# Question 5: The Founder’s Acquisition

## Your role

You represent the board of Asterix Robotics after shareholders challenge its acquisition of NovaSense, a private company in which Asterix’s founder and chief executive has a financial interest.

## Governing law

1. Directors and officers owe duties of care and loyalty.

2. A director is interested when she receives a material personal benefit not shared proportionately with shareholders or stands on both sides of a transaction.

3. A shareholder is a controller if the shareholder owns more than 50 percent of the voting power or exercises actual control over the board or the challenged transaction.

4. A controller’s self-dealing transaction receives business-judgment review only when, from the outset, it is conditioned on both:

   * Approval by an independent, fully empowered committee that satisfies its duty of care, and
   * An informed and uncoerced majority-of-the-minority shareholder vote.

5. If only one of those protections is effective, entire-fairness review remains applicable, although the burden may shift.

6. If the interested party is not a controller, approval by a fully informed majority of disinterested directors or disinterested shareholders ordinarily restores business-judgment review unless the transaction constitutes waste.

7. Entire fairness examines both fair dealing and fair price.

8. A fact is material if a reasonable shareholder would consider it important when deciding how to vote. Material omissions may defeat cleansing.

9. Independence is compromised when material personal or financial ties create reasonable doubt about whether a director can act independently. Ordinary friendship alone is insufficient.

10. A charter exculpation provision eliminates monetary liability for duty-of-care violations but not loyalty violations, bad faith, or improper personal benefit.

11. A financial adviser may be liable for aiding and abetting if it knowingly participates in a fiduciary breach.

12. Potential remedies include damages, rescission when practical, rescissory damages, fee shifting in appropriate circumstances, and governance relief.

## Facts

Elena Voss founded Asterix and serves as chief executive and board chair. She owns 34 percent of Asterix’s voting stock. Six of the nine directors were originally nominated by her. Two are current Asterix executives. The remaining four have no employment relationship with Asterix.

Elena proposed that Asterix acquire NovaSense for approximately $190 million. She owned 22 percent of NovaSense through an investment vehicle. She disclosed that ownership.

She did not disclose a side agreement under which NovaSense’s lead investor would pay her an additional $8 million carried-interest distribution if NovaSense sold for more than $150 million.

Before forming a special committee, Elena negotiated a preliminary term sheet with NovaSense and publicly described the companies as “nearing a transformative combination.”

The board then formed a three-director special committee. It had authority to negotiate or reject the transaction. One committee member served as chair of a charity receiving approximately $500,000 annually from Elena’s family foundation. That contribution represented about 8 percent of the charity’s annual budget.

The committee retained Peak Partners as its financial adviser. Peak had earned $12 million from Elena and companies she controlled during the preceding five years. Peak disclosed that it had “historical relationships” with Elena but did not state the amount of prior fees.

NovaSense supplied projections showing rapid growth. An earlier management forecast, prepared two months before acquisition discussions, projected substantially slower growth. The earlier forecast was in the electronic data room but was not included in the committee’s board materials.

NovaSense derived 61 percent of its revenue from one customer whose contract could be terminated on 90 days’ notice. That contract and its termination right were in the data room. The committee discussed customer concentration generally but did not receive a sensitivity analysis showing the effect of losing that customer.

The committee considered contacting three alternative acquisition targets. Elena told the committee that delaying the NovaSense transaction could allow a competitor to purchase it. The committee did not conduct a broader market check.

Peak concluded that a price range of $175 million to $210 million was financially fair. The committee approved $190 million.

The shareholder vote was conditioned on approval by a majority of disinterested shares. Fifty-four percent of those shares voted in favor.

The proxy disclosed Elena’s 22 percent ownership and Peak’s general historical relationship with her. It did not disclose:

* The $8 million side payment.
* The amount of Peak’s previous fees.
* The earlier lower forecast.
* The full details of the principal customer’s termination right.

Nine months after closing, NovaSense’s largest customer terminated its contract. Asterix wrote down 70 percent of the acquisition value.

Shareholders filed claims against Elena, the directors, and Peak.

## Assignment

Analyze:

* Whether Elena should be treated as Asterix’s controller.
* Whether the special committee and shareholder vote alter the standard of review.
* The effect of forming the committee after preliminary negotiations and public commitment.
* Committee independence, authority, diligence, and good faith.
* Whether the omitted information was material.
* Fair dealing and fair price.
* Potential liability of Elena, the committee members, other directors, and Peak.
* The effect of the exculpation provision.
* The likely outcome of a motion to dismiss and the probable scope of discovery.
* Available remedies and settlement exposure.
* Whether the board should defend, seek early settlement, create an independent litigation committee, pursue claims against Peak, or take another course.
* Governance changes that may reduce future risk without unnecessarily conceding liability.

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