March 22, 2019

Delaware Chancery Enjoins Merger But Won’t Impose “Go-Shop”

It’s becoming increasingly rare to see the Delaware Chancery Court issue an order enjoining a deal – but that’s what Vice Chancellor McCormick did earlier this month in FrontFour Capital v. Taube (Del. Ch.; 3/19). The transaction involved a proposed acquisition of two entities, Medley Management and Medley Capital, by a company called Sierra Income. The pricing terms of the two acquisitions were very different – while Medley Management would receive a 100% premium to market, Medley Capital shareholders were to receive a price that provided no premium to its net asset value.

Medley Management was majority owned by two brothers, who also owned a less than 15% stake in Medley Capital. To make a long story short, the court found that, despite the brothers’ relatively low ownership interest in Medley Capital, they were controlling shareholders of that entity. It also found that the Medley Capital board willfully deferred to them, and allowed them to dominate a process that was kind of a mess. The Vice Chancellor ultimately found that the controlling shareholders and the directors breached their fiduciary duties.

The plaintiffs sought both corrective disclosure & a requirement that the company be actively shopped in order to seek a better deal. VC McCormick enjoined the deal pending distribution of revised disclosure, but as this Morris James blog notes, she decided that she was precluded from ordering that the company be shopped free from the contractual deal protections. This excerpt explains her reasoning:

With respect to the remedy, the Court enjoined the stockholder vote pending corrective disclosures. The Court reasoned, however, that controlling precedent prohibited the most equitable remedy: a Court-ordered “go shop” free from deal protections. Specifically, the Delaware Supreme Court’s decision in C & J Energy Services, Inc. v. City of Miami Gen. Empls. and Sanitation Empls. Ret. Tr., 107 A.3d 1049 (Del. 2014) prevented the Court from infringing upon the acquirer’s rights in the deal protection provisions without a finding of wrongdoing on its part.

The blog says that the plaintiffs did allege wrongdoing on the part of the buyer.  Specifically, the plaintiffs claimed that the buyer aided & abetted the breaches of fiduciary duty. But this claim wasn’t pursued in discovery or addressed in the plaintiffs’ briefs.

John Jenkins