Private Equity Digest
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JANUARY | 2023
Mind the Gap (in Interest Alignment): Potential Issues in Portfolio Company Sales
While private equity activity bounced from month to month in 2022, there was a general downward trend over the course of the year, culminating in a steep decline in the number of deals in December. The total value of deals both globally and in the U.S. peaked in April and May, respectively. While it is unclear if December is a bellwether for 2023, tight credit markets and proactive regulatory regimes seem poised to dampen enthusiasm in the immediate term.
In this issue, we discuss litigation risk in private equity exits that may become more prevalent in challenging markets.
Sales of portfolio companies by a controlling stockholder, a critical component of private equity sponsor strategies, can pose litigation risk under certain circumstances. This includes the risk of claims brought by minority stockholders alleging that a controlling stockholder or its board affiliates forced a sale in violation of fiduciary duties. Below we discuss certain key considerations for private portfolio company sales in view of recent Delaware Court of Chancery decisions.1
When Might a Stockholder Owe Fiduciary Duties and to What Extent?
Generally, a corporation’s board of directors and officers, not its stockholders, owe fiduciary duties to the corporation and its stockholders, and a controlling stockholder may vote its shares in its own self-interest and is not required to self-sacrifice. A controlling stockholder also generally has the right to negotiate a control premium for its shares.
However, a controlling stockholder may not use its control over the corporate machinery to the detriment of the minority stockholders. In this regard, where there is a controlling stockholder and that stockholder is exercising its control to cause the board or the corporation to act, the controller owes a fiduciary duty of loyalty to the company’s minority stockholders. In a sale transaction to a third party, a controlling stockholder’s duty of loyalty is most often implicated when a plaintiff alleges that the controlling stockholder has caused the corporation to engage in a transaction in which the controller extracted additional value at the Global Sponsor-Related M&A Activity
U.S. Sponsor-Related M&A Activity