Gentile v. Rossette, C.A. No. 20213 (Del. Ch. May 28, 2010) (Noble, V.C.)
In this decision, the Court of Chancery held that the former controlling stockholder of SinglePoint Financial, Inc. (“SinglePoint”) had not established the entire fairness of a debt conversion transaction (the “Debt Conversion”) entered into between the Company and the former controlling stockholder, P. David Rossette (“Rossette”). In contrast, the Court found that a put option (the “Put Option”) received by Rossette in connection the merger (the “Merger”) of SinglePoint with and into Cofiniti, Inc. (“Cofiniti”) that was not received by the other stockholders of SinglePoint was entirely fair.
SinglePoint was an unsuccessful company for which Rossette provided substantial financial support. Pursuant to the Debt Conversion, in order to improve the Company’s balance sheet, the Company converted much of its debt to Rossette into common stock of SinglePoint at a conversion price of $0.05 per share. This price was agreed to by SinglePoint’s independent and only other director, Douglas W. Bachelor (“Bachelor,” and together with Rossette, the “Defendants”), and was based largely on a fairness opinion obtained by Rossette. Plaintiffs argued that the Debt Conversion was an improper dilution of their voting and economic rights.
In considering Plaintiffs’ challenge to the Debt Conversion, the court held that entire fairness applied because Rossette could “orchestrate the pricing component for his benefit”—what the Court called a “classic example of self-dealing by a controlling shareholder.” Moreover, the Court held that even though an independent director (Bachelor) approved the transaction, he was not sufficiently informed to “enable him to be an independent counterweight to a controlling shareholder.” Therefore, the burden was on the Defendants to show entire fairness. The Court concluded that the process for approving the Debt Conversion was not fair due to a lack of independent thought and helpful analysis of the transaction. In addition, the Court held that the price was not fair. The Court recognized that because the market for the Company’s shares was thin (and almost nonexistent), there was no reliable way to calculate the fair value of the Company. Thus, the Court chose a value for the Company’s shares ($0.40) that was in the mid-range between $0.10 (the valuation by the Defendant’s expert) and $0.75 (the management-set price to exercise options to purchase shares of SinglePoint stock). The Court awarded damages to Plaintiffs based on the difference between the $0.40 per share fair value and the $0.05 conversion price. In addition, the Court concluded that Bachelor was entitled to protection under the Company’s provision adopted under Section 102(b)(7) of the General Corporation Law of the State of Delaware, and therefore was not liable for his role in approving the Debt Conversion.
The Court denied Plaintiffs’ challenge to the Put Option. The Cofiniti Merger term sheet included the repayment of the Company’s debt to Rossette, but Rossette agreed to the Put Option in lieu of repayment when insisted upon by Cofiniti and faced with the threat that the Merger would otherwise fail. Thus, the Court concluded that the Put Option was a detriment to Rossette and was entirely fair to the Plaintiffs.
Finally, the Court held that Rossette’s behavior did not rise to the level of bad faith that would require him to pay Plaintiffs’ attorneys’ fees.