August 7, 2013

Delaware Chancery on Fiduciary Duties When Controlling Stockholder Maintains Post-Closing Interest

John Grossbauer of Potter Anderson notes: In SEPTA v. Volgenau, Delaware Vice Chancellor Noble granted summary judgment to defendants on all counts of a challenge to the acquisition of SRA International by Providence Equity Partners, in which the company’s controlling stockholder and founder. Dr. Ernst Volgenau, maintained a post-closing interest. The Court found that the business judgment rule was applicable here because the transaction was negotiated by a committee of disinterested directors and subject to the non-waivable approval of a majority of the minority shares of stock of SRA.

The Court cited In re MFW Shareholders Litigation with approval, but found that case not strictly applicable because the transaction did not involve a majority stockholder squeezeout, but rather a sale to a third party, albeit one in which the majority stockholder agreed to roll over a portion of his shares. The Court instead found In re John Q. Hammons Hotels to be the appropriate precedent. In that opinion, Chancellor Chandler noted his belief that business judgment would be the applicable standard of review in a transaction in which a controlling stockholder received differential consideration if the deal were subject both to majority of minority approval and was negotiated by independent directors. As in Hammons, the Vice Chancellor found that Dr. Volgenau did NOT stand on both sides of the transaction for purposes of invoking entire fairness review, because he had not initiated the transaction and was willing to sell to other bidders.

In making the determination that the procedural protections here were sufficient, the Court addressed a number of issues. He found that the fact the lead independent director sought, post-signing, an additional fee of $1.3 million, which would be donated to a charity, was not enough to compromise his independence. Similarly, the contingent fee paid to the bankers, and the bonus paid to the committee’s counsel, did not taint the advisers. He found, in regard to the latter, that failure to disclose the possibility of the additional counsel payment was not a material omission. Finally, the Vice Chancellor found that the differential consideration was permitted under the Class A/B charter structure at issue, given that the value of the consideration received by Mr. Volgenau and other stockholders was equal, and plaintiffs had not succeeded in creating a triable issue of fact to the contrary.