In re Morton’s Restaurant Group, Inc. S’holders Litig.: Alleged Controlling Stockholder Fits Within Safe Harbor by Sharing Control Premium Pro Rata With Minority Stockholders in Third-Party Deal
December 2, 2013
In In re Morton’s Restaurant Group, Inc. Shareholders Litigation, 74 A.3d 656 (Del. Ch. 2013), the Court of Chancery granted the director defendants’ motion to dismiss, reasoning that the plaintiffs’ complaint was “devoid of … well-pled facts compromising the independence of a supermajority of the board, challenging the adequacy of the board’s market check, or suggesting that any bidder received favoritism,” and also failed to “plead any facts supporting a rational inference of a conflict of interest” on the part of Morton’s largest stockholder or any director.
Morton’s Restaurant Group, Inc. had a ten-member board that approved the merger. The board included two executives from the company’s 27.7% stockholder, Castle Harlan, Inc. The rest of the board included one insider, CEO Christopher Artinian, and seven independent directors. The board conducted a nine-month search for a buyer, beginning in January 2011, before entering into a merger agreement with subsidiaries of Landry’s, Inc. Morton’s stockholders received $6.90 per share, a 33% premium over Morton’s pre-announcement market closing price, and all stockholders received the same per share consideration.
Plaintiffs argued that Castle Harlan was a controlling stockholder acting in its own self-interest and causing the Morton’s board to sell the company “quickly” and without regard for the long-term interests of the public stockholders, because Castle Harlan allegedly had a unique need for liquidity to invest in a new investment fund.
First, the Court disagreed with plaintiffs’ contention that a 27.7% stockholder, who nominated only two of ten board members, was a controlling stockholder. The Court declined to equate the facts with those in In re Cysive, Inc. Shareholders Litigation—the Court’s “most aggressive finding” that a minority blockholder was a controlling stockholder. There, a 35% stockholder was also the company’s visionary founder, CEO and chairman. In Morton’s, the Court found nothing in the complaint suggesting that Castle Harlan could control the corporation in the same way the defendant in Cysive had, regardless of the fact that Castle Harlan had once owned the entire company.
Second, the Court reasoned that even if Castle Harlan were a controlling stockholder plaintiffs nonetheless failed to plead facts supporting the inference that Castle Harlan had an improper conflict of interest. Plaintiffs argued that Castle Harlan wanted to sell the company quickly as a means of gaining liquidity for its new investment fund. But the plaintiffs also conceded that, during the sales process, the board reached out to over a hundred bidders, signed over fifty confidentiality agreements, employed two different investment banks to help test the market, and treated all bidders evenhandedly. In fact, plaintiffs admitted they could not identify a single logical buyer that Morton’s did not contact. The Court therefore concluded that plaintiffs failed to plead facts supporting the conclusion that the merger was a fire sale in which Castle Harlan’s interest in selling quickly trumped its own natural interest in maximizing the sales price, and therefore created a conflict of interest with the other stockholders.
Moreover, the Court noted that when the largest stockholder supports an arm’s-length transaction that spreads the merger consideration ratably across all stockholders, without any special treatment for itself, the stockholder’s conduct presumptively falls within a safe harbor and immunizes the transaction from challenge.
The Court also rejected the argument that the board breached its fiduciary duties by allowing its financial advisor to provide financing for the Landry’s bid. Morton’s M&A Committee had weighed the decision and only allowed its advisor to finance the bid if it recused itself from further negotiations and reduced its fee by $600,000. The company took those funds and hired a second financial advisor. The Court concluded that these steps could not support an inference that the directors breached their duty of loyalty.
Because Morton’s had an exculpatory provision in its certificate of incorporation, plaintiffs needed to plead a non-exculpated breach of duty to survive a motion to dismiss. Because the Court of Chancery concluded that the board did not breach its duty of loyalty and did not act in bad faith in agreeing to the merger agreement, it granted the motion to dismiss.