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Hamilton Partners, L.P. v. Highland Capital Management, L.P.

Court of Chancery of Delaware

May 7, 2014

HAMILTON PARTNERS, L.P., a New Jersey limited partnership, Plaintiff,
HIGHLAND CAPITAL MANAGEMENT, L.P., a Delaware limited partnership, and JOSEPH F. FURLONG, III, Defendants.

Date Submitted: January 30, 2014

Ronald A. Brown, Jr., Esquire and Marcus E. Montejo, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware, Attorneys for Plaintiff.

Michael F. Bonkowski, Esquire and Therese A. Scheuer, Esquire of Cole, Schotz, Meisel, Forman & Leonard, P.A., Wilmington, Delaware, and Steven L. Klepper, Esquire of Cole, Schotz, Meisel, Forman & Leonard, P.A., Hackensack, New Jersey, Attorneys for Defendant Highland Capital Management, L.P.

M. Duncan Grant, Esquire and James H.S. Levine, Esquire of Pepper Hamilton LLP, Wilmington, Delaware, and Brian A. Berkley, Esquire and Leah Greenberg Katz, Esquire of Pepper Hamilton LLP, Philadelphia, Pennsylvania, Attorneys for Defendant Joseph F. Furlong, III.


NOBLE, Vice Chancellor

Plaintiff Hamilton Partners, L.P. (the "Plaintiff") filed this stockholder class action challenging the merger (the "Merger") between a Nevada corporation, American HomePatient, Inc. ("New AHP"), a successor-by-merger to a Delaware corporation of the same name ("AHP"), and an affiliate of one of the company's stockholders, Defendant Highland Capital Management, L.P. ("Highland"). The Merger was the sixth step in a complicated, going-private transaction between AHP and Highland (the "Restructuring"). In brief, the Restructuring involved: (i) a small debt repurchase by AHP; (ii) a reincorporation by merger of AHP into New AHP; (iii) a self-tender offer by New AHP; (iv) a debt refinancing by New AHP; (v) director resignations from the New AHP board; and (vi) the Merger.

The Plaintiff claims that Highland, as a controlling stockholder, breached its fiduciary duties because the Merger was not entirely fair.[1] In addition, the Plaintiff has asserted breach of fiduciary duty and aiding and abetting claims against one of the directors of AHP and New AHP, Defendant Joseph F. Furlong, III ("Furlong, " and together with Highland, the "Defendants"), for his actions related to the Merger.[2]

Highland and Furlong each moved to dismiss the Plaintiff's claims under Court of Chancery Rule 12(b)(6) for failure to state a claim. The Court concludes that Highland's motion must be denied, but Furlong's motion must be granted.


A. The Parties

AHP (and then New AHP) was a home health care provider with 241 branches in 33 states.[4] Before the Restructuring, AHP was a publicly traded Delaware corporation.[5] As part of the Restructuring, and preceding the Merger, AHP reincorporated by merger as New AHP, a Nevada corporation, on June 30, 2010.[6] Furlong has been a director of AHP since 1994 and the company's President and Chief Executive Officer ("CEO") since 1998.[7]

Highland, a Delaware limited partnership, is a "credit-oriented hedge fund" based in Dallas, Texas.[8] Leading up to and throughout the Restructuring, Highland was a significant creditor of AHP.[9] In addition, before the Restructuring, Highland owned approximately 48% of AHP's outstanding common stock. By the time of the Merger, Highland held approximately 78.5% of AHP's stock.[10]

The Plaintiff was a stockholder of AHP (and then New AHP) at all relevant times.[11]

B. Highland's Initial Interest in AHP

In hindsight, Highland's interest in AHP can be traced to the company's past financial troubles. Historically, a large portion of AHP's revenue came from services and products purchased through various Medicare and Medicaid programs.[12] During the 1990s, the company took on significant debt to fund dozens of branch office acquisitions. This expansion plan was successful until an untimely coincidence: around the time that AHP's debt levels seemed to peak, Congress reduced certain Medicare reimbursements, which caused some financial distress for the company.[13] In 2001, Highland started acquiring AHP's distressed debt.[14]

By 2002, under the weight of approximately $275 million in debt that had become due, AHP filed for bankruptcy.[15] With more than 37% of the company's secured debt, Highland was its largest secured creditor.[16]

Highland tried to work out a reorganization plan with AHP while it was in bankruptcy. Not only did the company resist Highland's overtures, but it even went so far as to propose a reorganization plan with its unsecured creditors—to which Highland and other secured creditors objected.[17] Despite the objection, however, the Bankruptcy Court approved the company's plan in July 2003. After its lack of success in obtaining control over AHP in bankruptcy, according to the Plaintiff, Highland started to acquire the company's stock.[18]

C. Highland's First Acquisition Proposal

In February 2006, when Highland owned approximately 9.9% of AHP's stock, [19] it proposed to acquire the rest of the company's outstanding stock for $3.40 per share. This offer was an 11% premium to the prior day's trading price. In its letter to the AHP board, Highland noted that if the directors were "unwilling" to negotiate with it, then it would "take all appropriate steps to accomplish a transaction, " such as by seeking board representation at the upcoming AHP annual stockholder meeting.[20] The Plaintiff does not allege whether any negotiations took place between AHP and Highland regarding this acquisition proposal.

Consistent with its earlier statement, Highland soon notified AHP of its intent to nominate a representative at the annual meeting. At the same time, Highland gave advance notice of its intent to solicit proxies for two bylaw amendments: one to expand the board and to allow for any vacancies created to be filled by a stockholder vote; and another to afford Highland, presumably by virtue of its ownership percentage, the ability to call a special stockholder meeting. The Plaintiff describes these proposals as being "designed to thwart AHP's staggered board protections."[21]

Once again, as in bankruptcy, AHP resisted Highland's advances. Furlong and the rest of the AHP board recommended that stockholders vote against Highland's nominee and bylaw amendments.[22] In particular, the board explained that its recommendation was "based on [its] assessment of the significant inherent conflicts and appearance of conflicts that exist between the interests of [AHP] stockholders and the interests of Highland."[23] Sensing this resistance, Highland withdrew its acquisition proposal in March 2006 and its board nominee and bylaw amendment proposals two months later.[24]

D. Highland Increases its Stock Ownership of AHP

The Plaintiff suggests that Highland withdrew its offer in favor of a "more attractive chink in AHP's armor, " alleging that the hedge fund proceeded to buy up the company's stock in the public market.[25] By April 2007, Highland acquired approximately 6.5 million additional shares of AHP stock at an average price of $2.85 per share. Altogether, Highland now held approximately 48% of AHP's stock.[26]

Highland's significant equity stake in AHP allegedly triggered change-in-control rights in Furlong's employment agreement with the company. The Plaintiff alleges, upon information and belief, that Furlong "knew" about Highland's intent to buy more AHP stock and that he declined to prevent it.[27]Under the terms of his agreement, Furlong now had the right to terminate his employment and demand a $6.6 million payment from the company. But, he elected not to do so. Instead, Furlong came to an alternative arrangement with AHP under which, in exchange for not exercising this contract right, he would remain President and CEO of the company and receive additional compensation of nearly $5 million in 2008. According to the Plaintiff, Highland was involved in the contract negotiations between Furlong and AHP.[28]

The Plaintiff further alleges that Highland's large position in AHP rendered it, as of April 2007, an "interested stockholder" as defined in 8 Del. C. § 203. This designation would have generally limited Highland's ability to consummate a business combination with the company for three years.[29]

E. AHP Enters into Several Forbearance Agreements with its Creditors

For several years after it exited bankruptcy, AHP successfully paid its debt obligations. During the relatively tight financial markets of 2009, however, the company struggled to refinance a large line of credit set to mature in August.[30]Fortunately, AHP and a majority of its senior debt holders—namely, Highland, which now held approximately 82% of this debt—negotiated a one-month forbearance agreement in late July 2009.[31] Over the next several months, as one forbearance agreement expired, AHP and its creditors (i.e., Highland) entered into another, with the last of ten forbearance agreements set to expire on May 15, 2010. By the Plaintiff's calculations, May 2010 was "just past the Section 203 three year prohibition" for Highland to enter into a business combination with AHP.[32]

F. AHP and Highland Negotiate a (Complicated) Going-Private Transaction

Meanwhile, in April 2009, Highland again proposed to acquire AHP for what the Plaintiff describes as "nominal value."[33] This time, Highland was allegedly intent on negotiating a deal. Part of its strategy to be the only potential acquirer of AHP, according to the Plaintiff, was to withhold its consent and prevent the company from refinancing its debt beyond the revolving, short-term forbearance agreements.[34]

AHP's board responded to Highland's new proposal by forming a special committee (the "Special Committee"), comprised of every AHP director except Furlong.[35] The four-member Special Committee then engaged Raymond James & Associates, Inc. ("Raymond James") as its financial advisor and retained legal advisors.[36] As it initiated a process to sell the company, the Special Committee purportedly "neither conducted a market canvass nor an auction." According to the Plaintiff, the Special Committee simply made "two telephone calls to what it believed were the most likely potential suitors."[37]

The Special Committee then began negotiating with Highland. The Plaintiff maintains that Furlong "injected himself" into at least two aspects of these negotiations. Specifically, he was allegedly "involved" in the Special Committee's initial counterproposal for a transaction in the range of $1.30 per share. Then, after Highland noted that it preferred not to pay cash in a transaction, Furlong was allegedly "involved" in the Special Committee's proposing to use a self-tender offer structure. During this back and forth, Highland raised its offer to a slight premium to AHP's then-current stock price of $0.26 per share.[38]

Several weeks later, presumably after continued negotiations, Highland proposed its "final offer" to acquire the AHP stock it did not own for $0.67 per share through a self-tender offer initiated by the company. The offer required AHP to pay the legal fees for Highland's counsel.[39] Apparently, even though the Special Committee "quickly" agreed to Highland's final offer a mere "matter of weeks" after it was proposed in late 2009, the parties did not enter into a definitive agreement on the transaction that became the Restructuring until April 2010— allegedly after the Section 203 period expired.[40]

The Special Committee received a fairness opinion as to the self-tender offer price of $0.67 per share from its financial advisor, Raymond James, on the evening of April 27, 2010.[41] That same day, the Special Committee recommended the Restructuring with Highland. Based on this recommendation, the AHP board approved the transaction. Highland, AHP, New AHP, and certain of the company's debtholders then executed the Restructuring Support Agreement (the "Restructuring Agreement"). By this time, AHP's stock was trading slightly above the $0.67 per share that had been agreed to. The AHP board would later justify the transaction by stating, in part, that the debtholders "were unlikely to extend the forbearance agreement if the Company did not proceed with the proposed transaction."[42]

G. The Terms of the Restructuring Agreement

Part of the dispute in this action is whether the Restructuring Agreement required the Merger. For this reason, the Court considers its terms in some detail. The Restructuring Agreement, governed by ...

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