Oak Hill Wins Landmark Trial Victory in Delaware Fiduciary Duty Case

Paul, Weiss won a landmark trial victory for Oak Hill Capital Partners in the Delaware Court of Chancery. The win marked the first time the Chancery Court has concluded at trial that defendants satisfied the exacting “entire fairness” standard. It followed a long-running dispute related to Oak Hill’s investment in Oversee.net, in which it owned preferred stock and a majority of the common stock.

The case was filed in 2016 by Frederick Hsu, who co-founded Oversee.net and is the second largest holder of its common stock after Oak Hill. He alleged that Oak Hill and its representatives on the Oversee board of directors breached their fiduciary duties by causing the company to accumulate cash so that Oak Hill could redeem its preferred stock, instead of investing in the company’s long-term growth. In his opinion, however, Vice Chancellor J. Travis Laster concluded that Oak Hill and its directors “proved that their conduct was entirely fair” in managing Oversee and redeeming their preferred stock, finding that the defendants met their burden under the standard of entire fairness—a demanding standard, under which it is exceedingly rare for defendants to prevail.

At trial, the Paul, Weiss team was able to demonstrate that it was appropriate for Oak Hill to redeem its preferred interest, in light of the extreme unlikelihood that any cash reinvested in the business would have yielded value for the common shareholders. While Vice Chancellor Laster agreed with the plaintiff that the company undertook a cash-accumulation strategy and decreased investment efforts, he also agreed with Oak Hill that the conduct at issue was entirely fair. In particular, he held that “[t]he defendants proved by a preponderance of the evidence that the Company declined not because of the cash-accumulation strategy, but rather because of industry headwinds and relentless competition, most notably from Google, Inc. The defendants also proved by a preponderance of the evidence that if the Company had reinvested its net income, it could not have generated a return sufficient to create value for the holders of common stock.” The court observed that “Oak Hill, the Board, and the management team were not obligated to take a long-shot bet. They proved by a preponderance of the evidence that it was value-maximizing to accumulate cash and use it for redemptions.” Vice Chancellor Laster also found that, based on the presentation at trial, Oak Hill and its directors “spent countless hours working . . . to make the Company a success” and to create value for all shareholders.

As Vice Chancellor Laster noted, trial included testimony from 19 witnesses, as well as 2,593 exhibits, 44 depositions lodged with the court, and 416 pages of pre-trial and post-trial briefing. The court concluded that “the evidence . . . was not in equipoise,” and weighed in our clients’ favor.

The Paul, Weiss trial team included, among others, litigation partner Andrew Ehrlich.