GFI is an institutional wholesale brokerage and trade execution services company, essentially an intermediary in transactions involving some of Wall Street’s largest investment banks. GFI also had other businesses, principally software products that provide specialized trading platforms for institutional investors. The saga for corporate control began in July 2014, when GFI announced a proposed merger with the Chicago Mercantile Exchange (“CME”) valued at $4.55 per share.
As alleged by the GFI stockholder-plaintiffs, the proposed merger price was inadequate and resulted from a conflicted sales process designed to benefit certain management insiders at the expense of public stockholders. In the proposed deal with CME, immediately following the merger of GFI and CME, CME would sell GFI’s brokerage business to a consortium of GFI insiders that included founder Michael Gooch and CEO Collin Heffron, who were also GFI directors. Gooch and Heffron controlled Jersey Partners Inc. (“JPI”), which was GFI’s largest stockholder at the time of the merger announcement, holding approximately 37% of GFI’s stock. This 37% block of GFI stock provided JPI (and Gooch and Heffron, by extension) with an effective veto over any merger transaction, because such transactions required approval by two-thirds of GFI’s shares. The stockholders alleged that Gooch and Heffron used JPI’s voting power to leverage a sweetheart deal in which they would acquire the GFI’s brokerage business at a steep discount to its true value.
As plaintiffs alleged, Gooch and Heffron further impeded the work of a “Special Committee” of outside directors formed by GFI’s board of directors to negotiate the transaction with CME and evaluate other strategic alternatives on behalf of GFI. Gooch and Heffron, for their part, refused to sell JPI’s shares of GFI to any party but CME and would not support any transaction that did not result in the management consortium’s acquisition of the brokerage business. Gooch and Heffron went so far as to enter into a voting agreement with CME that prevented JPI from supporting any alternative deal for a full year, even if the remaining GFI stockholders voted down the proposed merger with CME.
Yet BGC Partners, Inc. (“BGC”), a competitor of GFI, came forward with a higher offer for GFI in September 2014. That offer did not contemplate Gooch, Heffron and the management consortium acquiring GFI’s brokerage business. A bidding war ensued, with escalating bids by BGC forcing CME and the management consortium to raise their offer. BGC’s highest offer for the Company was a $6.20 per share all-cash offer that CME and the management consortium could not match. As plaintiffs alleged, Gooch and Heffron forced the GFI Board to reject this offer and move forward with a stockholder vote on a proposed merger with CME at $5.85 per share. By the time of the stockholder vote, BGC had withdrawn its $6.20 per share offer in favor of a lower $6.10 per share offer, which still represented materially higher consideration than CME and the management consortium were able to offer GFI’s public stockholders.
Stockholders voted overwhelmingly against the deal with CME. Gooch and Heffron, however, would still not agree to a transaction with BGC. In a press release issued after the stockholder vote, GFI management stated that it would begin exploring alternative transactions for the company, notwithstanding BGC’s pending $6.10 per share tender offer. The Special Committee, however well-intentioned, appeared powerless to overcome Gooch and Heffron’s self-interest.
The stockholder litigation became the forum for the Special Committee to seek judicial intervention to counter Gooch and Heffron’s intransigence. As the outside directors would later disclose to the Court and to stockholders in SEC filings, the Special Committee had never agreed to reinstitute a corporate sales process and, instead, wanted to secure a transaction with BGC at $6.10 per share. The Special Committee further demanded that JPI (i.e., Gooch and Heffron) independently pay an extra $0.10 per share to every stockholder who lost out on BGC’s higher $6.20 per share offer. Plaintiffs secured an expedited trial on their breach of fiduciary duty claims in the hope of forcing Gooch and Heffron to comply with the Special Committee’s demands.
Facing a trial that would bring to light a number of unflattering facts known only to the litigants, the conflicted directors eventually agreed to pursue a tender offer transaction with BGC at $6.10 per share. Gooch and Heffron, however, refused to make stockholders whole for losing out on BGC’s higher $6.20 per share offer. Plaintiffs agreed to postpone the expedited trial in exchange for the public disclosure of the Special Committee’s disagreement with management’s press release and an agreement by Gooch and Heffron to allow the Special Committee to participate in negotiations with BGC.
Plaintiffs continued to press their claims, believing they had a strong case for liability, as stockholders would have received more for their shares had Gooch and Heffron not prioritized their interests over the interests of GFI’s public stockholders. The Delaware Court of Chancery scheduled a trial for the fall of 2015. With the threat of a trial still looming and their depositions scheduled, Gooch and Heffron ultimately agreed to a settlement that will make stockholders whole for the value they lost when the GFI Board failed to agree to BGC’s $6.20 per share offer. The settlement likewise removed the voting agreement tail that prevented JPI from agreeing to an alternative transaction for a 12-month period following the negative stockholder vote on the CME deal.
The $10.75 million settlement fund will provide stockholders with even more than $0.10 per share and will not be reduced for an award of counsel fees. Thus, as a result of the litigation, GFI stockholders will receive total compensation for their shares even higher than BGC’s highest offer of $6.20 per share. In short, the stockholder plaintiffs and their counsel achieved what the Special Committee could not achieve by itself – maximum value for GFI public stockholders’ shares. The Court has scheduled a hearing for November 24, 2015 to consider whether to approve the settlement.