Merger & acquisition law news

A decision concerning the sale of Morton’s Restaurant Group, Inc. (“Morton’s”) is the most recent case in a line of cases issued by the Delaware Court of Chancery (the “Chancery Court”) that has rejected claims based on allegations that large, non-controlling shareholders wrongfully rushed sales at allegedly inadequately prices in order to gain liquidity. Chancellor Strine, who authored the decision dismissing the action, held that, absent certain “narrow circumstances” not present in the Morton’s case, the economic interests of a large stockholder in a sale transaction are presumptively aligned with the interests of the other holders. Chancellor Strine also found that, absent additional indicia of control, a 28-percent stockholder was not a controlling stockholder for purposes of determining whether the Morton’s board complied with its fiduciary duties in a change-in-control transaction.
Plaintiffs in the Morton’s case alleged that Castle Harlan, Inc. (“Castle Harlan”), a 28-percent stockholder and Morton’s former private equity sponsor, forced the Morton’s board to accept an inadequate price in order to satisfy Castle Harlan’s purported liquidity needs, which were allegedly driven by Castle Harlan’s supposed need to raise capital for a new investment fund. Chancellor Strine found that the plaintiffs had not demonstrated that Castle Harlan either specifically controlled Morton’s extensive nine-month sales process or generally controlled Morton’s.
Rejecting the plaintiffs’ allegation that Castle Harlan was conflicted because of its supposed need for immediate liquidity, Chancellor Strine stated that the extensive nine-month sale process rebutted any allegation that Castle Harlan had forced a “fire sale.” He also rejected the plaintiffs’ theory that starting a new investment fund is a sufficient catalyst to cause a private equity fund stockholder to sell its shares at a sub-optimal price. Accordingly, there was no basis to rebut the presumption that Castle Harlan’s interests were aligned with Morton’s other stockholders.
The Chancery Court also dismissed the plaintiffs’ aiding and abetting claims against Castle Harlan and Morton’s financial advisors, holding that such claims could not be stated absent a viable claim alleging an underlying breach of fiduciary duty.
Chancellor Strine’s holistic analysis of Castle Harlan’s potential control over Morton’s indicates a continued willingness by the Chancery Court to focus on factors outside of a larger stockholder’s ownership stake and analyze other relevant indicia of control. The decision also reinforces the Chancery Court’s willingness to dismiss plaintiffs’ claims when their allegations are contradicted by the public record or assert economically irrational theories. (In re Morton’s Rest. Grp., Inc. S’holders Litig., C.A. No. 7122-CS (Del. Ch. July 23, 2013))