• Delaware Court Analyzes Whether Controlling Stockholder, Chairman and CEO May Have Violated Contractual and Fiduciary Duties in Negotiating a Control Premium
  • March 29, 2012 | Authors: Irwin A. Kishner; Edward B. Stevenson
  • Law Firm: Herrick, Feinstein LLP - New York Office
  • Under Delaware law, a controlling stockholder owes minimal duties to minority stockholders and has the right to sell its stock without considering the interests of other stockholders.  Generally, a controlling stockholder may receive a control premium without sharing it with other stockholders.  However, the Delaware Court of Chancery has found that the controlling stockholder of Delphi Financial Group, Inc., Robert Rosenkranz, who is also the founder, chairman and chief executive officer, may have violated his fiduciary duties and contractual duties under Delphi's charter when he negotiated a control premium in the sale of Delphi to Tokio Marine Holdings, Inc.

    Delphi's charter provides for two classes of stock, Class A held by the public and Class B held by Rosenkranz.  Although Rosenkranz only holds 12.9% of the equity, he holds 49.9% of the voting power.  Delphi's charter prohibits disparate consideration between the two classes of stock in the event of a merger.  Rosenkranz led the negotiations with Tokio, demanded $59 per Class B share and $43 per Class A share and conditioned the merger on a charter amendment removing the requirement of equal distribution of merger consideration.  The plaintiff stockholders requested a preliminary injunction arguing, among other things, that Rosenkranz breached his duty to stockholders by structuring a deal that included a stock price differential and attempting to coerce the Class A stockholders into amending the charter.

    The Court found that there is a reasonable likelihood that Rosenkrankz may have violated his fiduciary duties to the other stockholders and/or his contractual obligations under Delphi's charter when he negotiated a control premium and agreed to support the merger only if he received the premium.  The Court explained that a corporate charter is a contract between stockholders that embodies an implied covenant of good faith and fair dealing.  A party breaches the covenant by taking advantage of its position to control implementation of the agreement's terms such that its conduct frustrates the overarching purpose of the contract. However, although the Court found that plaintiffs have demonstrated a likelihood of success on the merits, it denied their request for an injunction because the transaction represents a large premium over the market price, damages are available as a remedy and no other potential purchaser has come forth to match the Tokio offer.

    In re Delphi Financial Group Shareholder Litigation, Consolidated C.A. No. 7144-VCG (Del. Ch. March 6, 2012)