DealLawyers.com Blog

Earlier this week, in Frank v. Mullen and B. Riley Financial, (Del. Ch.; 5/25), the Chancery Court rejected allegations that B. Riley, a minority stockholder of National Holdings Corporation, was a controlling stockholder and that its acquisition of the company should be evaluated under the entire fairness standard.  The plaintiff cited several factors that it claimed supported his allegations of control, including B. Riley’s 46% ownership interest and support from other large stockholders, its alleged outsized influence over the board and control over the merger process, and the target board’s perceptions that the stockholder had control.

All of this didn’t get the plaintiff much traction with the Court. Vice Chancellor Zurn concluded that none of the factors cited by the plaintiff provided the kind of clout over the target’s board that the plaintiff claimed, and that in combination, they did not represent actual control.  Instead, she concluded that what those factors provided the buyer with was leverage, which it was permitted to use:

Here, Plaintiff argues BRF exerted control over National for purposes of the merger, assumed fiduciary duties to National and its stockholders, and forced National into a conflicted transaction that warrants, and fails, entire fairness review. Plaintiff pleads that BRF had a great deal of leverage in the negotiations. But leverage in an arm’s-length negotiation is not tantamount to control over the special committee or board. The question is not what cards BRF held; the question is whether BRF controlled how the special committee played its cards. Plaintiff fails to plead facts that show BRF controlled the special committee or National’s board in the merger process.

VC Zurn observed that B. Riley had no board representation, committed to follow the MFW framework on multiple occasions during the negotiation process, was subject to a standstill, and that the plaintiff did not plead that B. Riley controlled the target’s board or the special committee.  While B. Riley did advise the target that it was not interested in selling to a third party and that it would pursue a change in control transaction after its standstill expired, the Vice Chancellor did not view either of those statements as interfering with the special committee’s control of the process.

The Vice Chancellor acknowledged that a take-private deal by a large stockholder involves the potential for a conflicted controller transaction, but said that where that stockholder doesn’t exercise actual control over the company’s business and affairs, independent directors can keep that stockholder out of the boardroom by engaging in an arm’s-length negotiation process.  By so doing, they can keep the presumptions of the business judgment rule. Ultimately, she concluded that “[w]hen there is an independent special committee, an independent board, and a clean process, a plaintiff cannot plead actual control over the transaction simply by pointing to a large blockholder’s negotiating leverage.”

– John Jenkins