Delaware Court Of Chancery Finds That Controller Sale Of Company Did Not Harm Minority Interests
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  • Delaware Court Of Chancery Finds That Controller Sale Of Company Did Not Harm Minority Interests

    01/22/2025
    On January 7, 2025, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery issued a post-trial decision in favor of defendant, a private equity fund (the “Fund”), finding that the Fund’s sale of a portfolio company (the “Company”) was protected by the business judgment rule and did not harm the interests of minority stockholders.  Manti Holdings, LLC, et al. v. The Carlyle Group Inc., No. 2020-0657-SG, 2025 WL 39810 (Del. Ch. Jan. 7, 2025).  The Court held that plaintiffs failed to rebut the business judgment rule, finding that while the Fund was a controller, it did not have a disabling conflict of interest, and that while the Fund wanted the sale of the Company to go forward in 2017, it did not force a “fire sale” from which it could extract a unique benefit.
     
    Plaintiffs alleged that the Fund’s business model required it to sell the Company in 2017, regardless of price, and that the Fund, a controller, caused the Company’s board of directors to run a sales process that was unfair to stockholders to facilitate the Fund’s exit from the Company before the initial fund term expired.  Plaintiffs asserted that the entire fairness standard should apply because the Fund was a controller and was conflicted because it would derive a unique benefit from the timing of the sale.
     
    The Court found that while the Fund was a controller and the defendant-appointed directors lacked independence, the transaction was not conflicted because defendants did not stand on both sides of the sale.  The Court found that without such a conflict, entire fairness would apply only if defendants had “extract[ed] something uniquely valuable” from the sale, such as fulfilling investor expectations for a timely liquidation of the fund.  However, the Court found the sale of the Company was not timed to drive a unique benefit to the Fund because there was no evidence that (i) defendants had an obligation to exit the investment in 2017, or (ii) the Fund sought to avoid a clawback mechanism by which certain affiliates would face potential disgorgement of sales.  In fact, the Court found that, as the largest shareholder of the Company, the Fund had an inherent financial incentive to negotiate a sale that would generate the largest return for all stockholders, including plaintiffs. 
     
    The Court was also not persuaded by plaintiffs’ argument that defendants received a non-ratable benefit from the sale because it owned preferred shares. Without a showing that the Fund had a unique need for liquidity motivating the sale, the Court found, instead, that the ownership of preferred stock aligned defendants’ interests with plaintiffs’, as the Fund stood to gain the most from a higher sale value from distributions for its common shares.  Finally, the Court rejected the notion that one director had his own conflict of interest due to the promise of a special cash bonus in light of the finding the majority of the board was not interested in the transaction, and the “presence of a controller does not sterilize the business judgment of the directors concerning the sale.” 

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