DealLawyers.com Blog

In June 2022, John blogged about the Delaware Chancery’s decision in Manti Holdings v. The Carlyle Group (Del. Ch.; 6/22) to deny a motion to dismiss allegations of “liquidity conflicts.” Specifically, that a PE sponsor and its representatives on a target company’s board were under pressure to sell to close out the fund that invested in the target — creating a conflict that justified application of the entire fairness standard.

On Tuesday, in what might be his last opinion before retiring as Vice Chancellor, VC Glasscock issued his post-trial memorandum opinion in Manti Holdings v. The Carlyle Group (Del. Ch.; 1/25) applying the business judgment rule after concluding that the PE sponsor wanted the sale to go forward, but “that its interest was the same as the minority stockholders—to maximize the value of its investment … It did not need [the target] to be sold 2017, it did not force a fire sale, and it did not extract a non-ratable benefit from the sale.”

I find that CUSGF III (which owned Authentix stock through Authentix Holdings) and Authentix Holdings, on their own, had sufficient voting control of Authentix to make them controllers. . . . However, I find below that Carlyle did not have conflicts of interests that trigger entire fairness review of the transaction. . . . Plaintiffs argue that Carlyle had liquidity-based conflicts from fund-life and clawback provisions; considerations that drove them to sacrifice fair value for speed. The evidence at trial does not support this hypothesis, however.

While the facts certainly demonstrate that Carlyle wanted to exit its investment in Authentix in 2017, the facts do not demonstrate that Carlyle needed to exit its investment in Authentix or that Carlyle was otherwise driven by time pressure to exit that would cause it to accept less than fair value for Authentix shares, for itself as well as the minority stockholders.

Here, CUSGF III’s fund life was set to end on September 30, 2017, but CUSGF III’s ten-year term did not impose a deadline for selling its portfolio of companies. Instead, Carlyle’s funds can continue to hold investments after term expiration (and Carlyle’s funds have done this before). CUSGF III’s term can also be extended to permit additional investment in portfolio companies (and Carlyle’s funds have also done this before). As such, even though Carlyle wanted to sell off its assets prior to the term expiration, there was nothing in the Limited Partnership Agreement that required it to sell off its assets or drove it to conduct a self-injuring fire sale.

This decision is consistent with the general presumption in Delaware courts that stockholders “have an incentive to seek the highest price for their shares,” and, as a result, “liquidity-driven theories of conflicts can be difficult.”

To prove a liquidity-driven conflict of a controller, it is not enough to show a general interest in investors that a fund adhere to a timeline; a plaintiff must show sufficient evidence “of a cash need” that explains why “rational economic actors have chosen to short-change themselves.” . . . I find that the record demonstrates that Carlyle was interested in moving quickly because of the volatility of Authentix’ business rather than due to liquidity pressure because of the fund life.

– Meredith Ervine