## Facts

- Reader’s Digest Association, Inc. had a dual-class structure: Class A nonvoting shares and Class B voting shares.
- A recapitalization plan proposed converting each Class A share into one share of a new voting class.
- The plan also contemplated a debt-financed repurchase of a large block of Class B shares held by two charitable entities, in exchange for 1.24 shares of the new voting stock per Class B share.
- The repurchase would cost roughly $100 million, financed largely with new debt, and would materially reduce the Funds’ voting stake.
- Plaintiffs, holders of Class A shares, alleged that although they would receive voting rights, the corporation’s debt-funded payment to the Funds would reduce or dilute Class A shareholders’ economic interest.
- An independent board committee recommended the transaction; Goldman Sachs provided a fairness opinion addressed to fairness to the corporation, not specifically to Class A shareholders as a separate group.
- Plaintiffs sought a preliminary injunction in the Court of Chancery to stop the imminent shareholder vote and transaction, asserting fiduciary-duty breaches and lack of entire fairness.
- The Court of Chancery denied preliminary injunctive relief; plaintiffs took an expedited interlocutory appeal.

## Issues

1. Whether the Court of Chancery erred, at the preliminary-injunction stage, in evaluating plaintiffs’ probability of success on an entire-fairness challenge to the recapitalization.
2. Whether the record required interim relief to prevent the transaction from proceeding before a full adjudication of the fairness issues.

## Decision

- The Delaware Supreme Court reversed the denial of a preliminary injunction.
- The Court held the Court of Chancery erred in estimating plaintiffs’ probability of success on the issue of entire fairness.
- The case was remanded with directions consistent with entering preliminary injunctive relief to maintain the status quo pending further proceedings.

## Legal Principles

- Transactions involving differential treatment of shareholder groups, or potential conflicts where a control bloc receives materially different benefits funded by corporate resources, may be subject to entire fairness review.
- Entire fairness requires proof of both fair dealing and fair price, assessed with particular attention to the effects on the allegedly disadvantaged stockholder group.
- A preliminary injunction requires a showing of (i) reasonable probability of success on the merits, (ii) irreparable harm, and (iii) a favorable balance of equities.
- Where an imminent corporate action would materially alter the status quo and meaningful fairness questions exist, injunctive relief may be warranted to preserve the ability to adjudicate the merits.

## Conclusion

The Delaware Supreme Court concluded that the lower court undervalued the strength of plaintiffs’ entire-fairness claim challenging a debt-financed repurchase benefiting a controlling Class B block, and it required preliminary injunctive relief to prevent the recapitalization from proceeding before a fuller fairness determination.


Levco Alt. Fund Ltd. v. Reader's Digest Ass'n, Inc., 803 A.2d 428 (Del. 2002)