Lance Salladay v. Bruce L. Lev, et al., C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020) (Glasscock, V.C.)
This memorandum opinion by the Delaware Court of Chancery denied a motion to dismiss a conflicted transaction without a controlling stockholder, holding that the entire fairness standard applied where defendants failed to adequately establish that MFW and/or Corwin invoked business judgment review.
This action arises out of a transaction involving Intersections, Inc. (the “Company”), where the board was conflicted, but the Company did not have a controlling stockholder. The Company formed an independent special committee with a financial advisor to explore financing options. Later that year, a potential acquiror approached the Company. By that time the previous committee was abandoned. After three weeks of negotiations between the acquiror and the Company’s management, the committee was reconstituted and reviewed the proposed transaction. The committee determined that any acquisition would be conditioned on approval by a majority-of-the-minority stockholder vote, and engaged in further deal negotiations. The committee had retained a new financial advisor, but that advisor terminated its engagement for reasons that were not disclosed. The committee retained a third financial advisor who provided a fairness opinion. The transaction-related disclosures stated that if stockholders did not approve the merger, a change of control would be triggered, with the acquiror controlling the Company.
Regarding the committee process, the Court found that MFW could provide the standard of review, even without a controlling stockholder. The Court held that the reasoning behind MFW’s ab initio requirement, as explained in Flood, applied “where there is no controlling stockholder but the board is conflicted.” The Court found that the committee was not properly constituted from the merger’s inception sufficient to invoke MFW’s cleansing effect because management engaged in substantive economic negotiations, including valuations and price discussions, that “set the field of play for economic negotiations to come,” even though management’s negotiations before the committee was involved were “limited” and occurred over three weeks.
Regarding the majority-of-the-minority stockholder vote, the Court held that the disclosures did not cleanse the transaction under Corwin because they were materially incomplete or misleading. First, the disclosures failed to clearly state that the change of control would only occur if the acquiror held a majority of the Company’s stock. In addition, calculating stock ownership from the disclosures was difficult. The Court held that because “an issue as fundamental to a stockholder as an apparent decision between selling or holding subject to a change of control” was material, the disclosures were ambiguous. Second, the Court held that the fairness opinion was the most material factor in the stockholders’ decision, and the reasons the committee switched financial advisors twice “in the context of a near-completed deal and a tight schedule, are not trivial.” Accordingly, the disclosures were incomplete and/or misleading such that Corwin’s cleansing effect did not apply.