May 24, 2021

Controllers: Del. Chancery Rejects Challenge to Committee Independence

In Franchi v. Firestone, (Del. Ch.; 5/21), the Chancery Court rejected breach of fiduciary duty allegations arising out of a controlling stockholder’s take-private acquisition of Voltari Corporation.  The deal was structured in order to conform to MFW’s ground rules for application of the business judgment rule to transactions with a controller. However, the plaintiffs alleged that the special committee established to negotiate the transaction was not independent, and that MFW did not apply.

Chancellor McCormick held that the plaintiffs failed to adequately allege conflicts of interest sufficient to call the special committee’s independence into question. This excerpt from a Shearman blog on the decision explains her reasoning:

Plaintiffs alleged that one member of the committee was not independent because he previously founded a company that collaborated with another company controlled by the controlling stockholder, was nominated to two boards by the controller over the past decade, and assisted with a documentary about the controller.  Plaintiffs challenged the independence of another member on the grounds that he served as a senior officer of another of the controller’s entities between 2009 and 2012.  Finally, plaintiffs alleged that the third member held senior positions in the past at the controller’s entities and continued to serve as director on other boards of companies affiliated with the controlling stockholder.

The Court found that most of the allegations concerned “ordinary past business relationships, board nominations, and board service that this court has deemed insufficient to cast doubt on a director’s independence.”  While the allegation with respect to a documentary was “more unusual,” plaintiffs did not show—and conceded at oral argument—that it did not “move the needle in their favor.”

The Chancellor also rejected the plaintiffs’ allegations of disclosure shortcomings in the proxy statement premised on the alleged conflicts of interest, as well as claims that the board failed to satisfy its duty of care.

In rejecting the duty of care claims, Chancellor McCormick noted that “the Special Committee met seven times, engaged and consulted with independent advisors, came to a reasoned decision to negotiate a transaction with [the controller], and successfully bid the deal price up by 48%.” She concluded that this activity did not support the conclusion that plaintiff asked the Court to draw that the committee acted with a “controlled mindset.”

John Jenkins