On August 17, 2012, the Delaware Chancery Court dismissed a shareholder suit alleging that a controlling shareholder had breached his fiduciary duties by “refus[ing] to consider an acquisition offer that would have cashed out all the minority stockholders of [the corporation], but required the controlling stockholder to remain as an investor in [the corporation].” In re Synthes, Inc. S’holder Litig., 2012 WL 3641014, at *1 (Del. Ch. Aug. 17, 2012) (Strine, J.). The court explained that “Delaware does not require a controlling stockholder to penalize itself and accept less than the minority, in order to afford the minority better terms.” Id.
Synthes was a Swiss global medical device company incorporated in Delaware. The Chairman of Synthes’s Board of Directors, Hansjoerg Wyss, owned 38.5% of Synthes’ shares and allegedly “controlled” an additional 13.25% of Synthes’ shares “owned by [his] family members and trusts.” Id. at *2.
The plaintiffs claimed that Wyss was “getting ready… to step down as Chairman of the Board” and “wanted to divest his stockholdings in Synthes and free up that wealth in order to achieve certain estate planning and tax goals.” Id. “Doing so piecemeal would be problematic” because “unloading that much stock on the public market in blocs would cause the share price to drop[.]” Id. Wyss thus allegedly “needed to sell his personal holdings to a single buyer.” Id.
In April 2010, “[t]he idea to find a potential buyer for Synthes [allegedly] arose … as part of the Board’s ongoing review of the company’s strategic initiatives.” Id.8 On December 23, 2010, Johnson & Johnson (“J&J”) submitted an offer “to acquire Synthes at an indicative price range of CHF [Swiss Franc] 145-150 per share, with more than 60% of the consideration to be paid in the form of J&J stock.” Id. at *3. On February 9, 2011, a group of three private equity firms (the “PE Buyers”) submitted an all-cash offer of CHF 151 per share and indicated that this was their maximum offer. “[T]he PE Buyers did not have deep enough pockets to make a bid for the whole company.” Id. at *4. Instead, the PE Buyers’ offer “’required’ Wyss to ‘convert a substantial portion of his equity investment in Synthes into an equity investment in the post-merger company.’” Id. at *4. “In other words,” the PE Buyers’ offer “was contingent on Wyss’ financing part of the transaction with his own equity stake … and Wyss remaining as a major investor in Synthes.” Id.
Wyss allegedly opposed the PE Buyers’ offer “because he wanted to cash out alongside the rest of Synthes’ shareholders rather than trade one illiquid bloc of stock (his Synthes shares) for another (shares in the private post-merger entity).” Id. Accepting the PE Buyers’ offer would have left Wyss with “a substantial bloc tied up in a company where he no longer had the same voting clout, and thus [he] would have [had] an illiquid, private company-bloc with no control or exit power.” Id. “[T]o avoid what could be seen as a down trade in status, Wyss allegedly caused the Board to cease consideration” of the PE Buyers’ offer.
Synthes ultimately entered into a merger agreement with J&J (the “Merger”) at a price of “CHF 159 per share, with a consideration mix of 65% stock (subject to a collar) and 35% cash.” Id. at *5. The merger agreement provided that “[a]ll stockholders, including Wyss, would receive the same per share Merger consideration.” Id. “There [were] no allegations that Wyss tried to negotiate a higher price for his own shares.” Id.
Shareholder plaintiffs subsequently brought suit alleging that Wyss had breached his fiduciary duties by “preventing the Synthes Board from pursuing the [PE Buyers’] Bid, which at the time presented the highest-value and greatest-certainty proposal for Synthes’ minority stockholders.” Id. at *6. “[T]he plaintiffs contend[ed] that Wyss had financial motives adverse to the best interests of the Synthes stockholders because he was supposedly anxious … to sell the company as a whole to facilitate his own exit” and “was only willing to accept a deal that delivered for him the liquidity he wanted for his shares in accordance with his retirement objectives.” Id.
The Chancery Court Finds the Complaint Fails to Allege That Wyss Had a Conflicting Interest
The Delaware Chancery Court “focus[ed] [its] analysis on whether Wyss had any conflicting interest in the Merger that would justify depriving the Board of the protections of the business judgment rule.” Id. at *8. Here, the plaintiffs contended that “Wyss was conflicted because … [he] would only accept [a deal] in which he received liquidity for his shares[.]” Id. at *11. The court found that “Wyss’ supposed liquidity conflict was not really a conflict at all because he and the minority stockholders wanted the same thing: liquid currency and, all things being equal, at the highest dollar value amount of that currency.” Id. at *12.
The Chancery Court noted that “a fiduciary’s financial interest in a transaction as a stockholder (such as receiving liquidity value for her shares) does not [generally] establish a disabling conflict of interest when the transaction treats all stockholders equally, as does the Merger.” Id. at *9. “This notion stems from the basic understanding that when a stockholder who is also a fiduciary receives the same consideration for her shares as the rest of the shareholders, their interests are aligned.” Id. The court explained that “there is a good deal of utility to making sure that when controlling stockholders afford the minority pro rata treatment, they know they have docked within the safe harbor created by the business judgment rule.” Id. “If, however, controlling stockholders are subject to entire fairness review when they share the [control] premium ratably with everyone else, they might as well seek to obtain a differential premium for themselves or just to sell their control bloc, and leave the minority stuck in.” Id.
The Chancery Court determined that “the plaintiffs’ main gripe [was] that Wyss refused to consider an all-cash offer that might have delivered a better deal for the minority shareholders at Wyss’ expense.” Id. at *12. “In other words, they complain that Wyss refused to facilitate a potentially better deal for the minority because he was not willing to roll a ‘substantial’ part of his equity stake into the post-merger entity and thereby accept a different, less liquid, and less value-certain form of consideration than that offered to the minority stockholders.” Id. The Chancery Court found this to be “an astonishing argument that reflects a misguided view of the duties of a controlling stockholder under Delaware law.” Id.
“A primary focus of [Delaware] corporate jurisprudence has been ensuring that controlling stockholders do not use the corporate machinery to unfairly advantage themselves at the expense of the minority.” Id. “Delaware law does not, however, go further than that and impose on controlling stockholders a duty to engage in self-sacrifice for the benefit of minority shareholders.” Id. at *13. There is no requirement that a controlling shareholder “subrogate his own interests so that the minority stockholders can get the deal that they want.” Id.
The Chancery Court held that “Wyss was thus entitled to oppose a deal that required him to subsidize a better deal for the minority stockholders by subjecting him to a different and worse form of consideration.” Id. “To hold otherwise would turn on its head the basic tenet that controllers have a right to vote their shares in their own interest.” Id. “Put simply, minority stockholders are not entitled to get a deal on better terms tha[n] what is being offered to the controller, and the fact that the controller would not accede to that deal does not create a disabling conflict of interest.” Id.
The court “conclude[d] that the plaintiffs have not pled facts supporting an inference that Wyss’ interest in obtaining liquidity in a sale of Synthes constituted a conflict of interest justifying the invocation of the entire fairness standard[.]” Id. at *16. “Rather, the pled facts demonstrate that Wyss received equal treatment in the Merger and that the business judgment rule applies to the Board’s decision to approve the Merger.” Id.