WILMINGTON, Del. (Legal Newsline) - The Delaware Court of Chancery has dismissed a challenge filed by a class of shareholders over the 2015 sale of domestic guru Martha Stewart’s merchandising company to Sequential Brands Group Inc.

The court, in its Aug. 18 opinion, ruled that the deal -- worth more than $350 million -- included the appropriate protective measures.

“The dual procedural protective measures deployed in connection with this transaction -- the creation of an independent special committee and the adoption of a majority of the minority approval condition -- followed the (Kahn v.) M&F Worldwide road map with precision and were in place at the moment Stewart began to negotiate for consideration over and above what would be paid to the other stockholders,” Vice Chancellor Joseph R. Slights III wrote.

The court said the measures kept the deal within the protection of the business judgment rule.

Under this standard, a court will not second-guess the decisions of a director as long as they are made in good faith, with the care that a reasonably prudent person would use, and with the reasonable belief that they are acting in the best interests of the corporation. 

Basically, the rule assumes that the directors of a corporation will act in the corporation’s best interests, unless proven otherwise.

In the consolidated class action, former stockholders of Martha Stewart Living Omnimedia Inc., or MSLO, brought claims in a verified second amended class action complaint against the company’s former controlling stockholder and namesake, Stewart herself, for breach of fiduciary duty and against the third-party buyer, Sequential, for aiding and abetting that breach. 

The claims arise out of a transaction that closed in December 2015, whereby MSLO was acquired by Sequential in a merger.

Pursuant to the merger, MSLO stockholders could elect to receive $6.15 per share either in cash or common stock of the newly formed company based on a conversion formula set forth in the merger agreement.

The plaintiffs contend Stewart leveraged her position as controller to secure greater consideration for herself than was paid to the other stockholders.

Stewart, in a motion to dismiss, denied she was paid disparate consideration.

However, she argued even if the complaint pleads she engaged in a conflicted transaction, the court should review the allegations under the business judgment rule standard since the transaction was structured in a manner that provided “meaningful protections” to the minority stockholders. 

Slights concluded, in the court's 69-page opinion, that the complaint does not adequately plead that Stewart, as controlling stockholder, engaged in a conflicted transaction “in any event.”

“The timeline of the negotiations surrounding the Merger and the ‘side deals’ Sequential entered into with Stewart reveals that Plaintiffs will be unable, under any reasonably conceivable circumstance, to prove a central element of their claim, causally related damages,” he wrote. “Contrary to the story chronicled in the Complaint, where Stewart allegedly diverted consideration from MSLO stockholders to herself, and thereby caused Sequential to lower its offer for the Company, the actual series of events described in the publicly filed documents on which the Complaint relies confirms that the consideration Sequential offered to MSLO stockholders actually increased after negotiations with Stewart began.

“Under these circumstances, it is not reasonably conceivable that Plaintiffs can prove their claim that Stewart engaged in a conflicted transaction through which she caused injury to the minority stockholders by diverting merger consideration to herself.”

In determining that the complaint fails to state a claim for breach of fiduciary duty against Stewart, the court dismissed the complaint against Sequential on that basis.

It said it “need not” reach the question of whether the complaint adequately pleads the other elements of aiding and abetting a breach of fiduciary duty. 

Delaware’s Court of Chancery consists of one chancellor and four vice chancellors. It is a non-jury trial court that serves as the state’s court of original and exclusive equity jurisdiction, and adjudicates a wide variety of cases involving trusts, real property, guardianships, civil rights, and commercial litigation. 

Often, the court’s litigation consists of corporate matters, trusts, estates and other fiduciary matters.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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Delaware Court of Chancery
500 N King St
Wilmington, DE - 19801

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