Going Private Transaction: Litigation

Litigation under Going Private Transactions

There are two types of going private lawsuits.

The one is brought by an acquiror against certain takeover defensive measures implemented by a company"s board of directors. For example, the acquiror may request the reviewing court to prevent the board from implementing any defensive measures, or seek mandatory redemption of poision pills by the board.

The key legal issue is whether certain defensive measures implemented by Unocal test in Unocal v. Mesa, the board meet the standard of fiduciary duty established by Delaware courts. 


The another is brought by stockholders of a target company, based on three reasons.

The first, public investors can file complaints against board of directors based on claims of breach of fiduciary duties of them. In these cases, investors may claim that directors breach their fiduciary duties in the name of the company, commonly referred to as "derivative action". Although directors have formally fiduciary duty for the company,  these investors are final beneficiaries of the duty in US, so directors have indirectly fiduciary duty for investors. US laws allow class action of these investor based on the claim.        

The second, public investors can accuse that the board violates Section 14(A) of Securities Exchange of 1934 in relation to disclosure of acquisition transactions, including disclosure misstatement. Like the first above, most of these lawsuits appear in the form of class action.

Finally, the plaintiff of the third is investors in a target company opposing a going private transaction. Dissatisfied with an offer price of the going private transaction, these plaintiff may request the company to buy back their stocks at a reasonable price, which is referred commonly to as "appraisal right". Persuant to the DGCL, however, these lawsuits apply only to the acquisition with cash as consideration. These challenging investors must hold stocks upon accomplish of the acquisition, not vote for the acquisition bill in the shareholder meeting, and even notify the company that they will exercise their appraisal right before the voting process.


The point is that these target companies must comply with the DGCL, a state corporate law protecting minority stockholders. If a target company is not registered in Delaware, many rights of public investors would not be supported by a reviewing court. For example, the board of directors of public companies listed in US which is registered in Cayman Island have no fiduciary duty for their stockholders.



However, these lawsuits stated above apply only to public companies registered in Delaware or other states in US. Many Asian companies comply with Cayman Islands Corporation Law, Chinese Corporation Law, Japanese Corporate Law and Korean company law. The liabilities of the board of directors under these laws are different from those under the DGCL. Thus, we provide consultation service about corporate governance under these laws.