In re FLS Holdings, Inc. Shareholder Litigation

FLS Holdings, Inc. (FLS) was formed through a leveraged buyout of Florida Steel Company in which shares of FLS preferred stock with a 17.5 percent dividend were issued in exchange for Florida Steel stock. The FLS preferred stock, unlike the common stock, did not carry voting rights. The FLS directors (the directors) (defendants) controlled a majority of the vote through the common stock. FLS fared poorly and sought a buyer. Kyoei Steel Ltd. offered to buy out FLS for $10 per share of FLS common stock, or $5 million in total, and $27 per share of FLS preferred stock, or $43.2 million in total. The directors and their financial advisor, Goldman Sachs, rejected the offer on the basis that the common stock was worth more and the preferred stock was worth less. Over a series of negotiations and rejected offers, the price offered for the common stock increased and the price offered for the preferred stock decreased. FLS finally accepted an offer of $9 million for the common stock and $29 million for the preferred stock. The common stockholders recouped 36 percent of their initial investment, and the preferred stockholders recouped 62 percent of the value of the interests they surrendered in the Florida Steel merger. However, a class of preferred stockholders (plaintiffs) took issue with the allocation of the final price and brought suit against the directors and certain other stockholders (defendants) in the Delaware Court of Chancery. This resulted in a settlement that offered no additional consideration to the plaintiff class. Instead, the settlement’s proponents concluded that an additional $1.7 million should have been allocated to the common stockholders but that the preferred stockholders would be able to keep this amount as a benefit derived from the settlement negotiations. Members of the class objected to the settlement as failing to resolve what they perceived as the fundamental lack of fairness in the merger allocation. The directors moved to dismiss the class claims and obtain an order confirming the settlement.