August 30, 2017

Controllers: Chancery Upholds Fiduciary Claim Based on Self-Tender

The Morris James blog highlights the Delaware Chancery Court’s recent decision in Buttonwood Tree Value Partners v. R.L. Polk & Co. (Del.Ch.; 7/17), which involved claims that controlling shareholders breached their fiduciary duty by low-balling a self tender :

This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.

In upholding the minority’s fiduciary duty claims, Vice Chancellor Glasscock noted the following facts:

– The controlling shareholders collectively owned more than 90% of the common stock of Polk;
– Directors allied with the controlling shareholders exercised that collective power as a control block;
– The controlling shareholders engineered a self-tender in a way that maintained their degree of control; and
– The tender offer price was set through a financial advisor that also did work for affiliates of the controlling shareholders.

Those facts aren’t great, but here’s the clincher – within roughly two years of the self-tender, the remaining stockholders had received extraordinary dividends amounting to 1/3rd of the self-tender price, along with merger consideration equal to 300% of the self-tender price.

As a result, Vice Chancellor Glasscock declined to dismiss the claims & determined that the controlling shareholders had the burden of proving entire fairness.

John Jenkins