January 27, 2023
The Delaware Court of Chancery recently dismissed claims brought against a special committee that approved a go-private transaction even though the transaction itself was subject to the entire fairness standard. The court previously determined that the company’s disclosures to stockholders may not have been sufficient to invoke the protections of the business judgment rule. Nevertheless, the court granted the special committee members’ motion to dismiss, finding that the plaintiff failed to allege that they were conflicted or acted in bad faith.
Ligos v. Tsuff arose out of the 2019 go-private transaction of Isramco Inc., an independent oil and natural gas company, by its controlling stockholder.1 The transaction was negotiated and approved by a special committee and also subject to a non-waivable condition requiring approval of a majority of the minority stockholders, which was obtained. In an earlier ruling, however, the court refused to apply the business judgment rule because of questions concerning the adequacy of the company’s disclosures about a pending arbitration between the company and an affiliate of the controller that allegedly was material to the company’s value.
In this most recent ruling, the court held that even though the transaction was reviewable under the stringent entire fairness standard, the plaintiff failed to show that the special committee members were interested, lacked independence or acted in bad faith. One of the few specific allegations made by plaintiff concerning the special committee’s independence related to one member’s prior employment at companies with ties to the controlling stockholder. The court reasoned that, because the employment ended nearly 20 years prior to the go-private transaction, it would not infer a lack of independence. The court also noted the absence of allegations that the special committee might have been beholden to the controller for a post-transaction relationship, noting to the contrary that their directorships terminated at the closing of the transaction.
The court also noted several allegations that were inconsistent with bad faith, including the fact that the negotiations spanned a four-month period and the special committee initially refused requests to meet in-person with the controller’s advisors, negotiated a price increase, engaged an additional law firm to evaluate the pending arbitration, showed willingness to walk away from the transaction; and ultimately was confronted with a possible “best-and-final” offer under a “ticking clock of unknown duration.” The court stated that any questionable negotiating strategies did not rise to the level of inferring bad faith.
The decision reaffirms the Delaware Supreme Court’s holding in Cornerstone,2 which requires a plaintiff to plead non-exculpated claims against each director for whom it seeks to impose liability. The fact that a transaction may be unfair does not mean that independent directors breached their duty of loyalty. Thus, while the controller will still have to defend the fairness of the go-private transaction, the special committee members are no longer party to the litigation.
1 Ligos v. Tsuff, C.A. No. 2020-0435-SG, mem. op. (Del. Ch. Dec. 1, 2022).
2 In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173 (Del. 2015).