Governance Insights 2025 Dual Fiduciaries: A Cautionary Tale For Nominee Directors
At the time of the sale, the company was the largest of the fund’s three remaining investments. The court noted that the fund’s governance agreement included customary end-of-term flexibility that permitted the fund to hold its investments past the expiration date at its discretion or to formally extend the term of the fund with the approval of either an advisory committee (comprising the fund’s largest investors) or a majority of the fund’s limited partners. The dissenting director gave evidence that one of the fund nominees explained to him during the sales process that the nominee was under pressure to sell the company “because it was one of the last investments still open in the applicable fund, and it was time [for the fund] to monetize and close that fund so the money could be returned to investors.” The court ultimately concluded that the fund had not acted under any real or perceived necessity to sell the company in 2017. The plaintiff was not able to provide any evidence that the fund’s investors were explicitly pressuring the fund to wind up its investments by the 10-year deadline, and, significantly, following the sale of the company, the advisory committee approved a two- year extension of the fund’s term. In the end, the court found that the fund was aligned with the interests of other investors in seeking to maximize value and that, in pursuing the sale, its nominees were not suffering from a conflict created by an alleged divergence between the needs of the fund and the interests of the company’s other stockholders (the relevant test in this case under Delaware law). The board weighed the dissenting director’s view of the benefits of deferring the auction against concerns that the momentum of the company’s growth would be lost if the sale were postponed. “To sell now or wait for a better opportunity later? Absent a showing of a
As negotiations narrowed to one final bidder, the company’s largest customer agreed to a multi-year contract on diminished terms and another key customer notified the company of its intention to extend its contract. With these updates in hand, Authentix finalized negotiations with the remaining bidder and secured a final offer of US$87.5 million with a US$17.5-million earnout. The board approved the deal in a four-to-zero vote, with one director (a nominee of another investor in the company) abstaining. As reasons for his abstention, the lone director criticized the sales process for failing to market Authentix’s potential to launch new upstream processes; suggested that a 12-month deferral of the auction would increase the sale price; and argued that the final bid still undervalued the company. The deal closed on September 13, 2017. End of Fund Life Cycle: Was the Fund Conflicted? Following closing, the shareholder that nominated the dissenting director brought a suit alleging that, among other things, two of the board members suffered from a conflict of interest in connection with the sale. The two impugned directors were managing directors of a prominent private equity firm that held a controlling interest in Authentix and were the fund’s nominees on the company board. The plaintiffs alleged that the fund, through its nominees, prematurely forced the sale of the company at a depressed price in order to offload its investment in the company prior to the expiration of the fund’s 10- year term (which was set for September 30, 2017).
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Davies | dwpv.com
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