In re HomeFed Corp. Stockholder Litig., C.A. No. 2019-0592-AGB (Del. Ch. July 13, 2020) (Bouchard, C.)
In this memorandum opinion, the Delaware Court of Chancery held the controlling stockholder did not employ the dual protections of MFW because it engaged in substantive economic discussions about the squeeze-out merger with the corporation’s largest unaffiliated stockholders. The Court of Chancery viewed those negotiations as undermining the ability of the company’s Special Committee to negotiate on behalf of minority stockholders.
This dispute relates to the transaction whereby Jefferies Financial Group, Inc. (“Jefferies”), a 70% stockholder of HomeFed Corporation (“HomeFed” or the “Company”), acquired the rest of the Company’s shares in June 2019. Jefferies did so by exchanging two of its shares for every HomeFed share held by minority stockholders. In fall 2017, a member of the HomeFed board of directors wrote to Jefferies proposing a potential merger of HomeFed and Jefferies with a 2:1 exchange ratio. Jefferies subsequently reached out to Beck, Mack and Oliver LLC (“BMO”), HomeFed’s second largest stockholder, about this proposal. In December 2017, HomeFed’s board created a Special Committee of independent directors to investigate a potential transaction. The resolutions creating the Special Committee included a provision that HomeFed’s officers were directed to not discuss a potential transaction with any other party unless the Chairman of the Special Committee had approved of or was present for such communications.
In March 2018, Jefferies broke off discussions about a potential transaction and the Special Committee “paused” its process. Jefferies, however, continued to discuss the potential of a transaction with BMO. The Special Committee learned about these negotiations in February 2019, shortly before Jefferies issued a press release proposing to acquire all remaining HomeFed common stock (with the same 2:1 Jefferies:HomeFed ratio). HomeFed’s board “reauthorized” the Special Committee to explore a potential transaction, even though it had never formally dissolved the Special Committee. The Special Committee proposed a $42 fixed value counteroffer to Jefferies, and Jefferies contacted BMO directly to discuss the proposal. The Special Committee subsequently condemned the unauthorized Jefferies-BMO communications, noting that such behavior was damaging to the Committee’s negotiating position. During negotiations on a proposd price collar for the exchange, BMO and another large stockholder, who together represented 70% of the Company’s unaffiliated shares, weighed in and obtained permission from the Special Committee to communicate directly with Jefferies.
After the minority stockholders approved the deal, Plaintiffs sued, alleging the members of HomeFed’s board breached their fiduciary duties by approving the transaction, and Jefferies as HomeFed’s controlling stockholder, breached its fiduciary duties by orchestrating an unfair transaction. HomeFed’s board and Jefferies (together, “Defendants”) moved to dismiss.
The Court reiterated the basic tenants of MFW: squeeze-out mergers are evaluated under entire fairness review unless the merger “is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders,” in which case the business judgment rule would apply.
The Court explained that it believed the February 2019 Jefferies offer was part of the process that began in December 2017 with the formation of the Special Committee. The bases for that conclusion were that the Board never disbanded the Special Committee, Jefferies continued discussions with minority stockholders about a potential deal after the Special Committee “paused” its work, and the “new” offer in February 2019 was essentially the same as the offer that necessitated creating the Special Committee in the first place. Because the Jefferies failed to condition any transaction upon the dual MFW protections before the start of that process in December 2017, it missed its opportunity to utilize that safe harbor.
The Court continued that even if it viewed the processes separately, Jefferies did not commit to the MFW protections before engaging in discussions with BMO regarding the 2:1 share exchange in 2019. Specifically, Jefferies received indications of support for its share exchange from BMO in early February 2019 but did not agree to the MFW protections until later that month. Jefferies’ discussions with BMO in early February 2019 were not “preliminary” because those discussions included the exchange ratio, which was the key economic term. By discussing the economic substance of the transaction with BMO before committing to the MFW framework, Jefferies “anchored the negotiations and undermined the Special Committee’s ability to bargain effectively as the minority stockholders’ agent.” The Court supported this conclusion by noting Plaintiffs’ allegation that Jefferies referenced the unaffiliated stockholders’ support for its proposal in refusing a counteroffer from the Special Committee.
Finally, two members of HomeFed’s board asserted that they were protected by an exculpatory provision. The Court disagreed, concluding that Plaintiffs had adequately pled the directors lacked independence. One of the board members had served in various executive roles with Jefferies and had a consulting role with HomeFed in addition to his director role. The other director had also worked for Jefferies and also served as an executive officer of HomeFed. That led to the rational inference that the directors could not be presumed to act independently from Jefferies.