CHANCERY COURT DECLINES TO DISMISS FIDUCIARY CLAIMS ARISING FROM A SELF-TENDER OFFER
By Lisa Stark and Dean Brazier
In Buttonwood Tree Value Partners L.P., et al. v. R.L. Polk & Co., Inc., et al., C.A. No. 9250-VCG (Del. Ch. July 24, 2017), the Delaware Chancery Court denied, in part, a motion to dismiss claims for breach of the fiduciary duty of loyalty brought by minority stockholders in R. L. Polk and Co., Inc. (“Polk”) against the directors of Polk and members of the Polk family, who controlled Polk, in connection with a self-tender offer. In this case, the Court held that it was reasonably conceivable that the Polk directors who were affiliated with the Polk family deliberately caused Polk to conduct a self-tender offer at a low price to enable Polk family insiders to maximize their proceeds from a future sale of Polk.
In March 2011, Polk made a cash offer to purchase a small percentage of its outstanding stock at $810 per share (the “2011 Self-Tender”). Polk’s stock had been trading between $600 and $650 at the time. The Polk family controlled more than 90% of Polk’s stock and the 2011 Self-Tender preserved the Polk family’s controlling interest. While the Polk directors did not recommend that Polk’s stockholders tender into the offer, the offering materials disclosed that Polk’s financial advisor had determined that the $810 price was fair. The offering materials also disclosed that Polk was not considering any extraordinary transactions.
Buttonwood Tree Value Partners, L.P. and Mitchell Partners L.P. (the named plaintiffs) sold shares to Polk pursuant to the 2011 Self-Tender. The 2011 Self-Tender closed in May 2011. In the second half of 2012, Polk declared three special dividends totaling $290 per share, or almost 36% of the offering price in the 2011 Self-Tender. Subsequently, Polk agreed to a sale in June 2013 for $2,675 per share. All in, stockholders of Polk that declined the 2011 Self-Tender, and held shares until June 2013 received $2,965, which was 366% more than the $810 offered in 2011. The stockholders who reaped the rewards of the special dividends and the subsequent sale included Polk family members and their three affiliated Polk directors.
In this action, the plaintiffs argued, among other things, that Polk’s directors breached their fiduciary duties by planning a freeze-out merger in the months immediately prior to the 2011 Self-Tender to maximize the Polk family members’ return on a future sale and by making material omissions and misstatements in the offering disclosures for the 2011 Self-Tender. Defendants moved to dismiss plaintiffs’ complaint.
In analyzing plaintiffs’ claims against the Polk directors who were affiliated with the Polk family, for purposes of the motion to dismiss, the Court determined that the defendants would bear the burden of proving the entire fairness of the 2011 Self-Tender Offer. Here, the Court noted that the Polk family and the Polk family directors had a material relationship with the financial advisor who opined that the 2011 Self-Tender was fair. Because of this relationship, the Court found it reasonably conceivable that a control group set an artificially low price for the 2011 Self-Tender, warranting the application of the entire fairness standard of review at trial. Thus, the Court denied plaintiffs’ motion to dismiss with respect to the Polk family affiliated directors.
Next, the Court assessed plaintiffs’ allegations that the entire fairness standard of review should also apply to its review of the claims alleged against Polk’s independent directors. To survive dismissal, the plaintiffs had to sufficiently plead a reasonably conceivable set of circumstances involving self-interest or bad faith on the part of the independent directors. Here, the Court noted that the complaint failed to explain why the independent directors had a conflict of interest in the 2011 Self-Tender or were not independent of the control group. Further, while the complaint alleged that the independent directors acted in bad faith by making material misstatements and omissions in the offering documents, the complaint failed to make non-conclusory allegations that the independent directors knowingly made any misstatements or omissions. Thus, the Court granted the motion to dismiss with respect to Polk’s independent directors.