Delaware Court Of Chancery Dismisses Claims Challenging Squeeze-Out Merger Because Special Committee Was Not “Interested” And Stockholder Vote Was Uncoerced
On May 10, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss claims for breach of fiduciary duty and unjust enrichment brought by former stockholders of Voltari Corporation, challenging the take-private buyout of the company by its controlling stockholder. Franchi, et al. v. Firestone, et al., C.A. No. 2020-0503-KSJM (Del. Ch. May 10, 2021). 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 offer was conditioned on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Nevertheless, plaintiffs claimed that the purchase price did not account for the value of the company’s net operating loss carryforwards and therefore the controller and the company’s directors breached their fiduciary duties. The Court, however, held that defendants were entitled to the benefit of the business judgment rule under MFW because plaintiffs did not adequately plead (i) a lack of independence as to the members of the special committee; (ii) that the committee acted with gross negligence in approving the merger; or (iii) that the proxy in connection with the stockholder vote failed to disclose material facts.
Plaintiffs alleged that one member of the committee was not independent because he previously founded a company that collaborated with another company controlled by the controlling stockholder, was nominated to two boards by the controller over the past decade, and assisted with a documentary about the controller. Plaintiffs challenged the independence of another member on the grounds that he served as a senior officer of another of the controller’s entities between 2009 and 2012. Finally, plaintiffs alleged that the third member held senior positions in the past at the controller’s entities and continued to serve as director on other boards of companies affiliated with the controlling stockholder. The Court found that most of the allegations concerned “ordinary past business relationships, board nominations, and board service that this court has deemed insufficient to cast doubt on a director’s independence.” While the allegation with respect to a documentary was “more unusual,” plaintiffs did not show—and conceded at oral argument—that it did not “move the needle in their favor.”
With respect to the alleged failure to exercise its duty of care, the Court held that plaintiffs did not adequately plead “conduct that constitutes reckless indifference or actions that are without the bounds of reason.” In particular, the Court rejected plaintiffs’ argument that the committee “fell victim to a ‘controlled mindset’” because “the special committee met seven times, engaged and consulted with independent advisors, came to a reasoned decision to negotiate a transaction . . . and successfully bid the deal price up by 48% percent.” Because plaintiffs failed to “undermine the cleansing effect of the MFW conditions,” the Court held that the business judgment rule applied to the merger and did not directly address the question of whether the purchase price properly accounted for the value of the company’s net operating loss carryforwards.
Finally, the Court rejected plaintiffs’ argument that the stockholder vote was uninformed because plaintiffs did not adequately allege that the proxy statement contained material omissions. Plaintiffs claimed that the proxy failed to disclose the special committee members’ conflicts of interest, but the Court already rejected the claim that the members were interested. Plaintiffs also claimed that the proxy failed to disclose that one of the company’s directors was deemed unsuitable to serve on the special committee because of his ties to controller, but the court found that was not material because that director was excluded from the special committee.