DealLawyers.com Blog

This Sullivan & Cromwell article discusses Vice Chancellor Laster’s bench ruling last week on a motion to dismiss after oral argument in Clement v. Apollo Global Management, LLC. In this case, the plaintiff alleged a controlling shareholder extracted two unique benefits in the challenged transaction — the conversion of a subordinated loan valued at $27.6 million to equity worth $2.8 million (causing dilution) and a release of any claims that may have existed from the time the controller owned the company — so the entire fairness standard should apply. VC Laster’s ruling provided two points of clarification on the concept of a controller’s receipt of “unique benefits” in a transaction. Here’s an excerpt from the article:

The first is whether the unique benefit received by the controller “has to be at the expense of the minority” shareholders. The court said that “the question really turns on whether we approach fiduciary liability using th[e] concept of compensatory damages” (which focuses on the plaintiff’s loss) or “principles of disgorgement” (which focuses on the defendant’s gain). Because disgorgement is “the dominant paradigm” in “a fiduciary world” where “we’re dealing with equity,” the court stated that, in its view, “it doesn’t make sense to limit the cause of action to one where there’s diversion of consideration.” Therefore, a unique benefit can arise “where the fiduciary takes a benefit, even if it’s not at the expense of the minority stockholders.”

The court also addressed a seeming divergence in views with Vice Chancellor Glasscock with respect to the framework for analyzing challenges to a merger where the claimed benefit is the elimination of litigation exposure. In In re Primedia, Inc. Shareholders Litigation, Vice Chancellor Laster had analyzed the issue through the lens of standing, whereas Vice Chancellor Glasscock’s decisions “jump over the concept of standing to address the merits of a challenge to an interested transaction.” The court stated that “when you have a controller that is a controller at the time of the merger . . . it really doesn’t matter” which framework is used because “it’s the same analysis for both” that all “coalesces into one thing”: “[t]here has to be an inference of something material that results in a conflict.” …

With respect to the loan conversion, the court held that the controller’s receiving 10 cents on the dollar for the loan was a “unique detriment,” not a “unique benefit.” With respect to the release, the court held that plaintiff failed to plead that the release covered any “viable claim[s]” that could survive a motion to dismiss, and thus the controller was not shown to have received a material unique benefit.

– Meredith Ervine