In Re: Crimson Exploration Inc. Stockholder Litigation, C.A. No. 8541-VCP (October 24, 2014) (Parsons, V.C.)
By William Axtman and Ryan Drzemiecki
In Re: Crimson Exploration Inc. Stockholder Litigation involved a consolidated class action claim made by certain minority stockholders (“Plaintiffs”) of Crimson Exploration, Inc. (“Crimson”) challenging the completed acquisition of Crimson by Contango Oil & Gas Co. (“Contango”). The transaction was structured as a stock-for-stock merger (the “Merger”), with the Crimson stockholders holding approximately 20.3 % of the combined entity following the merger and an exchange ratio representing a 7.7% premium based on the April 29, 2013 trading price of Contango common stock and Crimson common stock. Plaintiffs also alleged that the members of Crimson’s Board of Directors (the “Directors”) and various entities affiliated with the investment management firm Oaktree Capital Management, L.P. (“Oaktree”) breached their respective fiduciary duties by selling Crimson below market value for self-serving reasons. In total, Plaintiffs brought claims against Crimson, the Directors, Oaktree, Contango Acquisition, Inc. (the “Merger Sub”) and Contango (“Defendants”).
A major premise of Plaintiffs’ complaint is that Oaktree controlled Crimson and thereby had fiduciary duties to the minority stockholders of Crimson. Oaktree owned roughly 33.7% of Crimson’s pre-Merger outstanding shares and a significant portion of Crimson’s $175 million Second Lien Credit Agreement, which Contango agreed to payoff after the signing of the Merger, including a 1% prepayment fee (the “Prepayment”). Also, in connection with the Merger, Oaktree negotiated to receive a Registration Rights Agreement (the “RRA”) so that it had the option to sell its stock in the post-Merger combined entity through a private placement.
Building off their assertion that Oaktree controlled Crimson, Plaintiffs claimed that Oaktree breached its fiduciary duties by causing Crimson to be sold for a grossly inadequate price while benefiting from significant side benefits (e.g., the Prepayment and the RRA), which were not shared with the minority common stockholders. Likewise, Plaintiffs claimed that the Directors breached their fiduciary duties as reviewed under the entire fairness standard because they (i) were interested in the Merger themselves; (ii) were dominated by Oaktree and thus lacked independence; or (iii) acted in bad faith. Finally, Plaintiffs claimed that Contango and the Merger Sub aided and abetted the Directors’ and Oaktree’s respective breaches of fiduciary duties.
The Defendants brought a motion seeking to dismiss Plaintiffs’ complaint for failing to state a claim on which relief can be granted. As an initial matter, the court found that the Revlon standard did not apply because the Merger was a stock-for-stock transaction involving widely held, publicly traded companies. With regard to the claims against Oaktree, the court engaged in a lengthy discussion of Delaware law regarding what constitutes control, and although the court was skeptical that Oaktree controlled Crimson, it assumed control for the sake of reviewing Defendants’ motion to dismiss. The court then explained that triggering the entire fairness standard of review requires the controller to have engaged in a conflicted transaction. Such conflicted transactions under Delaware law fall within two categories: (i) transactions where the controller stands on both sides; and (ii) transactions where the controller competes with the common stockholders for consideration. Because it is undisputed that Oaktree had no pre-Merger relation to Contango, the Merger did not fall within the first category. The Court also held that the Merger did not fall within the second category because Oaktree received the same payment as all stockholders in the Merger other than (1) the Prepayment—which was not agreed upon until after the signing and thus could not qualify as additional or different merger consideration—and (2) the RRA—which the court held was not a sufficient or unique benefit to require application of the entire fairness standard. Thus, the Court held that, even assuming that Oaktree controlled Crimson and owed fiduciary duties to the other stockholders of Crimson, Plaintiffs’ complaint failed to implicate the entire fairness standard of review.
The court dismissed Plaintiffs claim that the Directors breached their duty of care because the Crimson Certificate of Incorporation included an exculpatory provision, as permitted by 8 Del. C. § 102(b)(7), which would have exculpated the Directors for such violations absent bad faith. With regard to Plaintiffs’ remaining claims against the Directors, the court explained that Delaware courts will review a transaction under the entire fairness standard if the plaintiffs allege facts sufficient to rebut the business judgment rule, which typically requires evidence that the board was interested in the challenged transaction or lacked independence. Because the Plaintiffs complaint failed to allege sufficient facts to support a reasonable inference that a majority of the Directors were not disinterested or lacked independence, the court held that the Directors’ approval of the Merger should be judged under the business judgment rule.
Reviewing the Directors’ and Oaktree’s actions under the business judgment rule, the court deferred to their decisions because the process by which they reached their respective decisions was reasonable and Plaintiffs failed to allege facts indicating bad faith. Thus, the court dismissed the Plaintiffs’ claims for breaches of fiduciary duties against both the Directors and Oaktree.
Finally, the court also dismissed Plaintiffs’ remaining claim that Contango and the Merger Sub aided and abetted the aforementioned breaches because, as per the court’s decision, no breaches occurred for Contango and the Merger Sub to have aided and abetted.