A recent Court of Chancery decision determined that the sale of a company initiated by the controller, a private equity fund that was also the largest equity holder in the company, did not run afoul of the business judgment rule. The decision in Manti Holdings, LLC v. The Carlyle Group Inc., C.A. No. 2020-0657-SG (Del. Ch. Jan. 7, 2025) is noteworthy for several reasons. This article will provide key bullet points with references to page numbers and footnotes of the 68-page post-trial decision.
First, it describes in detail the factual and legal reasons why the controller that initiated the sale of the company was only subject to the business judgment rule review, as opposed to the entire fairness standard. The opinion is also notable for its description of the typical timetable for exiting from investments that are common among private equity firms.
Short Overview
This case involved The Carlyle Group, the largest equity holder in a company called Authentix, and related entities. Carlyle’s private equity fund partnership agreement provided for a fund life of 10 years—although that did not impose a contractual obligation for Carlyle in this case to exit any particular investment at that time.
The minority stockholders claimed that Carlyle’s business model required it to sell Authentix regardless of price and that it caused the board to force a sales process that was unfair to stockholders. After a 7-day trial, the court determined that the interest of Carlyle was the same as that of the minority stockholders—which was to maximize the value of its investment.
The court reasoned that: (i) there was no pressure for a quick exit, nor did Carlyle conduct a fire sale; (ii) Carlyle did not extract a non-ratable benefit; (iii) the sale was arms-length; and (iv) moreover, the court determined that the business judgment rule applied to the sale–and not the entire fairness standard.
For more factual background details, the 2 prior Chancery decisions in this case should be consulted; the citations for those 2 prior Chancery decisions are found at footnotes 50 and 208.
Highlights
- The court provides an extensive factual description of the important details found after a 7-day trial regarding, for example, the various investors in the company and the sales process. See Slip op. at 3 to 32.
- As a practice tip, writers of pleadings and the like who file in Chancery should observe how the court structures its opinions in terms of: using Roman numerals (I, II, III) for initial sections, and denoting the next sub-sections with capital letters (A, B, C), and then using Arabic numbers (1, 2, 3) for the next sub-sections. Careful writers should also observe the court’s abbreviations for trial exhibits and trial transcripts, as well as how the court refers to the parties’ briefs and other factual sources. See Slip op. at 3.
- Two key basics of corporate law are always useful to repeat as a refresher: (1) Even as a controller, Carlyle as a stockholder was “free to sell its stock for its own reasons and on its own timing,” and as a stockholder, it was “owed fiduciary duties by the directors.” Slip op. at 34 (emphasis in original); (2) The court emphasized, however, that: “when acting as a controller, Carlyle itself could owe fiduciary duties to the Company and its stockholders.” Id.
- Although the court observed that Carlyle could be liable if it used its corporate control to compete with the majority for consideration, the facts did not support the view that they did so.
- The court also rejected the argument that Carlyle extracted for itself a form of consideration that was uniquely valuable, and also rejected the argument that the entire fairness standard applied. Slip op. at 35.
- A useful definition of a “controller” for the toolbox of corporate litigators is the following: when a stockholder: “(1) owns more than 50% of the voting power of a corporation, or (2) owns less than 50% of the voting power of the corporation but ‘exercises control over the business affairs of the corporation.’” Slip op. at 37 and footnote 223.
- The court also instructed that “a group of stockholders may be deemed a ‘control group’ and considered a controlling stockholder such that ‘its members owe fiduciary duties to their fellow shareholders.’” Id. and footnote 224.
The thorough reasoning of the court applied the extensive facts to the law in order to support its conclusion that the entire fairness standard did not apply and Carlyle did not receive a non-ratable benefit, as well as explaining why the Company conducted a fair sales process—and was not contractually bound to sell by a certain deadline. See Slip op. 39 to 67.