Voigt v. Metcalf
Memorandum Opinion (2020)
Rule of Law:
A minority stockholder may be deemed a de facto controller, subjecting a conflicted transaction to the entire fairness standard of review, when a holistic, fact-specific inquiry reveals a confluence of factors that, in the aggregate, support a reasonable inference of actual control over the corporation's affairs.
Facts:
- In 2009, private equity firm Clayton, Dubilier & Rice (CD&R) acquired a majority voting interest in NCI Building Systems, Inc. (the Company).
- As part of the 2009 deal, CD&R installed five designees on the Company's board and entered into a Stockholders Agreement granting it extensive contractual veto rights over major corporate decisions.
- By December 2017, CD&R had reduced its equity stake in the Company to 34.8%. At this time, four of the twelve directors were CD&R insiders, and the plaintiff alleged CD&R had longstanding ties to at least four other directors.
- In January 2018, CD&R announced it would acquire Old Ply Gem in a leveraged buyout and combine it with another portfolio company to form a new entity, New Ply Gem.
- In April 2018, CD&R completed this transaction (the 'Precedent Transaction'), valuing New Ply Gem's equity at approximately $638 million. CD&R owned 70% of New Ply Gem.
- Less than two weeks after the Precedent Transaction closed, the Company's Chairman James Metcalf and CEO Donald Riley met with CD&R to discuss a merger between the Company and New Ply Gem.
- CD&R and the Company negotiated a merger (the 'Challenged Transaction') in which the Company acquired New Ply Gem at an implied equity value of approximately $1.236 billion, representing a 94% premium over the value established three months prior.
- The merger was also structured for the Company to assume New Ply Gem's significant debt load.
Procedural Posture:
- Gary D. Voigt, a stockholder in NCI Building Systems, Inc., filed a lawsuit in the Delaware Court of Chancery.
- The suit named private equity firm Clayton, Dubilier & Rice (CD&R), its affiliates, and the members of the NCI Board of Directors as defendants.
- The complaint alleged direct and derivative claims for breach of fiduciary duty and unjust enrichment in connection with NCI's acquisition of New Ply Gem.
- The various defendants filed motions to dismiss the complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can be granted.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is a minority stockholder that owns 34.8% of a company's stock, has the right to appoint one-third of the board, holds extensive contractual veto rights over corporate actions, and has longstanding relationships with other directors, considered a controlling stockholder for purposes of triggering an entire fairness review of a conflicted transaction?
Opinions:
Majority - Laster, V.C.
Yes, a minority stockholder can be deemed a controlling stockholder when a holistic, fact-specific analysis reveals a confluence of factors that, in the aggregate, support an inference of actual control. The determination of controller status is a highly contextualized inquiry that cannot be resolved by a formulaic approach. Here, it is reasonably conceivable that CD&R exercised control over the Company based on the collective weight of several factors. These include CD&R's 34.8% stock ownership, which provided significant practical voting power; its influence over the board through four director designees and longstanding relationships with at least four other directors; and its extensive contractual veto rights under a Stockholders Agreement, which granted it power over key corporate decisions beyond that of an ordinary stockholder. Because CD&R was on both sides of the transaction (controlling New Ply Gem and plausibly controlling the Company), the transaction is subject to the entire fairness standard. The plaintiff's allegations of a 94% valuation premium over a three-month period are sufficient at the pleading stage to support a reasonable inference of unfair price, allowing the fiduciary duty claims to survive the motions to dismiss.
Analysis:
This case provides a detailed roadmap for pleading de facto controller status for a minority private equity sponsor, reinforcing that the analysis is a holistic evaluation of all sources of power, not just stock ownership percentage. The decision serves as a powerful reminder that procedural protections like special committees do not guarantee dismissal if the underlying facts suggest pervasive influence by the minority stockholder. The opinion underscores the difficulty defendants face in dismissing such claims at the pleading stage, particularly when there are strong indicia of control and a significant, unexplained valuation disparity in a conflicted transaction.
