New Senior Investment Group, Inc.
New Senior Investment Group, Inc. is a publicly traded real estate investment trust (a “REIT”) specializing in senior living properties. At the time the complaint was filed, the company was managed (and partially owned) by Fortress Investment Group, a global investment management firm. 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 (and still serves) as New Senior’s CEO. Though these two directors had a fiduciary duty to act in the best interest 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.
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 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. In situations like these, a properly functioning board of directors should appoint a special committee of independent directors to lead the negotiations. Here, not only did the special committee allow Givens to control the negotiations, but the special committee itself had a number of disabling conflicts of interest. Every member of the special committee had ties to Edens or Fortress which called into question their independence. For example, one board member was a co-owner of the Milwaukee Bucks with Edens, while another worked for a non-profit that had received substantial donations from Edens and his family. Based on these conflicts, Vice Chancellor Joseph Slights of the Delaware Court of Chancery ruled that the plaintiff had “pled sufficient facts to raise a reasonable doubt regarding the disinterestedness and independence of the New Senior board” and denied the defendants’ motion to dismiss.
While the complaint alleged that the $640 million price was too high, New Senior was further damaged by a secondary public offering of New Senior stock, part of which was used to finance the transaction. The price of the secondary offering was set by a committee made up of the directors Edens and Givens, and their conflicts contributed to an offering that benefited Fortress while harming New Senior. The stock offering was priced at $13.75, a significant discount to its then-trading price of $15.25, and the market reacted poorly to the offering, with the company’s shares falling over 7%. Fortress was 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 (which was substantially increased by the secondary offering). And in fact, Fortress’s management fees increased from $8.5 million in 2014 to $14.3 million in 2015.
On February 20, 2018, the Delaware Court of Chancery denied in its entirety the defendants’ motion to dismiss in John Cumming v. Wesley R. Edens, et al., a shareholder derivative action filed against the directors of New Senior. Vice Chancellor Slights’ 75-page opinion recognized that New Senior’s board of directors suffered from numerous conflicts of interest, concluding, “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.”
The Court also held that the appropriate standard of review was the plaintiff-friendly entire fairness standard, meaning that the burden would be on the defendants to show that the transaction was inherently fair to the company by demonstrating both fair dealing and fair price.
The discovery phase of the case included the review of more than 800,000 pages of documents, 16 depositions, and the filing of six motions to compel by the plaintiff. Following fact discovery, the plaintiff filed three expert reports related to the damages resulting from the real estate portfolio purchase and the secondary stock offering. After a mediation and extensive follow-up negotiations, the parties agreed to settle the litigation in exchange for the payment of $53 million in cash to New Senior. The settlement also included valuable corporate governance reforms, including the board’s agreement to approve and submit to New Senior’s stockholders for adoption at the 2019 annual meeting amendments to New Senior’s bylaws and certificate of incorporation which would (a) provide that directors shall be elected by a majority of the votes cast in any uncontested election of directors, and (b) eliminate New Senior’s staggered board, so that all directors are elected on an annual basis. A final settlement hearing in this case is scheduled for July 31, 2019, in Dover, Delaware.