Tuesday, August 23, 2022

Acquisition was entirely fair despite controller standing on both sides

By Anne Sherry, J.D.

The acquisition of a financial firm from a Cantor Fitzgerald affiliate was entirely fair to the buyer’s stockholders, even though Cantor CEO Howard Lutnick stood on both sides of the transaction. The Delaware Court of Chancery allowed that the sale process was not perfect, in part because “Lutnick’s presence loomed large at times,” but the special committee agreed to pay a price for a unique asset that fell within the range of fairness. Accordingly, the court concluded that Lutnick and the other defendants did not breach their fiduciary duties in orchestrating the deal (In re BGC Partners, Inc. Derivative Litigation, August 19, 2022, Will, L.).

The transaction. The acquirer, BGC Partners, sought to buy Berkeley Point Financial LLC to expand its real-estate platform. Berkeley Point is one of the few agency lenders preapproved to originate and underwrite loans for Fannie Mae and Freddie Mac. BGC bought Berkeley Point from a Cantor affiliate for $875 million and simultaneously invested $100 million in a Cantor affiliate’s mortgage-backed securities business.

Shareholders of BGC brought a derivative suit challenging the deal. They argued that Howard Lutnick, the controlling stockholder of both BGC and Cantor, pushed through a transaction that benefitted him at the expense of BGC’s stockholders.

Demand excused. The court first examined whether the board could have considered a litigation demand, an inquiry that turned on the disinterestedness and independence (or absence thereof) of two board members in particular. Along with Lutnick, Stephen Curwood and William Moran (who were also named as defendants, having served on the special committee that approved the transaction) constituted a majority of the demand board. The court found that Curwood’s desire to continue serving on the BGC board—a role that provided more than half of his household income—may have clouded his judgment on a hypothetical demand to sue Lutnick for breach of fiduciary duty. Curwood testified that the director position allowed him to feed his family and pursue his passion (a career in public radio), two motivations that the court called “among the most important things in life.” Curwood’s “strength of character is obvious,” the court wrote, and the conclusion that Curwood was not independent was “a matter of human nature coupled with the lack of precision inherent in assessing how one might respond to a demand that was never, in fact, made.”

As to Moran, while he would not have been unable to consider a demand because of lack of independence, he faced a substantial likelihood of liability on some claims that would have been the subject of the demand. Some of Moran’s actions during the deal negotiations raised questions and gave some merit to the fiduciary duty claim against him. “It is reasonable to think that Moran would have paused on whether he could authorize a suit against Lutnick concerning the Berkeley Point deal given some of Moran’s peculiar behavior during the deal process,” the court reasoned.

Entire fairness. Nevertheless, the court held that the transaction was entirely fair to BGC and its minority stockholders. Concerning fair dealing, the court identified some “defects” in the sale process: Lutnick had a role in selecting the special committee’s co-chairs and its advisors. Information was slowly doled to the special committee, but final negotiations were rushed. However, while imperfect, the standard is not perfection, even in a transaction with a controller. The deal did not hew to Lutnick’s preferred timing and was not timed to benefit Cantor. A majority of the special committee was independent throughout the negotiations, and the committee spent substantial time working and retained independent advisors. After months of due diligence, a deal was ultimately reached following arm’s-length bargaining that resulted in the special committee’s desired structure and a favorable price.

Even though the court found some of Moran’s behavior “questionable”—he communicated with Lutnick about the special committee’s composition, diligence, and timing without telling his fellow committee members, and he told Lutnick that the committee supported the deal before the financial adviser had formed a view on value—but the court could not conclude that Moran was beholden to Lutnick or blinded by a controlled mindset. Moran pushed back on Lutnick several times during substantive negotiations, and there was no evidence that he dominated the special committee or otherwise jeopardized its independent process.

Furthermore, the process achieved a fair price. Cantor’s first offer was for $850 million for 95 percent of Berkeley Point; the eventual price of $875 million for the entire company came after months of negotiations. The financial advisor also endorsed this price in a detailed fairness opinion after more than a month of additional diligence and a variety of analyses. The court confirmed the fairness of the acquisition price by reviewing expert opinions and testimony from each side to arrive at a range of fair values between $805 million and $1,164 million.

The case is No. 2018-0722.