SS M&A Litigation Outlook - Flipbook - Page 24
Gilbert et al. v. Perlman et al.,
C.A. No. 2018-0453-SG (Del. Ch. Apr. 29, 2020)
Why it is important
In Gilbert v. Perlman et al., the Delaware Court
of Chancery held that minority shareholders may
become fiduciaries – and thus, owe a fiduciary duty
to other minority shareholders – where they form a
control group with a controlling shareholder. To plead
this “unusual theory,” the court held a plaintiff must
allege (1) “an arrangement between the controller
and the minority stockholders to act in consort
to accomplish the corporate action,” and (2) facts
showing the controller needed to include minority
holders to achieve its goals and “ceded some material
attribute of its control to achieve their assistance.”
Although the court recognized this unusual theory,
it ultimately dismissed the fiduciary duty claims
against the minority shareholders, finding that the
mere existence of a voting agreement to roll over
shares is insufficient to support an inference that
minority shareholders shared in “control power”
over a transaction.
Summary
Minority shareholders of Connecture, Inc.
(Connecture) filed suit asserting that the company’s
controlling shareholder, Francisco Partners IVA, L.P. (Francisco Partners) and several minority
shareholders breached fiduciary duties owed to
the minority shareholders by agreeing to take the
company private through a cash-out merger at
an unfair price and using an unfair process. The
plaintiffs alleged that the minority shareholders
owed them fiduciary duties because they conspired
with the company’s controlling shareholder, thus
becoming part of a control group. The minorityshareholder defendants, Chrysalis Ventures
(Chrysalis) and David A. Jones, Jr. (Jones), moved
to dismiss the complaint under Rule 12(b)(6),
arguing that the complaint failed to adequately allege
that Chrysalis and Jones were part of the company’s
“control group.”
The Court of Chancery noted that, while only
controlling shareholders typically owe fiduciary
duties to minority shareholders, Delaware law also
charges minority shareholders with fiduciary duties
when they “exercise control over the business affairs
of the corporation.” The Court of Chancery also
noted that minority shareholders could become
fiduciaries if they formed part of a company’s control
group. While under Delaware law a control group
typically involves only minority shareholders, the
Court of Chancery held that a shareholder owning
less than a majority of a company’s stock can be
considered part of a control group with a majority
shareholder, and therefore owe fiduciary duties,
if (1) there is a legally significant relationship,
such as by contract, common ownership, or other
arrangement, toward a shared goal (this being a
prerequisite for the formation of any control group
under Delaware law) between the minority and
controlling shareholders, and (2) the controlling
shareholder perceives a need to include the minority
shareholders to accomplish the goal and cede “some
material attribute of its control to achieve their
assistance.” As to the latter element, the key is that
the “minority stockholders involved wield their own
levers of power as part of the group; this control of
the corporate machinery makes them fiduciaries.”
The plaintiffs argued that several factors indicated
that there was a legally significant relationship
between Jones, Chrysalis, and Francisco Partners
to satisfy the first prong of the court’s test, including
(1) under SEC rules, the minority and majority
shareholders were considered “affiliates;” (2)
Chrysalis entered into a voting agreement with
Francisco Partners requiring it to vote its shares in
favor of the merger; and (3) Chrysalis and Jones
coordinated with Francisco Partners before any
formal discussion of a take-private transaction, such
as by jointly participating in private placements and
negotiating a rollover arrangement in the posttransaction entity. The court found that the SEC
determination of affiliation was not dispositive, but
found the voting agreement and coordinated actions
might be sufficient to show more than mere “parallel
investing interests” between the two minority
defendants and Francisco Partners.
Nevertheless, the Court of Chancery determined that
the plaintiffs failed to satisfy the second element of
the test. The plaintiffs argued Francisco Partners
diluted or limited its control by allowing Chrysalis
and Jones to roll over their interest. The court found
this was not sufficient under Delaware law, and that
if the court accepted the plaintiffs’ position, a control
group would be created every time a minority
shareholder rolled over their investment in a going
private transaction with a majority shareholder. The
court stated that the complaint “points to neither
quid nor quo – it describes nothing [the majority
stockholder] needed or ceded to the [minority
stockholders], other than the bare right to roll over
shares.” Simply agreeing to the minority rollover,
and therefore agreeing to a smaller stake in the postmerger company, did not satisfy the second prong
of the test. Since there were no allegations that the
majority “shared” or “limited” its power, the Court
of Chancery held that the plaintiffs failed to allege
a control group and accordingly could not pursue
fiduciary duty claims against Chrysalis and Jones.
24
