VitalSpring Can't Buy Back Shares in Del. Settlement

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By Michael Greene

Jan. 19 — VitalSpring Technologies Inc. can't agree to return a shareholder's initial investment in the company to settle a derivative action, the Delaware Chancery Court ruled Jan. 14.

In a letter opinion, Vice Chancellor John W. Noble found that there was no justification for including the equity buyback in the settlement agreement between the parties.

The court reasoned that the company's commitment to repurchase the shares was a special benefit to derivative plaintiff Marvin Smollar that undercuts “any appearance that the settlement is fair and reasonable” to other investors who remain locked in their equity positions because of difficulties in trading the company's stock.

Stock Repurchase

In 2014, Smollar filed the underlying derivative lawsuit alleging that VitalSpring Chief Executive Officer Sreedhar Potarazu breached his fiduciary duties by misinforming shareholders about the company's financial condition and prospects, and of a possible buyout.

The court observed that through the litigation, Smollar obtained his requested remedies for several alleged corporate governance failures. The parties embodied these remedies into their proposed settlement agreement submitted to the court last July.

However, the settlement consideration also included a commitment by VitalSpring to buy Smollar's stock for $473,153.16, or roughly $0.16 per share—the price the plaintiff paid for his shares 15 years ago.

In response, several other VitalSpring stockholders challenged the proposed settlement claiming, among other objections, that Smollar breached his duty to act in the best interests of stockholders by obtaining a personal benefit for himself.

Unique Benefit

The court found that the equity buyback provided the plaintiff with an opportunity unavailable to other shareholders, citing that counsel for the parties were unaware of any transactions involving the company's stock in the past 12 months.

In refusing to approve the proposed settlement, the court found that there was no corresponding benefit to VitalSpring from the buyback provision. Specifically, the court found no indication that the share repurchase was motivated by a corporate purpose or otherwise justified by Smollar's role in bringing the derivative action.

“That Smollar achieved what he intended for the benefit of VitalSpring is a factor supporting approval of the proposed settlement, but that benefit (and the others that might result from the proposed settlement) is significantly outweighed by the concerns raised by the unique benefits accruing solely to Smollar,” Noble wrote.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com