Private equity firms with minority holdings in publicly listed companies are allowed to have a voice during the sales process, a Delaware court has ruled.
The case involves private equity firm Castle Harlan and the sale of its stake in Morton’s Restaurant Group. Common stockholders challenged the sale, fearing that Castle Harlan, a private equity firm with a 28 percent equity stake, was more interested in cashing out its investment rather than the long-term needs of the company.
“The argument is if you have a [minority] stock holding that is too large to sell in the public market, you might have a conflict of interest when pushing for a sale because you achieve something that you can’t otherwise achieve, and which isn’t shared with the other stockholders,” said Bill Regner, co-head of Debevoise & Plimpton’s M&A practice.
Regner adds that Delaware courts have been wrestling with this conflict of interest issue for some time. And while this case supports the involvement of a large minority stockholder during the sales process, other cases have ruled differently.
“There really seems to be a difference of views between judges on this question which is why it is something private equity sponsors should be focused on,” said Regner.
However a protracted sales process is one area where the law stands more comfortably in favor of minority stakeholders on the matter. In the Castle Harlan case, “approximately a hundred different potential buyers were contacted, suggesting the absence of a conflict of interest because Castle Harlan was clearly just trying to maximize the exit price,” added Regner.