DealLawyers.com Blog

Earlier this week in Krevlin v. Ares Corporate Opportunities Fund (Del. Ch.; 2/24), Chancellor McCormick addressed a shareholder challenge to the April 2019 acquisition of Smart & Final Stores by Apollo on the basis that Smart & Final’s former controller-sponsor, Ares’s “need for liquidity caused it to favor a deal, even at a suboptimal price, over no deal at all” – rendering the merger a conflicted-controller transaction. If this sounds familiar, it’s because VC Glasscock just addressed this issue about a month ago in a post-trial memorandum opinion, Manti Holdings v. The Carlyle Group (Del. Ch.; 1/25) — although Chancellor McCormick’s decision this week was at the motion to dismiss stage.

Like in Manti Holdings, Chancellor McCormick notes that “Delaware courts are particularly chary to infer liquidity-based conflicts arising from the lifecycle of a private equity fund.” In a short three pages of the opinion, she addresses the plaintiff’s liquidity-driven conflict theory, concluding that “the fact that Fund III and Fund IV were in ‘harvest mode’” and “generally not seeking to deploy capital into new investment opportunities” was insufficient, on its own, to render Ares conflicted.

These two decisions in rapid succession may somewhat assuage concerns that the Chancery Court had been taking a nuanced approach to evaluating claims that a controlling stockholder received a “special benefit” in transactions where all stockholders were entitled to receive the same consideration — after prior decisions cited unique liquidity needs, avoiding financial losses arising out of its investment structure or realizing intangible benefits like consolidation of control over the company. This Milbank General Counsel blog on last month’s Manti Holdings decision says, “private equity firms and other controllers should note the Court’s focus on alignment of interests and sales process integrity” and notes that “decision-making processes should be well documented, and potential conflicts of interest should be addressed to minimize litigation risk.”

– Meredith Ervine