Friday, May 17, 2024


Earlier this month, VC Glasscock issued an opinion in Kormos v. Playtika Holding UK II, where he dismissed breach of fiduciary duty claims against the Chair/CEO and CFO of a controlled company.  The opinion made reference to an earlier bench ruling where he sustained claims against the company’s controlling shareholder, Giant/Alpha, which is what alerted me to the bench ruling – which issued in January – in the first place.  And that bench ruling is actually what has my attention.

Playtika Holding Corp is a publicly traded company with a controlling shareholder, Playtika Holding UK II Limited (“Holding”).  Holding is a wholly-owned subsidiary of Giant/Alpha.  In 2021, Giant/Alpha faced a liquidity crisis and desperately needed to raise cash, which it sought to do by selling Holding’s Playtika stock, potentially in connection with a sale of the entire company.  But the process was rushed and messy, with Playtika itself and Giant/Alpha running separate inquiries; eventually, Giant/Alpha instructed Playtika’s board to stop talking to potential buyers, but to instead cause Playtika to institute a self-tender for its own stock.  SEC rules require that tender offers treat all shares of a class equally, which meant that the public shareholders – as well as Giant/Alpha – were able to tender in to the offer.  But, with Giant/Alpha tendering, it could receive cash back from Playtika which would then solve its liquidity problems.

Plaintiffs, the public holders of Playtika, alleged that this was a conflicted transaction that was not in Playtika’s best interests, and was therefore subject to entire fairness review (though they did not claim the price paid for the shares was unfair).

There’s just one problem with that argument, doctrinally: ever since Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971), we know that in order to be a conflicted transaction, implicating the duty of loyalty, the controller must receive a nonratable benefit, i.e., some benefit not available to the other stockholders – and arguably, it has to be a benefit that specifically comes at the minority’s expense.  In Sinclair itself, for example, the controlling shareholder caused the company to pay out massive dividends that allegedly robbed the company of the ability to take advantage of alternative opportunities, and it did so for its own private reasons.  Still, the dividend payments weren’t a conflict transaction – and were therefore subject only to business judgment review – because all shareholders got the same dividends, controller and noncontrollers alike.  The controlling shareholder did not receive a special benefit at the expense of the minority (As the Delaware Supreme Court put it, “a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its minority stockholders. As such, these dividends were not self-dealing”).

Similarly, in Playtika, the self-tender may have been motivated by Giant/Alpha’s need for cash, but all shareholders could participate in the tender on equal terms, meaning, it wasn’t a conflict transaction, and was therefore subject only to business judgment review.


There was a twist.

Giant/Alpha did not want to risk tendering so many shares that it actually lost control of Playtika.  So, it negotiated a provision whereby Playtika would have to announce the number of shares tendered publicly, which would allow Giant/Alpha to keep close tabs on the status of the offer.  Giant/Alpha could also withdraw shares that it previously tendered – which I gather was a negotiated term of the agreement, but also, by the way, required under SEC rules for all tendering shareholders.  So, because Giant/Alpha was able to monitor the shares tendered, and withdraw its own shares, it could adjust its tender and maintain control of the company.

Those provisions, according to VC Glasscock – as he explained in his bench ruling in January, and again in his recent opinion earlier this month, were a nonratable benefit to Giant/Alpha, because they uniquely allowed Giant/Alpha to maintain control, which was not something the minority could share.  And that was enough to transform the Playtika self-tender into a conflict transaction, subject to entire fairness review.

So here’s the thing.

Treating the right to monitor the number of public shares tendered as a nonratable benefit to Giant/Alpha – let alone one that comes at the expense of minority shareholders – strikes me as a bit of a reach.  SEC rules require that tendering shareholders be able to withdraw before the tender offer closes; that wasn’t a benefit unique to Giant/Alpha.  And if Playtika publicly announced how many shares had been tendered, that meant everyone could see what the status was.   

That said, the whole scenario was obviously hinky from the get-go.  There was an awful initial search for alternative transactions; the self-tender itself was designed to benefit Giant/Alpha, and you can see why a judge might be looking for a reason to at least scrutinize the arrangement more closely.  Hence, a nonratable benefit was identified – Giant/Alpha’s ability to modulate the number of shares it tendered. 

And it matters because, as I’ve written two papers about, and also blogged repeatedly (here, here, here, here, here, here, here, here, here, here, here, here, here, and here), the more that Delaware makes it very easy to insulate deals from review unless they involve a controlling shareholder conflict, the more that courts are motivated to identify a controlling shareholder conflict in order to give themselves the opportunity to review problematic transactions.  As my papers discuss, that’s often exhibited in the definition of what it means to be a controlling shareholder in the first place – but, as we can also see here, it exhibits itself in the definition of conflict, as well.

Anyway, that kind of morass is exactly why the Delaware Supreme Court granted interlocutory review of TripAdvisor, i.e., to address the definition of a conflict transaction.  But TripAdvisor involves a reincorporation from Delaware to Nevada; I have no idea whether the court will address just that scenario – which obviously involves questions of comity not present for other kinds of potential conflicts – or whether it will take a broader view of the problem.

Ann Lipton | Permalink