December 15, 2022

Going Private: Controller Ties Not Enough to Blemish Special Committee’s Independence

Prior business dealings between a company’s controlling stockholder and members of a special committee evaluating a transaction with that controller can call into question the committee’s independence. But the Chancery Court’s recent decision in Ligos v. Tsuff, (Del. Ch.; 12/22) illustrates that prior relationships don’t inevitably result in a conclusion that a director is independent.

The case arose out of a going private transaction in which the target was acquired by an affiliate of its controlling stockholder.  The plaintiff challenged the special committee’s independence based on the members ties to the controller and the mere presence of a controlling stockholder. As this excerpt from Shearman’s blog on the case indicates, Vice Chancellor Glasscock rejected those allegations and dismissed the claims against the special committee members:

After concluding that the Company’s Certificate of Incorporation exculpated the Special Committee members from all claims other than for breach of the duty of loyalty, the Court held that Plaintiff failed to assert facts suggesting that any of the Special Committee Defendants were interested in the Transaction.  First, the Court rejected the notion that the mere presence of a controlling shareholder was sufficient, noting that the Special Committee members would cease to be directors after the merger closed.

The Court next concluded that Plaintiff failed to allege that any material or beneficial relationship existed between the controller and any Special Committee member.  Finally, the Court found that Plaintiff failed to meet the high pleading standard to allege bad-faith conduct, finding no indication of an “intentional dereliction of duty.”  Thus, even though the Court agreed that the final outcome in the transaction was “not great,” the Court found that the Special Committee Defendants had “acted vigorously” in negotiating the merger.

In concluding that no material relationship existed between the controller and any special committee member, Vice Chancellor Glasscock said that the relationships alleged by the plaintiff were attenuated. In that regard, the most significant relationship that the plaintiff alleged was one in which a director had been a long-term employee of another business owned by the controller.  However, that employment relationship had terminated more than 20 years ago, and the only relationship that had continued since that time was his continuing service on the target’s board.

The relationships alleged with respect to the other special committee members were much weaker, and were essentially premised on their status as long-serving members of the target’s board. Under the circumstances, the Vice Chancellor concluded that the failure to allege that the members of the special committee had any expectations of future business dealings made the plaintiff’s argument about their lack of independence based on these ties unconvincing.

John Jenkins