July 8, 2024

Fiduciary Duties: Chancery Says 27% Stockholder Isn’t a Controller

In Sciannella v. AstraZeneca, (Del. Ch. 7/24), the Chancery Court dismissed breach of fiduciary duty claims arising out of the 2021 sale of Viela Bio, Inc. to Horizon Therapeutics PLC. In a 79-page opinion, Vice Chancellor Fioravanti rejected claims that pharma giant AstraZeneca, which owned approximately 27% of Viela’s shares, was a controlling stockholder.

The plaintiffs contended that their claims should be evaluated under the entire fairness standard because AstraZeneca was a controlling stockholder and pushed the company into the transaction because it wished to acquire a direct competitor. In alleging that AstraZeneca was a controlling stockholder, the plaintiffs pointed to, among other things, certain blocking rights provided to AstraZeneca in Viela’s charter.

Under the terms of the charter, certain corporate actions, including bylaw amendments, taken without the approval of Viela’s board would require the approval of the holders of 75% of its outstanding shares. As a practical matter, AstraZeneca’s ownership stake gave it the ability to block transactions subject to this supermajority vote requirement, but the Vice Chancellor concluded that the limited nature of these rights made them insufficient to confer controlling stockholder status on AstraZeneca. In his opinion, he distinguished the blocking rights provided to AstraZeneca from those in other Delaware cases in which blocking rights were held to be sufficient to convey control:

AstraZeneca’s equity position gave it limited blocking rights under the Viela Certificate. Though these blocking rights are meaningful, they are not nearly as formidable as the blocking rights highlighted in other cases. For example, unlike in Voigt where the defendants had the ability to block board decisions, AstraZeneca only had the right to veto bylaw amendments initiated by stockholders, and then only if the Board did not recommend them. .  .

The supermajority voting requirements under the Viela Certificate gave AstraZeneca—by virtue of its 26.72% voting block—veto power over limited corporate actions, but as a whole, did not give AstraZeneca power to wield control over the Board or “operate[] the decision-making machinery of [Viela].” Thermopylae Cap. P’rs, L.P. v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch. Jan. 29, 2016). Nor did AstraZeneca ever exercise its blocking rights. Cf. Tornetta, 310 A.3d at 503 (noting that the CEO exercised his veto rights to block bylaw amendments on two separate occasions).

Vice Chancellor Fioravanti also rejected the plaintiffs’ arguments that support agreements entered into when Viela was spun-off by AstraZeneca, AstraZeneca’s designation of two members of the board, and the fact that Viela’s executive officers were former employees of AstraZeneca, were sufficient to make it a controlling stockholder.  Finally, he rejected claims that AstraZeneca exercised transaction-specific control over the board through allegedly coercive threats made in a letter to Viela’s board to terminate its contracts with Viela. Rather than a coercive threat, the Vice Chancellor concluded that the letter at issue was a “proposal” to facilitate a business separation that had been in the works since Viela’s IPO in October 2019.

The transaction was structured as a merger with a front-end tender offer, and the plaintiffs also asserted that the company’s Schedule 14D-9 recommendation statement for the tender offer was misleading because it failed to disclose AstraZeneca’s alleged decision to abandon the company absent a sale and because it failed to disclose a set of projections prepared prior to the projections provided to stockholders in the 14D-9.  The Vice Chancellor rejected those claims as well and held that because Viela’s stockholders were fully informed, the transaction satisfied Corwin and board’s actions in connection with it were subject to review under the business judgment rule. Accordingly, he dismissed the plaintiffs’ claims.

John Jenkins