Entire Fairness – Page 3 – Delaware Docket

Directors Trigger Entire Fairness Review by Approving Merger to Extinguish Potential Liability for Derivative Claims

Aug 12 2016

In In Re Riverstone National, Inc. Stockholder Litigation, C.A. No. 9796-VCG (July 28, 2016), the Delaware Court of Chancery held that a board’s approval of a merger agreement containing a release of claims against the directors and entered into while a potential derivative suit for usurpation of corporate opportunity was threatened against such directors warranted entire fairness review.

Court of Chancery Affirms That Minority Stockholder May Be Controlling Stockholder

Mar 12 2016

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.

Chancery Court Determines Appropriate Standard of Review for Cash Flow “Tunneling” by Controlling Stockholder

Feb 13 2016

By David Forney and Eric Taylor

In In Re EZCorp Inc. Consulting Agreement Derivative Litigation, C.A. No. 9962-VCL (Del. Ch. January 25, 2016) (Laster, V.C.) the Delaware Court of Chancery granted in part and denied in part a 12(b)(6) motion to dismiss for failure to state a claim, but at its heart the ruling addressed the proper standard of review in a case alleging self-dealing by a controlling stockholder for “tunneling” cash flow and receiving non-ratable benefits from related-party services agreements. After a detailed and extensive analysis, the court held that the entire fairness standard of review, and not the business judgment standard of review, applied to non-merger business transactions where controlling stockholders can exact non-ratable benefits from the company, regardless of the type of transaction or method of extraction.

Chancery Court Dismisses Breach of Fiduciary Duty Claims Against Company and Its Board of Directors Relating to 2014 Recapitalization, But Holds That Contract Claims May Proceed

Jul 16 2015

By Annette Becker and Lauren Garraux

In a July 8, 2015 letter opinion, Vice Chancellor John W. Noble granted in part and denied in part the motion of Capella Holdings, Inc. and Capella Healthcare, Inc. (“Capella” or the “Company”) and five Capella directors (the “Director Defendants”) (collectively, “Defendants”) to dismiss breach of fiduciary duty and breach of contract claims asserted against them by James Thomas Anderson (“Anderson”), a founder and former director and officer of Capella, relating to a 2014 recapitalization of the Company.

Anderson’s counterclaims against Defendants all arise from a recapitalization of Capella which the Director Defendants approved in April 2014. Anderson voted against the recapitalization, which decreased Anderson’s ownership percentage in the Company, as well as that of the minority shareholders, and increased the ownership percentage of affiliates of GTCR Golder Rauner II LLC (“GTCR”), which, upon Capella’s formation, made an equity investment of approximately $206 million in the Company.

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.

Chancery Court Holds that Compensation Paid to Non-Employee Directors Pursuant to Shareholder-Approved Plan Must Be Reviewed Under Entire Fairness Standard

May 12 2015

By David Bernstein and Priya Chadha

In Calma v. Templeton, C.A. No. 9579-CB (Del. Ch. April 30, 2015) (Bouchard, C.), the Delaware Chancery Court held that Citrix System, Inc’s (“Citrix”) payment of compensation to non-employee directors under a shareholder-approved compensation plan must be reviewed under the entire fairness standard because the shareholders’ omnibus approval of a plan covering several different types of beneficiaries did not constitute ratification of the amount of compensation to be paid to non-employee directors.

In 2005, Citrix shareholders approved an equity compensation plan (the “Plan”) for beneficiaries such as directors, officers, employees, consultants, and advisors. The plan did not specify the amount of compensation that non-employee directors could receive, instead only providing a limit of 1 million restricted stock units (“RSUs”) for any beneficiary’s annual compensation. Based on the company’s share price at the time the suit was filed, 1 million RSUs would be worth over $55 million.

Chancery Court Finds No Fiduciary Duty for Limited Partners

Feb 13 2015

By Scott Waxman and Eric Jay

Chancery Court grants motion to dismiss against former limited partners seeking damages for a freeze-out merger they claimed was a self-dealing transaction by the general partner and its affiliates. The Court granted the motion to dismiss for lack of subject matter jurisdiction with regard to the general partner defendants based on a standard arbitration clause that referenced AAA Rules. The Court also granted the motion to dismiss for failure to state a claim with regard to the affiliated limited partner defendants because majority ownership of the merged entities, without more, did not create a fiduciary duty to the plaintiffs.

On February 10, 2015, Vice Chancellor Parsons issued a memorandum opinion in Lewis v. AimCo Properties, L.P., 2015 WL 557995, (Del. Ch. Feb. 10, 2015) granting Motions to Dismiss for each group of defendants in the case. The case was brought by several former holders of limited partnership units (“Plaintiffs”) in four Delaware limited partnerships (the “Partnerships”). Each of the Partnerships was managed by corporate entity general partners (“GP Defendants”) that were each indirectly owned by Apartment Investment and Management Company (“AimCo”). AimCo also indirectly held a majority of the limited partnership units of each Partnership through various affiliates (together with various officers, the “LP Defendants”).

Chancery Court Finds Majority Partner Breached Contractual and Fiduciary Obligations to the Minority

Dec 11 2014

By Scott Waxman and Claire White

In this Chancery Court decision, VC Laster examined damages owing to plaintiffs for claims of breach of contract and breach of fiduciary duties of care and loyalty in connection with the sale of a partnership’s assets. The plaintiffs, partners in a D.C. partnership, had proved at trial that the sale by the majority partners (U.S. Cellular) to a related party was not entirely fair to them, as minority holders.

On the breach of contract claim, VC Laster found that defendants had breached a confidentiality provision in the partnership agreement by sharing confidential information regarding the partnership with a valuation firm, for the purposes of obtaining a valuation for the sale transaction. Notwithstanding the breach, only nominal damages were awarded as plaintiffs failed to show proof of actual injury from the breach. Among other facts, the Count highlighted that the confidentiality provision in the partnership agreement could have been waived by the majority partners.

In re Zhongpin Inc. Stockholders Litig., C.A. No. 7393-VCN (November 26, 2014) (V.C. Noble)

Dec 03 2014

By Elise Gabriel and David Bernstein

In In re Zhongpin, shareholders of Zhongpin Inc. (“Zhongpin” or the “Company”) brought a class action complaint for breach of fiduciary duty against Xianfu Zhu (“Zhu”), Zhongpin’s CEO and chairman of the board, and Zhongpin’s board of directors (the “Board”) in relation to a merger through which Zhu – who owned 17.3% of Zhongpin’s common stock – would acquire the remainder of the Company’s outstanding shares for $13.50 per share in cash. The transaction was approved by an independent committee of Zhongpin’s Board and the Merger Agreement required approval by a majority of the unrelated stockholders, although this requirement had not appeared in Zhu’s original proposal to Zhongpin’s Board.

On the defendants’ motion to dismiss, the Court held that the plaintiffs had stated a claim for breach of fiduciary duty against Zhu and the individual defendants. The Court stated that plaintiffs had adequately alleged that Zhu was a controlling stockholder even though he owned only 17.3% of Zhongpin’s stock by pointing to a statement in Zhongpin’s Form 10-K that referred to Zhu as “our controlling stockholder” and that said that as a result of the stock ownership “our controlling stockholder” was able to exercise significant influence over a variety of matters, including election of directors, the amount of dividends, if any, new securities issuances and mergers and acquisitions. The Court further held that the transaction was subject to review under the entire fairness standard rather than the business judgment rule because, even though the Merger Agreement required approval by a majority of the unrelated stockholders (and that approval was obtained), Zhu’s original proposal had not included a majority of the minority requirement at the outset. Finally, the Court was unwilling to dismiss the claims against the directors even though Zhongpin’s certificate of incorporation contained a provision under DGCL Section 102(b)(7) protecting directors against monetary liability, because, in a case subject to the entire fairness standard, a claim against directors cannot be dismissed until there is a determination as to entire fairness.

In re Zhongpin

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.

Catagory:Entire Fairness