Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Squeeze-Out Merger Because Special Committee Members Were Allegedly “Interested”
On February 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by former shareholders of AmTrust, Inc., challenging the take-private buyout of the company by its controlling stockholders and a private equity firm. In re AmTrust Financial Services, Inc. Stockholder Litigation, C.A. No. 2018-0396-AGB (Del. Ch. Feb. 26, 2020). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—the buyout group conditioned its offer on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Plaintiffs challenged the independence of three of four members of the special committee because the buyout allegedly was expected to extinguish their potential liability in a pre-existing derivative action. The Court held that the MFW requirement of “independent” special committee approval “was intended to ensure not only that members of a special committee must be independent in the sense of not being beholden to a controlling stockholder, but also that the committee members must have no disabling personal interest in the transaction at issue.” Therefore, the Court found the transaction subject to entire fairness rather than business judgment review and denied the motion to dismiss as to the controlling stockholders and their affiliated directors.
Notably, the pre-existing derivative action involved claims of usurpation of a corporate opportunity. The Court noted that all defendants in that action except one—who retired before the take-private buyout—answered the complaint in lieu of moving to dismiss, while the motion to dismiss of the remaining defendant was denied with comments by the court that the allegations were “very troubling” and “very unusual.” The Court also highlighted that the pre-existing derivative action was valued by the special committee’s financial advisor (based on its legal counsel’s estimates) at between $15 million and $25 million. Indeed, the Court emphasized that defendants did not challenge that the potential liability was material to the special committee members who were defendants in the derivative action. Finally, the Court explained that the potential liability was likely to be extinguished because the transaction would eliminate the derivative plaintiffs’ standing and the controlling stockholders “would never press claims relating to their own alleged usurpation of a corporate opportunity.”
The Court also denied the motion to dismiss as to the allegedly self-interested members of the special committee. In this regard, the Court rejected defendants’ argument that they were protected against liability by an exculpatory provision in the company’s certificate of incorporation. The Court applied In re Cornerstone Therapeutics Inc., Stockholder Litigation, 115 A.3d 1173 (Del. 2015), which generally precludes dismissal even in the context of an exculpatory provision when the complaint “plead[s] facts supporting a rational inference that the director harbored self-interest adverse to the stockholders’ interests.”
The Court did, however, dismiss the claims against the fourth member of the special committee, with respect to whom there were no facts pled demonstrating self-interest or bad faith. Likewise, the Court dismissed aiding and abetting claims against the private equity firm and related defendants because the complaint failed to plead knowing participation in any breach.