Merger – Page 5 – Delaware Docket

Chancery Court Finds No Fiduciary Duty for Limited Partners

Feb 13 2015

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 Denies Motion to Expedite on Speculative Disclosure Claims

Jan 14 2015

By Annette Becker and Eric Jay

On January 12, 2015, Vice Chancellor Glasscock issued an opinion in Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) on a Motion to Expedite brought by Amy Parsons on behalf of similarly situated public stockholders (“Plaintiff”) as to disclosure claims concerning an imminent merger. The ruling on the disclosure claims was deferred after the Vice Chancellor denied Plaintiff’s Motion on December 31, 2014 as it related to Revlon claims raised, in order to allow Plaintiff to submit a supplemental brief clarifying why such claims would be material to stockholders.

The Motion was brought by Plaintiff against the Board of Directors of Digital River, Inc. (the “Company”) for breaches of fiduciary duties arising in connection with the Agreement and Plan of Merger entered into with Siris Capital Group, LLC, dated October 23, 2014 (the “Merger Agreement”). On November 18, 2014, Plaintiff initiated a class action to enjoin the proposed merger on the grounds that the Company was undervalued and that the Board of Directors failed to provide the stockholders with material information regarding the deal process.

Of the numerous disclosure claims raised by Plaintiff in the Motion to Expedite, Vice Chancellor Glasscock focused primarily on the claim regarding management retention, both because it was the most significant and it had not been rendered moot by the Company’s subsequent filing of a definitive proxy statement. Vice Chancellor Glasscock concluded that Plaintiff sought expedited discovery on the grounds that the disclosures were “simply not credible” without providing a factual basis for such assertion.

Because the disclosure claim was speculative, Vice Chancellor Glasscock found that the chance of receiving injunctive relief to be low and that the value of potential disclosure did not outweigh the cost of expedition. The Plaintiff’s Motion to Expedite was denied.

Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) (Glasscock, V.C.)

In Re Comverge, Inc. Shareholders Litigation

Dec 03 2014

By Sherwin Salar and Whitney Smith

In Re Comverge, Inc. Shareholders Litigation involves a stockholder challenge to a merger between Comverge, Inc. and H.I.G Capital, L.L.C. The plaintiff stockholders of Comverge contend that the Comverge board of directors (the “Board”) breached their fiduciary duties by: (1) conducting a flawed sales process and not suing HIG for an alleged breach of a non-disclosure agreement between the parties (the “NDA”); and (2) agreeing to deal protection measures that precluded the possibility of a topping bid. On November 25, 2014, Vice Chancellor Parsons granted HIG’s motion to dismiss with respect to the first claim, but denied the motion on the second claim. Furthermore, Vice Chancellor Parsons dismissed Plaintiffs’ claim that HIG aided and abetted the Board’s breaches of fiduciary duties, stating that even if there was a predicate breach of fiduciary duties by the Board, the Plaintiffs only allege conclusory facts that do not support a claim that HIG participated in those breaches.

Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., et al., C.A. No. 9405-VCP (November 26, 2014) (Parsons, V.C.)

Dec 02 2014

By Lisa Stark

In Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., the Delaware Court of Chancery held unenforceable provisions in a merger agreement and letter of transmittal requiring, as a condition to receiving the merger consideration, the target’s stockholders to: (1) indemnify the acquirer, up to their pro rata share of the merger consideration, for the target’s breaches of its representations and warranties, and (2) release the acquirer and its affiliates from any and all claims relating to the merger.

In this case, plaintiff, Cigna Health and Life Insurance Co. (“Cigna”), a former stockholder of defendant Audax Health Solutions, Inc. (“Audax”), sought some $46 million in merger consideration arising from the acquisition of Audax by Optum Services, Inc. Defendants refused to pay Cigna the merger consideration for failure to sign a letter of transmittal (or LoT). The LoT provided that the undersigned stockholder agreed to be bound by the indemnification provisions in the merger agreement and released the acquirer for any and all claims relating to the merger. Some of the target’s representations and warranties, which were the subject of the indemnification obligations, survived indefinitely. Cigna argued that the indemnification obligations and the LoT violated the Delaware General Corporation Law (the “DGCL”) for several reasons, including that they rendered the amount of merger consideration indefinite in violation of Section 251 of the DGCL and rendered the stockholders liable for the target corporation’s debts in violation of Section 102(b)(6) of the DGCL. Cigna argued that the release contained in the LoT was unenforceable for lack of consideration. Finally, Cigna argued that the stockholder representative appointment provisions in the merger agreement were unenforceable. In this decision, the Court addressed Cigna’s motion for judgment on the pleadings.

The Court found Cigna’s claims relating to the stockholder representative appointment provisions not properly presented, but agreed with Cigna that the indemnification and release obligations were unenforceable. Specifically, the Court held that the indemnification provisions violated Section 251 of the DGCL by putting at risk all of the merger consideration for an indefinite period of time and rendering the amount of merger consideration to be received by the stockholders undeterminable. As to the release, the Court held it unenforceable for lack of consideration–the right to receive the merger consideration vested at the effective time of the merger and the stockholders could not be required to release claims absent additional consideration. The Court expressly limited its holding to cases where a stockholder was required to indemnify a party as a condition to receiving the merger consideration and all of such stockholder’s merger consideration was subject to clawback. The Court also expressly stated that it was not addressing the validity of escrow holdbacks as a purchase price adjustment even though its reasoning could be applied to invalidate such arrangements. Finally, the Court stated that its opinion did not prohibit corporations from entering into separate agreements with stockholders to indemnify the acquirer prior to the time that the stockholders’ right to receive the merger consideration vested, but that “a post-closing price adjustment cannot be foisted on non-consenting stockholders.”

CignavAudax

Smollar v. Potarazu, C.A. No. 10287-VCN (November 19, 2014) (Noble, V.C.)

Dec 01 2014

By Lauren Garraux and Lisa Stark

In Smollar v. Potarazu, the Court of Chancery denied a stockholder’s request to expedite proceedings and to appoint a temporary receiver in connection with a challenge to an alleged impeding sale of VitalSpring Technologies, Inc. (“VitalSpring”) to an unidentified third-party. Plaintiff Marvin Smollar, a VitalSpring stockholder, filed the complaint against defendant Sreedhar V. Potarazu (“Defendant”), VitalSpring’s chief executive officer and sole director, following Defendant’s announcement that VitalSpring would be sold pending approval by the Federal Trade Commission. According to Defendant, the sale — which was projected to be completed around October 19, 2014 — was ultimately delayed pending further FTC guidance.

In his complaint, Plaintiff sought to enjoin the sale until VitalSpring released audited financial statements pursuant to an agreement with its stockholders and held an annual meeting of stockholders. VitalSpring apparently had not held an annual meeting of stockholders for several years contrary to Delaware law. According to Plaintiff, Defendant’s failure to hold annual meetings, to release audited financials and general lack of corporate transparency called into question the veracity of Defendant’s claims that a buyer for VitalSpring existed.

In re TPC Group Inc. Shareholders Litigation, Consolidated C.A. No. 7865-VCN (October 29, 2014) (Noble, V.C.)

Nov 03 2014

By Jamie Bruce and Lauren Garraux

The issue before the Court in In re TPC Group Inc. Shareholders Litigation was whether plaintiffs, shareholders of TPC Group Inc. (“TPC”) (“Plaintiffs”), were entitled to attorneys’ fees due to an increase in the merger price obtained between their commencement of shareholder litigation challenging the merger and the acquisition’s closing under an amended merger agreement. Shortly after TPC announced its acquisition by First Reserve Corporation, SK Capital Partners and their affiliates (collective, the “PE Group”), Plaintiffs filed complaints in Delaware Chancery Court challenging the intended merger on a number of grounds, including inadequate price. Ultimately, Plaintiffs’ claims were mooted by subsequent bidding and a supplemental proxy statement, which resulted in, inter alia, an increase of $5 per share ($79 million aggregate), an increase which TPC, its board and PE Group (collectively, “Defendants”) attributed to a competing proposal.

According to the Court, the critical issue with respect to Plaintiffs’ request was causation, i.e., whether Plaintiffs’ legal challenge was the cause of the price increase. Under Delaware law, it is presumed that plaintiffs are a cause; therefore, the burden is on the defendant to prove, by the preponderance of the evidence, that no causal connection (whether direct or indirect) existed between the price increase and plaintiffs’ litigation efforts. PE Group submitted affidavits citing concern over a competing proposal, negative publicity, public opposition by a significant shareholder, and the potential for an unfavorable evaluation by Institutional Shareholder Services when deciding whether PE Group should raise its bid. While acknowledging that these affidavits were self-serving, the Court indicated that Defendants’ account was the most credible and was consistent with the record, and the Court concluded that Defendants had met their burden in this regard and, therefore, denied Plaintiffs’ request for attorneys’ fees relating to an increase in the merger price.

InReTPC

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.

In re KKR Financial Holdings LLC Shareholder Litigation, C.A. No. 9210-CB (October 14, 2014) (Bouchard, C.)

Oct 21 2014

By Kristy Harlan and Eric Taylor

This case involves a challenge to a stock-for-stock merger by a group of stockholders of the target company who alleged breaches of fiduciary duty by both the board of directors of the target (the “Board”) and an alleged controlling stockholder who held less than 1% of the stock of the target. The transaction (the “Merger”) involved the acquisition of KKR Financial Holdings LLC (“KFN”) by KKR & Co. L.P. (“KKR”). KFN was managed by an affiliate of KKR, which was responsible for day-to-day operations of KFN, subject to the oversight of the Board pursuant to a management agreement between the parties. In October 2013, KKR expressed interest in acquiring KFN to a member of the Board. Over the next several months, the Board began to discuss the approach from KKR, set up a transaction committee to review the potential transaction, and met several times with representatives from KKR to negotiate for better terms. In mid-December 2013, the Board approved the Merger and KFN and KKR executed a merger agreement. The transaction was valued at approximately $2.6 billion.

This case is the consolidated result of nine separate actions that were filed challenging the Merger in December 2013 and January 2014. KFN and KKR moved for summary judgment, which the plaintiffs sought to overcome by arguing that the Merger should be subject to “entire fairness” review, instead of the presumed business judgment review. The Court held that the business judgment rule applied, granted summary judgment to KFN and KKR and dismissed the suit with prejudice.

Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., C.A. No. 8642-VCP (September 30, 2014) (Parsons, V.C.)

Oct 08 2014

By David Edgar and Joshua Haft

In Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., the plaintiffs, including Cheval Holdings, Ltd. (“Cheval Holdings”), Black Horse Capital, LP, Black Horse Capital Master Fund Ltd. (together with Black Horse Capital, LP, “Black Horse”), and Ouray Holdings I AG, filed a breach of contract action arising out of a transaction in which the plaintiffs and defendants, Jonathan M. Couchman, Xstelos Holdings, Inc., and Xstelos Corp. (formerly known as Footstar Inc. and Footstar Corp. (“Footstar”)) jointly acquired a pharmaceuticals company, CPEX Pharmaceuticals, Inc. (“CPEX”), which is now wholly owned by defendant FCB I Holdings, Inc. (“FCB Holdings”), an entity jointly owned by Footstar and Cheval Holdings. Immediately following the closing of the acquisition, FCB Holdings was owned 80.5% by Footstar and 19.5% by Cheval Holdings.

The plaintiffs’ claims arose out of an alleged oral promise in December 2010 by the defendants to transfer to the plaintiffs certain assets of CPEX, specifically an additional 60% ownership interest in the drug product known as SER-120 and referred to as “Serenity” by the court. The transfer was to occur after the closing of the CPEX acquisition in exchange for the plaintiffs funding a disproportionately large bridge loan to FCB Holdings (the “Serenity Agreement”). On January 3, 2011, each of Black Horse and Footstar entered into separate bridge loan commitment letters with FCB Holdings and CPEX in the amounts of $10 million and $3 million, respectively. In April 2011, the bridge loans were made to FCB Holdings and the CPEX acquisition closed. In connection with the CPEX acquisition, the bridge loans, and the other related transactions, the parties entered into customary transaction documents. Although the alleged oral promise of the Serenity Agreement was made prior to the parties entering into the transaction documents, none of the transaction documents executed in connection with the loan or the merger referenced the Serenity Agreement. Furthermore, the transaction documents also contained customary integration clauses. By December 2012, the transfer of assets contemplated by the Serenity Agreement had not occurred and relations between the parties deteriorated to the point where the plaintiffs filed this action in June 2013.

Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)

Jul 12 2014

By Eric Feldman and Sophia Lee Shin

Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.

Facts

Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership

In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.

Catagory:Merger