BFA probes Diller's $48.30 MGM bid over fiduciary conflicts

Bleichmar Fonti & Auld LLP opened an investigation into Barry Diller's $48.30-per-share bid to acquire MGM Resorts International, citing potential fiduciary breaches because Diller controls both sides of the proposed transaction.

The firm said the deal structure creates conflicts of interest under Delaware law because Diller serves on MGM's board while People, Inc., the company he founded and controls, holds the largest single stockholder position. "These facts create conflicts of interest under Delaware law," the firm said in a statement.

People, formerly known as IAC, submitted the unsolicited bid on June 1 and recently entered a governance agreement with MGM granting it the right to designate two directors. MGM's board said it would "carefully review and consider the proposal to determine the course of action that it believes is in the best interests of the Company and all of its shareholders."

The investigation raises questions about whether the $48.30 offer adequately values MGM, which reported Q2 adjusted EPS of $0.59 on revenue of $4.45 billion, beating estimates but down 25.32 percent year over year. BFA has recovered over $900 million from Tesla's board and $420 million from Teva Pharmaceutical in prior shareholder actions.

Under Delaware law, transactions involving a director who stands on both sides must be "cleansed" to ensure fairness to all shareholders. The governance agreement giving People the right to designate two MGM directors compounds the conflict, the firm said. Other MGM fiduciaries could potentially receive benefits not available to other stockholders, according to the investigation notice.

MGM's Q2 results, released July 29, showed revenue growth of 1.02 percent year over year to $4.45 billion, beating the $4.421 billion consensus estimate. But adjusted EPS fell 25.32 percent from $0.79 in the prior-year quarter, reflecting margin compression across its resort properties. The divergence between top-line growth and bottom-line profitability could factor into any independent valuation of the company.

Delaware's Cleansing Requirements

For the deal to proceed, MGM's board would need to establish an independent committee or take other steps to satisfy Delaware's strict requirements for conflicted transactions. The board's June 1 statement said it would "carefully review and consider the proposal," but the investigation will scrutinize whether any eventual agreement adequately protects shareholder interests.

The precedent from BFA's prior actions is instructive. The firm recovered over $900 million in value from Tesla's board of directors and $420 million from Teva Pharmaceutical, demonstrating that Delaware courts can impose significant remedies when fiduciary duties are breached. These outcomes suggest MGM shareholders could have meaningful leverage in any negotiation over the final deal terms.

What Shareholders Should Watch

The investigation adds another layer of uncertainty to MGM's stock, which has been under pressure from the earnings decline and the pending bid. Stifel downgraded MGM to Hold in June while raising its price target to $49, and Wells Fargo upgraded the stock to Equal-Weight in July, reflecting mixed analyst sentiment around the deal. Shareholders face a choice between accepting the $48.30 offer or pushing for a higher price through litigation or independent valuation.

BFA is representing shareholders on a contingency fee basis, meaning there is no cost to investors who join the investigation. The outcome could set a precedent for how large stockholders who also hold board seats structure future acquisition bids. If the investigation leads to a higher offer or deal renegotiation, it would validate shareholder concerns about the initial price. If the deal proceeds at $48.30, it would signal that Delaware's cleansing requirements were met.

This article is for informational purposes only and does not constitute investment advice.