Delaware Court Of Chancery Extends MFW Protections To One-Sided Controller Transactions

by Shearman & Sterling LLP

On August 18, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed a putative shareholder suit asserting claims for breach of fiduciary duty against Martha Stewart, the controlling stockholder of Martha Stewart Living Omnimedia, Inc. (“MSLO”), and aiding and abetting claims against third-party acquirer Sequential Brands Group Inc. (“Sequential”) in connection with Sequential’s strategic merger with MSLO.  In re Martha Stewart Living Omnimedia, Inc. Stockholders Litig., Consol. C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017).  Plaintiffs asserted that the sale was conflicted because Stewart negotiated for greater consideration for herself than for other stockholders and that the transaction did not meet the standards for application of the business judgment rule.  The Court found that plaintiffs failed to plead that the transaction was conflicted and that, even if it were, the protections afforded to stockholders through the establishment of an independent special committee and imposition of a majority-of-the-minority approval requirement warranted dismissal under the business judgment rule, in accordance with the standards set forth in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”). 

Media and merchandising company MSLO was founded by Stewart, who owned stock that commanded 88.8% of the total voting control of the company; Stewart also had several employment and intellectual property-related contracts with MSLO.  After a peer company proposed a potential merger at $4.90 per share, MSLO’s board formed a special committee composed of independent directors.  Thereafter, Sequential also expressed interest in merging with MSLO and submitted a preliminary offer of $6.20 per share conditioned on certain events.  After MSLO announced better-than-expected 2014 financial results, the special committee rejected the $4.90 per-share offer and, separately, advised Sequential that it could not meet the conditions of its preliminary $6.20 per-share offer.  Sequential then submitted a revised proposal for $5.75 per share.  Following negotiations with the special committee, which also authorized Stewart to negotiate post-closing arrangements with Sequential, Sequential increased its offer to $6.15 per share.  The special committee recommended approval of the proposed transaction, which was also made conditional on a fully-informed majority-of-the-minority stockholder vote of approval.  Ultimately, 99% of the minority stockholders voted for the deal. 

Plaintiffs alleged that Stewart diverted consideration from MSLO stockholders to herself through “side deals” with Sequential regarding intellectual property rights and employment.  The Court observed that the complaint contradicted numerous statements in the proxy, on which the complaint purportedly relied, and rejected the allegations regarding a purported conflict, noting that Sequential actually increased its offer after negotiations with Stewart began and that the related agreements with Stewart were not materially different from her arrangements with MSLO.  Significantly, the Court also ruled that MFW, which provides for the application of the business judgment rule in the context of “squeeze-out” transactions involving enumerated protections, is applicable to “one-sided” controller transactions, such as the transaction at issue in this case.  Regarding the protections afforded to minority stockholders in this case, because there was an independent special committee and the majority-of-the-minority condition in place before Sequential began to negotiate Stewart’s side deals, the procedural protections justified application of the business judgment rule.

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.

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