Levco Alternative Fund v. The Reader’s Digest Association, Inc.

The Reader’s Digest Association, Inc. (Reader’s Digest) (defendant) was a corporation that had issued Class A nonvoting stock and Class B voting stock. In 2002 Reader’s Digest proposed a recapitalization plan under which it would purchase each share of Class B stock for 1.24 shares of a new voting stock and recapitalize each share of Class A stock for one share of the new voting stock. Under the recapitalization plan, Reader’s Digest would purchase over 3.5 million shares of Class B voting stock from two shareholders, the DeWitt Wallace-Reader’s Digest Fund and the Lila Wallace-Reader’s Digest Fund (collectively, the funds) for approximately $100 million. The plan would reduce the funds’ ownership of Reader’s Digest voting stock from 50 percent to 14 percent. The plan would give Class A shareholders voting rights but reduce their equity interests in Reader’s Digest by over $100 million because Reader’s Digest would have to take on debt to pay for the funds’ Class B shares. An independent committee proposed the recapitalization plan, which was approved by Reader’s Digest’s financial advisor, Goldman Sachs. Though Goldman Sachs determined that the recapitalization plan was fair to Reader’s Digest, neither it nor the committee determined whether the plan was fair to Reader’s Digest’s Class A shareholders. A group of Class A shareholders (the plaintiff shareholders) (plaintiffs) filed a lawsuit in the Delaware Court of Chancery, seeking to enjoin the recapitalization plan because the plan was not entirely fair to the Class A shareholders. The court of chancery denied the request for a preliminary injunction. The plaintiff shareholders appealed.