“Landmark Decision: Delaware Court of Chancery Sets Precedent in Merger Litigation Scrutiny”

The recent decision by the Delaware Court of Chancery in Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Foundation Building Materials, Inc. sheds light on important aspects of Delaware law related to merger litigation, particularly in cases involving controlling stockholders and financial advisors.

In this case, Vice Chancellor Travis Laster addressed multiple motions to dismiss arising from the sale of Foundation Building Materials to a subsidiary of American Securities LLC. Despite being a publicly traded company, the court found that private equity firm Lone Star had significant control over the Company at both the stockholder and board level. The court noted that Lone Star’s pursuit of a sale was influenced by the potential early termination payment (ETP) under a tax receivable agreement (TRA) following the 2017 tax cuts.

One key aspect of the court’s analysis was the scrutiny of potential conflicts of interest in the sale process. The court dismissed certain breach of fiduciary duty claims but sustained others, particularly focusing on the ETP as a conflict of interest that required entire fairness review. The court also highlighted the importance of disclosure in M&A transactions, sustaining claims related to the TRA’s role in the decision to sell and the financial advisors’ fee arrangements.

Of particular significance was the court’s decision to sustain aiding and abetting claims against the board and special committee’s financial advisors. The court found that their contingent fee arrangements, tied to the merger consideration and the ETP, created incentives that favored Lone Star’s interests. This ruling underscores the need for transparency and independence in financial advisory relationships during M&A transactions.

Additionally, the court addressed appraisal notice claims, emphasizing the importance of compliance with statutory requirements regarding the timing and contents of appraisal notices. While dismissing claims of statutory deficiency in the content of the notice, the court found that the Information Statement issued with the merger did not provide all stockholders with the required 20 days to decide on appraisal.

Overall, the court’s decision in this case highlights the ongoing importance of thorough disclosure, independent financial advice, and careful consideration of potential conflicts of interest in M&A transactions involving controlling stockholders. This ruling serves as a reminder for companies and advisors to prioritize transparency and fairness in their deal-making processes to mitigate legal risks and uphold shareholder interests.

In conclusion, the Delaware Court of Chancery’s decision in Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Foundation Building Materials, Inc. sets a precedent for heightened scrutiny of conflicts of interest and disclosure practices in merger transactions, emphasizing the need for diligence and transparency in corporate deal-making.