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Delphi Shareholders Receive $49 Million Settlement

April 9, 2012

Shareholders of Delphi Financial Group scored an important victory in April when they wrested an additional $49 million for Delphi investors in connection with Tokio Marine Holdings, Inc.’s (“TMH”) buyout of the company. Delphi, a financial services holding company whose principal subsidiaries are insurance and insurance-related entities, was founded by Robert Rosenkranz in 1987. Delphi went public in 1990, with equity ownership divided into two stock classes: The Class A shares were publicly traded and each worth one vote. The Class B shares were all held by Chairman and CEO Rosenkranz and his affiliates, and each share of this class was worth ten votes. Through the agreement that created these share types, Rosenkranz held approximately 12.9% of Delphi’s equity, but he held 49.9% of Delphi’s voting power. Furthermore, any Class B shares sold or transferred by Rosenkranz automatically became singlevote Class A shares.

In July 2011, TMH announced to Delphi its interest and intent to acquire the company as part of a plan to expand into U.S. insurance markets. Meetings began between TMH and Delphi’s senior management (including Rosenkranz). When, in September 2011, TMH offered $45 per share for Delphi when it was trading in the low $20 per share range at the time, Rosenkranz told Delphi’s board that it was insufficient and that he would not vote his shares in favor of the deal. He would eventually come up with a counterproposal to Delphi’s board that reallocated the purchase price paid by TMH so that Class A shares would sell for $43 per share while his Class B shares would sell for $59. The board, through a special sub-committee authorized to negotiate internally with Rosenkranz, was unable to get him to reconsider the differential consideration but, despite the internal conflict, kept Rosenkranz as the company “point person” with TMH, since replacing him in the midst of negotiations might “spook” TMH. TMH would ultimately offer $46 per share, and Rosenkranz and the sub-committee then began to finalize the division of the merger consideration. The $46 per share offer was eventually to be allocated as $43.875 for each Class A share and $52.875 for each of Rosenkranz’s Class B shares, despite the fact that Delphi’s charter forbade such an unequal distribution. The board decided that the Class A shareholders would have to vote to amend the charter as part of the deal’s approval.

When the details of the proposed acquisition became public, a number of Class A shareholders sued. Plaintiffs were outraged that Rosenkranz had been allowed to remain Delphi’s point of contact with TMH even after he insisted on a disparate pricing arrangement. They alleged that the defendants had breached their fiduciary duty to obtain the highest price reasonably possible for their shares in the overall deal, and also that the resulting price differential for the Class A and B shares was a breach of fiduciary duty and a breach of Delphi’s charter, which required equal treatment of the share classes.

On March 6, 2012, Delaware Vice Chancellor Sam Glasscock III agreed in large part with plaintiffs. While he wrote that he would not issue a preliminary injunction, he did find many of the plaintiffs’ arguments that Rosenkranz and the other defendants breached their contractual and fiduciary duties persuasive, writing, “I therefore find that the Plaintiffs are reasonably likely to be able to demonstrate at trial that in negotiating for disparate consideration and only agreeing to support the merger if he received it, Rosenkranz violated duties to the stockholders.” In lieu of an injunction, Vice Chancellor Glasscock wrote that the threatened harm could still be remedied financially, because “[m]uch of the alleged misconduct … is remediable by readily ascertainable damages,” and that ultimately he could, if necessary, order Rosenkranz to disgorge any improper amount he gained through the merger. Just weeks later, in light of the evidence and Vice Chancellor Glasscock’s order, the parties reached the $49 million settlement for the Delphi investors.

In re Delphi Financial Group Shareholder Litigation, No. 7144-VCG (Del. Ch.).

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