Failure To Obtain Fairness Opinion Not Necessarily Bad Faith

By: Mark Tarallo

The Delaware Chancery Court recently considered the issue of whether or not the failure to obtain a fairness opinion in connection with the sale of a company constituted bad faith on the part of the board of directors.  The actions decided in Houseman v. Sagerman, C.A. No. 8897-VCG, 2014 WL 1600724 (Del. Ch. Apr. 16, 2014), arose out of the merger of Universata, Inc. (“Universata”) with HealthPort Technologies, LLC (“HealthPort”).  In late 2010, Universata was approached by HealthPort and at least one other suitor about a potential acquisition.  Universata sought legal counsel in connection with the proposed transactions, and counsel suggested that Universata engage an investment bank to assist in negotiations.  Universata engaged KeyBanc, as KeyBanc had worked with Universata previously and was familiar with the company.

In an effort to keep costs down (and presumably increase the return to shareholders), KeyBanc’s engagement was limited to assisting with due diligence and identifying other potential buyers.  Universata’s board of directors considered obtaining a fairness opinion from KeyBanc, but ultimately chose not to on the grounds of cost and timing.   Universata’s board ultimately approved the merger with HealthPort, at a directors’ meeting attended by counsel where the board was provided with a summary of the legal aspects of the merger documents by counsel and had the opportunity to ask questions of counsel.

The plaintiffs, who were stockholders and creditors of Unversata, brought suit against the directors on the grounds that they breached their duty of care by, among other things, failing to obtain a fairness opinion from KeyBanc in connection with the merger.  The court found that while the sales process was not perfect, the board did not “knowingly and completely fail to undertake a reasonable sales process.”  The court found that the board took several steps intended to maximize value, including hiring counsel, engaging KeyBanc to perform certain tasks, reviewing offers from multiple bidders, and negotiating aggressively with the ultimate buyer (HealthPort).  The court found that the plaintiffs could not prove bad faith by the board, as there was not a complete failure by the board to run a reasonable sales process, and dismissed the plaintiffs’ complaint on these issues.

The full text of the opinion is available here.

Feel free to contact Mark with any questions on this topic.

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