A court reviews transactions where a controlling stockholder stands on one side under entire fairness unless (1) a disinterested, independent, and sufficiently empowered special committee recommends a transaction to the board of directors; and (2) the majority of the minority stockholders approve the transaction in a nonwaivable vote. Threats, coercion, or fraud on the part of the controlling stockholder, however, may nullify either procedural protection.
In 2011, Tokio Marine Holdings, Inc. (“TMH”), through an intermediary, contacted defendant Robert Rosenkranz, who was the owner of Delphi Financial Group, Inc., about the possible purchase of Delphi. While negotiating with TMH on behalf of Delphi, Rosenkranz made it clear to Delphi's board that, notwithstanding the charter provision, he would not consent to the sale without a premium paid for his Class B stock. Although the Delphi board was reluctant to recommend a differential for the Class B stock, it also recognized that the premium TMH was willing to pay over market was very large, and would probably be attractive to the stockholders. It therefore set up a committee of independent directors to negotiate a differential for the Class B stock. The committee was ultimately able to negotiate the per share price demanded by Rosenkranz from $59 down to $53.875. Meanwhile, Rosenkranz continued to negotiate with TMH on behalf of Delphi. TMH ultimately agreed to pay $46 per share for Delphi. TMH was then informed that the deal would be structured to provide a differential: $44.875 per share for the Class A shares; $53.875 per share for the Class B shares. The deal was conditioned on a majority of the publicly held Class A shares being voted in favor, and a successful vote to amend the Delphi Charter to allow Rosenkranz to receive the differential. Plaintiffs Class A stockholders of Delphi filed a motion for preliminary injunction against Rosenkranz and TMH, contending that Rosenkranz was not entitled to the stock price differential, that the Delphi Board breached its duty to the stockholders in structuring the deal to include such a differential at the Class A stockholders' expense, and that the fiduciary breaches of Rosenkranz and the Board were aided wrongfully by TMH.
Should the court grant plaintiff stockholder class's motion for a preliminary injunction to prevent a merger, based on defendants' alleged breach of their fiduciary duties to the stockholders, breach of contractual obligations, and violation of disclosure obligations?
The Court of Chancery of Delaware denied plaintiff stockholders' motion for a preliminary injunction. The Court found that the stockholders demonstrated a likelihood of success on the merits at least as to the allegations against the founder. However, because the deal represented a large premium over market price, because damages were available as a remedy, and because there was no other potential purchaser, the balance of the equities did not favor an injunction. Addressing the issue of irreparable harm, in the context of a single-bidder merger, the Court when balancing the equities must be cognizant that if the merger is enjoined, the deal may be lost forever, a concern of particular gravity where, as here, the proposed deal offers a substantial premium over market price. In evaluating the appropriateness of enjoining a given merger, the Court has previously noted the difference between a single bidder situation and a situation where there exists a competing, potentially superior, rival bid. The Court concluded that having determined that a judicial intervention at this point is unlikely to prove a net benefit to the plaintiff class, and may cause substantial harm, it was preferable to allow the stockholders to decide whether they wish to go forward with the merger despite the imperfections of the process leading to its formulation.