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Takeover of Delphi Financial Moves Forward Despite Actions of CEO
Practical Law Legal Update 1-518-3659 (Approx. 4 pages)
Takeover of Delphi Financial Moves Forward Despite Actions of CEO
by PLC Corporate & Securities
| Published on 07 Mar 2012 • Delaware |
On March 6, 2012, Vice Chancellor Glasscock of the Delaware Court of Chancery declined to enjoin Tokio Marine's takeover of Delphi Financial even after finding the plaintiffs had a likelihood of success on the merits.
On March 6, 2012, Vice Chancellor Glasscock of the Delaware Court of Chancery declined to enjoin the stockholder vote to approve the merger of Delphi Financial Group, Inc. (Delphi) and Tokio Marine Holdings, Inc. (TMH). Despite his finding that the plaintiffs have a reasonable likelihood of success in showing a breach of duty of Delphi's CEO and controlling stockholder, the Vice Chancellor found that the balance of equities did not weigh in favor of an injunction because the deal was still at a substantial premium for the stockholders.
Background
On December 21, 2011, Delphi agreed to be acquired by TMH for $46 per share. However, the $46 per share offer was structured as $44.875 per share of Class A stock and $53.875 per share of Class B stock. The Class B stock is held by Delphi's founder, controlling stockholder and CEO, Robert Rosenkranz. Rosenkranz negotiated this control premium even though it was prohibited by Delphi's certificate of incorporation. On March 2, 2012, the plaintiffs filed a motion for a preliminary injunction in the Delaware Court of Chancery alleging breach of duty by Rosenkranz and the board of directors and that TMH aided those breaches.
Capital Structure
Delphi's two classes of stock outstanding consists of:
- Class A stock, which is mostly held by public stockholders, with each share representing the right to one vote.
- Class B stock, which is held by Rosenkranz and his affiliates, with each share representing the right to ten votes (but is capped at an aggregate voting power of 49.9%).
Through his Class B holdings, Rosenkranz controls Delphi. This would typically entitle him to a control premium in a sale of the company. However, a provision in the certificate of incorporation provides that on the sale of Delphi, each share of Class B converts to Class A and, therefore, is not entitled to a control premium. Despite this charter provision, Rosenkranz made it clear to the board that he was unwilling to vote his shares for a sale that did not give him a control premium. Ultimately the merger was conditioned on an amendment to the certificate of incorporation that would permit differential merger consideration between the Class A and Class B stockholders.
Special Committee
Despite his clear conflict of interest, Rosenkranz led the negotiations with TMH. However, following Rosenkranz's disclosure of his demand for a control premium, the board of directors did form a special committee to consider the offer from TMH, to direct further discussions and to consider strategic alternatives. Still, Rosenkranz remained the point person for negotiations with TMH throughout the process. The special committee:
- Was given full authority and the board conditioned its approval of the transaction on the affirmative recommendation of the special committee.
- Retained independent advisors.
- Was made up of five independent board members.
- Formed a subcommittee to consider the control premium that Rosenkranz requested.
- Conditioned the merger on the affirmative vote of a majority of the disinterested minority.
The subcommittee attempted to persuade Rosenkranz to accept the same consideration as the Class A stockholders, but was unsuccessful. After determining that without the premium Rosenkranz was willing to walk away from the deal, the subcommittee agreed to move forward with differential consideration, but to get a reduction in Rosenkranz's original demands.
For more information on special committees, see Practice Note, Making Good Use of Special Committees.
Further Conflicts
During the merger negotiations with TMH, Rosenkranz also tried to:
- Negotiate the sale to TMH of his personal investment advising company.
- Alternatively, keep certain affiliated agreements in place between the investment advising company and Delphi following the sale.
Once Rosenkranz disclosed these negotiations to the subcommittee of the special committee, the subcommittee convinced Rosenkranz to agree to delay further negotiations on these affiliated transactions until after the merger agreement was signed. However, during discovery, the subcommittee learned that Rosenkranz and TMH had come to an informal agreement over the terms.
Key Litigated Issues and Outcome
The key litigated issues were whether:
- The board breached its duty to obtain the best price reasonably available to the stockholders.
- The board and Rosenkranz breached their duties when negotiating the price differential.
- The balance of equities favored an injunction.
Similar to the El Paso/ Kinder Morgan merger ruling, the court found that the plaintiffs had shown a likelihood of success on the merits, at least concerning Rosenkranz's breach of duties. However, because the merger consideration was at a substantial premium (76%) for stockholders, the court found that the balance of equities did not weigh in favor of enjoining the stockholder vote and that any harms could be remedied by damages. (See Legal Update, Chancellor Strine Declines to Enjoin Kinder Morgan Acquisition of El Paso: Further Discussion.)
Practical Implications
The court found the plaintiffs had a reasonable likelihood of success on the merits, at least regarding Rosenkranz's breach. Key factors that influenced the court's support of the plaintiff's case included that Rosenkranz:
- Sought and negotiated a control premium despite the charter provision prohibiting this.
- Was the primary negotiator with TMH even though his interests were not aligned with the Class A stockholders. However, the court did not agree with the plaintiffs' claim that Rosenkranz was not motivated to negotiate the highest price.
- Did not disclose his conflicts until later in the process.
Significantly the court found that when a controlling stockholder has bargained away his control premium (in the certificate of incorporation, in this case), the controlling stockholder cannot later coerce an amendment to that provision in the face of a merger.
For more information on the fiduciary duties of the board of directors and controlling stockholders, see Practice Note, Fiduciary Duties of the Board of Directors.
Court documents: