Salladay v. Lev - No. 2019-0048-SG, 2020 Del. Ch. LEXIS 78 (Ch. Feb. 27, 2020)

Rule:

A corporate transaction entered by a conflicted board is subject to entire fairness, but the court's case law contemplates that if there is no controller present, then a fully constituted, adequately authorized, and independent special committee can cleanse such a transaction. This is because the true empowerment of a committee of independent, directors removes the malign influence of the self-interested directors, and thus should result in business judgment review. Whether such a committee is truly empowered is a necessary question, to be reviewed practically to determine if the transaction, in fact, is untainted by fiduciary self-interest. Must the committee be sufficiently constituted and authorized ab initio; consistent, that is, with the requirements set forth in MFW for cleansing a transaction in a control situation? The answer, the court perceives, is yes.

Facts:

Non-party Intersections, Inc. ("Intersections" or the "Company") is a Delaware corporation headquartered in Virginia. While Intersections was working to get its upgraded product on the market, it was also experiencing financial difficulties. Early in 2018, the Company began to look for additional borrowing or stock equity sales to raise capital. Several parties expressed interest, and the Company formed a special committee (the "Committee"), consisting of three independent directors, to enter due diligence and explore possible financing options with the potential partners. The Committee retained Houlihan Lokey, Inc. ("Houlihan Lokey") as its financial advisor to evaluate potential financing transactions. On September 14, 2018, a representative of the iSubscribed Investor Group contacted Intersections to explore a potential transaction, and Stanfield, Lev, and Intersections' CFO met with iSubscribed Investor Group representatives. iSubscribed simultaneously reached out to Loeb about its interest in the Company. Within a week, iSubscribed entered a non-disclosure agreement and began conducting due diligence. On September 25, an iSubscribed Investor Group representative contacted Lev to discuss its interest in acquiring Intersections. The iSubscribed Investor Group then formed WC SACD for the purpose of an acquisition. On October 9, WC SACD proposed to acquire Intersections at $3.50 per share (the "Merger") and provide $30 million of senior secured convertible note financing (the "Note Purchase Agreement," and together with the Merger the "Transaction"). The Transaction also contemplated that Stanfield, McGough, and Loeb could roll their equity into the deal. Finally, the offer was contingent on the Company granting WC SACD "the right to designate a majority of the members on the Board of Directors if the proposed acquisition transaction were terminated . . . ." The Committee renegotiated WC SACD's designation right so that while it applied if the Merger failed, it did not apply if that failure was due to WC SACD's breach or abandonment. On October 29, the Committee met a final time, and North Point provided its fairness opinion on the Transaction (the "Fairness Opinion"). The Amended Complaint alleged the Fairness Opinion was based on misleading information from both management and the Committee. The Committee recommended approval of all aspects of the Transaction. Later that day, the Board met, adopted the Committee's recommendation, and approved the Transaction at $3.68 per share, just below the midpoint of the range suggested to WC SACD by Stanfield. After it approved the Transaction, Intersections informed the potential financing partners who had submitted proposals that it was not interested in proceeding with them. On October 31, 2018, WC SACD and Intersections entered two agreements: the Merger, and the Note Purchase Agreement. In connection with the Merger, each of the Defendants rolled over significant portions of their equity. On November 29, 2018, Intersections filed its Schedule 14D-9 ("14D-9" or the "Proxy") with the Securities and Exchange Commission. The Plaintiff, in his Amended Complaint, highlights four parts of the 14D-9 he considers materially deficient or misleading.

Issue:

Must the special committee be constituted ab initio in order to effectively cleanse a transaction?

Answer:

Yes.

Conclusion:

The court held that the Amended Complaint adequately alleged that the procedural safeguards instituted were inadequate to cleanse the Merger and regain business judgment review, and thus, the transaction remained subject to entire fairness review. The Amended Complaint cleared the low hurdle of pleading unfair process and price under entire fairness review by adequately alleging that insiders influenced the transaction to divert merger consideration to themselves, and that the Company was sold at an unfairly depressed price. To effectively cleanse a transaction under Trados II and its progeny, the special committee must be constituted ab initio, as in MFW. The transaction here did not meet this requirement. Among other matters, disclosures did not cleanse the transaction under Corwin because they were materially incomplete or were materially misleading.