Are All Parties In It Together After the Agreement?

H.S. Grace & Company (HSG & Co) was engaged on behalf of minority shareholders of a small capitalized company to determine whether the value of their investment was intentionally devalued over the course of a seven-year period by the company’s senior management. Seven years earlier, the defendants’ company had acquired plaintiffs’ company. At the time, the two were similar in size and valuation.

The Issue

HSG& Co uncovered evidence of corporate governance problems that effectively allowed the acquiring company to increase its value 16-fold while reducing the market value of the acquired company by 75 percent.

How the Relationship Went Sour

The two companies were relative equals, with the acquiring company interested in two US regions where the acquisition target had a strong market presence. Following the acquisition, the president and the CFO of the acquired company were relegated to handling lower-level financial and administrative duties, reporting to defendants’ senior management. In this structure, the board, controlled by the defendants, proceeded to make decisions that violated the fundamentals of corporate governance structures where majority and minority stockholder groups exist.

How Does Corporate Governance Play a Role?

If the defendants had shared joint opportunities appropriately, the value of the acquired company would have increased significantly. While the majority of the value still would belong to the defendants as they were the majority shareholders, the minority shareholders would have reaped a fair percentage. This was not the case. Instead, the defendants diverted value to the parent company, thus depriving the minority shareholders of the acquired company of their fair share. Additionally, the defendants acted to reduce the minority shareholders’ percentage ownership in the acquired company as well as to misrepresent its intentions through a plan of action submitted to the banks that financed the acquisition contrary to what was disclosed in public filings. Furthermore, the defendants made a series of financial and operational decisions that effectively forced the acquired company to liquidate valuable assets to pay above-market interest rates on notes held by the parent company.

HSG Findings

HSG & Co found governance problems in the financial, operational, and management practices of the defendants. The defendants intentionally pursued a course of action that would diminish the value of the acquired company and the associated minority shareholder interests while greatly enhancing the value of their own company.

Result

After the expert report and deposition of H. Stephen Grace, the defendants’ attorney suggested that settlement discussions should be initiated. After brief negotiations, a settlement was reached that was favorable for the plaintiffs.

Testifying Resources

HSG Evaluates Appropriateness of Directors’ and Officers’ M&A Due Diligence

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