Document: Frank v. Elgamal et al., C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012)
The Delaware Court of Chancery held that four officers (the “Control Group”) of defendant American Surgical Holdings, Inc. (“American Surgical”) collectively constituted a “controlling stockholder” in connection with American Surgical’s acquisition by a private equity fund because each member of the Control Group (which collectively held 71% of American Surgical’s voting power) agreed to vote in favor of the merger and accepted employment with, and an interest in, the surviving entity.
In December 2010, American Surgical entered into a merger agreement with Green Point Partners, I LP (“Green Point”). As in many private equity transactions, Green Point used lucrative employment agreements and equity interests in the surviving entity to incentivize key American Surgical officers (the Control Group) to stay on following the consummation of the merger. In return, the members of the Control Group agreed to vote in favor of the merger. Plaintiff alleged, inter alia, that the board and the members of the Control Group breached their fiduciary duties in approving/negotiating a merger in which insiders received a benefit not shared equally with the corporation’s remaining stockholders. Defendants moved to dismiss the complaint, inter alia, on the grounds that the plaintiff had not rebutted the business judgment presumption.
The Court disagreed with the defendants. Specifically, the Court found that (1) the Control Group constituted a controlling stockholder for the reasons identified above; and (2) mergers between a controlled corporation and an unaffiliated third party in which the controller receives an interest in the surviving entity and the minority stockholders are cashed out are subject to entire fairness review absent robust procedural protections. While the merger had been negotiated by a special committee of independent and disinterested directors, the transaction had not been subject to a majority of the minority vote. According to the Court, the procedural protections of a special committee and a majority of the minority vote are required to avoid entire fairness review.