September 24, 2021

Del. Chancery Addresses Duties of Shareholders’ Reps

Shareholders’ representatives play an important role in many transactions where the target has a relatively large number of shareholders, but I haven’t seen their obligations addressed in judicial decisions. Okay, I admit I haven’t exactly been on the prowl for these decisions, but having stumbled across this Morris James blog describing the Chancery Court’s decision in Houseman v. Sagerman,(Del. Ch.; 7/21), I thought it was worth sharing.

The plaintiffs challenged a number of decisions made by the shareholders’ representative in the administering the proceeds of a merger, and argued that entire fairness was the appropriate standard of review. The matter was referred to a Special Master, who determined that the representative’s conduct should be evaluated under an an abuse of discretion standard. This excerpt from the blog summarizes the Chancery Court’s decision:

The Court of Chancery, upon de novo review of the Special Master’s report, noted that a Shareholders’ Representative, as attorney-in-fact for other shareholders, “generally assumes the obligations of a fiduciary.” However, the powers and duties of such a representative can be modified and circumscribed by contract. Here, the merger agreement indicated that “[t]he Shareholders’ Representative shall not have any duties or responsibilities except those expressly set forth in this Agreement.”

Under the merger agreement, the Shareholders’ Representative was empowered to “do[] any and all things and tak[e] any and all action that the Shareholders’ Representative, in such Person’s sole and absolute discretion, may consider necessary, proper, or convenient in connection with or to carry out … the transactions contemplated by this Agreement.” The Court interpreted that language as requiring that conduct be measured by the subjective good faith of Shareholders’ Representative.

So long as the Shareholders’ Representative actually concluded in good faith that specific acts were “necessary, proper or convenient” to protect the interests of all shareholders, the Shareholders’ Representative was empowered to take such acts, and all shareholders, even those who did not sign the merger agreement, were bound to such determinations.

That last part – the ability to bind non-signatories – is another interesting aspect of the decision. In support of that conclusion, the Chancery Court cited its prior decision in Aveta v. Cavallieri, (Del. Ch.; 9/10), which held that certain post-closing price adjustments determined through a stockholders’ representative were permissible under Section 251(b) of the DGCL:

The [Aveta] Court concluded that, because post-closing adjustments are generally permissible as a matter of corporate law, the scope of the contractual grant of authority to an agent to administer those adjustments is irrelevant. Accordingly, “it does not matter whether . . . the Purchase Agreement gave [the representative] authority to act on behalf of some, all, or none of [the] stockholders. All that [Section 251] required was for [the representative] to be designated as the individual who would follow the procedures and make or participate in the determinations called for by the Purchase Agreement.”

Since the merger agreement designated the shareholders’ representative to carry out the actions contemplated by that agreement, the shareholders were bound by the representative’s actions taken in conformity with the agreement, regardless of whether they were signatories to it.

John Jenkins