This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Court of Chancery recently ruled that Connecture Inc.’s Chairman of the Board and his affiliated investment company were not part of a control group accused of breaching their fiduciary duties by shortchanging shareholders in a go-private buyout of the web-based health insurance vendor in Gilbert v. Perelman, et al. No. 2018-0453-SG, memorandum opinion (Del. Ch. April 29, 2020).
Vice Chancellor Sam Glasscock’s April 29 memorandum opinion found board chairman David Jones Jr. and his investment affiliate, Chrysalis Ventures II, L.P., owed no duty to the minority as part of a control group because Francisco Partners GP IV Management Limited had a majority voting share without their holdings.
The Vice Chancellor defined corporate controllers as “stockholders who, through control of the majority of the voting shares (or otherwise) can seize the corporate machinery and turn it to their own benefit. When they do so, they control the entity; the property, in part, of the minority stockholders. In that sense, when they employ that control they too are fiduciaries.”
Applying Almond v. Glenhill
The opinion should be of interest to M&A specialists in that Vice Chancellor Glasscock sets out the reasons that, for purposes of this ruling, those two defendants are not part of the control group even though Securities Exchange Commission rules may include them in the “purchaser group.”
He used Chancellor Andre Bouchard’s 2018 Almond v. Glenhill Advisors opinion to explain when a transaction participant could be a necessary part of the control group – giving rise to fiduciary duties — even though, as here, its stock was not needed as part of a majority holding. But shared interests and goals are not enough to impart such duties. he said. Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *25–26 (Del. Ch. Aug. 17, 2018), aff’d Almond v. Glenhill Advisors, LLC, 224 A.3d 200 (Del. 2019).
Connecture Inc. a Delaware-chartered company based in Wisconsin that provides an online health insurance marketplace to connect health insurance consumers with providers, offered a series of private stock placements to raise capital between 2015 and 2017.
As a result of its purchases during this period, a group of Cayman Islands limited partnerships which the court collectively labeled “Francisco Partners” acquired a 56 % voting share of Connecture in 2017 – 68 % when combined with Jones and Chrysalis’ holdings.
In response to several abortive offerings by seven prospective suitors for Connecture, Francisco Partners – supported by Jones and Chrysalis — made an offer in late 2017 to acquire the remaining stock in a forced cash-out merger for $.30 cents a share.
According to Gilberts’ complaint, there was no provision for a minority vote on the buyout, but by that time, the board had decided to delist the stock from NASDAQ trading because of its failure to comply with listing requirements and the share price had dropped to $.17 cents.
The merger was finalized in April 2017, Gilbert’s suit was filed in June, and Jones and Chrysalis moved to dismiss
Not needed, not liable
Jones and Chrysalis owned a total of 11.2 percent of Connecture, which Francisco Partners did not need to force the buyout.
Vice Chancellor Glasscock found that whatever role Jones and Chrysalis had in the buyout, they could not have any control group fiduciary liability unless they were a necessary part of the control group and under Almond they could not be a part of that group unless their stock was needed to form a majority or they served some other role necessary to the transaction.
Almond requires one of two conditions, he said: “There must be an arrangement between the controller and the minority stockholders to act in consort to accomplish the corporate action, and the controller must perceive a need to include the minority holders to accomplish the goal, so that it has ceded some material attribute of its control to achieve their assistance.”
Liable as a director?
As to the separate breach-of-duty charge against Jones for his actions as a director, the Court noted that Jones is protected from liability for violations of his duty of care by 8 Del C. § 102(b)(7) in an exculpatory provision that shields him unless there are particularized allegations of self-interest or bad faith.
In that light, he asked the parties to decide in the next week whether they would set out their arguments in briefs as to Jones’s liability as a director separate from his actions as an alleged control group participant.