Control PremiumsIn re Books a Million Stockholders Litig., 2016 Del. Ch. LEXIS 154 (Oct. 10, 2016)

The Delaware Court of Chancery dismissed a minority shareholder challenge to a going-private merger, concluding the defendant directors did not act in bad faith when they favored the controlling shareholders’ bid over a third-party buyer’s higher offer.

The dispute arose out of a 2015 merger by which the controlling shareholder of Books-a-Million Inc. (BAM), a retail bookseller, bought the outstanding shares it did not already own in the company for $3.25 per share. A third party had offered to buy 100% of the company’s shares for $4.21 per share.

The transaction satisfied the requirements the Delaware Supreme Court had outlined in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014). Specifically, the board had set up a special committee that needed to give its approval to the transaction. The special committee retained independent legal and financial advisors for the transaction. Moreover, a majority of the minority shareholders approved the merger.

Two plaintiffs challenged the transaction with the Delaware Court of Chancery, alleging members of the board and special committee had breached their fiduciary duties to the shareholders. They did so because no rational director would reject the third-party bidder’s “substantially superior offer,” which was nearly 30% higher than the controlling shareholder’s offer, the plaintiffs said.

The Chancery noted the two offers were fundamentally different. The reality is that buyers of corporate control have to pay a premium above the market price, the court said. What’s more, “the law has acknowledged, albeit in a guarded and complex way, the legitimacy of the acceptance by controlling shareholders of a control premium.” Here the third party’s bid incorporated a premium to buy corporate control, whereas the controller’s bid contemplated a discount for the minority shares.

According to the Chancery, the discount here was not so extreme as to suggest any of the defendants tried to enable a sweetheart deal for the controlling shareholder.

The court said the business judgment rule applied, which prescribed the lowest level of scrutiny of the deal.

Considering a special committee met more than 30 times to negotiate the merger, pursued third-party bids to test the controller’s offer, and achieved a 20% increase in the sales price over the initial offer, the only rational conclusion was to consider the transaction fair to the minority shareholders, the Chancery said. It granted the defendants’ motion to dismiss the complaint.