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From Securities Regulation Daily, April 17, 2014

Board’s failure to obtain fairness opinion did not breach "Revlon" duties

By John M. Jascob, J.D.

The Delaware Chancery Court has dismissed breach of fiduciary duty and aiding and abetting claims arising out of a 2011 merger transaction involving Universata, Inc. The court held that the board’s failure to obtain a fairness opinion did not constitute bad faith under Delaware law because the board did undertake some process, even if flawed, to achieve the best price for stockholders. The court also dismissed claims against the investment bank engaged by the board to assist in the transaction, finding that the firm did not knowingly aid a breach of fiduciary duty by agreeing to provide only a limited range of services. The court allowed the plaintiffs to go forward, however, with certain claims against the directors for the improper diversion of corporate assets that would have gone as consideration to the stockholders (Houseman v. Sagerman, April 16, 2014, Glasscock, S.).

Background. The plaintiffs, Aaron Houseman and Nancy Houseman, were stockholders and creditors of Universata, a Delaware corporation providing on-site medical record release of information services. In 2006, the Housemans had sold their prior business to Universata for approximately $9 million, with payments to be made over a seven-year period. After Universata had difficulty making the payments, however, the Housemans elected in 2009 to convert some of that debt into an equity interest in the company. The Housemans also received a right to require Thomas D. Whittington, a Universata director and shareholder, to purchase up to 525,000 of their shares in Universata at a price of $2.10 per share, at any time between December 30, 2012, and December 30, 2013.

In May 2011, Universata’s board of directors approved a merger with a subsidiary of HealthPort Technologies, LLC for $1.02 per share in cash plus additional consideration worth approximately $0.17 per share. After the transaction closed, the Housemans refused to tender their shares. The Housemans initially pursued their purported contractual put rights against Whittington in a Minnesota state court, but that action was dismissed with prejudice. The Housemans then filed suit in Delaware alleging, among other things, that Universata’s directors breached their fiduciary duties in connection with the merger transaction. The Housemans also brought a claim for aiding and abetting breach of fiduciary duty against KeyBanc Capital Markets, Inc. (KeyBanc), the investment bank engaged by the board to assist with due diligence.

Fiduciary duty claims. The Chancery Court held, however, that the plaintiffs failed to demonstrate bad faith on the part of Universata’s directors. Although the Universata board did not conduct a perfect sales process, the court observed, neither did the directors utterly fail to undertake any action to fulfill theirRevlon duties. Even though the board did not obtain a formal fairness opinion, the board did undertake some process aimed at achieving the best price for stockholders. The board considered, and rejected based on cost, obtaining a fairness opinion from KeyBanc. Instead, the board hired KeyBanc to assist in shopping the company and to provide a more informal recommendation concerning HealthPort’s offer; received and considered bids from multiple interested bidders; and ultimately received from HealthPort everything the board felt it could get. Accordingly, the alleged process failures, even if true, did not state a claim for breach of the duty of good faith.

Aiding and abetting claims. The court also dismissed the plaintiffs’ claims against KeyBanc for aiding and abetting a breach of fiduciary duty. The court reasoned that the Housemans failed to plead facts showing that KeyBanc misled the board or created an “informational vacuum” sufficient for a finding of knowing participation in a breach. Moreover, the fact that KeyBanc agreed to provide limited services in connection with the transaction, rather than its full “panoply of services,” did not support an inference that KeyBanc knew the Universata board was breaching its fiduciary duties in selling the company. Rather, Delaware case law interpreting Revlon makes clear that there is no single way to a sell a company, and the fact that KeyBanc agreed to participate in a transaction in which it would not issue a fairness opinion did not demonstrate that the investment bank knew the failure to obtain additional services would constitute a breach of the board’s duties.

The case is No. 8897-VCG.

Attorneys: Eric M. Andersen (Mark Anderson, PA) Aaron Houseman. Steven L. Caponi (Blank Rome LLP) for Eric S. Sagerman and Universata, Inc. Stephen C. Norman (Potter Anderson & Corroon LLP), P. Nikhil Rao (Jones Day) for KeyBanc Capital Markets Inc.

Companies: Universata, Inc.; KeyBanc Capital Markets Inc.

MainStory: TopStory MergersAcquisitions CorporateGovernance DirectorsOfficers DelawareNews

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