The Delaware Court of Chancery has granted a motion to dismiss a lawsuit brought by shareholders of Martha Stewart Living Omnimedia, Inc. (MSLO) relating to MSLO’s acquisition by Sequential Brands Group, Inc. The plaintiffs in the class action lawsuit alleged that Stewart, the company’s namesake and former controlling shareholder, breached her fiduciary duty by securing greater consideration for herself than was paid to other shareholders as a consequence of the merger. The court applied the business judgment rule, rather than the entire fairness rule, in determining that Stewart did not breach her fiduciary duty (In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, August 18, 2017, Slights, J.).
Pre-merger agreements. Prior to the Sequential merger, MSLO maintained three agreements with Stewart: an employment agreement where Stewart served as MSLO’s chief creative officer and primary spokesperson for which she was compensated at least $1.8 million plus bonuses; an IP agreement where MSLO was the owner of Stewart’s primary trademarks even if she ceased to be the company’s controlling shareholder; and a license agreement, where MSLO paid Stewart an annual fee for the right to use Stewart-owned realty. Plaintiffs suing Stewart maintain that "side deals" diverted consideration from the minority shareholders.
Entire fairness or business judgment? In her motion to dismiss, Stewart argued that the merger was an arms-length transaction undertaken by an independent special committee and that the side deals gave her nothing more than she was already receiving from MSLO, which justifies application of the business judgment rule. She also argued that even if it was a "conflicted transaction" which would entail the entire fairness standard of review, then the transaction should still be reviewed under the business judgment rule because the transaction was accompanied by procedural protections for minority shareholders.
Despite the plaintiffs’ claims that Stewart’s side deals diverted consideration from minority shareholders, the court noted that after Sequential substantially completed negotiations with Stewart, its offer increased by $0.40 per share. The plaintiffs also failed to distinguish "new" side deals and "old" side deals that would support an inference that Stewart was receiving consideration that would have otherwise gone to shareholders. As such, the plaintiffs failed to adequately plead the presence of a conflicted transaction, requiring the application of the business judgment rule, the court stated. Nevertheless, the court determined that it was appropriate to take up the issue of whether the dual procedural protections provide a separate basis to invoke the business judgment rule.
Special committee. The dual procedural protections cited by Stewart to support the application of the business judgment rule were: (1) an independent, disinterested special committee; and (2) a fully-informed and uncoerced vote of a majority of the minority shareholders. In considering these arguments, the court first turned to whether the Delaware Supreme Court’s decision in Kahn v. M&F Worldwide Corp. (2014), which held that the business judgment rule will apply even at the pleading stage if there are designated measures intended to replicate arms-length bargaining in conflicted transactions, applies to one-sided controller transactions.
The court determined that M&F does apply to conflicted one-sided controller transactions. Regarding the special committee that approved the merger, the court determined that the plaintiffs lacked specific allegations the committee members were not independent because they were somehow beholden to Stewart, describing the allegations as conclusory and relying on inferences such as a shared interest in tennis.
Minority vote condition. The court also disagreed with the plaintiffs regarding the effectiveness of the majority of the minority of the vote condition. It rejected the contention that the vote of the minority shareholders was uninformed due to an alleged conflict of interest of financial advisor Moelis & Company, which, the court stated was not a conflict, and even if it were a conflict, the relationship between Moelis and a Sequential stockholder was disclosed in the proxy.
The plaintiffs also argued that some of the "minority" shares were owned by various MSLO insiders, such as a friend of Stewart and her sister-in-law, as well as other employees of the company. However, the court found that these allegations lacked specificity. The plaintiffs did not attempt to quantify the effect these purportedly non-minority shareholders had on the final vote, according to the court. Nor did they make any allegations that would support a reasonable inference that these votes were compromised by Stewart’s influence, the court observed.
Aiding and abetting claim. The plaintiffs had also claimed that Sequential had aided and abetted Stewart’s breach of fiduciary duty. However, having failed to establish the underlying claim of breach of fiduciary duty, the aiding and abetting claim was also dismissed.
The case is No. 11202-VCS.
Attorneys: Seth D. Rigrodsky (Rigrodsky & Long, P.A.) for Plaintiffs. Kevin R. Shannon (Potter Anderson & Corroon LLP) for Martha Stewart. John L. Reed (DLA Piper) and Mitchell A. Karlan (Gibson Dunn & Crutcher LLP) for Sequential Brands Group, Inc., Singer Madeline Holdings, Inc. and Madeline Merger Sub, Inc.
Companies: Sequential Brands Group, Inc.; Singer Madeline Holdings, Inc.; Madeline Merger Sub, Inc.
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