The impact of a "fair price" on the "entire fairness" test.

While management and the preferred stockholders of Trados, Inc. received all of the merger consideration in an end-stage transaction and the common stockholders received nothing, the Court of Chancery found that the transaction was still "entirely fair" to the common stockholders because the common stock had no monetary value before the merger, The court's 114-page opinion in In re Trados Inc. S'holders Litig., 2013 WL 4511262 (Del. Ch. Aug. 16, 2013) (Vice Chancellor J. Travis Laster) dealt extensively with a variety of issues that directors and investors should consider.

The court found that the Trados directors failed to demonstrate that they had followed a fair process. Although Trados's new CEO suggested that he might be able to develop a new line of business rather than sell the company, the board never considered any alternative to the sale. The court went so far as to say: "[T]here was no contemporaneous evidence suggesting that the directors set out to deal with the common stockholders In a procedurally fair manner." The court held: "In this case, the VC directors pursued the Merger because Trados did not offer sufficient risk-adjusted upside to warrant either the continuing investment of their time and energy or their funds' ongoing exposure to the possibility of capital loss."

The court pointed to a number of particular procedural failings. The court intimated that the board should have at least considered the sale from the standpoint of the common stockholders. Instead, "[t]he VC directors did not make this decision [to sell Trados] after evaluating Trados from the perspective of the common stockholders, but rather as holders of preferred stock with contractual cash flow rights that diverged materially from those of the common stock and who sought to generate returns consistent with their VC funds' business model." The court also held that the defendants missed chances to improve the record on the process by failing to either secure a fairness opinion or condition the transaction on the approval of a majority of the common stockholders.

With respect to the fair price analysis, the court found that the defendants had satisfied their burden of establishing that the price was entirely fair to the common stockholders. In making this determination, the court emphasized that the preferred shares held an 8 percent accumulating dividend, meaning that the preferred shares' liquidation preferences grew by 8 percent per year. The court...