Explore a case study on the fair treatment of minority shareholders in an M&A deal. Learn about the challenges, legal implications, and the role of controlling shareholders in this insightful analysis.
M&A Stories
January 28, 2019
In a recent merger between two energy companies, there was a crucial question: Did the controlling shareholders treat the minority shareholders fairly?
The M&A deal involved two complementary businesses. The target company operated heat and power systems, along with natural gas cooling systems, while the buyer designed and sold these systems. Before the merger, both companies were closely affiliated, sharing founders, CEOs, and even office space.
Merger discussions started in early 2016, initially involving the company leaders and legal counsel.
These talks weren’t initially disclosed to the board of directors. Later, independent committees were formed to negotiate the merger, which concluded in October 2016 with a purchase price of $0.38 per share.
The merger was approved by both boards and executed in November 2016, and then approved by the target shareholders, making the target a subsidiary of the buyer. At this time, the co-founders, John and George, held leadership roles in both companies and had substantial ownership interests.
The minority shareholders raised concerns, alleging that John and George, as controlling shareholders of both companies, breached their fiduciary duty. They argued that the merger undervalued their shares due to this conflict of interest.
John and George countered by noting that they received the same price per share as the minority shareholders. The court agreed, stating that even though they were controlling shareholders with a fiduciary duty, the price equality between the parties didn’t trigger Delaware’s entire fairness rule. This rule would have required John and George to prove the fairness of the deal if the minority shareholders had alleged liquidity problems on their part.
Since the fairness rule didn’t apply, the court applied the business judgment rule, giving the benefit of the doubt to the boards. This case highlights the fiduciary duty of controlling shareholders in M&A deals and the potential legal challenges they may face from minority shareholders.
It probably helped that each company formed independent committees of the board of directors to negotiate and approve the deal, meaning that George and John were not on either committee.
Case Reference:
Vardakas v. American DG Energy INC., Civil No. 17-10247-LTS, United States District Court, D. Massachusetts, (November 16, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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