Special Committee Report

Gregory Gooding, William Regner and Jeffrey Rosen are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gooding, Mr. Regner, Mr. Rosen, Emily Huang, Maeve O’Connor, and Sue Meng, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

This post surveys corporate transactions announced during the period from January through June 2021 that used special committees to manage conflicts and key Delaware judicial decisions during this period ruling on the effectiveness of such committees. While corporate transactional activity during the first half of 2021 may be remembered more for SPACs, cryptocurrencies and meme stocks, there continued to be a significant number of conflicted transactions and the Delaware courts continued to refine the boundaries of Delaware law involving the use of special committees.

Special Committee Independence: How Close is Too Close

Once a decision has been made to form a special committee, the most important question, and sometimes a fraught one, is which directors are sufficiently independent of the interested stockholder to effectively serve on that committee. Delaware case law is replete with examples of committees whose effectiveness has been challenged because one or more members allegedly lacked independence, in many cases as a result of social or business connections with the interested stockholder. However, a recent Delaware Court of Chancery decision may signal a willingness of the Delaware courts to apply closer scrutiny to such allegations.

The decision in Franchi et al. v. Firestone et al. [1] arose after Carl Icahn, the majority stockholder of Voltari Corporation, offered to take Voltari private in a merger conditioned on approval by a special committee and a majority-of-the-minority stockholder vote.

The court dismissed the claims under Delaware Supreme Court’s 2014 MFW decision, [2] despite allegations that one special committee member founded a company that collaborated with an Icahn-controlled company, was nominated by Icahn to serve on two boards in the past decade and was assisting with a documentary about Icahn, and that a second special committee member served as President of Icahn Enterprises from 2006-2009 (during which he was head of portfolio operations for Icahn’s activist hedge fund and 13 operating companies controlled by Icahn), served as a director of four Icahn-controlled companies during that period and three other Icahn-controlled companies thereafter, and continued to serve on two such boards at the time of the Voltari merger.

In prior Delaware cases, breach of fiduciary duty claims against controlling stockholders and directors of controlled companies have been allowed to proceed based on allegations of connections between a director and an interested stockholder including shared ownership of an NBA team; [3] shared ownership of an airplane; [4] a close and personal long-time friendship; [5]charitable efforts by the interested person’s family on the director’s behalf; [6] longstanding ties between the director and the interested person’s family [7]; being a “go-to director” for the interested person; [8] and shared connections to a university. [9]

Nonetheless, in Franchi the court said most of the allegations against the first Voltari director concerned the “sort of ordinary past business relationships, board nominations, and board service that have been held by this court to be insufficient to cast doubt on independence.” The court acknowledged that the relationships between the second Voltari director and Icahn were “more extensive” and created a “closer call,” but found that, because the vast majority of those relationships had ended more than a decade before the merger, it was “unreasonable” to infer that they impugned the director’s independence.

The reality is that controlling stockholders do not generally invite strangers to serve on the boards of their controlled companies. Some degree of connection is inevitable. The Franchi decision suggests that the Delaware courts may take an increasingly critical view of allegations that social and business connections compromise independence, particularly where those connections occurred in the past and are not continuing.

Other Recent Special Committee Decisions

Controlling stockholder did not “bully” a special committee by stating it would not consent to one of several transactions being considered by the committee.

A special committee of the board of directors of RCS Capital Corporation was formed to consider a proposed transaction in which its controlling stockholder was interested, as well as any other available alternatives. The committee ultimately considered three competing transaction proposals, but determined not to pursue the one that it determined to be superior because the controlling stockholder—whose support was needed to effectuate the transaction—made clear it would not be approved. A litigation trust created in the bankruptcy reorganization of the company brought breach of fiduciary duty claims against the controlling stockholder and his affiliates. In granting summary judgment in favor of defendants, the Delaware Court of Chancery held that the statement by the controlling stockholder that it would vote against the transaction did not constitute a “threat” that robbed the special committee of its independence. “A stockholder does not forfeit the right to exercise contract rights or to vote her stock merely by being a controller. There is no duty for a controller to sacrifice on behalf of the company.” RCS Creditor Trust v. Nicholas S. Schorsch, et al., C.A. No. 2017-0178-SG (Del. Ch. March 18, 2021)

MFW’s requirement that a merger with a controlling stockholder must be subject to disinterested stockholder approval to avoid entire fairness review applies even where the transaction is structured to avoid any requirement for a stockholder vote under the DGCL.

Turning Point Brands (TPB) merged into SDI, its controlling stockholder, in a forward triangular merger that did not require the vote of TPB’s stockholders. The transaction was approved by a special committee of independent directors of TPB. In a motion to dismiss breach of fiduciary duty claims brought by a TPB stockholder, defendants asserted that the business judgment rule applied under MFW, notwithstanding the absence of majority-of-the-minority stockholder approval, on the ground that the transaction did not require any stockholder vote at all. The Delaware Court of Chancery declined to dismiss the fiduciary duty claims, pointing to numerous types of controlling stockholder transactions to which both prongs of MFW have previously been held applicable notwithstanding the absence of a statutorily required stockholder vote, as well as the fact that the structure of the present transaction—and thus the lack of any need for a stockholder vote—was mandated by the controlling stockholder. The court left open the possibility that the protections of MFW might in some circumstances be available without a stockholder vote but did not identify what those circumstances might be. Paul-Emile Berteau v. David E. Glazek, et al. and Turning Point Brands, Inc., C.A. No. 2020-0873-PAF (Del. Ch. June 30, 2021)

Endnotes

1Franchi et al. v. Firestone et al., C.A. No. 2020-0503-KSJM (Del. Ch. May 10, 2021).(go back)

2Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).(go back)

3Cumming v. Edens, 2018 WL 992877 (Del. Ch. Feb. 20, 2018).(go back)

4Sandys v. Pincus, 152 A.3d 124 (Del. 2016)(go back)

5Delaware Cty. Employees Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015)(go back)

6Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).(go back)

7Id.(go back)

8In re BGC Partners, Inc., 2019 WL 4745121 (Del. Ch. Sept. 30, 2019).(go back)

9In re Oracle Corp. Deriv. Litig., 824 A.2d 917 (Del. Ch. 2003).(go back)

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