September 5, 2012

Chancellor Strine Addresses Controlling Stockholders Duties in a Company Sale

John Grossbauer of Potter Anderson notes: In re Synthes, Inc. Shareholder Litigation, Chancellor Strine dismissed with prejudice claims challenging the sale of Synthes to Johnson & Johnson. The plaintiffs had alleged that the controlling stockholder was conflicted due to his desire for liquidity, and that the directors of Synthes were similarly responsible for an alleged flawed sales process and for allegedly permitting the controlling stockholder to block consideration of a possibly more favorable private equity bid that would have required the controller to roll over a “substantial” portion of his shares. There is a great deal of interesting discussion of the duties of controlling stockholders in the context of a sale. Among other things, the Chancellor states that a controlling stockholder who takes the same consideration as other stockholders is afforded a “safe harbor” from loyalty claims.

The Chancellor also discusses in a lengthy footnote the Supreme Court’s McMullin decision, and posits the types of circumstances in which the controlling stockholder’s preference for cash might rise to the level of a breach of duty. The Chancellor also discusses Revlon, finding it inapplicable here because the consideration paid was 65% stock, citing In re Sante Fe as binding precedent on the issue. He declined to rely on “transcript dictum” to apply Revlon because the deal was an “end stage” transaction. The Chancellor also cited his Lear opinion for the proposition that enterprise value may be an appropriate metric to use in evaluating the preclusive affect of a termination fee on a competing bidder.