Delaware Docket – Page 49 – Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

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

Nov 06 2014

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.)

Nov 05 2014

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.)

Nov 03 2014

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.)

Oct 27 2014

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.

In Re: Crimson Exploration Inc. Stockholder Litigation, C.A. No. 8541-VCP (October 24, 2014) (Parsons, V.C.)

Oct 26 2014

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.

In re KKR Financial Holdings LLC Shareholder Litigation, C.A. No. 9210-CB (October 14, 2014) (Bouchard, C.)

Oct 21 2014

By Kristy Harlan and Eric Taylor

This case involves a challenge to a stock-for-stock merger by a group of stockholders of the target company who alleged breaches of fiduciary duty by both the board of directors of the target (the “Board”) and an alleged controlling stockholder who held less than 1% of the stock of the target. The transaction (the “Merger”) involved the acquisition of KKR Financial Holdings LLC (“KFN”) by KKR & Co. L.P. (“KKR”). KFN was managed by an affiliate of KKR, which was responsible for day-to-day operations of KFN, subject to the oversight of the Board pursuant to a management agreement between the parties. In October 2013, KKR expressed interest in acquiring KFN to a member of the Board. Over the next several months, the Board began to discuss the approach from KKR, set up a transaction committee to review the potential transaction, and met several times with representatives from KKR to negotiate for better terms. In mid-December 2013, the Board approved the Merger and KFN and KKR executed a merger agreement. The transaction was valued at approximately $2.6 billion.

This case is the consolidated result of nine separate actions that were filed challenging the Merger in December 2013 and January 2014. KFN and KKR moved for summary judgment, which the plaintiffs sought to overcome by arguing that the Merger should be subject to “entire fairness” review, instead of the presumed business judgment review. The Court held that the business judgment rule applied, granted summary judgment to KFN and KKR and dismissed the suit with prejudice.

Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

Oct 15 2014

By Eric Feldman and Porter Sesnon

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)), one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee.

Taylor controlled the Partnership through his control of the Partnership’s general partner. As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners. In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions. In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership. Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee. The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.” Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., C.A. No. 8642-VCP (September 30, 2014) (Parsons, V.C.)

Oct 08 2014

By David Edgar and Joshua Haft

In Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., the plaintiffs, including Cheval Holdings, Ltd. (“Cheval Holdings”), Black Horse Capital, LP, Black Horse Capital Master Fund Ltd. (together with Black Horse Capital, LP, “Black Horse”), and Ouray Holdings I AG, filed a breach of contract action arising out of a transaction in which the plaintiffs and defendants, Jonathan M. Couchman, Xstelos Holdings, Inc., and Xstelos Corp. (formerly known as Footstar Inc. and Footstar Corp. (“Footstar”)) jointly acquired a pharmaceuticals company, CPEX Pharmaceuticals, Inc. (“CPEX”), which is now wholly owned by defendant FCB I Holdings, Inc. (“FCB Holdings”), an entity jointly owned by Footstar and Cheval Holdings. Immediately following the closing of the acquisition, FCB Holdings was owned 80.5% by Footstar and 19.5% by Cheval Holdings.

The plaintiffs’ claims arose out of an alleged oral promise in December 2010 by the defendants to transfer to the plaintiffs certain assets of CPEX, specifically an additional 60% ownership interest in the drug product known as SER-120 and referred to as “Serenity” by the court. The transfer was to occur after the closing of the CPEX acquisition in exchange for the plaintiffs funding a disproportionately large bridge loan to FCB Holdings (the “Serenity Agreement”). On January 3, 2011, each of Black Horse and Footstar entered into separate bridge loan commitment letters with FCB Holdings and CPEX in the amounts of $10 million and $3 million, respectively. In April 2011, the bridge loans were made to FCB Holdings and the CPEX acquisition closed. In connection with the CPEX acquisition, the bridge loans, and the other related transactions, the parties entered into customary transaction documents. Although the alleged oral promise of the Serenity Agreement was made prior to the parties entering into the transaction documents, none of the transaction documents executed in connection with the loan or the merger referenced the Serenity Agreement. Furthermore, the transaction documents also contained customary integration clauses. By December 2012, the transfer of assets contemplated by the Serenity Agreement had not occurred and relations between the parties deteriorated to the point where the plaintiffs filed this action in June 2013.

In re Cornerstone Therapeutics Inc. Stockholder Litigation, Consolidated C.A. No. 8922-VCG (Sept. 26, 2014) (Glasscock, V.C.)

Oct 08 2014

By Annette Becker and Mark Hammes

In In Re Cornerstone Therapeutics Inc. S’holder Litig., 2014 WL 4418169 (Del. Ch. Sept. 10, 2014), Defendant directors of Cornerstone Therapeutics Inc. (“Cornerstone”) brought a motion to dismiss based on an exculpatory provision in Cornerstone’s certificate of incorporation pursuant to Section 102(b)(7) of the Delaware General Corporation Laws in the context of a controlling stockholder freeze-out merger. In the memorandum opinion, the Court denied the motion to dismiss, finding that, since entire fairness applied to the transaction at the outset, the director defendants must await a determination of entire fairness at trial before the Court could consider whether they were exculpated by the provision. The director defendants moved for interlocutory appeal under Delaware Supreme Court Rule 42 challenging the denial of the Court’s decision regarding the motion to dismiss.

This decision considers the motion for interlocutory appeal. The Court held that the defendant directors are entitled to an interlocutory appeal of the order denying the motion to dismiss. An interlocutory appeal may be certified by the Court only when the appealed decision (1) determines a substantial issue, (2) establishes a legal right, and (3) meets one or more criteria further enumerated in Rule 42, including that the decision falls under any of the criteria for certification of questions of law set forth in Rule 41. Here, the denial of the motion, if reversed, would result in dismissal of the defendant directors from the suit, so it is a substantial issue. Further, it establishes a legal right in that it necessitates the defendant directors be held as parties to the litigation. Finally, it satisfies the further “conflicting decisions” qualification set forth in Rule 41(b)(ii) because decisions of the Courts of Chancery have been conflicting as to whether, in a transaction subject to entire fairness review at the outset, in which there is a claim for “breach of duty on the part of facially disinterested directors who negotiated …. or otherwise facilitated the transaction needs to be specifically pled” and whether an exculpatory provision must be ignored at the motion to dismiss stage to await consideration of entire fairness at trial. As a result, the Court granted the defendant directors’ application for certification of interlocutory appeal.

InReCornerstorneTherapeuticsStockholder

Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., C.A. No. 9587-ML (Sept. 30, 2014) (LeGrow, A., M.C.)

Oct 07 2014

By Annette Becker and Caitlin Howe

This final report stems from plaintiff-shareholder Oklahoma Firefighters Pension & Retirement System’s (“Oklahoma Firefighters” or “Plaintiff”) demand under 8 Del. C. §220 for access to defendant Citigroup Inc.’s (“Citigroup” or “Defendant”) books and records in connection with alleged fraud and money laundering at two Citigroup subsidiaries. Following a paper record trial in June 2014, the court concluded in its draft report that Plaintiff had a proper purpose in seeking access to the books and records, but the court narrowed the scope of Plaintiff’s initial request. At the present phase of the case, Citigroup objects to the conclusions reached in the draft report, arguing that the incidents at the subsidiaries do not give Plaintiff a credible basis from which to infer wrongdoing or mismanagement on the part of the Citigroup Board of Directors. Moreover, Citigroup contends that even if Plaintiff’s purpose were proper, the scope of the documents requested is still too broad.

The demand arises from incidents at Banco Nacional de Mexico, S.A. (“Banamex”) and Banamex USA, which together account for 10% of the global profits of Citigroup. At Banamex, a fraudulent accounts receivables finance arrangement was discovered, which caused Citigroup to adjust downward its 2013 fourth quarter and full year financials by $235 million. Investigations into the fraud indicated that Citigroup may not have had the proper internal controls in place to prevent fraud, and Moody’s subsequently downgraded Banamex’s debt and deposit ratings due to the allegations surrounding the bank. Another smaller fraud of $30 million was also uncovered at Banamex. At Banamex USA, grand jury subpoenas were issued by the United States District Attorney for the District of Massachusetts regarding compliance with Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) regulations. The grand jury subpoenas were issued subsequent to a number of consent orders between Citigroup and various financial regulatory agencies regarding insufficient BSA and AML controls, risk management, the flow of drug cartel-related funds, and general oversight. In response to the BSA and AML concerns, the Citigroup Board of Directors charged the Board’s Audit Committee with responsibility for legal compliance oversight.