On March 20, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed class action claims asserted by former shareholders of NCI, Inc. against its former directors for breach of fiduciary duty in connection with the company’s acquisition by affiliates of H.I.G. Capital, LLC in a tender offer followed by a merger. English v. Narang, C.A. No. 2018-0221-AGB (Del. Ch. Mar. 20, 2019). Plaintiffs alleged that the company’s founder, who held approximately 34% of the shares and controlled about 83.5% of the voting power, orchestrated a sale of the company at a discounted price to address a personal need for liquidity prompted by his retirement as the company’s CEO at age 73. But the Court found that the complaint “contained no concrete facts from which it reasonably can be inferred that [the founder] had an exigent or immediate need for liquidity.” Therefore, the Court applied Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and dismissed the claims because a majority of NCI’s disinterested stockholders tendered their shares in an uncoerced and fully-informed tender offer.
NCI was acquired for approximately $283 million after an 18-month sale process. Approximately 73.6% of disinterested stockholders tendered their shares. Nevertheless, plaintiffs argued that the transaction should be subject to an entire fairness review—rather than the deferential business judgment standard under Corwin—because the founder was conflicted with respect to the acquisition, in that it provided him a “unique benefit” to address his “need or desire for liquidity.” But the Court explained that “there are no facts pled . . . that support a basis for conceiving that [the founder] wanted or needed to get out of [NCI] at any price, as opposed to having [millions] of reasons to make sure that when he exited, he did so at full value.”
Plaintiffs also argued that Corwin was inapplicable because the recommendation statement for the transactions was misleading and, therefore, the stockholders allegedly were not fully informed when they tendered their shares. For example, plaintiffs asserted that the financial projections included in the recommendation statement understated the company’s upside. But the Court found that optimistic statements by the company’s CEO before and after the transaction (referenced by plaintiffs) did not contradict the financial projections. Moreover, the Court explained, the projections were the same as the ones provided to potential acquirors, and plaintiffs offered “no logical reason why any of the [directors] would want a lower price for the Company even if the Board had been rushing a sale of the Company.” Likewise, the Court rejected plaintiffs’ assertions that omissions of discussions with company management about post-closing employment rendered the recommendation statement misleading because the complaint did not allege facts demonstrating that any such discussions occurred before the merger agreement was signed. Dismissing plaintiffs’ final challenge, the Court found that the recommendation statement adequately disclosed work done by the company’s financial advisors for the acquiror and its affiliates.