Chancery Finds That the Standard of Review for the Conduct of a Shareholders’ Representative Turns Upon the Merger Agreement’s Language

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Houseman v. Sagerman, C.A. No. 8897-VCG (Del. Ch. July 20, 2021)

A merger agreement between a subsidiary of Healthport Technologies, LLC and Universata, Inc., gave the owners of 72 percent of Universata’s stock (the “Owners”) the power to appoint a Shareholders’ Representative. Among other responsibilities, the Shareholders’ Representative was charged with “disbursing among the Shareholders the cash portion of the Purchase Price and any other payments paid to Shareholders under this Agreement.” 

Litigation ensued addressing alleged wrongdoing of the Shareholders’ Representative in the administering the merger proceeds, and the matter was referred to a Special Master. In challenging the conduct of the Shareholders’ Representative, the plaintiffs argued that entire fairness was the appropriate standard of review and that the Shareholders’ Representative should bear the burden of establishing that its determinations were fair to all stockholders. The Special Master concluded that an abuse of discretion standard was appropriate.

The Court of Chancery, upon de novo review of the Special Master’s report, noted that a Shareholders’ Representative, as attorney-in-fact for other shareholders, “generally assumes the obligations of a fiduciary.” However, the powers and duties of such a representative can be modified and circumscribed by contract. Here, the merger agreement indicated that “[t]he Shareholders’ Representative shall not have any duties or responsibilities except those expressly set forth in this Agreement.” Under the merger agreement, the Shareholders’ Representative was empowered to “do[] any and all things and tak[e] any and all action that the Shareholders’ Representative, in such Person’s sole and absolute discretion, may consider necessary, proper, or convenient in connection with or to carry out … the transactions contemplated by this Agreement.” The Court interpreted that language as requiring that conduct be measured by the subjective good faith of Shareholders’ Representative. So long as the Shareholders’ Representative actually concluded in good faith that specific acts were “necessary, proper or convenient” to protect the interests of all shareholders, the Shareholders’ Representative was empowered to take such acts, and all shareholders, even those who did not sign the merger agreement, were bound to such determinations.

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