Current Capital’s Jonathan Foster Completes Successful Expert Witness Project on behalf of Glenhill Capital Management LP
Law360 (August 17, 2018, 9:57 PM EDT) — A Delaware Chancery judge on Friday sided with directors of furniture company Design Within Reach Inc. and its hedge fund backers at Glenhill Capital Management LP, and rejected investor claims that a roughly $170 million merger with Herman Miller Inc. should be voided because of a quickly fixed mistake.
In an 83-page opinion, Chancellor Andre G. Bouchard validated measures taken by Herman Miller to rectify an error that had diluted ownership stake and wrote that investor had sought an “inequitable windfall” because of the mistake. The chancellor also ruled that investors’ allegations of fraud and breaches in fiduciary duty were unfounded.
“Although Herman Miller, with the assistance of its financial and legal advisers, conducted extensive due diligence in connection with the merger, it did not become aware of any defects associated with the reverse stock splits and 2013 conversions until after this litigation began,” Chancellor Bouchard wrote, adding the company “promptly” rectified the issues.
Soon after the 2014 merger, investor Charles Almond and others sued Glenhill Capital Management LP, managing member Glenn Krevlin, and former directors of Design Within Reach in Delaware Chancery Court contending they pushed through a series of self-dealing transactions that came at the expense of public investors. Herman Miller was added as defendant about a year later and the case went before Chancellor Bouchard for a five-day trial in November.
Also, the shareholders argued Herman Miller failed to acquire the 90 percent ownership interest required to complete the merger and that selling stockholders only owned about 60 percent of the company’s common stock due to the defective conversion, the opinion said.
Herman Miller filed a counterclaim asking the Chancery Court to validate the merger and measures it took to rectify seven defective corporate acts. Bouchard noted the shareholders only opposed validation of actions to remedy issues with reverse stock splits and conversions.
A 50-to-1 reverse stock split was wrongly converted by a factor of 2,500-to-1 and the error was not discovered until after the merger, according to the opinion.
“The reality is that counsel tasked with documenting these transactions botched them up unbeknownst to anyone associated with the transactions until after they had been implemented,” Chancellor Bouchard wrote in the opinion.
Given that the error, if not corrected, would have “gutted” the value of Glenhill’s stock it is “inconceivable that Krevlin or anyone associated with Glenhill knew about the double dilution problem,” Chancellor Bouchard wrote.
Chancellor Bouchard also rejected the shareholders’ claims that directors or members breached fiduciary duties and benefited from overpayments before the merger. Those claims were derivative in nature, and under case law, a merger extinguishes a plaintiff’s standing to maintain a derivative suit, Bouchard wrote.
Chancellor Bouchard was not swayed by the shareholders’ “novel premise” they were entitled to seek the claims under a “transactional paradigm” provided for in case law that an overpayment can be both direct and derivative in nature.
The shareholders argued that Glenhill, the company’s majority stakeholder, was part of a control group with other entities and thus subject to an overpayment claim under existing case law. Such claims can be both direct and derivative in nature “when a transaction results in an improper transfer of economic value and voting power from the minority stockholders to the controlling stockholder,” the opinion said.
Chancellor Bouchard ruled it was clear that Glenhill “was DWR’s controlling stockholder by itself (and not as part of the group plaintiffs suggest) at all relevant times and that each of the challenged transactions did not increase — but actually reduced — its economic stake and voting power in the company.”
Glenhill acquired control of DWR in 2009 with a $15 million investment, and later stock transactions granted Krevlin or DWR board members additional common or preferred shares. “It’s obviously a very thoughtful decision,” Glenhill counsel Adrienne Ward of Olshan Frome Wolosky LLP told Law360 on Friday. Counsel for the various other parties did not immediately respond Friday. An attorney for Herman Miller and Design Within Reach declined comment. Charles Almond et al. represented by Peter B. Ladig Bayard PA and David H. Wollmuth and Michael C. Ledley of Wollmuth Maher & Deutsch LLP.
Investor Andrew Franklin is represented by Norman M. Monhait and P. Bradford DeLeeuw of Rosenthal Monhait & Goddess PA, Scott J. Watnick of Wilk Auslander LLP and Thomas A. Brown of Morea Schwartz Bradham Friedman & Brown LLP.
Glenhill Advisors LLP et al. are represented by Andrew D. Cordo and F. Troupe Mickler IV of Ashby & Geddes PA, Adrienne Ward and Brian Katz of Olshan Frome Wolosky LLP and John B. Horgan of Ellenoff Grossman & Schole LLP.
John Edelman and John McPhee are represented by Douglas D. Herrmann of Pepper Hamilton LLP and Paul B. Carberry, Joshua Weedman and Erin Smith of White & Case LLP. Windsong Brands LLC is represented by Frederick B. Rosner, Scott J. Leonhardt, and Jason A. Gibson of The Rosner Law Group LLC and S. Preston Ricardo of Golenbock Eiseman Assor Bell & Peskoe LLP. Herman Miller Inc. and Design Within Reach Inc. are represented by John D. Hendershot, Susan M. Hannigan and Brian F. Morris of Richards Layton & Finger PA and Bryan B. House of Foley & Lardner LLP.
The case is Almond et al. v. Glenhill Advisors LLC et al., case number 10477, in the Court of Chancery of the State of Delaware.
Jonathan F. Foster is a Managing Director of Current Capital Partners LLC, a private equity investing, M&A advisory and management services firm. Foster’s expert witness work focuses mainly on governance, mergers and acquisitions, and valuation in complex corporate litigation. He has consulted on approximately 30 cases, filed some 15 declarations and reports, been deposed numerous times and testified at trial. Current Capital’s Advisory Board, which is comprised of retired operating executives from the industrial and services sectors, can also provide input on industry specific issues.