The Delaware Chancery Court recently issued a 113-page post-trial opinion in In re: BGC Partners Derivative Litigation, (Del. Ch.; 8/22), holding that BGC Partners’ acquisition of Berkeley Point Financial from a Cantor Fitzgerald affiliate was entirely fair. The ruling provides a reminder that a deal can satisfy the demanding entire fairness standard even when a special committee’s process was far from perfect — although you may need to go through a full trial to get to that result.
Underscoring the point about this deal’s process being far from perfect, it’s worth noting that Vice Chancellor Lori Will had previously declined to dismiss the plaintiffs’ derivative complaint alleging breaches of fiduciary duty or shift the burden of proving entire fairness to the plaintiff, holding that the plaintiff had sufficiently pled that two members of the special committee may not have been independent of the controller.
The plaintiffs alleged that the transaction was a fait accompli engineered by Cantor’s CEO, Howard Lutnick, and contended that the special committee was ineffective and did not stand up to Lutnick. They also contended that Cantor withheld valuation information and that the price paid in the deal was inflated. In her opinion, the vice chancellor acknowledged that the process by which the special committee negotiated and approved the deal had some fairly significant flaws, but in the end decided that the deal was entirely fair:
The plaintiffs scored some points at trial. Lutnick initiated the deal. He had a financial incentive to cause BGC to overpay for Berkeley Point. He overstepped in identifying advisors for the special committee and asking its co-chairs to serve. [Special Committee Co-Chair] Moran had one-off discussions with Lutnick that should never have happened. When it came time for the final negotiations, the special committee’s written counterproposal did not reflect its preferred structure. And there remains some mystery around how the ultimate deal was reached.
The evidence presented by the defendants, however, carried the day. The special committee and its advisors were independent. Though the process was marred by Lutnick and Moran’s actions, Lutnick extracted himself from the special committee’s deliberations after it was fully empowered. Moran pushed back on Lutnick when needed and worked tirelessly on the committee’s behalf. The special committee’s diligence requests were met and it had the information it needed to negotiate on a fully informed basis. The committee members—each engaged and diligent—bargained with Cantor and obtained meaningful concessions.
Vice Chancellor Will also concluded that the price the special committee agreed to pay was in line with what its financial adviser determined to be appropriate and fell within the range of fairness. In reaching this conclusion, she also held that the directors whose independence was challenged in fact acted independently, and that under Kahn v. Lynch, the company’s use of a well-functioning, independent special committee shifted the burden of persuasion on the entire fairness issue to the plaintiffs.
— John Jenkins, DealLawyers.com, August 23, 2022