Gilbert v. Perlman, C.A. No. 2018-0453-SG (Del. Ch. Apr. 29, 2020) (Glasscock, V.C.)

In this memorandum opinion, the Delaware Court of Chancery determined that two minority stockholders of Connecture, Inc. (“Connecture” or the “Company”) were not part of a control group with the Company’s majority stockholder.  As a result, those minority stockholders did not owe fiduciary duties to Connecture and its stockholders, and the Court dismissed fiduciary duty claims asserted against them in connection with a going private transaction.

Connecture is a Delaware corporation that provides web-based solutions for health insurance markets.  David Jones was chairman of Connecture since 2011 and an affiliate of Chrysalis Ventures II, L.P. (“Chrysalis”).  Through a series of private placements and open-market purchases, Francisco Partners IV, L.P. and Francisco Partners IV-A, L.P. (together, “FP Investors”) obtained a 56% ownership interest, and Chrysalis separately obtained an 11% ownership interest, in Connecture. 

In October 2017, the Company delisted from NASDAQ because it could not meet NASDAQ’s minimum share price or market capitalization requirements.  On November 13, 2017, FP Investors made an offer to purchase Connecture for $.30 per share.  Connecture formed a special committee to negotiate the potential transaction with FP Investors.  In the course of those negotiations, Chrysalis offered to roll over its shares if it would help the special committee negotiate a higher price for non-rolling stockholders.  The special committee and FP Investors agreed and FP Investors raised their offer to $.35 per share.  Later, Jones and another member of Chrysalis asked to roll over their equity, and FP Investors agreed to let them do so.  Chrysalis and FP Investors also entered into a voting agreement to vote in favor of the transaction, which effectively guaranteed approval, as there was no condition requiring majority of the minority approval.  On April 24, 2018, the stockholders voted on the transaction, with only 9.9% of the shares held by the minority stockholders who were not involved in the rollover voting to approve the transaction.  On April 25, 2018, the merger closed.

Plaintiffs filed suit alleging breach of fiduciary duty claims against Chrysalis, Jones, FP Investors, and certain affiliates of FP Investors.  Plaintiffs alleged that all of the defendants were part of a “buyout group” and, as controlling stockholders, owed fiduciary duties to the Company and its stockholders.     

Chrysalis and Jones both moved to dismiss, asserting that they were not controlling stockholders and did not owe fiduciary duties.  Because FP Investors was a majority stockholder, and therefore had control on its own, the Court held that Chrysalis and Jones could only be members of a control group if (i) they had a legally significant relationship with FP Investors and (ii) FP Investors agreed to materially limit or share its control power.

Plaintiffs first argued that Chrysalis and Jones were members of a control group because the SEC defined them as “Purchaser Filing Parties,” meaning they were “affiliates” of the Company under SEC rules.  The Court rejected this argument and held that this SEC determination was not dispositive. 

Plaintiffs next pointed to the voting agreement between Chrysalis and FP Investors, as well as the coordinated actions between FP Investors and Chrysalis before any discussion of a take-private transaction, such as the joint participation in private placements and rollover.  Plaintiffs argued that those facts supported a finding that those stockholders were members of a control group.

While the Court acknowledged that such allegations may be sufficient to show more than mere “parallel investing interests” between FP Investors, Chrysalis, and Jones, they did not show that FP investors materially limited or shared its control.  The Court rejected plaintiffs’ argument that FP investors limited or shared its control by permitting the rollover, which would dilute its investment.  The Court noted that accepting such an argument would result in a determination that a control group is formed every time minority stockholders roll over their investment in a going private transaction with a majority stockholder.  The Court found that such a determination would not be in accordance with Delaware law. 

Accordingly, the Court held that Chrysalis and Jones did not owe fiduciary duties as controlling stockholders and dismissed the fiduciary duty claims against them in that capacity. 

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