Archive: June 5, 2015

Delaware Court of Chancery Dismisses Shareholder Derivative Action Against Interested Directors Following Secondary Offering

By Annette Becker and Mark Hammes

In In re Molycorp, Inc. Shareholder Derivative Litigation, the Delaware Court of Chancery dismissed claims brought against director representatives of private equity investors for breach of fiduciary duties, aiding and abetting, and unjust enrichment for failure to state a claim.  The Court held that the private equity investors along with certain directors exercised their contractual rights to sell their stock in Molycorp Inc. a publicly traded corporation (“Molycorp”) in a secondary offering and the directors were under no obligation to delay such a demand registration during a time in which Molycorp was experiencing a cash shortfall.

Molycorp was engaged in the production and sale of rare earth oxides. Before Molycorp’s July 2010 IPO, three initial private equity investors (PEIs) negotiated a Registration Rights Agreement. The agreement secured the PEIs right to demand that Molycorp register their shares in a secondary offering. The results of the July 2010 IPO did not yield the funds expected, and a secondary offering of Molycorp shares in February 2011 left the company still short on cash. A potential loan from the Department of Energy fell through, and potential financing arrangements with two other companies looked increasingly unlikely. In May 2011, the PEIs exercised their demand registration rights, and the offering was held in June 2011. Due to a recent spike in the price of rare earth oxides, the PEIs (and several directors appointed by the PEIs) sold their shares in the resulting June offering at an inflated value. In September 2011, the rare earth oxide bubble burst. Subsequent efforts by Molycorp to make up for its cash shortfall by issuing convertible notes left it with inadequate funds to implement its planned production increase. As a result Molycorp missed out on potential profits from the rare earth element bubble.

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Chancery Court Affirms Former Executive’s Right to Advancement in Connection with Federal Indictment

By Lisa Stark and Lauren Garraux

In a post-trial memorandum opinion, Chancellor Andre Bouchard determined that Donald L. Blankenship, the former CEO and Chairman of Massey Energy Company (“Massey”), now known as Alpha Appalachia Holdings, Inc. (“Alpha”), was entitled to advancement of unpaid legal expenses incurred in connection with his indictment following an April 2010 mine explosion in West Virginia. According to Chancellor Bouchard, Blankenship’s right to advancement stemmed both from Massey’s October 2010 Amended and Restated Certificate of Incorporation (the “Charter”) and an Agreement and Plan of Merger between Massey and Alpha, pursuant to which Alpha acquired Massey.

Blankenship served as Massey’s CEO and Chairman until his retirement in December 2010. During his tenure at Massey, in April 2010, an explosion occurred at a West Virginia coal mine operated by a Massey subsidiary. The explosion killed 29 miners and led to both civil proceedings and a federal criminal investigation into the incident launched by the United States Attorney’s Office for the Southern District of West Virginia. For several years after the explosion, Massey and Alpha, which acquired Massey in January 2011, honored Blankenship’s right to advancement of his legal expenses and paid such expenses incurred in connection with the civil proceedings and federal criminal investigation. In November 2014, Blankenship was indicted on charges arising from the explosion. Following the indictment, Alpha stopped paying Blankenship’s legal fees.

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