Topic: Fair Price

Delaware Court of Chancery Applies Entire Fairness Review in Finding That Controlling Stockholders and Special Committee Members Breached Fiduciary Duties to Target Stockholders

By Lisa Stark and Frank Mazzucco

In FrontFour Capital Group LLC v. Taube, C.A. No. 2019-0100-KSJM (Del. Ch. Mar. 11, 2019), the Delaware Court of Chancery found that, due to their conduct in connection with two mergers of affiliated entities, controlling stockholders and special committee members breached their fiduciary duties to target stockholders under the entire fairness standard of review and failed to provide certain material disclosures to stockholders.

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CHANCERY COURT DISMISSES COMPLAINT FOR FAILURE TO STATE A CLAIM, HOLDING THAT REVIEW OF SALE UNDER ENTIRE FAIRNESS IS NOT WARRANTED

By: Joanna Diakos and Adam Heyd

In Aron English and Richard Peppe v. Charles K. Narang, et al., C.A. No. 2018-0221-AGB (Del. Ch. March 20, 2019), the Delaware Court of Chancery (the “Court”) dismissed a stockholder suit against the board members of NCI, Inc., a publicly-traded company (the “Company”), for failure to state a claims for relief in connection with allegations of breach of fiduciary duty, and against H.I.G. Capital, LLC (“HIG”) for aiding and abetting such breach during a sale of the Company to HIG.  The Court held that the controlling stockholder’s alleged need for liquidity was not sufficient to compel review of the Company sale under an “entire fairness” standard, and that the vote of stockholders approving the sale was fully informed.

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Chancery Court Grants Preliminary Injunction Restraining Former Director from Selling Shares Allegedly Invalidly Issued to Himself

By: Annette Becker and Michael Payant

In Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC (C.A. No. 2018-0489-TMR), the stockholders of Applied Energetics, Inc. (“AE” or “Plaintiff”) sued defendants George Farley (“Farley”) and his family owned-holding company AnneMarieCo., LLC (“AMC”) for issuing stock to himself and transferring such shares to AMC in a self-interested transaction.  Plaintiff sought a preliminary injunction to restrain defendants from selling AE shares during the pendency of the stockholder litigation. The Delaware Court of Chancery (the “Court”) granted the preliminary injunction holding that AE established reasonable probability of success on the merits for its claims.

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CHANCERY COURT FINDS THAT LANGUAGE OF LIMITED PARTNERSHIP AGREEMENT GOVERNS WHICH CLAIMS SURVIVE SUMMARY JUDGMENT IN MASTER LIMITED PARTNERSHIP’S RELATED PARTY TRANSACTION

By Scott Waxman and Adrienne Wimberly

In Mesirov v. Enbridge Company, Inc., et al. C.A. No. 11314-VCS (Del. Ch. Aug.29, 2018), the Delaware Chancery Court dismissed five of eight counts alleged with respect to a transaction where Enbridge Energy Company (EEP) repurchased for $1 billion a two-thirds interest in Alberta Clipper Pipelines (AC interest), despite the fact that EEP had sold that same interest years prior for $800 million and the business had steadily declined since such sale.  The dismissals were based primarily upon the language and obligations included in EEP’s limited partnership agreement.

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CONTROLLER BREACHES FIDUCIARY DUTIES BY COERCING ONEROUS FINANCING TERMS

By: Kent Carlson and Rich Minice

In Basho Technologies, Inc. v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch. July 6, 2018), the Delaware Court of Chancery reaffirmed the principle that a stockholder with actual control of a corporation violates its fiduciary duties by advancing its own interests to the detriment of the corporation.  Applying the entire fairness standard in its decision following trial, the court held that Georgetown Basho Investors, LLC (“Georgetown”), the controlling stockholder of Basho Technologies, Inc. (“Basho”), owed and breached fiduciary duties to Basho as a stockholder with actual-but not majority-control. The court ultimately awarded plaintiffs Earl Gallaher (“Gallaher”) and various investment funds under his control (the “Plaintiff(s)”) damages in the aggregate amount of $20,268,878.

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CONTROLLING STOCKHOLDER CANNOT ADVANCE ITS OWN SELF-INTEREST AT EXPENSE OF MINORITY STOCKHOLDERS

By: C. J. Voss and Rich Minice

In Carr v. New Enterprise Associates, Inc., C.A. No. 20170381-AGB (Del. Ch. Mar. 26, 2018), the Delaware Court of Chancery, in denying in part and granting in part a motion to dismiss, reaffirmed the principle that a controlling stockholder, when acting outside its capacity as a stockholder, cannot use the corporation to advance the controlling stockholder’s self-interest at the expense of minority stockholders.  In the context of defendants’ motion to dismiss, the court found that it was reasonably conceivable that the controlling stockholder of American Cardiac Therapeutics, Inc. (“ACT”) and its conflicted board of directors had breached their duty of loyalty to ACT’s minority stockholders by approving a sale of a warrant to a third party that included an option to acquire ACT, allegedly at an unfairly low price, in order to incentivize the third party to also acquire and invest in the controlling stockholder’s other portfolio companies.

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Chancery Court Dismisses Minority Stockholders’ Action Seeking Quasi-Appraisal in United Capital Corp. Buyout

By: Shoshannah Katz and Andrew Gahan

In In re United Capital Corp., Stockholders Litigation, C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017), the Delaware Court of Chancery dismissed a suit brought by plaintiff minority stockholders (“Plaintiff”) that sought a quasi-appraisal to remedy alleged breaches of the duty of disclosure in connection with the acquisition of United Capital Corp. (“United Capital” or “Company”) via short-form merger.  The Court concluded that Plaintiff had not adequately alleged that any omitted information was material to the decision to seek appraisal and that the duty of disclosure was not violated.

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Dell Inc. Fails to Persuade Court That Merger Price was Best Evidence of its Fair Value

By: Naomi R. Ogan and Stephanie S. Liu

In In Re Appraisal of Dell, C.A. No. 9322-VCL, (Del. Ch. May 31, 2016), stockholders of Dell Inc. (“Dell”) sought appraisal of their shares in connection with Dell’s 2013 “go-private” merger. Vice Chancellor Laster of the Delaware Court of Chancery held that the fair value of the Dell’s common stock at the effective time of the merger was $17.62, approximately a 28% premium over the final merger consideration of $13.75 per share. In making its determination, the court rejected Dell’s contention that the negotiated merger consideration was the best evidence of Dell’s fair value and held that the Dell was sold for too little and that the concept of fair value under Delaware law is not equivalent to the economic concept of fair market value.

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

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.

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Holders of Preferred Stock Beware: Delaware Chancery Court Holds that Preferred Stock Is Subject to the Issuer’s Need as a Going Concern, Not Just DGCL §160

By David Bernstein and B. Ashby Hardesty, Jr.

TCV v. TradingScreen, Inc. concerns the interplay between a charter provision providing for the mandatory redemption of preferred stock, Section 160 of the Delaware General Corporation Law (the “DGCL”), and Delaware common law. The Chancery Court held that despite an adequate surplus under Section 160, common law restrictions prohibited a corporation from redeeming preferred stock as required by its charter.

In TCV, TradingScreen’s charter required that if after a specified date holders of a majority of TradingScreen’s Series D preferred stock asked for assistance in selling their preferred stock, TradingScreen would give that assistance. If no third-party buyer were found, TradingScreen would repurchase its preferred stock at its fair value as agreed upon or determined by an expert.  In June 2012, the holders of a majority of the preferred stock requested assistance in selling their shares. When no suitable third-party buyer was found, an expert selected by Trading Screen and the majority owners of the preferred stock made a valuation and determined the sale price. After receiving the valuation, TradingScreen refused to repurchase more than a small portion of the preferred stock, stating that its board had determined, based on a study it had had prepared by an outside expert, that doing so would impair TradingScreen’s ability to continue as a going concern. The preferred stockholders brought suit, alleging, among other claims, that TradingScreen breached the Charter by failing to honor the charter’s redemption provision and, as a result, triggered interest payments at 13% on the unpaid amounts.

The preferred stockholders argued that because TradingScreen had a surplus that far exceeded the amount it would need to redeem the preferred stock without violating Section 160, its charter required it to repurchase the preferred stock. TradingScreen argued that under Delaware common law, funds would not be “legally available” for repurchase of preferred stock if doing so threatened the corporation’s ability to continue operating as a going concern. The Chancery Court agreed with TradingScreen. It held that even though redemption of the preferred stock would not violate Section 160, “outside the DGCL, a wide range of statutes and legal doctrines restrict a corporation’s ability to use funds.” It held that the common law restricted TradingScreen’s ability to redeem its shares when doing so would damage its ability to continue as a going concern, and that to challenge the Board’s judgment regarding the effect of redemption on TradingScreen’s ability to continue as a going concern, the preferred stockholders would have to show that the Board’s decision was made in bad faith or was so far off the mark as to constitute actual or constructive fraud. The Court rejected the argument that the charter provisions regarding the preferred stock were a contract between the corporation and the holders of the preferred stock, saying the preferred stockholders “fail to appreciate the hybrid nature of preferred stock” and that the preferred stockholders “are holders of equity, not debt.” It is likely many holders of preferred stock will be surprised to learn that their rights with regard to their preferred stock are subject to the issuers’ needs as going concerns.

TCV v. TradingScreen, Inc., C.A. No. 10164-VCN (Del. Ch. March 27, 2015) (Noble, V.C.)

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

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.

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

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