Court Upholds Business Judgment Rule in Private Equity Sale Dispute

In Manti v. Authentix, minority stockholders of Authentix Acquisition Corp. (“Company”) challenged the $87.5 million sale of the Company by private equity firm The Carlyle Group to Blue Water Energy, LLC. The plaintiffs alleged that Carlyle’s liquidity needs influenced the sale. The Fried Frank firm notes that the Delaware Court of Chancery initially ruled that the entire fairness standard of review applied, raising concerns about a conflicted controller transaction.

However, after seven years of litigation, the court’s post-trial decision on January 7, 2025, determined that the Merger was not a conflicted-controller transaction. The court applied the business judgment rule and dismissed the claims, finding that Carlyle did not receive a non-ratable benefit from the sale.

The case stemmed from Carlyle’s control over the Company by owning 70% of the preferred stock and 52% of the common stock. In September 2017, Carlyle’s Fund was nearing the end of its ten-year term. In 2016, the Company’s board initiated a sale process amid business challenges, including non-renewal of key contracts.

The Plaintiffs argued that Carlyle forced a quick sale to align with the Fund’s expiration, resulting in a lower sale price that disadvantaged minority stockholders. They claimed Carlyle obtained a non-ratable benefit through its preferred stock holdings, warranting an entire fairness review.

The court rejected these claims, finding that Carlyle was not under compelling pressure to sell. No contractual deadline or investor pressure forced Carlyle to sell, and the sale process was comprehensive, involving negotiations with competing bidders.

Since Carlyle shared the same interest in maximizing value as other stockholders, a business judgment review was applied, and the case was dismissed.

This Delaware ruling clarifies that private equity sponsors are generally not liable for timing a portfolio company’s sale with fund expiration unless a compelling liquidity need exists.

A thorough sale process and aligning interests with other stockholders are key to protection for business judgment. Law firms advising private equity clients should ensure robust sale processes and precise records of independent decision-making to mitigate fiduciary risk.