In re BGC Partners, Inc. Derivative Litigation, C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019) (Bouchard, C.)
In this memorandum opinion, the Court of Chancery declined to dismiss derivative claims challenging the fairness of an interested transaction in which billionaire businessman Howard Lutnick stood on both sides through companies he controlled. In denying the motions to dismiss, the Court held that the stockholder plaintiffs were excused from having to make a pre-suit demand because the complaint alleged with particularity facts that, when viewed holistically and not in isolation from each other, created a reasonable doubt that a majority of the directors who would have considered such a demand were independent from Lutnick for purposes of deciding whether to bring a lawsuit against him. The Court also determined that, although the outside directors did not have a direct financial interest in the transaction like Lutnick, the complaint nonetheless stated a non-exculpated claim for breach of the duty of loyalty against them because it was reasonably conceivable from the allegations in the complaint that they acted to advance Lutnick’s self-interest when they voted to approve the transaction.
This case involved a transaction in which BGC Partners, Inc. (“BGC”), a public company controlled by Lutnick, paid $875 million to acquire Berkeley Point Financial LLC (“Berkeley Point”), a private company also controlled by Lutnick (the “Transaction”). In February 2017, Lutnick (BGC’s Chairman and CEO) informed BGC’s audit committee that BGC’s management was considering acquiring Berkeley Point at a potential purchase price in the “low $700 million range” and that Cantor Fitzgerald, L.P. (“Cantor”), which indirectly owned Berkeley Point and was also controlled by Lutnick, had already reached agreements in principle to buy out outside investors, thereby paving the way for a sale of Berkeley Point to BGC.
BGC’s board of directors was comprised of five directors: Lutnick and four outside directors. In March 2017, the four outside BGC directors were appointed to a special committee of the board (the “Special Committee”) to evaluate the merits of the proposed Transaction. Although the Special Committee resolutions recognized Lutnick’s conflict of interest, the Special Committee immediately authorized BGC’s management (i.e., Lutnick) to proceed with negotiating the Transaction. The plaintiffs alleged in their complaint that Lutnick controlled the negotiations and commandeered the Special Committee. Over the course of the negotiations, Cantor increased its asking price for BGC to $875 million and the Special Committee allegedly did not “push back” on the price increase and failed to seek certain protections for BGC.
In a May 2017 presentation, Sandler O’Neill, the Special Committee’s financial advisor, gave eight reasons for why Cantor’s $880 million valuation of Berkeley Point overvalued the company and should be reduced to at least $720 million. In June 2017, the Special Committee proposed to Cantor the $720 million valuation that Sandler O’Neill had endorsed. Cantor’s counterproposal, the terms of which were not disclosed in the Special Committee’s meeting minutes, were discussed by the Special Committee for no more than 75 minutes. Subsequently, the parties agreed that BGC would acquire Berkeley Point for $875 million and would also invest $100 million in a separate Cantor subsidiary.
In July 2017, the Special Committee approved the Transaction, which closed in September 2017. After the closing, Berkeley Point was integrated into Newmark, another Cantor affiliate, which completed an initial public offering (“IPO”) in December 2017. According to the plaintiffs, the IPO price implied a value for Berkeley Point of only $563 million.
In their complaint, the plaintiffs’ central allegation was that Lutnick caused BGC to overpay for Berkeley Point because his economic interest in Berkeley Point (60%) far exceeded his economic interest in BGC (13%) such that he would receive about 47% of every dollar that BGC overpaid in the Transaction. The plaintiffs asserted breach of fiduciary duty claims against the five directors on BGC’s board at the time of the Transaction (Lutnick and the four Special Committee members), alleging that they approved the Transaction at an unfair price and pursuant to an unfair process. The complaint also asserted claims against Lutnick, Cantor, and CF Group Management, Inc. (“CF Group”), another Lutnick-controlled company and Cantor’s managing general partner, alleging that they breached their fiduciary duties as controlling stockholders by using their control over BGC and the Special Committee to force the Transaction. The complaint also alleged that Lutnick breached his fiduciary duties as CEO of BGC by interfering with the Special Committee process. Lutnick, Cantor, and CF Group moved to dismiss under Rule 23.1 based on the plaintiffs’ failure to make a pre-suit demand on BGC’s board. The Special Committee directors moved to dismiss under Rules 23.1 and 12(b)(6).
For purposes of the Rule 23.1 motions to dismiss, the plaintiffs acknowledged that one of the BGC directors in office at the time the complaint was filed (who was not on the board at the time the Transaction was approved) was able to impartially consider a demand. The defendants conceded that Lutnick was interested for purposes of the motions. The issue for the Court therefore became whether, under Aronson v. Lewis, the complaint alleged particularized facts that created a reason to doubt the independence of two of the remaining three BGC directors. The Court determined that pre-suit demand was excused because the complaint sufficiently alleged particularized facts that, when considered in totality and not in isolation from each other, spun a web of professional and personal relationships between each of the three remaining directors and Lutnick that created a reasonable doubt about their ability to impartially consider a demand and decide whether to bring a lawsuit against Lutnick. In reaching this conclusion, the Court stressed the importance of adopting a holistic approach to director independence in the demand futility context and of affording a plaintiff all reasonable inferences.
The Court also denied the Special Committee directors’ Rule 12(b)(6) motion to dismiss under In re Cornerstone Therapeutics Inc., Stockholder Litigation because the allegations in the complaint supported a rational inference that the three directors approved the Transaction “to advance the self-interest of an interested party who stood on both sides of the Transaction (Lutnick) from whom they could not be presumed to act independently.” While a closer call, the Court denied the motion to dismiss as to the fourth member of the Special Committee, given the plaintiffs’ lower pleading burden under Rule 12(b)(6), finding it reasonably conceivable based on the facts alleged that the fourth committee member would not be willing to jeopardize his longstanding status as one of Lutnick’s “go-to choices” for board appointments by negotiating harder for BGC to pay a lower price or to reject the Transaction outright.