DealLawyers.com Blog

A recent Fried Frank article (plus summary HLS blog) discusses Delaware Court of Chancery decisions – Roofers Local v. Fidelity National (Del. Ch.; 5/25) and Wei v. Levinson (“Zoox”) (6/25), which we’ve blogged about before – that highlight the unpredictability of outcomes where entire fairness is applied. Because both of these involved litigation pending prior to February 17, the recent DGCL amendments were not applicable, and neither case involved a transaction structured to comply with MFW.

In Roofers, the court dismissed the case at the pleading stage, holding that although the process may have been flawed, the price appeared to be fair.

In Zoox, by contrast, the court rejected dismissal of the case at the pleading stage, holding that the allegations that a majority of the board that approved the transaction was conflicted was itself sufficient to indicate that both the process and the price may have been unfair—even though the transaction at issue appeared to provide more value to the stockholders than any other transaction proposed to the board.

The alert says, context matters:

Roofers involved a transaction with a conflicted controller – but the transaction was approved by two concededly independent directors, and the process was apparently pristine other than for a question about fairness based on the timing of the parties’ announcement of the transaction. The independent special committee was fully authorized, functioned well, and was focused on ensuring that the transaction be on terms at least equivalent to “a public market deal.”

Zoox, involved a sale to a third-party buyer following a process with multiple bidders, none of whose proposals provided as much value to the common stockholders – but the transaction was approved by a majority-conflicted board. There was no “distance” between the Preferred Stock holders and the directors they had appointed; the officer-directors were promised material non-ratable personal financial benefits; and the officer-directors had spoken of “forc[ing]” the deal on the stockholders.

But here’s the key: Both transactions “could have met the requirements for safe harbor protection (if the Amendments had been applicable) based on approval by the special committees.” Here are practice points from the blog in light of these differing outcomes and the March DGCL Amendments:

– Consider structuring conflicted transactions to come within the new DGCL safe harbors. The requirements for availability of the safe harbors are far easier to satisfy than the MFW prerequisites for business judgment review, particularly as (other than for going-private transactions) only approval by an independent special committee (and not by the minority or disinterested stockholders) is required.

– Consider including at least two independent directors on the board—so that conflicted transactions can be structured to come within the new safe harbors. The board should establish a record, when making independence determinations, that it obtained all relevant information and carefully considered the issue. Preferred stockholders appointing directors should carefully consider the benefits and disadvantages of appointing directors who hold control or leadership positions with the preferred stockholder.

– Contextualize fairness of price. When entire fairness applies (i.e., when the new DGCL safe harbors and MFW are unavailable), it still may be possible to obtain pleading-stage dismissal of fiduciary claims challenging conflicted transactions—at least where, as in Roofers, the plaintiff fails sufficiently to allege unfairness of the price and there was a strong (even if somewhat flawed) process. Analysis of fairness of the price should include what the company received in exchange for what it gave, as well as a comparison of the terms to what would be market. Although fairness of the price may be the predominant consideration, fairness of the process always should be addressed as well, no matter how fair the price.

– Other process points:

• A special committee should establish a record that it considered alternatives, and the reasons it rejected them.
• A buyer, to protect against claims of aiding and abetting sell-side fiduciary breaches, should maintain a record of deal term concessions made during the negotiations.
• A transaction generally should not be announced before the special committee has done any work.
• Management and directors should avoid statements about a personal vision, mission or dream for the company—although the court’s view as to whether such statements indicate motivation based on “personal interests” will no doubt depend on the specific language used and the overall factual context.
• Management and directors should understand that comments they make to a counterparty during a sale process, purportedly “off the record,” are likely to come to light in the event of litigation and could have serious negative consequences.

– Meredith Ervine