Court of Chancery Affirms That Minority Stockholder May Be Controlling Stockholder
By David Forney and Eric Taylor
In Calesa Associates, L.P, et. al v. American Capital, Ltd., et. al, C.A. No. 10557-VCG (Del. Ch. February 29, 2016) (Glascock, V.C.), the Delaware Court of Chancery denied (with one minor exception) a 12(b)(6) motion to dismiss for failure to state a claim in a direct suit brought by stockholders of Halt Medical, Inc. (“Halt”) alleging breaches of fiduciary duties by an alleged controlling stockholder, American Capital, Ltd., a publicly traded private equity firm, and several of its affiliates (collectively, “American Capital”), and certain of Halt’s directors. The fiduciary duty claims relate to a recapitalization transaction (denominated by the Plaintiffs as a “squeeze-out merger”) that the plaintiffs claimed disproportionately benefitted American Capital and certain of Halt’s directors allegedly controlled by American Capital at the expense of Halt’s other stockholders. The Plaintiffs argued that, through a complex series of premeditated transactions and control of Halt’s Board, American Capital chocked off Halt’s capital needs and then restructured Halt pursuant to a transaction resulting in a “squeeze out” of the minority stockholders.
The Court found that the plaintiff stockholders alleged facts sufficient to support a reasonable inference that American Capital was Halt’s controlling stockholder because of its control over the Halt Board, despite its 26% equity ownership stake. In reaching the decision, the Court reaffirmed that majority equity ownership is not the sole test, and that “control” exercised by a significant minority stockholder, even when the stockholder is exercising contractual blocking rights negotiated in prior equity transactions, is enough to characterize the non-majority stockholder as a controller for purposes of determining that the “entire fairness” standard, and not the business judgment rule, governs the board’s fiduciary duties and the controller’s actions.