DealLawyers.com Blog

February 10, 2025

Del. Chancery Refuses to Tag Minority Stockholder with Controller Status

The Delaware courts continue to slog their way through a stream of lawsuits in which plaintiffs seek to have the entire fairness standard applied to an M&A transaction by claiming that a substantial minority stockholder should be regarded as a conflicted controller.  Late last month, in Turnbull and Acosta v. Klein, et. al., (Del. Ch.; 1/25), the Chancery Court was confronted with another lawsuit in which these claims were front and center, but the Court’s newest member, Vice Chancellor Bonnie David, shot them down.

The case arose out of the sale of U.S. Well Services to ProFrac Holding Corp. in an all-stock merger. The plaintiffs challenged the merger as unfair and brought breach of fiduciary duty claims against the board and its largest stockholder, private equity firm Crestview Advisors. Crestview owned approximately 25% of USWS’s stock outright and 40% on a fully converted basis. The plaintiffs alleged that Crestview controlled USWS and negotiated unique benefits for itself in the merger, and that the transaction should be evaluated under the entire fairness standard.

In addition to Crestview’s ownership stake, the plaintiffs pointed to its contractual right to designate two of USWS’s nine directors and the influence it could have conceivably wielded over them.  They also contended that Crestview, along with certain other investors, comprised a control group.  Vice Chancellor David concluded that those allegations were insufficient to support the argument that Crestview exercised either general or transactional control over the company, and that the plaintiffs’ allegations of the existence of a control group were also lacking.

Citing Delaware precedent, she held that Crestview’s ownership position, director designation rights, and allegations of its influence over one director weren’t enough to support an inference that it exercised general control over the Board.  That meant the plaintiffs had to establish that Crestview exercised control over the merger transaction, and the Vice Chancellor concluded they came up short there as well.

The plaintiffs asserted three arguments in support of their theory of transactional control. First, they pointed to disclosures in the merger proxy indicating that the buyer had initially reached out to Crestview concerning the possibility of a sale. They contended that this demonstrated that the buyer recognized that Crestview was calling the shots on a potential deal. Vice Chancellor David disagreed, noting that the focus is not on the buyer’s perceptions, but on the alleged controller, and whether it effectively controls the board so that it also controls disposition of the unaffiliated stockholders’ shares.

The plaintiffs then pointed to USWS’s decision to appoint a special committee as indicating that its management, board and the buyer all recognized that Crestview was a controlling stockholder. The Vice Chancellor didn’t buy that one either:

Forming a special committee serves as “evidence of sound corporate governance[,]” not control—and it limits a stockholder’s ability to exercise transaction-specific control. Rouse Props., 2018 WL 1226015, at *19. “[T]o hold otherwise might discourage fiduciaries from employing these important measures for fear they might unwittingly signal that they perceive a minority blockholder with whom they are dealing to be a controller.”

Finally, the plaintiffs pointed to the fact that Crestview attended five board meetings at which the transaction was discussed, and argued that its attendance gave Crestview the ability to tank the deal if it didn’t like it.  Unfortunately for the plaintiffs, attendance was all that they alleged, and that wasn’t enough to support an inference of control.

The plaintiffs threw together a bunch of allegations in support of their theory that Crestview and other investors constituted a control group.  Perhaps the most interesting of these allegations was that the by cooperating with each other to prioritize their interests, the alleged members of the control group engaged in “transaction-specific coordination.”  None of the plaintiffs’ theories got much traction with the Vice Chancellor, and here’s what she had to say about this one:

Plaintiffs argue that the Amended Complaint adequately alleges “transaction-specific coordination” in which the alleged control group memberscooperated with one another to prioritize their collective interests in the Merger itself. . . Plaintiffs allege that ProFrac asked for Crestview’s support in early merger discussions, and ultimately negotiated a deal that uniquely benefitted Crestview, TCW, the Wilks Brothers, and Matlin. . . But again, the Amended Complaint does not allege any agreement among the members of the supposed control group with respect to the Merger. Plaintiffs simply conflate consensus among the parties in approving the Merger with the act of forming a group. See Silverberg, 2019 WL 4566909, at *6–7 (distinguishing an act of consensus from the formation of a group).

John Jenkins