DealLawyers.com Blog

A recent Fried Frank alert discusses the Chancery Court’s July decision in Berger v. Fox (Del. Ch.; 7/26) involving claims that a PE take-private was steered to a preferred, lower bidder due to financial advisor conflicts. Plaintiffs argued that the target’s failure to run a full company auction or solicit alternative bidders reflected the board’s bad faith and that the financial advisor’s relationship with the buyer caused it to improperly favor the buyer. As the alert discusses, Vice Chancellor David rejected these arguments.

The court rejected the Plaintiffs’ contention that the sale process—which included neither an auction nor any solicitation of alternative bidders—reflected bad faith. The court noted that the news media publicly reported that the Company was considering strategic alternatives; that the Company separately ran a process to sell the D&A Business, in which it contacted 80 potential bidders; and that the Board had received two unsolicited bids to acquire the Company. Further, the Board had considered conducting a pre-signing market check, but rejected doing so, deciding instead to negotiate a low break fee, after considering the widespread news of its process, the risk of additional delay, and the fact that the two unsolicited bidders both had rejected a go-shop provision. These decisions were not outside the bounds of reason or otherwise indicative of bad faith, the court stated.

The court rejected the Plaintiffs’ contention that the Financial Advisor’s relationship with the Buyer caused it to steer the deal to the Buyer. The court noted that, although the Financial Advisor disclosed to the Board that it expected to receive significantly more compensation from the Buyer than from the Company relating to the Merger, the contingent fee arrangement with the Company incentivized the Financial Advisor to maximize price. Also, the Financial Advisor had “similar relationships” with both competing bidders as it had with the Company. Further, the court stated, even if the Financial Advisor had an incentive to favor the Buyer over its other clients, the Complaint “still fail[ed] to allege” that the Financial Advisor acted improperly—i.e., it acted as directed by the Board and did not mislead the Board.

VC David also rejected claims that the financial advisor aided and abetted the directors’ alleged breaches and that the disclosures regarding the financial advisor’s conflicts were inadequate.

The alert shares key takeaways from the decision. Here are a few:

It is extremely difficult for plaintiffs to succeed on claims that independent and disinterested directors acted in bad faith. As the Company’s directors were independent and not self-interested in the transaction, and were exculpated for duty of care violations, they could have liability only if they had acted in bad faith. It is a “daunting task,” the court stated, to show that independent and disinterested directors intentionally failed to run a reasonable sales process or intentionally caused a merger proxy statement to omit material information—as they would have “no motive” for doing so. Moreover, the court stressed, in this case, it appeared that the “fully independent Board retain[ed] experienced advisors, inform[ed] itself of potential conflicts, engag[ed] with multiple bidders, and me[t] over a dozen times before reaching a deal”—none of which indicated bad faith.

The Financial Advisor’s relationship with the Buyer did not create an incentive for it to favor the Buyer. The court emphasized that the Financial Advisor had fully disclosed to the Board its relationship with the Buyer, and the Board fully disclosed the conflict to the stockholders. Also, the Financial Advisor had “similar relationships” with the competing bidders. And, in any event, there were no allegations that the Financial Advisor had taken “any action without Board direction or approval or concealed information from or otherwise misled the Board.”

The Company’s disclosure to stockholders relating to the Financial Advisor was adequate. Although the amount of the fees the Financial Advisor expected to receive for concurrent engagements with the Buyer was not disclosed to the stockholders, the court concluded that “the scale” of the engagements was sufficiently disclosed as the proxy stated that that compensation was expected to be “significantly more” than the fees the Financial Advisor would receive from the Company in connection with the Merger. Also, the court concluded that it was not necessary that the Company have disclosed in the proxy that the Financial Advisor, a month before being engaged by the Company, had in the ordinary course provided an “Illustrative LBO Analysis” of the Company with the Buyer, which it had shared with the Buyer.

With respect to the aiding and abetting claim against the Financial Advisor, the court applied the heightened Mindbody standard for “knowing participation.” Notably, the court did not mention recent decisions in which Vice Chancellor J. Travis Laster has suggested that the Mindbody standard should apply only when aiding and abetting claims are asserted against third-party buyers, and not when asserted against financial advisors.

– Meredith Ervine