In re Delphi Financial Group Shareholder Litigation: Court of Chancery Addresses Control Premiums in Dual Class Common Stock Setting
March 7, 2012
In In re Delphi Financial Group Shareholder Litigation, C.A. No. 7144-VCG (Del. Ch. Mar. 6, 2012), the Court of Chancery declined to enjoin Tokio Marine Holdings, Inc.’s proposed takeover of Delphi Financial Group. The Court found that the plaintiffs had demonstrated a likelihood of success on the merits with respect to their allegations against Delphi’s founder and controlling stockholder, Robert Rosenkranz, but it found that the balance of the equities weighed against an injunction because the deal was a large premium to market, damages were available as a remedy, and no other potential purchaser had emerged.
Delphi had two classes of common stock: Class A, with one vote per share, and Class B, with ten votes per share. Rosenkranz and his affiliates owned all of the Class B and some of the Class A, but Rosenkranz’s voting power was capped at 49.9% under Delphi’s certificate of incorporation and a voting agreement. Delphi’s certificate of incorporation prohibited disparate treatment between the Class A and Class B in a merger. The Court noted that these provisions were in place at the time of Delphi’s initial public offering and that, while they preserved Rosenkranz’s voting power, they limited his ability to realize additional benefits through his ownership of Class B shares.
Tokio Marine approached Delphi with a takeover proposal, and Rosenkranz negotiated on Delphi’s behalf. Rosenkranz later indicated to the Delphi board that he was a seller, but only if he obtained a control premium for his stake. The board formed a special committee to negotiate the proposed transaction with Tokio Marine, and the special committee, in turn, formed a sub-committee to negotiate the “price differential” with Rosenkranz. Ultimately, the parties settled on a transaction in which the Class A would receive approximately $45 per share (representing a 76% premium to market), while Rosenkranz would receive approximately $54 per share for his Class B shares. The transaction was conditioned on a non-waivable vote of a majority of the disinterested Class A stockholders as well as on an amendment to Delphi’s certificate of incorporation allowing Rosenkranz to receive a control premium.
Although the Court stated that a controlling stockholder is entitled to negotiate for a control premium, it found that, in this case and at the preliminary injunction stage, the prohibition in Delphi’s post-IPO certificate of incorporation on disparate merger consideration reflected that Rosenkranz had already received a control premium in connection with the sale of Class A shares, which enabled him to exercise voting control despite retaining only 12.9% of Delphi’s equity. Presumably, the Court noted, the Class A shares were priced to reflect Rosenkranz’s inability to receive an additional control premium in the event of a merger. While noting that Rosenkranz could have negotiated to amend the certificate of incorporation on a clear day, the Court suggested that Rosenkranz’s attempt to “coerce such an amendment” by tying it to the merger proposal rendered the existing provisions “illusory.” Ultimately, the Court found that the plaintiffs were reasonably likely to demonstrate at trial that Rosenkranz breached his fiduciary duties in “negotiating for disparate consideration and only agreeing to support the merger if he received it.” Thus, although it did not enjoin the transaction, the Court indicated that it could remedy this potential breach by ordering disgorgement of the improper consideration.