In this memorandum opinion, the Court of Chancery denied a motion for preliminary injunction by plaintiff-stockholders of Delphi Financial Group, Inc. (“Delphi” or the “Company”) to enjoin a merger between the Company and Tokio Marine Holdings, Inc. (“TMH”). Among other things, plaintiffs challenged a proposed amendment to the Company’s charter (the “Charter Amendment”) that would eliminate an equal treatment provision and permit the Company’s controlling stockholder to receive a higher price per share in the merger for his controlling class of stock. Plaintiffs also challenged certain advisory agreements between the Company and affiliates of the controlling stockholder that had been in place since the Company was founded. Plaintiffs claimed that the agreements devalued the Company’s stock and that the controlling stockholder had entered into an inappropriate, pre-closing “Gentlemen’s Agreement” with TMH regarding the duration of the advisory agreements post closing. On the preliminary record, the Court found that plaintiffs had demonstrated a likelihood of success with respect to certain claims. Nevertheless, the Court denied plaintiffs’ motion for preliminary injunction after finding no threat of irreparable harm and the balance of the equities weighed in favor of denying plaintiffs’ application. The Court based its decision to deny the injunction and permit the stockholders to vote on the deal on the large premium over the Company’s unaffected per share market price offered to the minority stockholders, the availability of damages as a remedy, the reality that no other purchaser had come forth or seemed likely to come forth to match or exceed TMH’s offer, and the lack of any material disclosure violations.
Defendant Robert Rosenkranz (“Rosenkranz”) founded Delphi in 1987 and is its controlling stockholder. When Rosenkranz took Delphi public in 1990, he created two classes of stock: Class A, largely held by the public and entitled to one vote per share; and Class B, retained by Rosenkranz and entitled to ten votes per share in stockholder matters. Although Rosenkranz retained less than 13% of Delphi’s outstanding shares, he retained control of the Company through his high-vote stock. In addition to having two classes of stock, the Company has a charter provision, which directs that, on sale of the Company, each share of Class B stock would be converted to Class A stock and be entitled to the same consideration as any other Class A stock. Also, before founding Delphi, Rosenkranz established in 1982 an investment advising firm, Acorn Advisory Capital L.P. (“Acorn”), which has provided consulting services to third parties since its formation. Pursuant to two contracts entered in 1987 and 1988, Delphi receives investment consulting services from Acorn. These contracts have been publicly disclosed in Delphi’s SEC filings since the Company’s 1990 IPO. The contracts are terminable by either party upon thirty days’ notice.
On July 20, 2011, TMH made an unsolicited approach to Delphi to express it interest in acquiring the Company. After initial negotiations, TMH raised its initial offer of $33 – $35 per share to $45 per share. On September 16, 2011, Rosenkranz presented TMH’s $45 per share offer to the Company’s board of directors (the “Board”). Rosenkranz told the Board that despite the offer’s substantial premium, he found it inadequate from his perspective and that he would be unlikely to vote his Class B shares in favor of the merger at that price. Rosenkranz’s request for additional merger consideration for his Class B shares began a process that ultimately led to TMH and Delphi entering into a merger agreement on December 21, 2011. The merger agreement provides for total per share merger consideration of $53.875 to the Class B shares and $44.875 to the Class A shares, which represents a 76% premium to the Class A stock price on the day before the merger was announced. The merger is conditioned on the approval of the majority of Delphi’s disinterested minority stockholders and approval of the Charter Amendment.
Initially, the Court of Chancery determined on the preliminary record that plaintiffs demonstrated a likelihood of success on the merits at least with respect to the allegations against Rosenkranz. The Court determined that because of the equal treatment provision in the Delphi charter, plaintiffs had a likelihood of showing that Rosenkranz breached his contractual and fiduciary duties by seeking and obtaining a control premium for his shares. The Court reasoned that Rosenkranz gave up his right to a control premium when he included the equal treatment provision in Delphi’s charter when the Company went public in 1990. Although, generally, a controlling stockholder may receive a control premium, the Court opined that Rosenkranz, based on the preliminary record, likely had no right to receive a second control premium at the expense of the Class A stockholders. The Court reasoned that Class A stockholders, in return for the protections in the charter against differential merger consideration, likely paid a higher price for their shares. The Court noted that Rosenkranz benefited by selling his control premium to the Class A stockholders at Delphi’s IPO, and thus effectively extracted a control premium from this initial sale yet retained effective voting control. The Court held on the present record that plaintiffs were reasonably likely to be able to demonstrate at trial that Rosenkranz violated duties to the Class A stockholders in negotiating for disparate consideration and only agreeing to support the merger if he received it. On the other hand, the Court held that plaintiffs did not demonstrate on the preliminary record that a post-merger contract involving Acorn and other Rosenkranz affiliates would net Rosenkranz any disparate consideration in violation of the Delphi charter, because the contracts could be canceled on thirty days’ notice by either party, and Rosenkranz was contractually obligated to vote in favor of the merger. Thus, there was no reason for TMH to induce Rosenkranz’s support through overpayment for Acorn’s services.
Although the Court held that plaintiffs were reasonably likely to be successful on the merits with respect to their claims against Rosenkranz, the Court nevertheless denied plaintiffs preliminary injunction after balancing the equities. The Court determined that the 76% premium offered by TMH weighed heavily in favor of permitting the transaction to proceed to a stockholder vote. The Court noted that money damages could largely remedy the threatened harm. The Court held that the availability of money damages and the stockholders’ potential loss of a substantial premium on their shares, together, outweighed the value of an injunction. The Court further explained that the available damages remedies, particularly in this case where damages easily could be calculated, serve as a sufficient deterrent for the behavior alleged by plaintiffs. Accordingly, the Court held that it was in the best interest of the stockholders to decide for themselves whether the merger offered an acceptable price for their shares.
The full opinion is available here.