A recent Delaware Chancery decision is noteworthy for its application of the Revlon exception to the recent statement of Delaware law in the Rosson case–a Supreme Court opinion[1] declaring that equity-dilution or overpayment claims are derivative, except when there is also a change of control in which event it would be a direct claim.  In KZ Capital General Trading LLC v. Petrossov, C.A. No. 2020-0750-PAF, Order (Del. Ch. Jan. 31, 2022), the Court explained that there are 3 ways to trigger a Revlon[2] level of heightened scrutiny in which case dilution claims could be direct.  Revlon duties can be triggered in the following ways:

“(1)  When a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; and, (2) Where in response to a bidder’s offer, a target abandons it long-term strategy and seeks an alternative transaction involving the break-up of the company; or, (3) When approval of a transaction results in a sale or change of control.”

Order at 19 (citation omitted).

The Order also includes a helpful definition of “control” for Revlon purposes.  The Court noted that:  “To establish control, the complaint must sufficiently allege that: (1) the alleged controller owns more than 50% of the voting power of a corporation, or (2) owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation.”  Order at n.95 (citing In Re Vaxart, Inc. S’holder Litig., 2021 WL 5858696, at *15 (Del. Ch. Nov. 30, 2021)).

The court observed that Revlon will not apply:  “Where the plaintiffs cannot allege that a sale or change of control has taken place or necessarily will take place such that the public shareholders of a corporation have been or will be deprived of a control premium.”  Order at 19-20 (citations omitted).

[1] Brookfield Asset Management, Inc. v. Rosson, 261 A.3d 1251, 1267 (Del. 2021), highlighted on these pages.

[2] Revlon, Inc. v. MacAndrews & Forbes Hldgs, Inc., 506 A.2d 173, 182 (Del. 1986).