By Amy Leisinger, J.D.
The Delaware Chancery Court has declined to dismiss shareholder claims for breach of fiduciary duty made against the directors of an insurance company following a going-private merger. According to the court, the plaintiffs sufficiently pleaded facts demonstrating that the business judgment rule does not apply to the transaction because members of the special committee formed to negotiate and approve the merger had a material self-interest in the transaction given an earlier-filed lawsuit. The court did, however, dismiss the claims against one of the committee members who joined the company after the lawsuit, as well as the aiding and abetting claims against the other parties to the merger transaction (In re AmTrust Financial Services, Inc. Stockholder Litigation, February 26, 2020, Bouchard, A).
Merger. AmTrust, Inc., a family-controlled company engaged in the property and casualty insurance business, teamed up with a private equity firm to take AmTrust private through a merger. The buyout group conditioned the transaction on special committee approval and the approval of a majority of AmTrust’s minority stockholders. Following negotiations, the special committee voted to approve a $13.50 per share merger with the buyout group. However, the proposed merger terms drew criticism from major AmTrust stockholders, including Carl Icahn, who sued for breach of fiduciary duty and opposed the proposed share price.
Icahn later indicated willingness to support a transaction at $14.75 per share in discussions with certain AmTrust officials in which the special committee did not participate. Thereafter, the special committee and the company’s board approved an amended merger agreement with a price of $14.75 per share, and Icahn entered into a settlement agreement in which he agreed to drop his lawsuit, support the merger, and forego his appraisal rights. Thereafter, a majority of unaffiliated AmTrust stockholders approved the amended merger proposal.
The plaintiffs filed a complaint alleging that the final transaction did not comply with the framework set forth in Kahn v. M & F Worldwide Corp. for subjecting a squeeze-out merger by a controlling stockholder (the family owners of AmTrust) to business judgment review rather than the entire fairness standard. The special committee had a material self-interest in the transaction because it was expected to extinguish viable derivative claims against the members made in the settled pre-merger lawsuit, they alleged.
Material interest. In MFW, the Delaware Supreme Court held that the business judgment rule is the appropriate standard of review for a challenge to a merger when the merger is conditioned on both the approval of an independent special committee and the uncoerced vote of a majority of minority stockholders. The plaintiffs alleged that the special committee’s work yielded a proposed transaction that was ultimately rejected and that the final approved transaction for $14.75 per share was negotiated between Icahn and the family owners of AmTrust without any involvement by the special committee. The court found that the plaintiffs adequately alleged that at least one of the conditions of the MFW standard had not been satisfied. The second MFW condition considers the "independence" of members of a special committee, and the plaintiffs have pleaded a reasonably conceivable set of facts showing that three of the four members of the special committee had a material self-interest in the transaction in terms of the merger extinguishing potential liability in the Icahn’s earlier action, according to the court. The conditions necessary to apply the MFW framework to subject the transaction to business judgment review have not been satisfied, and the plaintiffs’ claims for breach of fiduciary duty may proceed, the court found.
Other claims dismissed. The court did, however, dismiss the fiduciary duty claim against one special committee member, noting that he was not named in the earlier action and that the plaintiffs did not allege facts to demonstrate that he had a material self-interest in the transaction or acted in bad faith. The court also dismissed a separate fiduciary claim against another director in his capacity of an AmTrust officer for failure to allege specific actions taken or statements made by him in that position.
As to the aiding and abetting claims against the other parties to the merger, the court found that the plaintiffs failed to plead facts demonstrating that these parties knew that their conduct assisted in a breach of fiduciary duty. The allegations do not support an inference that they must have known that members of the special committee were interested in the transaction, the court concluded.
The case is C.A. No. 2018-0396-AGB.