In Re Rouse Properties, Inc. Fiduciary Litigation considers what the Delaware Court of Chancery describes as a pattern in the post-Corwin, post-MFW world. The pattern involves post-closing challenges to corporate acquisitions where a less-than-majority blockholder sits on either side of the transaction, but the corporation in which the blockholder owns shares does not recognize her as a controlling stockholder. Therefore the corporation does not attempt to neutralize her presumptively coercive influence.
The pattern, in its simplest form, according to the Court, consists of two elements:
- the stockholder plaintiff pleads facts in hopes of supporting a reasonable inference that the minority blockholder is actually a controlling stockholder such that the MFW paradigm is implicated and the Corwin paradigm is not; and
- failing that, the plaintiff pleads facts in hopes of supporting a reasonable inference that the stockholder vote was uninformed or coerced such that Corwin does not apply.
In this case, Plaintiffs were stockholders of Rouse Properties Inc., which was acquired by Brookfield. Brookfield and its affiliates owned 33.5% of Rouse. Plaintiffs sought to recover damages on behalf of a putative class of Rouse stockholders for alleged breaches of fiduciary duty by Rouse’s directors and Brookfield as a controlling stockholder as a result of the merger.
The Court first examined the claim that Brookfield was a controlling stockholder. The Court noted Corwin cannot protect a board’s determination to recommend a transaction when it is reasonably conceivable that a conflicted controller may have influenced the board and stockholder decisions to approve the transaction. Delaware law recognizes that “controller transactions are inherently coercive,” and that a transaction with a controller “cannot, therefore, be ratified by a vote of the unaffiliated majority.
Under Delaware law, a stockholder is a controller only if she:
- owns more than 50% of the voting power of a corporation or
- owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation.
The Court further noted a “minority blockholder” like Brookfield “is not considered to be a controlling stockholder unless it exercises such formidable voting and managerial power that, as a practical matter, it is no differently situated than if it had majority voting control.” The Court stated its “power must be so potent that independent directors cannot freely exercise their judgment, fearing retribution from the controlling minority blockholder.”
The Court did not find that Brookfield was a controlling stockholder after conducting a detailed analysis. Among other reasons, it declined to follow Cysive which was the “most aggressive finding that a minority blockholder was a controlling stockholder.” In Cysive the alleged controller was a combined 40% blockholder and the court was satisfied that the alleged controller could, in his roles as CEO and 40% blockholder, wield “his voting power . . . to elect a new slate [of directors] more to his liking without having to attract much, if any support from public stockholders” in the event he became “dissatisfied with the independent directors.” Since Brookfield was not a controlling shareholder of Rouse it owed no fiduciary duties to Rouse’s shareholders and the related count in the complaint was dismissed.
The Court next applied Corwin where the Delaware Supreme Court noted the “proposition that when a transaction [is] not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” The Court discussed three types of coercion which could prevent application of the business judgment rule:
- The notion of “inherent coercion” arises in transactions involving conflicted controlling stockholders. However there was no controller in this case; thus, there is no inherent coercion.
- “Structural coercion” occurs when the Board structures the vote in a manner that requires stockholders to base their decision on factors extraneous to the economic merits of the transaction at issue. Plaintiffs did not allege or argue that the stockholder vote was structurally defective in this case.
- “Situational coercion” can arise when the board, by its conduct, creates a situation where “stockholders are being asked to tender shares in ignorance or mistaken belief as to the value of the shares.”
In this case the Plaintiffs’ situational coercion theory was that the Board (and Brookfield) knew that Rouse’s trading price was temporarily depressed when the Brookfield proposal came across the transom. The theory was also based on the notion the Board knew the stock price would be lifted from the trough as soon as Q4 2015 financial results were released to the market. The Court rejected the Plaintiff’s analysis because all of the 2015 financial data was included in the proxy statement. In addition the stockholders received the Q4 2015 financial results, along with the rest of the public, on February 29, 2016, nearly four months before the June 23, 2016 stockholder vote.
The Plaintiffs’ also failed in their attempt to cast the stockholder vote as uninformed under Corwin because they did not plead “a [material] deficiency in the operative disclosure document.” The Court noted the materiality of a disclosure was tested by asking whether “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote,” not whether the information at issue “might be helpful.”
The Court did not find any material deficiency in the disclosure documents. Among other things, the Court addressed disclosures regarding a conflict of interest by Rouse’s financial advisor:
It is true that “the [Committee] was obliged to disclose potential conflicts of interest of its financial advisors so that stockholders could decide for themselves what weight to place on a conflict faced by the financial advisor.” The Proxy did just that. It disclosed that Bank of America has provided, currently is providing and may in the future provide “investment banking, commercial banking and other financial services to [Brookfield] for which it has received and may receive compensation.” It further disclosed the aggregate revenues Bank of America received from Brookfield between 2014 and 2016. Finally, it explained that the Committee considered this information before engaging Bank of America but determined that the potential conflicts were not material in the context of the proposed transaction or expected to impair the banker’s ability to perform financial advisory services for the Committee. With this information in hand, stockholders had more than enough information to evaluate Bank of America’s fitness to serve as the Committee’s financial advisor.