Chancery Dismisses Derivative Claims That Private Equity Sponsors Comprised A Control Group

Morris James LLP
Contact

Patel v. Duncan, C.A. No. 2020-0418-MTZ (Del. Ch. Sept. 30, 2021)

For stockholders to comprise a control group, the alleged group members must be connected in some “legally significant way – such as by contract, common ownership, agreement or another arrangement – to work together toward a shared goal.” Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251-52 (Del. 2019). There must be “an indication of an actual agreement, although it need not be formal or written.” Id. Here, the court dismissed a claim alleging that two private equity funds comprised a control group that agreed to cause the corporation to engage in two unfair, self-interested transactions as a quid pro quo arrangement between them. Specifically, the plaintiff alleged they agreed to cause the corporation to overpay in two successive transactions in which the counterparties who benefitted unfairly were affiliates of the respective private equity funds. 

The court found the allegations that they comprised a control group to be insufficient. While public disclosures indicated the corporation was a “controlled company” for purposes of New York Stock Exchange listing requirements, they did not concede the existence of a “control group” under Delaware law. Similarly, the stockholders’ voting agreement concerned the election of directors, not the transactions at issue. The court also reasoned that allegations concerning the funds’ cooperation in a prior investment did not reasonably support the existence of an agreement in fact here. At bottom, the court reasoned, the stockholder-plaintiff really contended that its allegations of unfair transactions supported that there must be an agreement in fact for a quid pro quo. The court regarded such allegations as conclusory and insufficient, however.

The court also reasoned that the plaintiff failed to allege sufficiently that a demand upon the board of directors would be futile under Rule 23.1. Even assuming arguendo that the plaintiff sufficiently alleged a control group, which it had not, that would not mean that the alleged controlling stockholders’ director-designees were per se disabled from considering a demand. And the plaintiff otherwise failed to show that a majority of the directors faced a substantial risk of personal liability in considering a demand. 

The court accordingly granted the defendants’ motions to dismiss.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morris James LLP | Attorney Advertising

Written by:

Morris James LLP
Contact
more
less

Morris James LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.