Tuesday, March 13, 2018

Block shareholder did not ‘control’ board in merger talks

By Amy Leisinger, J.D.

The Delaware Chancery Court has dismissed a shareholder class action against two real estate companies for breach of fiduciary duty in connection with a merger. According to the court, the complaint failed to adequately allege that the acquiring company (a 33.5 percent shareholder of the acquisition target) exercised control over the target’s board or the special committee considering the merger in a manner to render the board’s merger recommendation invalid. Further, the court found no sufficient evidence that the shareholders’ vote in favor of the merger was uninformed or coerced. Further finding no allegations of corporate waste, the court dismissed the shareholders’ claims with prejudice (In re Rouse Properties, Inc. Fiduciary Litigation, March 9, 2018, Slights, J.).

Merger. In 2012, Rouse Properties Inc. conducted a stock purchase rights offering, and a group of companies affiliated with Brookfield Asset Management (together, “Brookfield”) came to hold 54 percent of Rouse’s stock. In January 2016, Brookfield, then a 33.5 percent shareholder, proposed to acquire all outstanding Rouse common stock through a merger. Rouse formed a special committee of non-Brookfield-related directors to negotiate with Brookfield and consider other alternatives, and the committee hired legal and financial advisors to assist in the process. After lengthy negotiations, the parties arrived at a price of $18.25 per share and signed a merger agreement; over 82 percent of Rouse’s unaffiliated shares voted in favor of the merger.

The plaintiffs filed a complaint challenging the merger and alleging that Brookfield’s influence over the Rouse board is revealed in transactions between Rouse and Brookfield on terms favorable to Brookfield before the merger and in the special committee’s determinations during the merger negotiation process.

No control, no coercion. In a post-closing challenge to a merger where a less-than-majority shareholder sits on both sides of the transaction, the court explained, a complaining shareholder must plead facts demonstrating that the block shareholder is actually a controlling stockholder for practical purposes or that the shareholder vote was uninformed or coerced. The business judgment rule applies if no controlling shareholder is involved and a majority of disinterested, informed shareholders approves the transaction, the court stated.

The shareholders failed to adequately allege that Brookfield exerted actual control over the special committee in the merger process, the court found. The committee refused to allow Brookfield to speak directly with an individual connected with Brookfield before the negotiation process, according to the court, and the allegations concerning the Brookfield designee sitting on the Rouse board compensation committee are conclusory allegations that cannot support an inference of favoritism. “[A] director’s independence is not compromised simply by virtue of being nominated to a board by an interested stockholder,” the court stated. There were no disabling conflicts resulting from the committee advisors’ past associations with Brookfield that suggested Brookfield exercised actual control over the special committee through the advisors, according to the court, and the structural elements of Brookfield’s proposal and bargaining positions also do not demonstrate control but instead only practical self-interest. Further, the court explained, the committee did not “tilt the playing field” in Brookfield’s favor, as evidenced by the several rounds of negotiation and the committee’s push for a “majority of the minority” voting condition.

The complaint also failed to adequately allege that the proxy statement caused Rouse shareholders to be uninformed, the court found. The proxy disclosed “more than adequate” financial information to enable stockholders to fairly assess the value of their shares, as well as the committee advisors’ connections with Brookfield, the court explained.

Without a claim of corporate waste to overcome application of the business judgment rule, the court dismissed with prejudice the shareholders’ claims for breach of fiduciary duty by the Rouse directors and the related aiding and abetting claims against Brookfield.

The case is C.A. No. 12194-VCS.