Chancery Upholds Class Claims Alleging Breaches of Fiduciary Duty in Alleged Controlling Stockholder’s Tender Offer
JAB Holding Company S.à.r.l. and its affiliates (together “JAB”) completed a partial tender offer (the “Tender Offer”) for shares of Coty Inc. (“Coty”) on April 25, 2019, increasing its ownership stake from 40% to 60% of the outstanding Coty shares. At the time of the Tender Offer, Coty had a nine-member board of directors – four directors affiliated with JAB (the “JAB Directors”) and five individual directors (the “Individual Directors”). Pierre Laubies, the CEO of Coty, was one of the Individual Directors. Although Laubies was the only Individual Director with a management position at Coty, he, like all of the Individual Directors, had professional ties to JAB and its officers, with Laubies having formerly served as CEO of a JAB affiliate.
JAB conditioned the Tender Offer on the approval of the “independent directors” and the independent directors’ recommendation of the Tender Offer to Coty stockholders. The Coty board formed a three-member special committee (the “Special Committee”) to assess the merits of the transaction, which consisted of three of the Individual Directors (not including Laubies). The Special Committee recommended that stockholders sell their shares to JAB without ever seeking a specific increase in the Tender Offer price. The Special Committee did recommend that the Board approve a stockholders’ agreement (the “Stockholders’ Agreement”) in connection with the Tender Offer that would require appointment of independent directors to the Coty board. The Coty board approved the Special Committee’s recommendation, from which decision the JAB Directors recused themselves. In its Schedule 14-D Solicitation/Recommendation Statement (“Recommendation Statement”) Coty proclaimed that it was not aware of any conflicts of interest between JAB and the Independent Directors. After the Tender Offer expired, Coty unveiled a new strategic plan, and its stock price then rose approximately 25%.
The plaintiffs (“Plaintiffs”), stockholders of Coty, alleged in class claims that the Individual Defendants breached their fiduciary duties by failing to disclose the Special Committee’s conflicts of interest, among other things. Plaintiffs also claimed that JAB breached its fiduciary duties as a controller by initiating a coercive tender offer. Lastly, Plaintiffs brought derivative claims for breaches of the Stockholders’ Agreement. All of the parties agreed that the entire fairness standard, which requires that the board implement a fair price and process, applied to the Tender Offer. All defendants moved to dismiss the complaint for failure to state a claim for relief.
Coty’s certificate of incorporation exculpates directors from breaches of the duty of care under Section 102(b)(7) of the Delaware General Corporation Law. Laubies contended that the Court should dismiss the breach of fiduciary duty claims against him because that exculpatory provision shields him from liability. In In re Cornerstone Therapeutics Inc, Stockholder Litigation, 115 A.3d 1773, 1179-80 (Del. 2015), the Delaware Supreme Court ruled that a director is not protected from liability under Section 102(b)(7) if there are allegations in the complaint that support a rational inference that the director “acted to advance the self-interest of an interested party from whom [the director] could not be presumed to act independently . . . . .” Here, Laubies (Coty’s CEO) did not contest that he was not independent from JAB. The Court held that it was reasonably conceivable that Laubies acted to advance JAB’s self-interest in the Tender Offer because Plaintiffs adequately alleged that Laubies (i) voted to approve the Stockholders Agreement and recommend that stockholders sell their shares to JAB, (ii) ensured that the Special Committee and its financial advisor used “understated” financial projections, and (iii) failed to provide clarity on Coty’s strategic plan before the Tender Offer. Thus, the Court of Chancery denied Laubies’ motion to dismiss.
Next, the JAB Directors argued that the Court should dismiss the breach of fiduciary duty claims against them because they abstained from recommending the Tender Offer. While the Court recognized that the abstention doctrine absolves directors of liability for board decisions in which they played no role, the Court found that it was reasonably conceivable that the JAB Directors were involved in the process of approving the Tender Offer. This was because Plaintiffs adequately had alleged that the JAB Directors (i) failed to disclose their relationships with the Special Committee, which led Coty in its Recommendation Statement improperly to describe the Special Committee as independent, and (ii) participated in a key board meeting about the Tender Offer. Accordingly, the Court denied the JAB Directors’ motion to dismiss because there was a question of fact about whether the JAB Directors totally abstained from the process by which the board approved the Tender Offer.
Finally, the Defendants claimed that stockholders who continued to hold Coty shares after the Tender Offer (the “Remaining Stockholders”) were no worse off by JAB gaining majority ownership of shares because JAB was effectively a controller before the Tender Offer. The Court disagreed, finding that it was reasonably conceivable that the Remaining Stockholders suffered harm as a result of the Tender Offer. This was because, among other things, the Remaining Stockholders may have lost their ability to get a control premium for their shares once JAB acquired more than 50% of the shares. The Court, therefore, refused to dismiss the Remaining Stockholders’ class claims.Share