In Re Zhongpin Inc. Consolidated Stockholders Litigation, C.A. No. 7393-VCN (Novemeber 26, 2014)

The Court denied a motion to dismiss brought against the individual members of the board of a Chinese company. Plaintiffs, the public stockholders, alleged that the process by which the CEO purchased all the outstanding shares was unfair, and that they did not received an adequate price for their stock. The case survived the motion despite the fact that the going-private merger was negotiated by an independent special committee of the board and was approved by a slim majority of unaffiliated stockholders. Delaware evaluates motions to dismiss under a “reasonably conceivable” pleading standard that draws all inference in favor of the plaintiff. Under this standard, the Court found that the plaintiffs had sufficiently alleged that the CEO was a de facto controlling shareholder despite his holding a mere 17.3 percent of the company’s stock. Among other facts in the complaint, the Court noted 10-K filings that disclosed the CEO’s influence over major company decisions, as well his insistence on an allegedly low price early in the process, from which he refused to deviate. The stockholders claimed that this price was below the even the low end of ranges arrived at using various valuation methodologies. In addition, the CEO refused to cooperate with any third-party bidders. The Court found it reasonably conceivable that this had chilled the special committee’s ability to secure a higher per-share price. All these factors led the Court to conclude that the plaintiffs had sufficiently pleaded that the CEO was a controlling stockholder, which shifted the standard of review of the transaction to entire fairness, which precluded dismissing the case at such an early stage.