Conflict of Interest – Page 3

Chancery Court Holds that Company Does Not Have to Pay Damages for Refusing to Appoint Director Represented by Counsel That is Also Representing Opposing Party in Adverse Litigation

Jun 24 2015

In Partners Healthcare Solutions Holdings, L.P. and GTCR Fund IX/A, L.P. v. Universal American Corp., Partners Healthcare Solutions Holdings, L.P. (“Partners”) sued Universal American Corporation (“UAM”), seeking damages and specific performance following a dispute as to Partners’ appointment of a director to UAM’s board. During the litigation, the parties reached a settlement as to the specific performance aspect of the litigation, leaving only the issues of damages. UAM filed a motion for summary judgment, which Vice Chancellor Glasscock granted.

In March 2012, Partners entered into a merger agreement with UAM, pursuant to which UAM purchased a Partners subsidiary, and Partners became one of UAM’s largest stockholders. Partners was also given a seat for its designee on UAM’s board pursuant to a letter agreement (“Board Seat Agreement”). That agreement provided that the designee must be independent under stock exchange rules, and granted Partners the right to name a replacement in the event that the initial designee resigned. Partners named David Katz, a former board member of Partners, to the UAM board.

Court of Chancery Finds That Manager Breached Her Fiduciary Duty of Loyalty by Engaging in Numerous Self-Interested Transactions

Jun 03 2015

By Nick Froio and Zack Sager

In this memorandum opinion, the Delaware Court of Chancery found Sandra Manno (“Manno”), the manager of CanCan Development, LLC, a Delaware limited liability company (the “Company”), liable for breaching her fiduciary duty of loyalty to the Company by engaging in numerous self-interested transactions.

A manager of a Delaware limited liability company owes traditional fiduciary duties of care and loyalty unless the organizational documents of the limited liability company modify such duties. The Court, citing Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), implied that the organizational documents of the Company did not modify the traditional fiduciary duties.

In re: El Paso Pipeline Partners L.P. Derivative Litigation, C.A. No. 7141-VCL (June 12, 2014)

Jul 01 2014

By Eric Feldman and Porter Sesnon

In In re: El Paso Pipeline Partners L.P. Derivative Litigation, the Delaware Court of Chancery granted summary judgment in favor of the defendants on claims for breach of contract and breach of the implied contractual covenant of good faith and fair dealing in connection with a conflicted transaction.

In March 2010, El Paso Pipeline Partners, L.P., a Delaware limited partnership that operates as a publicly traded master limited partnership (the “MLP”), purchased a 51% interest in two entities that owned certain liquid natural gas (“LNG”) assets (the “Drop-down”) from its parent corporation that “sponsored” the MLP, El Paso Corporation (the “Parent”). Parent also indirectly owned the general partner of the MLP, El Paso Pipeline GP, L.L.C. (the “General Partner”), giving it control over and an economic interest in the MLP. As a result, the proposed Drop-down created a conflict of interest for the General Partner.

Chen v. Howard-Anderson, C.A. No. 5878-VCL, decided on April 8, 2014

Apr 10 2014

By Annette Becker and Jason Jones

In Chen v. Howard-Anderson, Vice Chancellor Laster considered a motion for summary judgment brought by certain officers and the Board of Directors of Occam Networks, Inc., (“Occam”), a public Delaware corporation seeking a determination by the Court that they did not breach their fiduciary duties. The plaintiffs (former stockholders of Occam) claim that the defendants breached their fiduciary duties “by (i) making decisions during Occam’s sale process that fell outside the range of reasonableness (the “Sale Process Claim”) and (ii) issuing a proxy statement for Occam’s stockholder vote on the Merger that contained materially misleading disclosures and material omissions” (the “Disclosure Claim”).

In 2009, Calix, Inc. and Occam (competitors in the broadband market) began discussing a potential business combination. In response, the Board of Occam determined that formal discussions with Calix were not appropriate at that time and retained Jeffries & Company for advice on strategic alternatives. By June 2010, Occam proposed to acquire Keymile International GmbH (“Keymile”) for $80 million, and Calix submitted a term sheet proposing to purchase Occam for $156 million (in a mix of cash and stock). Another suitor, Adtran, presented a third option by offering a slightly higher cash offer price to acquire Occam as compared with the Calix offer. Occam had a cool reaction to Adtran. Occam prepared April and June financial projections for 2010, 2011, and 2012 which were more positive than the estimates of the two public analysts who followed Occam. The projections were not shared with Adtran, and were materially higher than Adtran’s internal projections for Occam, and later projections that Adtran would create. Occam did not provide Calix with the June financial projections. On June 23, 2010 Calix submitted a revised term sheet increasing its offer to purchase Occam to $171.1 million (to be paid in a mix of cash and stock). Adtran confirmed its interest in acquiring Occam and on June 24, 2010 proposed an all cash offer at a premium of approximately 11% over Calix’s bid. On June 24, 2010 the Board met to consider the various alternatives – the cash and stock merger with Calix, the cash sale to Adtran, or remaining independent and acquiring Keymile. It was not clear that the Board was aware that Adtran’s bid was 11% higher than Calix’s offer. The Board directed Jeffries to conduct a 24 hour “market check.”

Kahn et. al. v. M&F Worldwide Corp. et. al., No. 334, 2013

Mar 18 2014

By Kristy Harlan and Porter Sesnon

In a much anticipated decision, on March 14, 2014 the Delaware Supreme Court sitting en banc unanimously affirmed then-Chancellor Strine’s decision in In re MFW Shareholders Litigation to dismiss a stockholder lawsuit related to the 2011 acquisition of M&F Worldwide Corp. (“MFW”) by its controlling stockholder, MacAndrews & Forbes Holdings, Inc. (“Holdings”). In upholding the dismissal, the Delaware Supreme Court confirmed that the business judgment standard of review, rather than an “entire fairness” standard of review, applies to controlling-party buyouts where the transaction is conditioned ab initio upon both: (1) the approval of an independent, adequately-empowered special committee that meets its duty of care and (2) the un-coerced, informed vote of a majority of the minority stockholders.

In May 2011, Holdings, which owned 43.4% of MFW’s common stock, began to explore the possibility of taking MFW private. In June 2011, Holdings delivered a written proposal to purchase the MFW shares not already owned by Holdings for $24 per share in cash, representing a premium to the prior day’s closing price of $16.96. Holdings’ proposal expressly stated that it would be subject to approval by a special committee of MFW’s board made up of independent directors, and included a non-waivable condition that a majority of the minority of stockholders approve the transaction.

In re Answers Corporation Shareholders Litigation, C.A. No 6170 (February 3, 2014) (Noble, V.C.)

Feb 12 2014

By Kristy Harlan and Eric Taylor

In re Answers Corporation involves an allegation that the board of a publicly-traded Delaware corporation, Answers Corporation (the “Company”), breached its fiduciary duties in negotiating and approving a sale of the Company. The plaintiffs alleged that the three conflicted directors controlled the Board, that the four remaining directors breached their duty of loyalty and acted in bad faith, and that the buyer of the Company (“AFCV”) aided and abetted the directors’ breach of fiduciary duty.

In March 2010, the Company received an unsolicited expression of interest from AFCV concerning a possible transaction. Shortly thereafter, the Board discussed the possibility of exploring strategic alternatives, including the recent expression of interest, ultimately deciding to explore potential transactions and engage a financial advisor to assist in the process. As part of this process, the Board’s financial advisor continued discussions with AFCV regarding a potential transaction, in addition to conducting a market check where it approached ten other potential buyers. Despite discussions with at least seven other possible buyers, no potential buyer other than AFCV made an offer. During this time, the Board rejected multiple requests for exclusivity from AFCV in order to preserve the Board’s opportunity to negotiate with other potential purchasers. The Board also rejected several offers from AFCV, deeming them to be inadequate, and pressured AFCV to increase the price offered until the transaction was finally approved. The Board’s financial advisor discussed with the Board the relative merits of pursuing various sales processes, advising the Board that additional bidders were unlikely to come forward, and ultimately provided a fairness opinion with respect to the final price offered by AFCV. During the final stages of negotiation with AFCV, after several quarters of declining revenues, the Company received quarterly results reflecting significant improvements in performance and record revenues. Despite the improved results, the Board was concerned about the future stability and performance of the Company, primarily due to its significant reliance on Google-directed traffic (which was entirely dependent on Google algorithms, subject to change at any time in Google’s discretion) and increasing competitive pressures, and ultimately approved the sale of the Company to AFCV.

Catagory:Conflict of Interest