Manti Holdings, LLC v. The Carlyle Group Inc.
2022 WL 1746433 (2022)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A controlling stockholder is conflicted, triggering the entire fairness standard of review, when it orchestrates a transaction motivated by a unique need for liquidity not shared by minority stockholders, especially when the transaction's structure provides the controller with non-ratable benefits. To survive a motion to dismiss, claims against directors protected by an exculpatory charter provision must plead non-exculpated claims of disloyalty, such as acting to advance the interests of a conflicted controller.
Facts:
- Authentix's capital structure included preferred stock and common stock, with preferred stockholders entitled to the first $70 million of any sale consideration.
- The Carlyle Group, through its subsidiaries, was Authentix's controlling stockholder, holding a majority of both its preferred and common stock.
- In 2015, Authentix began a sale process, with investment banks initially estimating its value could exceed $200 million.
- The sale process was hampered by uncertainty surrounding the renewal of key customer contracts, including with Saudi Aramco, which depressed Authentix's valuation in initial bids.
- A Carlyle representative, Steve Bailey, told a director that he was under pressure to sell Authentix quickly because it was one of the last investments in a fund that Carlyle needed to monetize and close.
- In mid-August 2017, just before the final sale agreement, Authentix successfully renewed or extended its key customer contracts, resolving the major uncertainties that had previously lowered its perceived value.
- Despite these positive developments, on September 12, 2017, the Authentix Board approved a sale to Blue Water Energy for $77.5 million in guaranteed consideration.
- The sale price allowed Carlyle to profit on its preferred stock holdings while providing little to no consideration for the common stockholders, including the Plaintiffs.
Procedural Posture:
- Manti Holdings, LLC and other minority stockholders (Plaintiffs) initiated an action against The Carlyle Group, its related entities, and three directors of Authentix (Defendants) in the Delaware Court of Chancery.
- After Defendants moved to dismiss the initial complaint, Plaintiffs filed a Verified Amended Complaint on November 3, 2020.
- Defendants moved to dismiss the Amended Complaint pursuant to Rule 12(b)(6), arguing both that the claims were waived under a stockholders agreement and that they failed to state a claim.
- The Court of Chancery stayed consideration of the motion pending a Delaware Supreme Court decision in a related appraisal action involving the same parties.
- Following the Supreme Court's decision, the Court of Chancery first issued an opinion holding that the stockholders agreement did not waive Plaintiffs' right to bring their fiduciary duty claims.
- The Court then considered the remainder of the Defendants' motion to dismiss for failure to state a claim.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a complaint state a claim for breach of fiduciary duty under the entire fairness standard when it alleges that a controlling stockholder, motivated by a unique need for liquidity to close its investment fund, engineered a quick sale of the company at a price that primarily benefited its preferred stock holdings to the detriment of common stockholders?
Opinions:
Majority - Vice Chancellor Glasscock
Yes, the complaint states a claim for breach of fiduciary duty because it is reasonably conceivable that the entire fairness standard of review applies to the sale. The entire fairness standard applies because the complaint adequately pleads that Carlyle, the controlling stockholder, was conflicted. The conflict arose from Carlyle's unique benefit: an urgent need for liquidity to close its investment fund, a motivation not shared by the other stockholders. This was evidenced by director Steve Bailey's statement that he was 'under pressure to sell Authentix' to 'monetize and close that fund.' This unique interest, combined with the non-ratable benefit Carlyle received from its preferred stock payout in the low-priced sale, is sufficient to plead a conflict and trigger entire fairness review. Because the entire fairness inquiry is fact-intensive, dismissal at the pleading stage is inappropriate. The claims against the director defendants also survive because the complaint pleads non-exculpated claims for breach of the duty of loyalty; the Carlyle-affiliated directors were dual fiduciaries in a conflicted transaction, and the CEO allegedly lacked independence from the conflicted controller.
Analysis:
This decision clarifies that a controlling stockholder's unique liquidity needs can constitute a disabling conflict of interest that triggers entire fairness review, even if the controller also holds common stock and receives the same per-share price for it. It demonstrates that Delaware courts will scrutinize a controller's subjective motivations when they diverge from the interests of minority stockholders. The opinion also reinforces the high bar for dismissing claims against directors at the pleading stage when a complaint adequately alleges they acted in service of a conflicted controller, even if they are protected by a Section 102(b)(7) exculpatory charter provision.
