Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. Mar. 10, 2014) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery granted in part and denied in part defendants’ motion for summary judgment as to certain claims asserted by a stockholder plaintiff in connection with a merger involving a rollover of equity by stockholders who collectively held more than a majority of a corporation’s outstanding shares. The Court found, among other things, that there were issues of material fact remaining as to whether the entire fairness standard should apply to the merger, and, assuming entire fairness applied to the merger, whether a special committee was well functioning and fully informed about the material negotiations relating to the allocation of the merger consideration.
The stockholder plaintiff brought claims against American Surgical Holdings, Inc. (“American Surgical” or the “Company”) and several of its officers and directors in connection with American Surgical’s merger with an affiliate of Great Point Partners I, LP (“GPP”). In 2009, American Surgical began exploring opportunities to sell the Company. During preliminary discussions with potential acquirors, Zak Elgamal, the CEO and a director of the Company, and Jaime Olmo-Rivas, another executive officer and director, expressed interest in rolling over between 20-30% of their American Surgical stock into stock in the surviving entity. The Company eventually received indications of interest from three potential acquirors, and the board formed a special committee (the “Special Committee”) to evaluate the offers.
After evaluating the indications of interest, the board accepted an offer from GPP pursuant to which the minority stockholders would receive $3.16 in cash per share and Elgamal, Olmo-Rivas, and two other American Surgical “key employees” (the “Rollover Group”) would receive $2.21 per share plus approximately 21% ownership of the surviving entity. In late February 2010, however, GPP revised the terms of this offer based on a material dispute as to the Company’s 2009 EBITDA. Although GPP thought it had reached a new revised deal at $2.86 per share, an internal Company email describing the revised terms of the offer suggested a range of options for the allocation of merger consideration between (i) $2.86 cash per share to minority stockholders and $2.21 plus a 16.06% interest to the Rollover Group and (ii) $2.90 per share to the minority stockholders and $2.10 per share and a 19.62% interest to the Rollover Group. Accordingly, the minority stockholders would receive a higher amount of cash to the extent that the Rollover Group received a higher allocation of stock in the surviving entity. Despite the apparent discussion of this range of options, the amended offer letter from GPP closely tracked the option that would result in a lower cash payment for the minority stockholders. The minutes from the Special Committee meeting following the receipt of the amended offer letter, however, do not reflect a discussion of the range of options. In addition, the members of the Special Committee could not recall if they discussed the range of options and did not know how the final per share figure was calculated.
The plaintiff stockholder commenced an action claiming, among other things, that (i) the Rollover Group constituted a control group that negotiated the transaction, and thus entire fairness applied and (ii) the Special Committee did not shift the burden of proving entire fairness because it did not control the material negotiations and was not sufficiently informed.
The Court first noted that in evaluating whether the Rollover Group constituted a control group two distinct periods of time were at issue: (i) when the board decided to put the Company up for sale and (ii) when the merger consideration allocation was agreed upon. The Court concluded that the Rollover Group did not constitute a control group during the initial sales period, but held that a reasonable inference could be drawn that the members of the Rollover Group were connected in a legally significant way when the initial GPP offer was accepted; and thereafter, the control group exercised its control to select the merger allocation option most favorable to its members.
With regard to the fiduciary duty claims against the board, the Court found that the Company entered Revlon mode when the board decided to put the Company up for sale. The Court stated that to the extent the Rollover Group was a control group at the time the merger allocation was negotiated, the board’s Revlon duties may have shifted from obtaining the best price reasonably available for all of the stockholders to obtaining the best price reasonably available for the minority stockholders. Nevertheless, the Court determined that the Special Committee was disinterested, independent, and acted in good faith in adopting GPP’s revised offer as the best value reasonably available and, therefore, was entitled to judgment as a matter of law under the exculpatory provision in the Company’s charter. The Court found, however, that because there was an issue of material fact as to whether the Rollover Group selected the merger allocation without informing the Special Committee of the range of options, there was a reasonable inference that Elgamal and Olmo-Rivas may have acted in bad faith. Thus, the Court denied the grant summary judgment to the defendants with respect to those claims.
The Court also found that, if the Rollover Group was a control group, there was an issue of fact whether the Rollover Group was either on both sides of the transaction or was competing with the minority stockholders for the same consideration such that entire fairness would apply to the transaction. Likewise, there was a genuine issue of material fact whether the Special Committee was adequately informed about the range of merger allocation options and thus whether it was well functioning. The Court granted the motion for summary judgment, however, with regard to several non-director employees, who it held did not owe fiduciary duties to the stockholders.