The Hedge Fund Law Report

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By Topic: Controlling Shareholders

  • From Vol. 3 No.4 (Jan. 27, 2010)

    Dealing with Mr. Big: Recent Developments in Transactions Involving Controlling Shareholders

    Controlling shareholders of public companies contemplating a sale of the company to a third party sometimes favor private equity bidders over their strategic competitors.  This is because private equity sponsors typically can be more flexible than strategic buyers in structuring transactions that allow the controlling shareholder to retain an equity stake in the surviving entity or to receive other financial benefits that are not shared with the minority shareholders, such as continuing employment with the surviving entity, stock options and other arrangements.  The Delaware Chancery Court’s recent decision in In re John Q. Hammons Hotels Inc. Shareholder Litigation, No. 758-CC (Oct. 2, 2009) provides a road map for parties to structure controlling shareholder sale transactions so that they will be subject to the protections of the business judgment rule, rather than the more rigorous “entire fairness” standard of review.  However, the Chancery Court held in Hammons that a merger between a controlled company and a third party unaffiliated with the controlling shareholder was subject to the entire fairness test because the controlling shareholder received consideration different from that received by the minority shareholders and because the transaction did not include sufficient procedural protections to protect the minority: namely, in addition to the special committee process typically used in going private transactions, there be a condition to the merger that it be approved by holders of a majority of the outstanding shares held by the minority shareholders.  In a guest article, William D. Regner and Dmitriy A. Tartakovskiy, Partner and Associate, respectively, at Debevoise & Plimpton LLP, explore the implications of the Hammons decision on the structuring of controlling shareholder sale transactions.

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