A Conflicted Controller Transaction Survives a Motion to Dismiss
In In re Hansen Medical, Inc. Stockholders Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018), the Delaware Court of Chancery found that plaintiffs had stated a reasonably conceivable claim that the acquisition of Hansen Medical, Inc. (“Hansen”) by Auris Surgical Robotics, Inc. (“Auris”) should be reviewed under the entire fairness standard of review because the transaction involved a controlling stockholder group which extracted benefits from the transaction not shared with the minority. The Court denied motions to dismiss filed by the alleged control group and Hansen’s directors and officers.
According to the plaintiffs, the alleged control group, consisted of two minority stockholders (the “Controller Defendants”), who collectively held a controlling interest in Hansen, had a twenty-one year history of coordinating their investment strategy in at least seven different companies, and were given the unique opportunity to rollover their stock in Hansen for preferred stock in Auris at the expense of Hansen’s minority stockholders. In determining that it was reasonably conceivable that a control group existed, the Court considered, in addition to the Controller Defendants’ alleged investment history and the rollover opportunity, the voting agreement, merger agreement, and stock purchase agreement executed by the Controller Defendants (to the exclusion of Hansen’s minority stockholders) in connection with the merger.
Next, the Court held that plaintiffs stated a reasonably conceivable claim that the entire fairness standard applied to its review of the claims asserted against the Controller Defendants. As a general matter, transactions involving controllers that receive a “non-ratable” benefit (i.e. a benefit not shared with other stockholders) are subject to entire fairness review. Here, plaintiffs claimed that the Controller Defendants were given the opportunity to “rollover” their Hansen stock into Auris preferred stock, a benefit not provided to Hansen’s minority stockholders. Plaintiffs also alleged that the minority stockholders received only cash in exchange for their shares at an unfairly low price. Because the Controller Defendants received a “unique” benefit to the exclusion of the minority stockholders, the Court found it reasonably conceivable that the merger was subject to entire fairness review. Further, the Court held, based on plaintiffs’ alleged facts, it was reasonably conceivable that the Controller Defendants could be held liable for breaching their duty of loyalty.
The Court also found that plaintiffs’ complaint stated non-exculpated claims that the Hansen directors and certain officers breached their fiduciary duty of loyalty for, among other things, disseminating a proxy statement in connection with the merger that misled stockholders about Hansen’s financial projections. According to plaintiffs’ complaint, the proxy statement included three valuation ranges calculated using discounted cash flow analyses that were based on three separate management projections. The proxy statement presented all three scenarios as equally plausible when in fact, the highest valuation was the most likely scenarios, and the other two were included “just to keep the CFO from looking stupid.” Including the other two valuations significantly altered the total mix of information, making it reasonably conceivable that the proxy statement was materially misleading.