This is a question that has periodically come up over the years here at PB.com.
Tweeting with Ann Lipton re What Happens if there is Unfair Dealing but a Fair Price
It now has an answer from the Delaware Chancery Court (HT: Andrew Czerkawski on Francis Pileggi's blog):
Minority shareholders of a former publicly traded telecommunications company brought suit in the Delaware Court of Chancery, alleging the controlling shareholder, with the aiding and abetting of the company’s pre-spin-off parent, breached his fiduciary duty of loyalty he owed to the minority. The lead plaintiff claimed the controller caused the company to unfairly sell a litigation asset in In re Straight Path Communications Inc. Consolidated Stockholder Litigation, 2023 Del. Ch. LEXIS 387 (Del. Ch. Oct. 3, 2023). ...
... because the parent paid the company $10 million to release an essentially worthless claim, the parent paid a “not unfair” price. ...
Emphasizing the unified analysis, finding a fair price paid did not end the Court’s decision: “the question is one of entire fairness, and what the stockholders could have achieved, absent the iniquities.” The Court pointed out its precedent on fair process—“[t]his court has held that a fair price ‘does not ameliorate a process that was beyond unfair.” The defending fiduciary must satisfy “[b]oth aspects of the entire fairness test – fair dealing and fair price.” “This assessment provides an opportunity to evaluate the transaction holistically and ‘eliminate the ability of the defendants to profit from their breaches of the duty of loyalty.’”
The takeaway?
In disputes challenging the fairness of conflicted controller transactions, fiduciary liability does not live and die on price alone. Even if the controller forces an otherwise sweetheart deal, the court will still closely scrutinize the manner in which the controller exercised that force. If the transaction’s process tips the deal’s unfairness past equipoise, then the controller faces nominal damages along with a judicial rebuke.
