In Doppelt v. Windstream Holdings, Inc., No. 10629-VCN (Del. Ch. Feb. 5, 2016), the Delaware Court of Chancery denied a motion to dismiss claims brought by plaintiff stockholders against a Windstream Holdings Inc.’s board of directors for breach of fiduciary duty, finding that the plaintiffs’ allegations were reasonably conceivable and that the director liability exculpation provision in the corporation’s certificate of incorporation would not clearly preclude liability on the part of the board of directors. The Chancery Court granted defendants’ motion to dismiss as to plaintiffs’ claim for rescission and claim against the corporation for breach of fiduciary duty.
Plaintiffs Jeffrey Doppelt and Neil Dolgin (the “Plaintiffs”) brought suit on behalf of themselves and all other similarly situated stockholders of Windstream Holdings, Inc. (“Windstream”), a Delaware corporation headquartered in Little Rock, Arkansas, against Windstream and Windstream’s board of directors (the “Board,” and collectively with Windstream, the “Defendants”). Plaintiffs sought monetary damages arising from the Board’s alleged breach of fiduciary duties, a declaration that the Windstream stockholders’ approval of certain Board proposals at a special meeting held on February 20, 2015 was void because the approval was obtained in violation of the Board’s disclosure duties, and an injunction to prevent the Board from continuing to violate such duties.
On December 18, 2014, Windstream announced a spin-off proposal (the “Spin-Off”) under which Windstream would spin-off assets into a publicly-traded [real estate investment trust (a “REIT”)], but retain 19.9% of the newly formed REIT and distribute the remainder to Windstream stockholders. This structure, Windstream announced, … was expected to reduce [Windstream’s] debt by $4 billion, and in order to avoid a $600-800 million tax burden, [Windstream’s operating company subsidiary] would be converted to a limited liability company (requiring a charter amendment). Following the transaction, Windstream would undergo a one-for-six reverse stock split to increase the post-transaction per-share trading price.
Doppelt, No. 10629-VCN at *3-4. Windstream stockholders were also asked to approve a Board proposal that would remove valuable voting rights of stockholders (the “Proposal to Eliminate Voting Rights”). Plaintiffs alleged that the Board’s proposal to effectuate the one-for-six reverse stock split (the “Reclassification Proposal”) and the Proposal to Eliminate Voting Rights (collectively, the “Proposals”) were presented as “part and parcel” of the Spin-Off. Plaintiffs further alleged that the proxy statement soliciting stockholder approval of the Reclassification Proposal and the Proposal to Eliminate Voting Rights was materially misleading in violation of the Board’s disclosure duties because it omitted important financial information and other material information regarding the Spin-Off. Lastly, the Plaintiffs alleged that that the Board publicly indicated that the post-transaction dividend target would be $0.70 per current Windstream share while the actual target was $0.58.
Defendants urged the Court to dismiss the Plaintiffs’ claims on four grounds: 1) the proxy statement contained all material facts, and in any event all facts that Plaintiffs alleged were not disclosed in the proxy statement were publicly disclosed at the time of the special meeting, 2) the director liability exculpation provision in Windstream’s Certificate of Incorporation (under the authority of Section 102(b)(7) of the Delaware General Corporation Law) compelled dismissal of Plaintiffs’ claims, 3) Plaintiffs were not entitled to post-closing equitable relief, and 4) all claims against Windstream itself should be dismissed. In a Memorandum Opinion issued on February 5, 2016, Vice Chancellor Noble addressed all four of Defendants’ arguments. Since the decision was in response to a motion to dismiss, the Court was required to consider Plaintiffs’ allegations under a more lenient “reasonably conceivable” standard rather than a more stringent “likelihood of success on the merits” standard.
The Court concluded that, at this stage of the litigation, it was at least reasonably conceivable that the alleged disclosure violations were material, relevant to the requested stockholder action, and not adequately disclosed at the time of the special meeting. Although the Defendants argued that information related to the Spin-Off was irrelevant to the vote on the Proposals, the Court concluded that it was reasonably conceivable that the Spin-Off and the Proposals constituted a single transaction entitling Windstream stockholders to all material information related to the Spin-Off prior to voting on the Proposals. Additionally, the Court determined that although Windstream might have publicly disclosed some of the allegedly withheld information prior to the special meeting, the Court could not find that such information was reasonably available to stockholders. Finally, the Court highlighted Windstream’s apparent inaccuracies in its public disclosures, such as the $0.12 discrepancy between the published and actual target post-Spin-Off dividend, as support for the Court’s finding that it was reasonably conceivable that the alleged disclosure violations were material.
The Court was not convinced that the failure of Plaintiffs’ complaint to allege that the Board was disloyal or acted in bad faith would preclude liability on the part of the Board by virtue of the exculpation provision in Windstream’s Certificate of Incorporation. Although the complaint did not explicitly state that the Board acted in bad faith, the Court could reasonably infer that the Board made the alleged misrepresentations knowingly and in bad faith because the complaint alleged that the Board’s omissions from the proxy statement were “deliberate.” The Court ultimately concluded that the exculpation provision did not compel dismissal of Plaintiffs’ claims at this stage of the proceeding.
The Court dismissed Plaintiffs’ claim requesting equitable relief in the form of rescission of the Spin-Off because the Court determined that such relief was no longer reasonably available. The Court arrived at its conclusion after considering the impracticalities in trying to unravel the Spin-Off after it had been implemented.
Finally, the Court dismissed all claims brought against Windstream itself. After dismissal of the equitable rescission claim against Windstream, the only remaining claims against Windstream were for breach of fiduciary duty, and such a claim could not be brought against the corporation itself.