The ACS-Xerox Deal Litigation

The Deal Professor posts on shareholder suits challenging ACS's deal to sell itself to Xerox:

The first lawsuit is a cookie-cutter complaint, presumably a placeholder for a later amended one. It contends that the officers and directors of ACS breached their duty of loyalty in approving the sale transaction. The core of this claim is an allegation that the executives of ACS were conflicted because of new executive employment agreements with Xerox and change of control payments of approximately $16 million to be paid to them.

The Deal Prof notes that the real issues in the case are (a) the use of a special board committee of outside directors to bless the terms of the deal under which the controlling shareholder gets a different deal than everybody else and (b) "whether a holder of high-vote shares (not constituting a controlling interest) in a dual-class stock structure can even get a share premium." As to the latter, he observes:

This was an issue in the News Corporation’s acquisition of Dow Jones’ acquisition, where the Bancroft family controlling Dow Jones faced the same dilemma. At the time, Professors Stephen Bainbridge and Larry Ribstein had some good analysis on this issue, which is summarized on Professor Bainbridge’s blog. They both touched upon the issue of whether the TCI ruling imposes a per se ban on this practice; both agreed that Delaware law would permit it subject to the procedural propriety of the special committee’s actions.

I agree with the good professors. There are many cases in Delaware law supporting the right of controlling stockholders to receive premiums and making clear that equal treatment is not required (e.g., the famous case of Nixon v. Blackwell). In the TCI case, I think Chancellor Chandler was responding to the argument that the TCI directors had to go along with Mr. Malone’s demand for 10 percent. Chancellor Chandler basically said, “Look, Malone could have taken less and avoided this litigation.” The TCI opinion chose to side-step Delaware’s traditional support of majority controlling shareholder rights and focused on some terrible facts like paying $1 million bonuses.

I concur, not surprisingly.

But I do want to quibble with one of the Deal Prof's other points. He asserts that ACS's "Mr. Deason is not a controlling shareholder but rather owns only 43.6 percent of the voting interest and is restricted by agreement from taking majority control of the company."

In In re Cysive, Inc. Shareholders Litigation, 836 A.2d 531 (Del.Ch. 2003), VC Leo Strine held that:

Although it is true that he does not control a majority of the company's voting power, that was also true of the controlling stockholder in Lynch itself, which only controlled 43.3% of the votes. Moreover, in Lynch the stockholder held to have control was (in simplified terms) limited contractually to naming no more than five of the company's eleven directors. Likewise, in Western National, the 46% stockholder was limited to electing two members of the board for a period beyond the merger at issue and was subject to certain restrictions on the purchase of additional shares.

If nonmajority shareholders contractually barred from electing a majority of the board can nevertheless be deemed "controlling," so should a 40+% shareholder even though he is contractually barred from going over 50%.

"Under Delaware law, the notion of a 'controlling' stockholder includes both de jure control and de facto control." Solomon v. Armstrong, 747 A.2d 1098, 1116 n.53 (Del.Ch. 1999). Less than a majority stake can often provide de facto, if not de jure, control. Hence, for example, "A parent corporation may 'control' a corporation that it does not wholly own and even one in which the parent has less than a majority stock interest." Weinstein Enterprises, Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005). Of course, de facto control must be proven when the shareholder owns less than 50%: "For a stockholder that owns less than a numerical majority of a corporation's voting shares to be deemed a controlling stockholder for purposes of imposing fiduciary obligations, the plaintiff must establish the actual exercise of control over the corporation's conduct by that otherwise minority stockholder." Id.