Topic: Freeze-Out

Chancery Court Holds Fee-Shifting Bylaw Inapplicable to a Former Stockholder Because it Was Adopted After Stockholder’s Equity Interest Was Eliminated

By Susan Apel and Max Kaplan

Chancellor Bouchard finds, as a matter of first impression in Delaware, that a non-reciprocal fee-shifting bylaw is inapplicable to a plaintiff stockholder because it was adopted after the plaintiff’s interest in the corporation was eliminated in a reverse stock split.

In Strougo v. Hollander, C.A. No. 9770-CB (March 16, 2015), Plaintiff – a former stockholder of First Aviation Services, Inc. (“First Aviation”) – challenged (on behalf of himself and a putative class) the fairness of a 10,000-to-1 reverse stock split that cashed out the ownership interests of Plaintiff and the putative class at the request of the Chief Executive Officer and controlling shareholder of First Aviation in order to take First Aviation private.  Four days after consummation of the reverse stock split, the First Aviation Board adopted a non-reciprocal fee shifting bylaw that required any “current or prior stockholder or anyone on their behalf” who initiates or asserts a claim or counterclaim against First Aviation or any director, officer or employee and who does not obtain a judgment on the merits that substantially achieves the full remedy sought, to be jointly and severally liable for all fees, costs and expenses incurred in connection with the claim or counterclaim.  There was no public announcement to the First Aviation stockholders that the board had adopted the bylaw and Plaintiff was notified of the bylaw after the lawsuit was filed.

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Chancery Court Finds No Fiduciary Duty for Limited Partners

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”).

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Laidler v. Hesco Bastion Environmental, Inc. (May 12, 2014)

By Annette Becker and Naomi Ogan

In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.

Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.

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