August 10, 2020

Del. Chancery Dismisses Challenge to M&A Retention Comp

The Delaware Chancery Court recently rejected a challenge to a retention plan implemented by Fox in connection with the spin-off of its broadcasting business to a new entity & related sale of its remaining businesses to Disney.  In Brokerage Jamie Goldenberg Komen Rev Trust v. Breyer, (Del. Ch. 6/20), Chancellor Bouchard held that the plaintiff’s claims were derivative, not direct, and that as a result, the plaintiff lacked standing to pursue them post-merger.

In order to understand the Chancellor’s decision, you need to know a little about the way the deal was structured & what the plaintiff owned. In March 2019, 21st Century Fox (“Old Fox”) spun off its broadcasting business to a new entity, Fox Corporation (“New Fox”), & sold off its It sold its other businesses to Disney for $71.6 billion.  As part of the transaction, Old Fox entered into retention comp arrangements with its executives, including Fox co-chair Rupert Murdoch & his sons.  The Murdochs’ awards were allegedly worth $82.4 million, which is nice work if you can get it and further proof that, as Mel Brooks put it, “it’s good to be da king!”

The plaintiff was originally an owner of Old Fox common stock, and brought a derivative action on behalf of Old Fox challenging the retention plan prior to the closing. It subsequently became an owner of New Fox and Disney stock as a consequence of the Transaction, and amended its complaint to assert direct and derivative claims on behalf of New Fox.  This excerpt from a recent K&L Gates blog on the case addresses the Chancellor’s analysis of whether the plaintiff’s claims were direct or derivative:

Upon Defendant’s motion to dismiss, the issue before the court was whether Plaintiff was permitted to bring the suit as a shareholder under Delaware law. First, the Court analyzed whether Plaintiff’s claims were direct or derivative. The Court explained that in order for a shareholder to bring a direct claim in the context of a merger transaction, the shareholder plaintiff must “allege facts showing that the side payment improperly diverted proceeds that would have [otherwise] ended up in the consideration paid to the target [shareholders].”

Here, Plaintiff contended its claims were direct because Defendants diverted Old Fox assets during the Transaction that reduced the overall consideration paid to Old Fox shareholders. The Court found that Plaintiff failed to adequately plead that Defendants influenced the sale process in such a way that “caused anything to be taken off the table that otherwise would have gone to [the Old Fox shareholders]”, and therefore Plaintiff’s claims are derivative. The Court reasoned that Plaintiff’s allegations did not support an inference that the proceeds for the compensation plan, but for Defendant’s improper interference, would have been paid out to shareholders.

The Chancellor’s conclusion that the claims were derivative put the plaintiff in a bind. That’s because, subject to a couple of exceptions, Delaware requires a derivative plaintiff to be both a continuous and contemporaneous owner of shares. The continuous ownership requirement was a problem for the Old Fox claims because the general rule in Delaware is that derivative claims pass to the buyer at the closing of a merger. As for the claims against New Fox, since the comp plan was put in place before the deal closed, the plaintiff wasn’t a contemporaneous owner of New Fox stock when the actions at issue were taken.

The plaintiff tried to work its way around these problems by arguing that the transaction was “merely a reorganization,” and that the contemporaneous ownership requirement didn’t apply. Chancellor Bouchard didn’t buy this argument. In his view, since New Fox contained only a portion of Old Fox’s business, it was a “vastly different” company and the deal wasn’t merely a reorganization.  As a result, the Court dismissed the plaintiff’s claims due to lack of standing.

John Jenkins