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Delaware Court Of Chancery Finds Allegations Of A Controlling Stockholder Group Sufficient To Preclude Dismissal Of Merger-Related Fiduciary Duty Breach Claims
06/26/2018On June 18, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss claims of breach of fiduciary duty brought by a putative class of minority stockholders of Hansen Medical Inc. (“Hansen”) against an alleged group of controlling stockholders, in connection with the squeeze-out merger of Hansen into Auris Surgical Robotics, Inc. (“Auris”). In re Hansen Medical, Inc. Stockholder Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018). Plaintiffs alleged that certain stockholders, who together controlled more than sixty percent of Hansen, negotiated a deal that undervalued the minority stockholders’ shares, while the alleged controllers were able to roll over their investments into the acquiring company. The Court found that the complaint adequately pleaded a “long history of cooperation and coordination” between the alleged controllers such that it was reasonably conceivable that they were acting as a control group. Therefore, the Court held that the entire fairness standard of review applied—rather the deferential business judgment rule—and denied the motion to dismiss.
According to the complaint, after Hansen received a letter of interest for its acquisition from Auris in September 2015, Hansen’s board created a four-member transaction committee, which initially included one director (the “Alleged Director-Controller”) who controlled approximately 34% of Hansen stock. Another alleged member of the controlling stockholder group controlled an additional 31% (together, the “Controller Defendants”). On October 15, 2015, the Alleged Director-Controller allegedly resigned from the committee because Auris had informed the company that any acquisition might be conditioned on certain “Key Stockholders,” including the two Controller Defendants, being required to roll over their Hansen stock into an investment in Auris. The Alleged Director-Controller also subsequently resigned from the Hansen Board in January 2016. The companies announced entry into a merger agreement on April 20, 2016. At the same time, the Controller Defendants entered into stock purchase agreements with Auris and agreements to vote in favor of the merger. Notably, however, approximately 75% of the minority-held shares voted against the merger. Asserting claims for breach of fiduciary duty, plaintiffs alleged that the cash consideration that each of the minority stockholders received undervalued their shares and that the investment rollover by the Controller Defendants reflected a unique benefit.
Denying the motion to dismiss, the Court found that various factors “when viewed together” rendered it “reasonably conceivable that the Controller Defendants functioned as a control group during the Merger.” The Court highlighted that the Controller Defendants had coordinated their investment strategy in at least seven different companies for more than twenty years and that this “history of coordination colors the actions of the Controller Defendants during the Merger.” Specifically, the Court pointed to the following allegations: (i) Auris identified the Controller Defendants at a very early stage of negotiations as “Key Stockholders” and entered into agreements to negotiate with them directly; (ii) ultimately, the Controller Defendants concurrently entered into voting agreements with Auris; and (iii) again concurrently, the Controller Defendants entered into stock purchase agreements with Auris.
