In re: Crimson Exploration Inc. Stockholder Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE: CRIMSON EXPLORATION INC. ) Civil Action No 8541-VCP STOCKHOLDER LITIGATION )
MEMORANDUM OPINION
Submitted: February 25, 2014 Decided: October 24, 2014
Carmella P. Keener, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Seth D. Rigrodsky, Esq., Brian D. Long, Esq., Gina M. Serra, Esq., RIGRODSKY & LONG, P.A., Wilmington, Delaware; Kent A. Bronson, Esq., Andrei V. Rado, Esq., Gloria Kui Melwani, Esq., Melissa Ryan Clark, Esq., MILBERG LLP, New York, New York; James S. Notis, Esq., Kira German, Esq., GARDY & NOTIS, LLP, New York, New York; Attorneys for Plaintiffs.
Srinivas M. Raju, Esq., Robert L. Burns, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael C. Holmes, Esq., Elizabeth C. Brandon, Esq., VINSON & ELKINS LLP, Dallas, Texas.; Attorneys for Defendants Crimson Exploration Inc., Thomas H. Atkins, Lee B. Backsen, B. James Ford, E. Joseph Grady, Anthony C. Isaac, Allan D. Keel, Lon McCain, Jay S. Mengle, Adam C. Pierce, John A. Thomas, Cassidy J. Traub, Ni Zhaoxing, Oaktree Capital Management, L.P., OCM GW Holdings, LLC, and OCM Crimson Holdings, LLC.
PARSONS, Vice Chancellor. The plaintiffs in this consolidated class action challenge the now-completed stock-
for-stock merger of Crimson Exploration, Inc., and Contango Oil & Gas Co. (the
“Merger”). The plaintiffs allege that the directors of Crimson breached their fiduciary
duties in approving the Merger. Their claims challenge the Merger on the familiar
grounds of inadequate process, inadequate price, and inadequate disclosure. The
complaint also alleges that a group of affiliated defendants, including Oaktree Capital
Management, L.P., constituted controlling stockholders of Crimson and breached their
fiduciary duties by selling the company below market value for self-serving reasons. As
such, the plaintiffs ask the Court to review the challenged transaction under the entire
fairness standard. Finally, the plaintiffs accuse Contango, and its affiliate, Contango
Acquisition, Inc., of aiding and abetting the foregoing breaches of fiduciary duties.
For the reasons that follow, the Court concludes that the complaint must be
dismissed under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which
relief can be granted. Even if the plaintiffs properly allege that Oaktree, alone or with
others, occupies the position of a controller that owes fiduciary duties to the other
stockholders, the well-pled allegations are insufficient to implicate entire fairness. As to
the director defendants, the plaintiffs failed to allege sufficient facts to support a
reasonable inference that a majority of the Board was not disinterested or lacked
independence. Thus, no claims against the directors support use of the entire fairness
standard. Reviewing the allegations of wrongdoing under the business judgment rule, the
Court finds them insufficient to state a claim. The aiding and abetting claims must be
1 dismissed as well largely because, apart from the inadequately pled breaches of fiduciary
duty in Counts I and II, nothing remains for Contango or its affiliates to have aided or
abetted.
Lastly, the Court denies a pending motion to intervene and finds that the proposed
intervenor has not proffered any additional information so material that it would be unjust
to dismiss this complaint with prejudice.
I. BACKGROUND1
A. The Parties
Defendant Contango Oil & Gas Co. (“Contango”), a Delaware corporation
headquartered in Houston, Texas, is an independent natural gas and oil company that
focuses primarily on properties in the Gulf of Mexico. Contango is the acquiring
company in the Merger.
Crimson Exploration, Inc. (“Crimson” or the “Company”) is a Delaware
corporation headquartered in Houston, Texas, that operates as an independent oil and gas
company. It focuses primarily on the Gulf Coast, Texas, and Colorado regions.
Crimson‟s board consists of seven individuals, each of whom is a named defendant in
this action. Crimson became a subsidiary of Contango following the Merger.
Oaktree Capital Management, L.P. (“Oaktree Capital”) is an investment
management firm. OCM Crimson Holdings LLC (“OCM Crimson”) is a Delaware
1 Unless otherwise noted, the facts recited herein are drawn from the well-pled allegations of the Consolidated Amended Class Action Complaint (the “Complaint”), together with its attached exhibits, and are presumed true for the purposes of Defendants‟ motions to dismiss.
2 limited liability company (“LLC”) and an Oaktree Capital affiliate. OCM GW Holdings,
LLC (“OCM Holdings”) is also a Delaware LLC. OCM Holdings is the holding
company for Oaktree Capital, OCM Crimson, and other unspecified Oaktree affiliates
(collectively, the “Oaktree Entities”).2 Oaktree holds roughly 15.5 million shares of
Crimson common stock, which represents about 33.7% of its outstanding shares. An
Oaktree affiliate also owns a significant, though unspecified, portion of Crimson‟s $175
million Second Lien Credit Agreement (“Second Lien”). Plaintiffs allege that Oaktree is
Crimson‟s controlling stockholder.
Allan D. Keel is Crimson‟s President and CEO. He is also a member of the board.
Keel owned slightly more than one million shares of Crimson common stock. He signed
a support agreement to vote his shares in favor of the Merger. Following the Merger,
Keel became the President and CEO of the surviving corporation and remained a director.
B. James Ford has been a director of Crimson since February 28, 2005. He is the
Co-Portfolio Manager and Managing Director of Oaktree Capital Group LLC (“Oaktree
Group”), Oaktree Capital‟s successor. He owns no shares of Crimson stock, but does
own slightly more than 1.4 million shares, or slightly less than 1%, of Oaktree Group
stock valued at $77 million. As anticipated, Ford has served as a director on the board of
the combined company following the Merger.
2 Unless it is necessary to differentiate the various entities for reasons of clarity, this Memorandum Opinion will refer to the Oaktree Entities generally as “Oaktree.”
3 Cassidy J. Traub became a Crimson director on December 7, 2009, and served on
the board until the Merger closed. He also is a Vice President at Oaktree Management‟s
Principal Group and has worked for Oaktree since 2005. He owned no Crimson stock.
Adam C. Pierce was a member of the Crimson board from January 24, 2008, until
the Merger closed. He is a Senior Vice President of Oaktree, but he personally owned no
Crimson stock.
Lon McCain has been a Crimson director since June 1, 2005. He has served on
the board of directors of the surviving company since the Merger was effectuated.
Ni Zhaoxing served on the Crimson board as a director from December 22, 2010,
until the Merger closed. He is the Chairman and CEO of America Capital Energy
Corporation (ACEC). ACEC owned over 6.6 million shares of Crimson common stock,
roughly 14.9% of all shares outstanding. ACEC is wholly owned by Shanghai Zhong
Rong Property Group, Ltd. (“SZRPG”). Ni is the founder, CEO, and controlling
stockholder of SZRPG. Plaintiffs allege that Ni, in effect, controlled ACEC‟s shares of
Crimson. In addition, ACEC was a permitted investor under Crimson‟s Second Lien.
The seventh director of Crimson, Lee B. Backsen, assumed that post on June 1,
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE: CRIMSON EXPLORATION INC. ) Civil Action No 8541-VCP STOCKHOLDER LITIGATION )
MEMORANDUM OPINION
Submitted: February 25, 2014 Decided: October 24, 2014
Carmella P. Keener, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Seth D. Rigrodsky, Esq., Brian D. Long, Esq., Gina M. Serra, Esq., RIGRODSKY & LONG, P.A., Wilmington, Delaware; Kent A. Bronson, Esq., Andrei V. Rado, Esq., Gloria Kui Melwani, Esq., Melissa Ryan Clark, Esq., MILBERG LLP, New York, New York; James S. Notis, Esq., Kira German, Esq., GARDY & NOTIS, LLP, New York, New York; Attorneys for Plaintiffs.
Srinivas M. Raju, Esq., Robert L. Burns, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Michael C. Holmes, Esq., Elizabeth C. Brandon, Esq., VINSON & ELKINS LLP, Dallas, Texas.; Attorneys for Defendants Crimson Exploration Inc., Thomas H. Atkins, Lee B. Backsen, B. James Ford, E. Joseph Grady, Anthony C. Isaac, Allan D. Keel, Lon McCain, Jay S. Mengle, Adam C. Pierce, John A. Thomas, Cassidy J. Traub, Ni Zhaoxing, Oaktree Capital Management, L.P., OCM GW Holdings, LLC, and OCM Crimson Holdings, LLC.
PARSONS, Vice Chancellor. The plaintiffs in this consolidated class action challenge the now-completed stock-
for-stock merger of Crimson Exploration, Inc., and Contango Oil & Gas Co. (the
“Merger”). The plaintiffs allege that the directors of Crimson breached their fiduciary
duties in approving the Merger. Their claims challenge the Merger on the familiar
grounds of inadequate process, inadequate price, and inadequate disclosure. The
complaint also alleges that a group of affiliated defendants, including Oaktree Capital
Management, L.P., constituted controlling stockholders of Crimson and breached their
fiduciary duties by selling the company below market value for self-serving reasons. As
such, the plaintiffs ask the Court to review the challenged transaction under the entire
fairness standard. Finally, the plaintiffs accuse Contango, and its affiliate, Contango
Acquisition, Inc., of aiding and abetting the foregoing breaches of fiduciary duties.
For the reasons that follow, the Court concludes that the complaint must be
dismissed under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which
relief can be granted. Even if the plaintiffs properly allege that Oaktree, alone or with
others, occupies the position of a controller that owes fiduciary duties to the other
stockholders, the well-pled allegations are insufficient to implicate entire fairness. As to
the director defendants, the plaintiffs failed to allege sufficient facts to support a
reasonable inference that a majority of the Board was not disinterested or lacked
independence. Thus, no claims against the directors support use of the entire fairness
standard. Reviewing the allegations of wrongdoing under the business judgment rule, the
Court finds them insufficient to state a claim. The aiding and abetting claims must be
1 dismissed as well largely because, apart from the inadequately pled breaches of fiduciary
duty in Counts I and II, nothing remains for Contango or its affiliates to have aided or
abetted.
Lastly, the Court denies a pending motion to intervene and finds that the proposed
intervenor has not proffered any additional information so material that it would be unjust
to dismiss this complaint with prejudice.
I. BACKGROUND1
A. The Parties
Defendant Contango Oil & Gas Co. (“Contango”), a Delaware corporation
headquartered in Houston, Texas, is an independent natural gas and oil company that
focuses primarily on properties in the Gulf of Mexico. Contango is the acquiring
company in the Merger.
Crimson Exploration, Inc. (“Crimson” or the “Company”) is a Delaware
corporation headquartered in Houston, Texas, that operates as an independent oil and gas
company. It focuses primarily on the Gulf Coast, Texas, and Colorado regions.
Crimson‟s board consists of seven individuals, each of whom is a named defendant in
this action. Crimson became a subsidiary of Contango following the Merger.
Oaktree Capital Management, L.P. (“Oaktree Capital”) is an investment
management firm. OCM Crimson Holdings LLC (“OCM Crimson”) is a Delaware
1 Unless otherwise noted, the facts recited herein are drawn from the well-pled allegations of the Consolidated Amended Class Action Complaint (the “Complaint”), together with its attached exhibits, and are presumed true for the purposes of Defendants‟ motions to dismiss.
2 limited liability company (“LLC”) and an Oaktree Capital affiliate. OCM GW Holdings,
LLC (“OCM Holdings”) is also a Delaware LLC. OCM Holdings is the holding
company for Oaktree Capital, OCM Crimson, and other unspecified Oaktree affiliates
(collectively, the “Oaktree Entities”).2 Oaktree holds roughly 15.5 million shares of
Crimson common stock, which represents about 33.7% of its outstanding shares. An
Oaktree affiliate also owns a significant, though unspecified, portion of Crimson‟s $175
million Second Lien Credit Agreement (“Second Lien”). Plaintiffs allege that Oaktree is
Crimson‟s controlling stockholder.
Allan D. Keel is Crimson‟s President and CEO. He is also a member of the board.
Keel owned slightly more than one million shares of Crimson common stock. He signed
a support agreement to vote his shares in favor of the Merger. Following the Merger,
Keel became the President and CEO of the surviving corporation and remained a director.
B. James Ford has been a director of Crimson since February 28, 2005. He is the
Co-Portfolio Manager and Managing Director of Oaktree Capital Group LLC (“Oaktree
Group”), Oaktree Capital‟s successor. He owns no shares of Crimson stock, but does
own slightly more than 1.4 million shares, or slightly less than 1%, of Oaktree Group
stock valued at $77 million. As anticipated, Ford has served as a director on the board of
the combined company following the Merger.
2 Unless it is necessary to differentiate the various entities for reasons of clarity, this Memorandum Opinion will refer to the Oaktree Entities generally as “Oaktree.”
3 Cassidy J. Traub became a Crimson director on December 7, 2009, and served on
the board until the Merger closed. He also is a Vice President at Oaktree Management‟s
Principal Group and has worked for Oaktree since 2005. He owned no Crimson stock.
Adam C. Pierce was a member of the Crimson board from January 24, 2008, until
the Merger closed. He is a Senior Vice President of Oaktree, but he personally owned no
Crimson stock.
Lon McCain has been a Crimson director since June 1, 2005. He has served on
the board of directors of the surviving company since the Merger was effectuated.
Ni Zhaoxing served on the Crimson board as a director from December 22, 2010,
until the Merger closed. He is the Chairman and CEO of America Capital Energy
Corporation (ACEC). ACEC owned over 6.6 million shares of Crimson common stock,
roughly 14.9% of all shares outstanding. ACEC is wholly owned by Shanghai Zhong
Rong Property Group, Ltd. (“SZRPG”). Ni is the founder, CEO, and controlling
stockholder of SZRPG. Plaintiffs allege that Ni, in effect, controlled ACEC‟s shares of
Crimson. In addition, ACEC was a permitted investor under Crimson‟s Second Lien.
The seventh director of Crimson, Lee B. Backsen, assumed that post on June 1,
2005, and held it until the Merger closed.3
3 The seven individual defendants—Keel, Ford, Traub, Pierce, McCain, Ni, and Backsen—comprised the Crimson Board of Directors immediately before the Merger (the “Board” or the “Director Defendants”). Of the Director Defendants, three worked for Oaktree while serving on the Board (the “Oaktree Directors”): Ford, Traub, and Pierce. Of the Director Defendants, three remained on the board of the surviving company after the Merger (the “Continuing Directors”): Keel, Ford, and McCain.
4 Defendant Contango Acquisition, Inc. (the “Merger Sub”), along with Contango,
is accused of aiding and abetting. “Defendants,” therefore, consist of the Merger Sub,
Contango, the Director Defendants, the Oaktree Entities, and Crimson.
The lead plaintiffs John Knapp, Theodore Schumm, and James P. Hoffmann
(“Plaintiffs”) initiated this consolidated class action. Collectively, they held at all
relevant times over 228,000 shares of Crimson common stock. Plaintiffs filed the
operative Complaint on September 13, 2013.
B. Significant Non-Parties
The Complaint highlights the roles of certain members of Crimson‟s management
team and emphasizes the degree of continuity between those executives and managers
before and after the Merger. For example, E. Joseph Grady, Crimson‟s Senior Vice
President and CFO, will become the Senior Vice President and CFO of Contango. As of
the Merger date, Grady held slightly more than one-half million shares of Crimson.
Along with Keel, Grady participated extensively in the Merger negotiations.
Several other members of the Crimson management team also continued to serve
as part of Contango‟s management. Thomas H. Atkins, Crimson‟s Senior Vice President
of Exploration, held about one-quarter million shares of Crimson and became Senior
Vice President of Exploration of the combined company. A. Carl Isaac, Crimson‟s
Senior Vice President of Operations, held nearly one-fifth of a million shares of Crimson,
and stayed on as Vice President of Operations. Jay S. Mengle, Crimson‟s Senior Vice
President of Engineering, held more than one-third of a million shares of Crimson stock
and has served as the Senior Vice President of Engineering of the combined company.
5 Finally, John A. Thomas, General Counsel and Corporate Secretary of Crimson before
the Merger, owned 37,000 shares of Crimson stock.
Each of these executives entered into support agreements to vote their shares in
favor of the Merger.
C. Facts
1. Crimson Exploration: Its history, operations, and balance sheet
Crimson traces its history back to 1987. By May 2001, the Company was known
as GulfWest. In late 2004 and early 2005, Keel saw an opportunity in the then-struggling
and cash-strapped GulfWest. Seeking investors to provide the capital needed to get the
Company back on track, Keel contacted Oaktree. Though Keel initially intended to take
GulfWest private, Oaktree decided to leave the Company public and invested $40 million
in February 2005. In connection with that recapitalization, Keel received a substantial
portion of the Company‟s equity pursuant to an agreement he had with Oaktree, and he
joined GulfWest as CEO. Around the same time, Grady became the CFO. On June 29,
2005, GulfWest merged with and into Crimson Exploration, Inc., thus becoming a
Delaware corporation and acquiring a new moniker.
Initially, natural gas dominated Crimson‟s production profile. By 2012, however,
natural gas liquids and crude oil each comprised roughly half of its production profile.
Without delving into the same level of detail as the Complaint in describing Crimson‟s
energy assets, I note two specific oil leaseholds. The first one, the Woodbine oil plays in
Southeast Texas, allegedly constitute important, long-term, oil-producing properties that
will generate above-average returns. Crimson acquired the Woodbine leaseholds in 2011
6 and reported successful drilling there in 2012. The second leasehold is the Buda
formation in South Texas. It is a naturally fractured oil formation that also is said to be
promising due to the formation‟s ability to produce oil more quickly and at a lower cost
than extraction via fracking.
At the time of the Merger, Crimson had two lines of credit. One was a senior
secured revolving credit agreement (“Senior Credit Agreement”), with Wells Fargo as
agent, that matured on May 31, 2015. The borrowing base, which was dependent on
proved crude oil and natural gas reserves, was $100 million. As of year-end 2012,
Crimson had $30.8 million available to it under the Senior Credit Agreement. Crimson
had obtained the other credit line, the Second Lien, on or around December 27, 2010,
with Barclays Bank Plc as the agent. The Second Lien was a term loan with an aggregate
principal of $175 million that matured on December 27, 2015. As of year-end 2012, the
entire $175 million principal amount remained outstanding. An affiliate of Oaktree
served as one of the Second Lien lenders. The Second Lien charged a variable interest
rate based on the higher of: (a) 4%; (b) the prime rate; (c) the Federal Funds Effective
Rate plus 0.5%; or (d) the one-month LIBOR rate plus 1%. Both the Senior Credit
Agreement and the Second Lien were secured by liens on substantially all of Crimson‟s
assets.
2. Oaktree and Keel; Oaktree and Crimson
A major premise of the Complaint is that Oaktree—alone, in conjunction with its
affiliates, or as part of a larger group—controlled Crimson. I pause, therefore, to note the
allegations relevant to that assertion. First, the Complaint alleges a longstanding
7 relationship between Keel and Oaktree dating back approximately ten years. The
Director Defendants are alleged to have been handpicked by Keel and Oaktree. There are
no allegations, however, that Keel ever worked directly for Oaktree or any Oaktree
affiliate.
Oaktree is alleged to have exerted control over both Crimson‟s Board and its
management. In this regard, the Complaint alleges that: (1) Oaktree owned 33.7% of
Crimson‟s common stock; (2) Keel and Oaktree had a longstanding relationship; (3)
Oaktree handpicked Grady as CFO; (4) the Oaktree Directors comprised three of the
seven Board members; (5) the remaining directors were nominated to the Board after
Oaktree invested in Crimson and, thus, either were approved or handpicked by Oaktree or
an Oaktree employee, such as director Ford; and (6) Crimson‟s executive officers—
namely, Keel, Grady, Mengle, Isaac, Thomas, and Atkins—joined the Company after
Oaktree made its investment, and all of them executed support agreements in favor of the
Merger.
3. Events leading to the proposed merger
The series of events that led to the Crimson-Contango Merger appear somewhat
different depending on whether one reads the Complaint or the Joint Proxy Statement /
Prospectus of Contango Oil and Gas Co. and Crimson Exploration, Inc. (the “Proxy
Statement”).4 The Proxy Statement indicates that in recent years the Crimson Board and
4 Facts taken from the Proxy Statement will be cited accordingly; uncited statements come from the Complaint. Consideration of the Proxy Statement is appropriate in resolving the pending motions to dismiss for the reasons stated in note 38 infra.
8 management pursued various potential strategic transactions with other companies and
private equity firms, but that, for various reasons, none of those opportunities panned out.
Near the end of 2012, management and the Board decided to attempt to identify strategic
opportunities more objectively and then pursue them. To that end, Crimson engaged
Barclays Capital Inc. (“Barclays”) as a financial advisor in early January 2013.5
Both the Complaint and the Proxy Statement trace the genesis of the Merger to a
conversation between Contango acting CEO Brad Juneau and a Crimson manager at a
youth sporting event in early January 2013. After those discussions were reported up the
chain of command, Juneau and Keel conferred by telephone on January 9, 2013. Juneau
and Keel discussed each company‟s respective business objectives: Contango sought to
diversify its asset base while Crimson desired more working capital to exploit its existing
opportunities and increase growth.6 Contango had only nine full-time employees and
lacked depth in management. Thus, as the Complaint repeatedly emphasizes, many
members of Crimson‟s management expected positions in the new company.
Discussions continued over the following weeks. According to the Complaint,
management was proceeding without the permission of the Crimson Board. One week
after the January 9, 2013, telephone call, Keel, Grady, and Atkins met with Joseph J.
Romano, Contango‟s interim CEO, to discuss the possibility of either a strategic
combination or a joint venture to develop the Woodbine properties. The Crimson
5 Proxy Statement 50-51. 6 Id. at 51.
9 executives concluded from this meeting that a strategic combination would be superior.7
Over the next several days, they and Contango negotiated the terms of a confidentiality
agreement, which the parties signed by January 21, 2013.8 Due diligence by both
companies followed. Keel and Grady met on January 29 with Barclays to discuss its
initial work on evaluating some six different strategic alternatives for Crimson. Crimson
management informed Barclays of the preliminary negotiations with Contango, but they
had not yet advised the Board about those negotiations. Keel and Grady had a follow-up
meeting with Barclays on January 31.9
During a telephone call on February 5, 2013, Romano and Keel established a
preliminary equity split of 80/20 in favor of Contango. According to the Proxy
Statement, that figure was based on preliminary net asset value analyses performed by
each company and each company‟s then-current market capitalization.10 Keel first
contacted representatives of Oaktree regarding a potential merger with Contango on
February 6. Oaktree responded favorably. On February 12, Grady and Thomas,
Crimson‟s general counsel, engaged Vinson & Elkins LLP (“Vinson & Elkins”) to serve
7 Id. at 51. 8 Id. at 52. Although the Complaint, ¶ 54, states that the parties executed the confidentiality agreement on January 17, this apparent date discrepancy is immaterial. 9 Proxy Statement 52. 10 Id.
10 as legal counsel on matters related to the potential merger.11 The same day, Keel and
Romano met to discuss the proposed transaction. On the subject of Crimson‟s
outstanding debt, Romano asked whether Oaktree would consider converting the debt it
held under the Second Lien to equity. Oaktree ultimately would reject that request. As
negotiations continued, members of Crimson management met with Contango‟s financial
advisors to receive briefings on Contango‟s properties and assets, including its land
contracts.12 On February 15, Keel and Grady agreed with Romano that an 80/20 split still
seemed appropriate. The Complaint alleges, however, that Barclays had not provided
Crimson with any valuation or analysis of the proposed deal at this point.
On February 26, 2013, Crimson‟s Board of Directors held a special meeting to
consider the proposed transaction. Based on the information presented by management,
the Board responded favorably to continuing negotiations with Contango. Although the
Company already was utilizing Barclays for a review of strategic alternatives, the Board
also retained Barclays to serve as the Company‟s financial advisor on the proposed
transaction.13 According to the Proxy Statement, between late February and late April,
2013, members of Crimson management—primarily Keel and Grady—spoke numerous
times with Board members, as well as with representatives of Oaktree and ACEC, about
the discussions with Contango, the status and results of the due diligence review, and
11 Id. at 53. 12 Id. 13 Id. at 54.
11 other matters relevant to the Merger. Romano also met several times informally with
members of Crimson‟s Board.14
Talks continued through March 2013. On March 5, Grady, Keel, and Thomas met
with Vinson & Elkins to discuss the fiduciary duties of the members of Crimson‟s
Board.15 On March 8, Romano met with Ford, as a representative of Oaktree, to discuss
the possibility of exchanging Oaktree‟s debt under the Second Lien for equity. Ford
responded that Oaktree would not agree to such an exchange. Four days later, the Board
held its regularly scheduled meeting. Vinson & Elkins reviewed with the Board their
fiduciary duties as directors in connection with a strategic merger. Members of
management presented information derived from due diligence and informed the Board
of their justifications for the business combination with Contango.16 Barclays also
attended the meeting and presented the previously requested strategic review options, as
well as the firm‟s preliminary assessment of the proposed transaction with Contango.
Barclays advised the Board that the Company would need significant capital to fully
exploit its assets. In that regard, Barclays suggested a merger with a better-capitalized
company, a sale of the Company, or a recapitalization as possible ways of acquiring that
capital.17 After discussing these options, the Board found that a strategic merger would
14 Id. 15 Id. at 55. 16 Id. 17 Id. at 56.
12 be most attractive. Based on this conclusion and the preliminary information it had
received, the Board determined that a merger with Contango would provide a significant
enhancement in stockholder value.18
During the second half of March, 2013, Crimson management met with various
representatives of Contango regarding executive employment following the proposed
merger. In addition, discussions, diligence, and negotiations regarding the terms of the
merger agreement, including various deal protection measures, continued through April.19
The Crimson Board met telephonically on April 11, 2013, with senior management and
representatives from Vinson & Elkins and Barclays to discuss remaining issues regarding
the Merger.20
Two significant events occurred in mid-April. First, Oaktree sought a Registration
Rights Agreement (“RRA”) so that it could sell its stock in the combined entity in a
private placement. Oaktree retained Kirkland & Ellis LLP to negotiate that agreement.
Crimson, Contango, and Oaktree participated in the negotiation of the RRA from April
13 to April 25, 2013.21 Second, based on the results of its diligence, Contango
downwardly revised the estimates of its proved offshore reserves. Thereafter, on April
25, Keel and Romano agreed to a revised equity split of 79.7/20.3.
18 Id. 19 Id. at 59. 20 Id. at 60. 21 Id.
13 The negotiations drew to a close in late April 2013. On April 27, the Crimson
Board held a telephonic meeting to discuss the Merger and received updates on
developments from senior management, Barclays, and Vinson & Elkins. The Board
authorized management to finalize the remaining terms,22 and met again on April 29 to
discuss final terms with management and Barclays. Barclays provided its oral opinion
that, based on the exchange ratio stated above, the deal was fair, from a financial point of
view, to Crimson stockholders.23 The Board approved the Merger. Director Ni was not
present at this meeting, but he later expressed his support for the Merger. Senior
management from Crimson and Contango signed the final merger agreement (“Merger
Agreement”) later in the evening. Crimson and Contango announced the Merger the next
day, April 30.
4. The Merger Agreement
The terms of the Merger Agreement called for Contango to acquire Crimson in
consideration for 0.08288 shares of Contango for each share of Crimson. This exchange
ratio represented a price of approximately $3.19 per share, a 7.7% premium based on the
April 29, 2013, trading price of Contango common stock and Crimson common stock.
After the Merger, Crimson stockholders owned roughly 20.3% of the combined entity.
The now-completed transaction required a majority vote of both Crimson and Contango
stockholders. Support agreements entered into in connection with the Merger Agreement
22 Id. at 62. 23 Id. at 63. Barclays provided a written fairness opinion to the Board later the same day.
14 locked up some 37.25% of the Crimson stock in favor of the merger. 24 As noted in
sections I.A and I.B supra, numerous members of Crimson management continued to
hold positions in the combined entity.
The Merger Agreement included several deal protection measures, including a $7
million termination fee and up to a $4.5 million expense fee. The termination fee
represents roughly 1.8% of Crimson‟s enterprise value.25 Subject to a fiduciary out,
Crimson also agreed to a no-solicitation provision and to provide Contango with
matching rights for any superior proposal. Plaintiffs also emphasize that the deal lacked
any collar mechanism setting a floor on the trading price of Contango shares.
5. Alleged side consideration
Plaintiffs rely heavily on alleged side consideration provided to Crimson
management and Oaktree that was not shared with the common stockholders. It is
undisputed that Oaktree received the RRA it sought and that Contango agreed to pay off
the entire Second Lien, including a 1% prepayment penalty (the “Prepayment”). These
two items are discussed in greater detail below in the context of the Court‟s analysis of
whether Oaktree competed with the common stockholders for consideration. I note,
however, that the Complaint does not allege that Oaktree demanded that the Second Lien
24 As alleged in the Complaint, this number included Oaktree‟s 33.7% ownership and the collective ownership of former Crimson management of approximately 3.5% of Crimson‟s common stock. 25 Proxy Statement 60. The total deal value was $390 million, including the assumption of $244 million in long-term debt. The termination fee amounted to 4.49% of the equity value.
15 be repaid in advance in connection with the closing of the Merger. Indeed, the Proxy
Statement said only that it is “anticipated that, at or immediately following the effective
time of the merger, Crimson‟s [Second Lien] . . . will be terminated and any indebtedness
thereunder repaid.”26 The Proxy Statement similarly stated that the parties expected that
Crimson‟s Senior Credit Agreement, along with Contango‟s comparable senior debt,
would be “amended, restated or replaced.”27 The Complaint also reviews, at length, the
salary increases and new employment agreements that Crimson management were to
receive and the amounts that were to be paid to them through accelerated vesting of stock
options and various other change-in-control payments.
D. Procedural History
After certain initial matters, including consolidation and the appointment of lead
counsel for Plaintiffs, Plaintiffs filed the Complaint on September 13, 2013. Defendants
moved to dismiss. The parties completed their briefing on the motions to dismiss on
January 27, 2014.28 The next day, January 28, Angelo Fisichella, as trustee for a trust
that owned stock in Crimson, moved to intervene in this action on behalf of the trust and
the common stockholders of Crimson. Defendants opposed that motion and it, too, was
26 Id. at 112. 27 Id. at 111. 28 Briefing on the motions to dismiss consisted of Contango‟s Opening Brief (“Contango Br.”), Crimson‟s Opening Brief (“Crimson Br.”), Plaintiffs‟ Opposition Brief (“Pls.‟ Opp‟n Br.”), and Defendants‟ Reply Brief (“Defs.‟ Reply Br.”).
16 the subject of full briefing.29 On February 25, the Court heard argument on the motions
to dismiss and briefly discussed with the interested parties the pending motion to
intervene (the “Argument”). Ultimately, the Court decided to stay the motion to
intervene pending resolution of the motions to dismiss.30 This Memorandum Opinion
resolves all pending motions.
E. Parties’ Contentions
Plaintiffs allege that this transaction undervalues the Company and deprives the
stockholders of receiving fair value for their shares. According to Plaintiffs, Oaktree, as
Crimson‟s controller, caused the Company to be sold for a grossly inadequate price and
received significant side benefits not shared with the minority common stockholders,
such as the Prepayment and the RRA. On that basis, Plaintiffs contend that entire
fairness applies and Oaktree cannot satisfy that demanding standard of review.
Management‟s complicity in this scheme stems from their self-interested employment
agreements with the surviving company. Rather than negotiating a superior exchange
ratio, Plaintiffs allege, senior management instead focused on effectively extracting for
themselves extensions of their employment agreements and higher salaries. Similarly,
Plaintiffs aver that the Director Defendants authorized the Merger because they: (1) were
29 Briefing on the motion to intervene consisted of the Intervenor‟s Opening Memorandum (“Intervenor‟s Mem.”), Defendants‟ Answering Brief (“Defs.‟ Opp‟n to Intervention”), and the Intervenor‟s Reply Brief (“Intervenor‟s Reply”). 30 Arg. Tr. 15 (“I‟ll defer until a decision on this motion to dismiss any action on the motion to intervene.”).
17 interested in the Merger themselves; (2) lacked independence because Oaktree dominated
them; or (3) acted in bad faith.
Plaintiffs base their claims, in part, on a series of management presentations before
the Merger was announced in which Keel and Grady suggested Crimson‟s share value
significantly exceeded the amount received as merger consideration. Plaintiffs also
allege that, seemingly to provide cover for the Merger, the insiders artificially depressed
Crimson‟s valuation with a suspiciously timed accounting impairment of the Company‟s
natural gas assets. Plaintiffs further assert that Barclays suffered from conflicts of
interest in this transaction. Finally, Plaintiffs claim that Contango and the Merger Sub
aided and abetted the Crimson Defendants‟ breaches of fiduciary duties.31
Defendants argue first and foremost that Oaktree was not a controlling
stockholder. But, even if Oaktree was a controller, Defendants contend, Plaintiffs have
not pled sufficient facts to trigger entire fairness review. Defendants challenge the
adequacy of Plaintiffs‟ allegations, reviewed under the more defendant-friendly standard
of the business judgment rule, to state a claim for breach of fiduciary duty. That is,
31 Plaintiffs also challenge in general terms the adequacy of the disclosures in the Proxy Statement, but the Complaint does not allege any specific disclosure violations. Plaintiffs likewise did not seek to enjoin the merger. Furthermore, even assuming the Complaint adequately pled a disclosure violation, such a violation would support, at most, a breach of the Director Defendants‟ duty of care. Because, as discussed in Section II.E.2 infra, Crimson‟s Certificate of Incorporation provides for exculpation to the fullest extent allowed by Delaware law, such a breach would not support Plaintiffs‟ claim for money damages. Therefore, Defendants‟ motions to dismiss any disclosure claims that might be asserted is well-founded, and I will not address those claims further.
18 absent Oaktree as a conflicted controller, Plaintiffs have not alleged sufficient facts to
support a reasonable inference that a majority of the Crimson Board either was interested
in or lacked independence regarding the merger or approved the Merger in bad faith.
Thus, according to Defendants, Plaintiffs have failed to state a claim for breach of the
duty of loyalty. Furthermore, the exculpatory provision in Crimson‟s Certificate of
Incorporation bars any remaining duty of care claims against the Director Defendants.
Contango, for its part, maintains that the aiding and abetting claims fail because there was
no underlying breach of fiduciary duty. But, even if there was, Contango says, Plaintiffs
failed adequately to allege any knowing participation by Contango or the Merger Sub in
any such breach, including a breach of the duty of care.
II. ANALYSIS
A. Standard of Review for Motion to Dismiss
Pursuant to Rule 12(b)(6), this Court may grant a motion to dismiss for failure to
state a claim if a complaint does not assert sufficient facts that, if proven, would entitle
the plaintiff to relief. As recently reaffirmed by the Supreme Court, “the governing
pleading standard in Delaware to survive a motion to dismiss is reasonable
„conceivability.‟”32 That is, when considering such a motion, a court must:
accept all well-pleaded factual allegations in the Complaint as true, accept even vague allegations in the Complaint as “well- pleaded” if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under
32 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537 (Del. 2011) (footnote omitted).
19 any reasonably conceivable set of circumstances susceptible of proof.33
This reasonable “conceivability” standard asks whether there is a “possibility” of
recovery.34 The court, however, need not “accept conclusory allegations unsupported by
specific facts or . . . draw unreasonable inferences in favor of the non-moving party.”35
Failure to plead an element of a claim precludes entitlement to relief and, therefore, is
grounds to dismiss that claim.36
Generally, the Court will consider only the pleadings on a motion to dismiss under
Rule 12(b)(6). “A judge may consider documents outside of the pleadings only when: (1)
the document is integral to a plaintiff‟s claim and incorporated in the complaint or (2) the
document is not being relied upon to prove the truth of its contents.”37 Under at least the
first exception, I find that consideration of the Proxy Statement is appropriate in resolving
this dispute.38
33 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)). 34 Id. at 537 & n.13. 35 Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)). 36 Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000) (Steele, V.C., by designation). 37 Allen v. Encore Energy P’rs, 72 A.3d 93, 96 n.2 (Del. 2013). 38 The Proxy Statement is “integral to [Plaintiffs‟] complaint as it is the source for the merger-related facts as pled in the complaint.” Orman v. Cullman, 794 A.2d 5, 16 (Del. Ch. 2002). Although Plaintiffs do not state this fact directly, one cannot read the Complaint in the context of the Proxy Statement without drawing such a conclusion. In that regard, I also note that Plaintiffs referenced the Proxy 20 B. Tiers of Scrutiny
The “reasonable conceivability” pleading standard asks whether the allegations in
the complaint could entitle a plaintiff to relief. Whether a plaintiff‟s allegations would
entitle her to relief, however, depends upon the level of scrutiny under which those
allegations are reviewed. The parties here vigorously dispute the proper standard of
review. Two standards of review potentially could apply: 39 the business judgment rule or
entire fairness. Accordingly, I begin my analysis by examining the appropriate standard
of review.
1. Business judgment rule
Under 8 Del. C. § 141(a), the business and affairs of a corporation are managed
under the direction of the board of directors. The business judgment rule is a principle of
prudence and discretion that “operates to preclude a court from imposing itself
Statement in the Complaint, Compl. ¶¶ 139, 141, cited it repeatedly in their Opposition Brief, Pls.‟ Opp‟n Br. 10, 11, 13, 14, 42, 46, 48, and did not object to Defendants‟ reliance upon it. 39 A third level of scrutiny, enhanced scrutiny, applies when, for example, directors set out to sell the company in a bidding process, break up the company, or otherwise engage in a change-of-control transaction. See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). Revlon does not apply here because the challenged Merger was a stock-for-stock transaction involving widely held, publicly traded companies. See generally Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 46-47 (Del. 1994) (quoting Paramount Commc’ns, Inc. v. Time Inc., 1989 WL 79880, 15 Del. J. Corp. L. 700, 739 (Del. Ch. July 17, 1989)) (noting that there is no sale or change-in-control in a stock-for-stock merger where control of both companies remains dispersed among the public stockholders). Consequently, I have limited my focus in this Memorandum Opinion to the business judgment rule and entire fairness.
21 unreasonably on the business and affairs of a corporation.”40 The rule “in effect provides
that where a director is independent and disinterested, there can be no liability for
corporate loss, unless the facts are such that no person could possibly authorize such a
transaction if he or she were attempting in good faith to meet their duty.”41 The “rule
posits a powerful presumption in favor of actions taken by the directors in that a decision
made by a loyal and informed board will not be overturned by the courts unless it cannot
be „attributed to any rational business purpose.‟”42
Practically, the business judgment rule means that litigants challenging a board‟s
decision face an uphill battle. Rather than question the wisdom of the decision itself,
under the business judgment rule, the court instead will examine the process by which the
board of directors reached its decision and, if the process is reasonable, the court will
defer to the decisions of the board.43 The court also will determine whether the action
was taken by a board majority comprised of disinterested and independent directors.44 If
40 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993). 41 Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1052-53 (Del. Ch. 1996). 42 Cede, 634 A.2d at 361 (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). 43 See Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *4 (Del. Ch. Nov. 30, 2007). 44 Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).
22 the challenger successfully rebuts the rule‟s presumptive applicability, the burden shifts
to the defendants to prove the transaction‟s entire fairness.45
2. Entire fairness
“[E]ntire fairness is the highest standard of review in corporate law. It is applied
in the controller merger context as a substitute for the dual statutory protections of
disinterested board and stockholder approval, because both protections are potentially
undermined by the influence of the controller.”46 The entire fairness standard involves an
inquiry into two interrelated concepts: fair dealing and fair price.
The former embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and stockholders were obtained. The latter aspect of fairness relates to the economic and financial considerations of the proposed merger, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company‟s stock.47
The two fairness aspects require looking to different factors, but the court does not
conduct a bifurcated inquiry and instead examines the whole transaction for its entire
fairness.48
45 Globis P’rs, 2007 WL 4292024, at *5. 46 Kahn v. M&F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014). 47 Emerald P’rs v. Berlin, 787 A.2d 85, 97 (Del. 2001) (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983)). 48 See, e.g., Cinerama v. Technicolor, 663 A.2d 1156, 1172 (Del. 1995).
23 As noted in the previous section, one method of triggering entire fairness review is
to rebut the presumptive applicability of the business judgment rule. Certain actions by
controlling stockholders also will trigger entire fairness review. This case involves two
different contested issues related to the law of controlling stockholders: (1) when is a
stockholder a controlling stockholder?; and (2) which transactions involving a controlling
stockholder implicate entire fairness? I address these issues first.
a. When does a stockholder become a controlling stockholder?
Not surprisingly, Delaware law treats a majority stockholder as a controlling
stockholder.49 Exceeding the 50% mark, however, is only one method of determining
whether a stockholder controls the company. A stockholder who “exercises control over
the business affairs of the corporation” also qualifies as a controller.50 A significant
number of cases examine whether a minority stockholder nevertheless exercised control
over a corporation. The following is a non-exhaustive list of significant cases where the
parties disputed whether a non-majority stockholder satisfied this actual control test.
49 Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994). 50 Id. at 1113-14 (quoting Ivanhoe P’rs v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)); see also Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005) (“For a stockholder that owns less than a numerical majority of a corporation‟s voting shares to be deemed a controlling stockholder for purposes of imposing fiduciary obligations, the plaintiff must establish the actual exercise of control over the corporation‟s conduct by that otherwise minority stockholder.”)
24 Case Posture Share % Controller? Mot. to O’Reilly v. Transworld Healthcare, Inc.51 Dismiss 49+52 Yes (“MTD”) In re W. Nat’l Corp. S’holder Litig.53 Summ. J. 46 No Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co.54 MTD 44 No Kahn v. Lynch Post-Trial 43.3 Yes In re Primedia, Inc. Deriv. Litig.55 MTD 40.34+ Yes In re Sea-Land Corp. S’holder Litig.56 MTD 39.5 No In re Cysive, Inc. S’holder Litig.57 Post-Trial 35+ Yes N.J. Carpenters Pension Fund v. infoGROUP, Inc.58 MTD 34-3759 ??60 In re PNB Hldg. Co. S’holder Litig.61 Post-Trial 33.5 No In re Morton’s Rest. Gp., Inc. S’holder Litig.62 MTD 27.7 No
51 745 A.2d 902 (Del. Ch. 1999). 52 Some cases involved options to purchase additional shares or a potential control group, here indicated by a “+” symbol. The number listed in the “Share %” column indicates the minimum amount of shares the alleged controller held. 53 2000 WL 710192 (Del. Ch. May 22, 2000). 54 2006 WL 2521426 (Del. Ch. Aug. 25, 2006). 55 910 A.2d 248 (Del. Ch. 2006). 56 1987 WL 11283 (Del. Ch. May 22, 1987). 57 836 A.2d 531 (Del. Ch. 2003). 58 2011 WL 4825888 (Del. Ch. Oct. 6, 2011). 59 The ownership interest in infoGROUP is unclear. At one point, the complaint asserts that Gupta, the alleged controller, beneficially owned roughly 37%, but later states that Gupta had approximately a 34% investment in the company. The opinion similarly references both numbers. 2011 WL 4825888, at *1, 10. 60 As discussed below, while the court found that Gupta dominated the board, it is unclear if the court determined whether Gupta was a controlling stockholder. 61 2006 WL 2403999 (Del. Ch. Aug. 18, 2006). 62 74 A.3d 656 (Del. Ch. 2013). 25 As this table makes clear, the cases do not reveal any sort of linear, sliding-scale
approach whereby a larger share percentage makes it substantially more likely that the
court will find the stockholder was a controlling stockholder. Instead, the scatter-plot
nature of the holdings highlights the importance and fact-intensive nature of the actual
control factor. Examining this factor reveals why, in Cysive, Chief Justice Strine, writing
as a Vice Chancellor, found a 35% stockholder controlled the corporation, while, in
Western National, Chancellor Chandler held that a 46% stockholder was not a controller.
In the seminal case of Kahn v. Lynch, Alcatel owned 43.3 percent of Lynch
Communications. In finding that Alcatel acted as a controller, the Delaware Supreme
Court noted the following factors: (a) Alcatel designated five of the eleven members of
the board; (b) the record was replete with instances of Alcatel making its will known to
the board and then prevailing in its wishes;63 (c) certain non-Alcatel board members
testified that the Alcatel representative terrified them; and (d) Alcatel dominated the
merger discussions and threatened a hostile takeover if the board did not comply.
Overall, Alcatel demonstrated a high degree of control.
In contrast to Lynch, the evidence of actual control was much less convincing in
the Western National and Superior Vision cases. Western National featured a passive
46% stockholder, American General Corp., that was subject to a standstill agreement that
prevented it from acquiring more shares without board permission and limited it to
63 For example, an Alcatel representative informed the Lynch board that: “„You must listen to us. We are 43 percent owner. You have to do what we tell you.‟” Lynch, 638 A.2d at 1114.
26 appointing only two directors to the eight-member board.64 When American General
indicated it would not sell its shares to a third party in a merger, the Western National
board began exploring with American General the possibility that it might buy the
remainder of the company. A special committee negotiated a Western
National/American General merger, which 99.98 percent of voting stockholders
approved.65 Although the court thoroughly examined the question, it found that
American General did not dominate the board or the special committee.
The Superior Vision decision involved the rather unusual situation of Superior
Vision suing ReliaStar, its largest stockholder, because ReliaStar refused to vote in favor
of dividends Superior Vision wished to pay. The court focused on whether ReliaStar
exercised control over the board of directors as to the transaction in question, but found
no such domination.66 Indeed, the board and the alleged controller were at loggerheads
about corporate dividend policy and ReliaStar invoked a contractual right it previously
obtained from the company to vote against such dividends. The court declined to find
that such a large stockholder acting in its own self interest pursuant to a contractual right
owed any fiduciary duties to the company or the other stockholders.
64 Western Nat’l, 2000 WL 710192, at *2. 65 Id. at *5. 66 Superior Vision, 2006 WL 2521426, at *4 (“[T]he focus of the inquiry has been on the de facto power of a significant (but less than majority) shareholder, which, when coupled with other factors, gives that shareholder the ability to dominate the corporate decision-making process.”).
27 At the other end of the spectrum are Cysive and infoGROUP. The stockholders
found to be controlling in each of those cases owned significantly less than a majority of
the shares, though still a percentage larger than Oaktree in this case. Cysive involved
Nelson Carbonell, the company‟s founder, CEO, chairman, and a 35% stockholder, who
also employed his brother and brother-in-law in high-ranking positions at the company.67
If his stock holdings were combined with the holdings of his close family member
managers and the group‟s options to purchase shares, Carbonell could command as much
40% of the common stock. This combination of stockholdings and embedded managerial
oversight allowed Carbonell “as a practical matter . . . to control the corporation.”68
As to the infoGROUP case, it is not clear whether it involved a controlling
stockholder question analogous to what is presented here.69 In infoGROUP, the court
denied the defendants‟ motion to dismiss merger-related duty of loyalty claims on the
grounds that the complaint adequately alleged that a majority of the directors lacked
independence from Gupta, a director and the alleged controller, who the court found was
interested in the transaction because of a unique liquidity need. 70 The court found that
67 Cysive, 836 A.2d at 533-35. 68 Id. at 553. In a later case, then-Chancellor Strine noted that, in the Cysive opinion, “this court made, perhaps, its most aggressive finding that a minority blockholder was a controlling stockholder.” Morton’s Rest. Gp., 74 A.3d at 665. 69 infoGROUP, 2011 WL 4825888, at *8 (“The crux of this claim is that, at the time the Merger was approved, Gupta was an interested director and the remaining directors were controlled by him, and thus, not independent.”) 70 Id. at *9-10 (noting that Gupta owed over $20 million and had no discernible cash flow since being forced out as the company‟s CEO, a liquidity problem that 28 Gupta, as an interested director, potentially dominated the remaining board members
“through a pattern of threats that could, arguably, have intimidated the Board
Defendants.”71 These allegations sufficed to survive a motion to dismiss.
These cases72 show that a large blockholder will not be considered a controlling
stockholder unless they actually control the board‟s decisions about the challenged
transaction. Lynch involved a controller who literally dominated the boardroom and
threatened a hostile takeover; Cysive involved managerial dominance combined with an
ability to muster up to 40% of the common stock; and infoGROUP involved a potential
37% stockholder, who was the founder and ousted CEO, but remained on the board and
allegedly dominated the other directors, who “succumbed to [his] control after being
cowed by his threats and hostile, erratic behavior.”73 Absent a significant showing such
as was made in these prior cases, the courts have been reluctant to apply the label of
plaintiffs alleged caused him to force the board to sell the company at a significant discount to its true worth). 71 Id. at *11. 72 I do not consider the O’Reilly and Primedia cases instructive here, because those cases appear to have involved majority stockholders. That is, the plaintiffs at least alleged sufficient facts to find as much at the motion to dismiss stage. The 49% controller in O’Reilly also held significant amounts of the company‟s debt and an option to purchase 2% of the company‟s stock. O’Reilly, 745 A.2d at 908. Primedia involved several related investment entities of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). The complaint alleged a KKR affiliate served as the general partner and sole voting power of six limited partnerships holding 40.34% of the company. A separate KKR affiliate, through a series of interlocking entities, was alleged to have a 20.91% ownership interest in the company, for a total of over 61%. Primedia, 910 A.2d at 251. 73 infoGROUP, 2011 WL 4825888, at *7.
29 controlling stockholder—potentially triggering fiduciary duties—to large, but minority,
blockholders.
b. Which transactions involving a controlling stockholder trigger entire fairness review?
Entire fairness is not triggered solely because a company has a controlling
stockholder. The controller also must engage in a conflicted transaction. This section
describes those conflicted controller transactions where the courts have applied entire
fairness review. As relevant to the dispute before me, those situations fall into one of two
categories: (a) transactions where the controller stands on both sides; and (b) transactions
where the controller competes with the common stockholders for consideration.
Delaware law holds that a “controlling or dominating shareholder standing on both
sides of a transaction, as in a parent-subsidiary context, bears the burden of proving its
entire fairness.”74 Two decades after Lynch, and after numerous cases discussing the
nuances of entire-fairness burden-shifting following a majority-of-the-minority vote or
negotiation and approval by a special committee of the board, the Delaware Supreme
Court issued its opinion in Kahn v. M&F Worldwide Corp. (“MFW”). In that opinion,
the Supreme Court held that a controlling stockholder buyout could be reviewed under
the business judgment rule if the controller satisfied a number of procedural
requirements.75 In this case, however, it is undisputed that Oaktree had no pre-Merger
relation to Contango. As a result, this variety of conflicted transaction is not before me.
74 Lynch, 638 A.2d at 1115 (citing Weinberger, 457 A.2d at 710). 75 88 A.3d 639, 645-46 (Del. 2014). 30 The second variety of controller transactions implicating entire fairness review
involves situations where the controller does not stand on both sides of the transaction,
but nonetheless receives different consideration or derives some unique benefit from the
transaction not shared with the common stockholders. The first subset of these cases will
be referred to as the “disparate consideration” cases. In these cases, the corporation
enters into a merger or other transaction with a third party and the controller or control
group will receive more consideration for their shares, which often include a separate
class of high-vote stock, than the minority common stockholders.
In re Tele-Communications, Inc. involved such an arrangement. AT&T entered
into negotiations to buy a TCI division with high-vote and single-vote stock. The special
committee agreed to an extra premium for the high-vote stock in a stock-for-stock
merger. This resulted in the high-vote stock receiving $376 million more in
consideration than the single-vote stock.76 According to the court‟s tally, the board
collectively controlled 50.8% of the vote.77 Five members of the board held 84% of the
high-vote shares, meaning that they received an additional $220 million compared to the
common stockholders.78 Entire fairness applied.79 Similarly, In re Delphi Financial
76 In re Tele-Communications, Inc. S’holder Litig., 2005 WL 3642727, at *7 (Del. Ch. Jan. 10, 2006). 77 Id. at *2 n.24. 78 Id. at *7. 79 The court applied entire fairness for the reasons stated in the text supra, but, in the alternative, also found entire fairness applicable because a majority of the board was interested in the transaction. Id. at *8. 31 involved a 49.9% controller holding high-vote stock who negotiated a substantial
premium for his own shares, despite a provision in the company‟s charter mandating
equal consideration for the high-vote and single-vote shares in the event of a merger.80 In
the context of a motion for a preliminary injunction, the court assumed for sake of the
motion that the entire fairness standard applied.81
The different consideration received by the controller need not be in the form of
more money. In one variant, which may be called the “continuing stake” cases, the
controller receives different consideration in the form of continuing equity in the
surviving entity. For example, In re John Q. Hammons Hotels (“JQH Hotels”) involved
a merger between JQH Hotels and an unrelated third party. John Q. Hammons, the 72%
controller of JQH Hotels, negotiated with the acquirer separately and, for personal tax
and financial reasons, received a combination of a small equity stake in the surviving
entity, significant liquidation rights, a large line of credit, and various other contractual
rights, while the other stockholders received cash.82 The board approved these side
arrangements along with the merger price for the common stock. The court found that,
although Hammons did not stand on both sides of the transaction, he nonetheless was “in
a sense „competing‟ [with the minority stockholders] for portions of the consideration”
80 In re Delphi Fin. Gp. S’holder Litig., 2012 WL 729232, at *3 (Del. Ch. Mar. 6, 2012). 81 Id. at *12 n.57. 82 In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *7-8 (Del. Ch. Oct. 2, 2009).
32 the acquirer was willing to pay.83 Based on the circumstances and the use of flawed
procedural protections for minority stockholders, the court reviewed the transaction for
entire fairness.
The plaintiffs advanced a related theory in the LNR Property case.84 There, the
controlling stockholder negotiated a cash-out merger, which included an arrangement by
which the controller, together with other members of senior management, would roll part
of their proceeds into a 25% equity stake in the surviving entity. The board had allowed
the controller to negotiate the merger. The allegations that the controller acted as both
buyer and seller, and thus was conflicted and may not have sought the highest price,
created the potential for entire fairness review and sufficed to avoid dismissal.85
The final category of controller-conflict cases will be referred to as the “unique
benefit” cases. In these cases, the controller receives some sort of special benefit not
shared with the other stockholders. This niche line of cases involves the controller
extracting something uniquely valuable to the controller, even if the controller nominally
receives the same consideration as all other stockholders.
The recent Primedia decision exemplifies a unique benefit case.86 At the risk of
oversimplifying its complex background, the plaintiffs basically alleged that KKR, the
83 Id. at *12. 84 In re LNR Prop. Corp. S’holder Litig., 896 A.2d 169 (Del. Ch. 2005). 85 Id. at 178. 86 In re Primedia, Inc. S’holder Litig., 67 A.3d 455 (Del. Ch. 2013).
33 58% controller of Primedia, Inc., breached its fiduciary duties by trading in the
company‟s preferred stock on the basis of material nonpublic information and thus was
required to disgorge all of its profits. While the Delaware courts dealt with the initial
derivative suits, Primedia began reviewing strategic alternatives and entered into a
merger agreement under which it would be acquired by an unrelated third party. KKR
provided sufficient written consents to effectuate this transaction. In it, all stockholders
received the same monetary consideration.87 The plaintiffs urged the court, however, to
review the merger under entire fairness because KKR received a unique benefit: de facto
elimination of the derivative claim against it because the acquiring company would not
pursue that claim.88 The failure to obtain any value for the claim against KKR allegedly
rendered the merger unfair to minority stockholders. If successful, the pro rata value of
the disgorgement claim to the minority could have been as much as $80 million before
interest, while the pro rata merger consideration paid to them amounted to $133 million.89
The court found the plaintiffs adequately alleged facts requiring entire fairness review.
In another recent case, Synthes, Inc., Chief Justice Strine, then writing as
Chancellor, dismissed a complaint challenging a third-party merger where the founder
and 38.5% controlling stockholder received the same consideration as every other
87 Id. at 462-67, 472-75. 88 Id. at 476. 89 Id. at 482.
34 stockholder.90 The plaintiffs advanced the theory, forcefully swatted down by the court,
that the controller‟s estate planning requirements led to a unique need for liquidity that
caused the controller to sell the company for less than it was worth. The court
acknowledged that there could be “very narrow circumstances in which a controlling
stockholder's immediate need for liquidity could constitute a disabling conflict of interest
irrespective of pro rata treatment.”91 Such a situation, however, would require “a crisis,
fire sale where the controller, in order to satisfy an exigent need . . . agreed to a sale of
the corporation” without performing the basic sale tasks necessary to achieve a price
reflecting the corporation‟s market value.92
In sum, triggering entire fairness review requires the controller or control group to
engage in a conflicted transaction. That conflicted transaction could involve standing on
both sides of the transaction, as when a controller buys out the minority, or receiving
different consideration than the other stockholders. In the latter situation, entire fairness
is deemed appropriate because the controller is presumed to be competing with the
minority stockholders for a larger portion of the total consideration the acquirer is willing
to pay.93 Delaware courts appear to have identified three types of cases where the
90 In re Synthes, Inc. S’holder Litig., 50 A.3d 1022 (Del. Ch. 2012). 91 Id. at 1036. In this portion of its opinion, the court referenced the infoGROUP decision as an instance in which the plaintiffs alleged sufficiently dramatic facts for the court to find liquidity to be a unique benefit accruing to the controller, even though all parties received the same consideration. See id. at 1036 n.67. 92 Id. at 1036. 93 See JQH Hotels, 2009 WL 3165613, at *12. 35 controller “competes with the common”: (1) the controller receives disparate
consideration, which the board approves;94 (2) the controller receives a continuing stake
in the surviving entity, whereas the minority is cashed out; and (3) the controller receives
a unique benefit, despite nominal pro rata treatment of all stockholders.
C. Is Oaktree a Controlling Stockholder?
1. The potential allegations of a control group
Oaktree controlled 33.7% of Crimson‟s stock. Perhaps recognizing that this
would be an aggressive instance of finding a blockholder to be a controller in a third-
party merger, Plaintiffs attempt to include the shares of others in the tally of shares
controlled by Oaktree. Although Plaintiffs do not explicitly allege the existence of a
control group, the Complaint and Plaintiffs‟ Opposition Brief sufficiently hint at its
existence to put Defendants on notice. For instance, Plaintiffs note that Oaktree, along
with several executive officers of Crimson,95 executed voting agreements in favor of the
94 In cases where a third party negotiates directly with a controlling stockholder, without board involvement, in an effort to secure the support necessary to approve a transaction, the courts have found no breach of fiduciary duty by the board of directors. See In re Sea-Land Corp. S’holder Litig., 642 A.2d 792 (Del. Ch. 1993) (granting summary judgment for directors in case where third-party tender offeror paid a 39.5% blockholder $5 extra per share—for an option to purchase the entire block—when the board had no involvement in arranging for payment of the extra consideration), aff’d sub nom. Sea-Land Corp. S’holder Litig. v. Abely, 633 A.2d 371 (Del. 1993) (Table). For disparate treatment claims to be actionable against the directors, “the board must at least have approved the transaction creating the disparity.” Id. at 803. See also In re Novell, Inc. S’holder Litig., 2013 WL 322560, at *14 (Del. Ch. Jan. 3, 2013) (“The Board did not breach its fiduciary duties with respect to a transaction it did not approve, and to which [the Corporation] is not a party.”). 95 The specifics can be found in Section I.A. 36 Merger, thus locking up 37.25% of the stockholder vote.96 In the same paragraph, the
Complaint alleges that Oaktree, the executive officers, and the Crimson Board together
control 52.15% of the vote. The almost 15% differential between these numbers comes
from Director Defendant Ni and his affiliated corporate entities. Plaintiffs do not allege
that Ni signed a voting agreement. Rather, they aver that, as a “permitted investor” under
the Second Lien, “Ni‟s interests are aligned with Oaktree.”97
Under Delaware law, in appropriate circumstances, multiple stockholders together
can constitute a control group, with each of its members being subject to the fiduciary
duties of a controller. The alleged members of a control group, however, must be
“connected in some legally significant way”—such as “by contract, common ownership,
agreement, or other arrangement—to work together toward a shared goal.”98 The law
does not require a formal written agreement, but there must be some indication of an
96 Compl. ¶ 3. 97 Id. ¶ 22. 98 Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009).
37 actual agreement.99 Plaintiffs must allege more than mere concurrence of self-interest
among certain stockholders to state a claim based on the existence of a control group.100
Plaintiffs have not met their burden in that regard in this case. They do not plead
that Ni signed any voting agreement regarding the Merger or that there is any agreement,
formal or otherwise, between ACEC and Oaktree. Instead, the Complaint twice
conclusorily alleges an alignment of interests between ACEC and Oaktree.101 The Court
accepts that ACEC was a permitted investor under the Second Lien. But, it is not clear
from the Complaint that ACEC actually invested in the Second Lien at all.102
Furthermore, even assuming ACEC held some unspecified portion of the Company‟s
debt under the Second Lien, that allegation, without more, is insufficient to support a
reasonable inference that Ni joined forces with Oaktree to form a control group.
99 See, e.g., PNB Hldg. Co., 2006 WL 2403999, at *10 (“The record, though, does not support the proposition that these various director-stockholders and their family members were involved in a blood pact to act together. To that point, there are no voting agreements between directors or family member[s]. Rather, it appears that each had the right to, and every incentive to, act in his or her own self-interest as a stockholder.”). 100 See Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5, 2006) (“Nor is the allegation that Cox, Comcast and AT & T had parallel interests sufficient to allege that the Cable Companies were part of a „controlling group.‟”). 101 Compl. ¶¶ 22, 75. 102 The Complaint avers that ACEC‟s interests conflicted with other stockholders because it was a creditor of Crimson. Id. ¶ 58. The Opposition Brief similarly states that ACEC and Oaktree were co-creditors. Pls.‟ Opp‟n Br. 16 n.14. If ACEC had invested in the Second Lien, Plaintiffs presumably would have said so. Yet, Plaintiffs consistently identified ACEC as a “permitted investor” in the Second Lien rather than an “investor.” Compl. ¶¶ 22, 77; Opp‟n Br. 35, 39.
38 Basically, Plaintiffs ask the Court to infer that, because ACEC could have (and may
have) invested in the Second Lien and, because Oaktree did invest in the Second Lien,
Oaktree and ACEC were in cahoots.103 I decline to pile up questionable inferences until
such a conclusion is reached. The simple fact that the interests of two entities are aligned
is legally insufficient to establish the existence of a control group.104 Without Ni‟s
shares, the combined holdings of Oaktree, the other Board members, and Crimson senior
management remains well short of a majority. Thus, the allegations of the Complaint fail
to support a reasonable inference that Oaktree was part of a control group.
2. Oaktree’s ‘control’ over Crimson
As previously discussed, to adequately plead that a non-majority blockholder was
a controlling stockholder, a plaintiff would have to allege facts to show that the
blockholder actually controlled the board‟s decision about the transaction at issue. The
Complaint supplies little in the way of specific allegations of control. Instead, Plaintiffs
advance an overarching theory that Oaktree sought to exit its investment in Crimson and,
thus, was willing to undersell its shares.105 Arriving at Plaintiffs‟ desired conclusion,
however, requires drawing a number of inferences from the alleged facts. Some of the
natural inferences, however, point in opposite directions.
103 Plaintiffs‟ conclusory statement that “Oaktree also has substantial ties to Defendant Ni” does nothing to strengthen their argument. Pls.‟ Opp‟n Br. 6. 104 See Williamson, 2006 WL 1586375, at *6. 105 Plaintiffs effectively assert an aggressive variant of the infoGROUP liquidity argument, but they do so on significantly less compelling facts.
39 The Complaint repeatedly highlights the longstanding relationship between Keel
and Oaktree.106 For example, Plaintiffs allege that Keel and Grady sought and received
Oaktree‟s approval for the proposed merger before bringing it to the attention of the
Crimson Board.107 The Complaint, however, also asserts that the merger price was unfair
and that the directors undersold the Company.108 Plaintiffs further allege that, instead of
negotiating a higher premium for the common stockholders, Keel and the rest of
management focused on securing their own post-merger employment.109
Inferences that might be drawn from these allegations include: (1) Keel was
Oaktree‟s underling and the pair colluded to advance their own interests at the expense of
the common stockholders; (2) Keel and other management members sought to benefit
themselves at the expense of the common stockholders; and (3) the common stockholders
should have received a higher premium. The reasonableness of these inferences is
questionable, however. For example, Oaktree would suffer the most from a low merger
price, given its holdings of over 15.5 million shares, and thus would need to secure
significant side benefits to overcome that loss. Similarly, Keel would need to negotiate
personal gains large enough to offset the loss from accepting a lower-than-necessary
106 E.g., Compl. ¶¶ 16, 19, 40, 52, 75. Plaintiffs‟ Opposition Brief similarly emphasizes that relationship. E.g., Pls.‟ Opp‟n Br. 4-6. 107 Compl. ¶ 58. 108 E.g., id. ¶¶ 4, 68, 79, 80, 86-100. 109 Id. ¶ 59 (“Moreover, rather than discuss any improvement to the exchange ratio, Crimson and Contango representatives discussed future employment and salaries.”).
40 exchange ratio. Those gains also would have to be significant given his holdings of over
one million shares and right to accelerated vesting of restricted stock as a result of the
Any damage to Keel because of a lower exchange ratio would impact Oaktree
fifteen times as much, given its much larger stock holdings. As such, Keel‟s allegedly
negotiating a better employment package for himself instead of increasing the exchange
ratio could have cost Oaktree substantially. As for Crimson management, inferring that
they would favor their own interests over those of the stockholders is inconsistent with
Oaktree‟s alleged control over management, because management‟s successfully
securing new corporate perquisites in that way would not advance Oaktree‟s interests.
Lastly, I note that ACEC, as Crimson‟s second largest stockholder, would have no
incentive to undersell its shares.
Overall, Plaintiffs‟ allegations simply do not support a reasonably coherent theory
as to why the key players would undersell their millions of shares. Here, Oaktree
controlled over one-third of the common shares and may have been Crimson‟s largest
creditor. Three of the seven Board members worked for Oaktree and, according to
Plaintiffs, Oaktree “designated a majority of the Board as well as senior management.”110
Although Keel did not work for Oaktree, Plaintiffs argue that his “fealty to Oaktree
cannot be seriously questioned.”111 But, the focus in a control analysis is on domination
110 Pls.‟ Opp‟n Br. 4. 111 Id.
41 of the board with regard to the transaction at issue. There are no specific allegations from
which a court reasonably could infer that Oaktree, alone or in combination with others,
actually exercised control over Crimson or the negotiation of the Merger. In Cysive, by
contrast, the 35-40% controller was himself the CEO and founder of the target company
and had installed his family members in high management positions, creating a
concentration of power that purportedly allowed managerial and board domination.
Similarly, infoGROUP involved an overbearing former CEO who allegedly terrorized the
other members of the board with a series of threats and erratic behavior. Oaktree, the
alleged controller in this case, is an outside investment fund. Moreover, the lead
negotiators, Keel and Grady, were not employed by Oaktree.
At this stage, however, all reasonable inferences must be drawn in favor of
Plaintiffs, and they only need to show it is reasonably conceivable that Oaktree controlled
Crimson. Having considered all of the allegations and the available record, I am hesitant
to conclude that Plaintiffs could not conceivably make that showing. Regardless, as the
next section shows, even assuming that Oaktree did control Crimson, entire fairness still
does not apply in this case.
3. Is the entire fairness standard implicated?
Section II.B.2.b supra identified three types of conflicted transactions involving a
controlling stockholder that would trigger entire fairness. The Crimson-Contango
Merger involved a stock-for-stock merger where each Crimson stockholder received the
same number of Contango shares. Plaintiffs have not alleged that Oaktree stood on both
sides of the transaction and it is undisputed that Contango was an unrelated third party.
42 This was not a going-private transaction or a parent-subsidiary merger. Similarly,
Plaintiffs have not alleged that the controller received a continuing stake in the surviving
entity while the remaining stockholders were cashed out. Instead, Plaintiffs argue that
Oaktree “competed” for consideration with Crimson‟s minority stockholders.112 In terms
of the Court‟s taxonomy, Plaintiffs allege some combination of disparate consideration
(the Prepayment) and receipt of a unique benefit (the RRA). In the end, however,
Plaintiffs failed adequately to plead a conflicted transaction by a controller.
Stockholders generally are presumed to have an incentive to seek the highest price
for their shares. That inference or presumption is even stronger in the case of large
stockholders.113 Besides being a matter of common sense, Delaware courts frequently
112 Pls.‟ Opp‟n Br. 31. 113 See, e.g, In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1035 (Del. Ch. 2012) (“Controlling stockholders typically are well-suited to help the board extract a good deal on behalf of the other stockholders because they usually have the largest financial stake in the transaction and thus have a natural incentive to obtain the best price for their shares.”); In re CompuCom Sys., Inc. S’holder Litig., 2005 WL 2481325, at *6 (Del. Ch. Sept. 29, 2005) (“Generally speaking, a controlling shareholder has the right to sell his control share without regard to the interests of any minority shareholder, so long as the transaction is undertaken in good faith. The same has long been true as a general proposition when a parent chooses to negotiate for the sale of a subsidiary corporation to an independent third party. The reasons for the law‟s tolerance of such sales is clear—as the owner of a majority share, the controlling shareholder‟s interest in maximizing value is directly aligned with that of the minority.”); Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *27 (Del. Ch. Jan. 25, 1999) (“To the extent a plaintiff shareholder . . . is to challenge the independence of directors based solely upon their election by and relationship to a controlling stockholder in a situation like this, he has an obligation to produce record evidence demonstrating that the controlling stockholder‟s commercial interests were of such a substantial nature as to possibly compromise its natural desire to obtain the best price for its shares.”).
43 have made statements to the same effect.114 Plaintiffs ask this Court to disregard this
natural inference and instead conclude that Crimson management, the Board, ACEC, and
the Company‟s largest stockholder, Oaktree, approved this merger against their self-
interested incentives as stockholders to maximize value. Plaintiffs have not alleged any
specific facts or theories persuasive enough to render it reasonable for me to draw this
inference.
Besides the RRA and the Prepayment, Oaktree received the same payment as all
stockholders in the Merger.115 As a preliminary matter, the Court is mindful of the
precedent holding that side deals between an acquirer and a controller, which the board
did not approve and to which the corporation is not a party, do not implicate entire
fairness.116 As to the Prepayment, I accept as fact that Contango agreed to pay the loan
114 See e.g., In re OPENLANE, Inc. S’holder Litig., 2011 WL 4599662, at *7 (Del. Ch. Sept. 30, 2011) (“[T]hat, collectively, the Board had more to lose or gain from a change of control transaction than any other [Company] shareholder, suggests that the Board would be motivated to get the best price reasonably available for [the Company‟s] shareholders.”); Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *8 (Del. Ch. Nov. 30, 2007) (“The accelerated vesting of options does not create a conflict of interest because the interests of the shareholders and directors are aligned in obtaining the highest price.”). 115 Synthes, 50 A.3d at 1040 (“[W]hen a controlling stockholder acts in accordance with those incentives [to achieve a high price] and shares its control premium evenly with the minority stockholders, courts typically view that as a „powerfu[l]‟ indication „that the price received was fair.‟”) (quoting Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, 1143 (Del. Ch.1994), aff'd, 663 A.2d 1156 (Del. 1995)). 116 See case cited supra note 94.
44 back early, entirely, and with a 1% prepayment penalty.117 But, this does not affect the
analysis: the Proxy Statement makes clear that at the time the merger was signed, there
was no agreement to repay the debt early.118 Plaintiffs have not alleged otherwise. In
addition, even though the Prepayment was anticipated, mere anticipation is not equivalent
to having a term in a definitive merger agreement. When the parties signed the Merger,
Oaktree was due the same consideration as all other Crimson stockholders and nothing
more. Because there was no agreement to repay the debt, the Prepayment could not
qualify as additional or different merger consideration. Furthermore, there are no
allegations that the Crimson Board was involved in negotiating or approved the debt
repayment as part of the Merger Agreement. In fact, the Complaint suggests that
Contango approached Oaktree on the subject of the debt, rather than vice versa.119
The Court doubts that the 1% prepayment fee would compensate Oaktree
sufficiently to cause it to take a lower price for its shares. There are no allegations
questioning Crimson‟s ability to repay the debt; indeed, the Complaint emphasized that
Crimson‟s financial position had been improving in recent years.120 Oaktree owned some
“significant,” but unspecified percentage of the Second Lien. Yet, even if it owned the
entire Second Lien, which it did not, the value of the prepayment would amount to
117 Arg. Tr. 30-31 (discussing Contango‟s refinancing of the debt, as described in its October 1, 2013, 8-K). 118 Proxy Statement 111-12. 119 Compl. ¶¶ 56, 59. 120 Id. ¶¶ 101-25.
45 approximately $1.75 million.121 Another $0.12 per share, therefore, would be more
valuable to Oaktree than any amount it possibly could have made from the Prepayment
on the terms alleged.122 Given the lack of allegations that Crimson was in financial
straits, that Oaktree feared non-payment of its debt, or that the terms of the Second Lien
otherwise were unfavorable to Oaktree, I consider it unreasonable to infer that Oaktree
preferred the Prepayment to a better deal price. Indeed, one reasonable inference from
the pleadings is that Contango wanted the debt eliminated, preferably by a conversion to
equity—a request Oaktree denied—and therefore repaid it to serve its own interests.
The Proxy Statement notes that Crimson, Contango, and Oaktree all were parties
to the RRA negotiations.123 Again, there is no allegation in the Complaint that the
Merger‟s terms included the RRA. As such, a similar analysis to the Prepayment could
apply here: the RRA was not part of the actual Merger Agreement and is not alleged to
have been approved by the Crimson Board, so it does not qualify as additional
consideration. But, Crimson‟s apparent involvement in the RRA negotiations, while the
merger negotiations were ongoing, suggests that the RRA was more integral to the
Merger Agreement. Unlike the Prepayment, which appears to have been made in
121 One percent of the $175 million face value of the Second Lien equals $1.75 million. 122 Oaktree‟s 15.5 million shares multiplied by $0.12 amounts to $1.86 million. As discussed in Section II.E.1.b below, Plaintiffs allege that the Board undersold the Company by dramatically more than $0.12 per share. Plaintiffs cannot have it both ways. 123 Proxy Statement 60.
46 Contango‟s discretion and was not an obligation, Oaktree allegedly “demanded” an RRA
from Contango.124 This is the closest Plaintiffs come to alleging a conflict transaction.
Accordingly, the Court must consider whether the RRA conferred a unique benefit on
Oaktree.125
Plaintiffs answer this question in the affirmative, arguing that the RRA “will allow
Oaktree to divest its holdings on more favorable and convenient terms.”126 Plaintiffs also
reiterate their theme that Oaktree lacked liquidity or otherwise wished to exit its
investment.127 They emphasize, for example, that Oaktree usually holds its assets for five
years, but has held its interest in Crimson for eight.128 According to Plaintiffs, the mere
demand for the RRA showed that “Oaktree apparently wanted out of its Crimson
124 Compl. ¶ 60. 125 There is some dispute whether the RRA gave Oaktree something it did not have already with Crimson, and the parties disputed whether the Court, at this stage, could consider any registration agreement between Oaktree and Crimson. See Pls.‟ Opp‟n Br. 30 n.23 (arguing the Court cannot consider any stockholder agreement with Crimson and, regardless, the Merger would extinguish that agreement and the terms of the new one are different and better, so the RRA constitutes a unique benefit). It is unnecessary to resolve these issues. Rather, I will assume the RRA constituted a new benefit for Oaktree. 126 Pls.‟ Opp‟n Br. 31-32. 127 Arg. Tr. 57 (counsel for plaintiffs likened this case to infoGROUP: “in that case, [the court] found that need/desire for liquidity was a different, separate type of consideration . . . the exact same status applies here.”). 128 Compl. ¶ 16. 47 investment.”129 The Complaint further asserts that Oaktree‟s smaller post-transaction
holdings allow for easier disposal of its shares.130
Based on these rather general and conclusory allegations, I find unconvincing
Plaintiffs‟ contention that Oaktree was motivated by a need for liquidity. In my opinion,
it is not reasonably conceivable that Plaintiffs will be able to prove that proposition based
on the facts alleged or any reasonable inferences drawn from those allegations. Plaintiffs
appear to be arguing that Oaktree‟s longer-than-normal investment in Crimson reflected
the illiquid size of its control block. One previous case, on much more extreme facts,
found liquidity to be a compelling motivation in a cash-out merger practically demanded
by the controlling stockholder.131 A later case suggested that for liquidity to be a driving
motivation, there would need to be circumstances involving “a crisis, fire sale” of the
company.132 There is no evidence that the Merger challenged in this case represents a
crisis, fire sale. Here, Plaintiffs point to the RRA and a longer investment horizon as
evidence of a conflict on behalf of Oaktree, but this theory is not reasonably conceivable.
First, if Oaktree wished to exit its investment, the obvious method would be a cash-out
merger, as in infoGROUP, not a stock-for-stock transaction. Second, Oaktree did not
propose this transaction or attempt to spring it on the Board, as occurred in infoGROUP.
129 Id. ¶ 59. 130 Pls.‟ Opp‟n Br. 30 n.23. 131 N.J. Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888 (Del. Ch. Oct. 6, 2011). 132 Synthes, 50 A.3d at 1036.
48 Instead, according to Plaintiffs‟ own allegations, Keel and Grady began the negotiations
with Contango and then contacted Oaktree. These allegations fall far short of the
allegations that sufficed to support the possible existence of a conflict in prior cases.133
Regardless, I am not persuaded that the RRA, standing alone, conceivably could
be a sufficient benefit to require application of the entire fairness standard here. The case
law has recognized only a few situations where, despite the stockholders receiving the
same consideration, the controller nonetheless receives a unique benefit and the court
applies entire fairness: (a) the controller eliminates something bad for it and good for the
minority, as in the elimination of the derivative claim in Primedia; or (b) all parties suffer
a sub-optimal sale price, but the controller still benefits because it receives cash to satisfy
an idiosyncratic liquidity problem, as in infoGROUP.
The rationale for entire fairness is understandable in both of these instances.
Primedia can be viewed as a disparate consideration case: By failing to account for the
value of the derivative suit—which would have involved a substantial transfer from the
controller to the corporation—the controller captured a larger pro rata share of the total
consideration. Certain aspects of the infoGROUP case could have qualified for enhanced
scrutiny under Revlon: the board sold the corporation for cash and the allegation was that
133 See infoGROUP, 2011 WL 4825888, at *9 (describing controller with $25 million in debt and virtually no incoming cash); see also McMullin v. Beran, 765 A.2d 910 (Del. 2000) (describing sale process where 80% controller proposed to sell entire company in cash-out merger, allegedly to satisfy need for cash to fund a separate acquisition, and conducted the negotiations itself, and where the board approved the merger with just one meeting).
49 the board undersold. But, the added conflict on the part of the interested controlling
stockholder subjected the transaction to entire fairness.
Here the situation is different. Every stockholder received the same exchange
ratio and Oaktree received something that would have had no value to the widely
dispersed public stockholder. Oaktree did not face a severe liquidity problem, such as in
infoGROUP. The RRA appears to have had relatively minimal cash value to Oaktree—
basically, lawyers‟ fees and costs—and no cash value to the minority. The average
public stockholder presumably would sell their shares by way of a public market, rather
than dispose of them in a private placement; only large blockholders benefit from shelf-
registration as provided by the RRA.
Following the Merger, Crimson stockholders owned roughly one-fifth of
Contango. Oaktree, through its one-third holdings of Crimson, became about a seven-
percent stockholder in the surviving company. That fact alone likely would dramatically
increase the liquidity of Oaktree‟s holdings. The Court finds, therefore, that the RRA,
particularly considered in light of Oaktree‟s lesser holdings following the Merger, is not a
sufficiently unique benefit to trigger entire fairness.
Plaintiffs have failed to allege facts sufficient to support a reasonable inference
that Oaktree was a controlling stockholder, that it was conflicted in the Contango
transaction, or that it received some benefit not shared with the common stockholders.
Thus, none of those theories advanced by Plaintiffs provide a basis for applying entire
fairness review in this case.
50 D. The Complaint Does Not Otherwise Allege Facts Sufficient to Rebut the Business Judgment Rule
Courts also will review a transaction under entire fairness if the plaintiffs allege
facts sufficient to rebut the business judgment rule. Plaintiffs can rebut the presumption
by showing the board was interested in the challenged transaction or lacked
independence. “To successfully rebut the business judgment rule in this manner, thereby
leading to the application of the entire fairness standard, a plaintiff must normally plead
facts demonstrating „that a majority of the director defendants have a financial interest in
the transaction or were dominated by a materially interested director.‟”134
Aronson v. Lewis135 set forth the now-standard definitions for the terms
“interested” and “independent.” Interestedness means that the directors “appear on both
sides of a transaction [or] expect to derive any personal benefit from it in the sense of
self-dealing, as opposed to a benefit which devolves upon the corporation or all
stockholders generally.”136 “Independence means that a director‟s decision is based on
the corporate merits of the subject before the board rather than extraneous considerations
or influences.”137 Establishing a lack of independence requires pleading allegations “that
134 Orman v. Cullman, 794 A.2d 5, 22 (Del. Ch. 2002) (quoting Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 979 (Del. Ch. 2000)). 135 473 A.2d 805 (Del. 1984). 136 Id. at 812. 137 Id. at 816.
51 the directors are „beholden‟ to the [interested party] or so under [its] influence that their
discretion would be sterilized.”138
Taken as true, the allegations in Plaintiffs‟ Complaint in this case and the
inferences drawn from them are insufficient to create a reasonable doubt that a majority
of the Board is disinterested and independent. None of the directors worked for, held
stock in, or had any other disqualifying relationship with Contango. At best, Plaintiffs
have raised colorable challenges to three board members: Keel, Ford, and McCain. Of
those potential challenges, only the allegations of Keel‟s interestedness have significant
traction. Even so, at least four members of the Board—a majority—were independent
and disinterested in approving the Merger.
At the outset, the Court rejects Plaintiffs‟ main allegations that the Crimson Board
lacked independence because: (1) Ford, Traub, and Pierce, the Oaktree Directors, worked
for the alleged controller; and (2) Keel‟s longstanding ties to Oaktree aligned him with
Oaktree as well. I addressed these arguments at length in Section II.C. Because Oaktree
was not conflicted, even if it appointed a majority of the Board, that fact is not relevant to
determining the directors‟ independence or interestedness in this transaction. In that
regard, I find persuasive Defendants‟ argument that: “A rational 33% stockholder and its
board representatives would have the same interest as the public stockholders to obtain
the highest price reasonably available for Crimson‟s shares.”139
138 Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993). 139 Crimson Br. 16.
52 As previously noted, Plaintiffs allege that Keel focused on improving his own
post-employment package instead of securing a better exchange ratio. The Complaint,
complete with a table, shows Crimson‟s senior management‟s post-transaction pay
bumps.140 In addition to securing more lucrative contracts, Keel and company also
negotiated extensions of their employment contracts.141 These deals come on top of
standard change-in-control payouts from accelerated vesting of stock options.142 Even
assuming Keel was sufficiently interested in the transaction that his business judgment
would be skewed, however, the Complaint is devoid of particularized facts from which I
could conclude that Keel dominated the rest of the board on the Merger. This inference
founders because everyone had the same self-interest in maximizing the exchange ratio.
The benefit to Keel from his anticipated post-transaction employment would need to have
been so powerful that it overtook the value he derived from his own shares and led him to
dominate the Oaktree Directors as well as Ni. The Complaint does not allege facts
sufficient to enable the Court reasonably to draw such an inference.143
140 Compl. ¶ 70. 141 Id. ¶ 71. 142 Id. ¶ 72. 143 The available evidence indicates that Keel held significant amounts of Crimson stock and his $150,000 salary increase is dwarfed by the “$1.811 million [he received] as a result of accelerated vesting of restricted stock and deferred exchange payments.” Id. ¶ 73. In these circumstances, it is more reasonable to infer that Keel would seek to maximize the merger price to increase further the value of his stock options and more than one million shares of common stock.
53 Of the remaining Crimson directors, the only ones that plausibly could be said to
be interested are Ford and McCain. Both of these directors would continue as directors
post-merger. Even assuming the prospect of a continuing directorship sufficed to make
these directors interested, which is doubtful,144 that would taint only two of Crimson‟s
seven directors. The Complaint, therefore, does not allege sufficient facts to support a
reasonable inference that Keel, Ford, or McCain dominated the remaining board
members.
In sum, at least four of the seven board members, and perhaps as many as six,
were disinterested and independent with regard to the challenged Merger transaction.
Because Oaktree was not conflicted in this third-party transaction, there is no basis to
impute any Oaktree-based conflict to the Oaktree Directors. Moreover, to the extent that
any of the directors held Crimson shares or options, that fact would tend to align their
interests with the common stockholders, not create a conflict.145
144 Orman, 794 A.2d at 28-29 (“No case has been cited to me, and I have found none, in which a director was found to have a financial interest solely because he will be a director in the surviving company. To the contrary, our law has held that such an interest is not a disqualifying interest.”). 145 See Globis P’rs, 2007 WL 4292024, at *8 (“The accelerated vesting of options does not create a conflict of interest because the interests of the shareholders and directors are aligned in obtaining the highest price.”); In re PNB Hldg. Co. S’holder Litig., 2006 WL 2403999, at *10 (Del. Ch. Aug. 18, 2006) (“As a general matter, it is useful to have directors with, as Ross Perot was wont to say, skin in the game. Such directors have a personal interest in ensuring that the company is managed to maximize returns to the stockholders.”).
54 E. The Complaint Fails to State a Claim when Reviewed Under the Business Judgment Rule
Plaintiffs, through their Complaint, briefing, and oral argument, strenuously
attempted to convince the Court to review this merger for entire fairness. So far, they
have failed. Oaktree, if it was a controller, was not conflicted in this transaction. And, a
majority of the Board was disinterested and independent. As a result, the Crimson
Board‟s decision to enter into the Merger is protected by the business judgment rule
unless Plaintiffs have alleged facts from which they conceivably could show bad faith on
the part of the Board. Plaintiffs have not met that pleading standard.
1. Do Plaintiffs adequately allege bad faith?
a. The bad faith standard
There is no fiduciary duty of good faith. Instead, good faith is a subsidiary
element or condition of the duty of loyalty, as the Delaware Supreme Court stated in
Stone v. Ritter.146 As examples of conduct that would establish a failure to act in good
faith, the Supreme Court listed the following:
where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties.147
146 911 A.2d 362, 369-70 (Del. 2006). 147 Id. at 369 (quoting In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006)).
55 Plaintiffs accuse the Director Defendants of some combination of intentional action not in
the best interest of the corporation and a conscious disregard of duties.
Bad faith is not a light pleading standard. Even gross negligence, without more,
does not constitute bad faith. When challenging a transaction, it takes an “„extreme set of
facts . . . to sustain a disloyalty claim premised on the notion that disinterested directors
were intentionally disregarding their duties.‟”148 Allegations that directors failed to do all
they should have state merely a violation of the duty of care.
b. The bad faith allegations
Plaintiffs‟ bad faith allegations focus on three topics: (a) the merger price; (b) an
accounting impairment disclosure; and (c) a conflicted process, particularly as to
Barclays. Taking all reasonable inferences in favor of Plaintiffs, I conclude that the
allegations in the Complaint are not sufficient conceivably to support a showing of such
an “extreme set of facts” as to convert carelessness to disloyalty.
Plaintiffs allege that the consideration was “extraordinarily low”149 and that the
premium for Crimson stockholders was “tiny.”150 There was no need, Plaintiffs argue, to
sell Crimson at all and “definitely not at a fire-sale price as was offered by the
Merger.”151 The Board made a business judgment to sell the Company. Crimson
148 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (2009) (quoting In re Lear Corp. S’holder Litig., 967 A.2d 640, 654 (Del. Ch. 2008)). 149 Compl. ¶ 80. 150 Id. ¶ 81. 151 Pls.‟ Opp‟n Br. 42. 56 retained Barclays to engage in a review of strategic alternatives and they presented six
options to the Board, including various recapitalizations that involved continuing as a
stand-alone company.152 Mere disagreement with the Board‟s ultimate decision to enter
into a merger, rather than proceed as a stand-alone company, however, does not show bad
faith by the Board members. As to the merger price, Plaintiffs acknowledge that this is
not a Revlon case. Whether or not Defendants are correct that a stock-for-stock merger
not involving a change in control does “not need to reflect a premium per se,”153
Delaware law requires that for an allegation of price inadequacy to support a bad faith
claim, the Court would need to conclude that the “price was „so far beyond the bounds of
reasonable judgment that it seems inexplicable on any ground other than bad faith.‟”154
Plaintiffs have failed to allege facts from which this Court reasonably could find or infer
that the exchange ratio here, representing a 7.7% premium, satisfies this demanding
standard.
There is no rule that a low premium represents a bad deal, much less bad faith.155
The Complaint alleges, at length, that pre-merger presentations by Keel and Grady at
152 Proxy Statement 52. 153 Crimson Br. 23. 154 In re Alloy, Inc., 2011 WL 4863716, at *12 (Del. Ch. Oct. 13, 2011) (quoting Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 981 (Del. Ch. 2000)). 155 See, e.g., In re BJ’s Wholesale Club, Inc. S’holder Litig., 2013 WL 396202 (Del. Ch. Jan. 31, 2013) (granting motion to dismiss in case with 6.6% premium); In re Dollar Thrifty S’holder Litig., 14 A.3d 573 (Del. Ch. 2010) (denying preliminary injunction in case with a 5.5% premium); In re CompuCom Sys. Inc. S’holder Litig., 2005 WL 2481325 (Del. Ch. Sept. 29, 2005) (granting motion to dismiss 57 various trade shows and investor meetings suggested that Crimson‟s share value
dramatically exceeded the merger price.156 The Complaint alleges that, throughout 2012
and 2013, “Company management repeatedly told stockholders that it valued the
Woodbine asset alone at approximately $5 per share” and that, using net asset value
(“NAV”), “Crimson‟s management had been consistently and continuously providing
investors with per share valuations [of] $20 (base case) to $32 (upside case).” 157 This
alleged upside case would exceed the merger price by ten-fold.
In this case, Plaintiffs fail to allege that a higher price reasonably was available or
that there was another bidder ready and willing to buy Crimson for a higher price. These
failures are conspicuous because, if Plaintiffs believed that the Keel and Grady
presentations they quoted at length were reliable and accurate, implying the Board
approved a sale of the Company for somewhere between one-tenth and one-sixth of its
value, one might think some other buyer would emerge to capture this surplus. The
merger price emerged as part of a transaction that resulted from nearly four months of
negotiations between Crimson and Contango. The Crimson Board approved the Merger
after Barclays opined that the price was fair. On the facts alleged, I do not consider it
where deal price represented no premium to common stockholders and even a discount to the trading price the day before); cf. In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013) (finding transaction where common stockholders received nothing still satisfied the entire fairness standard). 156 Compl. ¶¶ 86-100. 157 Id. ¶ 86.
58 reasonably conceivable that Plaintiffs could show that the merger price so exceeded the
bounds of reason as to make it explainable only by bad faith.
On a related note, Plaintiffs allege that the Company reported an “apparently
unjustified” $117 million impairment in the fourth quarter of 2012.158 This impairment
allegedly is all the more suspicious because the Company‟s newly appointed Chief
Accounting Officer departed the Company shortly after the announcement.159 Plaintiffs
infer from these facts that Crimson‟s management and Board took “steps to temporarily
and artificially suppress the valuation of certain of Crimson‟s assets in order to conceal
the true value of the Company and accomplish the Transaction on terms more favorable
and palatable to Contango.”160 Missing from the Complaint, however, are any alleged
facts that would support a reasonable inference that Crimson released the disclosure
intentionally to drive down the Company‟s value or that the Board knew or believed the
impairment was inaccurate.161 Instead, the Complaint conclusorily and vaguely states
that the “timing and circumstances here suggest that this may well have been an
accounting maneuver to seek to artificially and temporarily reduce the overall value of
158 Id. ¶ 127, 136. 159 Id. ¶ 137. 160 Id. ¶ 126. 161 Plaintiffs allege only the accounting rules behind such impairments “allow for a great deal of discretion,” id. ¶ 130, and then go on to assert that the admittedly discretionary decision was carried out poorly, id. ¶¶ 131-33. Even if the impairment was negligent or grossly negligent, however, more would be needed to show bad faith.
59 the Company so as to help justify the payment of an otherwise unjustifiably low
consideration to Crimson stockholders in a pending Contango deal.”162 None of the
allegations show or fairly imply that the Director Defendants intentionally acted in a
manner other than in the best interests of the Company.
Plaintiffs further allege that Barclays was conflicted and that Barclays‟s fairness
opinion is suspicious. As for the conflicts, a Barclays affiliate acted as the lending agent
on the Second Lien and Oaktree hired Barclays to advise it on two significant divestiture
deals.163 Plaintiffs argue that these pre-existing relationships mean that “Barclays was
obviously beholden to Oaktree.”164 For this relationship to amount to a conflict, Oaktree
would need to have an objective materially different from Crimson and the Company‟s
other stockholders, i.e., a goal other than achieving the highest value for its shares.
Plaintiffs‟ allegations that Oaktree held its investment in Crimson three years longer than
usual and sought the RRA do not show a compelling liquidity problem or otherwise make
it reasonable to infer that Oaktree sold its shares for less than full value.165 As discussed
in greater detail in preceding sections, Plaintiffs have failed to allege facts that
conceivably would support a finding that Oaktree was conflicted in this transaction. The
162 Id. ¶ 136. 163 Id. ¶ 77. 164 Pls.‟ Opp‟n Br. 13. 165 See In re Morton’s Rest. Gp., Inc. S’holder Litig., 74 A.3d 656, 667-68 (Del. Ch. 2013) (rejecting conclusory argument that private equity fund wished to sell its stake in the company because it typically sold companies every three to five years and had been holding its current investment for over five years).
60 relationship alleged between Oaktree and Barclays similarly fails to support an inference
of bad faith on behalf of the Director Defendants.
The Complaint also criticizes Barclays‟s fairness opinion as flawed and unreliable.
The alleged flaws include that: (1) Contango‟s financial advisor, Petrie Partners
Securities, LLC (“Petrie”), consistently valued Crimson higher than Barclays; 166 (2)
Barclays chose “unreasonably high discount rates”;167 (3) Barclays failed to include the
value of the Buda wells in its fairness opinion;168 and (4) the Crimson Board “obviously
failed” to maintain oversight of Barclays‟s work.169
In many respects, Plaintiffs‟ allegations boil down to criticisms of Barclays‟s
methodology compared to Petrie‟s valuation models. To that extent, Plaintiffs‟
arguments amount to little more than disagreements with Barclays‟s methods or a belief
that another financial advisor would have done a better job. Such allegations do not
support a claim of bad faith.170 Overall, Plaintiffs have failed to allege any flaws so
166 Compl. ¶ 138. 167 Id. ¶ 139. 168 Id. ¶ 122. 169 Pls.‟ Opp‟n Br. 45-46. 170 Plaintiffs emphasize that Barclays‟s fairness opinion excluded the Buda wells discovery. According to the Complaint itself, however, the Buda wells announcement by Crimson occurred in late June 2013, almost two months after Barclays issued its fairness opinion. Compl. ¶ 121. 61 serious that they would negate the Crimson directors‟ ability to rely, in good faith, on
Barclays‟s professional advice.171
Finally, the Complaint‟s oversight allegations are merely conclusory. Plaintiffs
cite Keel and Grady‟s negotiations with Contango before informing the Board and
Barclays‟s alleged conflicts as examples of the Board‟s failed oversight. Plaintiffs‟
rendition of the facts attempts to show that the Crimson Board was asleep at the switch.
But, the Crimson Director Defendants, in fact, authorized the exploration of strategic
alternatives before any negotiations with Contango began, met numerous times formally
and informally to discuss the Merger, and utilized other independent advisors, such as
engineering consultants and outside lawyers, to assist them in the process.172 None of the
alleged oversight failures, whether considered separately or collectively, support a
reasonable inference that the Director Defendants acted, or failed to act, in bad faith.
Plaintiffs also rather half-heartedly challenge the deal protection measures. They
contend that the Merger included “the typical slate of buyer-friendly deal protection
mechanism terms.”173 Specifically, the deal included a termination fee, a no-solicitation
171 See Selectica, Inc. v. Versata Enters., Inc., 2010 WL 703062, at *17 (Del. Ch. Feb. 26, 2010) (“Under [8 Del. C.] § 141(e), where a board has relied on an expert‟s advice in making a decision, a due care claim challenging that decision must establish such facts as would make reliance on the expert opinion unreasonable.”), aff’d, 5 A.3d 586 (Del. 2010). 172 See Proxy Statement 50-63 (detailing the history of the Merger). Plaintiffs obviously are aware of these facts. See Pls.‟ Opp‟n Br. 45-46 (citing Proxy Statement 50-54 as support for their assertion that Keel and Grady conducted negotiations before informing the Board). 173 Pls.‟ Opp‟n Br. 15. 62 agreement, and matching rights for Contango, as described in Section I.D.4 supra. The
termination fee represented about 4.49% of Crimson‟s equity value, which is at the high
end of the range of fees the courts have found reasonable.174 The no-solicitation
provision, with a fiduciary out, allowed the Crimson Board to consider superior proposals
subject to Contango‟s temporally limited matching rights.175 These deal protection terms,
particularly the termination fee, were negotiated at length176 and the package of
protections suggests that the parties‟ focus was on deal closure. As noted, Plaintiffs do
not seriously contest these measures. In any event, I do not find it reasonably
conceivable that Plaintiffs could show the Director Defendants acted in bad faith by
approving these deal protection measures.
Finally, Plaintiffs allege that Crimson locked up the Merger with binding support
agreements. Oaktree and other Crimson executives and Board members entered into
support agreements assuring that at least 37.25% of the vote would favor the deal.177
174 See, e.g., In re Answers Corp. S’holder Litig., 2011 WL 1366780, at *4 n.47 (Del. Ch. Apr. 11, 2011) (denying motion for preliminary injunction for merger involving a termination fee of 4.4% of equity value); Dollar Thrifty S’holder Litig., 14 A.3d at 613-14 (upholding termination fee of 3.9% of equity value); In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975 (Del. Ch. June 24, 2005) (upholding termination fee of 3.75% of equity value combined with matching rights). 175 Proxy Statement 120-21. 176 Id. at 56-59. 177 Compl. ¶ 64. The Proxy Statement counted the support agreements and Oaktree as totaling roughly 38.3% of Crimson‟s outstanding shares. Proxy Statement 130. The Court will assume the higher number.
63 First, as Plaintiffs note, the support agreements allowed for termination if the Board
changed its recommendation and Contango‟s stockholders voted against the Merger or if
Crimson received an unsolicited superior proposal.178 Second, Plaintiffs failed to plead
facts sufficient to support a reasonable inference that a majority of the vote was locked
up.
Plaintiffs argue that Ni‟s vote was “assured” because he “had already expressed
his support for the Merger by voting in favor of the Merger Agreement” as a director.179
There may be situations where the Court, in the absence of a formal support agreement,
reasonably could infer that a majority of the shares were locked up and the merger was a
foregone conclusion. Plaintiffs have not alleged such facts here. A director‟s vote in
favor of a merger is not equivalent to a lock up and does not have the same force as a
stockholder entering into a binding voting agreement. Most importantly, there is no
evidence that Ni, as a Crimson director or as an officer or agent of ACEC, entered into a
contractual commitment to vote the shares he controlled in favor of the deal. In total,
therefore, over 60 percent of the vote remained in play. Thus, the vote was not a
foregone conclusion.
In sum, Plaintiffs have failed to plead facts from which this Court conceivably
could conclude that the Director Defendants acted in bad faith.
178 Compl. ¶ 64. 179 Pls.‟ Opp‟n Br. 41.
64 2. The remaining duty of care claims cannot overcome the exculpatory provision in Crimson’s Certificate of Incorporation
The Crimson Certificate of Incorporation includes an exculpatory provision, as
permitted by 8 Del. C. § 102(b)(7), which exculpates the Board of Directors for
violations of the duty of care. As such, to adequately state a claim for monetary
damages, the Complaint must plead a breach of the duty of loyalty, such as by alleging
bad faith by the directors. At this point, the Complaint seeks only damages. The
Complaint failed adequately to allege a conflicted transaction by a controller or a
majority of the Board or that the Board members acted in bad faith. Thus, Plaintiffs have
not stated a claim for breach of the duty of loyalty. Any remaining duty of care claims,
therefore, fail to state a claim under Crimson‟s exculpatory provision.
Plaintiffs also purport to have pled claims based on disclosure flaws in the Proxy
Statement. In two paragraphs in the 160-paragraph Complaint, in the course of
criticizing Barclays, Plaintiffs allege that the Proxy Statement failed to disclose: (1)
certain details about how Barclays calculated the exchange ratio in its NAV analysis; and
(2) the details of how Barclays inadvertently understated Crimson‟s projected 2017 cash
flows.180 To the extent these allegations represent more nit-picking as to Barclays‟s
methodology, I dismiss them for the reasons stated in the preceding section.
To the extent Plaintiffs assert that Defendants violated their disclosure obligations,
they have waived these arguments. Plaintiffs did not mention any of these alleged
180 Compl. ¶¶ 139, 141.
65 disclosure problems in their Opposition Brief or at the Argument.181 As such, any
disclosure claims are waived.182 Even if the arguments are not waived, they fail to state a
claim under Rule 12(b)(6). As for the inadvertent understatement of future cash flows,
the Proxy Statement mentioned the understatement. Nevertheless, Plaintiffs ask for more
details. With regard to the NAV analysis, Plaintiffs seek inclusion of specific details
about how Barclays conducted its analysis. Proxy Statements, however, need not
disclose every detail underlying a financial advisor‟s analysis.183 Thus, assuming
Plaintiffs are pursuing a disclosure claim, they have failed to allege that anything material
was omitted from the Proxy Statement.184 Furthermore, and in any event, the allegations
181 See Arg. Tr. 33-34 (counsel for Defendants: noting this point). 182 See Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (“It is settled Delaware law that a party waives an argument by not including it in its brief.”). 183 See In re 3Com S’holder Litig., 2009 WL 5173804, at *6 (Del. Ch. Dec. 18, 2009) (“There are limitless opportunities for disagreement on the appropriate valuation methodologies to employ, as well as the appropriate inputs to deploy within those methodologies. Considering this reality, quibbles with a financial advisor‟s work simply cannot be the basis of a disclosure claim.”); Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *11 (Del. Ch. Nov. 30, 2007) (describing disclosures required for work done by investment bankers). 184 See Wayne Cty. Empls. Ret. Sys. v. Corti, 2009 WL 2219260, at *8 (Del. Ch. July 24, 2009) (to establish a material omission from a proxy statement, “a plaintiff „must show a substantial likelihood that the omitted facts would have assumed actual significance in the deliberations of a reasonable stockholder because, if disclosed, those facts would have significantly altered the total mix of information available to stockholders‟”) (quoting Wayne Cty. Empls. Ret. Sys. v. Corti, 954 A.2d 319, 330 (Del. Ch. 2008)) (internal quotations omitted).
66 here would support, at most, a duty of care violation, which would be barred by the
exculpatory provision.185
3. Plaintiffs’ claim for aiding and abetting also fails
The preceding sections showed the Complaint failed to state a claim against
Oaktree or the Director Defendants for breaching any fiduciary duty. Plaintiffs accuse
Contango and the Merger Sub of having aided and abetted such purported breaches of
fiduciary duty. Because the underlying breaches of fiduciary duty are being dismissed,
Plaintiffs‟ aiding and abetting claim must be dismissed as well.186 The only possible
exception would be as to an otherwise exculpated claim for breach of the duty of care. If
Contango or the Merger Sub aided or abetted such a breach, they could be liable because
they do not come within the exculpation clause.
Even assuming a breach of the duty of care by the Director Defendants, however,
the Complaint does not adequately plead aiding and abetting by Contango or the Merger
Sub. Stating a claim for aiding and abetting requires allegations meeting each part of a
four-pronged test: (1) the existence of a fiduciary relationship; (2) a breach of that
fiduciary‟s duty; (3) Defendants‟ knowing participation in that breach; and (4)
185 Globis P’rs, 2007 WL 4292024, at *15 (“There is nothing in the Complaint, however, from which the Court reasonably could infer any of the alleged breaches was anything other than a good faith, erroneous judgment as to the proper scope of disclosure. Thus, Section 102(b)(7) provides an alternative basis for dismissing [Plaintiffs‟] claims the Individual Defendants breached their fiduciary duty of disclosure.”). 186 Id. (“As this Court has determined that the Complaint fails to state a claim for any underlying breach of fiduciary duty, [Contango and the Merger Sub] cannot be liable for aiding and abetting such a breach.”).
67 damages.187 Here, the Complaint fails to allege knowing participation by Contango or the
Merger Sub in any breach of fiduciary duties by Defendants.
In their Opposition Brief, Plaintiffs argue that Contango exploited the divergent
interests among Crimson insiders, such as Oaktree and Keel. Plaintiffs specifically point
to the fact that Contango met with Oaktree in an effort to negotiate the RRA.188
Accordingly, Plaintiffs ask the Court to infer that Contango knowingly participated in
breaches of fiduciary duties by Oaktree and the Board. This Memorandum Opinion
rejects the argument that Oaktree breached any fiduciary duties it may have owed as a
controller in this Merger. As such, the allegations as to Oaktree cannot form the basis of
an aiding and abetting claim. Aside from these arguments—which appear directed to
duty of loyalty violations, which were dismissed on the merits supra—the Complaint is
devoid of any non-conclusory statements from which I reasonably could infer that
Contango or the Merger Sub aided or abetted any non-dismissed breaches of fiduciary
duties. Thus, Plaintiffs‟ aiding and abetting claims also will be dismissed.
F. The Motion to Intervene
At the Argument, the Court stayed Fisichella‟s motion to intervene pending a
decision on the motions to dismiss.189 Having concluded for the reasons stated in this
Memorandum Opinion that Plaintiffs‟ Complaint fails to state a claim and should be
187 Mapiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001). 188 Pls.‟ Opp‟n Br. 47 (citing Compl. ¶¶ 59-60). 189 Arg. Tr. 7-10.
68 dismissed under Rule 12(b)(6), and having received full briefing on the motion to
intervene, I turn next to that motion.
Resolving the motion to intervene involves two questions. First, whether the
Court should permit Fisichella to intervene based on the requirements for intervention in
Court of Chancery Rule 24. And, second, whether there is something sufficiently
compelling about the motion to intervene that the Court, under Court of Chancery Rule
15(aaa), should dismiss this action with prejudice as to the existing Plaintiffs only and
allow Fisichella to amend the Complaint or file a new complaint to include the
information he obtained from his books and records action under 8 Del. C. § 220 (the
“220 Information”).190 As discussed below, these two questions significantly overlap.
Rule 24 allows two types of intervention: intervention of right and permissive
intervention. Fisichella seeks to enter this case as a permissive intervenor. A party
seeking permissive intervention must show that their “claim or defense and the main
action have a question of law or fact in common.”191 Applications for permissive
intervention are subject to the Court‟s discretion. “In exercising its discretion the Court
shall consider whether the intervention will unduly delay or prejudice the adjudication of
the rights of the original parties.”192 Fisichella‟s motion satisfies the commonality
190 Fisichella, in connection with his memorandum in support of his motion to intervene, filed a proposed Verified Class Action Complaint in Intervention. Intervenor‟s Mem. Ex. 1. 191 Ct. Ch. R. 24(b). 192 Id.
69 requirement in that he asserts the same breach of fiduciary duty claims in connection with
the Merger. As such, the main considerations are the issues of undue delay and prejudice
to the adjudication of the rights of Defendants.
Rule 15(aaa), a procedural rule with no federal analog, provides that parties
responding to a motion to dismiss under Rule 12(b)(6) have the option of amending their
complaint or filing a responsive brief to the motion to dismiss. If the parties file a
responsive brief and the “Court thereafter concludes that the complaint should be
dismissed under Rule 12(b)(6) . . . such dismissal shall be with prejudice . . . unless the
Court, for good cause shown, shall find that dismissal with prejudice would not be just
under all the circumstances.”193 At the Argument, Plaintiffs chose to go forward with
their opposition to Defendants‟ motions to dismiss on their existing Complaint,
notwithstanding Fisichella‟s then-pending and briefed motion to intervene. As a result,
the dismissal of this Complaint is, by default, with prejudice as to Plaintiffs.
The wrinkle is the pending motion to intervene. Fisichella seeks to intervene
under Rule 24(b). The parties do not seriously dispute that he meets the basic
requirements for permissive intervention, but Defendants urge the Court to exercise its
discretion to deny intervention here. To resolve this dispute, I must consider: (1) whether
Fisichella, as an intervenor, brings something so compelling to the table that the Court
should consider dismissing the Complaint with prejudice only as to the existing Plaintiffs
rather than the class as a whole, including Fisichella; and (2) whether the timing of the
193 Ct. Ch. R. 15(aaa).
70 motion to intervene is such that granting it would unduly delay or prejudice the
adjudication of the rights of Defendants.
Defendants primarily argue that the motion to intervene is untimely. Fisichella
filed the 220 action on May 8, 2013, and apparently received at least some responsive
documents by the end of June.194 He filed suit in Texas in late July, and the Texas court
stayed that action on August 30, 2013, pending resolution of the Crimson litigation in this
forum.195 Fisichella did not move to intervene here until January 28, 2014, nearly five
months after the Texas court stayed his action and the day after the parties completed
briefing on Defendants‟ motions to dismiss.196
While ordinarily delay such as Fisichella‟s would cause serious concern, it is less
of a problem in the circumstances here. As Fisichella expressly stated in his Intervenor‟s
Reply Brief, he “does not seek to take over this litigation, to replace Co-Lead Plaintiffs or
Co-Lead Counsel, or to litigate a „duplicative parallel litigation.‟”197 Fisichella further
asserted that his “sole purpose” in seeking to intervene in this action “is to place the 220
194 Intervenor‟s Mem. 3-4. 195 Id. at 7-9. By the time Fisichella filed his complaint in Texas, all nine of the actions that comprise this consolidated Delaware Action already had been filed. 196 Defendants moved to dismiss this action on October 14, 2013. Plaintiffs filed their Opposition Brief on December 27, nearly four months after the Texas court stayed Fisichella‟s suit. To the extent Plaintiffs wanted to add any of the 220 Information, they could have done so before filing their Opposition Brief. Similarly, Fisichella could have moved to intervene well before December 27. Yet, he waited an additional month, until the day after Defendants filed their Reply Brief, to seek to intervene. 197 Intervenor‟s Reply 1.
71 Information, which the Delaware Plaintiffs were unable to secure, before the Court to aid
in its consideration of the pending motions to dismiss.”198 Without these disclaimers, the
Court might be facing the prospect of allowing the filing of a new complaint, followed by
a new motion to dismiss, and another round of briefing and argument. That would be
disruptive, wasteful of the resources of the Court and the litigants, and prejudicial to
Defendants. Because Defendants and Fisichella essentially have invited the Court to
consider the 220 Information in deciding the pending motions to dismiss, however, the
potential for such prejudice is greatly reduced. Therefore, I have accepted that invitation
and taken the new information proffered by Fisichella into account in analyzing
Defendants‟ motions.
Fisichella argues that the information from the 220 action is highly relevant to this
case.199 In reviewing Fisichella‟s arguments and the expanded allegations in his proposed
complaint, however, I find nothing that would lead me to reach a different conclusion on
the motions to dismiss.
Fisichella argues that the new information shows Oaktree had inside information
about the Merger and that its representatives often formed a majority of the directors in
attendance at the relevant Board meetings. Assuming those allegations are true, that
198 Id. 199 The Court also notes that Plaintiffs declined to take a position on Fisichella‟s intervention. Moreover, Defendants stated in their Brief Opposing Intervention that “Defendants have agreed to allow Lead Plaintiffs to make use of the [220 Information] in connection with the motions to dismiss.” Defs.‟ Opp‟n to Intervention 3. Nevertheless, Plaintiffs chose not to do so.
72 would support an inference that Oaktree was a controller as to the Merger. In this
Memorandum Opinion, however, I have found that even if Oaktree did control Crimson,
Oaktree was not conflicted in the transaction such that the entire fairness standard would
apply. Fisichella also contends that the new information shows the inadequacy of the
merger price. I rejected all of Plaintiffs‟ similar arguments about inadequate price,
however, and I saw nothing in the additional information Fisichella seeks to introduce
that would cause me to alter that conclusion. Further, Fisichella relies on the 220
Information to attack Barclays‟s valuations and submits that, in any event, Barclays‟s
work shows that the merger consideration was inadequate. At most, the 220 Information
indicates that the premium paid for Crimson was below average. But, as discussed
previously, a low premium does not mean that the Board acted in bad faith in approving
the Merger. Finally, although Fisichella alleges a series of process-related flaws, the
more important of these were addressed either directly in the Complaint or in Plaintiffs‟
briefing. I conclude, therefore, that Fisichella‟s information only would add greater
detail to arguments the Court already has rejected, without materially strengthening those
arguments.
For these reasons, I hold that dismissing the Complaint with prejudice to the class
would not be unjust. Furthermore, based on the marginal benefit of the 220 Information
and my determination that consideration of the 220 Information would not enable
Plaintiffs or Fisichella to avoid dismissal under Rule 12(b)(6), I conclude that the motion
to intervene should be denied.
73 III. CONCLUSION
For the reasons stated in this Memorandum Opinion, Defendants‟ motions to
dismiss are granted, and Plaintiffs‟ Complaint is dismissed with prejudice. In addition, I
deny Fisichella‟s motion to intervene.
IT IS SO ORDERED.
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