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Hamilton Partners., LP v. Highland Capital Mgmt., LP, C.A. No. 6547 (Del. Ch. May 25, 2012) (Noble, V.C.)

May 25, 2012

In this letter opinion, Vice Chancellor Noble deferred ruling on a motion to dismiss because the Court could not determine at the pleading stage whether the substantive law of the State of Delaware or the State of Nevada applied to the plaintiff’s claim that American HomePatient, Inc.’s (“AHP”) controlling stockholder, Highland Capital Management, LP (“Highland”), and its CEO, President, and director, Joseph Furlong, III, breached their fiduciary duties in connection with a merger between AHP and a Highland subsidiary.   The Vice Chancellor deferred ruling on the motion to dismiss because the relevant provision in the restructuring agreement was ambiguous on the issue whether AHP’s board was bound to approve a second step merger at the time the restructuring agreement was executed, when the corporation was a Delaware corporation, or whether AHP’s board reserved the right to approve the merger after the corporation reincorporated to Nevada.

The restructuring agreement at issue, which was negotiated between Highland and a special committee of AHP’s board, contemplated a multi-step transaction in which (i) AHP would first reincorporate in Nevada, (ii) AHP would then commence a self tender for all its shares not owned by Highland, (iii) all of the members of AHP’s board would thereafter resign and the board vacancies would be filled by Highland designees, and (iv) AHP would merge with an indirect wholly owned subsidiary of Highland and, pursuant to such merger, all of the stockholders who did not tender in the self-tender offer (other than Highland) would be cashed out at the same price as the self-tender.  The complaint alleged that, although the self-tender was negotiated and agreed to in the context of a restructuring transaction, Highland and AHP did not actually execute a restructuring agreement until nearly a year after the terms had been negotiated.

Following the self-tender offer, Highland owned more than 78% of AHP’s outstanding stock and proposed to AHP’s board, consisting of Furlong and Highland designees, that AHP merge with Highland’s subsidiary under 8 Del. C. § 251.  The merger was approved by AHP’s board, submitted to the stockholders with the board’s favorable recommendation, and consummated.

Plaintiff, Hamilton Partners, LP (“Hamilton”), an AHP stockholder, alleged that Highland and Furlong breached their fiduciary duties in connection with the merger.  Specifically, Hamilton alleged that the merger was subject to entire fairness review because Highland was a controlling stockholder that stood on both sides of the transaction, and that Highland breached its fiduciary duties because the merger was not entirely fair.  Plaintiff further alleged that Furlong breached his fiduciary duties and aided and abetted Highland’s breach of fiduciary duties by accepting millions of dollars in change-of-control payments and knowingly assisting the freeze-out transaction. 

Highland and Furlong asserted that their actions should be reviewed at the time of the execution of the restructuring agreement, thus rendering Delaware law applicable.  Plaintiff Hamilton asserted that Nevada law should apply because AHP’s board allegedly did not agree to the merger at the time of the restructuring agreement.  Rather, Hamilton argued the restructuring agreement did not commit AHP to the merger, thereby making the appropriate time to review Highland’s and Furlong’s actions when the merger was approved and recommended after AHP was reincorporated in Nevada.

The restructuring agreement provided that “Highland shall take all action and shall cause ... AHP ... to promptly ... take all actions to effectuate ... the merger pursuant to which the remaining shares of AHP not held by Highland and its affiliates will be cancelled in exchange for an amount equal to ... $0.67.”  The Vice Chancellor held that this provision was ambiguous because it was susceptible to two different interpretations.  One reasonable interpretation of the provision would be that it bound Highland and AHP to consummate the merger without binding AHP’s board to recommend the merger. Another reasonable interpretation of the provision would be that AHP’s board bargained for the right to decide whether to approve the merger after AHP became a Nevada corporation.  With respect the latter potential interpretation, the Court noted that the provision omitted language used elsewhere in the restructuring agreement specifically binding the board. In addition, the Court noted that AHP would have a reason to bargain for a preservation of the right to approve the merger to ensure that the stockholders were cashed-out in the second step merger at the same price as the self-tender offer.  Because the Vice Chancellor could not determine the proper interpretation of the restructuring agreement, he deferred ruling on the motions to dismiss until completion of discovery and briefing.

The full opinion is available here