May 2025 in Brief: Mergers & Acquisitions

Court of Chancery Dismisses Entire Fairness Case at Pleading Stage

By Lisa Stark, Delaware Corporate Counsel

In a rare move, the Delaware Court of Chancery dismissed a case challenging a $250 million capital investment by a controlling stockholder in exchange for preferred stock. The transaction was negotiated between the controller and a fully informed special committee of disinterested and independent directors, and it was subject to entire fairness review. As noted by the Court, the application of entire fairness typically “will preclude dismissal of a complaint on a Rule 12(b)(6) motion to dismiss.” However, here, the Court found that the complaint failed to allege facts about the price or process used to approve the capital investment that demonstrated a lack of fairness. In so finding, the Court departed from another recent Chancery Court opinion by declining to fault a special committee for negotiating a success-based fee for its investment banker.

This case, Roofers Local 149 Pension Fund v. Fidelity National Financial, Inc., C.A. No. 2024-0562-LWW (Del. Ch. May 9, 2025), involved F&G Annuities & Life, Inc. (“F&G”), a controlled but publicly traded subsidiary of Fidelity National Financial, Inc. (“Fidelity National”). In 2022, Fidelity National spun off F&G but retained approximately 85 percent of F&G’s outstanding common stock. In November 2023, the F&G board began discussing capital-raising transactions, including a potential transaction to issue preferred stock to Fidelity National, and created a two-person special committee of disinterested and independent directors to evaluate such a transaction. The special committee held its first meeting on November 30, 2023, together with its advisors from Sullivan & Cromwell and Barclays, and discussed an anticipated proposal from Fidelity National, as well as compensation for its members. The special committee thereafter met nine times, during which it negotiated Fidelity National from a starting proposal of preferred stock with a 6.5 percent dividend rate and a 10 percent conversion premium to a final proposal for a 6.875 percent dividend rate and a 17.5 percent conversion premium. The special committee considered as an alternative to Fidelity National’s proposal a public market offering of preferred stock, but Barclays advised against such a move on the basis that pricing would be less favorable to F&G. The special committee also considered alternative capital-raising transactions, such as a common stock offering. With respect to the final $250 million deal with Fidelity National, the special committee obtained an opinion that the transaction was commercially reasonable. The Court’s opinion did not address why Barclays’s opinion did not speak to the financial fairness of the transaction.

Several months after the transaction closed, the plaintiff brought this action against Fidelity National, challenging the fairness of its financing transaction with F&G. Fidelity National moved to dismiss. The Court noted that the transaction would be reviewed under the exacting entire fairness standard, which would typically preclude dismissal at the pleading stage, but that entire fairness is not “a free pass to a trial.” Here, the Court found that the plaintiff failed to plead facts that demonstrated a lack of fairness. In so finding, the Court rejected plaintiff’s argument that there was anything inherently unfair about Barclays’s contingent fee structure or the special committee’s finalizing its own fee structure fairly late in the process. On the contingent, banker fee structure, the Court departed from an opinion last year in Firefighters’ Pension System of Kansas City Trust v. Foundation Building Materials, Inc., 318 A.3d 1105 (Del. Ch. 2024), in which the Court heavily criticized contingent fee structures for special committee bankers. The Court also rejected the plaintiff’s argument that the failure of F&G to condition the transaction on a majority of the minority vote was strong evidence of unfair dealing. With respect to the fair price analysis, the Court noted that the plaintiff criticized the terms of the financing and speculated that a pure debt or equity offering might be more fair but failed to articulate why the terms were unfair. Accordingly, the Court dismissed the complaint.

Delaware Court of Chancery Dismisses Challenge to Merger, Distinguishing Arm’s-Length Leverage from Control

By Ann E. Sheppard, Elon University School of Law

On May 5, 2025, the Court of Chancery of Delaware issued its order in a case arising from a putative class action challenging a corporate merger transaction. In Frank v. Mullen (C.A. No. 2023-0381-MTZ), Richard Frank (“Plaintiff”), a former stockholder of National Holdings Corporation (“Company”), brought suit against B. Riley Financial, Inc. (“BRF”), which purchased the Company in 2021, contending that BRF controlled the Company for purposes of the merger. In 2021, BRF was the Company’s largest stockholder, owning 46.4 percent of the Company’s stock. Plaintiff asserted that, in part due to BRF’s significant stake, BRF was a controlling stockholder owing fiduciary duties to the Company in connection with the merger transaction, which, as a result, was marred by unfair process and price. BRF moved to dismiss all of Plaintiff’s claims under Court of Chancery Rule 12(b)(6) for failure to state a claim.

The Court granted the defendant’s motion to dismiss, holding that leverage in an arm’s-length negotiation is not “actual control.” The Court did affirm that although shareholders with less than 50 percent stock ownership of a company generally do not owe fiduciary duties, where a stockholder owns less than 50 percent of a Company’s stock and exercises control of the Company’s business affairs, the stockholder will assume fiduciary duties. Here, however, Plaintiff failed to plead facts that would show that BRF “dominated or controlled [the board’s] ‘corporate decision-making process.” The Court noted, “When there is an independent special committee, an independent board, and a clean process, a plaintiff cannot plead actual control over the transaction simply by pointing to a large blockholder’s negotiating leverage.”

According to the Court’s decision, Plaintiff failed to allege “actual control” in its allegations regarding BRF’s stock ownership, voting power, control over the board, and control over the merger process. First, BRF owned only 46.4 percent of the Company’s stock, and its refusal to sell its shares did not constitute control over the special committee considering bids for the Company. Second, Plaintiff contended that BRF and the Company’s second-largest shareholder acted in concert, aggregating their voting power to 65 percent. The Court held that actual control requires more than mere alignment of interest; it requires actual agreement, which Plaintiff failed to allege existed. Third, the Court found that BRF’s past majority stake in 2018 and past dealings with a Company director did not amount to control over “high-status roles,” the ability to interfere with management decisions, or “substantial influence [in decisions to] replace management” constituting control over the board at the time of the merger. Fourth, the Court found the Company’s merger with BRF was an arm’s-length transaction—none of Plaintiff’s allegations supported an inference of control over the board rather than the board’s functioning independently. Lastly, although the Company’s special committee recognized that BRF “could potentially be viewed as a controlling stockholder,” Plaintiff’s counsel conceded, and the Court agreed, that the Company’s internal characterizations and filing in a related Section 220 action are not dispositive of actual control.

This case provides an example of an arm’s-length transaction where leverage exerted by minority shareholders does not amount to “actual control,” and does not subject the transaction to an entire fairness review.