it regarded as clients, rather than as an advisor solely focused on C & J’s best interests.

The plaintiffs further argue that Com-stock failed to keep the board adequately informed, did not take advantage of Na-bors CPS’ declining performance over the course of the negotiations, and had the board approve a poorly priced deal in order to secure a lavish pay package for himself. Most fundamentally, the plaintiffs argue that the board failed to fulfill its fiduciary duties under Revlon in approving a transaction where Nabors would end up with majority voting control of C & J. Rather than engage in an active market check, the board signed up its favorite deal with the inadequate protections of a passive market check and certain bye-law pro *1055 visions, which the plaintiffs characterize as protections for Comstock and his managers, not for C & J stockholders. Accordingly, the plaintiffs characterize the injunction below as a modest one that requires the board to conduct the shopping process it should have done in the first place.

The defendants counter that this is a highly favorable, strategic transaction that was approved by a board whose disinterestedness was not questioned by the Court of Chancery. Although the board authorized Comstock to lead the negotiations, the defendants stress that Comstock owned a 10% stake in C & J, and had no incentive to do anything to harm the value of those shares. Nor, say the defendants, did Comstock have any self-interested, non-business-related reason to favor the Na-bors deal over any of the others that C&J had considered, even if he wanted a better compensation package. As important, the defendants argue that the entire board was apprised of the process throughout and approved the deal because it was beneficial to stockholders. They highlight the frequent communication between Com-stock and the independent directors, especially Adrianna Ma, whose employer, General Atlantic, is a private equity firm that owned 10% of C & J’s stock. 11 The defendants argue that Revlon does not apply, but even if it did, the board satisfied its requirement to “aet[ ] reasonably ... to secure the transaction offering the best value reasonably possible.” 12 They state that the Court of Chancery misapplied the standard for a preliminary injunction and also misinterpreted Revlon when it granted one and required the C & J board to shop the deal.

With those contentions in mind, we summarize the most relevant facts from the record below and the briefing by the parties.

B. The Key Players in the Deal Dynamic

C & J, a Delaware corporation founded in 1997, is an oilfield services provider. The company went public in 2011 and currently has a market capitalization of over $730 million. 13 C & J’s board has seven directors, five of whom are independent. The only management directors are C & J’s founder, chairman, and CEO, Com-stock, and its CFO, Randy McMullen. Nabors, which has a total market capitalization of over $3 billion, is a Bermuda exempt company that also provides oilfield services. 14 As noted, Nabors’ CEO and chairman is Anthony Petrello. Nabors has two primary divisions: a completions and productions services division (“Nabors CPS”) and a drilling and rig services division. None of C & J’s board members had any prior affiliation with Nabors before *1056 beginning discussions about the transaction challenged in this litigation.

C. Citi’s Trauber Introduces Nabors’ Petrello and C & J’s Comstock

In 2013, C & J’s board began to explore strategic acquisitions to grow its business, and authorized Comstock to lead the search. By the end of the year, Comstock had identified at least three potential “strategic partners” and made an offer for one company, but no discussions advanced beyond the initial stages. 15

In January 2014, Stephen Trauber, Vice Chairman and Global Head of Energy Investment Banking at Citi, approached Comstock with an unsolicited pitch book, suggesting Nabors CPS as a target. Na-bors was at that point considering different options for Nabors CPS, including selling it or taking it public. 16 Citi had previously worked as a financial advisor to Nabors, and Trauber was a social acquaintance of Petrello’s. 17 Before identifying Nabors CPS as a target, C & J’s primary financial advisor was Goldman Sachs, 18 but when the companies began negotiating, Petrello told Comstock that Nabors’ board wanted to use Goldman, and suggested that Comstock work with Citi instead. 19 Comstock complied, asserting that it was “the right thing to do” because Citi had surfaced the deal for C & J to consider. 20 But Comstock testified at his deposition that he would have otherwise chosen to work with Goldman because Goldman ‘.‘really knows [the] business well.” 21 Ma further explained that the board did not consider engaging other bankers because Comstock “wanted to keep it confidential and not let [the deal] leak to other banks in the industry,” and the other directors agreed that the deal was “a highly confidential situation” and that “any leak could meaningfully change the economics of the transaction.” 22

In May 2014, C & J’s board asked Citi to provide C & J with financing for the transaction in addition to serving as the financial advisor. The directors recognized the conflict that would result, so they asked Tudor, Pickering, Holt & Co. Securities, Inc. (“Tudor”) for another independent fairness opinion.

As mentioned, the plaintiffs argue that Citi’s Trauber seemed to act more as a banker for the deal than for C & J. Com-stock testified during his deposition that he believed Trauber was communicating with Petrello without Comstock’s authori *1057 zation: “I felt like Mr. Trauber was giving feedback to Tony [Petrello]. So if I was negotiating with Mr. Trauber, I was negotiating with Tony.” 23 Comstock’s perception of needing to “negotiate” with his own financial advisor gives color to the plaintiffs’ allegation that the deal process fell short of the ideal.

D. Negotiating the Deal

Consistent with the plaintiffs’ depiction of Trauber as a banker for the deal, the transaction process began with a January 2014 meeting between Comstock and McMullen, on behalf of C & J, and Petrel-lo, on behalf of Nabors, with Trauber in an as-yet-undefined role. 24 After that meeting, Comstock believed that a transaction was worth pursuing: he perceived that Nabors CPS was underutilized by Nabors because the company was focused on its other division, and he thought that Nabors CPS would be a “good fit ... operationally, culturally, and strategically.” 25

Discussions between Comstock and Pe-trello continued over the next several months. On March 5, C & J’s senior management met with Petrello and other Nabors executives to analyze the transaction, including the possibility of structuring the deal so that the surviving company would be domiciled outside of the U.S. and thus pay tax at lower rates, through what is now widely called a “corporate inversion.” 26 Because Nabors is a Bermuda-based company, C&J could avoid paying U.S. corporate taxes by merging into Na-bors and re-domiciling in Bermuda. The tax benefits from structuring the transaction in this way are substantial — Citi estimated the savings as worth $200 million in net present value. 27

Both parties agreed that Comstock and C & J’s management team would manage the combined entity. But for the re-domiciling to be effective for tax purposes, Na-bors would need to own a majority of the new company. On April 3, 2014, Comstock convened a special board meeting to discuss the potential deal. Comstock had previously discussed acquiring Nabors CPS with some of the directors, but the April 3 meeting appears from the record to be the first time he received formal approval to negotiate 28 C & J’s board conveyed excitement about the substantial tax benefits that re-domiciling in Bermuda would provide, in addition to the other deal synergies, but also expressed worry about losing control because Nabors would own a majority of the stock in the surviving entity. 29 Director Ma testified in her deposition that the board was aware of the im *1058 portance of a change of control because legal counsel had explained during a board call “what the Revlon rules were.” 30

After discussing the tradeoffs between losing control and tax savings, C & J’s directors unanimously approved a nonbinding offer of $2.6 billion, which Com-stock delivered in a letter to Petrello dated April 4.

E. Pricing the Deal

Petrello rejected the April 4 offer, asserting that Nabors CPS was worth a minimum of $3.2 billion. The parties continued to negotiate over price while Comstock arid his team conducted due diligence on Nabors CPS. The plaintiffs contend that these negotiations were tainted by Com-stock’s self-interest, because Petrello made overtures assuring Comstock that he would receive a lucrative compensation package if the deal was completed. 31

After Petrello rejected Comstock’s offer, Comstock emailed the other directors on April 14 to inform them of his intention to raise C & J’s offer to $2.75 billion to keep the deal alive. He explained that he believed “[t]he upside potential here is like no other M & A deal we have come across.” 32 But he acknowledged concerns from board members about “the slippery slope up on pricing,” and the need to “be very vigilant” in proving “the possibility of ... results in due diligence.” 33 The other board members agreed to raise the offer. 34 Accordingly, Comstock sent a second letter to Petrello on April 16, offering $2.75 billion, which represented a multiple of 6.9 over 2014 EBITDA.

On April 22, Nabors released its first quarter results for 2014, which were lower than Nabors expected and worse than Comstock or C & J’s board had anticipated. 35 Comstock expressed concern that Nabors CPS was unlikely to generate its forecasted EBITDA for 2014, which would threaten the proposed valuation for the deal. 36 At the same time, Comstock questioned the credibility of Nabors’ financial results, although he stated in his deposition that he was reacting to what turned out to be an error in Nabors’ proprietary accounting system. 37

*1059 Notwithstanding these negative developments for Nabors, Petrello rejected the $2.75 billion offer on April 23, arguing that the proposal did not reflect the full intrinsic value of Nabors CPS, or the value of the synergies the combination would create. 38 According to Nabors Red Lion Ltd.’s Form S^l filing with the SEC, C & J’s board members discussed Petrello’s demands, but there is no evidence of these discussions in the record before us. Com-stock responded to Petrello in a letter dated April 25, noting his fear that Nabors CPS would be unable to achieve the level of EBITDA projected earlier in the month. But rather than reduce the valuation he was using as a basis for price negotiations, Comstock agreed to use more favorable forward-looking projections into 2015 and “stretch” the multiple from 6 to 6.5. 39 The April 25 letter set a maximum value for Nabors CPS at $2.9 billion. 40

Because there is no evidence that this new offer was approved by the board in advance, there is at least some support for the plaintiffs’ contention that Comstock at times proceeded on an “ask for forgiveness, rather than permission” basis. But as the defendants hasten to point out, the board gave Comstock broad authority to negotiate, and he kept them apprised of major developments, even if he did not seek approval at every stage of the process. 41

To wit, on April 29, C & J’s board met for its regularly scheduled meeting. According to the minutes, Comstock presented an update on the negotiations with Na-bors, including Petrello’s response to the April 23 offer. 42 That evening, • after the board meeting, Comstock and Petrello agreed to a deal based on a valuation of $2,925 billion for Nabors CPS during a telephone conversation. The plaintiffs accurately contend that Petrello used this conversation to assure Comstock that he and his fellow C&J managers would receive aggressive employment agreements. But the record also reflects that Comstock did not follow up on these overtures to discuss specifics during the negotiation process.

The plaintiffs allege that the valuation adjustments made following the announcement of Nabors CPS’ decline in performance demonstrate that the C&J stockholders got a bad deal. But there is also a colorable basis to believe that Comstock was playing the negotiation game skillfully when he reacted to the downward movement in Nabors CPS’ performance as he did. 43 The record contains evidence that *1060 Comstock attempted to protect C & J stockholders using strategic negotiating tactics; for example, Comstock made clear throughout the process that he was willing to cease negotiations if terms protecting C & J’s stockholders were not reflected in the final deal. 44 He also revealed in internal emails with McMullen and other C & J directors that he thought focusing on Na-bors CPS’ declining performance would be an effective negotiating strategy to keep the price low, and that the deal was worthwhile because of the value he and his management team could bring to the combined entity. 45 In other words, the record can be reasonably read to suggest that Comstock believed in good faith that he should not pile onto Nabors’ woes, but rather use the evidence of Nabors CPS’ declining performance to keep the price negotiations at a positive value for C & J while ensuring that, in the end, the company secured an asset whose acquisition he believed would generate valuable benefits for C & J’s stockholders. We also note that Comstock ultimately lowered C & J’s offer to $2.86 billion days before closing because C & J’s “diligence only proved” some of Nabors CPS’ projected EBIT-DA. 46

Moreover, we note that Comstock continually shared the details of the valuation changes and negotiations with the C & J board, 47 which was majority-independent, and which had the final say in approving the deal before it went to a stockholder vote. Although it authorized Comstock to continue negotiations on its behalf in the April 3 meeting, C & J’s board remained engaged in the process. By way of example, the board met seven times between April 3 and June 24. The truncated record contains several emails from Comstock to the other directors during that time, keeping them apprised of relevant findings from his diligence, including the declining state of Nabors CPS’ business. Ma confirmed in her affidavit and deposition that the board broadly authorized Cbmstock to negotiate a deal and he “briefled] us all along the way.” 48 During the negotiating process, Trauber remarked in an email to Comstock that in his “26 years” of doing “hundreds” of deals, he had “never seen a CEO have to provide their board so much data day-to-day and have to constantly answer emails from the board.” 49 Even if the board was not aware of every “blow by *1061 blow,” 50 the record suggests that the board was informed about the transaction they would eventually vote to approve, especially the final terms of the deal. 51

The board also considered whether to actively shop C & J to potential buyers. Ma testified at her deposition that the board asked Citi whether “other strategic bidders” would be interested in C & J, and the board “considered potential strategic bidders for C & J as part of our ability and certainty in closing the Nabors transaction.” 52 She noted that Citi assessed the probability of engagement from other potential buyers as “low.” 53

F. The Final Deal Terms

After these extensive negotiations, Com-stock and Petrello agreed to a valuation for Nabors CPS of $2.86 billion, which was premised on a forecast of Nabors CPS’ 2015 EBITDA of $445 million 54 and an implied multiple of 6.4. 55 This price was lower than Petrello’s initial ask of $3.2 billion, but higher than C & J’s initial offer of $2.6.

To consummate the transaction, Nabors would create a new subsidiary, Red Lion, into which it would transfer its CPS business. C&J would then merge with Red Lion. C & J’s former stockholders would own 47% of the combined entity, and their shares would be converted into Red Lion common stock on a 1:1 basis in a tax-free transaction. Nabors would own the remaining 53%, and receive approximately $938 million in cash. 56 The entity would *1062 then be renamed C & J Energy Services, Ltd., and be listed under C & J’s current ticker, CJES, on the New York Stock Exchange. Because New C & J would be a Bermuda corporation, the rights of its stockholders would be governed by Bermuda law, rather than Delaware law.

To ensure that C & J’s stockholders would retain some control over New C & J, C & J’s board also insisted on several corporate governance protections. Under the merger agreement, C & J stockholders would have the power to designate four board members, including Comstock as the chairman of the board. 57 Comstock would become CEO and McMullen would become President and CFO. To ensure that C & J retained a controlling interest in the entity, C & J also negotiated the following requirements:

(i) For a period of five years, a two-thirds vote of the stockholders of the combined entity will be required to amend the bye-laws (unless approved by Comstock and at least three directors not nominated by Nabors); sell the company; issue stock; or repurchase more than 15% of the outstanding shares of the company in a given year;

(ii) In the event of a sale of the company or major assets, all stockholders will receive consideration of the same type and of the same amount calculated on a per share basis. This bye-law provision cannot be amended without a unanimous stockholder vote;

(iii) From the closing date until the earlier of the five year anniversary of the effective date or the date that Na-bors owns less than 15% of the combined entity’s shares (the “standstill” period), Nabors will be prohibited (without a two-thirds board vote) from acquiring additional shares beyond its ownership stake as of closing; soliciting or encouraging any proposal for a business combination; soliciting or becoming a participant in the solicitation of any proxy related to any vote, or agreeing to vote with any person undertaking a “solicitation”; participating in a “group” with respect to securities of the combined entity; granting proxies to any third party (other than as recommended by the board) or entering into any understanding or agreement with respect to the voting of equity securities of the combined entity; seeking additional representation on, or proposing any changes to the size of, the board of directors;

(iv) Board members will be nominated by a three-member nominating committee, two of whom will be current C & J directors. The board will be classified with current C & J directors in each class;

(v) Without a two-thirds vote of the combined entity’s board, and during the standstill period, Nabors can only sell its stock to a person or group that is not subject to SEC Rule 13d, i.e., the transferee cannot (i) hold the securities with the “purpose, or with the effect of, changing or influencing the control” or (ii) own more than 20% of the combined entity. If Nabors chooses to sell more than 10% of the outstanding shares to a person or group, the combined entity will have a right of first refusal. Na- *1063 bors will be prohibited from selling its stock to certain competitors. If any other company wishes to buy a controlling stake in the combined entity, they will be required to make an offer for the whole company, and

(vi) If Nabors violates any of the standstill provisions of the merger agreement, the violation will provide a basis to terminate the employment of certain members of the post-merger management team who are currently affiliated with Nabors. 58 .

C&J also bargained for a no-solicitation clause with a “fiduciary out” to allow C & J to negotiate with third parties under Certain circumstances; a “fiduciary out” allowing C & J to terminate the deal in favor of a superior proposal; and a modest $65 million termination fee (2.27% of the deal value). ' And although Comstock signed a voting support agreement committing his shares to vote for the merger, he would be released from that agreement if the C&J board changed its recommendation in favor of the deal or otherwise exercised its “fiduciary out.” 59

C & J’s board considered the formal terms of the transaction at a special board meeting on June 24. Citi and Tudor both presented valuation analyses and fairness opinions to the board. Both financial ad-visors found that the transaction would be fair to stockholders, and that it would add value to C & J’s stock. 60

Following discussions, the board unanimously approved the transaction, subject to the approval of C & J stockholders, with the intention to close before the end of 2014. The deal was publicly announced the following day, on June 25. The stock market reacted positively to the news: shares of both companies’ stock rose, and analyst coverage largely viewed the transaction as favorable to C & J’s stockholders. 61

G. Comstock’s Compensation Package

C & J’s attorneys advised the current board that it would be “best from a fiduciary perspective to negotiate the deal terms and get those settled and agreed to before introducing the employment agreements.” 62 Consistent with this approach, Comstock deferred negotiating about the *1064 specifics until late June. 63 But as the plaintiffs point out, Petrello had assured Com-stock throughout the process . that he would be aggressive in protecting Com-stock’s financial interests if a deal was consummated.

At approximately the same time that C & J’s board approved the-deal, Comstock asked Petrello to sign a side letter affirming that C & J’s management would run the surviving entity and endorsing a generous compensation package. Comstock negotiated for: a $1.1 million annual base salary, in addition to a bonus targeted at 200-300% of that amount; a lump-sum $3.3 million “success cash bonus”; and a “success equity bonus” of 500,000 restricted stock units, vested over three years, worth approximately $15.8 million. 64 He would also be paid approximately $173 million in severance if his employment was terminated without cause. 65 By comparison, Comstock’s base salary in 2014 is $875,000, with a target bonus range of 100-200%. He also received a grant of restricted stock worth $3.27 million. 66 Comstock’s current severance package is also less generous, in part because it was premised on a lower salary level, but also by its own terms. 67 His current compensation package at C & J is thus more modest than what he stands to receive as CEO of New C & J if the deal is consummated.

When Petrello hesitated to sign the letter, objecting to some of Comstock’s de *1065 mands, Comstock threatened to “not sign ... and not announce the transaction.” 68 Comstock emailed the other directors to keep them informed of what he characterized as Petrello’s “last minute gamesmanship.” 69 But a few hours later, Petrello agreed to sign the letter with some modifications, 70 and the deal was announced as planned. 71

The evidence from the record thus provides some support for the arguments made by both sides in this case. The evidence showing that Comstock was focused on his compensation casts shade on his motivations, as he ultimately secured a generous package. That said, the Court of Chancery did not find that Comstock likely breached his duty of loyalty or faced a certain conflict of interest, 72 and we cannot do so ourselves as a factual matter on this record.

Although Comstock appeared interested in improving his compensation, there is no basis in the record or market dynamics to suggest that a deal with Nabors was necessary for him to achieve that objective. Selling to a private equity buyer or purchasing another substantial asset, which C & J had considered in late 2018, would have the potential to generate similar benefits for him. As important, Comstock faced no threat to his tenure, held 10% of C & J’s stock, and had a strong interest in maximizing the value of those shares. Given that Nabors would own a majority of New C & J’s stock, there was also a logical reason for him and his management team to seek strong protection against removal, especially because C & J’s deal thesis was premised on the higher valuation its team could achieve in managing Nabors CPS’ underutilized assets. 73

Additionally, C&J stockholders have the opportunity to vote, on a non-binding, advisory basis, on the compensation proposals for C & J executives as part of the same proxy as the binding vote to approve the merger agreement. And the employment agreement Comstock negotiated is not binding on the board of New C&J, which must approve any compensation package. Most important of all, any potential conflict must be balanced against the numerous meetings that the C&J board held during the process, the board’s close involvement and communications with Comstock throughout, and the reality that the board’s favorable view of the transaction was validated by the stock market reaction.

Likewise, the plaintiffs’ argument that the board lacked awareness of the change in control implications of the deal is belied by the protective provisions built into the merger agreement. That agreement not only ensured that C&J stockholders would share pro rata in any future control premium if New C & J is sold, but also *1066 contained an unusual buy-side “fiduciary out” allowing for a lengthy and viable post-signing market check.

It is therefore unsurprising that the Court of Chancery was unable to find a reasonable probability of success on the merits or that any member of the board was conflicted. 74 Although the record before us reveals a board process that sometimes fell short of ideal, Revlon requires us to examine whether a board’s overall course of action was reasonable under the circumstances as a good faith attempt to secure the highest value reasonably attainable. 75 When that standard is applied to this record, we cannot conclude that the plaintiffs have proven that the majority-independent C & J board acted unreasonably in negotiating a logical strategic transaction, with undisputed business and tax advantages, simply because that transaction had change of control implications.

III. ANALYSIS

A. The Court Of Chancery Applied The Wrong Standard Of Proof And Evi-dentiary Burden For A Preliminary Injunction

To obtain a preliminary injunction, the plaintiffs must demonstrate: (1) a reasonable probability of success on the merits; (2) that they will suffer irreparable injury without an injunction; and (3) that their harm without an injunction outweighs the harm to the defendants that will result from the injunction. 76 Delaware courts have emphasized that in cases like this, where the plaintiff seeks to enjoin a corporate transaction, the showing of a reasonable probability of success must be “particularly strong” when “no other bidder has emerged despite relatively mild deal protection devices.” 77

In this case, although the Court of Chancery correctly identified the standard of review for a preliminary injunction, it misapplied that standard when it found that there was “a plausible showing of a likelihood of success on the merits as to a breach of the duty of care, and that goes to an absence of an effort to sell.” 78 The court also stated that the question “is a very close call,” 79 outlined substantial arguments against granting the injunction, admitted that the principle that stockholders are entitled to a particular sales process was “not a particularly satisfying one,” 80 and highlighted that no rival bidders had emerged in the five months since the announcement despite modest deal *1067 protections. 81 A party showing a “reasonable probability” of success must demonstrate “that it "will prove that it is more likely than not entitled to relief.” 82 The Court of Chancery’s own decision indicates that the plaintiffs did not carry that burden in this case, but the Court of Chancery failed to apply the correct standard of review when it nevertheless awarded the plaintiffs’ requested injunctive relief.

B. The Plaintiffs Have Not Demonstrated A Reasonable Probability Of Success On The Merits

1. The Court of Chancery’s Ruling Rested on an Erroneous Understanding of What Revlon Requires of a Board of Directors

Not only did the Court of Chancery fail to apply the appropriate standard of review, its ruling rested on an erroneous understanding of what Revlon requires. Revlon involved a decision by a board of directors to chill the emergence of a higher offer from a bidder because the board’s CEO disliked the new bidder, after the target board had agreed to sell the company for cash. Revlon made clear that when a board engages in a change of control transaction, it must not take actions inconsistent with achieving the highest immediate value reasonably attainable. 83

But Revlon does not require a board to set aside its own view of what is best for the corporation’s stockholders and run an auction whenever the board approves a change of control transaction. As this Court has made clear, “there is no single blueprint that a board must follow to fulfill its duties,” 84 and a court applying Revlon’s enhanced scrutiny must decide “whether the directors made a reasonable decision, not a perfect decision.” 85

In a series of decisions in the wake of Revlon, Chancellor Allen correctly read its holding as permitting a board to pursue the transaction it reasonably views as most valuable to stockholders, so long as the transaction is subject to an effective market check under circumstances in which any bidder interested in paying more has a reasonable opportunity to do so. 86 Such a market check does not have to involve an active solicitation, so long as *1068 interested bidders have a fair opportunity to present a higher-value alternative, and the board has the flexibility to eschew the original transaction and accept the higher-value deal. 87 The ability of the stockholders themselves to freely accept or reject the board’s preferred course of action is also of great importance in this context. 88

Here, the Court of Chancery seems to have believed that Revlon required C & J’s board to conduct a pre-signing active solicitation process in order to satisfy its contextual fiduciary duties. 89 It did so despite finding that C & J’s board had no improper motive to sign a deal with Nabors 90 and that the board was well-informed as to C & J’s value, 91 and despite the fact that Comstock, one of C & J’s largest stockholders, had a strong motive to maximize the value of his shares, and had no reason to do a deal just to secure his (unthreatened) management future. *1069 Not only that, but the employer of one of C & J’s directors, Ma, was a private equity firm that owned 10% of C & J stock and was therefore unlikely to support a transaction that would compromise the value of its large equity position. 92

The Court of Chancery imposed a pre-signing solicitation requirement because of its perception that C & J’s board did not have “an impeccable knowledge of the value of the company that it is selling.” 93 In so ruling, the Court of Chancery seemed to imply that Revlon required “impeccable knowledge,” and that there was only one reasonable way to comply, ie., requiring a company to actively shop itself, which ignores the Court of Chancery’s own well-reasoned precedent 94 and that of this Court, including our recent decision in Lyondell, 95 And the court’s perception that the board was not adequately informed was in tension with its other findings, grounded in the record, that C & J’s directors were well-informed as to Nabors CPS’ value. 96

Nor does the record indicate that C & J’s board was unaware of the implications of structuring the deal so that Nabors would have majority voting control over the surviving entity. 97 As the undisputed facts demonstrate, the C&J board was aware that Nabors would own a majority of the voting stock of New C & J, and indeed that such a shift in control was , required to effect the tax-motivated re-domiciling that the board believed would be beneficial to C & J’s stockholders. The board took steps to mitigate the effects of that change in control, including by providing that a two-thirds vote will be required to amend the corporate bye-laws, sell the company, or issue stock for a period of five years; and preventing Nabors from acquiring additional shares or selling its shares for the five year standstill period. Most important, the board negotiated for a bye-law providing that all stockholders will receive pro rata consideration in any sale of the company or its assets, a bye-law that cannot be repealed without unanimous stockholder approval.

Although we are reluctant in the context of this expedited appeal to conclude that these provisions were, in themselves, sufficient to take the transaction out of the reach of Revlon, they do constitute important efforts by the C&J directors to protect their stockholders and to ensure that the transaction was favorable to them. 98

*1070 It is also important to note that there were no material barriers that would have prevented a rival bidder from making a superior offer. As discussed, the C & J board negotiated for a broad “fiduciary out” that enabled the board to terminate the transaction with Nabors if a more favorable deal emerged. This was an unusual protection for a buyer of assets to secure, because sellers (for logical reasons) rarely give buyers such an out. Consistent with his fiduciary duties as a C & J director, Comstock’s voting support agreement would fall away upon a decision by the C & J board to exercise its out, leaving him free to vote in favor of a higher priced deal. 99 Therefore, if a competing bidder emerged, it faced only the barrier of a $65 million termination fee. 100 Further, the transaction was announced on July 25, and was not expected to be consummated until near the end of 2014, a period of time more than sufficient for a serious bidder to express interest and to formulate a binding offer for the C & J board to accept.

In prior cases like In re Fort Howard Corporation Shareholders Litigation, this sort of passive market check was deemed sufficient to satisfy Revlon. 101 But as the years go by, people seem to forget that Revlon was largely about a board’s resistance to a particular bidder and its subsequent attempts to prevent market forces from surfacing the highest bid. QVC was of a similar ilk. 102 But in this case, there was no barrier to the emergence of another bidder and more than adequate time for such a bidder to emerge. The Court of Chancery was right to be “skeptical that another buyer would emerge.” 103 As important, the majority of C & J’s board is independent, and there is no apparent reason why the board would not be receptive to a transaction that was better for stockholders than the Nabors deal.

It is also contextually relevant that C & J’s stockholders will have the chance to vote on whether to accept the benefits and risks that come with the transaction, or to reject the deal and have C & J continue to be run on a stand-alone basis. 104 Although the C & J board had to satisfy itself that the transaction was the best course of action for stockholders, the board could also take into account that its stockholders would have a fair chance to evaluate the board’s decision for themselves. As the Court of Chancery noted, “[t]he shareholders are adequately informed.” 105

*1071 Given these factors, we conclude that the Court of Chancery failed to apply the correct legal analysis when it imposed the injunction. Because the Court of Chancery could not find that the plaintiffs had met their burden while misapplying Revlon and reading it to require an active market check in all circumstances, it certainly could not have found a reasonable probability of success when applying Revlon faithfully.

2. The Court of Chancery Erred by Entering a Mandatory Injunction Without Applying the .Correct Procedural Standard

For these reasons, the Court of Chancery should not have issued any injunction at all. But the Court of Chancery also erred by entering a mandatory injunction without applying the correct procedural standard. The court order provides that C & J is “ordered to solicit alternative proposals to purchase the Company... .” 106 To issue a mandatory injunction requiring a party to take affirmative action — such as to engage in the go-shop process the Court of Chancery required— the Court of Chancery must either, hold a trial and make findings of fact, or base an injunction solely on undisputed facts. 107 Here, the Court of Chancery issued a mandatory injunction on a paper record that surfaced a number of important factual disputes and that was only sufficient to convince the Court of Chancery that the plaintiffs had a plausible merits case. This was error. The plaintiffs here did not seek an expedited trial; they sought a preliminary injunction, and an unusual one at that. The injunction ordered C & J to solicit and negotiate alternative proposals, and stated that doing so would not constitute a breach of the merger agreement, despite the plain language of Section 6.4 of the agreement to the contrary. 108

Although the equitable authority of our Court of Chancery is broad, it is not uneabined and must be exercised with care and respect for the rights of litigants. The record below did not provide a basis for the Court of Chancery to force Nabors to endure a judicially-ordered infringement of its contractual rights that would, by judi- *1072 eial fíat, not even count as a breach of Nabors’ rights. 109 The Court of Chancery-made no finding, even on a preliminary basis, that Nabors aided and abetted the C & J’s board’s alleged breach of fiduciary duties. 110 This was unsurprising, given that the plaintiffs did not even make a fair argument below to support attributing liability to Nabors. 111

Preliminary injunctions are powerful tools, and their bluntness can be disconcerting to plaintiffs, defendants, and trial judges. But the traditional use of a preliminary injunction in the Court of Chancery is to preserve the status quo 112 —for example, to enjoin a corporate transaction until there is a full trial if the court believes that there is a reasonable probability a fiduciary breach has occurred — not to divest third parties of their contractual rights. Even after a trial, a judicial decision holding a party to its contractual obligations while stripping it of bargained-for benefits should only be undertaken on the basis that the party ordered to perform was fairly required to do so, because it had, for example, aided and abetted a breach of fiduciary duty. 113 To blue-pencil an agreement to excise a provision beneficial to a third party like Nabors on the basis of a provisional record and then declare that the third party could not regard the excision as a basis for relieving it of its own contractual duties involves an exercise of judicial power inconsistent with the standards that govern the award of mandatory injunctions under Delaware law. 114

That is especially the case when the stockholders subject to irreparable harm are, as here, capable of addressing that harm themselves by the simple act of casting a “no” vote. 115 In a situation like this *1073 one, where no rival bidder has emerged to complain that it was not given a fair opportunity to bid, 116 and where there is. no reason to believe that stockholders are not adequately informed or will be coerced into accepting the transaction if they do not find it favorable, the Court of Chancery should be reluctant to take the decision out of their hands. 117 Moreover, almost any judicial injunction, much less one of this unusual kind, creates a greater risk that the underlying transaction might not be available to the stockholders after the injunction is lifted. 118 And there is also the important issue of whether C & J’s breach of the no-solicitation clause of the contract would excuse Nabors from closing if it determined doing so was in its interests. 119

We are mindful that an after-the-fact monetary damages case is an imperfect tool, and we acknowledge that there are colorable questions about the interests of certain key players in the transaction that have not been fully explored given the expedited nature of the proceedings. But, as noted, the Court of Chancery did not find that the plaintiffs’ duty of loyalty claims had any merit based on the record, 120 and could not even find a reasonable probability of success as to any care-based breach of fiduciary duty claim. To rely on this insufficient premise to issue a powerful mandatory injunction, when no rival transaction was available, and when the stockholders can reject the deal for themselves if they do not find its terms to be-value-maximizing, was an error.

*1074 For all these reasons, the order of the Court of Chancery is hereby REVERSED. The mandate shall issue immediately.