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Chancery Denies Corwin Defense Based on Proxy Omissions and Sustains Claims Against Financial Advisor

Posted In Fiduciary Duty

Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., C.A. No. 2017-0421-KSJM (Del. Ch. June 21, 2019).

Under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), Delaware courts generally will dismiss post-closing fiduciary duty claims arising out of M&A deals when the challenged transaction was approved by a fully-informed and uncoerced majority of the company’s disinterested stockholders. Several decisions since Corwin, including this one, have denied motions to dismiss under Corwin, finding the doctrine’s prerequisites were not satisfied. This decision also is notable for sustaining a bad faith claim against directors and claims against the investment bank Jefferies. 

This decision arises out of Virtu Financial, Inc.’s acquisition of KCG Holdings, Inc. A former KCG stockholder alleged that KCG’s directors breached their fiduciary duties in the transaction, that Virtu and Jefferies (KCG’s financial advisor and largest stockholder) each aided and abetted in that breach, and that Virtu and Jefferies engaged in a civil conspiracy concerning the transaction. Defendants moved to dismiss under Corwin, for failure to state a non-exculpated claim against the directors, and for failure to state aiding and abetting and civil conspiracy claims against Virtu and Jefferies.

The Court of Chancery denied the motion. First, the Court found the stockholders’ approval was not fully-informed and thus Corwin did not apply. According to the Court, the company’s proxy was materially incomplete or misleading for failing to disclose: (1) full information about a proposed divestiture strategy at KCG, which Jefferies had discussed with Virtu; (2) the CEO’s initial objection to the deal price, the circumstances surrounding his negotiation of a compensation pool for management, and his negotiation of and later support for a lower deal price; and (3) earlier optimistic management projections and the circumstances leading to the lower revised final projections. 

Second, the Court found the plaintiff adequately pled a non-exculpated breach of fiduciary duty. According to the Court, the complaint adequately alleged that the director defendants were complicit in the procedural flaws concerning the CEO’s negotiation of management compensation at the expense of the stockholders, as well as the downward-revised projections to make the deal price more attractive, supporting a claim for bad faith disloyal conduct. The Court also sustained the aiding and abetting and civil conspiracy claims against Virtu and Jefferies, citing their secret negotiations early in the transaction’s process.