In In re Carvana Co. S’holders Litig., ___ A.3d ___, 2024 WL 1300199 (Del. Ch. Mar. 27, 2024), the Delaware Court of Chancery granted a motion to dismiss filed by a special litigation committee formed under Zapata Corp. v. Maldanado, 430 A.2d 779 (Del. 1981), which had concluded that derivative claims arising from Carvana’s controlling stockholders’ participation in a direct offering were not worth pursuing. In early 2020, Carvana’s board of directors explored options for an equity financing and began to negotiate a non–pro rata direct offering with an initial group of twenty-four large stockholders. A large third-party institutional investor led the buy-side negotiations. It was understood that Carvana’s controlling stockholders would also participate up to $50 million. After price negotiations, the parties agreed to a purchase of up to $600 million shares at $45 per share, which represented an 8.2 percent discount to the stock’s unaffected market price. The offer was oversubscribed. When stockholder-plaintiffs filed derivative claims, the Court of Chancery denied the defendants’ motion to dismiss, because the plaintiffs adequately alleged that three of Carvana’s six directors were either interested in the transaction or lacked independence from the controlling stockholders. Following that decision, Carvana’s board of directors formed a two-member Zapata special litigation committee (“SLC”) to investigate the claims and determine whether they should be pursued. The special committee retained independent legal and financial advisors, conducted its investigation, and then moved to dismiss the claims.
With respect to the first step of the Zapata inquiry, the Court found there were no material disputes of fact whether the SLC members were independent, or whether they conducted a reasonable investigation with sufficient bases for their conclusions. The plaintiffs failed to provide any information supporting that either committee member had material financial ties to the controller. The Court rejected plaintiffs’ argument that the fact the SLC hired one of two law firms recommended by the general counsel suggested a lack of independence; the Court explained, “Accepting a recommendation from management alone does not evidence a lack of independence . . . .” The fact the SLC members were defendants in two factually unrelated cases concerning Carvana that did not concern the direct offering at issue similarly did not compromise their independence. The Court also explained that an SLC member’s presence on the board when the corporation moves to dismiss derivative claims at the outset of the case does not in itself indicate any pre-judgment of the claims. The Court also found the SLC conducted an unbiased, reasonable investigation. The investigation included counsel’s review of documents, eighteen witness interviews, and nine SLC meetings, culminating in the Committee’s 170-page report. The Court rejected the plaintiffs’ arguments that the SLC’s counsel should not have run the investigation or spent far more time on it than the committee members themselves. One committee member’s statement that his schedule permitted only a “minimal” time commitment did not undermine the investigation, because the subsequent investigation was reasonable. The SLC’s financial advisor also concluded that the direct offering was fair to Carvana, and that if anything the controlling stockholders were worse off from the transaction due to the economic dilution of their holdings. With respect to Zapata’s second step, in which the Court applies its own business judgment to assess the SLC’s recommendation, the Court found that “a disinterested and independent decision-maker for the Company, not acting under any compulsion and with the benefit of the information available to the SLC, could reasonably accept the SLC’s recommendation to dismiss Plaintiffs’ claims.” The Court accordingly granted the SLC’s motion to dismiss.
Originally Published in American Bar Association, BLT
