In Chester County Employees’ Retirement Fund v. KCG Holdings, Inc. et al, C.A. No. 2017-0421-KSJM (Del. Ch. June 21, 2019), the Delaware Court of Chancery denied the defendants’ motion to dismiss claims of breach of fiduciary duty, aiding and abetting, and civil conspiracy brought against the largest stockholder of KCG Holdings, Inc. (“KCG”), its directors, and its long time financial advisor for failure to maximize value for KCG stockholders when negotiating the merger transaction due to certain actions taken by influencers during the sale process. The Court held that the plaintiff stockholders adequately pled their claims against the defendants to avoid dismissal of claims.
KCG was a global financial services company that offered high-frequency trading services. Defendant Jefferies LLC (“Jefferies”) was KCG’s financial advisor and also its largest stockholder. Virtu Financial, Inc. (“Virtu”) was one of KCG’s competitors. Over the course of a few months, Jefferies met with Virtu to discuss a potential acquisition of KCG. Virtu was willing to buy KCG for $20 per share, and then Jefferies would help Virtu sell KCG’s standalone bond trading platform. Jefferies shared confidential information on KCG with Virtu that it had acquired as KCG’s financial advisor.
Two months later, Jefferies informed KCG that Virtu was interested in acquiring KCG, but Jefferies did not disclose its role or its prior negotiations. Virtu emailed KCG an indication of interest to buy KCG at a price between $18.50 and $20 per share, a premium to its trading price. The KCG board hired Goldman Sachs as a financial advisor for the deal, but they kept Jefferies on as co-advisor even though, by that time, they had reason to believe that Jefferies had prior negotiations with Virtu.
When Virtu made an offer of $20 per share, KCG’s board voted in favor of a counter offer of $20.21 per share, based on their belief that a restructuring plan would return $500 million to the KCG shareholders. KCG’s CEO was opposed to the $20.21 price, but stated that he would support it if Virtu could eliminate certain risks, in particular, “personnel risks and the retention pool”. The CEO delivered the $20.21 offer to Virtu but stressed his concern regarding compensation.
That evening, Virtu made a deal with KCG’s CEO on compensation, and another KCG board member emailed: “[G]reat news. Thank you for your understanding on this. The Board is very appreciative on this.” The board unanimously approved Virtu’s $20 offer pending a fairness opinion. The CEO revised KCG’s projections downward, taking the $20 bid from the bottom to the middle of the discounted cash flow range. Then the board approved the revised projections and approved the merger for $20 per share.
KCG filed a proxy statement for a stockholders’ vote. The next day a KCG stockholder commenced litigation against the director defendants, KCG, Virtu’s subsidiary and Jefferies for breach of fiduciary duty, aiding and abetting and initially challenging the merger (after which KCG issued a new proxy and the preliminary injunction motion was withdrawn). At a rescheduled vote, 75.5% of KCG’s shares voted for the merger. The merger closed on July 20, 2107. Following the merger, Virtu sold the bond trading platform for $400 million, and Jefferies acted as Virtu’s financial advisor on the deal.
KCG stockholder plaintiffs’ complaint alleged that (1) the KCG directors breached their fiduciary duties to the KCG stockholders, (2) Virtu and Jefferies aided and abetted in the breach, and (3) Virtu and Jefferies conspired to pursue the merger for their own benefit to the detriment of the KCG stockholders.
The Court rejected the defendants’ request to apply the Corwin business judgment standard, because the defendants failed to prove that the stockholders were fully-informed when they voted for the merger. The proxy did not reveal the detailed divestiture strategy that Jefferies had planned with Virtu. The proxy did not disclose the CEO’s fluctuating position when he supported a lower purchase price only after settling on satisfactory compensation terms. And the proxy did not disclose the earlier projections of KCG’s value, rather only presented the last-minute revised projections. The Court found that such omitted facts altered the “total mix” of information made available to the reasonable investor.
Since the plaintiff stockholders alleged that the stockholder vote was not fully informed, the plaintiff stockholders’ claims were determined to be subject to the Revlon standard of review. Under Revlon directors can choose how to maximize value as long as they use a reasonable approach. Directors must take an active role in the sale of the company, including “becoming reasonably informed about the alternatives available” and “acting reasonably to learn about actual and potential conflicts faced by directors, management, and their advisors.” In this case the plaintiffs argued that the director defendants acted in bad faith by “failing to cabin [the CEO’s] conflict or prevent [the CEO] from downwardly revising the projections.” Due to the facts described above, the Court found that plaintiffs’ allegations make it “reasonably conceivable that the director defendants placed management’s interests ahead of their obligation to maximize stockholder value”, supporting an inference of bad faith.
The Court also found that plaintiffs’ allegations make it reasonably conceivable that Jefferies and Virtu aided and abetted the directors’ breach of fiduciary duty. Jefferies misled the directors about its prior negotiations with Virtu and created an information vacuum. Jefferies also disclosed confidential KCG information to Virtu that it had received when acting as KCG’s financial advisor.
Finally, the Court found that plaintiffs’ allegations make it reasonably conceivable that Jefferies and Virtu conspired to agree upon a merger price and to sell the bond trading platform, and that they interfered with the directors’ exercise of their fiduciary duties and exploited confidential information. It is also reasonably conceivable that this conduct resulted in damage to the KCG stockholders.
As a result the court denied Defendants’ motion to dismiss.