November 29, 2021

Private Equity: Del. Chancery Says Sponsors Not a “Control Group”

This Morris James blog discusses the Chancery Court’s recent decision in Patel v. Duncan (Del. Ch.; 9/21). In that case, the Court rejected allegations that ties between PE fund sponsors were sufficient to treat them as a control group, and dismissed derivative claims alleging that the sponsors agreed to cause the company to overpay in two transactions that unfairly benefitted their respective affiliates. This excerpt summarizes Vice Chancellor Zurn’s decision:

The court found the allegations that they comprised a control group to be insufficient. While public disclosures indicated the corporation was a “controlled company” for purposes of New York Stock Exchange listing requirements, they did not concede the existence of a “control group” under Delaware law. Similarly, the stockholders’ voting agreement concerned the election of directors, not the transactions at issue.

The court also reasoned that allegations concerning the funds’ cooperation in a prior investment did not reasonably support the existence of an agreement in fact here. At bottom, the court reasoned, the stockholder-plaintiff really contended that its allegations of unfair transactions supported that there must be an agreement in fact for a quid pro quo. The court regarded such allegations as conclusory and insufficient, however.

The Court also rejected the plaintiff’s claims of demand futility, concluding that even assuming that the plaintiff adequately pled the existence a control group, more would be required to establish that the control group’s director-designees were disabled from considering a demand.

John Jenkins