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Feb. 29 — Private equity firm American Capital Ltd. will have to face a lawsuit accusing it of breaching its fiduciary duty owed to a group of Halt Medical Inc. investors, the Delaware Chancery Court ruled Feb. 29.
The investors' lawsuit claimed that American Capital, as a controlling stockholder, coerced Halt into a transaction that improperly diluted their interest in the company and that Halt directors breached their fiduciary duties by approving the transaction.
Vice Chancellor Sam Glasscock III declined to apply the deferential business judgment rule in allowing the claims to proceed. The rule establishes a presumption in favor of corporate decisions.
Instead, he found that the investors had pleaded facts to support an inference that American Capital was a controlling stockholder triggering the less deferential entire-fairness review. The court also determined that it was reasonably conceivable at the pleading stage that a majority of Halt's seven-member board was controlled by American Capital and interested in the disputed transaction.
The lawsuit arose from a transaction that the investors alleged was entered into to allow Halt to be sold to a third party. The investors asserted that after the transaction was completed, the defendants' true motive emerged—to squeeze minority shareholders out of the company, which they asserted held valuable intellectual property related to the treatment of fibroid tumors in women.
The investors alleged that after the transaction, American Capital's equity position in Halt increased from 26 percent to almost 66 percent.
The court found that the investors had alleged facts that showed that American Capital exercised actual control over the board at the time of the transaction.
Glasscock said that there is “no magic formula to find control; rather it is a highly fact specific inquiry,” citing a the chancery court 2014 decision, In re Crimson Exploration Inc. Shareholder Litigation .
In Crimson, the chancery court found that there isn't a “linear, sliding scale approach” to determining what percentage of stock would make it more likely that a non-majority shareholder had actual control.
Glasscock determined that the investors sufficiently alleged that at least four Halt directors were either under the influence of, or shared a special interest with, American Capital. For example, they alleged that Halt board member and chief executive Jeffrey Cohen knew his job was dependent on American Capital's support.
“Given that Cohen faced a decision between supporting the Transaction, on terms highly favorable to [American Capital], and rejecting the Transaction, which was tantamount (on the facts alleged) to voting for the collapse of the Company and losing his employment, it is reasonably conceivable that Cohen was ‘beholden'” to American Capital, Glasscock wrote.
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The opinion is available at http://www.bloomberglaw.com/public/document/CALESA_ASSOCIATES_LP_CALESA_FAMILY_TRUST_JULY_6_2000_FRED_APPLEGA.
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