Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Alleged Controller’s Tender Offer As The “Abstention Principle” Is “Not Absolute” And A De Facto Controller May Obtain Additional Benefits From Mathematical Control
On August 17, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss claims brought by stockholders of Coty Inc. (the “Company”) against its directors and affiliates of its alleged controller. In re Coty, Inc. Stockholder Litigation, C.A. No. 2019-0336-AGB (Del. Ch. Aug. 17, 2020). Plaintiffs claimed that defendants breached their fiduciary duties by initiating and approving a tender offer in which the alleged controller increased its holdings from 40% to 60% allegedly at an unfair price and through an unfair process. Four of the nine director defendants, who were associated with the alleged controller (the “Controller Directors”), recused themselves from the board vote to recommend the tender offer and approve a related stockholders agreement. Nevertheless, the Court held that the “abstention defense” is “not absolute and often implicates factual questions that cannot be resolved on the pleadings.” As to all defendants, the Court upheld the claims even of stockholders that did not tender their shares because a de facto controller may “obtain real benefits from securing mathematical control of a corporation in a transaction and, as a corollary, . . . other stockholders of the corporation potentially may suffer harm as a result of such a transaction.”
After receiving the tender offer proposal, the board formed a special committee of three of the outside directors to evaluate the offer. The special committee recommended approval and the board voted to—and did—recommend that stockholders tender their shares. Although the outside directors did not seek dismissal of the breach of fiduciary duty claim and there was no apparent dispute that the tender offer was subject to entire fairness review, the Controller Defendants sought dismissal because they recused themselves from the board vote. However, the Court found that the allegations in the complaint rendered it “reasonably conceivable that the [Controller] Directors did not totally abstain from the process” and declined to dismiss the claims against them.
In this regard, the Court explained that the complaint alleged that the Controller Directors failed to disclose in certain director questionnaires all of their relationships with members of the special committee, which allegedly caused the Company to distribute a recommendation statement to the stockholders with respect to the tender offer that “misleadingly portrayed” the special committee members as independent. The Court also noted that the recommendation statement itself suggested that the Controller Directors “participated in the key board meeting before the vote” on the tender offer.
Defendants all argued that—accepting as true plaintiffs’ allegation that the alleged controller was a de facto controller in advance of the tender offer—stockholders could not maintain claims as to shares they continued to hold because they “were not differently situated than they were” before the tender offer. But the Court could not “rule out” at the pleadings stage that these remaining stockholders suffered harm when the alleged controller “secured mathematical control.” The Court highlighted that the Company’s recommendation statement on the tender offer itself noted the loss of a control premium in the future as a “negative factor” and “recognized the potential value to [the alleged controller] of obtaining a majority ownership stake.”