Delaware Docket

Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

 

I​​​​n re Zhongpin Inc. Stockholders Litig., C.A. No. 7393-VCN (November 26, 2014) (V.C. Noble)

By Elise Gabriel and David Bernstein

In In re Zhongpin, shareholders of Zhongpin Inc. (“Zhongpin” or the “Company”) brought a class action complaint for breach of fiduciary duty against Xianfu Zhu (“Zhu”), Zhongpin’s CEO and chairman of the board, and Zhongpin’s board of directors (the “Board”) in relation to a merger through which Zhu – who owned 17.3% of Zhongpin’s common stock – would acquire the remainder of the Company’s outstanding shares for $13.50 per share in cash. The transaction was approved by an independent committee of Zhongpin’s Board and the Merger Agreement required approval by a majority of the unrelated stockholders, although this requirement had not appeared in Zhu’s original proposal to Zhongpin’s Board.

On the defendants’ motion to dismiss, the Court held that the plaintiffs had stated a claim for breach of fiduciary duty against Zhu and the individual defendants. The Court stated that plaintiffs had adequately alleged that Zhu was a controlling stockholder even though he owned only 17.3% of Zhongpin’s stock by pointing to a statement in Zhongpin’s Form 10-K that referred to Zhu as “our controlling stockholder” and that said that as a result of the stock ownership “our controlling stockholder” was able to exercise significant influence over a variety of matters, including election of directors, the amount of dividends, if any, new securities issuances and mergers and acquisitions. The Court further held that the transaction was subject to review under the entire fairness standard rather than the business judgment rule because, even though the Merger Agreement required approval by a majority of the unrelated stockholders (and that approval was obtained), Zhu’s original proposal had not included a majority of the minority requirement at the outset. Finally, the Court was unwilling to dismiss the claims against the directors even though Zhongpin’s certificate of incorporation contained a provision under DGCL Section 102(b)(7) protecting directors against monetary liability, because, in a case subject to the entire fairness standard, a claim against directors cannot be dismissed until there is a determination as to entire fairness.

In re Zhongpin

In re Sanchez Energy Derivative Litig., C.A. No. 9132-VCG (November 25, 2014) (Glasscock, V.C.)

By Priya Chadha and David Bernstein

In In re Sanchez Energy, Vice Chancellor Glasscock granted a motion to dismiss in a shareholder derivative action because the plaintiffs had failed to make a demand on the Board, holding that the plaintiffs failed to meet Rule 23.1’s particularized pleading standards for demand futility.  The case centered around a transaction in which Sanchez Energy Corporation (“Sanchez Energy”), a publicly held corporation, purchased property at $2500/acre from Sanchez Resources, LLC (“Sanchez Resources”), a privately held, company, which Sanchez Resources had purchased for  $184/acre.  Two members of the Sanchez family—A.R. Sanchez Jr. and A.R. Sanchez III—owned a combined 21.5% of the shares of Sanchez Energy and served on its board of directors, which had three other members.  Those three members comprised Sanchez Energy’s audit committee, which approved the transaction.

The court rejected the plaintiff’s claim that demand would have been futile because the three members of the Audit Committee were not independent.  The Vice Chancellor said the plaintiffs had failed to show the audit committee members’ social and business relationships with the Sanchezes were such that “the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.”  He also rejected Plaintiffs’ arguments that the Sanchezes should be treated as controlling shareholders because they failed to show that the Sanchezes controlled the board or the negotiation process for the transaction.  Vice Chancellor Glasscock pointed to the fact that transaction was approved by the Audit Committee and that the Sanchezes owned at most a combined 21.5% stake in Sanchez Energy as evidence that the Sanchezes were not controlling shareholders.  Lastly, VC Glasscock rejected the idea that because of  the huge disparity between what Sanchez Resources paid to acquire the property and what Sanchez Energy paid to acquire the property from Sanchez Resources, the transaction was so facially unfair that it could not have been the product of valid business judgment, noting, among other things, that between Sanchez Resources’ initial purchase and its sale to Sanchez Energy, half of the property had been developed and found to contain proven oil reserves.

Thus, because the Complaint failed to specifically please facts excusing demand, the Court dismissed the Complaint.

In Re Sanchez

In Re Comverge, Inc. Shareholders Litigation

By Sherwin Salar and Whitney Smith

In Re Comverge, Inc. Shareholders Litigation involves a stockholder challenge to a merger between Comverge, Inc. and H.I.G Capital, L.L.C.  The plaintiff stockholders of Comverge contend that the Comverge board of directors (the “Board”) breached their fiduciary duties by: (1) conducting a flawed sales process and not suing HIG for an alleged breach of a non-disclosure agreement between the parties (the “NDA”); and (2) agreeing to deal protection measures that precluded the possibility of a topping bid.  On November 25, 2014, Vice Chancellor Parsons granted HIG’s motion to dismiss with respect to the first claim, but denied the motion on the second claim.  Furthermore, Vice Chancellor Parsons dismissed Plaintiffs’ claim that HIG aided and abetted the Board’s breaches of fiduciary duties, stating that even if there was a predicate breach of fiduciary duties by the Board, the Plaintiffs only allege conclusory facts that do not support a claim that HIG participated in those breaches.

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Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., et al., C.A. No. 9405-VCP (November 26, 2014) (Parsons, V.C.)

By Lisa Stark

In Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., the Delaware Court of Chancery held unenforceable provisions in a merger agreement and letter of transmittal requiring, as a condition to receiving the merger consideration, the target’s stockholders to: (1) indemnify the acquirer, up to their pro rata share of the merger consideration, for the target’s breaches of its representations and warranties, and (2) release the acquirer and its affiliates from any and all claims relating to the merger.

In this case, plaintiff, Cigna Health and Life Insurance Co. (“Cigna”), a former stockholder of defendant Audax Health Solutions, Inc. (“Audax”), sought some $46 million in merger consideration arising from the acquisition of Audax by Optum Services, Inc.  Defendants refused to pay Cigna the merger consideration for failure to sign a letter of transmittal (or LoT).  The LoT provided that the undersigned stockholder agreed to be bound by the indemnification provisions in the merger agreement and released the acquirer for any and all claims relating to the merger.  Some of the target’s representations and warranties, which were the subject of the indemnification obligations, survived indefinitely.  Cigna argued that the indemnification obligations and the LoT violated the Delaware General Corporation Law (the “DGCL”) for several reasons, including that they rendered the amount of merger consideration indefinite in violation of Section 251 of the DGCL and rendered the stockholders liable for the target corporation’s debts in violation of Section 102(b)(6) of the DGCL.  Cigna argued that the release contained in the LoT was unenforceable for lack of consideration.  Finally, Cigna argued that the stockholder representative appointment provisions in the merger agreement were unenforceable.  In this decision, the Court addressed Cigna’s motion for judgment on the pleadings.

The Court found Cigna’s claims relating to the stockholder representative appointment provisions not properly presented, but agreed with Cigna that the indemnification and release obligations were unenforceable.  Specifically, the Court held that the indemnification provisions violated Section 251 of the DGCL by putting at risk all of the merger consideration for an indefinite period of time and rendering the amount of merger consideration to be received by the stockholders undeterminable.  As to the release, the Court held it unenforceable for lack of consideration–the right to receive the merger consideration vested at the effective time of the merger and the stockholders could not be required to release claims absent additional consideration.  The Court expressly limited its holding to cases where a stockholder was required to indemnify a party as a condition to receiving the merger consideration and all of such stockholder’s merger consideration was subject to clawback.   The Court also expressly stated that it was not addressing the validity of escrow holdbacks as a purchase price adjustment even though its reasoning could be applied to invalidate such arrangements.  Finally, the Court stated that its opinion did not prohibit corporations from entering into separate agreements with stockholders to indemnify the acquirer prior to the time that the stockholders’ right to receive the merger consideration vested, but that “a post-closing price adjustment cannot be foisted on non-consenting stockholders.”

CignavAudax

Smollar v. Potarazu, C.A. No. 10287-VCN (November 19, 2014) (Noble, V.C.)

By Lauren Garraux and Lisa Stark

In Smollar v. Potarazu, the Court of Chancery denied a stockholder’s request to expedite proceedings and to appoint a temporary receiver in connection with a challenge to an alleged impeding sale of VitalSpring Technologies, Inc. (“VitalSpring”) to an unidentified third-party.  Plaintiff Marvin Smollar, a VitalSpring stockholder, filed the complaint against defendant Sreedhar V. Potarazu (“Defendant”), VitalSpring’s chief executive officer and sole director, following Defendant’s announcement that VitalSpring would be sold pending approval by the Federal Trade Commission.  According to Defendant, the sale — which was projected to be completed around October 19, 2014 — was ultimately delayed pending further FTC guidance.

In his complaint, Plaintiff sought to enjoin the sale until VitalSpring released audited financial statements pursuant to an agreement with its stockholders and held an annual meeting of stockholders.  VitalSpring apparently had not held an annual meeting of stockholders for several years contrary to Delaware law.  According to Plaintiff, Defendant’s failure to hold annual meetings, to release audited financials and general lack of corporate transparency called into question the veracity of Defendant’s claims that a buyer for VitalSpring existed.

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NAMA Holdings LLC v. Related WMC LLC, et al., C.A. No. 7934-VCL (November 17, 2014) (Laster, V.C.)

By Joshua Haft and Scott Waxman

In NAMA Holdings, LLC v. Related WMC LLC, The Related Companies, L.P., and WMC Venture, LLC, the plaintiff, NAMA Holdings, LLC (“NAMA”) filed claims against Related WMC LLC (“Related Sub”) for breach of the implied covenant of good faith and fair dealing and against The Related Companies, L.P. (“Related Parent”) and World Market Center Venture, LLC (“WMCV”) for tortious interference with contract. The case originated from a suit filed by Related Sub and WMCV seeking a declaration that they complied with certain of their contractual obligations under the WMCV operating agreement, in which the Delaware Chancery Court granted partial summary judgment in favor of Related Sub and WMCV. In this Memorandum Opinion, the Delaware Chancery Court issued its post-trial decision after a trial on NAMA’s claims for breach of the implied covenant of good faith and fair dealing by Related Sub and tortious interference with contract by Related Parent and WMCV.

The plaintiff’s claims arose out of the development of a retail shopping mall in Las Vegas, Nevada called the World Market Center (the “Center”). In order to develop the Center, Alliance Network, LLC (“Alliance Network”) was formed by Prime Associates Group, LLC, which was owned by Shawn Samson and Jack Kashani, Crescent Nevada Associates, LLC, owned by relatives of Kashani, and NAMA. NAMA contributed 70% of the capital for Alliance Network, but after a dispute over additional needed capital, the project was restructured such that WMCV was formed by Alliance Network and Related Parent, a New York City real estate firm. WMCV had two members, Network World Market Center, LLC, a wholly owned subsidiary of Alliance Network (“Network”), and Related Sub.

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In re: Allergan, Inc. Stockholder Litigation, C.A. No. 9609-CB (Del. Ch. November 7, 2014) (Bouchard, C.)

By David Bernstein and Meredith Laitner

On November 7, 2014, Chancellor Bouchard denied the plaintiffs’ requests for summary judgment in In re: Allergan, Inc. Stockholder Litigation.  This ruling comes amid an acrimonious proxy fight in which a company owned by Valeant and Pershing Square are seeking to remove six of the nine members of the Allergan Board and request that the Board engage in good faith discussions with Valeant with regard to a Valeant proposal to merge with Allergan that will come to a head at a special stockholder meeting scheduled for December 18, 2014.

The charter and bylaw provisions challenged by the plaintiffs permitted holders of 25% of Allergan’s stock to call a special meeting or act by stockholder consent, but not with regard to any matter that is identical or substantially similar to one presented at a stockholder meeting held during the previous year (a so-called “Similar Items” provision).  In a Supplemental Proxy Statement, Allergan had stated that this would permit stockholders to remove directors, but not to replace them by written consent at a meeting called by stockholders if an election had occurred within the past year.  The plaintiffs asked for a declaratory judgment that the Similar Items provisions would not prevent the stockholders from, at a special meeting, both removing the entire Board and electing a new Board so long as the new directors had not been up for election during the preceding year.

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Higher Education Management Group, Inc. v. Matthews, C.A. No. 911-VCP (November 3, 2014) (Parsons, V.C.)

By David Bernstein and Max Kaplan

On November 3, 2014, the Delaware Chancery Court granted defendants’ motion to dismiss derivative claims in Higher Education Management Group, Inc. v. Mathews, C.A. No. 911-VCP (Del. Ch. Nov. 3, 2014) (Parsons, V.C.), after finding, among other things, that plaintiffs failed to plead with particularity facts showing demand upon nominal defendant’s board would have been futile.  In this case, defendant corporation’s subsidiary, Aspen University, paid out nearly $2.2 million in what were apparently expense reimbursements between 2003 and 2011.  These outlays were never recorded in the firm’s accounts—a fact discovered by management through a November 2011 audit. Apparently, rather than recording the expense, which would have required Aspen to restate previous years’ financial statements, management chose to treat the $2.2 million as a secured loan receivable owed by Aspen University’s former CEO—plaintiff Patrick Spada—with the intention of taking a write-off in the future.  Spada denied there ever was a loan and alleged that defendant officers and directors materially misrepresented the corporation’s finances by knowingly mischaracterizing the $2.2 million as a loan.

The court did not reach the merits of plaintiffs’ accusations, and it instead found that plaintiffs failed to either make a demand on the board or sufficiently plead that such a demand would be futile.  Plaintiffs had argued that the director defendants had made knowing misrepresentations that exposed them to a “substantial likelihood” of liability, and therefore all the directors were “interested” for purposes of satisfying the demand futility test.  However, Plaintiffs pled events that, if taken as true, showed only that two directors knew that there was no loan.  With regard to all the other directors, plaintiffs alleged only general knowledge of the loan being fake, attributing identical actions to all of the directors as a group without making specific allegations with regard to individual directors.  According to the court, “such broad and identical assertions . . . do not meet the requirements of pleading facts with particularity.”  Having found that the facts pled by the plaintiffs were only sufficient to show that a minority of directors were “interested,” the court concluded that a demand had not been shown to be futile and dismissed the claim.

Higher Education Management Group, Inc. v. Mathews

Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., et al., C.A. No. 8980-VCG (October 31, 2014) (Glasscock, V.C.)

By David Bernstein and Marisa DiLemme

This decision involves a merger agreement (the “Agreement”) between Apollo (Mauritius) Holdings Pvt. Ltd. and Cooper Tire & Rubber Company (“Cooper”), a principal purpose of which was for Apollo to acquire Cooper’s 65% interest in Chengshan Cooper Tires (“CCT”), a Chinese tire manufacturer. After the merger was announced, the minority owner of CCT apparently caused CCT’s union workers to go on strike by telling them that if they did not protest, they would be fired.  The minority partner also prevented Cooper from getting access to CCT’s financial records, which made it impossible for Cooper to prepare and deliver financial statements for the third quarter of 2013 as required by the Agreement.  Apollo refused to consummate the merger and sought a judicial declaration that its refusal was not a breach of the Agreement because Cooper had not satisfied several conditions to closing.

Vice Chancellor Glasscock agreed that Apollo was not required to carry out the merger because Cooper had not satisfied some of the conditions to closing.  Among other things, he found that the strike at CCT violated a Cooper covenant to cause each of its subsidiaries to “conduct its business in the ordinary course of business consistent with past practice.”  Cooper argued that an exception to the definition of “Material Adverse Effect” for a negative reaction to the Agreement by Cooper’s labor unions or joint venture partners also applied to the covenant to cause all subsidiaries to conduct their businesses in the ordinary course, but Vice Chancellor Glasscock rejected this argument, pointing out that even within the definition of Material Adverse Effect, there were some things (events that would prevent Cooper from fulfilling its obligations under the Agreement or from consummating the merger) that were not subject to the exception.

Another argument that Cooper made is that by attempting to negotiate terms on which the minority owner of CCT would withdraw its opposition to the transaction, Apollo acquiesced in proceeding with the merger despite what the minority owner was doing.  Vice Chancellor Glasscock rejected this argument, saying that Apollo was negotiating with the minority owner in an effort to make it possible for the merger to proceed.

CoopervApollo

In re TPC Group Inc. Shareholders Litigation, Consolidated C.A. No. 7865-VCN (October 29, 2014) (Noble, V.C.)

By Jamie Bruce and Lauren Garraux

The issue before the Court in In re TPC Group Inc. Shareholders Litigation was whether plaintiffs, shareholders of TPC Group Inc. (“TPC”) (“Plaintiffs”), were entitled to attorneys’ fees due to an increase in the merger price obtained between their commencement of shareholder litigation challenging the merger and the acquisition’s closing under an amended merger agreement.  Shortly after TPC announced its acquisition by First Reserve Corporation, SK Capital Partners and their affiliates (collective, the “PE Group”), Plaintiffs filed complaints in Delaware Chancery Court challenging the intended merger on a number of grounds, including inadequate price.  Ultimately, Plaintiffs’ claims were mooted by subsequent bidding and a supplemental proxy statement, which resulted in, inter alia, an increase of $5 per share ($79 million aggregate), an increase which TPC, its board and PE Group (collectively, “Defendants”) attributed to a competing proposal.

According to the Court, the critical issue with respect to Plaintiffs’ request was causation, i.e., whether Plaintiffs’ legal challenge was the cause of the price increase.  Under Delaware law, it is presumed that plaintiffs are a cause; therefore, the burden is on the defendant to prove, by the preponderance of the evidence, that no causal connection (whether direct or indirect) existed between the price increase and plaintiffs’ litigation efforts.  PE Group submitted affidavits citing concern over a competing proposal, negative publicity, public opposition by a significant shareholder, and the potential for an unfavorable evaluation by Institutional Shareholder Services when deciding whether PE Group should raise its bid.  While acknowledging that these affidavits were self-serving, the Court indicated that Defendants’ account was the most credible and was consistent with the record, and the Court concluded that Defendants had met their burden in this regard and, therefore, denied Plaintiffs’ request for attorneys’ fees relating to an increase in the merger price.

InReTPC

Mehta v. Smurfit-Stone Container Corp., C.A. No. 6891-VCL (October 20, 2014) (Laster, V.C.)

By Scott Waxman and Caitlin Howe

Pro se plaintiffs, Ram and Neena Mehta (the “Mehtas”), owned common stock of defendant Smurfit-Stone Container Corporation (“Smurfit”), which, after reorganizing in a Chapter 11 bankruptcy, merged with a wholly-owned acquisition subsidiary of Rock-Tenn Company (“Rock-Tenn Sub” and “Rock-Tenn Parent”, respectively). The Mehtas challenged (i) decisions leading to Smurfit’s bankruptcy, (ii) the merger with Rock-Tenn Sub, and (iii) Rock-Tenn Sub’s failure to pay the Mehtas the merger consideration from the Rock-Tenn Sub/Smurfit merger. The defendants moved to dismiss the Mehtas’ claims for failure to state a claim, and Vice Chancellor Laster granted the defendants’ motion with respect to claims (i) and (ii); however, claim (iii) survives, with the caveat that the Mehtas are not entitled to indirect or consequential damages.

On June 21, 2010, Smurfit emerged from a Chapter 11 bankruptcy, having cancelled and re-issued 95% of its stock to its former creditors and the remainder to its shareholders, including the Mehtas who owned 1,486 shares after the reorganization. Less than six months later, Smurfit and Rock-Tenn Parent announced their plans for a merger for cash and Rock-Tenn Parent stock consideration. The Mehtas timely filed a demand for appraisal, and the merger was subsequently consummated. However, the Mehtas eventually withdrew their demand and never filed a petition for appraisal. The Mehtas did not receive any merger consideration.

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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.

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