Davidow v. LRN Corp., C.A. No. 2019-0150-MTZ (Del. Ch. Feb. 25, 2020).
Delaware law does not invoke the entire fairness test for a voluntary, noncoercive offer by a corporation to buy its own shares. But, as this decision illustrates, Delaware courts will apply the entire fairness test where the self-tender is coercive or the board is interested or lacks independence in approving the transaction.
In fall 2017, the LRN Corporation (“LRN”), a firm that provides advisory services to companies on matters of ethics and corporate compliance, initiated a self-tender offer to acquire up to nearly 7.5 million shares of its own common stock for $1.35 per share. In connection with the self-tender, LRN provided a series of disclosures to its shareholders and stated that the tender offer’s purpose was to provide shareholders “an opportunity to sell [their] shares” because some of them had “expressed an interest in obtaining liquidity.” LRN explained that it recently received a $20 million dollar payment with which it planned to finance the self-tender, without disclosing the payment’s source. Following these disclosures, a substantial number of shareholders tendered their shares to LRN at a price of $1.35 per share. The tender offer closed in late 2017 and resulted in one director obtaining majority voting control. One year later, LRN informed its remaining stockholders that it had agreed to be acquired by another company for approximately $255 million—or a price of about $7.00 per share.
An LRN stockholder who had sold all his shares in the self-tender filed an action in the Delaware Court of Chancery in early 2019 against LRN and its directors for breach of the duty of loyalty. The plaintiff alleged that, at the time of the company’s disclosures concerning the self-tender, the defendants had already begun discussing a strategic process to sell all LRN shares for a price substantially higher than $1.35 per share. According to the complaint, the defendants did not disclose these facts to the LRN common stockholders and, instead, warned stockholders that they would possibly have to hold their shares “for a long period of time without receiving any cash or payment for them.” According to the plaintiff, the self-tender offer omitted material information and was structurally coercive.
Accepting the well-pled factual allegations as true, the Court of Chancery found that the plaintiff had adequately pled facts sufficient to state a claim that the individual director defendants breached their fiduciary duties by failing to make adequate disclosures and by structuring a coercive tender offer. Specifically, the board failed to make adequate disclosures regarding, inter alia, the purpose of the self-tender, the fairness of the offer price, and fiduciary interestedness. Further, several factors, including the company’s framing of the self-tender as a last opportunity to avoid a total loss, supported a finding that the transaction was coercive and contributed to the plaintiff’s “reasonable belief that he would receive little or no return on his LRN investment unless he tendered, ultimately forcing Plaintiff to choose between being cashed out at a low price or remaining a stockholder in a controlled company with a troubled transactional history and bleak prospects for a future liquidity event.” As a result of the alleged defective tender offer, the case will continue to trial under a standard of entire fairness review.