Securities Law Daily provides daily coverage of developments in the regulation of federal, state, and international securities and futures trading, with objective coverage of the...
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.
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.
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 firstname.lastname@example.org
To contact the editor responsible for this story: Yin Wilczek at email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)