The case of In re Delphi Financial Group Shareholder Litigation, decided by the Delaware Chancery Court on March 6, 2012, provides an informative analysis of both (i) the fiduciary obligations of a majority shareholder in a sale or merger, and (ii) the realities of obtaining injunctive relief in the context of a corporate sale or merger transaction. The case involved the proposed takeover of Delphi Financial Group, Inc. (“Delphi”) for a substantial premium over Delphi’s share price (the acquisition valued Delphi at $2.7 Billion). The founder of Delphi, Robert Rosenkranz, took Delphi public in 1990 and in doing so created two classes of shares. Class A shares were held largely by the public, but he held B shares that, despite representing only 13% of outstanding shares, provided voting rights that allowed Rosenkranz to retain control of Delphi. Delphi’s corporate charter, however, provided that upon the sale of the company, each share of Class B stock would be converted to a share of Class A stock, entitling the holder of Class B shares to the same consideration as Class A shareholders. These provisions typically result in the Class A shareholders paying more for their shares.
Upon receiving the takeover offer, Rosenkranz sought to use his voting power through his Class B shares to scuttle the merger unless he received more for his Class B shares than the Class A shareholders received. With the authority of Delphi’s board, he negotiated a substantial premium for all shares of Delphi from the acquirer, and then differentiated the total amount into different per-share values for Class A and Class B shares. Although the Class A shareholders would have received more than a 100% premium for their shares, they sued and sought an injunction to stop the merger.
After expedited discovery and the Class A shareholders’ motion for a preliminary injunction to stop the merger, the court determined that the Class A shareholders demonstrated a likelihood of success on the merits but refused to issue an injunction. The court found it likely that Rosenkranz and the board breached their fiduciary duties to the Class A shareholders by negotiating for two different sales prices despite the inclusion of the charter provision that Class B shareholders would receive the same consideration as Class A shareholders in a merger. But, the court concluded that the Class A shareholders could be compensated for any such breach of fiduciary by money damages, resulting in the court’s refusal to enjoin the merger. By refusing to enjoin the merger, the court allowed the shareholder vote to proceed.
The case is a good reminder that, despite being a complex merger transaction with sophisticated parties and advisers, courts are closely scrutinizing the actions of CEOs and majority shareholders. It is also a reminder that, as with all litigation, the likelihood of success on certain legal claims is not enough for a court to enjoin a corporate transaction from proceeding. Rather, only where money damages will be insufficient to remedy a harm will a court halt an ongoing transaction.