Entire Fairness Applied to Third-party Merger Transaction Where Controlling Shareholder Acquired Minority Stake in Resulting Company
In re LNR Propert Corp. Shareholders Litigation, C.A. No. 674-N, 2005 WL 3418631 (Del. Ch. Nov. 4, 2005, rev'd Dec. 14, 2005).
Former shareholders filed fiduciary class action in connection with a cash-out merger, naming corporation and former directors as defendants. The complaint alleged that the corporation's controlling shareholder negotiated to sell the company to a third-party investment firm in all-cash deal. The complaint further alleged that, as part of the transaction, the controlling shareholder and other members of company management agreed to invest approximately $184 million to acquire a 25% equity stake in the surviving entity. Defendants moved to dismiss for failure to state a claim.
The court concluded that the complaint could be read to allege that the board improperly allowed the controlling shareholder, owning 77% of the voting power of the company and acting as a buyer and seller in the transaction, to control the negations with the acquirer, as well as the outcome of the vote, resulting in an unfair and inadequate price for the stock in the cash-out. The court found that assuming the truthfulness of these allegations, the business judgment rule would not apply and the transaction would be subject to entire fairness review. The court also rejected Defendants' argument that Plaintiffs' claims were barred based on the corporation's exculpatory charter provision because (the court explained) the alleged misconduct implicated Defendants' duties of loyalty and good faith. As a result, the court denied the individual Defendants' motion to dismiss but did dismiss the corporate Defendant, which the court found was not a proper party.