In Kahn v. Student Loan Corporation, Vice-Chancellor Travis Laster refused to enjoin Citi Group's sale of Student Loan Corporation (SLC) for $600M. Citi owned 80% of SLC.
Representing the minority shareholders, Ethan Wohl, of-counsel to Labaton Sucharow, told the Court that Citi had impaired the value of SLC before the sale through its lending practices, rather than dressing SLC up for sale, because Citi's interests as majority shareholder and obligor diverged from the minority shareholders' equity interests. "This was the worst possible time to try to sell this business. Citi did it for its own personal reasons...and took a $200M haircut to accomplish the sale rather than keep the assets on their books."
Although Citi had claimed that the sale price was at a premium to SLC's (allegedly depressed) stock value, Mr. Wohl called premium-to-market pricing analysis "a sham." According to Mr. Wohl, Citi was really trying to take cash out of the company, to the detriment of SLC's stock price and to the interests of the minority shareholders.
Even though Citi had the right as a lender to withdraw its subsidiary's funding, Mr. Wohl said, as a controlling entity Citi had a fiduciary duty and was bound by a standard of fairness in how it dealt with the subsidiary's minority shareholders. There was no evidence in the record that SLC had become a bad credit risk or that continued lending would be unprofitable, which might justify a threat to terminate funding by Citi.
For Citigroup, Skadden Arps' Edward Welch told the Court that Citi had spent two years trying to sell SLC -- there was no fire sale. Further, Citi's lending to SLC was provided at market rates, and in fact SLC's interest expense dropped over time. SLC was not, said Mr. Welch, impaired by Citi's lending behavior. The suggestion that Citi was trying to impair the value of SLC after trying to sell it for two years, said Mr. Welch, was "fantasy."
For Student Loan Corporation, Morris Nichols' Ken Nachbar argued that the funding documents did not impair SLC's value because the loan obligation would not survive the acquisition. Mr. Nachbar reminded the Court that Citi did not withdraw funding or provide funding at greater than the market rate, and Citi had not duty to extend below-market funding indefinitely. Therefore, Citi could not have breached any duty. The stock holders were getting a "fantastic deal," said Mr. Nachbar, "and they should be celebrating, not suing."
Vice Chancellor Laster refused to either enjoin the sale or dismiss the complaint, and instead scheduled a trial on the matter for June 6-8, 2011. The Court concluded that the plaintiffs had a viable claim, but that even were they to prevail at trial, money damages would be an adequate remedy.