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In Re Homefed Corporation Stockholder Litigation arose from a transaction in which Jefferies Financial Group Inc., the 70% stockholder of HomeFed Corporation, acquired the rest of the shares of the company in July 2019 by exchanging two of its shares for each share of HomeFed held by its minority stockholders. The transaction traced its roots back to 2017, when a HomeFed director proposed that Jefferies take HomeFed private in a 2:1 share exchange. In December 2017, a special committee of HomeFed’s board of directors was put in place to negotiate with Jefferies. The special committee paused its process in March 2018, when Jefferies told the special committee it was no longer interested in pursuing the transaction.

Over the next eleven months, despite indicating a lack of interest in a transaction, Jefferies engaged in direct discussions concerning a potential transaction with HomeFed’s largest minority stockholder (BMO), whose support was essential to get a deal done with the approval of the minority stockholders. In early February 2019, BMO indicated to Jefferies that it would support a 2:1 share exchange. Shortly thereafter, Jefferies formally proposed acquiring the rest of HomeFed’s shares in a 2:1 share exchange conditioned on obtaining the approval of a special committee and a majority of the minority stockholders. After some back and forth, the reactivated special committee ultimately approved the 2:1 share exchange that Jefferies originally proposed.

The primary issue before the court was whether the transaction complied with the framework set forth in Kahn v. M & F Worldwide Corp. (“MFW”) for subjecting a squeeze-out merger by a controlling stockholder to business judgment review rather than the entire fairness standard. Central to the case was whether Jefferies committed itself to the dual protections of MFW before engaging in substantive economic discussions concerning the transaction that anchored later negotiations and undermined the ability of the special committee to bargain effectively on behalf of the minority stockholders.

The court first considered whether the pause in negotiations in March 2018 put enough time and distance between subsequent negotiations around February 2019 so that the MFW protections were implemented in a timely manner. The court agreed with plaintiffs that the break in negotiations was not meaningful.  The board never dissolved the special committee, negotiations were only paused, negotiations continued with BMO and BMO ultimately supported the exchange ratio.

The timing of the two sets of negotiations was not the fatal flaw however, but how the final negotiations progressed. Jefferies engaged in a series of discussions with BMO until Jefferies received an indication of support for a 2:1 share exchange from BMO—whose support was essential to get a deal done with minority stockholder approval—as well as from a financial advisor and key stockholder before Jefferies agreed to the dual MFW protections. To be more specific, Jefferies received these indications of support in early February 2019 but did not agree to the MFW protections until, at the earliest, February 20, 2019, when it amended its Schedule 13D.

The Court rejected defendants’ argument that Jefferies’ discussions with BMO before the February 2019 offer did not pass the point of no return for invoking MFW’s protections because those discussions were “preliminary” and only involved “an unaffiliated minority stockholder with no ability or authority to bind the corporation or any other stockholder.” As noted in Dell, “MFW’s dual protections contemplate that the Special Committee will act as the bargaining agent for the minority stockholders, with the minority stockholders rendering an up-or-down verdict on the committee’s work.” In addition to superior access to information, directors also owe fiduciary duties and, unlike minority stockholders, do not suffer from the collective action problem of disaggregated stockholders whereas minority stockholders are unencumbered by fiduciary duties (absent special circumstances) and may have divergent interests in a transaction, whether economic or otherwise.

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