Earlier this month I blogged about Harvard prof. Jesse Fried’s article calling into question the efficacy of rights offerings as “cleansing mechanisms” for insider transactions. A member reached out with a critique of the article. He didn’t take issue with Fried’s questioning the extent to which weight should be given to the right to participate in a financing, but thought that he gave short-shrift to current practice when it comes to rights offerings:
[Fried] does not adequately recognize that practice under existing law is to be skeptical about the weight to be given to rights to participate in establishing entire fairness. I can’t count how many times I have colleagues tell me that there is no problem because the offer is being made to all shareholders and I have to point out that it is not that simple because the shareholders other than the controller (e.g., the private equity firm) are not necessarily in the same position to participate, and so they still have to pay attention to the ability to justify the fairness of the price, with the right to participate just being one factor in overall fairness. I think Delaware law already makes that clear.
This CLS Blue Sky blog reviews some fairly recent Delaware case law addressing the limitations on the use of rights offerings to shift the standard of review from entire fairness to business judgment.
– John Jenkins