Delaware Decision Suggests Pro Rata Recap That Enables Prolonging of Existing Control Structure May Be Subject to Entire Fairness Absent Independent Director and Minority Stockholder Approval—<em>NRG Yield</em>

Delaware Decision Suggests Pro Rata Recap That Enables Prolonging of Existing Control Structure May Be Subject to Entire Fairness Absent Independent Director and Minority Stockholder Approval—NRG Yield


By: Andrew J. Colosimo, Christopher Ewan, Arthur Fleischer, Jr., Andrea Gede-Lange, David J. Greenwald, Randi Lally, Mark H. Lucas, Scott B. Luftglass, Brian T. Mangino, Brian Miner, Robert C. Schwenkel, David L. Shaw, Matthew V. Soran, Steven J. Steinman, Gail Weinstein

In NRG Yield v. Crane (Dec. 12, 2017), the Court of Chancery held that a corporate recapitalization was a “conflicted controller transaction” to which entire fairness review would apply even though the recapitalization involved a pro rata distribution that facially treated all stockholders equally. The court reasoned that the recapitalization provided the “unique benefit” to the controller of enabling its control to be prolonged (due to the issuance of low-voting shares that could be issued for future acquisitions without diluting the controller's voting interest). Notably, the recapitalization had been proposed by the controller, allegedly for the purpose of prolonging its control (following rapid dilution of its voting interest from 65% to 55%). The court applied business judgment review under MFW, however, and dismissed the case, as the independent directors and the minority stockholders had approved the recapitalization. We discuss the decision in the attached Fried Frank Briefing (including the court's distinguishing Williams v. Geier, in which the Delaware Supreme Court held that a pro rata distribution by a controlled company was not subject to entire fairness review even though it had the effect of perpetuating the existing control structure.).

Additional Information
publications-detail.inc