In a recent post-trial decision, the Delaware Court of Chancery upheld as entirely fair the third-party acquisition of a controlled company in which the controlling shareholder received consideration that differed from that provided to the public minority. In re John Q. Hammons Hotels Inc. S’holder Litig., C.A. No. 758-CC (Del. Ch. Jan. 14, 2011).
The matter arose from the 2005 sale of John Q. Hammons Hotels, Inc., a publicly traded company controlled by John Hammons. In the transaction, the public shareholders were cashed out at a substantial premium while Hammons himself received an ongoing preferred equity interest and other contractual rights. In an important decision earlier in the case, the Chancellor ruled that with proper planning such a transaction may be reviewed under the deferential business judgment rule, but held that the Hammons transaction would nevertheless be subject to the plaintiff-friendly “entire fairness” test due to the lack of sufficient procedural safeguards.
