June 14, 2017
Rights Offerings: Wow! You Mean This Might Actually Work?
While deal lawyers have long used rights offerings as a tool to cleanse a related party transaction, they’ve done so without any clear signal from the courts that this approach actually works. However, this Cleary blog says that the Chancery Court recently hinted that those of us who’ve used rights offerings in this way might be on the right track.
At a settlement hearing last month, Vice Chancellor Laster made a number of comments suggesting that a rights offering could effectively limit insiders’ liability in a transaction with a controlling shareholder. Here’s an excerpt summarizing those comments:
Although it is important to emphasize that these comments were made at an uncontested hearing, Vice Chancellor Laster’s analysis suggests that potential liability in transactions with controlling stockholders can be substantially reduced (if not eliminated) if (1) the transaction is structured so that minority stockholders are able to participate pro rata with the controlling stockholder (e.g., as a rights offering with any rights issued being transferable), (2) there is no other alleged coercion, and (3) the controller does not receive any unique benefit at the expense of the minority.
I blogged about rights offerings over at “John Tales” a little while back. They’re cumbersome & are usually a poor option for raising capital, but if Delaware ultimately gives its imprimatur to them as a way to limit liability or avoid entire fairness review in controlling shareholder transactions, we may see a lot more of them.
– John Jenkins