Shandler v. DLJ Merchant Banking, Inc., C.A. No. 4797-VCS (Del. Ch. July 26, 2010 (Strine, V.C.)

In this memorandum opinion, the Court of Chancery considered a motion to dismiss claims brought on behalf of Insilco Technologies, Inc. (“Insilco”) by the plaintiff, a bankruptcy court appointed Creditor Trustee. Among other claims, plaintiff brought claims for breach of fiduciary duty against Insilco’s controlling stockholder, a group of affiliated funds (the “DLJ Funds”) allegedly dominated and controlled by DLJ, Inc. and DLJ Merchant Banking, Inc. (“DLJMB”) (collectively, “DLJ”), and a group of DLJ-affiliated directors who comprised a majority of Insilco’s board. The court held these claims could proceed in part.  In 1998, Insilco had three primary divisions: (1) ThermaSys, an automotive components business, (2) a publishing business; and (3) a technology segment. DLJ allegedly utilized the DLJ Funds to acquire 74% of Insilco’s common stock and thereafter appointed its designees as a majority of the board. Plaintiff claims the Insilco board, and DLJ as majority shareholder, then engaged in self-dealing to further DLJ’s interests by: (1) causing Insilco to retain DLJ-related financial advisors (the “DLJ Advisors”) in connection with several transactions and to pay those advisors excessive fees; (2) causing Insilco to sell ThermaSys to a company controlled by DLJ for an unfair price; and (3) delaying the filing of insolvency petitions for Insilco to allow DLJ to recoup some of its losses at the expense of the company.

In its analysis, the court found that plaintiff pled sufficient facts to proceed with his loyalty claim against four of the Insilco directors in alleging that the ThermaSys transaction was substantively unfair and implemented through an unfair process. According to the complaint, the board did not implement the typical strategy of appointing a special committee of independent directors to determine whether it was in Insilco’s best interest to sell ThermaSys and to negotiate the terms of such a transaction. Rather, the DLJ-dominated Insilco board first determined to sell ThermaSys for $147 million to a DLJ affiliated entity and thereafter appointed a single-person special committee to negotiate the deal. After being appointed, the special committee made no effort to negotiate better terms or to seek other buyers, ratifying all prior actions of the board related to the deal within five days. Additionally, the special committee relied upon a fairness opinion by an investment bank, who plaintiff alleged had given DLJ a fairness opinion for the ThermaSys transaction just three weeks before being retained by Insilco in the same deal. Moreover, while the resolution creating the special committee indicated that its sole member was “completely disinterested,” he had previously served as the CEO of a DLJ portfolio company for two years. The court found that such facts supported a rational inference that certain of the directors supported the ThermaSys deal to benefit DLJ at the unfair expense of Insilco. The claims against the other directors were dismissed.

As to the claim that the board breached its fiduciary duties by causing the payment of “excessive” fees to the DLJ Advisors, the court found that the complaint was void of any factual basis to support that conclusion. Likewise, the court dismissed plaintiff’s fiduciary duty claim based upon “deepening insolvency,” finding that plaintiff had failed to plead sufficient facts to support an inference that DLJ knowingly diminished Insilco’s enterprise value by purposely delaying bankruptcy when DLJ knew that filing was the value-maximizing option.

In addition to his claims against the Insilco board, plaintiff brought the same fiduciary duty claims against DLJ. DLJ contended that the claims should be dismissed because DLJ, Inc., DLJMB, and the DLJ Funds were separate entities. The court rejected this argument, finding them to be a “family of entities” that acted jointly as if they were a single controlling stockholder. In reaching this conclusion the court considered the fact that the entities shared the same address and the same "officers or principals.” Recognizing, however, that “the premise of controlling stockholder fiduciary responsibility is to hold the controller liable for actions it causes using its control of the company’s board,” the court held that plaintiff’s claim for breach of fiduciary duty stood against DLJ only as to the ThermaSys transaction.

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