Justices Weigh Conflicts in Inovalon Investors’ Buyout Suit

Delaware justices appeared receptive to Inovalon Holdings Inc. shareholders’ bid to revive their proposed class action over the health analytics company’s $7.3 billion sale to a private equity consortium led by Nordic Capital.

The panel’s questions during Wednesday’s oral argument focused on potential conflicts arising from Inovalon CEO Keith Dunleavy’s rollover for post-merger equity, with Justice Gary Traynor asking whether that incentive “puts the controller on the other side of the transaction.”

The suit, which Chancellor Kathaleen St. J. McCormick dismissed in July, alleged that Dunleavy and other executives steered Inovalon into the take-private deal for a lower price that favored company insiders, while concealing conflicts of interest and potentially more lucrative offers.

Dunleavy was allegedly conflicted when overseeing the dealmaking process, having secured employment at the combined company, rolled over his $700 million equity stake, and negotiated an undisclosed management incentive plan, the shareholders argue in their appeal.

The company’s directors acknowledged the conflict of interest presented by Dunleavy’s potential to rollover his equity, but still permitted him to continue negotiating and propose a $44 per share price for the company. By the time a special committee had been formed to oversee the deal, key aspects of the transaction had already been decided, the shareholders said in their brief.

“Regardless of whether [Dunleavy] knew for a fact that he was going to accept rollover, he had every incentive to self-disable,” said Ned Weinberger, a partner at Labaton Sucharow LLP who represents the appellants. “If he wanted to negotiate for a side deal, he could have, assuming the proxy was accurate.”

Nordic reneged on the $44 per share offer, which was then revised down to $40.50 per share, an approximately $550 million value reduction, according to the appeal brief. Inovalon ultimately agreed to a $41 per share deal that allowed Dunleavy and others to roll over a total of $1.3 billion in equity value to the combined company.

“If at a certain point it becomes clear to the controller that there will be a rollover, and that he or she will participate in the company going forward, aren’t they at least plausibly willing to perhaps negotiate a lower price for the buyout because they know they are participating in the upside once the buyout occurs?” said Justice Abigail LeGrow.

Shareholders also want the case revived because Inovalon allegedly failed to disclose key information before completing the transaction, namely the existence of a management incentive plan, as well as conflicts of interest for financial advisers JP Morgan Securities LLC and Evercore.

Both financial advisers allegedly had concurrent engagements with members of the acquiring consortium, and JPM allegedly received hundreds of millions in fees from consortium members in the two years preceding the deal, according to the appeal brief.

The Delaware’s Chancery Court erred in ruling that the shareholders cast informed votes when approving the deal, despite the alleged disclosure violations, the pension fund appellants argue.

Kessler Topaz Meltzer & Check LLP, Friedman Oster & Tejtel PLLC and Labaton Sucharow LLP represent the appellants.

Latham & Watkins LLP, Morris Nichols Arsht & Tunnell LLP represent the board committee members that negotiated the deal. Richards Layton & Finger PA represents Inovalon and Abrams & Bayliss LLP represents Dunleavy.

The case is City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings Inc., Del., No. 305,2023, 2/14/24.