AmTrust Financial Services, Inc. (“AmTrust” or the “Company”) founded in 1998 by brothers George and Michael Karfunkel, operates through three business segments: Small Commercial Business Insurance, Specialty Program Business Insurance, and Specialty Risk and Extended Warranty. In March 2018, AmTrust announced that its controlling stockholders (the “Karfunkel-Zyskind Family”), along with their private equity partners, Stone Point Capital, would be taking the Company private. Saxena White and its co-counsel, which had been litigating a federal derivative action against the Company’s directors related to accounting malfeasance, believed that there were serious questions related to the price of the take-private transaction and the process leading to the transaction. Accordingly, we served a books and records demand on the Company, seeking information related to the transaction. After reviewing the documents produced by AmTrust, we determined that both the price and the process of the transaction appeared to be unfair to the Company’s minority shareholders. In short, we believed that the take-private transaction was executed by the Karfunkel-Zyskind Family in order to benefit itself and its affiliates at the expense of the minority stockholders, and we filed a class action complaint (the “Complaint”) challenging the transaction.
Specifically, the Complaint alleges that the transaction was timed and initiated to unfairly capitalize on the Company’s temporarily depressed share price, resulting from the stock market’s overreaction to AmTrust’s self-inflicted accounting discrepancies and financial restatements, which were the subject of separate derivative litigation. The Complaint further alleged that the Special Committee of outside directors, purportedly established to negotiate on behalf of the minority shareholders, had conflicting loyalties and plainly lacked independence from the Karfunkel-Zyskind Family. Indeed, the same directors were named as defendants in derivative actions concerning mismanagement and self-dealing at AmTrust and thus expected to benefit from any take-private transaction, which would extinguish their derivative liability. These directors also engaged a conflicted financial advisor, Deutsche Bank, which rendered a fairness opinion in favor of the transaction and which, unsurprisingly, had numerous prior engagements with AmTrust and Stone Point. Given their numerous ties to these parties, it is doubtful that Deutsche Bank would have ever recommended against the take-private transaction.
In the lead-up to the shareholder vote on the transaction, investor Carl Icahn acquired more than 9.3% of AmTrust’s shares. Icahn believed that the offer price was unfairly low and publicly opposed the take-private transaction. Icahn solicited proxies to oppose the deal, and in the face of this strong opposition from the Company’s public shareholders, the Karfunkel-Zyskind Family were unable to obtain the required majority-of-the-minority approval of the initial merger agreement. The Karfunkel-Zyskind Family then negotiated directly with Icahn to reach a new deal with a higher offer price, which was approved by shareholders.
Icahn’s ability to negotiate a higher price (which Plaintiffs still believe is unfair to the public shareholders) further demonstrates the Special Committee’s breach of their fiduciary duties. Icahn was able to negotiate a higher price than the Special Committee even though he was a brief interloping minority stockholder, who had been a stockholder of the Company for all of four weeks, with no access to or cooperation from AmTrust management, no due diligence, and no fiduciary duty to the other minority shareholders.
On June 5, 2019, Defendants filed their Motions to Dismiss, Plaintiffs filed their Opposition on August 21, 2019, and Defendants filed their replies on September 27, 2019. On November 5, 2019, a hearing on these motions was held before Chancellor Andre Bouchard of the Delaware Court of Chancery. On February 26, 2020, the Chancery Court issued an opinion denying the motions. The opinion stated in part, “Plaintiffs have pled facts supporting a rational inference that [the conflicted outside directors] harbored self-interest adverse to the interests of Amtrust’s minority stockholders when they approved the Transaction[.]” The case is now in discovery.