Delaware Court: Entire fairness review of Leucadia deal with FXCM is appropriate

Maria Nikolova

The Court has found it appropriate to examine the Leucadia transaction with a full record.


Did the $300 million loan extended by Leucadia National Corp. (NYSE:LUK) to FXCM Inc, now known as Global Brokerage Inc (NASDAQ:GLBR), constitute a waste of corporate assets? Were the terms of the transaction grossly unfair to the broker? These are some of the questions to which the Court of Chancery of the State of Delaware aims to answer.

On Friday, Vice Chancellor Glasscock published a Memorandum Opinion on the case Brett Kandell v. Dror Niv, et al, in which he stated that an entire fairness review of Leucadia loan to FXCM is appropriate.

  • The Leucadia deal

According to the Complaint, filed by Mr Kandell, a stockholder of FXCM Inc at all times relevant to this case, the Leucadia loan represented a waste of assets and the terms of the transaction were unfair to the broker.

The Court found, however, that the plaintiff plays down the urgency with which the Defendants had to act when having to decide on the potential deal. At the final FXCM board meeting in the immediate aftermath of the Flash Crash in January 2015, CFTC regulators entered the room and announced that “if the Board did not approve the transaction at that very moment, they would shut down the Company’s operations immediately and force FXCM into liquidation.” The Plaintiff faults the Board for failing to form “a special committee of independent directors to cleanse the process of conflicts of interest.”

Although the Court did not support this particular claim made by the Plaintiff, it decided to support a review of the Leucadia transaction.

“I have found it reasonably conceivable that entire fairness review is invoked here. Under that standard of review, it is appropriate that I examine the transaction with a full record”, says Vice Chancellor Glasscock.

The “entire fairness standard” is triggered in cases where a majority of the directors approving the transaction are interested or where a majority stockholder stands on both sides of the transaction. When the entire fairness standard is applied, the corporate board has the burden to demonstrate that the transaction is inherently fair to the stockholders by demonstrating both fair dealing and fair price.

The Court finds that the Plaintiff has managed to state a claim with regard to the Leucadia loan and rules against the Defendants’ objections with regards to it.

  • A business model allegedly reliant on a clear violation of a federal regulation

Regulation 5.16,which the CFTC adopted in September 2010, as part of the Dodd-Frank reforms, states that:

“a) No retail foreign exchange dealer, futures commission merchant or introducing broker may in any way represent that it will, with respect to any retail foreign exchange transaction in any account carried by a retail foreign exchange dealer or futures commission merchant for or on behalf of any person:

(1) Guarantee such person against loss;

(2) Limit the loss of such person; or

(3) Not call for or attempt to collect security deposits, margin, or other deposits as established for retail forex customers.”

The Complaint alleges that the Defendants were aware of FXCM’s purported violations of Regulation 5.16 because of FXCM’s marketing materials and its client agreements offering guarantees to customers.

The Court finds that the Regulation itself clearly prohibits touting loss limitations to clients, and that FXCM did precisely that.

“I pause to emphasize that this case presents a highly unusual set of facts: a Delaware corporation with a business model allegedly reliant on a clear violation of a federal regulation; a situation of which I can reasonably infer the Board was aware”, Vice Chancellor Glasscock.

The Memorandum Opinion states that FXCM pursued clients “explicitly on the ground that it would hold them harmless for loss beyond investment, in contradistinction to competing FX brokers.” The Vice Chancellor infers that the directors understood that FXCM was engaged in this policy. He also infers that based on the facts alleged and the Form 10-Ks, that the directors were aware of Regulation 5.16 and its prohibition on advising clients that the broker would limit trading loss.

“I find it reasonably likely that the directors knowingly condoned illegal behavior”, said Vice Chancellor Glasscock.

The legal proceedings continue at the Delaware Chancery Court.

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