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By Yin Wilczek
Entertaining and lifestyle maven Martha Stewart Aug. 18 beat back an investor lawsuit alleging she breached her fiduciary duty in the sale of her namesake company in 2015 to Sequential Brands Group.
The plaintiffs alleged that Stewart leveraged her position as controlling stockholder to secure more consideration for herself than other shareholders.
The Delaware Chancery Court dismissed the claims. The court applied the business judgment rule—a standard deferential to corporate decision-making—because the deal was structured using the measures outlined by the state’s high court in Kahn v. M&F Worldwide Corp. ( MFW) to protect minority shareholders ( In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig. , 2017 BL 289570, Del. Ch., No. 11202-VCS, 8/18/17 ).
This is the first time in which the Delaware courts have considered MFW in the context where the controlling stockholder is a seller only. Prior cases in which the ruling was applied—including those involving take-private transactions for Books-A-Million Inc. and Dole Food Co.—had controlling stockholders with interests on both sides of the deal.
Sequential bought Martha Stewart Living Omnimedia Inc. in December 2015 for $6.15 per share in cash and stock.
In their lawsuit, the shareholder plaintiffs alleged that while Stewart received the same consideration they did for her shares, she diverted more consideration to herself in the form of side deals, such as various intellectual property-related agreements.
In granting Stewart’s motion to dismiss, Vice Chancellor Joseph Slights III concluded that MFW applies to situations where the controlling stockholder is a seller only. He also found that the transaction took the protective steps required in MFW: It was approved by a special independent committee and by a majority of non-affiliated shareholders.
MFW lays out a “roadmap by which a controlling stockholder’s buyout of its subsidiary in a negotiated merger will earn the controller the maximum deference our law allows, even at the pleadings-stage,” the judge wrote. “Because the course of this transaction hit each point on the M&F Worldwide map, Plaintiffs’ only path to challenge the Merger is via a claim of waste, which they have neither pled nor remotely suggested is viable here.”
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