On January 24, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted over $18 million to a class of stockholder plaintiffs, concluding that the acquisition of the “Hometown” division of Sears Hometown and Outlet Stores, Inc. (“SHOS”) by its controlling stockholder did not meet the entire fairness standard. This ruling was made in the case of In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation, C.A. No. 2019-0798-JTL (Del. Ch. Jan. 24, 2024). Despite this determination, the Court also found that the controlling stockholder's actions preceding the transaction—such as removing two members from SHOS’s Special Committee and amending a bylaw to limit the company's options—did not constitute a breach of fiduciary duties.
The plaintiffs brought forward claims alleging both breach of fiduciary duties and unjust enrichment. They contended that the controlling stockholder purchased Hometown at an unfairly low price, leveraging his position to prevent SHOS from liquidating Hometown while continuing to operate the more profitable division, Outlet. The controlling stockholder, despite the support of the Special Committee, disagreed with this strategy, believing it was not in the best interest of the stockholders. In order to restrict the authority of the Special Committee, the controlling stockholder removed two out of the three directors who made up the Committee and amended SHOS's bylaws to mandate 90% board approval for liquidation, along with requiring two separate board votes, each taken at least 30 days apart—effectively making a liquidation unattainable. Subsequently, the controlling stockholder engaged in negotiations with the sole remaining member of the Special Committee to purchase Hometown at $2.25 per share, while Outlet was sold to a third party.
When assessing whether the controller's independent actions to amend bylaws and dismiss directors constituted a breach of fiduciary duties, the Court employed enhanced scrutiny. Applying this standard, the Court determined that the controller possessed a reasonable and good-faith belief that the proposed liquidation plan relied on excessively optimistic value estimates and would ultimately be detrimental to stockholders. Consequently, the Court deemed the controller's actions as "drastic but necessary" steps toward achieving his intended goal.
Nonetheless, the Court found the controller accountable to minority stockholders as the resulting acquisition of Hometown did not pass the entire fairness examination. The Court concluded that despite the remaining member of the Special Committee fulfilling their duties exceptionally, the controller had curtailed the negotiating authority of the committee by eliminating two out of three members, thereby tainting the process with unfairness. Moreover, the Court determined that the price paid by the controller for Hometown was not deemed fair, regardless of his personal belief in its fairness. Consequently, the Court ruled that the entirety of the transaction failed the entire fairness test, despite one of its elements—the sale of Outlet—being executed with both a fair price and fair dealing.
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