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New Senior Investment Group, Inc.

Case Details

Date Filed: December 27, 2016
Case Number: 13007-VCS
Jurisdiction: Delaware Chancery
icon-casetype Case Type: Derivative Shareholder Case

Case Summary

With Saxena White acting as Co-Counsel, on December 27, 2016, a derivative lawsuit was filed on behalf of New Senior Investment Group (“New Senior,” or the “Company”) against New Senior’s board and its once-removed corporate parent company, Fortress Investment Group (“Fortress”), alleging that the publicly traded senior housing real estate investment trust (“REIT”) structured a $640 million deal to benefit Fortress, a global investment management firm, at the expense of its shareholders. On June 8, 2017, Plaintiff filed an Amended Complaint.

New Senior was managed (and partially owned) by Fortress.   As New Senior’s manager, Fortress dominated the company’s board and its executive team:  Fortress co-founder Wesley Edens was New Senior’s Chairman, and Fortress managing director Susan Givens served as New Senior’s CEO.  Though these two directors had a fiduciary duty to act in the best interests of New Senior, their long-standing ties to Fortress meant that their loyalties were divided.  This management structure exposed New Senior to the risk that these insiders would manipulate the company to serve Fortress’ interests. And that is exactly what happened.    In June 2015, the board of directors of New Senior approved the purchase of a portfolio of 28 senior-living properties for $640 million from Holiday Retirement.  The majority owner of Holiday Retirement was none other than Fortress, representing a classic self-dealing transaction with every member of the six-person board deeply entangled with Fortress when it decided to approve the deal.    With New Senior motivated to get the lowest price possible for the transaction and Fortress seeking the highest price possible, Edens and Givens were obviously conflicted.  The special committee of independent directors appointed to lead the negotiations itself had a number of disabling conflicts of interest and ties to Edens or Fortress which called into question their independence.  Even more damaging to New Senior was a secondary public offering of New Senior stock, part of which was used to finance the transaction.   The stock was priced at a significant discount and the market reacted poorly to the offering, with the Company’s shares falling over 7%.  Fortress was also incentivized to direct New Senior to issue an excess amount of stock, as Fortress received a management fee of 1.5% of New Senior’s gross equity.

On February 20, 2018, the Delaware Court of Chancery denied in its entirety the Defendants’ motion to dismiss. Based on these conflicts, the Court ruled in its order that Plaintiff had “pled sufficient facts to raise a reasonable doubt regarding the disinterestedness and independence of the New Senior board.”  The Vice Chancellor concluded: “It can be reasonably inferred from these allegations that New Senior’s directors engaged in an unfair process when negotiating and approving the challenged transactions.”

On October 18, 2018, the Court granted Plaintiff’s Motion for Leave to File Second Amended Derivative Complaint, and on November 9, 2018, Defendants moved to dismiss the declaratory judgment claim in the Second Amended Complaint.  On January 19, 2019, Defendants filed a Motion for Summary Judgment, which was fully briefed by March 27, 2019.

After extensive discovery involving the review of more than 800,000 pages of documents, sixteen depositions, several motions to compel by Plaintiff, meditation and ongoing follow-up negotiations, the parties agreed to settle the litigation in exchange for the payment of $53,000,000 to New Senior.  The settlement also included valuable corporate governance reforms.  Described as a “landmark” settlement by Law360, on July 31, 2019, the Delaware Court approved the settlement.  The settlement is the largest derivative action settlement as a percentage of market capitalization to date in Delaware and is one of the top ten derivative action settlements in the history of the Chancery Court.  In his remarks at the final settlement hearing, the Vice-Chancellor called the settlement “impressive” and further described counsel’s efforts as “hard fought, but fought in the right way to reach a productive result.”