Controlling Stockholder – Page 4

In re Sanchez Energy Derivative Litig., C.A. No. 9132-VCG (November 25, 2014) (Glasscock, V.C.)

Dec 03 2014

In In re Sanchez Energy, Vice Chancellor Glasscock granted a motion to dismiss in a shareholder derivative action because the plaintiffs had failed to make a demand on the Board, holding that the plaintiffs failed to meet Rule 23.1’s particularized pleading standards for demand futility. The case centered around a transaction in which Sanchez Energy Corporation (“Sanchez Energy”), a publicly held corporation, purchased property at $2500/acre from Sanchez Resources, LLC (“Sanchez Resources”), a privately held, company, which Sanchez Resources had purchased for $184/acre. Two members of the Sanchez family—A.R. Sanchez Jr. and A.R. Sanchez III—owned a combined 21.5% of the shares of Sanchez Energy and served on its board of directors, which had three other members. Those three members comprised Sanchez Energy’s audit committee, which approved the transaction.

The court rejected the plaintiff’s claim that demand would have been futile because the three members of the Audit Committee were not independent. The Vice Chancellor said the plaintiffs had failed to show the audit committee members’ social and business relationships with the Sanchezes were such that “the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.” He also rejected Plaintiffs’ arguments that the Sanchezes should be treated as controlling shareholders because they failed to show that the Sanchezes controlled the board or the negotiation process for the transaction. Vice Chancellor Glasscock pointed to the fact that transaction was approved by the Audit Committee and that the Sanchezes owned at most a combined 21.5% stake in Sanchez Energy as evidence that the Sanchezes were not controlling shareholders. Lastly, VC Glasscock rejected the idea that because of the huge disparity between what Sanchez Resources paid to acquire the property and what Sanchez Energy paid to acquire the property from Sanchez Resources, the transaction was so facially unfair that it could not have been the product of valid business judgment, noting, among other things, that between Sanchez Resources’ initial purchase and its sale to Sanchez Energy, half of the property had been developed and found to contain proven oil reserves.

Thus, because the Complaint failed to specifically please facts excusing demand, the Court dismissed the Complaint.

In Re Sanchez

In Re: Crimson Exploration Inc. Stockholder Litigation, C.A. No. 8541-VCP (October 24, 2014) (Parsons, V.C.)

Oct 26 2014

By William Axtman and Ryan Drzemiecki

In Re: Crimson Exploration Inc. Stockholder Litigation involved a consolidated class action claim made by certain minority stockholders (“Plaintiffs”) of Crimson Exploration, Inc. (“Crimson”) challenging the completed acquisition of Crimson by Contango Oil & Gas Co. (“Contango”). The transaction was structured as a stock-for-stock merger (the “Merger”), with the Crimson stockholders holding approximately 20.3 % of the combined entity following the merger and an exchange ratio representing a 7.7% premium based on the April 29, 2013 trading price of Contango common stock and Crimson common stock. Plaintiffs also alleged that the members of Crimson’s Board of Directors (the “Directors”) and various entities affiliated with the investment management firm Oaktree Capital Management, L.P. (“Oaktree”) breached their respective fiduciary duties by selling Crimson below market value for self-serving reasons. In total, Plaintiffs brought claims against Crimson, the Directors, Oaktree, Contango Acquisition, Inc. (the “Merger Sub”) and Contango (“Defendants”).

A major premise of Plaintiffs’ complaint is that Oaktree controlled Crimson and thereby had fiduciary duties to the minority stockholders of Crimson. Oaktree owned roughly 33.7% of Crimson’s pre-Merger outstanding shares and a significant portion of Crimson’s $175 million Second Lien Credit Agreement, which Contango agreed to payoff after the signing of the Merger, including a 1% prepayment fee (the “Prepayment”). Also, in connection with the Merger, Oaktree negotiated to receive a Registration Rights Agreement (the “RRA”) so that it had the option to sell its stock in the post-Merger combined entity through a private placement.

In re KKR Financial Holdings LLC Shareholder Litigation, C.A. No. 9210-CB (October 14, 2014) (Bouchard, C.)

Oct 21 2014

By Kristy Harlan and Eric Taylor

This case involves a challenge to a stock-for-stock merger by a group of stockholders of the target company who alleged breaches of fiduciary duty by both the board of directors of the target (the “Board”) and an alleged controlling stockholder who held less than 1% of the stock of the target. The transaction (the “Merger”) involved the acquisition of KKR Financial Holdings LLC (“KFN”) by KKR & Co. L.P. (“KKR”). KFN was managed by an affiliate of KKR, which was responsible for day-to-day operations of KFN, subject to the oversight of the Board pursuant to a management agreement between the parties. In October 2013, KKR expressed interest in acquiring KFN to a member of the Board. Over the next several months, the Board began to discuss the approach from KKR, set up a transaction committee to review the potential transaction, and met several times with representatives from KKR to negotiate for better terms. In mid-December 2013, the Board approved the Merger and KFN and KKR executed a merger agreement. The transaction was valued at approximately $2.6 billion.

This case is the consolidated result of nine separate actions that were filed challenging the Merger in December 2013 and January 2014. KFN and KKR moved for summary judgment, which the plaintiffs sought to overcome by arguing that the Merger should be subject to “entire fairness” review, instead of the presumed business judgment review. The Court held that the business judgment rule applied, granted summary judgment to KFN and KKR and dismissed the suit with prejudice.

In re Nine Systems Corp. S’Holders Litig., Consol. C.A. No. 3940-VCN (September 4, 2014) (Noble, V.C.)

Sep 23 2014

By Marisa DiLemme

In re Nine Systems Corp. S’Holders Litig. involves the 2002 recapitalization of a two-year-old start-up company, Streaming Media Corporation, later known as Nine Systems Corporation (the “Corporation”). The Corporation was going to have to liquidate unless it could carry out two acquisitions, and the purpose of the 2002 recapitalization was to fund these acquisitions. The recapitalization was approved by four of the directors of the Board of the Corporation, one the CEO of the Corporation and the other three employees of three private equity funds, two of which provided the financing needed for the acquisitions through the recapitalization, and the third of which was given a 90-day option to participate in the recapitalization but did not do so. The fifth director, whose firm had brought in minority stockholders, was not kept informed regarding the recapitalization, which was highly dilutive to the minority stockholders, and never fully approved it. The terms of the recapitalization were proposed by the director whose firm was the largest participant in the recapitalization based on his estimate that the Corporation was worth $4 million, without any independent valuation of the Corporation. After the acquisitions, the Corporation became successful, and it was sold four years later for $175 million.

Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)

Jul 12 2014

By Eric Feldman and Sophia Lee Shin

Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.

Facts

Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership

In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.

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.

Hamilton Partners, L.P. v. Highland Capital Management, et al., C.A. No. 6547-VCN (May 7, 2014) (Noble, V.C.)

May 09 2014

By David Bernstein

Plaintiff Hamilton Partners, L.P. challenged in the Delaware Chancery Court the fairness of a merger between a Nevada corporation, American HomePatient, Inc. (“New AHP”), a successor to a Delaware corporation of the same name (“AHP”), and Highland Capital Management, L.P. (“Highland”), which before the challenged transactions owned 48% of AHP’s stock and held most of its debt. The initial question was whether the validity of the actions was governed by Nevada law or by Delaware law. The Court said that most of the transactions took place under an agreement that was signed while the corporation was a Delaware corporation and that those transactions would be governed by Delaware law. However, transactions that were not approved by the Board until after the reincorporation in Nevada would be governed by Nevada law.

The Court then addressed whether the fairness of the merger should be determined under the business judgment rule or under the entire fairness test, which would apply if Highland was a controlling stockholder. The Court said that although there were prior Delaware decisions that made it possible that Highland’s 48% ownership interest alone might not have caused it to be viewed as a controlling person when determining whether the Board’s approval of the merger should be evaluated based on the business judgment rule or on the entire fairness test, the combination of Highland’s 48% stock interest and the fact that it had used its creditor position to force the corporation to engage in the series of transactions that was being challenged made it clear that Highland was a controlling person and that the entire fairness test should apply. Therefore, noting that it is almost never possible to dismiss a complaint in an instance in which the entire fairness test applies, the Court refused to dismiss the claim against Highland.

The Plaintiff also sued Joseph Furlong, the CEO and a director of AHP, claiming that he had a personal interest in the merger (he would receive a $6.5 million payment if it took place) and therefore his actions as a director should be evaluated under the entire fairness test. The Court said that because the Board consisted of three directors, and the other two directors, whose independence was not challenged and who were not claimed to have been dominated by Furlong, approved the merger, and their approval was governed by the business judgment rule, it made no difference whether Furlong’s approval was governed by the business judgment rule or was subject to the entire fairness test. The Court also pointed out that because the merger was approved by the Board after the corporation had reincorporated in Nevada, Furlong’s liability would be governed by a Nevada statute that exculpates a director from personal liability unless the director’s act or failure to act constituted a breach of fiduciary duties and the “breach of those duties involved intentional misconduct, fraud or a knowing violation of the law”. The Court found that the Plaintiff had not claimed that Furlong had been guilty of intentional misconduct, fraud or a knowing violation of law, and therefore Furlong was entitled to the protection of the Nevada exculpation statute. Accordingly, it dismissed the claims against Furlong.

hamiltonpartnersl p v highlandcapital1

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.

Frank v. Elgamal, C.A. No. 6120-VCN (March 10, 2014) (Noble, V.C.)

Mar 14 2014

By Annette Becker and Claire White

In this opinion, Vice Chancellor Noble considered defendants’ motion for summary judgment in connection with various breach of fiduciary duty claims asserted by a former stockholder, Richard Frank, against the Board of Directors and two employees of American Surgical Holdings, Inc. (“ASH”), a public company, in connection with the merger of ASH with an affiliate of Great Point Partners I, L.P. (“GPP”). In connection with the motion the Chancery Court examined:

• the “entire fairness” standard of review;

• the effect of a special committee on the standard of review;

• the standard of review for Revlon claims upon a motion for summary judgment, particularly where the target’s charter includes an exculpatory clause;

• a special committee’s examination of projections underlying a fairness opinion, including where multiple sets of projections are prepared; and

• the interaction between a shareholder’s unjust enrichment and breach of fiduciary duty claims upon a motion for summary judgment.

Catagory:Controlling Stockholder