Topic: Sale of Control

Chancery Court Finds That Stockholders Have Standing For Direct Suit Relating To Unique Claims For Breach Of Fiduciary Duties

By: David L. Forney and Calvin D. Kennedy

In In re Straight Path Communications Inc. Consol. S’holder Litig., C.A. No. 2017-0486-SG (Del. Ch. June 25, 2018), the Court of Chancery, denied a motion to dismiss, finding that the transfer of an indemnification claim to the controller of a company was “sufficiently intertwined” with the company’s sale for the stockholders to make the Plaintiff’s claim a direct claim instead of a derivative claim.  The Court stated that when a controller uses his control to extract a special benefit in a sale, at the expense of the consideration to the stockholders, both the injury and the recovery run directly in favor of the former stockholders. The Court also found that, the controller’s actions related to the purchase of the indemnification claim and other assets from the company for “a manifestly unfair price” were sufficient to state a viable claim for breach of fiduciary duties.

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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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