Delaware Court Addresses Derivative Claim Value Extinguished by Merger
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-07-01
In In re Primedia, Inc. Shareholders Litigation, 2013 WL 2169415 (Del. Ch. May 10, 2013), Vice Chancellor Laster of the Court of Chancery held that plaintiffs whose standing to pursue derivative insider trading claims had been extinguished by merger had standing to challenge directly the entire fairness of that merger based on a claim that the target board of directors failed to obtain sufficient value in the merger for the pending derivative claims.
In late 2005 and early 2006, two plaintiffs filed derivative complaints on behalf of Primedia, Inc. (“Primedia” or the “Company”) generally asserting that the members of the Company’s board of directors had breached their fiduciary duties by causing Primedia to sell assets and redeem preferred stock in a manner that benefitted certain affiliates of KKR, Primedia’s controlling stockholder. Primedia’s board formed a special litigation committee (the “SLC”) and authorized it to investigate plaintiffs’ allegations. While the SLC’s investigation was ongoing, plaintiffs amended their complaint to assert corporate opportunity claims against the KKR affiliates and indicated to the SLC their belief that the documents produced to plaintiffs during the SLC’s investigation would support an insider trading claim against the KKR affiliates under Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949)