SS M&A Litigation Outlook - Flipbook - Page 21
Salladay v. Lev,
C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020)
Why it is important
Summary
In Salladay v. Lev, the Delaware Court of Chancery
provides a valuable primer on the standards of review
governing conflicted board transactions that do not
involve a controlling stockholder. Absent a controlling
stockholder standing on both sides of a transaction,
Delaware law recognizes two paths to “cleanse” a
transaction otherwise subject to review under the
entire fairness standard: (1) approval by the informed,
uncoerced vote of the majority of shares held by those
free of conflict (pursuant to the Corwin decision);
or (2) approval by an unconflicted committee of
the board with full scope to negotiate or enter any
transaction (pursuant to the In re Trados decision).
In addition to reinforcing these seminal doctrines, the
Salladay decision breaks new ground by clarifying
– for the first time in the context of a conflicted
board transaction – that a special committee must
be constituted ab initio, i.e., before substantive
negotiation of economic terms, to have a cleansing
effect, just as is the case with controlling stockholder
transactions governed by the MFW standard.
Early in 2018, Intersections, Inc. (Intersections)
began evaluating its options for potential financing
transactions due to financial difficulty. Intersections
formed a special committee of independent directors
(the Committee), which hired Houlihan Lokey
Inc. as a financial advisor. Intersections ultimately
chose not to pursue a transaction and instead issued
promissory notes, totaling US$3 million, to two of
its shareholders.
We have previously covered Flood v. Synutra
International, Inc. and Olenik v. Lodzinski, both of
which addressed the use of special committees in
controlling shareholder transactions and are cited
in Salladay.
In September 2018, iSubscribed Investor Group
(iSubscribed) approached Intersections about
a potential transaction. Between September 14
and October 5, iSubscribed and Intersections
discussed the terms of a potential deal, including
price. On October 5, Intersections reconstituted the
Committee to consider the transaction. Negotiations
continued and, on October 29, the Committee met
and, after receiving a fairness opinion from an
outside firm, voted to approve the transaction in its
entirety at a price of US$3.68.
Lance Salladay, an Intersections stockholder, filed a
class action to challenge the merger. The defendants
moved to dismiss, arguing that review under the
business judgment rule was appropriate given
the involvement of the Committee and approval
by a majority of the company’s non-interested
shareholders. The court rejected both arguments.
First, the court held that the Committee was
ineffective. The court reasoned that a special
committee needed to be empowered “ab initio,”
citing recent decisions addressing controlling
shareholder transactions. The court found that
“commencing negotiations prior to the special
committee’s constitution may begin to shape the
transaction in a way that even a fully-empowered
committee will later struggle to overcome.” Applying
that logic, the court found that the plaintiffs’
sufficiently alleged that substantive economic
negotiations – in particular, price negotiations –
between iSubscribed and Intersections began prior
to the October 5 reconstitution of the Committee.
resignation of another, unnamed financial advisor
prior to the engagement of the financial advisor that
ultimately issued a fairness opinion.
The court thus found that the entire fairness
standard was applicable and denied the defendants’
motion to dismiss.
Second, the court also held that the vote of the
majority of the non-interested shareholders did
not cleanse the transaction under Corwin. The
court found that the complaint sufficiently alleged
material defects in the proxy statement that negated
the cleansing effect of approval by non-interested
shareholders. Among other things, the court found
that the company’s 14D-9 failed to adequately
disclose the details of a contractual change-ofcontrol provision, emphasizing that “proxies
should be lucid, and not a game of Clue,” and the
21
