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.
In 2009, in response to an unsolicited offer from GPP to acquire ASH, the Board formed an “M&A committee” to consider options for the sale of ASH. The M&A committee was comprised of one independent director (Toh) and two stockholder-directors (Elgamal and Olmo-Rivas) who, in the aggregate, owned more than 50% of the outstanding common stock of ASH. The Board also formed a separate special committee comprised of two independent directors, and engaged an independent financial advisor (Weber). Toh and Weber conducted negotiations directly with the potential bidders, and reported back to the special committee.
The special committee received three proposals, including one from GPP offering to purchase less than 100% of the outstanding shares of the target and granting an option to a group of stockholders (the “Rollover Group”), which was comprised of Elgamal, Olmo-Rivas and the two employees, to roll over a portion of their shareholdings into the surviving entity (together the four stockholders held 68.42% of ASH’s stock). In early 2010, the special committee recommended GPP’s offer after considering the best proposals submitted and after being told that the GPP proposal was more favorable to the company’s minority stockholders. The Board accepted the recommendation of the special committee.
After additional due diligence, GPP approached Toh and Weber to discuss revising downward its initial offer, citing accounting discrepancies. At least three different proposals were discussed, which varied as to amount of cash to be paid to the minority shareholders and Rollover Group, respectively, and as to the percentage of rollover ownership. The three options were communicated by Toh and Weber to Elgamal and Olmo-Rivas. GPP then submitted a revised offer to the special committee that closely tracked one of the options, where the Rollover Group received a smaller ownership interest in the surviving entity but a higher net cash price per share than pursuant to the initial GPP offer, while the minority shareholders received a lower net cash price per share. Two divergent sets of facts were presented to the Chancery Court regarding the meeting of the special committee to discuss the revised offer and whether the special committee was aware of the three options discussed among GPP, Toh, Elgamal and Olmo-Rivas. The special committee approved the terms of the amended GPP offer determining that the downward revision was reasonable, and received a fairness opinion to the effect that the consideration to be received by the minority stockholders was fair from a financial perspective.
As a threshold question to the substantive breach of fiduciary claim and determination of the appropriate standard of review, VC Noble considered whether a “control group” had been formed. VC Noble held that the Rollover Group did not constitute a “controlling stockholder” during the first phase of merger negotiations, where Toh, Weber and the special committee negotiated directly with the three bidders. However, VC Noble found a genuine issue of fact existed as to whether the Rollover Group (Elgamal and Olmo-Rivas in particular) exercised control during the second phase of merger negotiations and unilaterally selected the most favorable proposal ultimately presented to the special committee. The existence of a control group could implicate the entire fairness standard of review, and the Vice Chancellor denied summary judgment in relevant part.
For these reasons, VC Noble also found that a genuine issue of fact remained with respect to the stockholder’s Revlon claim against directors Elgamal and Olmo-Rivas sufficient to survive summary judgment, “as a reasonable inference of bad faith exists for two directors who may have been part of a control group that may have been on both sides of the negotiations or been competing for the consideration to be paid”. However, the Vice Chancellor granted summary judgment in favor of the two employee members of the Rollover Group, who were identified as “key employees” in the target’s SEC filings, on the basis that such employees were not directors and did not perform managerial functions sufficient to be deemed officers, and owed no fiduciary duty to the stockholders.
VC Noble then examined the effect of a special committee on the entire fairness standard of review and the circumstances in which the existence of a special committee warrants shifting the burden of proof from the defendant to the plaintiff. Based on the facts presented, VC Noble found that there were genuine issues of fact as to whether the special committee had been adequately informed of the three options and as to which option represented the best value to the Rollover Group or the minority stockholders, and denied summary judgment in relevant part.
The Court granted summary judgment with respect to the stockholder’s Revlon claims against Toh and the special committee. In order for a Revlon claim to survive summary judgment where the target’s charter includes an exculpatory provision, the challenging stockholder must demonstrate a material issue of fact as to whether such directors acted in good faith or breached their duty of loyalty. VC Noble found that the special committee (and Toh) had complied with “best practices” and acted in good faith at all times during the negotiations. The Court found that receipt of a fairness opinion by the special committee bolstered the evidence that the special committee and Toh had acted consistent with their duties of loyalty and good faith to obtain the best value reasonable available for the minority stockholders. This was true notwithstanding questions of fact regarding the creation of and assumptions underlying the projections used to support the fairness opinion (which VC Noble notes might implicate the duty of care), or the fact that ASH had determined, in its judgment, not to update the projections after GPP identified the accounting discrepancies, which the Court found reasonable in light of the facts.
Importantly, although the Court found persuasive, uncontroverted evidence that Toh and the special committee did not breach their fiduciary duties underRevlon in recommending the GPP proposal, the Vice Chancellor reserved judgment for further proceedings as to whether such directors could be held liable separately and personally liable for a breach of fiduciary claim under the entire fairness standard.
The Court also denied summary judgment with respect to the stockholder’s claim that the merger proxy was deficient for failure to discuss or evaluate the three options, holding that the revision of the GPP proposal was material information, particularly since the option selected by GPP represented the lowest cash consideration payable to the minority stockholders being asked to approve the merger. Significantly, the Vice Chancellor did not find ASH’s failure to include in the merger proxy all of the various sets of projections that had been presented to the financial advisor during its review to be material. Instead, VC Noble deemed the selected midpoint projections, which were relied upon by the financial advisor and presented in the proxy, to be material and properly disclosed.
Finally, VC Noble granted summary judgment with respect to the stockholder’s remaining unjust enrichment claim. Noting an important procedural difference from the motion to dismiss stage, where a duplicative unjust enrichment claim and breach of fiduciary duty claim are typically denied or allowed to proceed in tandem, the Court held that if a breach of fiduciary duty claim survives summary judgment, the continuance of an “entirely duplicative unjust enrichment claim premised on the exact same theory of liability would not only be unnecessary, but also redundant.”