April 11, 2018

Del. Chancery Says 33% Holder Not “Controlling Shareholder”

This Shearman & Sterling blog reviews In Re Rouse Properties, Inc. Fiduciary Litigation,(Del. Ch.; 3/18), in which the Chancery Court rejected allegations that a 33% minority shareholder was a “controlling shareholder” owing fiduciary duties to the corporation.

The plaintiffs alleged breaches of fiduciary duty by a special committee of the Rouse board that negotiated a sale to its 33% shareholder, Brookfield Asset Management. The plaintiffs alleged that Brookfield was a controlling shareholder, & that it dominated the committee during the merger negotiations. In support of those contentions, the plaintiffs alleged that two of the five directors on the committee “lacked independence from Brookfield,” and that one of those directors, Rouse’s CEO was “beholden” to Brookfield for various reasons, including the fact that Brookfield tried to discuss post-merger employment with him during the process.

Vice Chancellor Slights rejected those allegations. This excerpt summarizes his reasoning:

The Court found plaintiffs’ allegations of control insufficient. The Court explained that “our courts generally recognize that demonstrating the kind of control required to elevate a minority blockholder to controller status is ‘not easy.’” The Court noted that there had been no pre-merger discussions with Rouse’s CEO because they were precluded by the special committee, and that the CEO resigned immediately following the merger. As to the other challenged director, the Court explained that appointment to a board is “insufficient to call into question” such director’s independence.

In any event, plaintiffs did not plead that the three remaining special committee members were compromised or demonstrate that Brookfield otherwise controlled Rouse’s decision-making process. To the contrary, the Court found it clear that the special committee “negotiated hard” with Brookfield, successfully achieving “a majority of the minority voting condition despite real resistance from Brookfield” and a significant increase in the deal consideration. Given the absence of fiduciary duties owed by non-controlling stockholders, the Court dismissed the breach claims against Brookfield.

Since the deal was approved by a majority of the disinterested stockholders, the Vice Chancellor applied the business judgment rule in accordance with Corwin & dismissed the claims against the special committee directors as well.

John Jenkins