In Re: Pattern Energy Group Inc. Stockholders Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE PATTERN ENERGY GROUP ) C.A. No. 2020-0357-MTZ INC. STOCKHOLDERS LITIGATION )
MEMORANDUM OPINION Date Submitted: December 10, 2020 Date Decided: May 6, 2021
Ned Weinberger and Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; David MacIsaac and John Vielandi, LABATON SUCHAROW LLP, New York, New York; Chad Johnson, Noam Mandel, and Desiree Cummings, ROBBINS GELLER RUDMAN & DOWD LLP, New York, New York; Brian Schall and Rina Restaino, THE SCHALL LAW FIRM, Los Angeles, California, Attorneys for Lead Plaintiff Jody Britt.
A. Thompson Bayliss and April M. Kirby, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Alan S. Goudiss, K. Mallory Brennan, and Deke Shearon SHEARMAN & STERLING LLP; Christina Urhausen, SHEARMAN & STERLING LLP, San Francisco, California; Attorneys for Defendants Alan R. Batkin, Edmund John Philip Browne, Richard A. Goodman, Douglas G. Hall, Patricia M. Newson, Mona K. Sutphen, Michael Garland, Hunter Armistead, Daniel Elkort, Michael Lyon, and Esben Pedersen.
Rudolf Koch, Matthew D. Perri, and Andrew L. Milam, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Matthew A. Schwartz, Y. Carson Zhou, John-Francis S. Flynn, SULLIVAN & CROMWELL LLP, New York, New York; Attorneys for Defendants Riverstone Holdings LLC, Riverstone Pattern Energy II Holdings, L.P., and Pattern Energy Group, Holdings 2 LP.
ZURN, Vice Chancellor. The sales process of Pattern Energy Group Inc. (the “Company”) was run by
an undisputedly disinterested and independent special committee that recognized
and nominally managed conflicts, proceeded with advice from an unconflicted
banker and counsel, and conducted a lengthy process attracting tens of suitors that
the special committee pressed for value. But, even having acknowledged that one
eager bidder offered superior value, the special committee ultimately selected a
different bidder as the buyer. The buyer was preferred by a private equity investor,
who formed the Company and its upstream supplier, which the investor controlled;
appointed the Company’s management team; and held a consent right over Company
changes of control. The investor favored the buyer because its proposal, as shaped
by the investor, accomplished the investor’s goals of taking the Company private
and consolidating it with the upstream supplier, while permitting the investor to
retain its equity stake in the new company.
In apportioning fault for the selection of the buyer’s inferior bid, the plaintiff
primarily points to three forces: (1) the investor’s control over the Company together
with the upstream supplier and management; (2) the Company’s CEO, who was
conflicted in favor of the investor yet ran point on the sales process to stockholders’
detriment; and (3) the special committee’s prioritization of the investor’s goals over
stockholder value and inability to say “no.” In her post-closing class action
complaint, the plaintiff seeks entire fairness review due to the investor’s alleged
1 control group standing on both sides of the transaction, or due to the CEO’s alleged
fraud on the board. She claims the special committee and management breached
their fiduciary duties in a cash-out merger, and that the investor and supplier either
controlled that process or participated as third-party tortfeasors. The defendants—
the investor, the supplier, the conflicted directors, the special committee, and
conflicted management—contend that the cash-out merger with Buyer was cleansed
by an informed stockholder vote; that the directors were exculpated; and that no
breaches of fiduciary duty or third-party liability torts have been pled.
On the defendants’ motion to dismiss, the plaintiff prevails on most of her
arguments. Recognizing that neither the investor nor the supplier owned Company
stock, I leave open the possibility that the plaintiff may establish the investor,
supplier, and management stockholders formed a control group, given the investor’s
consent right and other pervasive sources of soft power over the Company and its
sales process. Thus, it remains possible that the transaction may be subject to the
entire fairness standard of review under a controller theory—but not a fraud on the
board theory.
At a minimum, the plaintiff has pled the special committee and management
failed to manage conflicts and prioritized the investor’s goals over stockholder value
in bad faith (as distinguished from dereliction of duty), and so states nonexculpated
claims for breach of fiduciary duty that will be reviewed under enhanced scrutiny.
2 All but two management defendants allegedly contributed to flaws in the process.
The sales process is not presumptively subject to the business judgment rule: the
votes in favor fall below a majority of disinterested stockholders because the block
at the tipping point was subject to a voting agreement that compelled favorable votes
that were not informed, disinterested, or voluntary. Plaintiff has also pled the special
committee improperly and completely delegated drafting the merger proxy
(the “Proxy”) to conflicted management, and that the Proxy was inadequate.
I. BACKGROUND1
The Verified Stockholder Class Action Complaint, filed on May 28, 2020
(the “Complaint”), challenges the March 16, 2020 all-cash acquisition
(the “Merger”) of Pattern Energy Group Inc. by Canada Pension Plan Investment
1 I draw the following facts from the Verified Consolidated Stockholder Class Action Complaint, available at Docket Item (“D.I.”) 101 [hereinafter “Compl.”], as well as the documents attached and integral to it. See, e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018); In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). Citations in the form of “Kirby Decl. ––” refer to the exhibits attached to the Declaration of April M. Kirby, Esq. in Support of the Opening Brief in Support of Defendants’ Motion to Dismiss, available at D.I. 75 and D.I. 76. Citations in the form of “Weinberger Decl. ––” refer to the exhibits attached to the Transmittal Declaration of Ned Weinberger in Support of Plaintiff’s Answering Brief in Opposition to Defendants’ Motions to Dismiss, available at D.I. 82. Citations in the form of “Proxy ––” refer to the Company’s Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed February 4, 2020, attached as Exhibit 1 to the Kirby Declaration and available at D.I. 75. On the Motion, the Court may consider the Proxy, as well as other publicly filed documents regarding the Merger. See Orman v. Cullman, 794 A.2d 5, 15–16 (Del. Ch. 2002); In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999), aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000); Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1168 n.3 (Del. Ch. 2002).
3 Board (“Buyer”).2 Lead Plaintiff Jody Britt (“Plaintiff”) was a Company
stockholder at all relevant times, and brings her claims on behalf of all other similarly
situated former public Company stockholders.3
A. The Company’s Longstanding Relationship To Riverstone Contextualizes And Bears On The Sales Process At Issue.
The Company was formed by Riverstone to operate energy projects developed
by another Riverstone entity.4 Riverstone “is a private equity fund investing
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE PATTERN ENERGY GROUP ) C.A. No. 2020-0357-MTZ INC. STOCKHOLDERS LITIGATION )
MEMORANDUM OPINION Date Submitted: December 10, 2020 Date Decided: May 6, 2021
Ned Weinberger and Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; David MacIsaac and John Vielandi, LABATON SUCHAROW LLP, New York, New York; Chad Johnson, Noam Mandel, and Desiree Cummings, ROBBINS GELLER RUDMAN & DOWD LLP, New York, New York; Brian Schall and Rina Restaino, THE SCHALL LAW FIRM, Los Angeles, California, Attorneys for Lead Plaintiff Jody Britt.
A. Thompson Bayliss and April M. Kirby, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Alan S. Goudiss, K. Mallory Brennan, and Deke Shearon SHEARMAN & STERLING LLP; Christina Urhausen, SHEARMAN & STERLING LLP, San Francisco, California; Attorneys for Defendants Alan R. Batkin, Edmund John Philip Browne, Richard A. Goodman, Douglas G. Hall, Patricia M. Newson, Mona K. Sutphen, Michael Garland, Hunter Armistead, Daniel Elkort, Michael Lyon, and Esben Pedersen.
Rudolf Koch, Matthew D. Perri, and Andrew L. Milam, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Matthew A. Schwartz, Y. Carson Zhou, John-Francis S. Flynn, SULLIVAN & CROMWELL LLP, New York, New York; Attorneys for Defendants Riverstone Holdings LLC, Riverstone Pattern Energy II Holdings, L.P., and Pattern Energy Group, Holdings 2 LP.
ZURN, Vice Chancellor. The sales process of Pattern Energy Group Inc. (the “Company”) was run by
an undisputedly disinterested and independent special committee that recognized
and nominally managed conflicts, proceeded with advice from an unconflicted
banker and counsel, and conducted a lengthy process attracting tens of suitors that
the special committee pressed for value. But, even having acknowledged that one
eager bidder offered superior value, the special committee ultimately selected a
different bidder as the buyer. The buyer was preferred by a private equity investor,
who formed the Company and its upstream supplier, which the investor controlled;
appointed the Company’s management team; and held a consent right over Company
changes of control. The investor favored the buyer because its proposal, as shaped
by the investor, accomplished the investor’s goals of taking the Company private
and consolidating it with the upstream supplier, while permitting the investor to
retain its equity stake in the new company.
In apportioning fault for the selection of the buyer’s inferior bid, the plaintiff
primarily points to three forces: (1) the investor’s control over the Company together
with the upstream supplier and management; (2) the Company’s CEO, who was
conflicted in favor of the investor yet ran point on the sales process to stockholders’
detriment; and (3) the special committee’s prioritization of the investor’s goals over
stockholder value and inability to say “no.” In her post-closing class action
complaint, the plaintiff seeks entire fairness review due to the investor’s alleged
1 control group standing on both sides of the transaction, or due to the CEO’s alleged
fraud on the board. She claims the special committee and management breached
their fiduciary duties in a cash-out merger, and that the investor and supplier either
controlled that process or participated as third-party tortfeasors. The defendants—
the investor, the supplier, the conflicted directors, the special committee, and
conflicted management—contend that the cash-out merger with Buyer was cleansed
by an informed stockholder vote; that the directors were exculpated; and that no
breaches of fiduciary duty or third-party liability torts have been pled.
On the defendants’ motion to dismiss, the plaintiff prevails on most of her
arguments. Recognizing that neither the investor nor the supplier owned Company
stock, I leave open the possibility that the plaintiff may establish the investor,
supplier, and management stockholders formed a control group, given the investor’s
consent right and other pervasive sources of soft power over the Company and its
sales process. Thus, it remains possible that the transaction may be subject to the
entire fairness standard of review under a controller theory—but not a fraud on the
board theory.
At a minimum, the plaintiff has pled the special committee and management
failed to manage conflicts and prioritized the investor’s goals over stockholder value
in bad faith (as distinguished from dereliction of duty), and so states nonexculpated
claims for breach of fiduciary duty that will be reviewed under enhanced scrutiny.
2 All but two management defendants allegedly contributed to flaws in the process.
The sales process is not presumptively subject to the business judgment rule: the
votes in favor fall below a majority of disinterested stockholders because the block
at the tipping point was subject to a voting agreement that compelled favorable votes
that were not informed, disinterested, or voluntary. Plaintiff has also pled the special
committee improperly and completely delegated drafting the merger proxy
(the “Proxy”) to conflicted management, and that the Proxy was inadequate.
I. BACKGROUND1
The Verified Stockholder Class Action Complaint, filed on May 28, 2020
(the “Complaint”), challenges the March 16, 2020 all-cash acquisition
(the “Merger”) of Pattern Energy Group Inc. by Canada Pension Plan Investment
1 I draw the following facts from the Verified Consolidated Stockholder Class Action Complaint, available at Docket Item (“D.I.”) 101 [hereinafter “Compl.”], as well as the documents attached and integral to it. See, e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018); In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). Citations in the form of “Kirby Decl. ––” refer to the exhibits attached to the Declaration of April M. Kirby, Esq. in Support of the Opening Brief in Support of Defendants’ Motion to Dismiss, available at D.I. 75 and D.I. 76. Citations in the form of “Weinberger Decl. ––” refer to the exhibits attached to the Transmittal Declaration of Ned Weinberger in Support of Plaintiff’s Answering Brief in Opposition to Defendants’ Motions to Dismiss, available at D.I. 82. Citations in the form of “Proxy ––” refer to the Company’s Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed February 4, 2020, attached as Exhibit 1 to the Kirby Declaration and available at D.I. 75. On the Motion, the Court may consider the Proxy, as well as other publicly filed documents regarding the Merger. See Orman v. Cullman, 794 A.2d 5, 15–16 (Del. Ch. 2002); In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999), aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000); Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1168 n.3 (Del. Ch. 2002).
3 Board (“Buyer”).2 Lead Plaintiff Jody Britt (“Plaintiff”) was a Company
stockholder at all relevant times, and brings her claims on behalf of all other similarly
situated former public Company stockholders.3
A. The Company’s Longstanding Relationship To Riverstone Contextualizes And Bears On The Sales Process At Issue.
The Company was formed by Riverstone to operate energy projects developed
by another Riverstone entity.4 Riverstone “is a private equity fund investing
primarily in energy, power, and infrastructure,” including renewable energy. The
developer entity’s structure and ties to the Company changed with the energy
market. The chronology of those changes is helpful background to this matter, as
the Company’s ties to Riverstone and the developer loom large in the Company’s
sales process.
Riverstone has owned and controlled Pattern Energy Group LP
(“Developer 1”) at all times.5 In October 2012, Riverstone, via Developer 1,
incorporated the Company and thereafter controlled the Company through
Riverstone’s stake in Developer 1.6 Riverstone arranged the Company and
2 See generally Compl. 3 Id. ¶ 23. 4 Id. ¶¶ 37, 43. Riverstone Pattern Energy II Holdings, L.P. is an affiliate of Riverstone Holdings LLC; this opinion refers to those entities collectively as “Riverstone.” Id. ¶ 39. 5 Id. ¶¶ 42, 46. 6 Id. ¶ 47.
4 Developer 1 in a symbiotic business relationship, in which Developer 1 created and
constructed renewable energy projects, but did not operate them, and the Company
had a right of first offer to purchase and operate Developer 1’s projects. 7
Developer 1 and the Company were run as a single entity out of the same offices,
and Developer 1 enjoyed the benefits of a management services agreement with the
Company.8
In 2013, Developer 1 took the Company public via an initial public offering
(the “IPO”).9 After the IPO, Riverstone still indirectly controlled the Company via
Developer 1, which retained a 67.9% majority interest; public investors and
Company management held the other third.10 Developer 1 also executed a
shareholder agreement with the Company in connection with the IPO. That
agreement gave Developer 1, and therefore Riverstone, a consent right over the
Company’s major corporate transactions, including sales and acquisitions worth
more than 10% of the Company’s market capitalization, so long as Developer 1
owned at least one third of the Company’s shares.11 Developer 1 continued to
7 Id. ¶ 46 n.2. 8 Id. ¶¶ 51–52. 9 Id. ¶ 47. 10 Id. ¶¶ 47, 49. 11 Id. ¶ 50. By February 2015, Developer 1’s ownership had dipped below the one-third threshold, so its consent right lapsed. Id.
5 develop new projects.12 The Company paid steady dividends and attracted long-
term investors, but its share price remained flat.13
In 2017, inspired by record demand for renewable energy,14 Riverstone
restructured its relationship with the Company, as Developer 1 seemingly lacked the
capital resources needed to develop projects to keep up with demand.15 Developer 1
was replaced with a Riverstone-sponsored and controlled private equity fund,
Pattern Energy Group Holdings 2, LP (together with any subsidiaries,
“Developer 2”). Developer 2 was funded and owned by Riverstone, the Company,
and Company management, with total capital commitments of nearly $1 billion.16
The Company became Developer 2’s limited partner with the goal of “[c]reat[ing]
strong, lasting alignment between [Developer 2] and [the Company].”17 Developer 2
acquired Developer 1’s assets and replaced Developer 1 as the Company’s symbiotic
counterpart.18 The Company primarily acquired its operating assets from
Developer 2, while Developer 2 retained development assets,19 and the Company
12 Id. ¶¶ 2, 38, 43–44, 46. 13 Id. ¶ 53. 14 Id. ¶ 54. 15 Id. ¶ 55. 16 Id. ¶¶ 2, 38, 57, 58. 17 Id. ¶ 60. 18 Id. ¶¶ 2, 38, 57. 19 Proxy at 36.
6 held a downstream right of first offer on all projects Developer 2 sold.20 Crucially,
Developer 2 acquired a consent right over the Company’s transfer of its Developer 2
stake (the “Consent Right”); in view of its domination over Developer 2, Riverstone
ultimately controlled the Consent Right.21
As Developer 2 took the stage, Developer 1 wound down, selling its equity in
the Company between late 2017 and October 2018 such that Riverstone no longer
held any direct interest in the Company at the time of the Merger.22 Still, Riverstone
and the Company remained intertwined operationally (as the Company bought and
operated the projects Riverstone’s Developer 2 operated) and structurally (as the
Company and its management were minority owners in Developer 2, and as
Riverstone controlled the Consent Right over a transfer of the Company’s minority
interest). Their investments also aligned: at the time of the Merger, Riverstone held
approximately 71% of Developer 2’s equity; the Company held 29%; and Company
management held the remaining 1% interest.23
Riverstone and the Company also had a great number of overlapping
fiduciaries, including Michael Garland, Hunter Armistead, Daniel Elkort, Michael
20 Compl. ¶¶ 57, 62. 21 Id. ¶¶ 62–63. 22 See id. ¶¶ 76–80. 23 Id. ¶¶ 58–59; Proxy at 36.
7 Lyon, and Esben Pedersen (collectively, the “Officer Defendants”).24 The Officer
Defendants have a long history with Riverstone: “[f]or over a decade Riverstone
has been their co-investor, partner, employer, sponsor, and financial patron.”25
Riverstone and the Officer Defendants formed Developer 1 together, buying
Developer 1’s portfolio from the Officer Defendants’ previous employer.26
Riverstone and the Officer Defendants also co-created the Company and
Developer 2.27
Garland served as Developer 2’s President, as well as Developer 1’s President
and director.28 Armistead took over as Developer 2’s President in April 2019, after
having served as Developer 1’s Executive Director.29 Garland and Armistead would
24 See Compl. ¶¶ 32–36, 51. 25 Id. ¶ 45; see also id. ¶¶ 32–36. 26 Id. ¶¶ 44–45. Riverstone purchased the portfolio from Babcock & Brown LLP, a now- defunct Australian global investment and advisory firm. Id. ¶ 44. In 2009, Riverstone and the management team of Babcock & Brown’s North American Energy Group, which included the Officer Defendants, acquired Babcock & Brown’s wind development portfolio to form Developer 1. Id. Defendant Hunter Armistead touted Riverstone’s acquisition, stating that Babcock & Brown’s management team, including the Officer Defendants, was “free of Babcock, which is a great thing[.]” Id. ¶ 45 (emphasis omitted). Armistead stated “[i]t was clear we needed to find another party that was interested in investing in renewables and valued our team . . . . We found the perfect partner in Riverstone—we have a new backer.” Id. 27 See id. ¶¶ 42, 46, 57. 28 Id. ¶ 24. 29 Id. ¶ 32.
8 also serve as Company officers, alongside Elkort, Lyon, and Pedersen.30 Garland
was the Company’s first Chief Executive Officer, and Armistead was the Company’s
Executive Vice President, Business Development.31 Elkort has held multiple roles
at the Company, but most recently acted as its Executive Vice President and Chief
Legal Officer.32 Lyon was the Company’s Chief Financial Officer since 2012, and
he took over as Company President in April 2019.33 Pedersen assumed the Chief
Financial Officer role at that time, after having served as the Company’s Chief
Investment Officer.34 In addition to their roles at the Company, Elkort, Lyon, and
Pedersen served Developer 1 and Developer 2. Elkort served as Developer 1’s
Director of Legal Services and Co-Head of Finance since June 2009 and also served
as a Developer 2 officer.35 Lyon served as Developer 1’s Head of Structured Finance
since May 2010.36 And Pedersen served as Developer 2’s Chief Financial Officer
since May 2018 and Developer 1’s Co-Head of Finance since June 2009.37
30 Id. ¶¶ 24, 32, 51. 31 Id. ¶¶ 24, 32. 32 Id. ¶ 33. Elkort also served as the Company’s General Counsel and Chief Compliance Officer. Id. 33 Id. ¶ 34. 34 Id. ¶ 35. 35 Id. ¶ 33. 36 Id. ¶ 34. 37 Id. ¶ 35.
9 Thus, the Officer Defendants were simultaneously tethered to Riverstone,
Developer 1 and then Developer 2, and the Company, facing potential conflicts of
interest as dual fiduciaries of the Company and Developer 1 or 2. 38 The Company
repeatedly noted in public filings these potential conflicts and the likelihood that
they would manifest.39
The entities also had overlapping directors. Of Developer 2’s five directors,
Riverstone appointed three,40 and the Company appointed two: Garland and
Armistead.41 As for the Company’s directors, Riverstone, via Developer 1,
appointed at least four of the initial directors on the Company’s seven-member board
of directors (the “Board”), including Garland.42 Riverstone itself appointed Edmund
John Philip Browne, The Lord Browne of Madingley, who was hired as a Riverstone
Managing Director and Partner in 2007 to help expand its existing energy practice
and identify Company opportunities in the alternative and renewable energy
markets.43 Browne served as a director through the Merger and was involved in the
38 Id. ¶ 52 & n.5. 39 Id. ¶ 52. 40 Id. ¶ 38. Riverstone appointed longtime colleagues of Company director Edmund John Philip Browne, The Lord Browne of Madingley: Chris Hunt, Robin Duggan, and Alfredo Marti. Id. ¶ 37. 41 Id. ¶¶ 58–59, 63. 42 Id. ¶¶ 47, 323. 43 Id. ¶ 37.
10 sales process.44 Riverstone also appointed Patricia Bellinger, who had previously
worked under Browne from 2000 through 2007 and left the Board by the time of the
Merger.45 Finally, Developer 1 initially appointed Michael Hoffman, who left the
Board by the time of the Merger.46 In addition to Garland and Browne, Alan R.
Batkin, Richard A. Goodman, Douglas G. Hall, Patricia M. Newson, and Mona K.
Sutphen (collectively, the “Director Defendants,” and together with the Officer
Defendants, the “Individual Defendants”) served as Company directors at the time
of the Merger.47 Batkin, Goodman, Hall, Newson, and Sutphen never held and do
not currently hold positions at Riverstone, Developer 1, or Developer 2.48
The interconnectedness of Riverstone, Developers 1 and 2, and the Company
significantly influenced the Merger process, which lasted from June 2018 through
November 2019. In the end, the two competing bidders were Brookfield Asset
Management Inc. (“Brookfield”) and Buyer, Riverstone’s preferred bidder. Buyer,
a pension fund that had previously invested over $700 million in Riverstone funds,
was a financial acquirer offering cash that would not disturb Riverstone and
44 Id. ¶ 47. 45 Id. Bellinger resigned from the Board on December 28, 2018. Id. ¶ 47 n.4. 46 Id. ¶ 47. Hoffman resigned from the Board on August 6, 2018. He founded one of the bidders that would go on to express interest in the Company and participate in the Merger process. Id. ¶ 47 n.3. 47 Id. ¶¶ 24–31. Because of Garland’s dual role as director and officer, he is included in references to both the Director and Officer Defendants. See id. ¶¶ 31, 36. 48 See id. ¶¶ 25, 27–30.
11 Developer’s operational and structural relationship with the Company. Rather,
Buyer funded Riverstone’s goals of taking the Company private, internalizing
Developer 2, and maintaining the roles of Riverstone, the Officer Defendants, and
the and Director Defendants—all for a low price.
Brookfield, a strategic acquirer, offered a stock-for-stock combination with
its subsidiary, a successful business in the energy sector.49 This offered superior
value to Company stockholders, but nothing for Riverstone and Developer 2. While
Brookfield contemplated internalizing Developer 2 and meeting Riverstone’s other
wants, in the end, Brookfield envisioned and specifically offered the Company and
its public stockholders a clean break from Riverstone and its affiliates.
In the end, Brookfield walked away and Buyer emerged victorious.
According to Plaintiff, Buyer prevailed because Riverstone, armed with insider
Individual Defendants, a conflicted advisor, and the Consent Right, put the Company
up for sale; partnered with Buyer to present a bid for both the Company and
Developer 2 that would cash out the Company’s public stockholders (except for
certain preferred and interested stockholders) at an inadequate price, while capturing
a premium for Developer 2; tilted the scale in favor of Buyer’s bid and against
Brookfield’s premium bid; and failed to adequately disclose material conflicts and
process flaws to Company stockholders. Plaintiff disputes the fairness of the Merger
49 See, e.g., id. ¶ 194.
12 consideration received from the all-cash transaction; contends that Company
fiduciaries breached their duties to stockholders by agreeing to the Merger,
prioritizing Riverstone over Company stockholders, and issuing a supposedly false
and misleading proxy statement; and alleges that the Company’s non-stockholder
affiliates, Riverstone and Developer 2, influenced and controlled the Merger process
to steer the Company toward Buyer and away from more favorable bidders.
With this overview of the Company’s relationship with Riverstone and the
allegedly resultant outcome of the sales process, our story begins in 2017 with the
details of Developer 2’s creation.
B. The Company Launches Pattern Vision 2020 To Meet Record Demand; Riverstone Obtains The Consent Right Over Transfers Of The Company’s Stake In Developer 2; And Company Fiduciaries Tout Excellent Performance.
Riverstone and the Company leveraged the public focus on renewable energy
to improve the Company’s supply chain and capital structure.50 In June 2017, the
Officer Defendants announced “Pattern Vision 2020,” a strategic initiative to double
the Company’s size and revamp its capital structure within three years, with positive
results beginning in 2020.51 The first part of the plan was to wind down
Developer 1’s operational relationship with the Company, replacing Developer 1
50 See id. ¶¶ 53–54. 51 Id. ¶ 56.
13 with Developer 2.52 The Company pitched its investment in Developer 2 as aligning
the Company’s interests with Developer 2 based, at least in part, on the Company’s
rights of first offer.53
Riverstone and the Company became Developer 2 limited partners under its
Second Amended and Restated Limited Partnership Agreement (the “Partnership
Agreement”).54 Section 12.01 of the Partnership Agreement gave Developer 2 the
Consent Right over transfers of any limited partner’s interests in Developer 2 by a
limited partner other than Riverstone—such as the Company.55 Developer 2’s board
could withhold its consent in its “sole discretion”; was “entitled to consider only
such interests and factors as it desires and shall have no duty or obligation to give
any consideration to any interest of, or factors affecting, the Partnership, any Partner
or any Transferee”; and could exercise its discretion without being “subject to any
52 Id. ¶¶ 2, 38, 57–59. 53 Id. ¶ 60. 54 Id. 55 Riverstone is the only limited partner exempted from the Consent Right. Id. ¶ 62. The Company also had substantial leverage over Developer 2 under the Partnership Agreement. Under Section 3.2, if Developer 2 proposed to “Transfer any material portion of the Equity Interests or all or substantially all of the assets of [Developer 2],” the Company had a right to receive notice and offer to purchase those equity interests or assets within 45 days. Id. ¶ 69. If the Company’s offer was rejected, Developer 2 could only sell the equity interests or assets within six months for an amount greater than or equal to 110% of the Company’s offer price. Id. And under Section 9.06(g), Developer 2 was required to obtain the Company’s consent before initiating or settling litigation concerning over $10 million. Id. ¶ 70 (emphasis omitted).
14 other or different standards imposed by this Agreement or any other agreement
contemplated hereby or under the Act or any other law, rule or regulation.”56 The
Consent Right restricted transfers only if the Company sold its stake via merger or
consolidation. It did not restrict the Company’s right to acquire a third party, and
therefore left an opportunity to structure a potential Company merger to avoid
triggering the Consent Right.57 Because Riverstone dominated over Developer 2
and its board, Developer 2’s Consent Right effectively gave Riverstone power over
any third-party acquisition of the Company, even if Riverstone liquidated its
Company stake.58
The second part of Pattern Vision 2020 involved selling a significant stake in
the enterprise to a third party, Public Sector Pension Investment Board (“PSP”).59
PSP purchased 9.9% of the Company directly from Developer 1. 60 PSP also
indirectly acquired 22% of Developer 2 through Riverstone funds, which was not
publicly disclosed at the time of the acquisition or later in connection with the
56 Id. ¶ 63 (emphasis omitted). 57 Id. ¶¶ 62, 67–68; Proxy at 36. 58 Compl. ¶¶ 62–64. The Company and Developer 2 acknowledged this reality in the Amended and Restated Purchase Rights Agreement dated as of June 16, 2017 (the “Purchase Rights Agreement”). Id. ¶ 66. At this time, Developer 1’s consent right lapsed under the shareholder agreement Developer 1 and the Company executed in connection with the IPO, and therefore Riverstone could not use Developer 1 as a vehicle to block the Company mergers. Id. ¶ 64. 59 Id. ¶ 71. 60 Id. ¶¶ 71–72.
15 Merger.61 Thus, PSP became both the Company’s largest individual stockholder and
a significant undisclosed Developer 2 stakeholder alongside Riverstone.62
The Company assured investors that Pattern Vision 2020 was progressing as
planned.63 In November 2017, Garland told public investors that the Company had
“a plan for creating long-term value for investors.”64 Garland pressed that the
Company’s June 2017 Developer 2 investment, along with an October 2017 equity
raise, “allows us to begin the next phase of our growth strategy” with “excellent
growth opportunities,” including “the near-term iROFO [identified right of first
refusal] assets . . . , our investment in [Developer 2], and the expanded development
pipeline of more than 10 gigawatts at [Developer 2].”65
Garland made similar assurances to Company investors throughout 2018,
repeating that the Company continued to execute on Pattern Vision 2020 and
expected resultant and substantial benefits as early as 2020. 66 Among those
61 Id. ¶¶ 71–75, 277. 62 Id. ¶ 71. PSP also entered into a joint venture agreement with the Company where it received the right to co-invest in renewable energy projects alongside the Company up to an aggregate amount of $500 million. Id. ¶ 72. The joint venture agreement contained a twelve-month standstill provision. Id. ¶ 73. Thus, despite the fact that the Company’s strategic plan was a three-year plan and forecasted positive results beginning in 2020, PSP was free to facilitate a sale of the Company by June 16, 2018. Id. 63 Id. ¶ 76. 64 Id. ¶ 78 (emphasis omitted). 65 Id. (first alteration in original). 66 Id. ¶ 79.
16 assurances was the representation that “that the operating portfolio can sustain the
existing level without raising common equity any time soon.”67
Company management continued to crow about Pattern Vision 2020 and its
trajectory through 2019.68 In particular, on March 1, May 10, and August 6, Garland
and Pederson told investors there was limited risk that the Company would need to
access additional capital to keep its asset portfolio operating; that the Company did
not intend to raise common equity capital; that even so, the Company had ample
liquidity and financing options for future growth, including ready access to outside
capital; and that the Company’s investment in Developer 2 would break even and
net positive by 2020.69 In August, Garland projected that gains realized from
Developer 2’s third-party sales would come to subsidize future development projects
and reduce the Company’s future capital contributions to Developer 2 and concluded
that the Company’s investment in Developer 2 “secure[d] [the Company] access to
continued growth opportunities as well as material and durable returns that [the
Company] anticipate[d] [would] begin next year.”70
67 Id. 68 Id. ¶¶ 81–90. 69 Id. ¶¶ 81–89. 70 Id. ¶ 89 (four of five alterations in original). The projections that formed the basis of the Merger’s fairness opinion projected hundreds of millions of dollars in distributions from Developer 2 and only $11 million of future investments from the Company into Developer 2. Id. ¶ 82 n.9.
17 Thus, throughout 2018 and 2019, Company investors repeatedly heard about
the Company’s stable and promising liquidity and growth as a standalone entity
under Pattern Vision 2020, with no need to raise common equity capital through
acquisition. Peddling these upward projections, the Company did not face an exigent
need to be acquired. But, unbeknownst to the investors, in June 2018, Riverstone
and the Officer Defendants had commenced a sales process with the Board’s full
cooperation.71
C. The Company Commences A Sales Process With Riverstone’s Involvement.
At some time prior to June 2018, Riverstone considered taking the Company
private, retaining Goldman Sachs & Co. (“Goldman”) and using the Company’s
confidential information in the process.72 Riverstone did not follow through on
taking the Company private. Rather, on June 5, 2018, the Board held its annual
meeting, during which it resolved to commence a sales process, despite the
Company’s strong independent performance.73 Without raising the issue to the
Board’s disinterested and independent members, Garland and Riverstone-affiliated
management had contacted an advisor, Evercore Group LLC (“Evercore”), in time
to get a complete presentation that “included preliminary potential valuations for
71 Id. ¶ 90. 72 Id. ¶ 93; Proxy at 36. 73 Compl. ¶¶ 98, 106–07.
18 various strategic options.”74 Before the June 5 meeting, management circulated
Evercore’s presentation, together with a memo outlining its view on the Company’s
strategic alternatives.75
Garland led the meeting, and advocated that the Board “consider a potential
sale of the business.”76 The Board discussed “the value which investors and
potential buyers ascribed to development activities” and “the assumptions made in
the Evercore valuation materials[.]”77 Chris Hunt, a Developer 2 director and
Riverstone partner, but not a Company fiduciary, attended the meeting and accessed
Evercore’s evaluation.78 The Board solicited Riverstone’s views on a potential
transaction, while simultaneously identifying Riverstone as a prospective acquirer
that “may be interested in participating in a potential transaction.” 79 Despite having
the opportunity to speak, Riverstone did not disclose to the Board that it had tinkered
with the idea of a take-private before the June 5 meeting. The Board concluded that
the Company should begin to engage in negotiations with interested parties.80 The
74 Id. ¶ 95 (emphasis omitted). 75 Id. The Company refused to produce both the management memo and the Evercore presentation in response to Plaintiff’s Section 220 Demand. 76 Id. ¶ 94. 77 Id. ¶ 96 (emphasis omitted) (alteration in original). 78 Id. ¶¶ 93, 97. Hunt’s attendance at the June 5 meeting was not disclosed in the Proxy. Id. ¶ 93. 79 Id. ¶ 97 (emphasis omitted). 80 Id. ¶ 92; Proxy at 36–37.
19 Board recognized at the outset that Riverstone was conflicted with respect to any
sale, including because Riverstone was a potential acquirer.81
D. The Board Forms The Special Committee, Which Kicks Off The Sales Process.
On June 5, the Board adopted a resolution creating a special committee (the
“Special Committee”) comprised of Bellinger, Batkin (chairperson), Hall, and
Newson.82 The resolution stated that the Board “determined that it is in the best
interests of the Company and its shareholders to conduct a strategic review and
consider and evaluate possible strategic transactions outside of the ordinary course
of business with the potential to increase value to the Company’s shareholders,” and
that “the Board believes that it is in the best interests of the Company and its
shareholders to establish a special committee of the Board comprised solely of
disinterested and independent directors . . . to consider and evaluate Strategic
Transactions and all matters pertaining thereto on behalf of the Company.”83 The
Board exclusively delegated to the Special Committee “all the power and authority
of the Board to consider and evaluate Strategic Transactions and all matters
81 Compl. ¶ 105. 82 Id. ¶¶ 99–100; Weinberger Decl. Ex. 1; Proxy at 37. 83 Weinberger Decl. Ex. 1 at PEGI-00000472.
20 pertaining thereto on behalf of the Company,” as well as the authority to appoint
advisors and Company officers to assist in the process.84
In December 2018, Bellinger resigned from the Board, and Goodman and
Sutphen were appointed to the Board.85 Goodman and Sutphen were then appointed
to the Special Committee.86 Accordingly, the Special Committee that ultimately
oversaw the sales process from December 2018 until the Merger’s closing consisted
of Batkin as chairperson, Hall, Newson, Goodman, and Sutphen, all of whom the
Company characterized as disinterested and independent.87
Garland and Browne were disqualified from serving on the Special
Committee because they harbored obvious conflicts arising out of their relationships
with Riverstone: Garland was a Developer 2 officer, director, and investor, and
Browne was a longtime Riverstone partner and managing director.88 Even so, the
Special Committee allowed Browne to attend the majority of Special Committee
meetings in his capacity as Riverstone’s representative and to attend the Special
Committee’s executive sessions where Company management was specifically
84 Id. at PEGI-00000472, -73. 85 Compl. ¶ 100. 86 Id. 87 Id. ¶¶ 99–100; Proxy at 36, 38. 88 Compl. ¶¶ 101–02.
21 excluded due to conflicts.89 The Special Committee also permitted Garland to have
substantial involvement in its process.90 The Special Committee delegated primary
responsibility for engaging with the Company’s potential suitors to Garland, despite
his status as a Riverstone fiduciary and the risk he would disclose material sales
process information to Riverstone.91
The Special Committee met for the first time on July 13, 2018 and considered
retaining financial advisors.92 Before that meeting, Batkin and Hall discussed
potential advisors with Garland and Lyon.93 Garland and Lyon preferred Goldman,
which had a longstanding relationship with Riverstone.94 Riverstone was founded
and operated by Goldman alumni; Goldman owned at least a 12% stake in
Riverstone that entitled certain Goldman funds to a proportional cut of management
fees and profits; and in the years before the Merger, Goldman received tens of
millions of dollars in fees from Riverstone.95 Furthermore, Goldman had advised
89 Id. ¶¶ 102–04. The Proxy does not disclose Browne’s attendance at any Special Committee meeting. Id. ¶ 104. 90 Id. ¶ 103. 91 Id. ¶ 105. 92 Id. ¶ 106. 93 Id. 94 Id. ¶¶ 98, 106–07. 95 Id. ¶ 107.
22 Riverstone on its exploration of taking the Company private, which was disclosed
in a July 2, 2018 letter to the Special Committee.96
Despite Garland and Lyon’s push for Goldman, the Special Committee
decided to retain only Evercore and to revisit the possibility of retaining Goldman
at a later time.97 The Special Committee also engaged Paul, Weiss, Rifkind,
Wharton & Garrison LLP (“Paul Weiss”) as independent legal counsel.98
The Special Committee met again on August 2.99 Batkin proposed the
Special Committee approach “both Riverstone and [PSP] . . . at the outset, given
their current investments in the Company and the Pattern Development Companies,
. . . their knowledge of potential partners and their familiarity with management.”100
In accordance with Batkin’s suggestion, when the Special Committee met next on
October 29, a PSP representative attended, as well as Browne, as Riverstone’s
representative.101 At that meeting, an Evercore presentation reviewed the
Company’s projections and valuations under different strategic alternatives.102
With Riverstone and PSP at the table, meeting participants also discussed the
96 Id. ¶ 98. 97 Id. ¶ 108; Proxy at 37. 98 Proxy at 37. 99 Compl. ¶ 109; Proxy at 37. 100 Compl. ¶ 109. 101 Id. ¶ 110; Proxy at 37. 102 Compl. ¶ 111.
23 “potential for a transaction with PSP, Riverstone, or another party.”103 Garland also
explained that he had been approached by both Brookfield and Party B about a
potential transaction.104 Paul Weiss outlined a number of process.105
The Special Committee, plus Browne, met again the following day, October
30.106 The Special Committee authorized Garland to meet with both Brookfield and
Party B and solicit their interest in making a strategic proposal for the Company.107
In early November 2018, the Special Committee established conduct
guidelines for management and Board members who were not members of the
Special Committee “in order to help ensure that the Special Committee would be
able to function independently and effectively execute its mandate.”108 These
guidelines prohibited Company management from engaging with any potential
parties to a strategic transaction without the Special Committee’s express
consent.109
103 Id. (alteration omitted). 104 Id. This opinion and the Proxy refer to other bidders as “Party —” for confidentiality purposes. See D.I. 69 at 13–17. 105 Proxy at 37. 106 Id.; Compl. ¶ 112. 107 Compl. ¶ 112. 108 Proxy at 37. 109 Id. at 37–38.
24 On November 19, the Board met, and Garland informed the Board that
meetings and negotiations were progressing with Brookfield, but Party B was not
interested in pursuing a transaction at that time.110
E. The Special Committee Engages With Numerous Bidders.
Over the next year, the Special Committee would engage with several bidders,
gaining momentum in the summer of 2019. While the Complaint’s allegations focus
primarily on the tale of two bidders—Buyer and Brookfield—other bidders’
indications of interest and the Special Committee’s response are important to a full
understanding of the sale process. The Special Committee’s engagement with these
other bidders, referred to in the Proxy as Party B and Party D, was interspersed with 111 its engagement with Brookfield and Buyer. Each bidder was pressed for a
premium, and Party B and Party D received confidential information and executed
confidentiality agreements with both the Company and Riverstone, just as
Brookfield and Buyer would do.112
And, just as Brookfield and Buyer would, Party B and Party D demonstrated
an understanding that any transaction needed to include Developer 2 and to satisfy
110 Id. at 38. 111 See id. at 37–53. Buyer, Brookfield, Party B, and Party D emerged as the primary prospects, but other bidders also expressed interest and were considered. 112 See, e.g., id. at 43, 48. After the Special Committee noted it could not give competitively sensitive due diligence to Party B because Party B was a significant competitor, on September 6, Party B and the Company entered into a confidentiality agreement; the
25 Riverstone. Party D’s first offer, on July 8, 2019, was to acquire the Company for
$25 in cash and Developer 2 at a multiple of 1.6x invested capital in either cash or
equity.113 On July 15, Party D revised its offer for Developer 2 to 1.8x invested
capital plus a potential earn-out, in response to feedback that an attractive and
competitive offer would offer a premium for Developer 2.114 On August 15,
reaffirming its interest to cash out the Company’s public stockholders and merge the
Company with Developer 2 in an equity-based transaction, Party D noted that, “[a]s
you are aware, we are engaged in productive discussions with [Riverstone] on the
terms under which we would govern the new combined company.”115 Bidders were
under the impression that any post-closing entity would be subjected to Riverstone’s
continued presence.
On August 19, the Special Committee discussed Party D’s offer and
authorized Evercore and Goldman to request written proposals based on publicly
available information.116 At an August 26 Special Committee meeting, Evercore
reported Party D orally raised its offer for the Company to $26.50 per share.117 The
Company, Party B, and a Riverstone affiliate entered into a side letter. See Compl. ¶¶ 170; Proxy at 47, 48. 113 Compl. ¶ 149; Proxy at 38. 114 Compl. ¶ 149; see also Proxy at 43. 115 Compl. ¶ 160. 116 Proxy at 45. 117 Compl. ¶ 168 n.20.
26 next day, August 27, Party B submitted to a non-binding letter of interest to acquire
the Company in an all-cash transaction for $25 to $28 per share, and 100% of
Developer 2 at an unspecified price.118
On September 20, Party D upped its cash offer for the Company to $26.75 per
share, which included Developer 2 at a valuation of approximately $800 million plus
an earnout for the 71% not owned by the Company.119 Party D would have allowed
Riverstone to hold equity in the combined entity.120 Party D stated it had reached an
agreement on all key terms with Riverstone, describing Riverstone as one of “the
three legs of the stool that are critical to accomplishing our objective of acquiring
and combining [the Company] and [Developer 2].”121 On September 23, Evercore
sent Party D a draft merger agreement, and eventually arranged a meeting with
Party D, the Company, and Riverstone to discuss the transaction.122
In the final weeks of the process, the Special Committee was considering
Brookfield, Buyer, Party B, and Party D. On September 29, the Special Committee
determined to proceed cautiously with Party B, given that Party B was a competitor
118 Id. ¶ 169; Proxy at 46. 119 Compl. ¶ 181. 120 Id. 121 Id. 122 Proxy at 49; see also id. at 50 (noting the Company met with Party B and Riverstone on September 25).
27 and its “indicative price did not exceed prices offered by other potential buyers.”123
By mid-October, Party B had determined it was not willing to move forward.124 On
October 17, Evercore instructed Brookfield, Buyer, and Party D to submit their “best
and final” offers by October 28.125 Party D did not submit a best and final offer and
ultimately withdrew.126
F. Brookfield Proposes A Merger With The Company; The Special Committee Seeks A Premium; And The Parties Begin Due Diligence.
Throughout January and February 2019, Garland and other members of
Company management continued discussions with Brookfield.127 On January 14
and January 15, management met with Brookfield representatives.128
On January 16, the Board met with Company management.129 Garland
informed the Board that at the Special Committee’s direction, he and other members
of Company management had met with Brookfield and engaged in initial discussions
regarding a potential strategic transaction involving the Company, Brookfield, and
123 Id. at 50. 124 Id. at 51. 125 Id.; Compl. ¶ 191. 126 Proxy at 52. 127 Compl. ¶ 113. 128 Proxy at 38. 129 Id.
28 TerraForm Power, Inc. (“TerraForm”).130 TerraForm is publicly traded and
Brookfield-controlled.131 At that time, none of the Company’s material confidential
information had been shared with Brookfield and TerraForm.132
On January 25, the Special Committee met for an update on management’s
discussions with Brookfield.133 Management developed and summarized a stock-
for-stock combination of the Company and TerraForm at an at-market exchange
ratio (i.e., no premium).134 The Special Committee excused management from the
meeting and held an executive session to further evaluate the TerraForm proposal
and consider next steps.135 The Special Committee asked its advisors, Paul Weiss
and Evercore, to evaluate an at-market share exchange as a potential transaction.136
On February 7, Garland revisited Brookfield and TerraForm.137 On February
15, at the Special Committee’s direction, Batkin, Garland and Evercore
representatives met with Brookfield representatives, and Brookfield proposed an at-
130 Id. 131 Id. 132 Id. 133 Id.; Compl. ¶ 113. 134 Proxy at 38. 135 Id. 136 Id. 137 Id.
29 market all-stock merger of the Company and TerraForm.138 On February 21,
Brookfield submitted a term sheet. Brookfield expressly indicated that its offer was
not conditioned an acquisition of Developer 2: under the proposal as submitted,
Riverstone could be excluded from the transaction.139
That same day, after receiving Brookfield’s proposal, the Special Committee
met.140 At that meeting, Garland flagged Developer 2’s Consent Right, telling the
Special Committee that Brookfield’s proposed transaction could “trigger existing
consent rights held by” Riverstone.141 The Special Committee also considered that
Brookfield’s offer did not include a premium, but decided to respond to the offer. It
directed Paul Weiss and Evercore “to analyze the proposed transaction’s structure
and terms, including with respect to issues relating to [the Company’s] relationship
with [Developer 2] and the absence of any premium to be offered to holders of
Company Common Stock,”142 and to prepare a response.143 The Special Committee
also authorized mutual due diligence, subject to a confidentiality agreement.144
138 Id. 139 Compl. ¶ 114. 140 Id. ¶ 116; Proxy at 39. 141 Compl. ¶ 116. 142 Proxy at 39. 143 Compl. ¶ 118. 144 Proxy at 39.
30 Accordingly, on February 28, the Company executed a confidentiality agreement
with Brookfield and TerraForm that included standstill provisions.145
The Special Committee met again on March 9 to review Brookfield’s term
sheet, joined by Paul Weiss, Evercore, Garland, Browne, and Elkort, Chief Legal
Officer for the Company and Developer 2.146 Batkin and Garland updated the
Special Committee regarding recent discussions with Brookfield. Garland told the
Special Committee that it would need to evaluate the Consent Right.147 Elkort was
even more explicit.148 The meeting minutes state that Elkort “emphasized” to the
Special Committee that “the need for [Riverstone’s] support for any potential . . .
transaction should not be underestimated because [Riverstone’s] rights to consent
that would likely be implicated by the proposed transaction appeared to be very
broad.”149 Nonetheless, based on Evercore’s advice, the Special Committee
determined to seek from Brookfield a 15% premium to the trading price of Company
common stock.150
145 Id. 146 Compl. ¶¶ 116–17; Proxy at 39. 147 Compl. ¶ 116. 148 Id. ¶ 117. 149 Id. 150 Proxy at 39.
31 At the meeting’s conclusion, the Special Committee met in executive session,
with management “excused from the meeting,” but with Browne still in
attendance.151 During that session, the Special Committee directed Paul Weiss and
Evercore to revise Brookfield’s term sheet.152 The Special Committee also
established “guidelines for management’s discussions with the various parties.”153
The Special Committee determined that the Company would deliver the revised term
sheet to Brookfield; Batkin would continue to coordinate, and have the option to be
involved in, discussions with Brookfield and any other potential transaction parties;
and Batkin would continue to serve as the Special Committee’s representative.154
The Special Committee authorized Garland to “notify” Developer 2 and Riverstone
about the Company’s discussions with Brookfield, but directed that Garland was not
to “divulg[e] any specific terms” to Developer 2 or Riverstone.155 At the close of
the executive session, the Special Committee instructed Paul Weiss to inform
management of the following:
151 Compl. ¶ 117; Proxy at 39. 152 Compl. ¶ 118. 153 Id. 154 Proxy at 39. 155 Compl. ¶ 119.
32 The Committee noted that it shall continue to be informed of developments arising from any of the discussions that it had authorized, that management and the advisors shall refrain from taking any further steps or engaging in any further discussions without the express authorization of the Committee and that the Committee shall retain final decision-making authority with respect to [the sales process].156
These instructions bolstered the instructions the Special Committee provided
management and Browne in November 2018. The Special Committee did not
formally meet again until May.157
Paul Weiss and Evercore revised the Brookfield term sheet as instructed;
management did not assist.158 On March 11, the Company provided Brookfield with
a revised term sheet that contemplated a Company-TerraForm merger with a 15%
premium for Company stockholders.159 The revised term sheet recognized the
Consent Right was readily circumvented, stating that the parties would “need to
structure the transaction as a merger of [TerraForm] into a subsidiary of [the
Company] due to” the Consent Right and that that the “structure” would “not affect
the economic terms of the transaction.”160 On March 20—with the Special
Committee’s authorization—Batkin, Company management, Evercore, and Paul
156 Id. ¶ 120 (emphasis omitted). 157 Id. ¶ 122. 158 Id. ¶ 121. 159 Id.; Proxy at 39. 160 Compl. ¶ 121 (emphasis omitted).
33 Weiss met with Brookfield to discuss the potential Company-TerraForm merger.161
They decided to move forward with due diligence.162
After it became evident that a Company-Terraform merger could be
accomplished without including Developer 2 or triggering the Consent Right,
Garland engaged in discussions with Brookfield, Riverstone, and Buyer that were
not sanctioned by the Special Committee.163 On March 12, Garland had an
unauthorized communication with representatives of Brookfield and TerraForm
about a potential transaction involving the Company, Brookfield, and TerraForm.164
And on April 11, the Company, Brookfield, and a Riverstone affiliate entered into a
three-party side letter to the Company-Brookfield confidentiality agreement to
facilitate Brookfield’s due diligence review of Developer 2.165 The Company and
Riverstone’s affiliate entered into a mutual confidentiality agreement.166 From this
timeline, it is reasonable to infer that Company representatives revealed to
161 Proxy at 39–40. 162 See id. at 40. 163 Compl. ¶¶ 120, 123–24. 164 Compl. ¶ 123; compare Proxy at 39 (“On March 12, 2019, Mr. Garland spoke with representatives of [Brookfield] and [TerraForm] about a potential transaction involving Pattern, [Brookfield] and [TerraForm].”), with Compl. ¶ 123 (“On March 20, 2019, as authorized by the Special Committee, Mr. Batkin, [Company] management and representatives of Evercore and Paul Weiss met with representatives of Party A to discuss the terms of a potential transaction involving [the Company] and Company A.” (emphasis added)). 165 Proxy at 40. 166 Id.
34 Brookfield the sales process’ goal of internalizing Developer 2 and including
Riverstone. This conclusion is consistent with Brookfield’s later statement that “it
had been told early in the process that [the Company] believed it was desirable for
[Company]’s senior management to maintain their positions in the combined
company, including their dual positions at [Developer] 2” and “that it was a priority
for [the Company] to internalize [Developer] 2 as part of a transaction.”167
Aware that Developer 2 was in play, on April 16, Brookfield met with Batkin,
Company management met, and the “Riverstone Representatives”—specifically,
two Developer 2 directors168—“to discuss how [Developer 2] would be affected by
a transaction.”169 The Riverstone Representatives indicated Riverstone would be
open to considering any proposals from Brookfield involving Developer 2 and the
Company.170 Brookfield responded that would be potentially interested in a
combination of the Company and TerraForm, with the surviving company directly
acquiring Developer 2.171 Throughout April 2019, at the direction of the Special
Committee, the Company continued due diligence into Brookfield’s proposal.172
167 Compl. ¶ 174. 168 Id. ¶ 124. 169 Proxy at 40. 170 Id. 171 Id. 172 Id.
35 G. The Special Committee Hires Goldman; Garland Identifies Buyer As A Potential Bidder.
As due diligence progressed with Brookfield, Goldman resurfaced. In early
April, the Special Committee retained Goldman as “a second financial advisor” with
respect to evaluating proposals for a potential transaction, notwithstanding the fact
that Goldman had long-term and lucrative relationships with Buyer and
Riverstone,173 and had advised Riverstone on a potential take-private of the
Company using confidential information provided by Riverstone shortly before the
sales process began.174 The Special Committee never requested access to the
materials Goldman prepared for Riverstone, even after Goldman offered to provide
them.175
Interestingly, the Special Committee retained Goldman only informally in
April and, as alleged, involved Goldman in the sales process throughout April and
May.176 It did not formally engage Goldman to evaluate a potential transaction and
173 Compl. ¶ 271 & n.26. 174 Id. ¶¶ 107, 134, 136; Proxy at 40. 175 Compl. ¶ 107. The Partnership Agreement restricted Riverstone from using any confidential information relating to, among others, the Company, which had been entrusted to Developer 2 with the expectation that the information be kept confidential. Kirby Decl. Ex. 25 § 15.06. Plaintiff alleges that the Board did nothing to prevent Riverstone from leveraging its access to the Company’s confidential information and that no information regarding Riverstone’s allegedly impermissible information sharing with Goldman was disclosed in the Proxy. Compl. ¶ 98. 176 Compare Proxy at 40 (“In early April 2019, the members of the Special Committee determined to continue to engage Evercore with respect to evaluating proposals with respect to a potential transaction. The Special Committee also determined to retain
36 execute an engagement letter until May 24.177 Goldman’s engagement letter
provided it stood to receive $2 million upon the announcement of a Merger and an
additional $4 million upon the execution of the Merger.178 The Company,
Riverstone, and Buyer also retained the right to provide Goldman with an additional
$3 million following the execution of the merger if they saw fit.179 This information
was not disclosed in the Proxy, and neither the Proxy nor the Section 220 production
explain why the Special Committee decided to belatedly retain Goldman.180
Throughout April, the push to satisfy Riverstone and Developer 2 continued.
In addition to expanding the scope of the potential Brookfield transaction to include
Developer 2, Garland turned his attentions to another potential bidder: Buyer, which
had established investment ties to Riverstone investment funds and would ultimately
prevail in purchasing the Company and Developer 2.181 On April 15, Garland had
an unauthorized meeting with the Riverstone Representatives and Buyer
Goldman . . . .”), with id. at 41 (stating that “[o]n May 24, 2019,” Goldman attended a Special Committee meeting, and after being excused from that meeting, the Special Committee “considered amending its formal engagement of Evercore and formally engaging Goldman Sachs” and ultimately “adopted resolutions to amend its formal engagement letter with Evercore and to execute an engagement letter with Goldman Sachs with respect to evaluating a potential transaction”). 177 Id. at 41. 178 Compl. ¶ 271. 179 Id. 180 Id. 181 Id. ¶ 124.
37 (the “April 15 Meeting”).182 There, Buyer “indicated that [it] was potentially
interested in acquiring [the Company].”183 According to Merger disclosures, while
Garland eventually disclosed the April 15 Meeting to Batkin and the Special
Committee, it took him a month to do so.184
The Special Committee met on May 2 with Company management, Paul
Weiss, Evercore, and Goldman.185 While the Proxy states Garland disclosed the
April 15 Meeting at the May 2 Special Committee meeting, this is unsupported by
the meeting minutes.186 The meeting minutes do not mention Buyer, let alone that
Garland had met with Riverstone and Buyer weeks earlier to discuss Buyer
potentially acquiring the Company.187 In another wrinkle, the minutes state Garland
told the Special Committee that Riverstone had suggested taking the Company
private, but “dropped the suggestion following consideration of conflicts and certain
contractual obligations.”188 According to Plaintiff, Riverstone had not “dropped the
suggestion” as Garland represented.189 Rather, Riverstone, with Garland’s active
182 Id. 183 Id.; Proxy at 40. 184 Proxy at 40. 185 Compl. ¶¶ 126–27; Proxy at 40. 186 Compare Compl. ¶¶ 125–27, 137, with Proxy at 40. 187 Compl. ¶ 126. 188 Id. ¶ 127. 189 Id.
38 involvement, sought a deal by which it would take the Company private along with
Buyer.190
On May 15, a month after Garland’s April 15 Meeting, Batkin informed the
Special Committee that Garland had spoken to Buyer via a memo
(the “Batkin Memo”).191 The Batkin Memo stated that Garland had discussions with
Riverstone and Buyer concerning a potential acquisition by Buyer and that Garland
“spoke to” a Buyer representative who Garland “knew when this person worked at
General Electric.”192 The Batkin Memo did not disclose to the Special Committee
that Garland’s unauthorized discussions had occurred a full month earlier.193 It also
gave the impression that Garland spoke to Buyer independently, while the Proxy
discloses Garland met with Buyer and Riverstone together.194 This was the only
memo Batkin sent to the Special Committee throughout the sales process.
A May 24 Special Committee meeting focused on Buyer’s arrival.195 The
meeting minutes state that Garland “noted that in addition to meeting with
[Brookfield], there would also be meetings the following week with [Buyer] and
190 Id. 191 Id. ¶ 128. 192 Id. 193 Id. 194 Compare id., with Proxy at 40. 195 Compl. ¶ 139.
39 [Riverstone], as [Buyer] had expressed interest in potentially structuring a strategic
transaction,” and that Buyer’s “approach to the Company . . . had come about
indirectly.”196 Garland still did not fully disclose to the Special Committee that he
had met with Buyer and Riverstone together over a month earlier, and that Buyer’s
interest as a potential bidder was piqued more directly than Garland suggested.197
On May 28, Buyer and the Company entered into a confidentiality agreement,
and Riverstone entered into a side letter to facilitate sharing Developer 2
information.198 By June, Buyer and Riverstone were believed to be working together
on a proposal.199 At some point, without the Special Committee’s approval,
Goldman joined these discussions which included talk of a take-private action.200
After receiving the Batkin Memo and learning of Garland’s unauthorized
communications, the Special Committee took no steps to reestablish control of the
merger process; rather, it continued delegating substantial authority and
responsibility to Garland.201 The Special Committee permitted Garland to continue
meeting alone with Brookfield, Buyer, and Riverstone.202 And he continued
196 Id. ¶ 140. 197 Id. 198 Proxy at 41. 199 Compl. ¶ 143. 200 See id. ¶¶ 306, 311(a)–(b). 201 Id. ¶ 133. 202 Id. ¶ 141.
40 wielding authority in the sales process.203 Plaintiff alleges this passivity suspiciously
followed Brookfield’s expression of interest in proceeding with a transaction that
might exclude Developer 2, as well as the tension between (1) Garland and Elkort’s
insistence to the Special Committee that Riverstone had a “broad” Consent Right
such that Riverstone would have to approve of any merger, and (3) Paul Weiss and
Evercore’s statements that the Consent Right was easily circumvented. 204
H. The Special Committee Continues Considering Brookfield.
The Special Committee continued to court Brookfield. At the May 2 meeting,
Batkin and Garland summarized recent discussions with Brookfield and Riverstone,
and Garland detailed the ongoing due diligence process.205 The meeting minutes
indicate that Brookfield remained interested, regardless of whether the transaction
included Developer 2.206 But Garland noted that Riverstone preferred any merger to
involve Developer 2.207 The Special Committee excused management and
commenced an executive session to evaluate potential issues with Brookfield,
including the Consent Right.208 The Special Committee reiterated the “potential
203 Id. ¶ 133. 204 Id. ¶ 130. 205 Proxy at 40. 206 Compl. ¶ 138. 207 Id. 208 Proxy at 40.
41 conflicts involving certain members of senior management.”209 Yet the minutes
show Browne attended the entire meeting, including the executive session.210
Brookfield was also considered at the May 24 meeting. Goldman and
Evercore noted that Brookfield had “indicated a desire to seek” Riverstone’s consent
to any transaction with the Company, but that a “[Company]-on-top triangular
merger may not trigger [Riverstone’s] consent right.”211 Goldman and Evercore also
listed the benefits of a Brookfield transaction: the creation of a leading renewables
platform with enhanced scale and diversification; a strong sponsor in Brookfield that
would team with best-in-class management at the Company; synergies that would
drive cash flow and support dividend growth; an expanded project development
portfolio; a reduced reliance on external financing with no need to raise common
equity through 2023; a stronger credit profile; and a better governance structure that
aligns the incentives of the sponsor and public stockholders.212
On May 29, at the Special Committee’s direction, Garland met again with
Brookfield; Riverstone attended that meeting, despite having started working with
Buyer on a potential acquisition.213 Garland and Riverstone “provide[d] an overview
209 Compl. ¶ 138. 210 Id. ¶ 134 n.14. 211 Id. ¶ 139. 212 Id. 213 Id. ¶ 141.
42 of [Developer 2] and its business plan to [Brookfield]” and answered questions.214
That same day, at the Special Committee’s direction, Garland met with
representatives of Buyer and Riverstone to do the same.215
On May 30, Batkin met with Company management, Paul Weiss, Evercore,
and Brookfield “to discuss key open issues identified by the Special Committee with
respect to a combination of [the Company] and [TerraForm], including price and the
need to insulate holders of Company Common Stock from the risks associated with”
litigation TerraForm was embroiled in.216 Those conversations proved productive.
On May 31, Brookfield submitted a revised term sheet reflecting not only
TerraForm’s all-stock acquisition at the 15% premium that the Company had
contemplated back in March, but also a concurrent acquisition of Developer 2 for a
cash price to be negotiated by the Company and Riverstone, such that Riverstone
would be cashed out and no longer have any ownership interest in the Company or
Developer 2 post-closing.217
The Special Committee met on the next day to review Brookfield’s
submission and “discuss[] next steps with respect to [Brookfield]’s recent
214 Proxy at 41. 215 Id. 216 Id. 217 Compl. ¶ 142; Proxy at 41.
43 proposal”;218 consistent with ongoing practice, Browne was present for the entire
meeting.219 Garland reported to the Special Committee that “[Riverstone] had
indicated it would work with all parties potentially interested in [Developer 2] to
provide information,” but that “it also appeared that [Buyer and Riverstone] may be
working with each other regarding a potential proposal.”220 As alleged, this
statement was a half-truth: Garland had known since at least mid-April that Buyer
and Riverstone were working together.221
Nonetheless, the Special Committee pressed forward with Brookfield.222 On
June 4, at the Special Committee’s direction, Paul Weiss sent Brookfield a marked-
up term sheet, along with a request that Brookfield confirm that the 15% premium
was not subject to continued due diligence.223 The revised term sheet reflected
certain structural changes designed to insulate the Company’s common stockholders
from potential liabilities associated with ongoing litigation involving TerraForm.224
218 Proxy at 41. 219 Compl. ¶ 143 & n.16. 220 Id. ¶ 143 (emphasis omitted); Proxy at 41 (“The Special Committee also discussed [Buyer]’s interest in a potential transaction.”). 221 Compl. ¶ 143. 222 Proxy at 41. 223 Id. 224 Id.
44 On June 5, Paul Weiss and Company management met with Brookfield and its
outside counsel; they met again on June 7.225
I. The Special Committee Entertains Competitive Bids From Brookfield, Buyer, And Others.
Between May and October 2019, Brookfield presented “several updated and
enhanced offers” to the Special Committee and Riverstone.226 The terms of
Brookfield’s offers were economically superior to Buyer’s.227 But Buyer stayed in
the running with Riverstone’s vote of confidence, Garland’s support, and the Special
Committee’s active interest.228
On June 12, the Special Committee and Browne reconvened.229 The Special
Committee noted that, among other things, Buyer and Riverstone had been
negotiating directly without the Special Committee’s involvement.230 Yet, to the
extent those negotiations were relevant to acquiring the Company, the Special
Committee did not attempt to intervene.231
225 Id. at 41–42. 226 D.I. 82 at 20; see Compl. ¶¶ 142–97. 227 See Compl. ¶¶ 142–97. 228 D.I. 82 at 20. 229 Compl. ¶ 144 & n.17. 230 Id. ¶ 144. 231 Id.
45 The Special Committee met again on June 18.232 Batkin reported that
Riverstone contacted Garland and stated that Buyer had offered to purchase
Developer 2 for a 2x multiple of Riverstone’s invested capital.233 But Buyer had not
yet made an offer to acquire the Company: it was focused on Developer 2.234
The Special Committee consulted with its advisors and, on June 27, gave
management instructions and guidelines regarding next steps.235 Management was
authorized and requested to seek written proposals from Buyer and Brookfield.236
Management could not discuss “role or compensation arrangements in connection
with any potential transaction without specific authorization from the Special
Committee, except for limited non-compensation related discussions regarding
potential key personnel, operational integration, or staffing in the event a transaction
were to occur.”237
On June 28, Buyer finally submitted a nonbinding proposal to purchase the
Company for $25.50 per share, a 14% premium over the volume weighted average
price (“VWAP”) for the three month period ending June 27, 2019.238 Buyer
232 Id. ¶ 145. 233 Id. 234 Id. 235 Proxy at 42. 236 Id. 237 Id. 238 Id.; Compl. ¶ 147.
46 contemplated merging the Company and Developer 2 and allowing Riverstone and
the Officer Defendants to maintain or receive an equity interest in the combined
company.239 Buyer’s offer specifically assumed it would reach a separate agreement
with Riverstone with respect to Developer 2, as well as separate agreements with
the Company’s senior management.240 Buyer also stressed that it needed to continue
its discussions with Riverstone and to discuss the matter with PSP.241
On July 1, Brookfield submitted a competitive bid, disclosing it had
completed its due diligence and proposing that TerraForm acquire the Company in
an all stock merger representing a 15% premium based on trading prices leading up
to the time of the announcement.242 The offer contemplated that the combined entity
concurrently acquire Developer 2 for cash at a 1.75x multiple of invested capital,
cashing Riverstone out.243 Brookfield also disclosed it was open to providing
Company stockholders with a cash option.244 The offer hedged that Brookfield
needed to reach an agreement with the Company and Riverstone on Developer 2’s
239 Compl. ¶ 147. 240 Id. 241 Id. 242 Id. ¶ 148. 243 Id. 244 Id. ¶ 148 n.18.
47 valuation.245 With competitive offers on the table, the Special Committee began
probing other bidders, and received interest as described above.
On July 12, Brookfield’s counsel sent Paul Weiss a draft merger agreement,
which provided that Brookfield, but not the Company, would have a termination
right in the event that a proposed Developer 2 acquisition failed to close with or
before the proposed Company-TerraForm merger.246 And on July 15, Batkin met
with Buyer, which reiterated its interest.247
On July 16, Batkin, Paul Weiss, Company management, Evercore, and
Brookfield met.248 They reviewed specifics of the pro forma business plan of the
combined company that would result from any Company-TerraForm merger.249 The
parties met again on July 17.250 On July 16 and 17, Brookfield and the Company
exchanged revised term sheets that reflected the same economic terms as
Brookfield’s July 1 offer, and additionally addressed the “governance of the pro
forma combined company.”251
245 Id. ¶ 148. 246 Proxy at 43. 247 Id. 248 Id. 249 Id. 250 Id. 251 Id.; Compl. ¶ 150.
48 Brookfield submitted a new offer on July 23.252 Acknowledging Riverstone’s
influence, Brookfield noted that the Company’s “Board and management wish to
also internalize [Developer 2] as part of this transaction” and reiterated that it was
open to buying Developer 2 for partial cash in a deal that included a 15% premium
to Company stockholders.253 Brookfield also stated that it would be willing to offer
a 20% premium to Company stockholders in a simpler transaction that did not
include acquiring Developer 2.254 This laid bare that including Developer 2 in a
transaction would result in less consideration for the Company’s public
stockholders, and that Riverstone and the Officer Defendants, as Developer 2
stockholders, were competing with Company stockholders for value.255
The Special Committee met on July 31 and August 1 to discuss the pending
offers, including Brookfield’s offer to pay more for the Company alone, without
Developer 2.256 The Special Committee noted that the two offers internalizing
Developer 2 provided similar value to Company stockholders; but in a key
difference, Brookfield would cash out Riverstone, while Buyer would allow
252 Compl. ¶ 151. 253 Id. 254 Id. 255 Id. 256 Id. ¶ 152. The July 31 meeting was unusual in that Paul Weiss and Evercore did not attend the meeting, but Goldman did. Id.
49 Riverstone to continue to own an equity interest.257 In addition, the Special
Committee weighed “the complexity of [Brookfield]’s proposal” against the
proposals from Buyer and Party D, as well as “the certainty of value of [Buyer]’s
and [Party D]’s all-cash proposals relative to [Brookfield]’s proposed all-stock
transaction with an option to include up to $750 million in cash.”258 The Special
Committee recognized that Brookfield’s offers exceeded Buyer’s then-current offer,
estimating that Brookfield’s offer at a 15% premium equated to a 1.8413 exchange
ratio, or approximately $28.25 per share, based on a 90-day VWAP.259
But Evercore flagged that Buyer was already in “advanced stages of
negotiation” with Riverstone, and that a combination of the Company and
Developer 2 was “in line with management’s vision.”260 The Special Committee
also discussed PSP’s conflicts of interests in any transaction, allegedly recognizing
that PSP was not similarly situated to the Company’s public stockholders.261
According to Plaintiff, at the August 1 meeting, the Special Committee
decided to see if Buyer would increase its offer, while holding off on further
257 Id. ¶ 154; Proxy at 44. 258 Proxy at 44. 259 Compl. ¶ 158. 260 Id. ¶ 157. 261 Id. ¶ 153.
50 substantive negotiations with Brookfield.262 The Special Committee determined
that, when it did re-engage with Brookfield, it would convey the importance of
reaching an agreement with Riverstone that included Developer 2 and was therefore
consistent with management’s expectations.263
Even so, between August 1 and August 12, the Special Committee directed
Evercore and Goldman to encourage Buyer, Brookfield, and Party D to improve their
previous proposals.264 Around this time, Buyer asked for exclusivity.265 Evercore
and Goldman indicated to Buyer that the Special Committee would consider
exclusivity only if Buyer raised its offer price for the Company.266 Buyer
declined.267
The market soon caught wind of the Company’s suitors. On August 12,
Bloomberg reported that Brookfield and TerraForm were in merger discussions with
262 Id. ¶ 156. 263 Id. ¶ 157. 264 Proxy at 44 (providing the Special Committee determined that Evercore and Goldman should encourage each bidder to “improve their offers and to accelerate their work”); id. (“Between August 1 and August 12, 2019, at the direction of the Special Committee, representatives of Evercore and Goldman Sachs contacted representatives of [Brookfield], [Buyer] and [Party D] to encourage each potential buyer to improve its previous proposal.”). 265 Id. 266 Id. 267 Id.
51 the Company.268 That day Company stock closed at $25.15 per share, representing
an increase of $1.85 per share over the closing price on August 9—the last full
trading day prior to the Bloomberg report.269 The next day, as requested by Canadian
regulators, the Company issued a press release stating that “it had responded to
inquiries from third parties, but that no definitive agreement had been reached with
respect to a strategic transaction with any party and that there was no assurance that
[the Company] would agree to any strategic transaction.”270
That same day, August 13, Batkin met with Company management, Paul
Weiss, Evercore, and Goldman to discuss structuring a Company-TerraForm
transaction, including excluding Developer 2.271 They met again on August 16.272
Garland reported that, since August 12, the Company received indications of interest
from at least seven new potential buyers.273 After Evercore and Goldman’s
consideration, Batkin authorized Garland and the advisors to contact these parties.274
Later that day, Buyer submitted an updated offer to purchase both the
Company and Developer 2 in a transaction that valued the Company in range of
268 Id.; Compl. ¶ 159. 269 Proxy at 44. 270 Id. 271 Id. at 45. 272 Id. 273 Id. 274 Id.
52 $26.25 to $26.50 per share.275 At that time, this reflected a 15.8% premium over the
three-month weighted average price for the Company, which was lower than the
20% premium Brookfield offered to pay in a deal that did not include Developer 2.276
Buyer did not indicate its valuation of Developer 2.277 But Buyer expressed its
confidence that it could negotiate a definitive price with Riverstone, as they had
already engaged in productive discussions.278 Buyer’s offer also assumed that it
would reach satisfactory agreements with Company management for their roles in
the post-closing entity.279 In conjunction with the offer and these assumptions,
Buyer reiterated its desire to discuss the proposed transaction with PSP.280
The Special Committee met on August 19.281 Buyer had offered to acquire
Developer 2 at a price equal to 1.8x of Riverstone’s invested capital, subject to an
earn-out that could increase the total purchase price to up to 2.25x Riverstone’s
invested capital; Riverstone believed this offer acceptable.282 The Special
Committee recognized that an integrated offer for both the Company and
275 Id.; Compl. ¶ 161. 276 Compl. ¶ 161. 277 Id. 278 Id. 279 Id. 280 Id. 281 Id. ¶ 162. 282 Id. ¶ 163.
53 Developer 2 meant an increase in consideration for the Company would result in a
decrease in consideration for Developer 2 and vice versa, requiring the companies
to compete for value.283 Specifically, the Special Committee noted that the
Developer 2 earn-out made it less likely Buyer would pay more for the Company,
acknowledging that the Company’s public stockholders were competing with
Developer 2’s owners (including Riverstone, PSP, and management) for merger
consideration.284
Despite this tension, the Special Committee decided to progress with Buyer,
authorizing a meeting between Buyer and PSP and instructing Paul Weiss to send
Buyer a draft merger agreement.285 The Special Committee authorized Company
management to begin discussing their compensation and post-transaction roles with
Buyer “provided that representatives of financial advisors to the Special Committee
were in attendance.”286
As instructed, Paul Weiss sent the draft merger agreement to Buyer’s outside
counsel.287 The draft provided that the closing would not be conditioned upon
283 Id. ¶ 162. 284 Id. ¶ 163. 285 Id.; Proxy at 45. 286 Proxy at 45; Compl. ¶ 163. 287 Proxy at 46.
54 closing a Developer 2 acquisition; it also included a go-shop provision.288 Paul
Weiss also brought Riverstone into the fold, contacting Riverstone’s outside counsel
to discuss a transaction with Buyer, the Company, and Developer 2.289 Paul Weiss
pressed that any Company-Buyer transaction should not be cross-conditioned with
any potential transaction involving Developer 2.290 In addition, Company
management, Evercore, Goldman and Buyer engaged in “high-level discussions
regarding arrangements relating to compensation and post-transaction roles for
[Company] management.”291 Buyer requested exclusivity, but the Special
Committee, in consultation with its advisors, declined to grant exclusivity to any
party at that time.292
In mid- to late-August, the Company’s advisors reached out to all interested
parties, including Brookfield.293 Of those bidders that came forward after the August
12 Bloomberg article, one requested to pursue a transaction and negotiate a
confidentiality agreement; six others decided to forego a transaction with the
Company.294
288 Id. 289 Id. 290 Id. 291 Id. 292 Id. 293 Id. at 45. 294 Id.
55 J. Brookfield Attempts To Accommodate The Company’s Shifting Goals And Riverstone’s Demands, But The Special Committee Proceeds With Buyer.
Brookfield submitted an updated offer letter on August 26.295 Brookfield
revealed that, on August 20, the Special Committee’s advisors had indicated an
unwillingness to move forward with Brookfield. Curiously, the advisors had told
Brookfield that (1) the Board no longer supported a transaction that internalized
Developer 2, which was inconsistent with their representations to Buyer in the same
time period; (2) Riverstone would use the Consent Right to block a TerraForm
acquisition; and (3) the Board prioritized deal certainty and price.296
Undeterred, Brookfield proposed a Company-on-top transaction in which the
Company would acquire TerraForm, “so that no Riverstone consent is required in
connection with the transaction,” at a ratio of two TerraForm shares for each
Company share.297 Brookfield’s proposal did not include Developer 2 or any side
benefits for Riverstone or the Officer Defendants; nor did it require any concessions
from Riverstone or amendments to the Company’s contractual agreements with
Developer 2.298 Special Committee meeting minutes provide that Brookfield’s
295 Compl. ¶ 164; see Weinberger Decl. Ex. 5. 296 Compl. ¶¶ 164–65, 174, 209. 297 Id. ¶ 166. 298 Id. ¶¶ 166, 168.
56 updated proposal “was not dependent upon any transaction with [Developer 2.]”299
But the Proxy stated that Brookfield said it would require concessions from
Developer 2.300
Brookfield’s offer valued the Company at $33.38 per share, representing a
45% premium—far above Buyer’s offer and the final Merger price.301 As Brookfield
indicated, this strategic transaction would allow Company stockholders “the
opportunity to continue to participate in the upside embedded in the shares of a world
class renewable power leader that will have a dividend payout ratio,” which “is [a]
more compelling opportunity than having their upside capped in a privatization
transaction.”302 Brookfield stated its offer would expire if it were not granted
exclusivity by August 30.303
On August 26, the Special Committee discussed Brookfield’s revised
proposal.304 The Special Committee and Browne met again on August 28.305 The
Special Committee noted Brookfield’s offer represented a 45% premium,306 and
299 Id. ¶ 168. 300 Proxy at 46. 301 Compl. ¶¶ 167, 171. 302 Id. ¶ 167 (emphasis omitted). 303 Proxy at 46. 304 Id. 305 Compl. ¶¶ 170–71. 306 Id. ¶ 171.
57 contemplated potential litigation risks from TerraForm, as well as “the uncertain
value of the all-stock consideration offered by [Brookfield] as compared to the all-
cash offers received from other bidders.”307 In view of these concerns, the Special
Committee determined that it needed to further evaluate Brookfield’s offer and that
it would be “premature” to grant exclusivity.308
On August 29, at the Special Committee’s direction, Evercore asked
Brookfield to clarify its proposal with respect to Developer 2 and what Brookfield
envisioned for the combined company’s relationship with Developer 2.309 In
response to those discussions, on August 30, Brookfield submitted an updated offer
letter.310 It recapped the changing messages it had received about Developer 2.
Brookfield stated that it had been told early in the process that the Company believed
it was desirable for senior management to maintain their positions in the combined
company, including their dual positions at Developer 2.311 The Company had also
been telling Brookfield that it prioritized internalizing Developer 2. 312 But by
August 20, the Company flipped the script, and Brookfield responded by
307 Proxy at 47. 308 Id. 309 Id. 310 Id.; Compl. ¶¶ 173–74; Kirby Decl. Ex. 27. 311 Compl. ¶ 174. 312 Id.
58 restructuring its proposal to make the Company the acquirer and surviving parent
company to avoid the Consent Right, and to address the Board’s supposed disinterest
in internalizing Developer 2.313 Brookfield emphasized its willingness to move
forward, stating that its due diligence was complete so that it could sign final deal
documents in September, but stated its offer would expire unless the Company
granted exclusivity by September 4.314 It is reasonable to infer that contrary to its
representations to Brookfield, the Special Committee and management (and
Riverstone) supported an internalization of Developer 2; they just did not support a
deal that cashed out Riverstone.
The Special Committee decided “to progress the transaction” with Buyer, and
authorized management to obtain their own legal counsel with respect to the
proposed Buyer transactions, including their interest in Developer 2, and to engage
in further discussions with Buyer relating to such interests and post-closing
management arrangements.315
Batkin discussed the competing offers with management and the Company’s
advisors on September 1.316 On September 2, Paul Weiss received a revised draft
313 Id. ¶¶ 173–74; Proxy at 47; Kirby Decl. Ex. 27 at PEGI-00000982. 314 Compl. ¶ 175; Proxy at 47. 315 Proxy at 47. 316 Id.
59 merger agreement from Buyer.317 Among other things, the draft removed the go-
shop provision and capped damages in the event of termination, but did not condition
the proposed merger on involving Developer 2.318 That same day, Batkin spoke with
Brookfield to discuss the possibility of adding downside protection for Company
stockholders in the form of a cash option or exchange ratio collar; the implications
for Brookfield’s proposal if Riverstone did not support the transaction; and
Brookfield’s request for exclusivity.319
On September 3, Paul Weiss sent a draft merger agreement to Brookfield’s
counsel, by which closing would not be conditioned on a transaction with
Developer 2.320 Batkin suggested that Brookfield arrange a meeting with Company
management and Riverstone to discuss Developer 2.321 Accordingly, the next day,
September 4, Brookfield’s CEO, Sachin Shah, met with Garland and Riverstone’s
representative, Hunt.322 Riverstone insisted that its consent was required for the
Company to acquire TerraForm and that it would require amendments to the
contracts between the Company and Developer 2 before providing such consent.323
317 Id. 318 Id. 319 Id. 320 Id. at 47–48. 321 Id. at 48. 322 Id.; Compl. ¶ 176. 323 Compl. ¶ 177.
60 Brookfield indicated that it did not intend to proceed with a transaction that
Riverstone did not support, and offered to consider Riverstone’s proposed
amendments.324 Shah emailed Batkin later that day, noting that “Riverstone needed
to consider matters to see if there was a path forward on a potential deal” and that
“the ball was in Riverstone’s court on the issue, not Brookfield’s, as Brookfield still
believed in the merits of a transaction.”325
Batkin followed up with Brookfield and Riverstone.326 Brookfield flagged
that its August 30 offer letter had expired and that Brookfield planned to terminate
discussions unless and until it received acceptable proposals regarding the
Company’s relationship with Developer 2.327 Batkin and the Special Committee’s
advisors considered granting Brookfield exclusivity, but declined.328
On September 10, Brookfield sent a revised proposal, addressed to the full
Board, to Batkin and the Special Committee.329 Brookfield recognized the complex
relationship between the Company, Developer 2, and Riverstone and its bearing on
the sales process:
324 Proxy at 48. 325 Compl. ¶ 178. 326 Proxy at 48. 327 Id. 328 Id. 329 Id.; Compl. ¶¶ 179–80; Weinberger Decl. Ex. 6.
61 Our understanding is that the relationship between the [Company] Board and Riverstone is complex. The Board has a fiduciary duty to shareholders of [Company] but is not free to accept certain types of transactions without prior Riverstone consent or, as we understand, any transaction not supported by Riverstone without attracting Riverstone litigation risk. We also understand that Riverstone is not necessarily economically aligned with [Company] shareholders given that it holds no (or negligible) equity in [Company]. Further, given the interrelated nature of the arrangements between [Company], its management, and Riverstone, there could be potential multiple competing interests. This is a unique and difficult scenario.330
Brookfield went on to say that “we do not believe it is in anyone’s best interests to
engage with Riverstone in a manner that creates animosity or material litigation
risk.”331 Brookfield was willing to resume discussions if Riverstone consented to
the deal and if the parties agreed to Riverstone’s requested amendments to the
entities’ existing contractual, operational, and structural arrangements.332
Brookfield was also willing to negotiate with Riverstone and Developer 2 if it was
granted exclusivity by both entities.333
On September 12, Riverstone and Developer 2 informed Batkin that they were
willing to resume talks with Brookfield and present Brookfield with suggested
amendments to the documents governing the relationship between the Company and
330 Compl. ¶ 179 (emphasis omitted); Weinberger Decl. Ex. 6 at PEGI-00000881. 331 Compl. ¶ 180. 332 Id.; Proxy at 48. 333 Compl. ¶ 180; Proxy at 48.
62 Developer 2.334 Batkin asked Riverstone to send Brookfield a written proposal of
preferred terms, which Riverstone did on September 18.335
As for Buyer, on September 8, the Special Committee directed Paul Weiss to
send a revised draft merger agreement to Buyer’s counsel.336 Buyer returned a
marked-up agreement on September 19; it included a 35-day go-shop period subject
to carve-outs for specific parties, including Brookfield.337 Thereafter, the parties
discussed open issues, including the go-shop provision, developments with
Developer 2, and financing.338 The Special Committee also continued probing the
Company’s remaining bidders, advancing discussions, and denying any particular
bidder exclusivity.339
On September 23, Batkin met with the Special Committee’s advisors and
Company management to discuss Riverstone’s demanded and “fairly expansive”
contract amendments.340 Brookfield indicated that “there were realistic options to
resolve the issues presented in Riverstone’s recent proposal, but that [Brookfield]
would only continue discussions regarding a transaction if granted exclusivity by
334 Proxy at 48. 335 Id. at 49; Compl. ¶ 180. 336 Proxy at 48. 337 Id. at 49. 338 Id. 339 Id. at 49–50. 340 Compl. ¶ 183.
63 [the Company].”341 Batkin denied exclusivity, but offered to pay Brookfield’s
going-forward expenses “to entice [Brookfield] to advance discussions with
Riverstone.”342
Over the next three days, the Special Committee strategized to keep
Brookfield in the running.343 Batkin and the Special Committee’s advisors sought
to arrange a meeting between Brookfield and Riverstone “to ensure that there was a
shared understanding of the terms in Riverstone’s September 18, 2019 proposal.”344
Batkin contacted Brookfield on September 25, and Brookfield agreed to the
meeting.345 With Batkin’s assistance, Brookfield and Riverstone scheduled a
meeting for October 1.346 But on September 27, Brookfield cancelled the meeting.347
On September 29, the Special Committee met to evaluate the remaining
bidders: Brookfield, Buyer, Party B, and Party D.348 The Special Committee
considered Brookfield’s offer and Riverstone’s demand, which included a right to
341 Proxy at 49. 342 Id. 343 Id. at 49–50. 344 Id. at 50. 345 Id. 346 Id. 347 Id. 348 Id.
64 buy back the Company’s 29% stake in Developer 2.349 Batkin advised the Special
Committee that Brookfield was willing to agree to Riverstone’s demanded terms
“as-is.”350 But Garland warned that a Company-TerraForm merger would alter the
Company’s relationship with Developer 2,351 even if those changes were the result
of Riverstone’s demands. Given Brookfield’s potentially higher bid, the Special
Committee noted its duty to “maximize value for shareholders.”352 It ultimately
determined that it would grant neither Buyer or Brookfield exclusivity, “given the
continued interest in [the Company] expressed by multiple credible parties.”353
K. Garland Drives Issuance Of Preferred Stock That Must Vote In Favor Of The Merger.
Also at the Special Committee’s September 29 meeting, with all directors in
attendance, Garland pressured the Board to authorize the issuance of a new class of
voting preferred shares, purportedly to fund the purchase of two renewable energy
projects.354 In June 2019, while the sales process was underway, the Board had laid
the groundwork for a potential preferred issuance and formed a transaction
349 Compl. ¶ 183. 350 Id. ¶¶ 183–85. 351 Id. ¶ 186. 352 Id. ¶ 188. 353 Proxy at 50. 354 Compl. ¶ 187.
65 committee.355 Despite having no apparent relationship to the sales process and a
specifically-designated committee to carry out any such issuance, Garland told the
Board to move quickly, noting his “concern that the Preferred Issuance had already
been delayed for months” due to the sales process “and indicated that it had reached
a point where it could not be delayed any further without risk of the Company’s
counterparty walking away from the proposed deal.”356 Garland “reminded the
Committee of the importance to the Company of consummating the Preferred
Issuance.”357
On September 30, the transaction committee approved the preferred stock
(the “Preferred Issuance”).358 Thereafter, on October 10, the Company sold
10,400,000 preferred shares with a par value of $260 million for $256.1 million, or
$24.625 per share, to CBRE Caledon Capital Management Inc. affiliates (“CBRE”)
in a private placement pursuant to a Securities Purchase and Rights Agreement
(the “Purchase Agreement”).359 The CBRE sale closed on October 25, raising
355 See D.I. 94, Ex. A ¶ 5 (noting that on June 12, 2019, the Board appointed a transaction committee to authorize and approve a new series of preferred stock). 356 Compl. ¶ 187. 357 Id. 358 Id. ¶¶ 190, 235. 359 Id. ¶ 235.
66 roughly $75 million more than Garland claimed the Company needed to fund the
cited projects.360
The preferred shares entitled CBRE to favorable dividends and distributions
in the years following the merger of the two entities.361 They entitled CBRE to one
vote per share, subject to a cap, such that they represented 9.99% of the vote on the
Merger, which occurred shortly after the sale closed.362 Importantly, the Securities
Purchase and Rights Agreement required CBRE’s preferred shares to be voted in
favor of the Merger—which had not yet been guaranteed, finalized, or signed at the
time the CBRE sale closed.363
L. The Special Committee Accepts Buyer’s Offer And Rejects Brookfield’s Premium.
By October, Brookfield and Buyer emerged as the Company’s remaining
serious bidders.364 Since late August 2019, Brookfield labored to secure the Special
Committee’s and Riverstone’s approval of its premium bid, continuing to entertain
Company management’s and Riverstone’s demands. In contrast, Buyer’s offer
360 Id. ¶ 244. 361 Id. ¶ 242. 362 Id. ¶ 236. 363 Id. ¶ 237. The Purchase Agreement required the shares to be voted in accordance with the recommendation of the Board so long as the special meeting took place on or before May 10, 2021. 364 See id. ¶¶ 188–96.
67 moved forward smoothly with little to no enhancement to its offer price.365 Despite
Brookfield’s efforts and the 45% premium, and with the preferred stock sale on the
horizon, Batkin and Company management determined that the Brookfield offer
would ultimately be inadequate for Riverstone.366
On October 3, Batkin again encouraged Brookfield to engage with
Riverstone.367 Brookfield once more demanded exclusivity and stood firm that,
without it, Brookfield “would not be willing to devote time and resources to
discussions with Riverstone.”368 Batkin told Brookfield that the Company could not
grant exclusivity, as the Special Committee was still in discussions with other
parties, including Buyer and Party D.369
Between October 13 and 16, Batkin and the Special Committee’s advisors
continued speaking with Brookfield.370 They recognized and reiterated that
Brookfield’s August 26 proposal was “competitive,” but to move forward,
Brookfield had to confirm that either (1) Brookfield’s proposal was not conditioned
on Brookfield entering into an agreement with Developer 2 or Riverstone, so that
365 See id.; Proxy at 52. 366 See Compl. ¶ 201. 367 Proxy at 51. 368 Id. 369 Id.; see also id. at 50. 370 Id. at 51.
68 those entities could not hold up a transaction; or (2) Brookfield had negotiated
definitive drafts of such agreements.371 The Special Committee warned Brookfield
that “other parties had entered more advanced stages of negotiations” and that the
Company “would be seeking definitive offers from all interested parties.”372
The Special Committee then pushed all remaining bidders.373 On October 17,
Evercore instructed Brookfield, Buyer, and Party D to submit their “best and final”
offers by October 28.374 On October 28, after months of negotiation that led to an
small increase of $1.25 per share from its original offer, Buyer submitted a definitive
all-cash offer to purchase the outstanding shares of Company Common Stock for
$26.75 per share.375 While still lower than Brookfield’s offer, Buyer also agreed to
simultaneously acquire Developer 2 and allow Riverstone to retain equity in the
combined company; it also offered the benefit of keeping the Company and
Developer 2’s management in place.376
That same day, Brookfield submitted a letter reaffirming its prior stock-
exchange proposal, noting that its “proposal has a clear path to execution” and that
371 Id. 372 Id. 373 Id. 374 Id.; Compl. ¶ 191. 375 Compl. ¶ 195; Proxy at 52. 376 Compl. ¶ 195.
69 “we have been advised by you and your advisors that our proposal is superior from
a value perspective to the others that you have received and that you will receive in
this sales process.”377 Brookfield reiterated that it could agree to Riverstone’s
demands,378 but acknowledged that “the situation vis-à-vis Riverstone continues to
be problematic for the [Company] Board and that Riverstone’s interests are likely
not aligned with those of the [Company] shareholders,” and expressed that it was
confident in its ability to grow the post-closing entity in the face of Riverstone’s
demands and consequent separation.379 Brookfield explained,
As requested, we have carefully reviewed Riverstone’s list of demands to potentially support a merger of [the Company] with [TerraForm]. Those demands effectively require a separation of the Riverstone business from [the Company]. The list from Riverstone, as you know, requires that all of [the Company]’s development expertise, systems, people and the Pattern name itself revert back to Riverstone, in exchange for their support.
As we have stated, we could agree to these requests. Brookfield has over 3,000 professionals focused on power operations, marketing, investment, development, and finance around the world. Our bench strength in management is deep. We have people and operations globally with the capabilities to manage, operate, grow, fund and deliver value to [the Company]’s shareholders, with a public track record of over 20 years. We also have a demonstrated expertise in carve-out transactions. . . . Therefore, we believe it would be possible to successfully execute such a separation to achieve the proposed merger at the value we have ascribed.
377 Id. ¶ 192 (emphasis omitted); accord Weinberger Decl. Ex. 7; see Proxy at 52. 378 Compl. ¶ 194; accord Weinberger Decl. Ex. 7. 379 Compl. ¶ 194; accord Weinberger Decl. Ex. 7.
70 Further, we believe executing on certain of the Riverstone demands may leave [the Company] as a far better company in the future than it currently is. If we separate the inter-related management, systems and eliminate the conflicts that Riverstone brings to [the Company] and merge the Company with [TerraForm], we will leave the merged entity with clear alignment between the Board, shareholders, management and its sponsor, Brookfield. All constituents will then have a singular focus on creating value for [the Company]. 380
The Company determined that Brookfield’s October 28 letter did not meet the
conditions set by the Special Committee, nor did it include a proposed merger
agreement.381 The Company extended the deadline for submitting definitive
transaction documentation to October 30, and requested that Brookfield confirm its
willingness to enter into and consummate a merger with the Company at the
proposed exchange ratio regardless of any agreement (or lack thereof) between
Brookfield and Riverstone.382
On October 30, Brookfield submitted a revised draft merger agreement,
which included a condition that Brookfield be permitted to engage in discussions
with Riverstone prior to executing it.383 It also conditioned closing on Riverstone’s
consent to certain amendments to Developer 2’s existing contractual relationships
380 Compl. ¶ 194 (emphasis omitted); accord Weinberger Decl. Ex. 7. 381 Proxy at 52. 382 Id. 383 Id.
71 with the Company.384 Brookfield did not submit definitive documentation or terms
relating to governance of the combined company or detail any requested
arrangements with Developer 2.385 The Special Committee extended its definitive
offer deadline again to November 2.386
On October 30 and 31, the Special Committee met to evaluate Buyer’s and
Brookfield’s final offers; Browne attended.387 Evercore presented an analysis
indicating that a Company-TerraForm merger would result in a combined company
with a stock valued in the range of at least $29.71 to $32.94 per share: well above
Buyer’s offer of $26.75 per share.388 Nonetheless, Evercore stressed that a
TerraForm transaction would undermine the “purpose and commercial viability” of
Developer 2.389 But management had projected that Developer 2 was on the cusp
of being self-funding, and nothing in the Company-TerraForm transaction
endangered Developer 2’s continued performance of its contractual obligations. 390
384 Id. 385 Id. 386 Id. 387 Id.; Compl. ¶¶ 196–97. 388 Compl. ¶¶ 198–99. Plaintiff alleges that even those values for the combined company were depressed because Evercore did not use consistent or updated dividend yields across its analyses, and if corrected, Evercore’s analysis would have shown the combined company would trade in the range of $32.69 to $36.15 per share. 389 Id. ¶¶ 201–04. 390 Id. ¶¶ 82, 202–04.
72 Goldman contributed by describing Riverstone’s confidence in the Company-
Buyer-Developer 2 proposal.391
On November 1, Brookfield told Paul Weiss it could negotiate any necessary
amendments with Riverstone within thirty days.392 Paul Weiss demanded that
Brookfield submit definitive documents the next day, which Brookfield could not
do without Riverstone’s cooperation, which it did not believe it would receive.393
As a result, Brookfield decided its efforts were futile and withdrew its bid.394 Buyer
was the last bidder standing.
On November 3, the Special Committee voted to recommend that the Board
approve the all-cash Merger with Buyer at $26.75 per share, which was $1.05 less
than the $27.80 closing trading price of the Company’s stock the previous day, but
represented a 14.8% premium to the Company’s closing price on August 9, the last
trading day before rumors of a potential acquisition leaked.395 Under the Merger
agreement with Buyer (the “Merger Agreement”), Buyer’s offer of $26.75 per share
implied an enterprise value for the Company of $6.1 billion, including debt.396
391 Id. ¶ 197. 392 Id. ¶ 205; Proxy at 52. 393 Compl. ¶ 205; Proxy at 52. 394 Compl. ¶ 205; Proxy at 53. 395 Compl. ¶¶ 206–07, 222. 396 Id. ¶ 207.
73 Evercore issued a fairness opinion confirming that the Merger was fair from a
financial point of view; Goldman did not issue an opinion.397 The Board approved
the Merger that day.398
During the Merger Agreement’s go-shop period, the Special Committee’s
financial advisors contacted sixteen additional potential bidders.399 The contacted
parties either did not respond or declined to pursue a transaction.400 Plaintiff alleges
that the go-shop process was a sham in light of the Merger Agreement’s $52.7
million termination fee and the discretionary power of Riverstone, Buyer, and the
Company to award to or withhold from Goldman an additional $3 million dollars
upon consummation of the Merger.401 On November 4, the Company officially
announced that it had entered into the Merger Agreement with Buyer.402
Around this time, Buyer, Riverstone, the Officer Defendants, and
Developer 2 entered into a Contribution and Exchange Agreement (the
“Contribution Agreement”) pursuant to which the Company and Developer 2
would be united under common ownership.403 The Contribution Agreement valued
397 Proxy at A-24. 398 Compl. ¶ 206. 399 Proxy at 54. 400 Id. 401 Compl. ¶¶ 216, 271. 402 See D.I. 74 at 10 (citing Compl. ¶ 206). 403 Compl. ¶ 208.
74 Developer 2 at $1.06 billion.404 According to its terms, the parties would “make
certain contributions contemplated by the Contribution Agreement, including with
respect to their interests in [Developer 2] in exchange for equity interests in [the
surviving entity].”405
Each of Riverstone, the Officer Defendants, PSP, and CBRE continue to hold
equity in the new combined company, whereas the Company’s public stockholders
were cashed out.406 The Officer Defendants are also eligible to earn up to
$51 million in earnout payments and were given new employment agreements with
generous compensation for a minimum of three-year terms with automatic one-year
renewals.407
M. The Officer Defendants Prepare The Merger Disclosures.
Concurrently with approving the Merger, the Board adopted resolutions that
delegated full authority to prepare and disseminate the Proxy to Company
management.408 Management had unbridled discretion to include or omit
information as “deemed necessary, appropriate or advisable.”409 The Board did not
404 Id. 405 Proxy at 74. 406 Compl. ¶¶ 209–11. 407 Id. ¶¶ 209–10, 212–14. 408 Id. ¶¶ 231–32; Weinberger Decl. Ex. 8 at PEGI-00000388. 409 Compl. ¶ 231; Weinberger Decl. Ex. 8 at PEGI-00000388.
75 reserve authority to review, alter, or discuss the Proxy’s disclosures before filing.410
As a result of leaving the Merger disclosures in the hands of the Officer
Defendants—particularly Garland—Plaintiff contends that the Proxy omitted or
misrepresented numerous categories of material information.411
On February 4, 2020, the Company filed the Proxy recommending that
Company stockholders vote in favor of the Merger.412 Including annexes, the
Proxy spanned 231 pages and, among other things, disclosed a detailed summary
of the Merger process, including details about the bids by and negotiations with
competitive bidders;413 the valuation metrics employed; the Consent Right; the
concurrent Developer 2 acquisition and Contribution Agreement and that certain
members of Company management stood to benefit under the Contribution
Agreement; and that certain directors and officers had potential conflicts of
interest, and the Board was aware that these interests existed and considered them,
among other matters, when it approved the Merger Agreement.414 After negative
commentary by proxy advisory firms and disclosure suits by stockholders, 415 but
410 Compl. ¶ 232; see also Weinberger Decl. Ex. 8 at PEGI-00000388. 411 Compl. ¶¶ 253–82. 412 Proxy at 1. 413 Id. at 36–54. 414 Id. at 6–7, 69–79. 415 See, e.g., Compl. ¶¶ 223–25.
76 before the stockholder vote, the Company issued further disclosures in a
supplemental definitive proxy statement filed on March 4, 2020
(the “Supplemental Proxy”).416
However, as alleged, the Proxy and Supplemental Proxy failed to disclose,
among other things, that Riverstone used the Consent Right to block a more
valuable deal with Brookfield and TerraForm; that Garland had unauthorized
discussions with potential bidders in violation of the Special Committee’s
instructions, including an unauthorized in-person meeting with Buyer and
representatives of Riverstone in April 2019; that Goldman faced conflicts of
interest, including that Goldman owns a substantial stake in Riverstone, had
advised Riverstone on a take-private of the Company, and had earned fees totaling
over $100 million from Riverstone and Buyer in recent years; that Browne, a
representative of Riverstone, attended a majority of the Special Committee’s
meetings and Executive Sessions; and that the Company’s largest stockholder,
PSP, held a 22% interest in Developer 2, and therefore was interested in the
Merger.417
416 See Kirby Decl. Ex. 2; D.I. 74 at 12. 417 See generally Compl.
77 N. The Market Reacts, And Company Stockholders Marginally Vote To Approve The Merger.
Following the Merger announcement, nine sets of plaintiffs filed pre-
merger lawsuits alleging that the Proxy made inadequate disclosures.418 All but
one of these lawsuits were voluntarily dismissed shortly after the Company filed
the Supplemental Proxy. The remaining lawsuit was filed by Water Island Capital,
LLC and its affiliates (“Water Island”), who also launched an aggressive public
campaign urging other stockholders to vote against the Merger based on the
themes pervading the Complaint.419
On February 18, Water Island issued an open letter to Company
stockholders, opposing the consideration paid for Company stock in the Merger as
“woefully inadequate.”420 Water Island claimed that the Merger “originally
offered at best a negligible premium,” and, at the time of Water Island’s letter, “a
significant discount” due to “the recent seismic shift in the value ascribed to
renewable energy companies.”421
418 See D.I. 74 at 12. 419 See id.; Compl. ¶¶ 224–25. 420 See D.I. 74 at 12 (quoting Water Island Capital, LLC Issues Open Letter to Shareholders of PEGI Group, Inc., BUSINESSWIRE (Feb. 18, 2020), https://www.businesswire.com/news/home/20200218005403/en/Water-Island-Capital- LLC-Issues-Open-Letter). 421 Id.
78 On February 19, the Company issued a press release responding to Water
Island’s claims and reiterating the Board’s position that the Merger was the best
path forward for the Company and its stockholders.422 Water Island then issued a
second letter on February 24, again urging stockholders to vote against the Merger
and detailing the same supposedly “misleading” aspects of the Proxy that Plaintiff
challenges in this litigation. Specifically, Water Island claimed that the Merger
consideration represented a “low-ball management-led buyout of [the Company]”;
that the Board “fail[ed] to restrain a conflicted management team from leveraging
a previously undisclosed [Developer] 2 ‘consent right’ in order to block any
merger that did not enrich their own self-interests”; and that “the Board’s claim of
a robust sales process couldn’t be further from the truth.”423
422 See id. at 13 (citing PEGI Board of Directors Reiterates Recommendation that Stockholders Vote “FOR” Proposed Canada Pension Plan Investment Board Transaction (Feb. 19, 2020), https://patternenergy.com/news/press-releases/pattern-energy-board- directors-reiterates-recommendation). 423 See id. (quoting Water Island Capital, LLC Issues Open Letter to Shareholders in Response to Misleading Claims Made by Pattern Energy Group, Inc. Board of Directors, BUSINESSWIRE (Feb. 24, 2020), https://www.businesswire.com/news/home/20200224005340/en/Water-Island-Capital- LLC-Issues-Open-Letter). Water Island further suggested to stockholders that the Company was “hiding the purchase price of [Developer] 2,” and that the Proxy did not disclose that the PSP, which held 9.5% of the shares in [the Company], was a “conflicted party who [should be] excluded from the majority-of-the-minority vote.” Id. PSP’s holding in the Company, as well as the investment rights that accompanied it and the potential that PSP might have interests that conflicted with the Company and its stockholders, were all disclosed in the Company’s Form 10-K filings for each of 2018, 2019 and 2020. See Kirby Decl. Ex. 3; Kirby Decl. Ex. 4; Kirby Decl. Ex. 5.
79 On February 26, the Company responded, noting that the Company faced
significant headwinds, including limited access to low-cost capital and a lack of
financial sponsors, which led to it consistently trading at a discount to its peers over
the last five years. The Company again reiterated that the Merger represented the
best path forward for stockholders.424
Following Water Island’s public criticism of the Merger, on February 28
and March 2, Institutional Shareholder Services (“ISS”) and Glass Lewis, the two
largest proxy advisory firms in the United States, both issued reports
recommending that stockholders reject the Merger.425 Glass Lewis expressed
concern that the Board and Special Committee did not run a sufficiently
independent process and believed the Company was worth more as a standalone
entity.426 While ISS also believed the Merger inadequate, it also acknowledged
that some Company stockholders may have preferred a cash offer, as opposed to
Brookfield’s potential all-stock transaction, because it provided “certainty of
value” in the face of “global pandemic fears,” and the recent surge in the value
424 See D.I. 74 at 14 (citing Pattern Energy Sets the Record Straight Regarding Water Island’s False Assertions and Mischaracterizations (Feb. 26, 2020), previously available at https://investors.patternenergy.com/news-releases/news-release-details/patternenergy- sets-record-straight-regarding-water-islands). 425 Compl. ¶ 225; see also D.I. 74 at 14–15. 426 Compl. ¶ 225.
80 attributed to renewable energy companies may not necessarily be a “resilient long-
term trend.”427
As of the Merger’s record date, the Company had 98,218,625 shares of
common stock outstanding and 10,400,000 shares of preferred stock outstanding,
with each common and preferred share receiving one vote for a total of
108,618,625 potential votes.428 Ultimately, on March 10, a total of 56,856,604 of
the Company’s outstanding shares voted in favor of the Merger by a slim majority
of 52%.429 PSP owned 9,341,035 (or approximately 8.6%) of the shares that voted
in favor of the Merger; because PSP owns 22% of Developer 2, Plaintiff alleges
PSP was interested.430 An additional 1,210,049 (or 1.1%) shares of those voted in
favor were held by members of Company management who received equity and
jobs in the post-closing company.431 CBRE’s 10,400,000 preferred shares, which
were rolled over into the post-closing company and remain outstanding, were
required to be voted in favor of the Merger.432 If these three blocks of votes were
excluded, only 41% of the disinterested shares voted in favor of the Merger.433
427 See D.I. 74 at 15; Compl. ¶ 225. 428 Compl. ¶ 247. 429 Id. ¶ 248. 430 Id. ¶ 249. 431 Id. An additional 50,872 shares were held by other Company insiders. Id. ¶ 249 n.23. 432 Id. ¶ 249. 433 Id. ¶ 250.
81 O. This Litigation Ensues.
The Merger sparked litigation in this Court: two class action complaints
challenging the adequacy of the Merger process and its consideration were filed in
May 2020.434 Those actions were consolidated into the present case,435 and Britt was
appointed lead plaintiff.436 Her class action Complaint asserts six counts.437
Count I, for breach of fiduciary duty, asserts the Director Defendants
“consciously disregarded their fiduciary duties by, among other things, agreeing to
the unfair Merger, which failed to maximize stockholder value, but was the preferred
transaction for Riverstone and a conflicted management team”;438 “knowingly and
willfully allow[ed] numerous conflicted individuals/entities to participate in its
deliberations, including Browne, Garland, Goldman, and other members of
management”;439 “knowingly and intentionally failed to disclose all material
information to the Company’s stockholders”; and “consciously abdicated their
434 Plaintiff’s original complaint was filed under a different case number. See Britt v. Garland, et al., C.A. No. 2020-0412-MTZ. The initial complaint under this case number was filed by Gary Broz, Robert Long, Walter James Peters III, and Michael Richardson (the “Broz Plaintiffs”). See D.I. 1. After the actions were consolidated under this caption and Britt appointed lead plaintiff, the Broz Plaintiffs voluntarily dismissed. See D.I. 64. 435 D.I. 10. 436 D.I. 44. 437 Plaintiff’s initial Complaint is identical to the operative consolidated Complaint, which Plaintiff filed on this docket belatedly after the parties completed briefing and argument on the Motions. See D.I. 100; D.I. 101; D.I. 102. 438 Compl. ¶ 292. 439 Id. ¶ 293.
82 duties by granting conflicted management sole authority to exercise its discretion to
determine what material information should be included (or excluded) from the
Proxy and distribute the Proxy to stockholders without prior Board and/or Special
Committee review and approval.”440
Count II, for breach of fiduciary duty, asserts the Officer Defendants “were
interested in the Merger as a result of their employment with and/or substantial
equity holdings in [Developer 2] and their continued employment with and equity
interests in the post-closing combined entity”;441 and that they “advanc[ed] their own
self-interest and the interests of Riverstone to the detriment of [Company]
stockholders” by improperly wielding Riverstone’s narrow consent right to
improperly influence the Special Committee, manipulating their own projections,
and knowingly and intentionally disseminating a materially false and misleading
Proxy.442 Count II alleges that Garland in particular breached his duties by
disobeying the Special Committee’s instructions, meeting with Buyer and
Riverstone without the Special Committee’s authorization, and concealing that
meeting from the Special Committee, which Plaintiff contends “allowed
Riverstone’s preferred bidder, Buyer, to enter the sales process and propose a
440 Id. ¶ 294. 441 Id. ¶ 299. 442 Id. ¶ 300.
83 transaction that benefited management and Riverstone at the expense of the
Company stockholders.”443
Count III asserts the Entity Defendants aided and abetted Company
fiduciaries’ breaches by, among other things, having unauthorized meetings with
Goldman, Garland, and Buyer; infecting the process with conflicted individuals and
entities; wrongfully exploiting the Consent Right in favor of the Merger and
Riverstone; and threatening meritless litigation against Brookfield to block a
transaction with it.444 Count IV asserts the Entity Defendants tortiously interfered
with the Company stockholders’ prospective economic advantage in the superior
Brookfield-TerraForm offer.445 Count V asserts the Entity Defendants, Officer
Defendants and Browne conspired to defeat the Brookfield-TerraForm transaction
in favor of the unfair Merger and to ensure the Company did not disclose all material
information to its stockholders, thereby inducing them to approve the Merger.446
Count VI collects the Officer Defendants and the Entity Defendants into a group
referred to as the “Controller Defendants,” and asserts they owed and breached
fiduciary duties as controllers.
443 Id. ¶ 301. 444 Id. ¶¶ 304–07. 445 Id. ¶¶ 308–13. 446 Id. ¶¶ 314–19.
84 As recourse for these alleged wrongs, Plaintiff seeks damages, fees, and
costs.447
On September 11, 2020, the Individual Defendants and Entity Defendants
moved to dismiss under Court of Chancery Rule 12(b)(6) (respectively, the
“Individual Defendants’ Motion” and the “Entity Defendants’ Motion,” and
together, the “Motions”).448 The parties briefed the Motions as of October 26.449 I
held argument on November 5, and requested that the parties submit supplemental
briefing.450 The parties completed supplemental briefing as of December 10, and
the matter was taken under advisement.451
II. ANALYSIS
The standards governing a motion to dismiss under Court of Chancery Rule
12(b)(6) for failure to state a claim for relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the “plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible to proof.”452
447 Id. ¶¶ (h)–(j). 448 D.I. 73; D.I. 74. 449 See D.I. 82; D.I. 84; D.I. 85. 450 See D.I. 88; D.I. 93. 451 See D.I. 91; D.I. 92; D.I. 94; D.I. 95; D.I. 96. 452 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations omitted); accord In re Baker Hughes Inc. Merger Litig., 2020 WL 6281427, at *5 (Del. Ch. Oct. 27, 2020).
85 Thus, the touchstone “to survive a motion to dismiss is reasonable
‘conceivability.’”453 This standard is “minimal”454 and plaintiff-friendly.455
“Indeed, it may, as a factual matter, ultimately prove impossible for the plaintiff to
prove his claims at a later stage of a proceeding, but that is not the test to survive a
motion to dismiss.”456 Despite this forgiving standard, the Court need not “accept
conclusory allegations unsupported by specific facts” or “draw unreasonable
inferences in favor of the non-moving party.”457 “Moreover, the court is not required
to accept every strained interpretation of the allegations proposed by the plaintiff.”458
A. Plaintiff Has Stated A Claim For Breach Of Fiduciary Duty Against The Director Defendants.
The Director Defendants argue that Plaintiff’s breach of fiduciary duty claims
must be dismissed under Corwin v. KKR Financial Holdings LLC459 because holders
453 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537 (Del. 2011). 454 Id. at 536 (citing Savor, 812 A.2d at 896). 455 See, e.g., Clouser v. Doherty, 175 A.3d 86 (Del. 2017) (TABLE); In re USG Corp. S’holder Litig., 2021 WL 930620, at *3–4 (Del. Ch. Mar. 11, 2021); In re Trados Inc. S’holder Litig. (Trados I), 2009 WL 2225958, at *8 (Del. Ch. July 24, 2009). 456 Cent. Mortg. Co., 27 A.3d at 536. 457 Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011) (citing Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)). 458 Trados I, 2009 WL 2225958, at *4 (internal quotation marks omitted) (quoting In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006)). 459 125 A.3d 304 (Del. 2015).
86 of a majority of disinterested shares approved the Merger in a fully informed,
uncoerced vote, and, therefore, the business judgment rule unrebuttably applies.460
Even if Corwin is inapplicable, the Director Defendants argue that Plaintiff’s duty
of care claims against them are barred by the exculpation provision in the Company’s
Certificate of Incorporation, and that Plaintiff does not plead a nonexculpated duty
of loyalty claim.461
Plaintiff asserts that she has stated nonexculpated claims against the Director
Defendants for violating their duties in bad faith; that Corwin does not apply to
cleanse the transaction; and that the Court should review it under an entire fairness
standard because controllers stood on both sides of the transaction, and/or Garland
committed fraud on the Board.462
Plaintiff is correct that Corwin does not place the Merger under the ambit of
the business judgment rule. Because Company stockholders were cashed out, “the
merger is presumptively subject to enhanced scrutiny.”463 Through the lens of
enhanced scrutiny, Plaintiff’s allegations render it reasonably conceivable that the
Director Defendants violated their duty of loyalty. Accordingly, the Director
460 See D.I. 74 at 2. 461 Id. at 3. 462 D.I. 82 at 32, 58–60. 463 Chester Cty. Empls.’ Ret. Fund v. KCG Hldgs., Inc., 2019 WL 2564093, at *10 (Del. Ch. June 21, 2019) (citing Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 184 (Del. 1986)).
87 Defendants’ Motion is denied as to Count I. Moreover, it remains possible that the
transaction will be subject to entire fairness because discovery may reveal that a
control group, consisting of the Entity and Officer Defendants, stood on both sides
of the transaction.
1. Revlon Enhanced Scrutiny Applies At The Pleading Stage.
The board of directors has the ultimate responsibility for managing the
business and affairs of a corporation.464 “In discharging this function, the directors
owe fiduciary duties of care and loyalty to the corporation and its shareholders,” and
“[t]his unremitting obligation extends equally to board conduct in a sale of corporate
control.”465
“When determining whether corporate fiduciaries have breached their duties,
Delaware corporate law distinguishes between the standard of conduct and the
standard of review.”466 “The standard of conduct describes what directors are
expected to do and is defined by the content of the duties of loyalty and care. The
standard of review is the test that a court applies when evaluating whether directors
have met the standard of conduct.”467
464 8 Del. C. § 141(a). 465 Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1280 (Del. 1989) (citations omitted). 466 Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014) (collecting authorities). 467 Id. (internal quotation marks omitted) (quoting In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d 17, 35–36 (Del. Ch. 2013)).
88 “Delaware has three tiers of review for evaluating director decision-making:
the business judgment rule, enhanced scrutiny, and entire fairness.”468 Which of the
three standards applies depends initially on whether the board members
(i) were disinterested and independent (the business judgment rule), (ii) faced potential conflicts of interest because of the decisional dynamics present in particular recurring and recognizable situations (enhanced scrutiny), or (iii) confronted actual conflicts of interest such that the directors making the decision did not comprise a disinterested and independent board majority (entire fairness). The standard of review may change further depending on whether the directors took steps to address the potential or actual conflict, such as by creating an independent committee, conditioning the transaction on approval by disinterested stockholders, or both.469
The business judgment rule, Delaware’s default standard of review, presumes
board members act “on an informed basis, in good faith and in the honest belief that
the action taken was in the best interests of the company.”470 “[W]here the business
judgment presumptions are applicable, the board’s decision will be upheld unless it
cannot be attributed to any rational purpose.”471
Revlon’s intermediate standard of enhanced scrutiny is applied when board
members face “potential conflicts of interest because of situational dynamics present
468 Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011). 469 Chen, 87 A.3d at 666–67 (quoting Trados II, 73 A.3d at 36). 470 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), rev’d on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000). 471 In re Walt Disney Co. Deriv. Litig. (Disney II), 906 A.2d 27, 74 (Del. 2006) (internal quotation marks omitted) (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)).
89 in particular” transactions.472 “Revlon enhanced scrutiny applies to ‘final stage’
transactions, including a ‘cash sale, a break-up, or a transaction like a change of
control that fundamentally alters ownership rights’”473 because in these transactions,
directors may be more prone to pursue self-interest and engage in selfish action.474
In cash-out mergers presenting no “long run” for stockholders, “the board’s duty to
shareholders is inconsistent with acts not designed to maximize present share value,
acts which in other circumstances might be accounted for or justified by reference
to the long run interest of shareholders.”475
Here, Buyer cashed out the Company’s public stockholders in the transaction,
and thus “there [exist] sufficient dangers to merit employing enhanced scrutiny.” 476
Because Company stockholders “received cash for their shares, the merger is
presumptively subject to enhanced scrutiny.”477
472 Trados II, 73 A.3d at 36. 473 Huff Energy Fund, L.P. v. Gershen, 2016 WL 5462958, at *13 (Del. Ch. Sep. 29, 2016) (quoting Lonergan v. EPE Hldgs., LLC, 5 A.3d 1008, 1019 (Del. Ch. 2010)). 474 Firefighters’ Pension Sys. of Kan. City, Mo. Tr. v. Presidio, Inc., 2021 WL 298141, at *12 n.13 (Del. Ch. Jan. 29, 2021) (citing Reis, 28 A.3d at 458 (explaining that parties may be more willing to cheat where they do not anticipate repeated transactions)). 475 TW Servs., Inc. v. SWT Acq. Corp., 1989 WL 20290 (Del. Ch. Mar. 2, 1989). 476 Lonergan, 5 A.3d at 1019. 477 KCG Hldgs., 2019 WL 2564093, at *10 (citing Revlon, 506 A.2d at 184); accord In re Mindbody, Inc., 2020 WL 5870084, at *13 (Del. Ch. Oct. 2, 2020) (“The cash-for-stock Merger was a final-stage transaction presumptively subject to enhanced scrutiny under Revlon.”).
90 Plaintiff asks this Court to further elevate the standard of review to entire
fairness.478 Entire fairness, Delaware’s most stringent standard, applies to board
action where there exists “actual conflicts of interest.”479 Under the entire fairness
standard, the defendants must show that the transaction in question was “objectively
fair, independent of the board’s beliefs.”480 Entire fairness applies in certain discrete
circumstances, including (1) when a plaintiff pleads facts that “call[] into question
the disinterestedness and independence of a sufficient number of directors;”481
(2) when the transaction was effectuated “by a controlling or dominating
shareholder,”482 and (3) when a plaintiff pleads a fraud-on-the-board theory and the
attendant “illicit manipulation of a board’s deliberative processes by self-interested
corporate fiduciaries.”483
Plaintiff has not pled facts sufficient to indicate that the Special Committee
was interested and lacked independence such that its members would be presumably
478 D.I. 82 at 32. 479 Trados II, 73 A.3d at 36. 480 Presidio, 2021 WL 298141, at *17 (internal quotation marks omitted) (quoting Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006)). 481 Chen, 87 A.3d at 672. 482 Kahn v. Lynch Comms. Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994). 483 Macmillan, 559 A.2d at 1279; see Mindbody, 2020 WL 5870084, at *25 n.229 (“[T]he presumptive standard of review in Macmillan was Revlon . . . . Yet . . . the court elevated the standard of review to entire fairness in view of the fraud-on-the-board theories advanced by the plaintiffs.”).
91 incapable of exercising their objective judgment in considering the merits of the
transaction. At the time of the Merger, the Board consisted of seven directors. Only
two, Garland and Browne, were allegedly conflicted with respect to the transaction;
that is why they were not appointed to the Special Committee.484 The remaining five
directors, Batkin, Goodman, Hall, Newson, and Sutphen, were disinterested and
independent with respect to the Merger, and were therefore appointed to the Special
Committee.485
Further, Plaintiff has not pled facts sufficient to support a fraud-on-the-board
theory. Still, this cash-out Merger may warrant entire fairness review under a
controller theory; time and discovery will tell. At a minimum, it warrants enhanced
scrutiny.
a. Plaintiff Has Failed To Plead Fraud On The Board.
Plaintiff principally contends entire fairness is warranted under a fraud-on-
the-board theory. Plaintiff invokes Mills Acquisition Co. v. Macmillan, Inc.,486 in
which the Delaware Supreme Court elevated the standard of review to entire fairness
based on the conclusion that insider officers committed fraud on the board out of
484 See, e.g., Compl. ¶¶ 24, 26, 101. The allegations of Garland and Browne’s interestedness and lack of independence are discussed further infra. 485 See id. ¶ 100. 486 559 A.2d 1261, 1279 (Del. 1989).
92 self-interest. Macmillan’s officers “failed to disclose that they tipped off their
favored bidder in a way that tainted and manipulated the Board’s deliberative
process.”487 Here, Plaintiff theorizes:
[T]he Complaint alleges that Garland—in plain violation of the Special Committee’s prohibition on members of [Company] management engaging with any potential parties to a strategic transaction without the express consent of the Special Committee—commenced unauthorized sale discussions with Riverstone and [Buyer] in April 2019. Garland never informed the Committee of the actual substance or circumstances of his improper outreach, which was part of Garland’s and the other Officer Defendants’ disloyal effort to steer the Merger process in favor of [Developer 2] and Riverstone. As a result of Garland’s misconduct, Riverstone inserted [Buyer] into the Merger process and ultimately blocked a more valuable transaction with Brookfield. As a matter of Delaware law, Garland’s self-interested and illicit manipulation of a board’s deliberative process requires the Merger be subjected to rigorous judicial scrutiny under the exacting standards of entire fairness.488
Plaintiff offers fraud on the board only in pursuit of entire fairness, while offering a
theory of director breach that tracks the paradigmatic Revlon narrative of an
overweening CEO and supine board.489 I question whether I should entertain fraud
487 City of Fort Myers Gen. Empls.’ Pension Fund v. Haley, 235 A.3d 702, 717 n.49 (Del. 2020) (citing Macmillan, 559 A.2d at 1279–81). 488 D.I. 82 at 32–33 (alteration, citations, footnote, and internal quotation marks omitted) (citing Compl. ¶ 124, and then quoting Macmillan, 559 A.2d at 1279). 489 See infra Section II.A.2.a; see also Mindbody, 2020 WL 5870084, at *1 (“[T]he paradigmatic claim under Revlon, Inc. v MacAndrews & Forbes Holdings, Inc. arises when a supine board under the sway of an overweening CEO bent on a certain direction tilts the sales process for reasons inimical to the stockholders’ desire for the best price.” (alteration, footnote, and internal quotation marks omitted) (quoting In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1002 (Del. Ch. 2005))).
93 on the board solely to set the standard of review, as the theory of breach should drive
the standard of review inquiry. Plaintiff’s theory of breach is not that Garland
deceived the Special Committee into favoring Buyer. Her theory is that the Special
Committee knowingly favored Buyer because they favored Riverstone and
Developer 2 over Company stockholders. For the sake of completeness, I consider
whether Plaintiff’s allegations can stretch to allege fraud on the board and conclude
they cannot.
In Mills, the board and special committee failed to engage in “planning and
oversight to insulate the self-interested management” in connection with a sale of
corporate control.490 Rather, the board placed “the entire process in the hands of [a
manager]” who chose the Committee’s financial advisors, and acted without board
oversight as the board looked on “with a blind eye.”491 “[T]he Macmillan board
completely relied on” interested management’s false portrayal of a potential bidder
that “served more to propagandize the board than to enlighten it.”492 Management
worked intensely and furtively with Macmillan’s Special Committee’s financial
advisor on restructuring proposals that would eventually reach the Special
Committee that largely benefitted management.493 Throughout negotiations and
490 Macmillan, 559 A.2d at 1282. 491 Id. at 1280. 492 Id. at 1267 (citation and internal quotation marks omitted). 493 Id. at 1268.
94 restructuring, “the Board and the Special Committee followed [management] in
lockstep. Neither took reasonable efforts to uncover the facts.”494 Because of the
deception in the change-of-control process, and because the board’s oversight failure
“afforded management the opportunity to indulge in the misconduct which
occurred,” entire fairness review was warranted.495
In recent years, Delaware courts have honed the pleading-stage distinctions
between a paradigmatic Revlon claim and a Mills theory warranting entire fairness
review.496 First, the rogue fiduciary must be materially interested, as by seeking
control or benefit from the company post-merger.497 Second, the board must be
“inattentive or ineffective” and permit the fiduciary’s manipulation.498 Third, so
494 Id. at 1269 (emphasis omitted). 495 Id. at 1279. 496 Of course, fraud on the board can also be perpetuated by an advisor. See, e.g., RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015). My discussion here focuses on the line between an overweening officer and a fraudster. 497 See Haley, 235 A.3d at 717, 719; City of Miami Gen. Empls.’ v. Comstock, 2016 WL 4464156, at *19 (Del. Ch. Aug. 24, 2016) (noting “plaintiff must allege that [the fiduciary] was acting out of self-interest and that he deceived the rest of the board into approving the transaction,” and declining to apply entire fairness because the fiduciary was not self- interested), aff’d, 158 A.3d 885 (Del. 2017); City of Warren Gen. Empls.’ Ret. Sys. v. Roche, 2020 WL 7023896, at *10 (Del. Ch. Nov. 30, 2020) (concluding the plaintiff failed to plead that the defendant fiduciaries were tainted by self-interest with respect to the buyout). 498 Roche, 2020 WL 7023896, at *15; see also Macmillan, 559 A.2d at 1279 (noting the board’s lack of oversight afforded the opportunity for mismanagement); Mindbody, 2020 WL 5870084 at *25 (considering whether “the Board was the passive victim of a rogue fiduciary” due to an informal, ill-equipped, and tardily-formed transaction committee); Kahn v. Stern, 183 A.3d 715, n.4 (Del. 2018) (TABLE) (noting that a variant of Macmillan claim exists where “impartial board members did not oversee conflicted members
95 enabled, the fiduciary must commit deception or manipulation, as by “deceiving an
independent board of directors into favoring a bidder”499 or “fail[ing] to disclose his
‘interest in the transaction to the board.’”500 Fourth, that deception must be
material.501 “[A]n omission is ‘material’ to a board if the undisclosed fact is relevant
and of a magnitude to be important to directors in carrying out their fiduciary duty
of care in decisionmaking.”502 Finally, the “key issue” is whether it is reasonably
conceivable that the deception “tainted the decisionmaking of [the] concededly
independent and disinterested directors[.]”503 The fiduciary’s allegedly deceptive or
sufficiently”); In re Xura, Inc. S’holder Litig., 2018 WL 6498677, at *4 (Del. Ch. Dec. 10, 2018) (discussing allegations of an inert special committee formed to evaluate and negotiate a transaction with a bidder, including an allegation that one of its members “did not even realize that the Special Committee existed or that he was a member of the committee until he learned about it at his deposition”). 499 Roche, 2020 WL 7023896, at *17 (citing Macmillan, 559 A.2d at 127, and also citing Stern, 183 A.3d at n.4, and also citing Comstock, 2016 WL 4464156, at *19); accord Comstock, 2016 WL 4464156, at *20. 500 Haley, 235 A.3d at 717 (quoting Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1995)); accord Mindbody, 2020 WL 5870084, at *23–24. 501 Mindbody, 2020 WL 5870084, at *23–25. 502 Id. at *23 (internal quotation marks omitted) (quoting Haley, 235 A.3d at 718). “[T]he term ‘material,’ when used in the context of a director’s obligation to be candid with the other members of the Board, is distinct from the use of the term ‘material’ in the quite different context of disclosure to stockholders in which an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” Haley, 235 A.3d at 719 (alteration and internal quotation marks omitted) (quoting Brehm, 746 A.2d at 259 n.49). 503 Roche, 2020 WL 7023896, at *15 (quoting Baker Hughes, 2020 WL 6281427, at *19).
96 manipulative conduct must cause the board to take action or inaction that was
outcome-determinative.
Thus, to elevate the standard of review for a paradigmatic Revlon claim, an
interested officer must be more than overweening; he must be fraudulent or outright
manipulative. The board must be more than supine; it must be deceived and permit
that deception. And the deception must affect the outcome. To raise the standard of
review on any less risks swallowing enhanced scrutiny in every paradigmatic Revlon
case.504
Garland was materially interested, and the Special Committee failed to
vigorously enforce its instructions or effectively manage conflicts. Garland misled
the Special Committee, failing to disclose that he met with Riverstone and Buyer
together, and saying instead that meetings with Buyer and Riverstone would occur
in the coming weeks, and that Buyer’s “approach the company…had come about
indirectly.”505 But the Special Committee’s deficiencies did not facilitate Garland’s
deception. The Special Committee oversaw and engaged in the sale process, and
504 See Macmillan, 559 A.2d at 1279 (“[J]udicial reluctance to assess the merits of a business decision ends in the face of illicit manipulation of a board’s deliberative processes by self-interested corporate fiduciaries. Here, not only was there such deception, but the board’s own lack of oversight in structuring and directing the auction afforded management the opportunity to indulge in the misconduct which occurred. In such a context, the challenged transaction must withstand rigorous judicial scrutiny under the exacting standards of entire fairness.”). 505 Compl. ¶ 140.
97 took measures to oversee Garland, including issuing repeated instructions on how
conflicted fiduciaries should behave and issuing a corrective memorandum after
learning of Garland’s April 15 Meeting.506 Importantly, Plaintiff’s argument seeking
entire fairness review depends on the allegation that “Garland breached the
Committee protocols.”507 Batkin told the Special Committee Garland had
discussions with Riverstone and Buyer concerning a potential acquisition, albeit
tardily and without the detail that Garland had met with them together.
The undisclosed fact that Garland had met with Riverstone and Buyer together
“is relevant and of a magnitude to be important to directors in carrying out their
fiduciary duty of care in decisionmaking.”508 The April 15 Meeting’s materiality is
evidenced by the Batkin Memo, which is the only memo sent during the process.
On May 15, the Batkin Memo informed the Special Committee that Garland had
discussions with Riverstone and Buyer concerning Buyer’s potential acquisition of
the Company. The Batkin Memo indicated that Buyer was interested in a transaction
and was willing to enter into a confidentiality agreement to engage in discussions.
But the Batkin Memo did not fully disclose that Garland met with Riverstone and
506 Id. ¶ 128. 507 D.I. 82 at 34. 508 Mindbody, 2020 WL 5870084, at *23 (internal quotation marks omitted) (quoting Haley, 235 A.3d at 718).
98 Buyer together and the impetus for, circumstances surrounding, and substance of
that meeting.
As for the Proxy, it discloses the fact of the meeting but is silent regarding its
timing, substance, and context. It inaccurately suggests that Garland disclosed the
April 15 Meeting immediately after it occurred—if Garland had so disclosed shortly
after the April 15 Meeting as the Proxy suggests, there would have been no occasion
to circulate the Batkin Memo weeks later. The Proxy also states that on May 2,
Garland “informed the Special Committee of his recent meeting with Riverstone
Representatives and [Buyer].”509 But the May 2 meeting minutes do not mention
Buyer, and state that Garland disclosed Riverstone had suggested taking the
Company private in conjunction with an unidentified third-party institutional
investor, but had “dropped the suggestion following consideration of conflicts and
certain contractual obligations of [Riverstone].”510 The May 2 meeting minutes were
therefore also misleading, as Garland had already identified and held a meeting with
Buyer.
To be sure, Garland’s tardy half-truths pale in comparison to the undisclosed
conflicts in Haley and Mindbody.511 They more resemble the immaterial early
509 Proxy at 40. 510 Compl. ¶ 127. 511 See Haley, 235 A.3d at 719 (“Plaintiffs have adequately alleged that the Board would have found it material that its lead negotiator had been presented with a compensation proposal having a potential upside of nearly five times his compensation at Towers, and
99 undisclosed management employment discussion in Comstock, as the Special
Committee would become fully aware of Riverstone and Buyer’s partnership, just
as the Comstock board would become aware of the undisclosed discussion.512 But
the Batkin Memo supports the inference that the Company’s fiduciaries considered
the April 15 Meeting material.
While the full story about the April 15 Meeting is material, its concealment
did not impact the Special Committee’s decisionmaking as Plaintiff suggests.
Garland’s belated half-truths about the meeting appear to have had no effect on the
process. The omitted fact that he actually spoke with Riverstone and Buyer together,
and the belated disclosure in the Batkin Memo, does not amount to “illicit
manipulation of the board’s deliberative process.”513 As in Comstock, Plaintiff does
that he was presented with this Proposal during an atmosphere of deal uncertainty and before they authorized him to renegotiate the merger consideration.”); Mindbody, 2020 WL 5870084, at *24 (offering a “catalogue[]” of “undisclosed conflicts”). 512 Comstock, 2016 WL 4464156, at *21 (“Plaintiff also alleges that Comstock deceived the board by failing to inform it of various steps he took while negotiating the transaction. For instance, plaintiff alleges that Comstock did not disclose an early discussion with Petrello regarding C&J management’s potential future contracts with New C&J, or Comstock’s motives for negotiating the transaction, as plaintiff interprets them. Significantly, however, plaintiff does not allege that management’s eventual future roles were never disclosed to the board, or that the critical deal terms Comstock negotiated, such as the EBITDA multiple, were hidden from the board.” (footnote omitted)). 513 Id. at *19 (quoting Macmillan, 559 A.2d at 1279).
100 not allege that Riverstone’s partnership with Buyer was never disclosed to the Board,
or that any terms Garland may have negotiated in those discussions were hidden.514
While Plaintiff contends the April 15 Meeting gave Riverstone and Buyer
entry to the sales process, the Board had already included Riverstone in the process.
Riverstone’s representative, Hunt, attended the first Board meeting and substantive
discussions of potential strategic alternatives.515 “The Board then solicited the views
of Riverstone” who it believed “may be interested in participating in a potential
transaction.”516
Plaintiff has not alleged how the meeting, the delayed and incomplete
disclosures, or the Special Committee’s lukewarm response harmed Brookfield,
caused the Board or Special Committee to disadvantage Brookfield, or enabled
Garland to continue any meaningful unprincipled conduct. The Special Committee,
with Batkin in the driver’s seat, engaged with Brookfield and afforded it the
opportunity to conduct extensive due diligence. Nor did Garland mislead the Special
Committee as to Brookfield’s bid; the Special Committee and its advisors
acknowledged the superior aspects of Brookfield’s bid, including its superior value.
Plaintiff does not allege that Garland “deceived the rest of the board into approving
514 Compare id. at *21, with Macmillan, 559 A.2d at 1279. 515 Compl. ¶¶ 92–94. 516 Id. ¶ 97 (emphasis omitted).
101 the transaction” or into rejecting Brookfield.517 Plaintiff does not plead facts to
support outcome-determinative deception.518
I end where I began, by noting that Plaintiff’s paradigmatic Revlon theory of
breach is incompatible with her fraud-on-the-board theory for entire fairness. Under
Plaintiff’s own breach theory, in which the Special Committee favored Riverstone’s
interest over that of company stockholders, the sales process outcome would have
been the same whether or not the Special Committee immediately learned the full
truth of Garland’s April 15 Meeting with Riverstone and Buyer.
b. Whether The Officer And Entity Defendants Form A Control Group Must Be Determined With The Benefit Of A Factual Record.
Plaintiff alleges the Officer Defendants stood on both sides of the transaction;
that Riverstone and the Officer Defendants, as Developer 2 stakeholders, competed
with the Company’s public stockholders for consideration; and that Riverstone and
the Officer Defendants retained equity in the post-Merger entity while public
stockholders were cashed out. Plaintiff contends the Entity and Officer Defendants
(together, the “Controller Defendants”) aggregated their sources of power and
517 See Comstock, 2016 WL 4464156, at *19. 518 Roche, 2020 WL 7023896, at *14–15; see also Comstock, 2016 WL 4464156, at *21 (describing the type of deceitful conduct necessary to trigger entire fairness).
102 influence to control the Company. Accordingly, entire fairness review may be
warranted if the Entity and Officer Defendants acted as a control group.519
“Delaware law imposes fiduciary duties on those who effectively control a
corporation.”520 The premise for contending that a controller owes fiduciary duties
“is that the controller exerts its will over the enterprise in the manner of the board
itself.”521 The controller analysis “must take into account whether the stockholder,
as a practical matter, possesses a combination of stock voting power and managerial
authority that enables him to control the corporation, if he so wishes.” 522 If a
controller or control group is present, entire fairness review arises “when the board
labors under actual conflicts of interest” stemming from the controller standing on
both sides of a challenged transaction or competing with the minority for
consideration.523 “The question whether a shareholder is a controlling one is highly
519 Despite Plaintiff’s deficient presentation of this theory for purposes of the standard of review, limited to a footnote in her answering brief, I consider whether she has pled a control group because she also asserts the Controller Defendants owe fiduciary duties and are liable for breaching them, and has briefed that those claims should survive Defendants’ motion under Rule 12(b)(6). See D.I. 82 at 34 n.66. 520 Voigt v. Metcalf, 2020 WL 614999, at *11 (Del. Ch. Feb. 10, 2020) (quoting Quadrant Structured Prods. Co. Ltd. v. Vertin, 102 A.3d 155, 183–84 (Del. Ch. 2014)). 521 Abraham v. Emerson Radio Corp., 901 A.2d 751, 759 (Del. Ch. 2006). 522 In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003). 523 FrontFour Cap. Gp. LLC v. Taube, 2019 WL 1313408, at *20 (Del. Ch. Mar. 11, 2019) (quoting Reis, 28 A.3d at 457, and citing Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997), and Kahn, 638 A.2d at 1115, and Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983), and In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *12 (Del. Ch. Oct. 2, 2009), and In re Delphi Fin. Gp. S’holder Litig., 2012 WL 729232, at *12
103 contextualized and is difficult to resolve based solely on the complaint.”524 “[T]here
is no magic formula to find control; rather, it is a highly fact specific inquiry.”525
Delaware cases have traditionally evaluated whether stockholders wielded
control over the corporation.526 This is unsurprising, as control manifests in whether
an individual or entity has the power to displace the will of the board, 527 and stock
n.57 (Del. Ch. Mar. 6, 2012), and also citing In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 487 (Del. Ch. 2013)). 524 Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5, 2006); accord In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *13 (Del. Ch. Mar. 28, 2018) (“Whether a large blockholder is so powerful as to have obtained the status of a ‘controlling stockholder’ is intensely factual and it is a difficult question to resolve on the pleadings.” (alterations and internal quotation marks omitted)); Cysive, 836 A.2d at 550–51 (same); see In re Zhongpin Inc. S’holders Litig., 2014 WL 6735457, at *9 n.33 (Del. Ch. Nov. 26, 2014) (“Whether or not a particular CEO and sizeable stockholder holds more practical power than is typical should not be decided at the motion to dismiss stage if a plaintiff pleads facts sufficient to raise the inference of control. To ignore real-world indicia of a stockholder’s actual power would depart from this Court’s precedent.”), rev’d on other grounds sub nom. In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173 (Del. 2015). 525 Calesa Assocs., L.P. v. Am. Cap., Ltd., 2016 WL 770251, at *11 (Del. Ch. Feb. 29, 2016) (citing In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *10 (Del. Ch. Oct. 24, 2014)); see Zhongpin, 2014 WL 6735457, at *6–7 (noting the inquiry of “whether or not a stockholder’s voting power and managerial authority, when combined, enable him to control the corporation . . . is not a formulaic endeavor and depends on the particular circumstances of a given case” (footnote and internal quotation marks omitted) (quoting Cysive, 836 A.2d at 553)). 526 E.g., In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 983 (Del. Ch. 2014) (“This action involves the novel claim that a holder of less than one percent of the stock of a Delaware corporation was a controlling stockholder and thus owed fiduciary obligations to the other stockholders of the corporation.”), aff’d sub nom. Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). 527 Superior Vision Servs., Inc. v. Reliastar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006) (considering “whether the actual control must be over the Board or whether separately negotiated contract rights can supply the requisite degree of control,”
104 ownership is the original vehicle for such displacement. A majority stockholder’s
control flows principally from its voting power, which translates into the power to
“alter materially the nature of the corporation and the public stockholders’
interests.”528
For a minority stockholder or an aggregate control group of minority
stockholders, fiduciary duties flow from aggregated sources of influence, including
voting power and softer sources of power.529 “It is impossible to identify or foresee
all of the possible sources of influence that could contribute to a finding of actual
and noting that, in evaluating whether a stockholder is a controller, “Delaware case law has focused on control of the board”). 528 Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43 (Del. 1994); see also Voigt, 2020 WL 614999, at *11 (“One method of pleading control sufficient to impose fiduciary duties is to allege that a defendant has the ability to exercise a majority of the corporation’s voting power.”). 529 See Corwin, 125 A.3d at 307 (noting the Delaware Supreme Court’s “instructions” to “look[] for a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock” (footnote omitted)); Emerald P’rs v. Berlin, 726 A.2d 1215, 1221 n.8 (Del. 1999) (noting that minority stockholdings with “some additional allegation of domination through actual control of corporate conduct” may give rise to controller status); In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (considering “stockholders who, although lacking a clear majority, have such formidable voting and managerial power that they, as a practical matter, are no differently situated than if they had majority voting control”); see also 8 Del. C. § 203(c)(4) (defining “[c]ontrol” as “the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract or otherwise”); 17 C.F.R. § 230.405 (defining “control” as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise”).
105 control.”530 The many sources of influence and of control that could contribute to a
finding of actual control include:
(i) relationships with particular directors, (ii) relationships with key managers or advisors, (iii) the exercise of contractual rights to channel the corporation into a particular outcome, and (iv) the existence of commercial relationships that provide the defendant with leverage over the corporation, such as status as a key customer or supplier.531
“Broader indicia of effective control also play a role,”532 and include, but are not
limited to, ownership of a significant equity stake; the right to designate directors;
contractual augmentation of the power of a minority stockholder or board-level
position; and the ability to exercise outsized influence in the board room or on
committees, as through roles like CEO, Chairman, or founder.533
Here, Plaintiff’s control group theory aggregates the Officer Defendants’
stock holdings and management roles with the Entity Defendants’ contractual,
operational, and structural pull, even though the Entity Defendants are not
stockholders. Plaintiff pegs the Entity Defendants as the group’s primary source of
power, pointing to the Company’s formation to serve Riverstone, the importance of
Developer 2’s commercial relationship with the Company, Riverstone’s ability to
530 Voigt, 2020 WL 614999, at *12 (citing Basho Techs. Holdco B, LLC v. Georgetown Basho Invs., LLC, 2018 WL 3326693, at *26 (Del. Ch. July 6, 2018), aff’d sub nom. Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100 (Del. 2019) (TABLE)). 531 Id. (citing Basho, 2018 WL 3326693, at *26). 532 Id. (citing Basho, 2018 WL 3326693, at *27). 533 Id. (citing Basho, 2018 WL 3326693, at *27).
106 install insiders as officers and directors at both the Company and Developer 2, and
the Consent Right. Accordingly, this case presents an interesting wrinkle. It is an
open question under Delaware law whether the Entity Defendants’ soft power alone,
anchored in historical and commercial ties and the contractual Consent Right, can
support including the Entity Defendants in a control group and imposing fiduciary
duties.
This Court has dismissed fiduciary duty claims against a group of alleged
controllers where some or all of the members held no stock in the company. 534 For
example, Klein v. H.I.G. Capital, L.C.C. considered a “novel” control group theory
in which the group’s purported members were not alleged to have owned any
company stock at the time of the transaction in question.535 Relying on the accurate
observation that Delaware law looks to substance rather than form when considering
who wields control sufficient to impose fiduciary duties, the plaintiff argued that the
group’s members “were effectively controlling stockholders of the Company.”536
The Court rejected this position: “[i]t [wa]s not alleged that [the defendant] owned
any stock of [the company] until the Transactions closed and thus, by definition, [the
534 See, e.g.¸ Skye Min. Invs., LLC v. DXS Cap. (U.S.) Ltd., 2020 WL 881544, at *24–29 (Del. Ch. Feb. 24, 2020); Klein v. H.I.G. Cap., L.L.C., 2018 WL 6719717, at *13 (Del. Ch. Dec. 19, 2018); Forsythe v. ESC Fund Mgmt. Co. (U.S.), 2007 WL 2982247, at *12–13 (Del. Ch. Oct. 9, 2007). 535 2018 WL 6719717, at *13. 536 Id.
107 defendant] could not have been part of a ‘group’ of Company stockholders when the
Transactions were negotiated.”537
But after remarking on the hurdle of stock ownership, the Court went on to
make the “more general[]” observation that the complaint was “devoid of any
allegations that [the defendant] was a party to any agreement or arrangement that
controlled the votes of any shares of the Company’s stock,” or that it “otherwise took
any action to exercise control over the directors of [the company] before the parties
entered into the Transactions.”538 Rather, the most that could be reasonably inferred
from alleged sources of power other than stock ownership was that the purported
controller “had the potential to later exercise control over the Company,” which “is
not enough to impose fiduciary obligations.”539
And Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited considered
claims against an alleged control group of six, only two members of which held any
537 Id. 538 Id. 539 Id. (emphasis added) (citing In re Sea-Land Corp. S’holders Litig., 1987 WL 11283, at *5 (Del. Ch. May 22, 1987) (reasoning that the “potential ability to exercise control is not equivalent to the actual exercise of that ability,” and only actual control over the board’s decision-making process suffices to impose fiduciary duties (emphasis omitted)), and also citing Gilbert v. El Paso Co., 490 A.2d 1050, 1056 (Del. Ch. 1984) (“Plaintiffs’ contention that Burlington occupied a fiduciary role because of its potential for control is subject to the same infirmity as its contract argument. . . . State law claims of breach of contract and breach of fiduciary relationship must subsist on the actuality of a specific legal relationship, not in its potential.”), aff’d, 575 A.3d 1131 (Del. 1990)).
108 company stock.540 Because the alleged group owned less than 50% of the
outstanding stock, the Court observed that plaintiff was required to plead facts
“allow[ing] a reasonable inference that the Alleged Controllers exercised such
formidable voting and managerial power that, as a practical matter, they were no
differently situated than if they had majority voting control.” 541 As to the four
alleged nonstockholder control group members, the Court concluded it was “not
reasonably conceivable they exercised actual control over the company because they
“owned no [company] units, appointed none of [the company]’s Board members and
held no contractual blocking rights.”542
But as to the two minority stockholders, the Court found it reasonably
conceivable that they exercised control, aggregating their stock with their
contractual blocking rights.543 The Court emphasized that “the focal point” of the
control analysis was the stockholders’ blocking rights and how they used them.544
540 Skye Min. Invs., 2020 WL 881544, at *24–29. 541 Id. at *26 (alterations and internal quotation marks omitted) (quoting In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 665 (Del. Ch. 2013)). 542 Id. at *27 (emphasis in original). 543 Id. at *26. 544 Id. (citing Basho, 2018 WL 3326693, at *25 (“If a defendant wields control over a corporation” either “generally or with regard to a particular transaction,” then “the defendant takes on fiduciary duties, even if the defendant is a stockholder who otherwise would not owe duties in that capacity.”), & *26 (noting that a plaintiff can show a minority blockholder’s domination and control in various ways including personal relationships with board members, contractual rights, commercial relationships, de facto ability to
109 Relying on Basho Technologies v. Georgetown Basho Investors,545 the defendants
argued that “a mere blocking right standing alone is highly unlikely to support either
a finding or a reasonable inference of control.”546 The Court agreed with that
statement, but held the plaintiff had alleged more.547 As alleged, the blocking rights
“amounted to a self-destruct button” that allowed the stockholders to “wield control
by driving [the company] into the ground if it suited their interests.”548 With this
“on/off switch for [the company] that could be, and allegedly was, manipulated by
[the stockholders] to serve their interests at the expense of [the company],” 549 the
stockholders “exercised their leverage with the Blocking Rights to steer [the
company’s operating subsidiary] off the cliff into the bankruptcy ravine below,” by
allowing the stockholders “to block all of [the company]’s efforts to finance any of
its ongoing operations.”550 As the Court observed, “[w]hen blocking rights empower
a minority investor to channel the corporation into a particular outcome, they
remove directors or the company’s own characterizations of the minority blockholder’s influence)). 545 2018 WL 3326693 (Del. Ch. July 6, 2018). 546 Skye Min. Invs., 2020 WL 881544, at *27 (internal quotation marks omitted) (referring to Basho, 2018 WL 3326693, at *26 n.315). 547 Id. 548 Id. at *26 (internal quotation marks omitted). 549 Id. 550 Id. at *27 (emphasis in original).
110 contribute to an inference of control.”551 The Skye plaintiffs “ma[d]e an even
stronger case as the Blocking Rights did more than channel [the company] to a
particular outcome,” as “the Blocking Rights gave [the stockholders] the unilateral
power to shut [the company] down—full stop.”552 In the end, the Court declined to
impute the stockholders’ blocking right to the nonstockholders, who otherwise
brought no power to the table, and so declined to find a control group.553
Klein and Skye Mineral Investors concluded that the members of a purported
control group that did not own stock were not part of the group. But both looked
beyond the bounds of stock ownership to other sources of soft power and left open
the possibility that, if a plaintiff pleads sufficient sources of influence, controller
status and its attendant fiduciary duties may extend to a nonstockholder.554 These
fact-specific evaluations of nonstockholder members of alleged control groups
followed this Court’s consideration of the possibility that fiduciary duties would
extend to a nonstockholder in In re EZCORP Inc. Consulting Agreement Derivative
Litigation.555 That consideration built on the United States Supreme Court’s
551 Id. (internal quotation marks omitted) (quoting Basho, 2018 WL 3326693, at *29). 552 Id. (internal quotation marks omitted) (quoting Basho, 2018 WL 3326693, at *29). 553 See id. at *27–29. 554 See id.; Klein, 2018 WL 6719717, at *13. 555 2016 WL 301245, at *8–10 (Del. Ch. Jan. 25, 2016).
111 decision in Southern Pacific Co. v. Bogert,556 which observed that the “the doctrine
under which majority stockholders exercising control are deemed trustees for the
minority” was not avoided simply because the defendant “did not itself own directly
any stock” in the company, but exerted its control through its subsidiary that held
the majority of the company’s stock.557 The Supreme Court stated,
[T]he doctrine by which the holders of a majority of the stock of a corporation who dominate its affairs are held to act as trustee for the minority does not rest upon such technical distinctions. It is the fact of control of the common property held and exercised, not the particular means by which or manner in which the control is exercised, that creates the fiduciary obligation.558
Chancellor Wolcott similarly held in the seminal decision in Eshleman v. Keenan;559
affirming that decision, the Delaware Supreme Court ruled that “the formal
corporate vehicle” behind a transaction does not necessarily matter, as “[t]he
conception of corporate entity is not a thing so opaque that it cannot be seen
through.”560 Drawing on Southern Pacific and Eshleman, EZCORP held that
fiduciary duties extended to an individual defendant that was the company’s
556 250 U.S. 483 (1919). 557 Id. at 491–92. 558 Id. at 492. 559 187 A. 25 (Del. Ch. 1936), aff’d, 2 A.2d 904 (Del. 1938). 560 EZCORP, 2016 WL 301245, at *9 (quoting Eshleman, 2 A.2d at 908).
112 “ultimate controller,” even though he exercised control only indirectly and did not
himself own stock.561
Fiduciary duties arise from the separation of ownership and control. 562 The
essential quality of a fiduciary is that she controls something she does not own. A
trustee need not (and does not) own the assets held in trust; directors need not own
stock. Even a third party lender that influences extraordinary influence over a
company may be liable for acting negligently or in bad faith.563 If a stockholder, as
one co-owner, can owe fiduciary duties to fellow co-owners because the stockholder
controls the thing collectively owned, surely an “outsider[]” that controls something
it does not own owes duties to the owner.564 “[I]t is a maxim of equity that ‘equity
regards substance rather than form,’”565 and “the application of equitable principles
561 Id. at *10. 562 See S. Pac. Co., 250 U.S. at 492. 563 Basho, 2018 WL 3326693, at *26 (citing NVent, LLC v. Hortonworks, Inc., 2017 WL 449585 at *9–10 (Del. Super. Feb. 1, 2017) (applying California law)). 564 EZCORP, 2016 WL 301245, at *9 (citing S. Pac. Co., 250 U.S. at 488, and Sterling v. Mayflower Hotel Corp., 93 A.2d 107, 109–10 (Del. 1952)). 565 Id. (quoting Monroe Park v. Metro. Life Ins. Co., 457 A.2d 734, 737 (Del. 1983), and citing Gatz v. Ponsoldt, 925 A.2d 1265, 1280 (Del. 2007)). Not every member of a control group needs to be similarly situated in that they each own stock. Envision a particular task that requires a truck, tools, and know-how. A first person owns a truck, a second owns the tools, and the third has the know-how. The three individuals can come together and complete the task, and are responsible for the quality of its completion. Their contributions need not be in identical ratios; that they do not each possess one truck part, one tool, and one skill is no reason to absolve them of their responsibility for the final work product. Similarly, holders of voting and soft power can work together to exert control without being similarly situated. The Officer Defendants
113 depends on the substance of control rather than the form[;] it does not matter whether
the control is exercised directly or indirectly.”566 “[T]he level of stock ownership is
not the predominant factor, and an inability to exert influence through voting power
does not foreclose a finding of control.”567 Thus, “Delaware corporate decisions
consistently have looked to who wields control in substance and have imposed the
risk of fiduciary liability on that person,”568 and “[l]iability for breach of fiduciary
duty therefore extends to outsiders who effectively controlled the corporation.”569
With this foundation, and considering evolving market realities and corporate
structures affording effective control, Delaware law may countenance extending
contributed stock ownership and executive leadership positions; Developer 2 had its commercial relationship with the Company; and Riverstone had the Consent Right, the Officer Defendants, and Developer 2. When aggregated, those sources of influence enabled the Controller Defendants to complete the task: exercising control over the Company to cause a merger with Buyer. The fact that the different actors held different sources of disaggregated power does not dilute their combined effectiveness, and I can see no reason why it should absolve the actors of the consequences of their control. 566 EZCORP, 2016 WL 301245, at *9–10. 567 FrontFour, 2019 WL 1313408, at *21; see also Crimson Expl., 2014 WL 5449419, at *10 (collecting cases and noting that “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,” but “[i]nstead, the scatter-plot nature of the holdings highlights the importance and fact-intensive nature of the actual control factor”); Calesa Assocs., 2016 WL 770251, at *11 (discussing Crimson Exploration and noting that it “found no correlation between the percentage of equity owned and the determination of control status”). 568 EZCORP, 2016 WL 301245, at *9. 569 Id. (emphasis added) (citing S. Pac. Co., 250 U.S. at 488, and also citing Sterling, 93 A.2d at 109–10).
114 controller status and fiduciary duties to a nonstockholder that holds and exercises
soft power that displaces the will of the board with respect to a particular decision
or transaction.
Here, in the context of the Company’s end-stage transaction, Plaintiff asks the
Court to consider Riverstone’s Consent Right, its commercial power through
Developer 2, and role as the Company’s creator, together with the Officer
Defendants’ managerial power and some stockholdings. And so, with the door left
open by EZCORP, Skye Mineral Investors, and Klein, I proceed with the well-
established control group analysis to consider whether the Controller Defendants
collectively owed duties with respect to the Merger.
To plead a control group, the plaintiff must first plead the connection among
those in the purported control group was “legally significant” to subject the members
to fiduciary duties.570 Plaintiff must then allege that the control group exercised
de facto control by actual domination or control of the board generally, or actual
domination or control of the corporation, its board, or the deciding committee with
respect to the challenged transaction.571
I first consider whether Plaintiff has alleged that the Controller Defendants
were bound in a legally significant way. The Delaware Supreme Court recently
570 Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 252 (Del. 2019). 571 See FrontFour, 2019 WL 1313408, at *22.
115 addressed the requirements for pleading a control group in Sheldon v. Pinto
Technology Ventures, L.P., adopting the “legally significant connection” standard
applied by multiple decisions of this Court:
To demonstrate that a group of stockholders exercises control collectively, the [plaintiff] must establish that they are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement—to work together toward a shared goal. To show a legally significant connection, the [plaintiff] must allege that there was more than a mere concurrence of self-interest among certain stockholders. Rather, there must be some indication of an actual agreement, although it need not be formal or written.572
Both historical ties and transaction-specific ties may support an inference of an
actual agreement.573
Plaintiff has alleged facts giving rise to the reasonable inference that the
alleged group had an “actual agreement” to work together in connection with the
sales process.574 Plaintiff identifies relevant historical and transactional ties,
reflected in the Company’s inception and its capital structures and management, and
the Consent Right. Plaintiff relates Riverstone’s long history with the Officer
Defendants and the Company, alleging that “[t]he extent and significance of the
572 220 A.3d at 251–52 (footnotes and internal quotation marks omitted) (quoting Crimson Expl., 2014 WL 5449419, at *15, and also quoting Carr v. New Enter. Assocs. Inc., 2018 WL 1472336, at *10 (Del. Ch. Mar. 26, 2018)). 573 See Garfield v. BlackRock Mortg. Ventures, LLC, 2019 WL 7168004, at *8–9 (Del. Ch. Dec. 20, 2019) (applying the principles in Sheldon, as well as those in In re Hansen Med. S’holders Litig., 2018 WL 3025525 (Del. Ch. June 18, 2018)). 574 See id. at *9–10.
116 relationship between the Officer Defendants and Riverstone cannot be overstated”
as “Riverstone has been their co-investor, partner, employer, sponsor, and financial
patron” for over a decade.575 In 2009, Riverstone and the Officer Defendants
together established Developer 1, “free[ing]” the Officer Defendants of their prior
employer which the Officer Defendants touted as “a great thing.”576 The Officer
Defendants believed they “found the perfect partner in Riverstone,” as Riverstone
was similarly “interested in investing in renewables,” “valued [the Officer
Defendants’] team,” and acted as a “new backer.”577
Riverstone delivered, and its relationship with the Officer Defendants
reverberated through the Company and its upstream developers. Riverstone
appointed the Officer Defendants to a team of fiduciaries that simultaneously served
the Company and Developer 1, and then Developer 2. The Officer Defendants also
invested in Developer 1, the Company, and Developer 2, and retained equity in the
post-Merger entity.
The connection ran deeper than overlapping appointments and investments.
Riverstone, via Developer 1, and the Officer Defendants created and molded the
Company to serve Riverstone’s needs and purchase and operate Developer 1’s
575 Compl. ¶ 45. 576 Id. 577 Id.
117 projects. Riverstone and Developer 1 used the Company’s spinoff and IPO to further
their shifting needs, meet and profit off increased demand in the energy sector, and
grow Developer 2 via Pattern Vision 2020. After the IPO, Riverstone retained
control over the Company, as Developer 2’s continued symbiotic relationship with
the Company was critical to achieving Pattern Vision 2020’s growth targets. Via
Developer 1, Riverstone controlled approximately 67.9% of the Company’s stock
and a majority of the Board, and retained the Consent Right over the Company’s
major transactions.578
Riverstone then tweaked its relationship with the Company. To retain veto
power over a change of control at the Company after selling all its equity, Riverstone
retained the Consent Right and loyal Riverstone personnel on the Board and in the
Company’s C-suite. The Company and Developer 2 agreed that Developer 2 had
contractual control over the Company in their Purchase Rights Agreement.579
As transaction-specific ties, Plaintiff alleges that the Company’s fiduciaries
with longtime Riverstone ties, including the Officer Defendants, tipped the scales to
secure a transaction with the Entity Defendants’ preferred bidder.580 Plaintiff has
578 See id. ¶¶ 47, 49, 50. 579 Id. ¶ 66. 580 The allegations against the Officer Defendants and their potential liability are discussed further infra. Although this discussion refers to the Officer Defendants generally and collectively, as will be discussed, Plaintiff has failed to state claims against Armistead and Pedersen.
118 alleged that Browne and the Officer Defendants facilitated Riverstone’s influence
over the sales process. And sometime in early 2018, with access to the Company’s
confidential information, Riverstone and Goldman explored a Company take-
private, but abandoned that effort; Riverstone’s insiders at the Company picked up
where it left off. The Officer Defendants began considering a sales process without
the Board’s knowledge, even retaining an advisor to prepare an analysis. With
Garland taking the lead, the Officer Defendants initiated the sales process at a time
when the Company was independently viable and achieving Pattern Vision 2020’s
milestones as planned and when there was no exigent or apparent need to sell. They
did so at a Board meeting that a Riverstone representative attended, and solicited
Riverstone’s opinion and identified it as a potential acquirer.
During the process and without the Special Committee’s authorization,
Garland met secretly with Riverstone and Riverstone’s preferred bidder, Buyer. The
Officer Defendants introduced Riverstone-friendly Goldman into the process.
Browne attended numerous Special Committee meetings, including executive
sessions. Garland and Elkort pressed the Consent Right, asserting that “the need for
[Riverstone’s] support for any potential . . . transaction should not be underestimated
because [Riverstone’s] rights to consent that would likely be implicated by the
proposed transaction appeared to be very broad.”581 And the Officer Defendants
581 Compl. ¶ 117.
119 pushed the Entity Defendants’ agenda, as reflected in the bidders’ perception that
the Company was tightly bound to Riverstone and Developer 2.582
Having alleged a legally significant connection, Plaintiff must also allege that
the control group exercised de facto control by actual domination or control of the
board generally, or actual domination or control of the corporation, its board, or the
deciding committee with respect to the challenged transaction.583 This need not be
a “pervasive” showing.584
“Invariably, the facts and circumstances surrounding the particular transaction
will loom large.”585 “Rarely (if ever) will any one source of influence or indication
of control, standing alone, be sufficient to make the necessary showing. A
reasonable inference of control at the pleading stage typically results when a
confluence of multiple sources combines in a fact-specific manner to produce a
particular result.”586 Therefore, the Court must holistically evaluate sources of
influence and authority, as “[d]ifferent sources of influence that would not support
582 See id. ¶¶ 151, 180–81. 583 See FrontFour, 2019 WL 1313408, at *22. 584 See Superior Vision Servs., 2006 WL 2521426, at *4 (“[P]ervasive control over the corporation’s actions is not required.”). 585 Voigt, 2020 WL 614999, at *13 (citing Basho, 2018 WL 3326693, at *28) (“A plaintiff may allege facts indicating that a defendant insisted on a particular course of action even though other fiduciaries or advisors resisted or had second thoughts. Or a plaintiff may allege that the defendant engaged in pressure tactics that went beyond ordinary advocacy to encompass aggressive, threatening, disruptive, or punitive behavior.”). 586 Id. (alterations omitted) (quoting Basho, 2018 WL 3326693, at *28).
120 an inference of control if held in isolation may, in the aggregate, support an inference
of control.”587 If that authority takes the form of a contractual right, that right must
give the nonstockholder power akin to “‘operating the decision-making machinery
of the corporation’ (a ‘classic fiduciary’),” rather than “‘an individual who owns a
contractual right, and who exploits that right,’ forcing a corporation to ‘react’ (which
does not support a fiduciary status).”588 The contractual right must confer control
over the board.589 Transaction-specific context is important: for example, a consent
right to a change of control carries more transactional influence in the context of an
end-stage transaction than it would in others.590 Whether such a right translates to
587 Id. 588 Skye Min. Invs., 2020 WL 881544, at *27 n.330 (alterations omitted) (quoting Thermopylae Cap. P’rs, L.P. v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch. Jan. 29, 2016)). 589 See KKR, 101 A.3d at 994 (contemplating a contractual right “to veto any action of the board”); Superior Vision Servs., 2006 WL 2521426, at *4 (noting a contractual right must afford control over the corporate decision-making process); Cox Commc’ns, 2006 WL 1586375, at *5 (finding control in a low stockholder stake and “the ability to shut down the effective operation of the At Home board of directors by vetoing board actions”); Acp Master, Ltd. v. Sprint Corp., 2016 WL 3566363, at *2 (Del. Ch. June 30, 2016) (finding control supported by “veto power over almost all important business actions at [the Company] under the company’s governing documents”). 590 See Cox Commc’ns, 2006 WL 1586375, at *5 (noting “[t]here is no case law in Delaware, nor in any other jurisdiction that this Court is aware of, holding that board veto power in and of itself gives rise to a shareholder’s controlling status” where such veto power was never actually wielded, but considering such veto power as “significant” to “coercive leverage” because the veto right conferred “the ability to shut down the effective operation of the . . . board”, and when combined with other soft power, might also confer the power to tilt a transaction (emphasis in original)); see KKR, 101 A.3d at 994 (considering “coercive power that stockholder could wield over the board’s ability to independently decide whether or not to approve the merger” as distinct from constraint of
121 control also depends on what other sources of soft power may be aggregated with
it.591
Plaintiff has not established that the Controller Defendants had the ability to
exercise a majority of the corporation’s voting power via stock ownership: not even
close. At the time of the Merger, the owners of Developer 2, including the Officer
Defendants, slightly more than 10% of the Company’s common stock; Riverstone
and Developer 2 held no stock in the Company.592 Accordingly, Plaintiff’s control
theory principally relies on the Controller Defendants’ soft sources of power.
The Entity Defendants had three sources of soft power. First, as explained,
the long history between Riverstone, Browne, and the Officer Defendants, amplified
by the officers’ significant Company roles as founders, CEO, executive vice
presidents, COO, chief compliance officer, and general counsel supports the
reasonable inference that Riverstone and Developer 2, via the Officer Defendants,
had “the ability to exercise outsized influence in the board room or on
the “business or strategic options available to the corporation”); Basho, 2018 WL 3326693, at *29 (considering contractual rights to limit financing wielded “to cut off the Company’s access to other sources of financing” when the company was in a “position of maximum financial distress” (emphasis added)). 591 See Cox Commc’ns, 2006 WL 1586375, at *4–5. 592 See Compl. ¶ 249 (identifying the stockholdings of PSP and Company management, which equaled roughly 10.7% of the Company’s outstanding stock and 9.7% of shares voted in favor of the Merger).
122 committees.”593 Second, and relatedly, Riverstone controlled Developer 2, an
essential part of the Company’s upstream supply chain, supporting the inference of
even more Riverstone “leverage over” the outcome of the sales process.594 With
these two sources of soft power, Riverstone pervaded the Company’s C-suite,
boardroom, and supply chain.
The third source of soft power, the Consent Right, is contractual, and is the
Entity Defendants’ direct source of control over the Company’s fate. “[V]eto power
is significant for analysis of the control issue.”595 In the context of a sales process,
Riverstone’s power to veto a transaction replicated the veto power of a majority
stockholder’s vote, even after Developer 1 sold off its interest in the Company. And
Riverstone used it to that effect, flexing the Consent Right before the Special
Committee and bidders to “channel the corporation into a particular outcome,”596
specifically cashing out public stockholders and internalizing Developer 2.
593 Voigt, 2020 WL 614999, at *12. 594 Id.; see also Cox Commc’ns, 2006 WL 1586375, at *5 (noting the Company’s operational dependence on the defendants offered leverage and contributed to control); Acp Master, Ltd., 2016 WL 3566363, at *2 (noting a stockholder that is a company’s “only significant customer” may “exert control” and “have significant leverage” (alterations omitted) (quoting Cox Commc’ns, 2006 WL 1586375, at *5)). As reflected by the Company’s many third-party bidders, its structure did not appear to “limit [the Company’s] value-maximizing options,” and is not the source of “Plaintiff[’s] real grievance” as in KKR. See KKR, 101 A.3d at 994; see also Corwin, 125 A.3d at 307–08 (quoting, analyzing, and affirming the Court of Chancery’s decision in KKR). 595 Cox Commc’ns, 2006 WL 1586375, at *5. 596 Voigt, 2020 WL 614999, at *12.
123 The Consent Right’s effect was outsized due to Riverstone’s other sources of
soft power. Even though advisors and Brookfield saw the Consent Right was readily
circumvented, all understood Riverstone’s approval was required, conditioned on
acquisition of Developer 2, no matter the transaction’s structure. The Company’s
advisors acknowledged early in the process that a transaction with Brookfield could
be structured to avoid the Consent Right, stating that the parties would “need to
structure the transaction as a merger of [TerraForm] into a subsidiary of [the
Company] due to” and that doing so would “not affect the economic terms of the
transaction.”597 But from the start, Garland insisted to the Special Committee that
any transaction with Brookfield would trigger the Consent Right.598 And Garland
and Elkort suggested to the Special Committee that Riverstone had “broad” consent
rights such that Riverstone would have to approve of any merger transaction
involving the Company.599
The Consent Right loomed large in negotiations with Brookfield. When
Brookfield submitted an offer that would exclude Developer 2, Evercore and
Goldman told Brookfield that “Riverstone has a consent right with respect to a
merger of [the Company], and Riverstone will not provide such consent to a
597 Compl. ¶ 121; see also id. ¶ 139. 598 See, e.g., id. ¶ 8. 599 Id. ¶¶ 117, 130.
124 transaction in which [TerraForm] becomes the parent company of [the
Company].”600 At first, Brookfield proposed the Company acquire TerraForm in a
transaction that excluded Developer 2 “so that no Riverstone consent is required in
connection with the transaction.”601 Brookfield explained:
We had previously been notified by your advisors that Riverstone has a consent right with respect to a merger of [the Company], and Riverstone will not provide such consent to a transaction in which [TerraForm] becomes the parent company of [the Company]. As you are aware, we, at your request, restructured the proposed transaction with [the Company] as the surviving parent company so that no Riverstone consent is required in connection with this proposed transaction.602
Even with the Consent Right so circumvented, the Special Committee worried
Riverstone would sue to block a transaction that did not involve Developer 2.603
Riverstone expressed it would not consent to any transaction with Brookfield and
600 Id. ¶ 164. 601 Id. ¶ 166. 602 Id. ¶ 173 (emphasis omitted). 603 Id. ¶ 171. Plaintiff contends that the Entity Defendants “threaten[ed] meritless litigation in the event a merger agreement was entered with Brookfield and TerraForm that did not satisfy Riverstone’s demands.” D.I. 82 at 5; see Compl. ¶¶ 15, 171, 177, 180, 260, 306, 311(d), 317. As support for this theory, Plaintiff points to Shah’s September 10 letter to the Board that acknowledged the Board was not “free to accept certain types of transactions without prior Riverstone consent or, as we understand, any transaction not supported by Riverstone without attracting Riverstone litigation risk.” Compl. ¶¶ 179–80. While the Complaint and the documents integral to it suggest that Riverstone was willing to take necessary steps to enforce the Consent Right in the event of a breach, they do not support Plaintiff’s sweeping allegations of overt and explicit threats. Those allegations must be developed through discovery.
125 TerraForm and would be displeased with the Company if it entered a deal that
circumvented the Consent Right.604 By September 2019, Brookfield understood the
state of play, as reflected in its letter to the Special Committee after meeting with
Riverstone:
Our understanding is that the relationship between the [] Board and Riverstone is complex. The Board has a fiduciary duty to shareholders of [the Company] but is not free to accept certain types of transactions without prior Riverstone consent or, as we understand, any transaction not supported by Riverstone without attracting Riverstone litigation risk.605
After meeting with Riverstone, Brookfield was unwilling to proceed with a
transaction structure that avoided the Consent Right, placing the Consent Right back
in play. Brookfield remained willing to move forward if Riverstone consented to
the deal and the parties agreed to Riverstone’s requested amendments of existing
contractual arrangements.606
Riverstone’s outsized role is reflected in the process itself. Riverstone had the
ability to meet with bidders, review and assess their offers, and weigh in, many times
before the Special Committee had considered the proposal. Bidders believed that
Riverstone’s satisfaction was essential to closing any deal, and accurately perceived
Developer 2 and the Company as a bundled buy-one-get-one package. Specifically,
604 Compl. ¶ 15. 605 Id. ¶ 179 (emphasis omitted). 606 Id. ¶ 180.
126 Party D acknowledged that Riverstone was one of “the three legs of the stool that
are critical to accomplishing our objective of acquiring and combining [the
Company] and [Developer] 2.”607 Brookfield stated that “the Board and
management wish to also internalize [Developer 2] as part of this transaction.”608
Brookfield acknowledged that it was not “in anyone’s best interests to engage with
Riverstone in a manner that creates animosity or material litigation,” and believed
that “no deal could be completed without the consent of Riverstone even though it
had no legal right to block a properly structured transaction.”609
Thus, having determined that the Controller Defendants are connected in a
legally significant way, it may be that their aggregate sources of power are sufficient
to establish a control group, as they allowed the Controller Defendants to drive the
outcome of the sales process and favor Buyer. But because this inquiry is highly
fact intensive, I decline to make a definitive determination that the Controller
Defendants operated as a control group owing fiduciary duties with respect to the
transaction and that entire fairness therefore applies.610 The Controller Defendants’
duties and resultant standard of review can only be known after the record is
607 Id. ¶ 181. 608 Id. ¶ 151 (emphasis added). 609 Id. ¶ 180. 610 See, e.g., In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192, at *5–6 (Del. Ch. May 22, 2000) (determining the controlling stockholder issue at summary judgment); Cysive, 836 A.2d at 552 (determining the controlling stockholder issue post-trial).
127 developed through discovery.611 I also decline to rule on the Motions to dismiss
Count VI until a later stage in these proceedings.612
*****
While discovery may shed light on facts that support increasing the standard
of review, at this stage, Plaintiff’s Revlon theory will be considered through the lens
of enhanced scrutiny because Company stockholders received cash for their shares.
This is so unless Defendants can demonstrate they should be afforded unrebuttable
protection under the business judgment rule via a Corwin cleansing vote.613 I turn
611 See In re Tesla Motors, Inc., 2018 WL 2006678, at *3 (Del. Ch. Apr. 27, 2018) (explaining the Court’s intention to merely hold plaintiffs had met their pleading-stage burden, but left the standard of review to be determined). 612 See Ct. Ch. R. 12(d) (“The defenses specifically enumerated (1)-(7) in paragraph (b) of this rule, whether made in a pleading or by motion, and the motion for judgment mentioned in paragraph (c) of this rule, shall be heard and determined before trial on application of any party, unless the Court orders that the hearing and determination thereof be deferred until the trial.”); see also Spencer v. Malik, 2021 WL 719862, at *5 (Del. Ch. Feb. 23, 2021) (“A party does not have a right to a pleading-stage ruling. Rule 12(d) states that pleading- stage motions brought under Rule 12 shall be heard and determined before trial on application of any party, unless the Court orders that the hearing and determination thereof be deferred until the trial. Not all disputes can or should be resolved at the pleading stage. Given the importance of the issue presented, the limited briefing provided by the parties, and the early stage of the case, the question . . . is deferred until after trial. The motion for judgment on the pleadings on this issue is denied on that basis.” (internal quotation marks omitted)); Slingshot Techs., LLC v. Acacia Rsch. Corp., 2021 WL 1224828, at *3 (Del. Ch. March 30, 2021) (“Under Rule 12(a)(1), a court may postpone the disposition of a pleading stage motion until a later stage of the case, including until the trial on the merits. Rule 12(d) reiterates this point, noting that a court should address a Rule 12(b)(6) motion in a preliminary hearing unless the court orders that the hearing and determination thereof be deferred until the trial.” (alterations and internal quotation marks omitted)). 613 See KCG Hldgs., 2019 WL 2564093, at *10.
128 next to whether Plaintiff has stated a nonexculpated claim in view of Revlon, and
then turn to whether cleansing has occurred under Corwin.
2. Plaintiff Has Stated A Nonexculpated Claim For Breach Against The Director Defendants.
The duties of care and loyalty “are the traditional hallmarks of a fiduciary who
endeavors to act in the service of a corporation and its stockholders” and “[e]ach of
these duties is of equal and independent significance.”614 The duty of care requires
the directors of a company to act on an informed basis.615 It also “requires a director
to take an active and direct role in the context of a sale of a company from beginning
to end.”616 “A breach of the duty of care exists where the fiduciary acted with gross
negligence.”617
“[T]he duty of loyalty mandates that the best interest of the corporation and
its shareholders takes precedence over any interest possessed by a director, officer
or controlling shareholder and not shared by the stockholders generally.”618
Corporate fiduciaries “are not permitted to use their position of trust and confidence
614 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993). 615 See id. at 368. 616 Id. (citing Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 66 (Del. 1989), and also citing Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)). 617 Mindbody, 2020 WL 5870084, at *32 (citing Morrison v. Berry (Morrison I), 2019 WL 7369431, at *22 (Del. Ch. Dec. 31, 2019)). 618 Cede & Co., 634 A.2d at 361 (citing Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984), and also citing Aronson, 473 A.2d at 812).
129 to further their private interests.”619 Under Delaware law, for a director to act loyally
to advance the best interests of the corporation, she “must seek to promote the value
of the corporation for the benefit of its stockholders.”620 “Delaware case law is clear
that the board of directors of a for-profit corporation must, within the limits of its
legal discretion, treat stockholder welfare as the only end, considering other interests
only to the extent that doing so is rationally related to stockholder welfare.”621
There is “no dilution of the duty of loyalty when a director holds dual or
multiple fiduciary obligations,” and there is “no safe harbor for such divided
loyalties in Delaware.”622 “If the interests of the beneficiaries to whom the dual
fiduciary owes duties diverge, the fiduciary faces an inherent conflict of interest.
But if the interests of the beneficiaries are aligned, then there is no conflict.”623
Claims arising out of the cash-out Merger, “a final-stage transaction
presumptively subject to enhanced scrutiny under Revlon,”624 “do not admit of easy
619 Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939). 620 Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL 1437308, at *17 (Del. Ch. Apr. 14, 2017) (internal quotation marks omitted) (quoting eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 34 (Del. Ch. 2010)). 621 Id. (alteration and internal quotation marks omitted) (quoting Leo E. Strine, Jr., A Job is Not a Hobby: The Judicial Revival of Corporate Paternalism and its Problematic Implications, 41 J. Corp. L. 71, 107 (2015)). 622 Chen, 87 A.3d at 670 (internal quotation marks omitted) (quoting Weinberger, 457 A.2d at 710). 623 Id. (footnote omitted) (citing Van de Walle v. Unimation, Inc., 1991 WL 29303, at *11 (Del. Ch. Mar. 7, 1991)). 624 Mindbody, 2020 WL 5870084, at *13.
130 categorization as duties of care or loyalty.”625 Situations that warrant enhanced
scrutiny “involv[e] potential conflicts of interest where the realities of the
decisionmaking context can subtly undermine the decisions of even independent and
disinterested directors.”626 “[T]he predicate question of what the board’s true
motivation was comes into play, and the court must take a nuanced and realistic look
at the possibility that personal interests short of pure self-dealing have influenced
the board.”627
To address this pervasive concern in final-stage transactions, Delaware law
expects directors to hold a single goal: “get the highest value reasonably attainable
for the shareholders.”628 “At a minimum, Revlon requires that there be the most
scrupulous adherence to ordinary principles of fairness in the sense that stockholder
interests are enhanced, rather than diminished, in the conduct of an auction for the
sale of corporate control.”629 “The sole responsibility of the directors in such a sale
625 Chen, 87 A.3d at 677 (quoting In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 67 (Del. 1995)). 626 Id. (quoting Trados II, 73 A.3d at 43). 627 Id. at 678 (alterations and internal quotation marks omitted) (quoting In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010)). In these game-ending situations, “there is a basis for concern that directors without a pure self-dealing motive might be influenced by considerations other than the best interests of the corporation and other stockholders.” Dollar Thrifty, 14 A.3d at 599 n.181. 628 Macmillan, 559 A.2d at 1285. 629 Id.; see also id. at 1264 (“When conducting an auction for the sale of corporate control, this concept of fairness must be viewed solely from the standpoint of advancing general, rather than individual, shareholder interests.”).
131 is for the shareholders’ benefit,” and “[t]he board may not allow any impermissible
influence, inconsistent with the best interests of the shareholders, to alter the strict
fulfillment of th[is obligation].”630
“A corporate board’s failure to obtain the best value for its stockholders may
be the result of illicit motivation (bad faith), personal interest divergent from
shareholder interest (disloyalty) or a lack of due care.”631 In evaluating alleged
breaches of the duties of care and loyalty through the lens of enhanced scrutiny, “the
focus is on whether the directors’ decision was, on balance, within a range of
reasonableness.”632
In order to maximize stockholder value, “[d]irectors are not required by
Delaware law to conduct an auction according to some standard formula, only that
they observe the significant requirement of fairness for the purpose of enhancing
general shareholder interests.”633 Accordingly, Delaware law does not per se
630 Id. at 1285 (citing Revlon, 506 A.2d at 182). 631 Rudd v. Brown, 2020 WL 5494526, at *6 (Del. Ch. Sept. 11, 2020) (quoting Lukens, 757 A.2d at 731). 632 Baker Hughes, 2020 WL 6281427, at *7 (internal quotation marks omitted) (quoting Paramount, 637 A.2d at 45). 633 Macmillan, 559 A.2d at 1286; see also id. at 1287 (“We do not intend to limit the broad negotiating authority of the directors to achieve the best price available to the stockholders.”); KCG Hldgs., 2019 WL 2564093, at *16 (“Under Revlon, directors are generally free to select the path to value maximization, so long as they choose a reasonable route to get there.” (internal quotation marks omitted) (quoting In re Answers Corp. S’holders Litig., 2011 WL 1366780, at *3 (Del. Ch. Apr. 11, 2011))).
132 “preclude differing treatment of bidders when necessary to advance those interests,”
as “[v]ariables may occur which necessitate such treatment.”634 “A board of
directors may favor a bidder if in good faith and advisedly it believes shareholder
interests would be thereby advanced,”635 and “[a] board may tilt the playing field if,
but only if, it is in the shareholders’ interest to do so.”636 But “the board’s primary
objective, and essential purpose, must remain the enhancement of the bidding
process for the benefit of the stockholders.”637
“[T]he paradigmatic claim under Revlon [] arises when a supine board under
the sway of an overweening CEO bent on a certain direction tilts the sales process
for reasons inimical to the stockholders’ desire for the best price.”638 A plaintiff may
state a claim for liability under Revlon by pleading a claim as to only one board
634 Macmillan, 559 A.2d at 1286–87. 635 Chen, 87 A.3d at 674 (internal quotation marks omitted) (quoting In re Fort Howard Corp. S’holders Litig., 1988 WL 83147, at *14 (Del. Ch. Aug. 8, 1988) (Allen, C.)). Id. (internal quotation marks omitted) (quoting In re J.P. Stevens & Co. S’holders Litig., 636
542 A.2d 770, 782 (Del. Ch. 1988)). 637 Macmillan, 559 A.2d at 1287 (noting that “there must be a rational basis for the action such that the interests of the stockholders are manifestly the board’s paramount objective”); see also Chen, 87 A.3d at 674 (“A board may not favor one bidder over another for selfish or inappropriate reasons. Any favoritism directors display toward particular bidders must be justified solely by reference to the objective of maximizing the price the stockholders receive for their shares.” (alterations and citation omitted) (quoting Golden Cycle, LLC v. Allan, 1998 WL 892631, at *14 (Del. Ch. Dec. 10, 1998), and then quoting In re Topps Co. S’holders Litig., 926 A.2d 58, 64 (Del. Ch. 2007))). 638 Mindbody, 2020 WL 5870084, at *1 (alteration, footnote, and internal quotation marks omitted) (quoting Toys “R” Us, 877 A.2d at 1002).
133 member––“[t]he sins of just one fiduciary can support a viable Revlon claim.”639
Plaintiff’s allegations are modeled after that paradigmatic theory: she asserts
Riverstone, through or alongside Garland, overrode a supine Special Committee
which, while disinterested and independent, breached its duty of loyalty to Company
stockholders by acting in bad faith.
Under this rubric, Plaintiff’s ability to state a claim against each of the
Director Defendants is further restricted by the exculpation provision in the
Company’s charter pursuant to 8 Del. C § 102(b)(7).640 Even under Revlon scrutiny,
allegations of a violation of duty of care alone do not state a claim against the
Director Defendants; Plaintiff must state a claim for breach of the duty of loyalty.641
In order to survive a motion to dismiss under a breach of the duty of loyalty theory,
Plaintiff must plead that the Director Defendants “were interested in the transaction,
lacked independence, or acted in bad faith.”642 If a plaintiff alleges “well pleaded
639 Id. at *14. 640 See Kirby Decl. Ex. 8 (“To the fullest extent permitted by the DGCL, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty owed to the Corporation or its stockholders.”). 641 See Cornerstone, 115 A.3d at 1179; Malpiede v. Townson, 780 A.2d 1075, 1094–95 (Del. 2001); Rudd, 2020 WL 5494526, at *7; KCG Hldgs., 2019 WL 2564093, at *16. 642 Baker Hughes, 2020 WL 6281427, at *15 (quoting Morrison I, 2019 WL 7369431, at *13).
134 facts that track the paradigmatic Revlon theory,” they will generally be sufficient to
support a nonexculpated claim at the motion to dismiss phase.643
A finding of bad faith in the fiduciary context is rare.644 “In the context of a
sale of corporate control, bad faith is qualitatively different from an inadequate or
flawed effort to obtain the highest value reasonably available for a corporation.”645
“[C]riticizing the price at which a board agrees to sell a company, without more,
does not a bad a faith claim make.”646 Delaware law explicitly recognizes several
forms of bad faith: (i) subjective bad faith, in conduct motivated by an intent to do
harm; (ii) intentional dereliction of duty or conscious disregard of duty; and (iii)
“allow[ing] interests other than obtaining the best value reasonably available for [the
company’s] stockholders to influence [director] decisions during the sale process,
given that they made decisions falling outside of the range of reasonableness.”647
“Absent direct evidence of an improper intent, a plaintiff must point to a decision
643 Mindbody, 2020 WL 5870084, at *13. 644 See In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017) (citing In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch. May 20, 2016)). 645 In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *13 (Del. Ch. Dec. 30, 2019) (internal quotations marks omitted) (quoting Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009)). 646 Id. at *14 (collecting cases). 647 Chen, 87 A.3d at 677–78; see also Disney II, 906 A.2d at 63–66.
135 that lacked any rationally conceivable basis associated with maximizing stockholder
value to survive a motion to dismiss.”648
Plaintiff asserts the Director Defendants’ bad faith takes the forms of
conscious disregard of their obligation to seek the highest value reasonably available
for Company shareholders, and conduct that “lacked any rationally conceivable
basis associated with maximizing stockholder value.”649 In support, Plaintiff
contends that the Director Defendants “knew the Merger did not maximize
stockholder value but approved it anyway,”650 and “knowingly fail[ed] to manage
conflicts at virtually every level of the Merger process” and “protect stockholders”651
by “d[oing] nothing to exclude Garland or Riverstone from the sale process after
learning of their misconduct” and “retain[ing] Goldman.”652 “In the transactional
context, an extreme set of facts is required to sustain a disloyalty claim premised on
648 Essendant, 2019 WL 7290944, at *13, *14 (alteration and internal quotation marks omitted) (quoting Chen, 87 A.3d at 684); see also Chelsea Therapeutics, 2016 WL 3044721, at *1 (stating that in cases where “there is no indication of conflicted interests or lack of independence on the part of the directors,” a finding of bad faith should be reserved for situations where “the nature of [the directors’] action can in no way be understood as in the corporate interest: res ipsa loquitur”). 649 D.I. 82 at 59 (alteration omitted) (quoting In re USG Corp. S’holder Litig., 2020 WL 5126671, at *29 (Del. Ch. Aug. 31, 2020)). 650 Id. 651 Id. at 62. 652 Id. at 64 (emphasis omitted).
136 the notion that disinterested directors were intentionally disregarding their duties.”653
Plaintiff’s allegations do not support an inference of conscious disregard, or that the
transaction lacked any rationally conceivable basis.
The Special Committee took a great number of reasonable actions to fulfill
their duties, as pled in the Complaint and disclosed in the Proxy. The Board
immediately formed the disinterested and independent Special Committee when it
decided to put the Company up for sale, and tasked it with managing the sales
process. The Special Committee hired Evercore as an independent financial advisor
and Paul Weiss as counsel, and met regularly with those advisors. The Special
Committee’s meeting minutes reflect that it discussed with its advisors how
Riverstone might wield the Consent Right. The Special Committee was aware
Goldman, Garland, and Browne had conflicts and those conflicts were later
disclosed in part to Company stockholders. To manage fiduciary conflicts, the
Special Committee twice implemented protocols requiring its authorization before
Garland, Browne, or the Officer Defendants contacted bidders. Those protocols
specifically prohibited management from discussing compensation relating to any
potential transaction.
653 Lyondell, 970 A.2d at 243 (alterations and internal quotation marks omitted) (quoting In re Lear Corp. S’holder Litig., 967 A.2d 640, 654 (Del. Ch. 2008)).
137 Further, for over one year, the Special Committee actively engaged in sale
discussions with roughly a dozen bidders, and kept at least four bidders in the
running until late October 2019. It weighed the risks and merits of transactions with
each potential bidder; executed confidentiality agreements with serious bidders in
an effort to further due diligence; encouraged those bidders to connect with
Riverstone in view of the Consent Right to increase the likelihood of a deal; arranged
meetings between Company representatives and each bidder; and exchanged draft
merger agreements with more than one interested party. The Special Committee
resisted calls for exclusivity, pursued go-shop provisions, and interfaced with
numerous bidders during the go-shop in its agreement with Buyer.654
Specifically as to Brookfield, Batkin and the Special Committee worked to
extract value and to facilitate Brookfield’s cooperation with Riverstone on multiple
occasions. When Brookfield threatened to walk away, Batkin and the Special
Committee worked to keep Brookfield seated. It offered to cover Brookfield’s
going-forward expenses, accommodated requests in due diligence, and gave
numerous extensions for document submissions. These actions with respect to
Brookfield yielded a return: by November 2019, Brookfield was offering a 45%
premium, was willing to satisfy Riverstone and Developer 2’s demands, and decided
to forego a Company-on-top merger.
654 See Compl. ¶ 216; Proxy at 47–49, 54.
138 Thus, the Special Committee took an “active and direct role in the sale
process” from beginning to end,655 was “reasonably informed about the alternatives
available to the company,” and acted “reasonably to learn about actual and potential
conflicts faced by directors, management, and their advisors.”656 “At first glance, it
is difficult to discern bad faith from this narrative.”657 It is impossible to conceive
of conscious disregard or the absence of any rationally conceivable basis for the
Director Defendants’ action.
But with each reasonable and measured step forward, the Complaint alleges
the Director Defendants took two steps back. At this procedural stage and in view
of the Court’s obligation to view end-game transactions with inherent skepticism,658
“the predicate question of what the board’s true motivation was comes into play, and
the court must take a nuanced and realistic look at the possibility that personal
interests short of pure self-dealing have influenced the board.”659 While this does
not give the Court free rein to rewrite the story or impose on fiduciaries post hoc
655 Citron, 569 A.2d at 66. 656 KCG Hldgs., 2019 WL 2564093, at *16 (quoting In re Rural Metro Corp. S’holders Litig., 88 A.3d 54, 89–90 (Del. Ch. 2014)). 657 Saba Software, 2017 WL 1201108, at *20. 658 See Chen, 87 A.3d at 677–78. 659 Id. at 678 (alterations and internal quotation marks omitted) (emphasis added) (quoting Dollar Thrifty, 14 A.3d at 598).
139 obligations to have taken certain steps,660 the Court must seek to “assure itself that
the board acted reasonably, in the sense of taking a logical and reasoned approach
for the purpose of advancing a proper objective and to thereby smoke out mere
pretextual justifications for improperly motivated decisions.”661 This mandates that
I assess the facts as pled and determine whether Plaintiff has stated a claim for bad
faith on the part of the Director Defendants. Rather than conscious disregard, “[t]he
loyalty issue in this case is whether the directors allowed interests other than
obtaining the best value reasonably available for [the Company’s] stockholders to
influence their decisions during the sale process, given that they made decisions
falling outside of the range of reasonableness.”662
Plaintiff’s allegations make it reasonably conceivable that the Director
Defendants placed the interests of Riverstone, Developer 2, and the Officer
Defendants above the interest of Company stockholders and their obligation to
maximize stockholder value, and therefore acted in bad faith.663
660 See Baker Hughes, 2020 WL 6281427, at *7; see also Lyondell, 970 A.2d at 243 (“The trial court decided that the Revlon sale process must follow one of three courses, and that the Lyondell directors did not discharge that known set of Revlon ‘duties.’ But, as noted, there are no legally prescribed steps that directors must follow to satisfy their Revlon duties. . . . More importantly, there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.” (alteration, internal quotation marks, and citation omitted)). 661 Baker Hughes, 2020 WL 6281427, at *7 (quoting Dollar Thrifty, 14 A.3d at 598). 662 Chen, 87 A.3d at 677. 663 See, e.g., KCG Hldgs., 2019 WL 2564093, at *17.
140 a. The Complaint Pleads That The Director Defendants Allowed Interests Other Than Obtaining The Best Value For Company Stockholders To Influence Their Decisions During The Sales Process.
The Complaint alleges that the Director Defendants elevated the long-term
welfare of Riverstone and Developer 2 over seeking the best value reasonably
available for Company stockholders by (1) infecting the process with interested
fiduciaries and conflicted advisors; (2) preferring Buyer throughout the process and
at the moment of decision over Brookfield’s premium bid; and (3) misusing the
Consent Right to dissuade Brookfield. Plaintiff’s concerns outweigh the Special
Committee’s few reasonable steps and demonstrate that, on balance, the Director
Defendants’ choices in conducting the sales process were unreasonable and in bad
faith.
i. The Special Committee’s Work Was Infected By Conflicted Directors, Management, And Advisors.
First, Plaintiff contends the Director Defendants allowed conflicted
individuals and entities to participate in deliberations (including Browne, Garland,
and Goldman) and failed to manage those conflicts. The facts alleged demonstrate
that the decision to involve these conflicted parties in the sales process depressed
Company stockholders’ value for Riverstone and Developer 2’s benefit.
141 The Board immediately identified Riverstone and Developer 2 as the source
of potential and actual conflicts with respect to the sales process. Nonetheless, the
Board gave Riverstone a seat at the table on day one and every day thereafter. Before
the June 5, 2018, annual meeting, and presumably without the knowledge of the
Board or stockholders, conflicted management—including Garland—retained
Evercore and secured a presentation that “included preliminary potential valuations
for various strategic options.”664 At the meeting, Garland first proposed that the
Board consider a potential sale, despite repeated and numerous representations to
Company investors (both before and after the meeting) that Pattern Vision 2020 was
proceeding as planned and that the Company had ample liquidity and was not
planning on raising common equity capital. Hunt (Developer 2’s director and
Riverstone’s partner, but not a Company fiduciary) attended that meeting, knowing
that Riverstone had already explored a potential take-private of the Company, with
access to the Company’s confidential information and with Goldman as an
advisor.665 The Board solicited Riverstone’s views on a potential transaction while
simultaneously identifying Riverstone as a prospective acquirer.666 From these facts,
it is reasonably conceivable that the June 5 suggestion that the Board “consider a
664 Compl. ¶ 95 (emphasis omitted). 665 See id. ¶¶ 93, 98. 666 Id. ¶ 97.
142 potential sale of the business” was from the start driven by, or for the benefit of,
Riverstone.667
Thereafter, the Board formed the Special Committee. The Board was aware
of Garland and Browne’s open and apparent ties to Riverstone.668 Because the
interests of Developer 2 and Riverstone diverged from those of the Company
stockholders, Browne and Garland “face[d] an inherent conflict of interest.”669 In
view of these conflicts, the Board did not appoint Browne or Garland to the Special
Committee, and the Special Committee twice implemented conflict-safety protocols.
Nonetheless, despite the risk that Browne would share information with Riverstone,
the Special Committee allowed Browne to attend the majority of Special Committee
meetings in his capacity as Riverstone’s representative and to attend executive
sessions where the Special Committee specifically excluded conflicted Company
management.670
The Special Committee also allowed Garland substantial involvement in its
process, delegating to him primary responsibility for engaging with the Company’s
667 Id. ¶ 94. 668 Id. ¶ 101. 669 Chen, 87 A.3d at 670. Compl. ¶¶ 101–04. The Proxy does not disclose Browne’s attendance at any Special 670
Committee meeting. Id. ¶ 104.
143 potential suitors.671 As the Director Defendants accurately point out, “[t]here is
nothing inherently wrong with a Board delegating to a conflicted CEO the task of
negotiating a transaction.”672 “But the conflict must be adequately disclosed to the
Board, and the Board must properly oversee and manage the conflict.”673 Garland
was afforded the opportunity to tip the scales in Riverstone’s favor and did so.
Plaintiff points to Garland’s unauthorized April 15 Meeting with Riverstone
and Buyer. The context is important. At this point, the Special Committee was
actively shopping the Company, taking into consideration Riverstone and
Developer 2’s interest in and potential satisfaction from the outcome, and working
to find a Riverstone-friendly financial acquirer, beginning with PSP.674 But
671 Id. ¶¶ 102–03, 105. 672 Haley, 235 A.3d at 721 n.69. 673 Id.; see also In re OPENLANE, Inc. S’holders Litig., 2011 WL 4599662, *5 (Del. Ch. Sept. 30, 2011) (finding that, as the Board was aware of the CEO’s possible employment after consummation of the transaction “and was fully committed to the process,” and that even though the CEO, who led the negotiations, was conflicted, “his efforts in negotiating the Merger Agreement and dealing with other potential acquirers d[id] not taint the process”)); RBC, 129 A.3d at 850–57 (affirming trial court’s findings that the Board failed to oversee the Special Committee, failed to become informed about strategic alternatives and about potential conflicts faced by advisors, and approved the merger without adequate information); id. at 855 (holding that, “[t]he record indicates that Rural’s Board was unaware of the implications of the dual-track structure of the bidding process and that the design was driven by RBC’s motivation to obtain financing fees in another transaction with Rural’s competitor,” and that, “[t]he Board, as a result, took no steps to address or mitigate RBC’s conflicts”); id. (“While a board may be free to consent to certain conflicts, . . . directors need to be active and reasonably informed when overseeing the sale process, including identifying and responding to actual or potential conflicts of interest.”). 674 See Compl. ¶¶ 109–11, 116–17; Proxy at 3.
144 Brookfield had emerged as a disinterested strategic bidder, proposing a transaction
that might not benefit Riverstone and leave Developer 2 behind.675 In late February,
Garland and Elkort allegedly met Brookfield’s interest with resistance, raising the
Consent Right to cast doubt on the viability of a Brookfield transaction.676 At a
March 11, 2019 Special Committee meeting, Brookfield submitted a term sheet
reflecting a Company-TerraForm transaction structured to circumvent the Consent
Right.677 The Special Committee did not meet again until May.678
During this period of quiet, after Brookfield sharpened its offer to avoid the
Consent Right, Garland arranged and held the unauthorized April 15 Meeting with
Riverstone and Buyer. That meeting presented Riverstone the opportunity to offer
up a preferred and familiar face as a third-party bidder: Buyer, which previously
invested over $700 million in Riverstone investment funds and whose representative
Garland “knew.”679 While Riverstone had been in the room since the first Board
meeting on June 5, 2018, and while the Special Committee had kept Riverstone and
Developer 2 in mind since the early stages of the sales process, Garland’s meeting
675 See Compl. ¶¶ 111–15. 676 See id. ¶¶ 116–19. 677 Id. ¶ 121. 678 Id. ¶ 122. 679 Id. ¶ 128.
145 after Brookfield’s offer spurred Buyer to action.680 It is reasonably conceivable (in
view of loose information sharing in the past, including through Hunt and Browne)
that Riverstone and Garland communicated the Company’s confidential information
to Buyer at the meeting.
If sunlight is the best disinfectant, the April 15 Meeting remained infectious.
Weeks later, on May 2, Garland disclosed that Riverstone had suggested taking the
Company private in conjunction with an unidentified third-party institutional
investor, but had “dropped the suggestion following consideration of conflicts and
certain contractual obligations of [Riverstone].”681 This was misleading, as
evidenced by the Batkin Memo and Proxy, which themselves fall short of full and
adequate disclosure.682 This series of inconsistent and incomplete disclosures gives
rise to the reasonable inference that Garland was less than candid with the Special
Committee—and later, Company stockholders—about his early dealings with
Riverstone and Buyer.
Nonetheless, after the April 15 Meeting, the Special Committee allowed
Garland to continue to front the sale process, even after learning that the risks
associated with his conflicts had materialized when he violated the Special
680 See id. ¶ 132; Proxy at 37. 681 Compl. ¶ 127. 682 See supra Section II.A.1.a.
146 Committee’s express conduct guidelines. The April 15 Meeting serves as one of the
structural components of the sales process that renders it reasonably conceivable that
Garland perceptibly tilted the sales process in favor of Riverstone, the Special
Committee was lackluster in its response, and this classic Revlon combination
ultimately gave Riverstone, via Buyer, the advantage.
In addition to conflicted management, the Special Committee’s work was
tainted by a conflicted advisor. The decision to hire Goldman illustrates the Special
Committee’s passivity in the face of Garland’s requests. When the Special
Committee first met on July 13, 2018, Garland (and the Officer Defendants)
recommended that the Special Committee retain Goldman, despite Evercore having
prepared management’s presentation for the June 5, 2018 meeting. As alleged,
conflicted management’s push for Goldman is unsurprising, as Goldman had
longstanding, deep, and financial ties to Riverstone and, more significantly, had
recently advised Riverstone with respect to a potential take-private of the
Company.683
Conceivably perceiving the risks associated with Goldman’s conflict, the
Special Committee decided to retain only Evercore and to revisit the possibility of
retaining Goldman at a later time, but did not determine that Goldman’s participation
683 See Compl. ¶¶ 12, 98; see Cinerama, 663 A.2d at 1169 (holding a “stake in” a “firm that deals with the corporation” is “self-dealing”) (citing 8 Del. C. § 144(a)).
147 would run afoul of the stockholder’s best interests.684 The Special Committee left
the door open, and Goldman would eventually join the fray and advocate for
Riverstone and Buyer, who each enjoyed a “substantial business relationship” with
Goldman.685 Goldman entered the sales process (1) in “early April 2019,” on the
heels of Brookfield’s third-party, independent bid and Paul Weiss’ suggestion that a
Company-TerraForm transaction could be structured to circumvent the Consent
Right and exclude Riverstone; and (2) on the eve of Riverstone and Garland offering
up a third-party bidder of their own, Buyer, with whom Goldman and Riverstone
were affiliated. Unlike the decision to retain Evercore, the Special Committee’s
decision to retain Goldman is not recorded in meeting minutes.686 Plaintiff and the
Director Defendants agree that “each and every one of these alleged conflicts was
disclosed to the Special Committee prior to the Special Committee’s decision to
retain Goldman Sachs.”687 At the end of the day, Goldman did not issue an
opinion.688 Rather, in the final days of the sales process, “Goldman advocated for
Riverstone, describing Riverstone’s communications with the conflicted investment
684 Compl. ¶ 108. 685 Id. 686 See id. ¶¶ 134–35. 687 See D.I. 74 at 23–24. 688 See Proxy at A-24.
148 bank that expressed confidence in the proposed transaction among the Company,
Buyer, and [Developer 2].”689
A secondary financial advisor may be “conflict-cleansing.”690 Here, as
alleged, Goldman further contaminated the process, despite the Special Committee’s
awareness of that risk. There was no apparent need for the Special Committee to
retain a second advisor; the Complaint and the Proxy indicate that Evercore was
sufficiently advising on the financial aspects of the process.691 And Goldman
benefitted from the Merger, as Goldman’s engagement letter entitled it to $2 million
upon the announcement of the Merger; an additional $4 million upon consummation
of the Merger; and a discretionary payment of up to $3 million upon or promptly
following the consummation of the Merger.692
Thus, Buyer, Riverstone, and conflicted management—who maintained post-
close positions with the company—had the ability to pay or withhold nearly a third
of Goldman’s total fee. Further, the Company granted Goldman a right of first offer
to act as joint book-runner or agent in the case of any offering of securities and a
right of first offer as a joint arranger and book-runner for any bank or bridge loan
689 Compl. ¶ 197; see also id. ¶¶ 153–58. 690 RBC, 129 A.3d at 864. 691 See Compl. ¶ 108. 692 Id. ¶ 271.
149 related to the Merger.693 As alleged, this further incentivized Goldman to push the
Special Committee toward Buyer’s offer and away from Brookfield’s, which was
structured such that the Company would not be required to raise capital through debt
or a security offering.694
ii. The Director Defendants Prioritized Riverstone and Developer 2 Over Maximizing Value.
In addition to mismanaging the foregoing conflicts, the Special Committee,
and eventually the entire Board, approved Riverstone’s preferred transaction with
Buyer despite acknowledging that Brookfield offered the superior bid. Plaintiff has
pled facts making it reasonably conceivable that the Director Defendants did not
believe “in good faith and advisedly” that Buyer’s bid would advance the
stockholders’ interest,695 and that the Director Defendants had no “rational basis” for
shunning Brookfield’s premium that was “justified solely by reference to the
objective of maximizing the price the stockholders receive for their shares.”696
As alleged, Riverstone’s desire for a Company take-private and Developer 2
internalization was the impetus for the sales process, the Special Committee’s focus
693 Id. ¶ 272. 694 Id. 695 Chen, 87 A.3d at 674 (quoting Fort Howard, 1988 WL 83147, at *14). 696 Id. (quoting Topps, 926 A.2d at 64).
150 during deliberations, and the reason for its final selection of Buyer over Brookfield.
The Special Committee held various meetings that addressed Developer 2 and its
interests; ways to structure transactions to include Developer 2; and the importance
of Riverstone’s ability to exercise the Consent Right, even though it was readily
circumvented. And the Special Committee explicitly told bidders that internalizing
Developer 2 was the preferred course of conduct and pressed bidders to structure
offers toward that end, despite knowing that it would require the Company’s
stockholders to compete for transaction consideration. Thus, while the Special
Committee engaged with numerous bidders and pressed them for value, they
repeatedly revealed their focus on satisfying Riverstone and meeting its desire to
internalize Developer 2.
When the sales process began, with Riverstone in the room, the Special
Committee first looked to Riverstone as an acquirer. The Special Committee next
considered PSP, which had strong ties to Riverstone. When a transaction directly
involving Riverstone or Riverstone-friendly PSP did not pan out, Riverstone’s role
evolved from preferred bidder to co-negotiator alongside the Company’s fiduciaries,
attending meetings with Garland, Brookfield and other bidders to discuss
Developer 2. The Special Committee encouraged bidders to meet with Riverstone
and agree to confidentiality, and Riverstone had those meetings.
151 While the Special Committee properly responded to Brookfield’s initial
October 2018 offer by pressing for a premium, it also communicated Riverstone’s
concerns about internalizing Developer 2. By May 31, 2019, Brookfield submitted
a revised term sheet that reflected an all-stock acquisition of the Company by
TerraForm at a 15% premium and also contemplated a concurrent acquisition of
Developer 2, which would cash Riverstone out of the Company and Developer 2 for
a cash price to be negotiated by the Company and Riverstone.697 The Special
Committee authorized Garland to “notify” Developer 2 and Riverstone about the
Company’s discussions with Brookfield.698
Brookfield’s offer inspired Garland and Riverstone to introduce Buyer into
the process. Even in the absence of an offer, the Special Committee devoted time
and resources to Buyer.699 Buyer did not submit a proposal to acquire the Company
until June 28, 2019. It proposed an all-cash transaction at a 14% premium, less than
Brookfield’s offer.700 Buyer’s offer specifically assumed that it would reach a
separate agreement with Riverstone with respect to Developer 2, and separate
agreements with senior management, without the Special Committee’s
697 Compl. ¶ 142. 698 Id. ¶ 119. 699 See id. ¶ 145. 700 Id. ¶¶ 145–47.
152 involvement.701 As the sales process progressed, Buyer solidified its offer for
Developer 2, stating it would purchase Developer 2 at a price equal to 1.8x of
Riverstone’s invested capital subject to a contingent earnout provision that could
increase the total purchase price to up to 2.25x Riverstone’s invested capital. The
Special Committee would later deem this earnout “acceptable to Riverstone.”702
Brookfield volleyed on July 1, reiterating its offer for the Company and
pricing Developer 2 for cash at a 1.75x multiple of invested capital, still cashing
Riverstone out of the combined company. Unlike Buyer, Brookfield intended to
reach an agreement with the Company, not just Riverstone, regarding Developer 2’s
valuation. Despite the higher premium and acquisition of Developer 2, the Special
Committee did not favor Brookfield, allegedly because Brookfield’s proposal did
not contemplate negotiating for Developer 2 free of the Special Committee.
On July 23, Brookfield submitted a new offer, noting the Special Committee’s
desire to “internalize [Developer 2] as part of this transaction.”703 Brookfield offered
to do so for cash at a 15% premium to Company stockholders. But Brookfield also
offered a 20% premium for a deal without Developer 2.704
701 Id. ¶¶ 147–48. 702 Id. ¶ 163. 703 Id. ¶ 151. 704 Id.
153 The Special Committee worried over Riverstone and Developer 2, even
though a deal with Brookfield offered the greatest value to Company stockholders.705
At July 31 and August 1 meetings, the Special Committee discussed that
Brookfield’s and Buyer’s offers internalizing Developer 2 provided similar value to
Company stockholders; but in a key difference, Brookfield would cash out
Riverstone, while Buyer would allow Riverstone to continue to own an equity
interest.706 The Special Committee also considered that Buyer’s offer favored
Riverstone over the Company’s stockholders: its offer for Developer 2 with an
earnout was higher than Brookfield’s, which made it less likely Buyer would
increase its offer for the Company.707 Thus, the Special Committee explicitly
acknowledged that the Company’s public stockholders were competing with
Developer 2’s owners for merger consideration.708
With Riverstone and Developer 2’s satisfaction driving the Special
Committee’s deliberations, Buyer emerged from those Special Committee meetings
as the frontrunner.709 Evercore observed that Buyer was already in “advanced stages
of negotiation” with Riverstone, and that combining the Company and Developer 2
705 See id. ¶ 158. 706 Id. ¶ 154. 707 Id. ¶ 163. 708 See id. 709 See id. ¶¶ 156–57.
154 was “in line with management’s vision.”710 The Special Committee recognized the
need to “determine whether [Buyer] would increase its offer,”711 but also insisted
that “it would need to convey to Brookfield the importance of reaching an agreement
with Riverstone about a deal that included [Developer 2] if it wanted to have a
chance to acquire [the Company].”712
On August 16, Buyer submitted an updated offer for both the Company and
Developer 2, valuing the Company less than Brookfield’s 15% premium bundled
with Developer 2, and certainly less than Brookfield’s 20% standalone premium.
The Company’s messaging to Brookfield from this point was inconsistent at
best and sabotage at worst. At an August 20 meeting, Evercore and Goldman told
Brookfield that the “Board of Directors of [the Company] is no longer supportive of
any transaction which includes the internalization of the 71% [of Developer 2] that
[the Company] does not currently own.”713 Goldman and Evercore also pressed the
Consent Right, stating that “Riverstone will not provide such consent to a transaction
in which TerraForm becomes the parent company of [the Company].”714
710 Id. ¶ 157. 711 Id. ¶ 156. 712 Id. ¶ 157. 713 Id. ¶ 164. 714 Id. (alteration omitted).
155 On August 28, 2019, the Special Committee discussed how Brookfield’s offer
was worth $34 per share, a 45% premium based on the then-current trading price,
and the risk that Riverstone would sue to block a transaction that did not involve
Developer 2 even though the Brookfield proposal was structured to avoid the
Consent Right. The Special Committee determined it was best “to progress the
transaction” with Buyer.715
By late August, Brookfield submitted an updated offer valuing the Company
at $33.38 per share.716 Brookfield restructured the proposed transaction as a
Company acquisition of TerraForm to avoid the Consent Right; addressed the
Board’s supposed disinterest in internalizing Developer 2; and stated that it had been
told early in the process, when internalizing Developer 2 was a priority, that the
Company believed it was desirable for senior management to maintain their
positions in the combined company, including their dual positions at Developer 2.717
Meanwhile, Buyer’s offer had remained afloat with little to no enhancement.
The Special Committee met on September 29, 2019. The meeting minutes
show the Special Committee explicitly recognized its duty to “maximize value for
shareholders”718 and had even acknowledged to Brookfield “that [its] proposal [wa]s
715 Id. ¶ 172. 716 Id. ¶ 167. 717 See id. ¶¶ 166, 168, 173–75. 718 Id. ¶ 188.
156 superior from a value perspective to the others that [the Company] ha[d] received
and that [the Company] will receive in this sales process.”719
But at that meeting, focused on Developer 2, Garland warned that a Company-
TerraForm merger would alter the Company’s relationship with Developer 2.720 In
addition, pushing to lock up a transaction with Buyer, Garland pressured the Board
to issue preferred stock that was bound to vote in favor of a Board-recommended
merger with Buyer. Garland brought this idea to the Special Committee as
Brookfield continued to press forward in the face of Riverstone’s many demands.721
A separate and independent committee was responsible for handling the stock
issuance, so there is no reasonably conceivable explanation as to why Garland would
have brought the “importance” of consummating the Preferred Issuance to the
Special Committee’s attention.722 And Garland had been touting the Company’s
padded wallet and exceptional performance; representing that the Company had no
need for liquidity; and assuring investors that the Company could easily manage any
maturing obligations without raising additional funds. But he told the Special
Committee that the issuance was required to fund two new projects.
719 Id. ¶ 192. 720 Id. ¶ 186. 721 See id. ¶¶ 183–90. 722 Id. ¶ 187.
157 The next day, September 30, the Board’s transaction committee approved the
Preferred Issuance. Plaintiff alleges Defendants issued the preferred shares to tilt
the stockholder vote on the Merger with Buyer in their favor.723 In support, Plaintiff
points out that “[t]he issuance of the preferred shares made no commercial sense”
because “[the Company] had more than sufficient borrowing capacity under its
credit agreements to purchase the projects in question, and the interest rate on such
debt would have been lower than the interest rate it agreed to pay on the preferred
shares.”724 Those shares would become pivotal in approving the Merger. It is
reasonably conceivable that the preferred stock issuance, backed by Garland and
passively observed by the Special Committee, was in furtherance of jamming though
the Board-approved Merger, which was not the best deal for stockholders.
Brookfield soldiered on. In late October, Evercore presented an analysis that
indicated that a TerraForm merger would result in a combined company with a stock
valued well above Buyer’s latest offer.725 But Evercore also asserted that a
TerraForm transaction would undermine the “purpose and commercial viability” of
723 See id. ¶¶ 236–38. 724 D.I. 82 at 26; Compl. ¶¶ 238–44. 725 Compl. ¶ 199. Plaintiff alleges that even those values for the combined company were depressed because Evercore did not use consistent or updated dividend yields across its analyses, and if corrected, Evercore’s analysis would have shown the combined company would trade in the range of $32.69 to $36.15 per share.
158 Developer 2.726 Goldman expressed its confidence in the Company-Buyer-
Developer 2 proposal.727
On November 1, Brookfield told the Special Committee it believed it could
negotiate any necessary terms with Riverstone within thirty days. This was met
with an unanticipated change of pace.728 The Special Committee’s advisors
demanded that Brookfield submit definitive documents the next day, which
Brookfield could not do without Riverstone’s cooperation.729 From the facts
alleged, Riverstone had its sights set on a take-private with a friendly acquirer, and
so it would not finalize a deal with Brookfield on that short deadline. Considering
that the sales process had lasted over a year and a half, that there was no exigent
need to sell, and that the Company had been amenable to extensions in the past, it
is reasonably conceivable that this was the final effort to elevate Buyer as the best
and last bidder standing. It worked: Brookfield withdrew its bid. 730 And on
November 3, the Special Committee voted to recommend that the Board approve
726 Id. ¶ 201. 727 Id. ¶ 197. 728 See id. ¶ 205; Proxy at 52. 729 Compl. ¶ 205; Proxy at 52. 730 Compl. ¶ 205; Proxy at 53.
159 the all-cash Merger with Buyer at $26.75 per share, which was $1.05 less than the
$27.80 closing trading price of the Company’s stock the previous day.731
The Director Defendants have argued they favored Buyer’s all-cash proposal
based in part on the complexities of Brookfield’s more burdensome stock-for-stock
deal. But in the Revlon context, it is dispositive that Buyer’s offer took Merger
consideration away from the Company’s public stockholders in protecting
Developer 2 and Riverstone. The Special Committee was bound to obtain the best
possible transaction for Company Stockholders.732 Where other forces preclude a
transaction at a higher price, “[t]he only leverage that a special committee may have
. . . is the power to say no.”733 As this Court has recognized,
The power to say no is a significant power. It is the duty of directors serving on such a committee to approve only a transaction that is in the best interests of the public shareholders, to say no to any transaction that is not fair to those shareholders and is not the best transaction available.734
Here, the Special Committee failed to use its voice. It is reasonably
conceivable that the Special Committee favored Riverstone’s long-term play over
stockholders’ final-moment value, and did so due to Riverstone’s influence and a
concern for Developer 2: “inappropriate” reasons that undermined the interests of
731 Compl. ¶¶ 206–07, 222. 732 See In re First Bos., Inc. S’holders Litig., 1990 WL 78836, at *7 (Del. Ch. June 7, 1990). 733 Id. 734 Id.
160 the stockholders.735 And even in the shadow of the Company’s contractual
obligation under the Consent Right, the Special Committee remained bound by
fiduciary duty to maximize stockholder value when considering that obligation and
any alternatives, such as Brookfield’s offer structured around the Consent Right.736
Accordingly, Plaintiff has stated a nonexculpated claim against the Director
Defendants collectively.737 “Whether Plaintiff can develop proof to sustain these
735 Chen, 87 A.3d at 674. 736 See Frederick Hsu, 2017 WL 1437308, at *23–24. 737 Indeed, “[t]he liability of the directors must be determined on an individual basis because the nature of their breach of duty (if any), and whether they are exculpated from liability for that breach, can vary for each director.” In re Dole Food Co., Inc. S’holder, 2015 WL 5052214, at *39 (Del. Ch. Aug. 27, 2015); see also In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *20 (Del. Ch. Mar. 19, 2018). Consequently, “[a] plaintiff must well-plead a loyalty breach against each individual director; so-called ‘group pleading’ will not suffice.” Reith v. Lichtenstein, 2019 WL 2714065, at *18 (Del. Ch. June 28, 2019) (internal quotation marks omitted) (quoting In re Tangoe, Inc. S’holders Litig., 2018 WL 6074435, at *12 (Del. Ch. Nov. 20, 2018)). That is, even if a plaintiff could “state a duty of loyalty claim against the interested fiduciaries,” that “does not relieve the plaintiff of the responsibility to plead a non-exculpated claim against each [other] director who moves for dismissal.” Cornerstone, 115 A.3d at 1180. Here, Plaintiff has pled specific facts against Garland and Browne supporting the reasonable inference that they acted in bad faith such that they breached the duty of loyalty. While the allegations against Batkin, Goodman, Hall, Newson, and Sutphen collectively group them as the Special Committee, Plaintiff pleads an adequate basis “to infer that these defendants acted disloyally or in bad faith” by virtue of the Special Committee’s involvement in the sales process. Voigt, 2020 WL 614999, at *25–26; see also In re WeWork Litig., 2020 WL 7343021, at *11 (Del. Ch. Dec. 14, 2020) (“Although group pleading is generally disfavored, the Complaint’s use of the term ‘SoftBank’ to capture both SBG and Vision Fund was justified here given the close relationship between these entities plead in the Complaint.”); Chen, 87 A.3d at 676–77 (“Depending on the facts of the case, the standard of review, and the procedural stage of the litigation, a court may be able to determine that a plaintiff’s claims only involve breaches of the duty of care such that the court can apply an exculpatory provision to enter judgment in favor of the defendant directors before making a post-trial finding of a breach of fiduciary duty and
161 allegations remains to be seen, but for now, the Complaint alleges facts from which
it is reasonably conceivable that the Board’s conduct with regard to the sales process
and approval of the Merger can in no way be understood as in the corporate
interest.”738 The Individual Defendants’ motion to dismiss Count I is denied.739
b. The Complaint Pleads That The Director Defendants Abdicated Their Duty Of Disclosure.
After resolving to sell the Company to Buyer in a combination with
Developer 2, the Board issued a resolution giving the Officer Defendants the power
to “prepare and execute” the Merger Proxy “containing such information deemed
necessary, appropriate or advisable” by only the Officer Defendants, and then to file
the Proxy with the SEC without the Board’s review.740 Plaintiff contends that the
Director Defendants acted in bad faith by “abdicating their strict and unyielding duty
determining the nature of the breach. If a court cannot make the requisite determination as a matter of law on a pre-trial record, then it becomes necessary to hold a trial and evaluate each director s potential liability individually. The liability of the directors must be determined on an individual basis because the nature of their breach of duty (if any), and whether they are exculpated from liability for that breach, can vary for each director.” (footnote omitted) (quoting In re Emerging Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *38 (Del. Ch. June 4, 2002), and citing Venhill Ltd. P’ship ex rel. Stallkamp v. Hillman, 2008 WL 2270488, at *23 (Del. Ch. June 3, 2008))). 738 Saba Software, 2017 WL 1201108, at *20 (internal quotation marks omitted) (quoting Chelsea Therapeutics, 2016 WL 3044721, at *1). 739 See, e.g., KCG Hldgs., 2019 WL 2564093, at *17; Saba Software, 2017 WL 1201108, at *20; Chen, 87 A.3d at 677–78. 740 Compl. ¶ 231; see id. ¶¶ 232–33.
162 of disclosure,”741 and relatedly, by “knowingly fail[ing] to correct a proxy statement
that they knew was materially incomplete and misleading.”742
Directors’ “fiduciary duties of care and loyalty apply when directors
communicate with stockholders,” and their “specific disclosure obligations are
defined by the context in which the director communicates.”743 When directors
request discretionary stockholder action, such as the approval of corporate
transactions like mergers, “they must disclose fully and fairly all material facts
within their control bearing on the request.”744 “This application of the fiduciary
duties of care and loyalty is referred to as the ‘fiduciary duty of disclosure.’”745 The
Delaware Supreme Court has described the parameters of this duty as “strict and
unyielding.”746
“A fundamental precept of Delaware corporation law is that it is the board of
directors, and neither shareholders nor managers, that has ultimate responsibility for
741 D.I. 82 at 66 (alterations and internal quotation marks omitted) (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)). 742 Id. at 68. 743 Dohmen v. Goodman, 234 A.3d 1161, 1168 (Del. 2020). 744 Id.; see also Baker Hughes, 2020 WL 6281427, at *12 (“Under Delaware law, when directors solicit stockholder action, they must disclose fully and fairly all material information within the board’s control.” (quoting In re Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *9 (Del. Ch. Jan. 5, 2017))). 745 Id. 746 Rosenblatt, 493 A.2d at 944 (discussing whether the defendant fiduciaries had satisfied their “duty of complete candor” and “whether the proxy statement satisfied the strict and unyielding disclosure requirements of Delaware law”).
163 the management of the enterprise.”747 But “[t]he realities of modern corporate life
are such that directors cannot be expected to manage the day-to-day activities of a
company.”748 “Thus Section 141(a) of DGCL expressly permits a board of directors
to delegate managerial duties to officers of the corporation, except to the extent that
the corporation’s certificate of incorporation or bylaws may limit or prohibit such a
delegation.”749 While the board “may delegate such powers to the officers of the
company as in the board’s good faith, informed judgment are appropriate,” “this
power is not without limit.”750 “The board may not either formally or effectively
abdicate its statutory power and its fiduciary duty to manage or direct the
management of the business and affairs of this corporation.”751 “Thus it is well
established that while a board may delegate powers subject to possible review, it
Grimes v. Donald, 1995 WL 54441, at *8 (Del. Ch. Jan. 11, 1995), aff’d, 673 A.2d 1207 747
(Del. 1996). 748 Rosenblatt, 493 A.2d at 943; accord Grimes, 1995 WL 54441, at *8 (“Of course, given the large, complex organizations through which modern, multi-function business corporations often operate, the law recognizes that corporate boards, comprised as they traditionally have been of persons dedicating less than all of their attention to that role, cannot themselves manage the operations of the firm, but may satisfy their obligations by thoughtfully appointing officers, establishing or approving goals and plans and monitoring performance.”). 749 Grimes, 1995 WL 54441, at *8. 750 Id. at *9. 751 Id.
164 may not abdicate them.”752 “The board must retain the ultimate freedom to direct
the strategy and affairs of the Company for the delegation decision to be upheld.”753
Abdication of directorial duty evidences disloyalty.754 “Allegations that [the
company’s] directors abdicated all responsibility to consider appropriately an action
of material importance to the corporation puts directly in question whether the
board’s decision-making processes were employed in a good faith effort to advance
corporate interests.”755 “Whether or not a delegation of a particular responsibility
constitutes an abdication of directorial duty is necessarily a fact specific question.”756
The Court must consider “why the delegation was made, and what task was actually
delegated,” as well as whether the board acted independently in delegating the
task.757
752 Id. 753 In re Bally’s Grand Deriv. Litig., 1997 WL 305803, at *4 (Del. Ch. June 4, 1997) (internal quotation marks omitted) (quoting Grimes v. Donald, 673 A.2d 1207, 1215 (Del. 1996), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)). Bomarko, Inc. v. Int’l Telecharge, Inc., 794 A.2d 1161, 1178 (Del. Ch. 1999) (citing 754
Cede & Co., 634 A.2d at 363), aff’d, 766 A.2d 437 (Del. 2000). 755 In re Walt Disney Co. Deriv. Litig. (Disney I), 825 A.2d 275, 278 (Del. Ch. 2003); see also Cysive, 836 A.2d at 550 n.26 (“Unless the plaintiffs can show that the independent board majority was duped by the interested block holder, abdicated its responsibilities so as to have acted in subjective bad faith, or acted so irrationally so as to have committed a violation of their duty of care, the business judgment standard of review would condemn their claims.”). 756 Bally’s Grand, 1997 WL 305803, at *4. 757 Rosenblatt, 493 A.2d at 943; see also id. at 944.
165 Here, Plaintiff has alleged that the Director Defendants delegated to
conflicted management total and complete authority to prepare and file the Proxy
and that the Director Defendants did not review the Proxy before it was filed. The
Director Defendants contend that “[o]f course” Plaintiff’s allegations are “not
true.”758 They argue that while Plaintiff is entitled to all reasonable inferences in
her favor, she “is not entitled to ask the Court to presume a board of directors
somehow waives its right to review a Proxy, acts in bad faith and breaches its
fiduciary duty whenever it fails to reserve its right to review subsequent drafts of a
proposed disclosure in a standard board resolution.”759
But the Director Defendants have not asserted any reason to reject Plaintiff’s
allegations as untrue at this stage, particularly where those allegations are consistent
with the delegating Board resolution. For example, there are no meeting minutes
demonstrating that the Director Defendants oversaw the Proxy’s preparation or that
they reviewed the Proxy before the Officer Defendants filed it with the SEC.760 So,
as is nearly always the case, the Court must accept Plaintiff’s allegations as true for
the purpose of the Motions.761 Plaintiff has alleged facts making it reasonably
758 D.I. 74 at 39. 759 D.I. 85 at 28. 760 See D.I. 74 at 39–40; D.I. 85 at 28. 761 See KCG Hldgs., 2019 WL 2564093, at *17 (“Defendants attack these allegations as factually inaccurate, but the Court must accept them as true for the purpose of this motion.” (footnote omitted)).
166 conceivable that the Director Defendants delegated full authority to prepare and
disseminate the Proxy to the allegedly conflicted Officer Defendants, and did so in
bad faith.762 Bad faith is reflected in the choice of agent and the complete scope of
delegation.
I first consider the Board’s chosen agents in determining whether a
delegation constitutes abdication.763 The Board delegated drafting the Proxy to the
Officer Defendants, known conflicted individuals who had been ostensibly walled
off from the sale process but still assisted in tilting the playing field toward Buyer
for the benefit of Riverstone and Developer 2. Delegating to Garland was
particularly problematic, especially after he had been less than forthright with the
Special Committee about his April 15 Meeting with Riverstone after Brookfield’s
first offer.
Second, the scope of the delegation goes too far. The Board’s resolution
granted the Officer Defendants full power and discretion to prepare the Proxy with
information they thought it needed to contain, and then to file the Proxy with the
762 See Compl. ¶¶ 231–32; Weinberger Decl. Ex. 8. 763 Cf. Rosenblatt, 493 A.2d at 942–43 (upholding the board’s delegation of authority as a valid exercise of business judgment where there was “no proof that D & M lacked independence or was in any way beholden to either party,” and “[t]he record fully support[ed] a conclusion that D & M had the requisite reputation and experience to assist Getty and Skelly”).
167 SEC without the Board’s review.764 The Board authorized interested parties to
unilaterally describe the process to the stockholders with finality, thereby infecting
the stockholder vote as well.
And from the alleged misrepresentations in the Proxy, it appears that the
Officer Defendants—specifically, Garland—capitalized on the opportunity to
selectively disclose the Individual Defendants’ self-interested involvement.765 As
alleged, the Proxy and Supplemental Proxy failed to disclose, among other things,
that Riverstone leveraged its relationship with Developer 2 and the Company to
block a more valuable deal with Brookfield and TerraForm; that Garland had
unauthorized discussions with potential bidders in violation of the Special
Committee’s instructions, including an unauthorized in-person April 15 Meeting
with Buyer and Riverstone in April 2019; that Goldman faced conflicts of interest,
including that Goldman owns a substantial stake in Riverstone, had advised
Riverstone on a take-private of the Company, and had earned fees totaling over
$100 million from Riverstone and Buyer in recent years; that Browne, a
representative of Riverstone, attended a majority of the Special Committee’s
764 See Compl. ¶¶ 231–33. 765 The Officer Defendants’ involvement in drafting and disseminating the Proxy, as well as the Proxy’s deficiencies, are discussed in Section II.B.2 infra.
168 meetings and Executive Sessions; and that the Company’s largest stockholder, PSP,
held a 22% interest in Developer 2.
Finally, Plaintiff has adequately alleged that the Director Defendants failed
to correct a Proxy they knew to be false and misleading. The Complaint’s
allegations indicate that the Director Defendants knew the truth (except for the
whole truth about Garland’s April 15 Meeting) so if the Director Defendants had
reviewed the Proxy, even if only after it was issued, they would have known it was
false or misleading. Because the Company issued further disclosures before the
stockholder vote in the Supplemental Proxy, the Director Defendants conceivably
had the opportunity to correct any alleged misstatements but failed to do so.766
As alleged, the Director Defendants’ decisions to delegate the Proxy to the
Conflicted Officer Defendants and forego reviewing it before filing, as well as their
failure to correct the Proxy’s alleged false and misleading statements, are actionable
as bad faith.767
766 See Kirby Decl. Ex. 2. 767 See, e.g., Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 979 (Del. Ch. 2013) (holding that complaint stated a claim that board had abdicated its responsibilities by failing to conduct meaningful investigation and allowing management to make decisions without oversight); Disney I, 825 A.2d at 278 (holding that complaint stated a claim for breach of duty of loyalty and action not in good faith where it alleged that board failed to act on executive’s compensation and abdicated decision-making responsibility to the company’s CEO); Nagy v. Bistricer, 770 A.2d 43, 61–62, 64 (Del. Ch. 2000) (holding that a board abdicated its statutory duty under Section 251(b) when it delegated the determination of the merger consideration to an investment bank selected by the acquirer); Grimes, 1995 WL 54441, at *11 (finding that complaint stated a claim that board had
169 3. The Merger Was Not Cleansed Under Corwin.
Having determined that Plaintiff has stated a claim against the Director
Defendants for breach of the duty of loyalty, I turn to the Director Defendants’
argument that any such breach was cleansed by a stockholder vote and that therefore
dismissal is appropriate under Corwin.768 Corwin gives rise to the irrebuttable
presumption of the business judgment rule when a transaction “is approved by a
fully informed, uncoerced vote of the disinterested stockholders.”769 To obtain the
protection of that presumption, the Director Defendants must “demonstrate that the
[cash-out] merger has been approved by a fully informed, uncoerced majority of the
disinterested stockholders.”770 Otherwise, for the reasons discussed supra, Revlon
improperly delegated its authority under Section 141(a) to the CEO, where the board agreed not to engage in “unreasonable interference, in the good faith judgment of the Executive, by the Board . . . in the Executive’s carrying out of his duties and responsibilities”); Jackson v. Turnbull, 1994 WL 174668, at *4–5 (Del. Ch. Feb. 8, 1994) (holding board impermissibly abdicated statutory obligation to set merger consideration by delegating task to its investment bankers), aff’d, 653 A.2d 306 (Del. 1994) (TABLE); Sealy Mattress Co. of N.J., Inc. v. Sealy, Inc., 532 A.2d 1324, 1338 (Del. Ch. 1987) (holding that board “could not abdicate its obligation to make an informed decision on the fairness of the merger by simply deferring to the judgment of the controlling stockholder”). 768 125 A.3d at 308 (holding that an “uncoerced, informed stockholder vote is outcome- determinative, even if Revlon applied to the merger”). 769 Id. at 309. 770 KCG Hldgs., 2019 WL 2564093, at *10 (internal quotation marks omitted) (quoting Corwin, 125 A.3d at 306).
170 enhanced scrutiny or entire fairness will apply and Plaintiff’s claims against the
Director Defendants will survive the Motions.
As of the close of business on the Merger’s record date, the Company had
98,218,625 shares of common stock and 10,400,000 shares of preferred stock
outstanding.771 The common and preferred shares voted together on the Merger as
a single class, with each common and preferred share receiving one vote for a total
of 108,618,625 potential votes.772 CBRE’s 10,400,000 preferred shares represented
roughly 10.4% of the outstanding shares. PSP, which also held a substantial stake
in Developer 2, held 9,341,025 shares.773 And management, who received post-
close equity and jobs, held 1,210,049 shares.774 Overall, 56,856,604 of these shares
or 52%, including CBRE, PSP, and management, voted in favor of the Merger.775
Plaintiff contends that Corwin does not apply because the vote was
uninformed and because a significant block of votes was not disinterested.776
771 Compl. ¶ 247. 772 Id. 773 Id. ¶ 249. 774 Id. 775 Id. ¶ 248. The Proxy informed stockholders if “you abstain from voting or fail to cast your vote, in person or by proxy, it will have the same effect as a vote ‘AGAINST’ the proposal to adopt the Merger Agreement and approve the Merger.” Proxy at 5 (emphasis omitted). 776 See D.I. 82 at 84–85.
171 Plaintiff argues PSP was not disinterested because “it held a stake in the buyer,”777
meaning Riverstone’s Developer 2. Plaintiff argues CBRE was neither disinterested
nor uncoerced, as it was contractually obligated to vote its preferred shares in
accordance with the Board’s recommendation regardless of its own economic
interest, and that further, its “preferred shares rolled over into the combined company
with an increased dividend rate.”778 The parties submitted supplemental briefing on
whether CBRE’s preferred shares should count toward the uncoerced, disinterested,
and fully-informed vote. Removing shares held by PSP, CBRE, and conflicted
management from the vote total, 35,905,530—or only 41%—of the remaining
87,667,551 disinterested shares were voted in favor of the Merger.779 Removing
only CBRE’s preferred shares leaves 46,456,604 or 47.3% of the overall outstanding
98,218,625 shares in favor of the Merger.780
In light of CBRE’s contractual obligation to vote in favor of the merger, which
CBRE agreed to without being informed of the merger’s terms, the Director
Defendants cannot invoke Corwin’s protections. CBRE was neither fully informed
nor disinterested, and its votes were compelled by contractual duty. Because
777 Id. at 84. 778 Id. 779 Compl. ¶ 250. 780 Id. ¶ 252.
172 removing CBRE’s preferred stock strips the Director Defendants of Corwin’s
protections, I need not reach PSP and management’s votes.
CBRE’s vote in favor of the Merger was not informed. Under Delaware law,
determining whether a vote was fully informed at the pleading stage requires the
Court to consider whether the “complaint, when fairly read, supports a rational
inference that material facts were not disclosed or that the disclosed information was
otherwise materially misleading.”781 For shareholders to be “fully informed,” they
must possess “all material information” as to a particular transaction.782
CBRE acquired its stock on October 10 when it executed the Purchase
Agreement.783 CBRE agreed that in the event of “any proposed merger,” it would
“vote its Preferred Shares in a manner consistent with the recommendation of the
Board.”784 CBRE agreed to this term 13 days before bidders submitted definitive
781 Mindbody, 2020 WL 5870084, at *26. 782 van der Fluit v. Yates, 2017 WL 5953514, at *7 (Del. Ch. Nov. 30, 2017) (quoting Solomon v. Armstrong, 747 A.2d 1098, 1127–28 (Del. Ch. 1999)). 783 See Compl. ¶¶ 181–206, 235; D.I. 92, Ex. A. 784 D.I. 92, Ex. A. § 6.09(g) (emphasis added); Compl. ¶ 237. CBRE also expressly waived any right to recover damages from the Company beyond the purchase price of the preferred stock, absent fraud. D.I. 92, Ex. A § 8.04. The preferred stock issuance and voting provision were disclosed in the Proxy. See, e.g., Proxy at 15 (“[T]he holders of Company Preferred Stock and Pattern have agreed that the holders of Company Preferred Stock shall vote their 10,400,000 shares of Company Preferred Stock in a manner consistent with the recommendations of the Board . . . .”); id. at 129 (“Pursuant to the Company Preferred Stock Purchase Agreement, we issued and sold 10,400,000 shares of Company Preferred Stock on October 25, 2019 to entities affiliated with CBRE . . . .”).
173 documentation and 18 days before bidders submitted best and final offers; 24 days
before the Special Committee and Board voted to approve the Merger; 117 days
before the Company issued the Proxy; and 152 days before the stockholder vote. As
of the date of the Purchase Agreement, the Special Committee was fielding offers
from at least four bidders, including Brookfield and Buyer, and it was rejecting
exclusivity requests. No transaction was definitive, and any terms were tentative at
best. CBRE effectively cast its vote in favor of the Merger before the Special
Committee and Board had the opportunity to finalize its terms, consider its merits,
approve it as furthering the best interests of the Company and its stockholders, or
disclose its terms for stockholder consideration. When CBRE agreed to vote in favor
of the Merger, it did not know that the transaction would close, the price at which it
might close and whether that price would be paid in cash or stock, or who the
counterparty might be. Contrary to the Director Defendants’ assertion,785 CBRE’s
lack of information was not cured ex post facto by the allegedly deficient Proxy,
issued after CBRE agreed to vote in favor of the Merger. CBRE’s uninformed assent
to the Merger precludes its votes from contributing to any cleansing under Corwin.
785 See D.I. 96 at 2 (“Plaintiff asks the Court to simply assume that CBRE must have disregarded the Proxy and the terms of the Merger itself in casting its votes because it had agreed to vote in favor of whatever transaction the [Company] board recommended. . . . CBRE, as a holder of preferred stock, had access to the same information set forth in the Proxy as every other stockholder. Plaintiff does not allege otherwise, and she offers no reason to assume that CBRE ignored the Proxy.” (footnote omitted)).
174 Second, CBRE was interested with respect to the Merger. A stockholder is
interested if it may derive pecuniary interest from one particular result or is otherwise
unable to be fair-minded, unbiased, and impartial.786 “That is, only the votes of those
stockholders with no economic incentive to approve a [challenged] transaction
count.”787 CBRE’s contractual obligation to vote in favor of the Merger carried with
786 See Scott v. Arden Farms Co., 28 A.2d 81, 85 (Del. Ch. 1942) (“The word ‘disinterested’ as so used, plainly means something more than not having a pecuniary interest in the controversy; it connotes fair-mindedness, including freedom from actual or probable bias, prejudice or partiality with relation to the questions to be determined.”). 787 Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 900 (Del. Ch. 1999) (emphasis omitted); cf. Corwin, 125 A.3d at 313–14 (“There are sound reasons for this policy. When the real parties in interest—the disinterested equity owners—can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk- taking than it promises in terms of benefits to them. The reason for that is tied to the core rationale of the business judgment rule, which is that judges are poorly positioned to evaluate the wisdom of business decisions and there is little utility to having them second- guess the determination of impartial decision-makers with more information (in the case of directors) or an actual economic stake in the outcome (in the case of informed, disinterested stockholders). In circumstances, therefore, where the stockholders have had the voluntary choice to accept or reject a transaction, the business judgment rule standard of review is the presumptively correct one and best facilitates wealth creation through the corporate form.” (footnote omitted)); see In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 426 (Del. Ch. 2002) (stating that “it is clear that the Put Agreements can create materially different incentives for the holders than if they were simply holders of Pure common stock,” and therefore discounting holders of those shares in majority of minority calculation); In re CNX Gas Corp. S’holders Litig., 4 A.3d 397, 416 (Del. Ch. 2010) (explaining that “[e]conomic incentives matter, particularly for the effectiveness of a legitimizing mechanism like a . . . stockholder vote”); Morton’s Rest. Gp., 74 A.3d at 663 n.34 (“[O]nly disinterested stockholder approval is a strong assurance of fairness.”); In re Zale Corp. S’holders Litig., 2015 WL 5853693, at *9 (Del. Ch. Oct. 29, 2015) (ruling plaintiff had not adequately alleged a stockholder was interested where the stockholder’s alternate economic interest, unique to that stockholder, was not material); Brandon Mordue, The Revlon Divergence: Evolution of Judicial Review of Merger Litigation, 12 Va. L. Bus. R. 531, 567 (2018) (explaining, in light of Corwin’s economic purposes,
175 it financial consequences for breach and financial incentives for performance.
CBRE bargained for the right to rollover its preferred stock at a premium into the
post-closing company and keep its shares after a merger.788 And after a change in
control, the annual dividend rate on CBRE’s preferred stock would increase by as
much as seventy-five basis points, and the holders would receive an accelerated
payment on certain otherwise contingent dividends.789 CBRE’s Merger benefits
were not shared with the Company’s public common stockholders, who were to be
cashed out.790 Accordingly, CBRE was interested by virtue of the Purchase
Agreement, as it stood to receive benefits from the Merger that were not shared with
the cashed-out majority.791 CBRE was also economically incentivized to perform
“Corwin thus suggests that an ‘interested’ stockholder would be one voting in favor of a transaction for reasons other than the economic merits of the transaction itself”). 788 Compl. ¶ 249. 789 D.I. 94, Ex. A § 2(a)–(c). 790 See PNB, 2006 WL 2403999, at *8, *14, *15 (holding that for the purposes of ratification, the only votes that counted were those of the shareholders who would be cashed out; a majority of those shareholders had to vote in favor of the transaction for the interested transaction to be ratified; and that the shareholders who stood to keep their shares in the merger were considered interested); cf. Stewart v. BF Bolthouse Holdco, LLC, 2013 WL 5210220, at *10 (Del. Ch. Aug. 30, 2013) (stating that “allegations that the directors stood on both sides of the transaction or derived a benefit that was not shared pro rata among the other shareholders” may implicate duty of loyalty as an “interested transaction”). 791 Cf. Larkin v. Shah, 2016 WL 4485447, at *20 (Del. Ch. Aug. 25, 2016) (noting that “[n]ot all stockholder approvals of a transaction have a cleansing effect,” and observing that “[a]mong that ‘yes’-block were stockholders owning 27.4% of Auspex’s shares who contractually agreed to tender under the Tender and Support Agreement,” and “[e]xcluding
176 under the Purchase Agreement and avoid the consequences of breach. CBRE’s votes
cannot contribute to cleansing under Corwin.
Finally, and fundamentally, Defendants have failed to demonstrate that
CBRE’s vote was voluntary. The business judgment rule standard of review applies
only if disinterested and informed stockholders have had the voluntary choice to
accept or reject a transaction.792 “[T]he term ‘ratification’ applies only to a voluntary
stockholder vote.”793 The Court declines to second-guess the board when the
stockholders, as a second set of decisionmakers, have approved the economic merits
of a transaction for themselves.794 To be a meaningful ratifying vote, the stockholder
must be voting on the transaction of her own accord and on the transaction’s merits.
A stockholder voting in favor of a specific transaction because it had previously
contracted to vote in favor of any transaction in exchange for consideration is not
them, stockholders owning roughly 70% of the outstanding shares not contractually bound to tender agreed to the merger”). 792 Corwin, 125 A.3d at 306, 310, 312–13; Frank v. Wilson & Co., 32 A.2d 277, 305 (Del. 1943) (“Ratification . . . implies a voluntary and positive act . . . .”). 793 KKR, 101 A.3d at 1003. The vote itself may be statutorily required; the point is that the stockholder’s “yes” is voluntary. See Corwin, 125 A.3d at 312–14; In re Volcano Corp. S’holder Litig., 143 A.3d 727, 740–45 (Del. Ch. 2016). 794 See Lavin v. West Corp., 2017 WL 6728702, at *8 (Del. Ch. Dec. 29, 2017) (citing Corwin, 125 A.3d at 313); J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 Wm. Mitchell L. Rev. 1443, 1457 (2014) (commenting that “a compromised board can substitute the stockholders as the necessary qualified decision maker and, thereby, restore the protections of the business judgment rule” and that it is appropriate that “a court should take into account and defer to an uncoerced endorsement from fully informed, disinterested stockholders”).
177 offering the second review that supports application of the business judgment rule.795
Indeed, this Court has excluded from a Corwin calculus votes by stockholders who
contractually agreed to vote their shares in favor of a transaction.796
CBRE’s vote was not a ratification of the Merger. Rather, it was a dutiful
performance under the Purchase Agreement. CBRE lacked the ability to vote no at
the ballot box in light of its contractual obligation to vote for the Merger. CBRE
could either perform its contractual obligation to vote in favor of the Merger, or
breach the Purchase Agreement and face the consequences. Including CBRE in the
cleansing vote count would run afoul of Corwin’s logical underpinnings.
In an effort to count CBRE’s votes as cleansing votes, the Director Defendants
point out that the Special Committee put Buyer and Brookfield on level footing
before CBRE. According to the September 29 meeting minutes, the purchaser of
the preferred shares would have a premium redemption right in the event the
Company’s acquirer did not meet certain requirements, but both Brookfield and
795 See In re Invs. Bancorp, Inc. S’holder Litig., 177 A.3d 1208, 1220–21 (Del. 2017) (noting “mere approval by stockholders of a request by directors for the authority to take action within broad parameters does not insulate all future action by the directors within those parameters from attack,” and explaining that only where “stockholders approve a specific corporate action, [will] the doctrine of ratification, in most situations, preclude[] claims for breach of fiduciary duty attacking that action” (quoting Sample v. Morgan, 914 A.2d 647, 663–64 (Del. Ch. 2007))); Gantler v. Stephens, 965 A.2d 695, 713 (Del. 2009) (“[T]he only director action or conduct that can be ratified is that which the shareholders are specifically asked to approve.”). 796 See Larkin, 2016 WL 4485447, at *20 (excluding shareholders who had contractual obligation to tender shares and vote yes if necessary).
178 Buyer were carved out from that redemption right.797 But this does not change the
fact that CBRE was required to vote in favor of the Merger regardless of the identity
of the acquirer.
The Director Defendants also contend Plaintiff cannot “explain how it was
coercive for CBRE to agree to vote in a manner consistent with the board’s
recommendation, where the Board itself was bound to vote the way of a fully
independent Special Committee, and a majority of the Board and all of the Special
Committee members are concededly independent.”798 This misses the point of
ratification and why the vote must be voluntary: the stockholders must consider and
approve the transaction with their own voice, wholly independently from the board.
CBRE agreed to vote in favor of the Merger—or any merger—without evaluating
the transaction’s merits or the Board’s fiduciary performance. CBRE agreed to
substitute or forego its own independent judgment and support the Board’s
recommendation for any merger within the identified timeframe.799 Plaintiff’s
argument, connecting CBRE’s vote through a daisy chain of substituted judgment to
the very Special Committee whose conduct the vote is to ratify, demonstrates the
fundamental reason why CBRE’s vote cannot be a cleansing vote. A stockholder
797 Kirby Decl. Ex. 20 at PEGI-00001291. 798 D.I. 92 at 5. 799 See Invs. Bancorp, 177 A.3d at 1222.
179 who must vote the same way as the board is echoing, not ratifying, the board’s
conduct, even if the board were comprised of entirely careful and loyal directors.
Without CBRE’s vote, the Director Defendants do not have the majority
necessary for Corwin to cleanse the Merger. The Individual Defendants’ Motion is
denied as to Count I, and Plaintiff’s nonexculpated claims against the Director
Defendants shall proceed.
B. Plaintiff Has Stated A Claim For Breach Of Fiduciary Duty Against Certain Officer Defendants.
Because Section 102(b)(7) does not exculpate a corporate officer’s breach of
fiduciary duty, Plaintiff’s claims against the Officer Defendants face a different
standard.800 Plaintiffs need only plead facts supporting a reasonable inference that
the Officer Defendants breached their fiduciary duty of care in their official
800 See, e.g., Baker Hughes, 2020 WL 6281427, at *15–16; Essendant, 2019 WL 7290944, at *15.
180 capacities.801 Plaintiff may recover damages from the Officer Defendants in their
roles as officers for breach of either the duty of loyalty or the duty of care.802
“Corporate officers owe fiduciary duties that are identical to those owed by
corporate directors.”803 As stated, “the duty of loyalty mandates that the best interest
of the corporation and its shareholders takes precedence over any interest possessed
by a director, officer or controlling shareholder and not shared by the stockholders
801 See, e.g., Baker Hughes, 2020 WL 6281427, at *15. As this Court noted recently, “[i]t is an open issue of Delaware law as to whether Revlon applies to an officer’s actions.” Mindbody, 2020 WL 5870084, at *32 n.287. For purposes of this decision, I assume a breach of an officer’s duties of care and loyalty should be reviewed under the traditional standards of bad faith and gross negligence, respectively, because the directors—not the officers—are responsible for the types of decisions that warrant Revlon enhanced scrutiny review. See id. (applying gross negligence even though Revlon applied to the underlying transaction because “Revlon neither creates a new type of fiduciary duty in the sale-of- control context nor alters the nature of the fiduciary duties that generally apply” (quoting Malpiede, 780 A.2d at 1083)); Morrison I, 2019 WL 7369431, at *22 (applying gross negligence standard to officer conduct, even though Revlon applied to the underlying company sale process). 802 See, e.g., Baker Hughes, 2020 WL 6281427, at *15. 803 Frederick Hsu, 2017 WL 1437308, at *39 (citation, footnote, and internal quotation marks omitted) (quoting Gantler, 965 A.2d at 708, and then quoting Hampshire Gp. Ltd. v. Kuttner, 2010 WL 2739995, at *12 (Del. Ch. July 12, 2010)).
181 generally.”804 Corporate officers “are not permitted to use their position of trust and
confidence to further their private interests.”805
“To plead a claim for breach of the duty of loyalty that will overcome a motion
to dismiss, a plaintiff must plead sufficient facts to support a rational inference that
the corporate fiduciary acted out of material self-interest that diverged from the
interests of the shareholders.”806 To make such a showing, the plaintiff may plead
that the officer was interested or lacked independence with respect to the challenged
transaction.807 To plead interestedness, a plaintiff can plead the fiduciary received
804 Cede & Co., 634 A.2d at 361; see also Gantler, 965 A.2d at 709 (“[T]he fiduciary duties of officers are the same as those of directors.”); Guth, 5 A.2d at 510 (“While technically not trustees, [corporate officers and directors] stand in a fiduciary relation to the corporation and its stockholders. A public policy, existing through the years, and derived from a profound knowledge of human characteristics and motives, has established a rule that demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale.”). 805 Guth, 5 A.2d at 510. 806 Saba Software, 2017 WL 1201108, at *21. 807 See, e.g., Cede & Co., 634 A.2d at 362 (“Classic examples of director self-interest in a business transaction involve either a director appearing on both sides of a transaction or a director receiving a personal benefit from a transaction not received by the shareholders generally. We have generally defined a director as being independent only when the director’s decision is based entirely on the corporate merits of the transaction and is not influenced by personal or extraneous considerations. By contrast, a director who receives
182 “a personal financial benefit from a transaction that is not equally shared by the
stockholders,” or “was a dual fiduciary and owed a competing duty of loyalty to an
entity that itself stood on the other side of the transaction or received a unique benefit
not shared with the stockholders.”808 To plead a lack of independence, a plaintiff
can plead the fiduciary is “sufficiently loyal to, beholden to, or otherwise influenced
by an interested party” to undermine the fiduciary’s ability to judge the matter on its
merits.809
Further, “[l]ike directors, officers breach the duty of loyalty if they act in bad
faith for a purpose other than advancing the best interests of the corporation.” 810 A
claim for breach of the duty of loyalty against officers will proceed where the
complaint alleges that they manipulated the sales process to sabotage the alternatives
they did not personally favor and acted with favoritism toward a particular bidder.811
a substantial benefit from supporting a transaction cannot be objectively viewed as disinterested or independent. This principle necessarily constrains our review of the Court of Chancery’s duty of loyalty formulation.” (citations omitted)). 808 Frederick Hsu, 2017 WL 1437308, at *26 (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)). 809 Id. 810 Id. at *39 (alteration and internal quotation marks omitted) (quoting Kuttner, 2010 WL 2739995, at *12). 811 See Chen, 87 A.3d at 686–87 (quoting and discussing Gantler, 965 A.2d at 709).
183 An officer’s compliance with the duty of care is evaluated for gross
negligence.812 “Gross negligence involves more than simple carelessness. To plead
gross negligence, a plaintiff must allege conduct that constitutes reckless
indifference or actions that are without the bounds of reason.”813 “While the inquiry
of whether the claims amount to gross negligence is necessarily fact-specific, the
burden to plead gross negligence is a difficult one.”814
Plaintiff’s Complaint places many wrongs at the many feet of the Officer
Defendants or “conflicted management,” and Garland appears in nearly every scene
of Plaintiff’s narrative. But the Complaint pleads few facts addressing the other
Officer Defendants’ individual involvement in the sales process. As a result,
Plaintiff has failed to plead breaches by each Officer Defendant. Plaintiff has alleged
facts from which it is reasonably conceivable that Garland, Elkort, and Lyon—but
not Armistead and Pedersen—breached their duty of loyalty by titling the sales
process toward Buyer in pursuit of their own interests and Riverstone and
Developer 2’s interests. Plaintiff has stated a claim against Garland for breaching
his duties as an officer in preparing the allegedly false and misleading Proxy—but
812 Baker Hughes, 2020 WL 6281427, at *15. 813 Id. (internal quotation marks omitted) (quoting Morrison I, 2019 WL 7369431, at *22). 814 Id. (quoting Zucker v. Hassell, 2016 WL 7011351, at *7 (Del. Ch. Nov. 30, 2016), aff’d, 165 A.3d 288 (Del. 2017)).
184 not Armistead, Elkort, Lyon, or Pedersen. The Individual Defendants’ Motion on
Count II is granted and denied in part.
1. It Is Reasonably Conceivable That Only Garland, Elkort, And Lyon Tilted The Sales Process In Buyer’s Favor; It Is Not Reasonably Conceivable That Armistead And Pedersen Did The Same.
Plaintiff claims the Officer Defendants breached both their duty of loyalty and
duty of care by “tilt[ing] the sale process” in Riverstone’s and Buyer’s “favor due to
[their] conflicts of interest.”815 The Complaint supports a reasonable inference that
Garland, Elkort, Lyon, and Pederson favored Riverstone and Developer 2’s interests
over the Company’s public stockholders because they were not independent of
Riverstone and Developer 2.816
As an initial matter, Plaintiff has alleged that each Officer Defendant was
conflicted with respect to Riverstone.817 Each held substantial roles with
Riverstone’s subsidiaries and the favored entity in the sales process, Developer 2 as
preceded by Developer 1. Garland, the Company’s CEO since its founding in
October 2012, also served as the President and a director of both Developer 1 and
815 D.I. 82 at 35 (quoting Mindbody, 2020 WL 5870084, at *1). 816 See Frederick Hsu, 2017 WL 1437308, at *39. 817 Compl. ¶¶ 32–36.
185 Developer 2.818 Armistead, the Company’s Executive Vice President of Business
Development since August 2013, served as Developer 1’s Executive Director since
June 2009 and as Developer 2’s President since April 2019.819 Elkort, the
Company’s Executive Vice President and Chief Legal Officer since May 2018, also
served as Developer 1’s Director of Legal Services and Co-Head of Finance since
June 2009 and as a Developer 2 officer.820 Lyon, the Company’s President since
April 2019, also previously served as Developer 1’s Head of Structured Finance.821
And Pedersen, the Company’s CFO since April 2019, also served as Developer 2’s
CFO since May 2018 and Developer 1’s Co-Head of Finance since June 2009.822
Thus, the Officer Defendants were dual fiduciaries at the time of the Merger.823
Because Riverstone’s and Developer 2’s interests diverged from those of the
818 Id. ¶ 24. Before the Merger, Garland also held a substantial equity interest in Developer 2. Therefore, his interests also diverged from those of the Company’s public stockholders to the extent an internalization of Developer 2 required the companies’ stockholders to compete for consideration. 819 Id. ¶ 32. 820 Id. ¶ 33. Before the Merger, Elkort also held a substantial equity interest in Developer 2. Therefore, his interests also diverged from those of the Company’s public stockholders to the extent an internalization of Developer 2 required the companies’ stockholders to compete for consideration. 821 Id. ¶ 34. 822 Id. ¶ 35. 823 See, e.g., Chen, 87 A.3d at 670.
186 Company’s stockholders, those Officer Defendants faced an inherent conflict of
interest.824
Plaintiff has also alleged that those Officer Defendants were interested in the
Merger and incentivized to favor Buyer and the associated internalization of
Developer 2 to secure for themselves equity and continued employment.825 Post-
closing, Garland continues to run the combined entity, and Armistead, Elkort, Lyon,
and Pedersen continue to serve as its executives.826 During the sales process, the
Company communicated to bidders that it was desirable for the Officer Defendants
“to maintain their positions in the combined company,”827 and the Officer
Defendants were, after a blackout period, permitted to negotiate these roles without
the Special Committee’s involvement.828 Each was therefore conceivably beholden
to Riverstone and Developer 2 for their continued employment, calling into question
their independence. Armistead, Garland, Elkort, Lyon, and Pederson also had the
opportunity to retain equity in the post-closing company, while the Company’s
824 Id. 825 See, e.g., Frederick Hsu, 2017 WL 1437308, at *26. 826 Compl. ¶¶ 24, 32–36. 827 Id. ¶ 174. 828 See id. ¶¶ 147, 174, 163.
187 public stockholders were cashed out. As disclosed in the Proxy, each received
substantial equity in the post-closing company.829
While Plaintiff has alleged that each of the Officer Defendants faced conflicts
of interest with respect to the Merger, the key question is whether Plaintiff has plead
facts making it reasonably conceivable that each Officer Defendant acted during the
sales process due to those conflicts. Plaintiff has not. The Complaint pleads facts
supporting a reasonable inference that only Garland, Elkort, and Lyon acted
disloyally to favor Riverstone and Developer 2’s interests, consistent with their
incentives. The Complaint lacks similarly sufficient allegations against Armistead
and Pedersen.
Readers who have made it this far are familiar with Garland’s questionable
contributions to the sales process. As discussed at length above, Garland is alleged
to have initiated and actively participated in the sales process as both a director and
officer with the primary objective of securing a merger with a friendly bidder that
would internalize Developer 2 at a premium price. In pursuit of this objective, he
and the Director Defendants acknowledged, yet ignored, concerns that the
Company’s public stockholders would be shorted merger consideration.
In addition, Plaintiff has alleged that Elkort and Lyon also contributed to
tilting the sales process toward Buyer. After Riverstone spurred the idea of take-
829 Id. ¶¶ 24, 32–35.
188 private, at a time when the Company did not need to raise equity capital,
management—including Garland, Elkort, and Lyon—kicked off the sales process
with Riverstone in the room and able to gather Company confidential information.830
Plaintiff alleges Garland and Lyon encouraged the Special Committee to retain
Goldman, despite its known conflicts including advising Riverstone on a potential
buyout of the Company.831 Garland and Elkort pressed the Special Committee to
favor a transaction that was Riverstone-approved.832 Elkort “emphasized” to the
Special Committee that “the need for Riverstone’s support for any potential
transaction should not be underestimated because Riverstone’s rights to consent that
would likely be implicated by the proposed transaction appeared to be very
broad.”833 But, as Brookfield realized, the Consent Right was readily structurally
circumvented.
Based on these facts, it is reasonably conceivable that Garland, Elkort and
Lyon breached their fiduciary duties as officers by consciously pressing for a
transaction with Buyer consistent with their personal and financial incentives, as
830 Taking Plaintiff’s group pleading as true, Armistead and Pedersen also participated in the sales process kickoff. However, unlike Elkort and Lyon, the Complaint does not allege that they took action to further their own interests or Riverstone’s interests once the sales process was underway. 831 Compl. ¶¶ 106–08; see also id. ¶ 139. 832 Id. ¶ 117. 833 Id. (alterations omitted).
189 well as Riverstone and Developer 2 interests.834 As alleged, their actions give rise
to a breach of the duty of loyalty, as they cannot escape their inherent conflicts. But
even if it were a close call, at a minimum, the facts pled give rise to the reasonable
inference that Elkort and Lyon were at least recklessly indifferent or grossly
834 See Frederick Hsu, 2017 WL 1437308, at *39; Chen, 87 A.3d at 687. The Officer Defendants contend that the 220 materials undermine Plaintiff’s allegations against them. See D.I. 85 at 23. Plaintiff refutes the Officer Defendants’ interpretation of those materials. See D.I. 82 at 37–40, 41. The 220 documents used to draft the Complaint are incorporated by reference or integral to it, and therefore I may review documents cited in the Complaint “to ensure that the plaintiff has not misrepresented [their] contents and that any inference the plaintiff seeks to have drawn is a reasonable one.” Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016), abrogated on other grounds by Tiger v. Boast Apparel, Inc., 214 A.3d 933 (Del. 2019). “Section 220 documents, hand selected by the company, cannot be offered to rewrite an otherwise well-pled complaint,” but can be offered to ensure the plaintiff is not taking documents out of context. In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL 4850188, at *14 n.216 (Del. Ch. Oct. 1, 2019). The Court cannot weigh competing factual interpretations of incorporated documents on a motion to dismiss. Owens on Behalf of Esperion Therapeutics, Inc. v. Mayleben, 2020 WL 748023, at *9 (Del. Ch. Feb. 13, 2020), aff’d sub nom. Owens v. Mayleben, 241 A.3d 218 (Del. 2020). It appears to me that Plaintiff has not misrepresented the 220 materials and has drawn reasonable inferences therefrom. See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013); see also In re CBS Corp. S’holder Class Action & Deriv. Litig., 2021 WL 268779, at *18 (Del. Ch. Jan. 27, 2021) (“The incorporation-by-reference doctrine does not enable a court to weigh evidence on a motion to dismiss. It permits a court to review the actual documents to ensure that the plaintiff has not misrepresented their contents and that any inference the plaintiff seeks to have drawn is a reasonable one. Where a defendant improperly and extensively uses Section 220 Documents in support of a Chancery Rule 12(b)(6) motion to support factual inferences that run counter to those supported in the complaint, the court may either exclude the extraneous matter from its consideration or convert the Chancery Rule 12(b)(6) motion into a motion for summary judgment so that the plaintiff may take discovery before the court determines if pre-trial dispositive relief is appropriate.” (footnotes and internal quotation marks omitted) (quoting Voigt, 2020 WL 614999, at *9)).
190 negligent with respect to the steps Garland and the Board took to tilt the sale process
in Buyer’s favor.835 Plaintiff has stated a claim against Garland, Elkort, and Lyon.
Plaintiff has failed to state a claim for breach against Armistead and Pedersen.
Unlike Elkort and Lyon, the Complaint fails to allege anything specific about
Armistead and Pedersen’s involvement in the sales process.836 The Complaint
alleges that Armistead and Pedersen had long histories with Riverstone and were
conflicted.837 But the only allegations tethering Armistead and Pedersen to the
process concern the Officer Defendants collectively.838 With no allegations
whatsoever tying Armistead to the process, it is not reasonably conceivable that
Armistead breached his duty of loyalty or care by titling the process toward Buyer
835 See Mindbody, 2020 WL 5870084, at *33 (“White was also involved in providing timing and informational advantages to Vista throughout the sale process. Plaintiffs allege that White, with Stollmeyer [director], populated Vista’s substantial data room. . . . In view of these facts, it is reasonably conceivable that White was at least recklessly indifferent to the steps Stollmeyer took to tilt the sale process in Vista’s favor.”); cf. KCG Hldgs., 2019 WL 2564093, at *18 (“The allegations support a pleadings-stage inference that the Director Defendants breached their duty of care by failing to employ a reasonable process that managed Jefferies’ influence. Whether the Director Defendants’ actions in this regard rose to the level of bad faith or merely state a claim for breach of the duty of care is a close call. The Court need not make this call in light of the sufficiency of Plaintiff’s other allegations.” (footnote omitted)). 836 Compare Compl. ¶¶ 33, 34, 106, 117, 130, 139, 210, 213–14, with id. ¶¶ 32, 35, 45, 85– 88, 210, 213–14. 837 See id. ¶¶ 32, 35. 838 See, e.g., Essendant, 2019 WL 7290944, at *7 n.91 (“[G]roup pleading is not sufficient to state a claim of breach of duty against an individual fiduciary.”); see D.I. 82 at 36 (citing Compl. ¶¶ 107–08, 116–17, 124, 126–27, 140, 187, 234).
191 in pursuit of his, Riverstone, or Developer 2’s interests.839 Plaintiff has not stated a
claim against Armistead.
As for Pedersen, the Complaint alleges that Pedersen shared the Company’s
favorable financial growth on 2019 earnings calls.840 Pedersen’s statements are the
backdrop against which Plaintiff outlines Garland’s stock issuances, contending the
issuances were not financially necessary and only done to secure CBRE’s favorable
votes. But Pedersen’s statements are consistent with his position as CFO, and
Plaintiff has not alleged that he utilized those statements to advance his own interests
or Riverstone and Developer 2’s interests. Nor has Plaintiff alleged those statements
were false; rather, Plaintiff relies on the truth of those statements to outline the
preferred stock issuance in stark relief. Plaintiff has not pled a breach of fiduciary
duty by Pedersen.
839 Compare Baker Hughes, 2020 WL 6281427, at *15–16, with Frederick Hsu, 2017 WL 1437308, at *39–40 (recognizing the lack of allegations against certain officer defendants, but inferring their involvement in management-level initiatives that were constructed to favor differentiated equity, and stating that “the claims against Kupietzky and Morrow strike me as weaker than the other claims in the case, but relative weakness is not grounds for dismissal” and “[g]iven the plaintiff-friendly standard that governs a Rule 12(b)(6) motion, these claims survive”). In Frederick Hsu, the Court found that, despite its scant allegations, the complaint stated a claim against those officers in view of their role in crafting management-level strategy and initiatives to shape the company to favor undifferentiated equity. Here, the Court is asked to assess a Board-level sales process that looped in conflicted management. There is no allegation that Armistead touched that process, nor are there allegations from which it would be reasonable to infer his involvement simply by virtue of his role as a Company offer and dual fiduciary. 840 Compl. ¶¶ 85–88.
192 2. It Is Reasonably Conceivable That Garland Is Responsible For The False And Misleading Proxy.
Plaintiff also claims the Officer Defendants breached their duty of loyalty or,
at a minimum, their duty of care by causing the Company to issue the materially
incomplete and misleading Proxy to stockholders. “It is elementary that under
Delaware law the duty of candor imposes an unremitting duty on fiduciaries,
including directors and officers, to not use superior information or knowledge to
mislead others in the performance of their own fiduciary obligations.”841 And those
fiduciaries certainly cannot “use their position of trust and confidence” to withhold
from stockholders material information “to further their private interests.”842
“Officers may breach their fiduciary duties to the extent they are involved in
preparing a proxy statement that contains materially misleading disclosures or
omissions.”843 This requires that the Court conduct an officer-by-officer analysis.844
841 Haley, 235 A.3d at 718 (alteration, internal quotation marks, and footnote omitted) (quoting McMillan, 559 A.2d at 1283). 842 Id. (alteration, internal quotation marks, and footnote omitted) (quoting Guth, 5 A.2d at 510); accord Macmillan, 559 A.2d at 1283. 843 Roche, 2020 WL 7023896, at *18 (citing Hansen, 2018 WL 3025525, at *11 (holding that a complaint stated a claim against an officer for violation of the fiduciary duty of disclosure and noting that directors and officers of a corporation generally owe the same fiduciary duties)); see also Baker Hughes, 2020 WL 6281427, at *15–16; Morrison I, 2019 WL 7369431, at *25, *27. 844 See Roche, 2020 WL 7023896, at *18; Baker Hughes, 2020 WL 6281427, at *15–16.
193 As explained, Plaintiff has pled the Board delegated preparation of the Proxy
to the conflicted Officer Defendants. Plaintiff contends the Officer Defendants are
collectively responsible for the allegedly false and misleading Proxy. Plaintiff’s
disclosure claim therefore involves a two-step analysis. The first step considers
which Officer Defendants were involved in preparing the Proxy. The second
addresses whether the Proxy is materially misleading.845
a. The Complaint Pleads Only That Garland Was Involved In Preparing And Disseminating The Proxy.
I turn first to the issue of whether the Officer Defendants were involved in
preparing the Proxy and whether group pleading is sufficient to state a claim against
all Officer Defendants. This Court recently addressed allegations that the
companies’ officers were responsible for disclosure deficiencies in City of Warren
General Employees’ Retirement System v. Roche846 and In re Baker Hughes Inc.
Merger Litigation.847 In both cases, the Court held that a plaintiff fails to plead a
claim against an officer based on disclosure deficiencies where “the Complaint is
devoid of any allegations that [the officer] had any role in drafting or disseminating
845 See Roche, 2020 WL 7023896, at *18–19 (noting, in the event the Proxy is misleading and Defendants’ disclosure is insufficient, the resulting transaction may still be cleansed if ratified by a shareholder vote under Corwin). 846 2020 WL 7023896, at *18–19 (Del. Ch. Nov. 30, 2020). 847 2020 WL 6281427, at *15–16 (Del. Ch. Oct. 27, 2020).
194 the Proxy.”848 The Court concluded the plaintiffs failed to state a claim against
certain officer defendants where (1) the complaint’s allegations did not specifically
allege that certain officers were involved in preparing the proxy, and (2) it was not
reasonably inferable from the Complaint or the Proxy that they were involved
because those officers did not sign the Proxy.849
Here, the Complaint sufficiently alleges that Garland was involved in
preparing and disseminating the Proxy. Garland was the Company’s CEO
throughout the sales process and “an integral figure” during merger negotiations.850
The Board resolutions approving the issuance of the Proxy authorized the
Company’s officers to prepare and issue the Proxy and, most significantly, Garland
signed the Proxy.851 It is reasonable to infer that Garland was involved in preparing
the disclosures in the Proxy in his capacity as an officer of the Company. 852 Count
II survives as to Garland.
848 Roche, 2020 WL 7023896, at *19 (quoting Baker Hughes, 2020 WL 6281427, at *16). 849 Id.; Baker Hughes, 2020 WL 6281427, at *16. 850 Roche, 2020 WL 7023896, at *19. 851 Id.; see Baker Hughes, 2020 WL 6281427, at *15–16 (holding that a CEO could be liable for breach of the duty of care for a deficient proxy where the CEO was involved in the negotiation of the merger and signed the proxy); Hansen, 2018 WL 3025525, at *11 (“Vance affixed his signature to the Proxy in his capacity as President and CEO and presented the information to the stockholders for their consideration. This means he may be liable for material misstatements in the Proxy in his capacity as an officer [and] as a director.”). 852 See Roche, 2020 WL 7023896, at *19; Baker Hughes, 2020 WL 6281427, at *16.
195 The same cannot be said for Armistead, Elkort, Lyon, and Pedersen. Although
the Board resolution delegated disclosure authority to the Officer Defendants
generally, the Complaint contains no specific allegations that Armistead, Elkort,
Lyon, or Pedersen were involved, and there is no indication from the Proxy itself
that they were, as only Garland signed off on the disclosures. Plaintiff’s case against
Armistead, Elkort, Lyon, and Pederson “boils down to the unsubstantiated assertion”
that they would have reviewed and authorized dissemination of the Proxy simply
because they were Company officers.853 This is “insufficient” to plead that
Armistead, Elkort, Lyon, and Pederson “acted with scienter or were grossly
negligent in connection with the failure” to prepare and file a materially complete
and accurate Proxy.854 Count II of the Complaint fails to state a claim for relief
against them.855
b. Plaintiff Has Alleged That Garland Prepared And Disseminated A False And Misleading Proxy.
I turn next to whether the Proxy was materially misleading. Plaintiff contends
that Garland breached his duty of disclosure, and consequently his duties of care and
loyalty, in preparing and disseminating a false and misleading Proxy. In a request
853 Baker Hughes, 2020 WL 6281427, at *16. 854 Id. 855 See id.
196 for stockholder action, directors are under a duty to disclose fully and fairly all
material facts within their control bearing on the request.856 The duty of disclosure
is not an independent duty, but derives from the duties of care and loyalty.857 To
state a claim for breach of the duty of loyalty, the Complaint must include well-pled
allegations supporting a reasonable inference that Garland acted in bad faith or to
further his own self-interest in disseminating the allegedly misleading Proxy.858 To
state a claim for breach of the duty of care, the Complaint must allege Garland was
grossly negligent in preparing and filing the Proxy.859 “Because fiduciaries must
take risks and make difficult decisions about what is material to disclose, they are
exposed to liability for breach of fiduciary duty only if their breach of the duty of
care is extreme.”860
Corporate fiduciaries can breach their duty of disclosure “by making a
materially false statement, by omitting a material fact, or by making a partial
856 E.g., Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989). 857 E.g., Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009). 858 Cf. Roche, 2020 WL 7023896, at *19–20 (“For the reasons addressed above, the only potential claim against Roche for issuing a materially misleading Proxy sounds in the fiduciary duty of care because there is no well-pleaded allegation in the Complaint supporting a reasonable inference that she acted in bad faith or to further her own self- interest.”). 859 See id. Morrison I, 2019 WL 7369431, at *25 (alteration omitted) (quoting Metro Commc’n 860
Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 157 (Del. Ch. 2004)).
197 disclosure that is materially misleading.”861 “An omitted fact is material if there is
a substantial likelihood that a reasonable shareholder would consider it important in
deciding how to vote,” in that it “would have been viewed by the reasonable investor
as having significantly altered the ‘total mix’ of information made available.”862
“[T]his materiality test does not require proof of a substantial likelihood that
disclosure of the omitted fact would have caused the reasonable investor to change
his vote.”863 Rather, a proxy must contain “information that a reasonable stockholder
would generally want to know in making [his or her voting] decision.”864 “The issue
of materiality of an alleged misstatement or omission in a prospectus is a mixed
question of law and fact, but predominantly a question of fact. Nevertheless,
conclusory allegations need not be treated as true, nor should inferences be drawn
unless they truly are reasonable.”865
861 Pfeffer, 965 A.2d at 684 (quoting O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 916 (Del. Ch. 1999)). 862 Rosenblatt, 493 A.2d at 944 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 863 Morrison v. Berry (Morrison II), 191 A.3d 268, 283 (Del. 2018) (internal quotation marks omitted) (quoting Rosenblatt, 493 A.2d at 944). 864 Id. at 287. 865 Pfeffer, 965 A.2d at 685 (internal quotation marks omitted) (quoting Branson v. Exide Elecs. Corp., 645 A.2d 568 (Del. 1994) (TABLE), and also quoting Feldman v. Cutaia, 951 A.2d 727, 731 (Del. 2008)).
198 Plaintiff identifies ten categories of materially false and statements in the
Proxy.866 Plaintiff has adequately alleged that the Proxy was false or misleading
with respect to many of them, based on fair characterizations of the disclosures and
materials produced pursuant to Section 220.867 Because the claim against Garland
survives if any one of Plaintiff’s identified deficiencies is sufficiently pled, I address
only a handful of the Proxy’s allegedly misleading disclosures.868
First, Plaintiff has adequately alleged that the Proxy did not disclose all
material information about Goldman’s compensation and conflicts. “Because of the
central role played by investment banks in the evaluation, exploration, selection, and
implementation of strategic alternatives, this Court has required full disclosure of
investment banker compensation and potential conflicts.”869 Here, the Proxy
disclosed neither Goldman’s compensation nor its conflicts with respect to
866 See D.I. 82 at 43–58. 867 The Individual Defendants argue “[t]here was nothing materially misleading about the Proxy,” D.I. 85 at 22, and that “[a]ll of Plaintiff’s allegations are based on mischaracterizations of the 220 Materials.” D.I. 74 at 41; see also D.I. 85 at 24. But, again, the Individual Defendants cannot rely on those materials “to rewrite an otherwise well-pled complaint” and overcome the reasonable inferences that can be drawn therefrom. Clovis, 2019 WL 4850188, at *14 n.216. 868 Whether each of the ten categories was in facts inadequately disclosed and material will be determined through discovery. 869 In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 832 (Del. Ch. 2011) (collecting cases).
199 Riverstone.870 The Individual Defendants do not argue otherwise.871 They instead
claim that no disclosure obligation existed because Goldman’s conflicts were well
known in the market and disclosed to the Special Committee before they retained
Goldman. These arguments miss the mark, as the Company’s stockholders were
entitled to be told all material information when considering the Merger, without
having to extract it from publicly available information.872 And disclosing conflicts
to a disloyal special committee compounds, rather than excuses, the failure to
disclose those conflicts to the electorate.
Second, Plaintiff contends that the Proxy failed to disclose all material
information about the Consent Right, including that the Special Committee and its
advisors confirmed that it did not prevent the Company from acquiring another
company through a reverse triangular merger.873 The Proxy described the Consent
Right and Brookfield’s reluctance to enter into a transaction without Riverstone’s
approval. But
870 See Compl. ¶¶ 267–72. 871 See D.I. 74 at 23–24. 872 See Zalmanoff v. Hardy, 2018 WL 5994762, at *5 (Del. Ch. Nov. 13, 2018), aff’d, 211 A.3d 137 (Del. 2019). 873 Compl. ¶ 254.
200 [o]nce defendants travel down the road of partial disclosure of the history leading up to the Merger[,] they have an obligation to provide the stockholders with an accurate, full, and fair characterization of those historic events. Partial disclosure, in which some material facts are not disclosed or are presented in an ambiguous, incomplete, or misleading manner, is not sufficient to meet a fiduciary’s disclosure obligations.874
In my view, Plaintiff has alleged that other material information about the Consent
Right’s overarching importance in the sales process was omitted from the Proxy.
For example, any reasonable stockholder reading the Proxy would not have
understood that a transaction could have been structured to avoid triggering the
Consent Right—and that such a transaction was offered and was more lucrative for
stockholders. The Proxy also fails to disclose that Riverstone and management
badgered the Special Committee and bidders about the Consent Right’s scope to
emphasize Riverstone and Developer 2’s interests. From the sales process alleged
and the Company’s deep and historic ties to Riverstone, it is reasonably conceivable
the stockholders would have considered all information about the Consent Right—
including how it was wielded in the sales process and by whom, potential bidders’
responses to its invocation, and the potential to circumvent it with creative
structuring—to be important in deciding how to vote on the Merger.
874 KCG Hldgs., 2019 WL 2564093, at *11 (alterations, citations, and internal quotation marks omitted) (quoting Morrison II, 191 A.3d at 283, and then quoting Appel v. Berkman, 180 A.3d 1055, 1064 (Del. 2018)).
201 The Individual Defendants argue that “the terms of the consent right were
public, and any investor that had decided to invest in [Company] stock was well
aware of these terms,” as the Consent Right “had already been disclosed to
[Company] investors, for years, in [the Company]’s public filings.”875 In support,
the Individual Defendants point to three SEC Form 10-Ks.876 But “our law does not
impose a duty on stockholders to rummage through a company’s prior public filings
to obtain information that might be material to a request for stockholder action.”877
And even if those public filings disclose the existence of the Consent Right, the
Consent Right’s importance as implemented in the sales process would not have
been in those filings.878 Here, the Proxy purported to describe the sales process, but
omitted any mention of how the Consent Right loomed over it.
Third, Plaintiff alleges that the Proxy was deficient in that it failed to disclose
that Brookfield proposed to pay stockholders over $6 per share more than Buyer,
and that the Special Committee believed that Brookfield’s proposal was “superior”
875 D.I. 74 at 20–21 (emphasis omitted). 876 Id. at 20 (citing Kirby Decl. Exs. 3–5). 877 Zalmanoff, 2018 WL 5994762, at *5 (citing In re Trans World Airlines, Inc. S’holders Litig., 1988 WL 111271, at *10 (Del. Ch. Oct. 21, 1988) (Allen, C.) (“Nor can I agree that if a fact is material, that a failure to disclose it is necessarily cured by reason that it could be uncovered by an energetic shareholder by reading an SEC filing. Closer to an acceptable response is the assertion that the number could be derived from appraisal information contained in the proxy statement.”), abrogated on other grounds by Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110 (Del. 1994)). 878 See id.; Trans World Airlines, 1988 WL 111271, at *10.
202 to all others received, including from Buyer.879 “Delaware law does not require
disclosure of a play-by-play of negotiations leading to a transaction or of potential
offers that a board has determined were not worth pursuing.”880 And a disclosure
claim will not be supported where it “boil[s] down to an argument that plaintiff
disagreed with a Special Committee’s decision not to pursue another acquisition
proposal and that other stockholders should have been informed about the offer in
case they, too, disagreed with the Special Committee.”881 However, the availability
of a superior bid may be material and therefore may be required to be disclosed to
stockholders.882
879 E.g., Compl. ¶ 192; see id. ¶¶ 261–65. 880 Comstock, 2016 WL 4464156, at *15; see also David P. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *12 (Del. Ch. June 27, 2008) (“In the usual case, where a board has not received a firm offer or has declined to continue negotiations with a potential acquirer because it has not received an offer worth pursuing, disclosure is not required.”). 881 In re OM Gp., Inc. S’holders Litig., 2016 WL 5929951, at *14 (Del. Ch. Oct. 12, 2016) (internal quotation marks omitted) (quoting Comstock, 2016 WL 4464156, at *15). 882 See Xura, 2018 WL 6498677, at *12 (“From the public disclosures provided to Xura stockholders, it is reasonably conceivable that stockholders lacked the following material information when they voted to approve the Transaction: . . . (5) Francisco Partners initially expressed interest in offering a superior bid but somehow learned that Siris was Xura’s counterparty and then moved its financial support to the buy-side of the Transaction . . . .” (emphasis added)); cf. Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *15 (Del. Ch. June 30, 2014) (“The types of companies that may or may not have made an offer for Ramtron during the sales process has no bearing on the issue of whether or not to seek appraisal. Furthermore, there are no allegations that any company made an offer for Ramtron that was of equal or greater value to the Cypress offer. Dent has failed to allege adequately how including the details of rejected offers that offered less value for the Company than the Cypress bid would be material to a Ramtron stockholder in determining whether or not to seek appraisal. Accordingly, I conclude that this aspect of Dent’s
203 Here, the Proxy omitted material information about Brookfield’s superior
offer. The Individual Defendants argue that Proxy disclosed that in July 2019
Brookfield offered a 20% premium for a transaction that did not include Developer 2
and a 15% premium for a transaction that did include Developer 2, and that this was
sufficient to disclose the value of Brookfield’s offers.883 This argument misses the
mark. Even assuming that information regarding Brookfield’s bid was immaterial,
the Delaware Supreme Court has “recognized that a partial and incomplete
disclosure of arguably immaterial information regarding the history of negotiations
leading to a merger might result in a materially misleading disclosure if not
supplemented with information that would allow the stockholders to draw the
complete picture.”884 The Proxy’s disclosure does not state the monetary value of
the July offer, and most importantly, it does not disclose or suggest that Brookfield
offered even more value in August, September, and October 2019.885 Without more,
the reasonable stockholder would be left to believe that Brookfield’s bid remained
stagnant, when, in fact, it increased in value and became noticeably superior to other
bids.
disclosure claim also fails to state a claim upon which relief can be granted.” (emphasis added)). 883 See D.I. 74, App. A at 2. 884 OM Gp., 2016 WL 5929951, at *12 (citing Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1281 (Del. 1994)). 885 See Compl. ¶¶ 164–67, 173–79, 192–200.
204 The Proxy also fails to disclose that the Special Committee itself believed, as
confirmed by Evercore’s valuation analysis, that Brookfield’s offer was more
valuable than Buyer’s.886 The Individual Defendants reject this position and the
Complaint’s allegations, arguing that the Special Committee merely believed that
Brookfield’s proposal “could” be superior and that in any event Brookfield never
submitted a “definitive, all-cash offer and proposed merger agreement.”887 The
documents incorporated and integral to the Complaint show that the Special
Committee and its advisors clearly told Brookfield that its offer was superior; and
the October 31, 2019 Board presentation shows that the Special Committee’s
advisors told the Board that Brookfield’s offer was worth vastly more to
stockholders than Buyer’s offer.888 This information should have been disclosed to
Company stockholders.889
Further, the fact that Brookfield did not submit a definitive offer does not
excuse disclosure of Brookfield’s final terms in view of the Complaint’s allegations
and the Proxy’s overall disclosures about the sales process. Brookfield eagerly
pursued the Company, even if that meant ceding to Riverstone’s demands, until the
886 See id. ¶¶ 192–200. 887 D.I. 74 at 22. 888 See Compl. ¶¶ 192–200. 889 Cf. In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 511–12 (Del. Ch. 2010) (suggesting that a board should disclose its basis for rejecting a competitive bid and pursuing an allegedly inferior offer).
205 Special Committee imposed an unreasonable deadline. As alleged, it is reasonable
to infer that Brookfield considered its late October 2019 offer as implying some
commitment to a deal within thirty days, contingent on Riverstone’s satisfaction in
negotiations; Brookfield walked away and took its premium bid with it because the
Special Committee ran out the clock.890 It is reasonable to infer that the absence of
the terms of Brookfield’s final superior bid and the Board’s recognition of that
superiority rendered the Proxy materially misleading.
Accordingly, Plaintiff has pled that the Proxy was materially misleading and
that Garland, who prepared the Proxy, was aware of its inaccuracies, and has
therefore stated a claim for breach against him. Count II, to the extent it is based on
the false and misleading Proxy, survives as to Garland.
C. Plaintiff Has Stated Third Party Liability Claims.
As explained above, Plaintiff may establish that the Officer Defendants and
Entity Defendants constitute a control group owing fiduciary duties. In the
alternative, Plaintiff has also asserted the Entity Defendants are liable as
890 Cf. Xura, 2018 WL 6498677, at *12 n.122 (“I acknowledge Defendants’ argument that Plaintiff merely speculates regarding whether Francisco Partners ultimately would have made a bid for Xura and whether that bid would have been superior to the Siris bid. Plaintiff’s response—that we will never know where the Francisco Partners’ overture might have gone—is, likewise, well taken. Indeed, as a wise ‘do-dah man’ once observed, ‘Sometimes your cards ain’t worth a dime if you don’t lay ‘em down.’ . . . In any event, what is conceivably material about Francisco Partners is not its initial expression of interest but the fact that it expressed interest, later declined to participate in the Go-Shop and then mysteriously joined forces with Siris on the buy-side of the Transaction.”).
206 nonfiduciary outsiders to the Company, through theories of aiding and abetting
(Count III), conspiracy together with the Officer Defendants and Browne (Count V),
and tortious interference (Count IV). If Plaintiff succeeds in demonstrating a control
group, the aiding and abetting and conspiracy claims against the Controller
Defendants will be dismissed.891
1. Plaintiff’s Claims for Aiding and Abetting and Civil Conspiracy Are Held In Abeyance Pending A Determination As To Whether The Controller Defendants Owe Fiduciary Duties.
For now, it is enough to say that the allegations about the Entity Defendants’
involvement, set forth in my discussion of their potential role as controllers, are
891 See Wallace ex rel. Cencom Cable Income P’rs II, L.P. v. Wood, 752 A.2d 1175, 1184 (Del. Ch. 1999) (“[Aiding and abetting], which on its face assumes the officers, parents and affiliates to be ‘non-fiduciaries,’ seems inconsistent with plaintiff[’]s primary argument that each defendant owes fiduciary duties to the [Company stockholders]. Nonetheless, I will not dismiss plaintiff[’]s[] aiding and abetting claim as I may later decide, after discovery or at trial, that plaintiff[] cannot prove the pleaded requisite control necessary to establish the existence of a fiduciary relationship between each defendant and the [Company].”); OptimisCorp v. Waite, 2015 WL 5147038, at *57 (Del. Ch. Aug. 26, 2015) (“In those instances where a fiduciary takes actions that would amount to aiding and abetting by a non-fiduciary, that conduct amounts to a direct breach of fiduciary duties.”), aff’d, 137 A.3d 970 (Del. 2016); Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch. Aug. 26, 2005) (“[C]ivil conspiracy is vicarious liability. It holds a third party, not a fiduciary, responsible for a violation of fiduciary duty. Therefore, it does not apply to the defendants which owe the [stock]holders a direct fiduciary duty.”); accord OptimisCorp, 2015 WL 5147038, at *57 (“[I]t is highly doubtful that a conspiracy of fiduciaries is a legally cognizable cause of action.”).
207 sufficient to plead knowing participation892 and substantial assistance893 for purposes
of aiding and abetting.894 While the Entity Defendants had the right to work in their
own interests by leveraging the Consent Right,895 that right ends at the point the party
“attempts to create or exploit conflicts of interest in the board.”896 Plaintiff has
892 See RBC, 129 A.3d at 861–62 (“Knowing participation in a board’s fiduciary breach requires that the third party act with the knowledge that the conduct advocated or assisted constitutes such a breach.” (alterations and internal quotation marks omitted) (quoting Malpiede, 780 A.2d at 1097)); Agspring Holdco, LLC v. NGP X US Hldgs., L.P., 2020 WL 4355555, at *20 (Del. Ch. July 30, 2020) (“[A]ll that is required to show that a defendant knew something are sufficient well-pleaded facts from which it can reasonably be inferred that this something was knowable and that the defendant was in a position to know it.” (quoting Great Hill Equity P’rs IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at *20 (Del. Ch. Nov. 26, 2014)). 893 See In re Oracle Corp. Deriv. Litig., 2020 WL 3410745, at *11 (Del. Ch. June 22, 2020) (noting “the secondary actor must have provided assistance or participation in aid of the primary actor’s allegedly unlawful acts” and that assistance must be substantial (alterations and internal quotation marks omitted) (quoting Restatement (Second) of Torts § 876 cmt. d (1979))). 894 This is necessarily a fact-intensive inquiry, making claims for aiding and abetting “ill- suited for disposition on the pleadings.” Clark v. Davenport, 2019 WL 3230928, at *15 (Del. Ch. July 18, 2019) (internal quotation marks omitted) (quoting In re Good Tech. Corp. S’holder Litig., 2017 WL 2537347, at *2 (Del. Ch. May 12, 2017) (ORDER)); accord Oracle, 2020 WL 3410745, at *11. 895 See Morrison v. Berry (Morrison III), 2020 WL 2843514, at *11 (Del. Ch. June 1, 2020); Morgan v. Cash, 2010 WL 2803746, at *7–8 (Del. Ch. July 16, 2010). 896 Morrison III, 2020 WL 2843514, at *11 (quoting RBC, 129 A.3d at 862). The cases the Entity Defendants invoke to defend arms-length bargaining for their own benefit are distinguishable. Unlike the alleged aider and abettor in Jacobs v. Meghji, 2020 WL 5951410, at *8 (Del. Ch. Oct. 8, 2020), the Entity Defendants had knowledge about the Company’s process; the Special Committee’s creation and role; Brookfield’s proposal; and the dual fiduciary Individual Defendants’ compliance with their fiduciary duties. This case is also unlike Morrison III, in which the Court dismissed an aiding and abetting claim against a private equity acquirer, even though it allegedly “act[ed] together with the [target’s chairman],” who “used silence, falsehoods, and misinformation” to mislead the board. 2020 WL 2843514, at *11 (internal quotation marks omitted). The Court concluded it could not “reasonably infer that [the acquirer] knowingly advocated or assisted [the
208 alleged facts from which it is reasonable to infer that the Entity Defendants wielded
the Consent Right and bargained with bidders in knowing tandem with the
Company’s dual fiduciaries tilting the Special Committee’s sales process toward
Riverstone’s preferred bidder.
With this conclusion on aiding and abetting, it is not surprising that Plaintiff’s
factual allegations about the Entity Defendants also support a claim for civil
conspiracy, as the claims often rise and fall together.897 Plaintiff’s allegations
support a reasonable inference that the Entity Defendants worked closely with
Browne and the remaining Officer Defendants throughout the sale process for the
purpose of closing an all-cash deal with Buyer that took the Company private,
internalized Developer 2, and left Riverstone and its dual fiduciaries with equity
stakes in the new structure.
chairman’s] deceptive communications,” and therefore dismissed the claim because the acquirer “had the right to work in its own interests to maximize its value.” Id. But unlike the acquirer in Morrison III, which was an arm’s-length bargaining party with no alleged connection to any officer, director, or advisor, the Entity Defendants were tied to and held power over Company fiduciaries and were alongside or behind the fiduciaries every step of the way. 897 See Agspring, 2020 WL 4355555, at *21; see also Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1039–40 (Del. Ch. 2006). Because Plaintiff has not pled facts indicating that Armistead or Pedersen breached their duties or committed an unlawful act in furtherance of the conspiracy, Plaintiff has not stated a claim for civil conspiracy against them.
209 2. Plaintiff Has Pled Tortious Interference.
Count IV asserts the Entity Defendants tortiously interfered with the
stockholders’ prospective economic advantage in the superior Brookfield offer.898
The parties have not briefed the doctrinal viability of a tortious interference claim if
the Entity Defendants are held to be fiduciaries. For now, assuming the claim would
go forward, allegations underpinning their de facto control support the elements of
tortious interference. The Entity Defendants’ three arguments to the contrary are
unavailing. First, as explained, their right to compete and wield the Consent Right
did not excuse their alleged improper actions. Second, Brookfield was a business
opportunity as it was “prepared to enter into a business relationship but was
dissuaded from doing so.”899
Finally, proximate cause presents the difficult question of whether
Riverstone’s actions throughout the process caused Brookfield to walk away where
898 See Compl. ¶¶ 308–13. To state such a claim, a plaintiff must plead “(a) the reasonable probability of a business opportunity, (b) the intentional interference by the defendant with that opportunity, (c) proximate causation, and (d) damages.” Organovo Hldgs., Inc. v. Dimitrov, 162 A.3d 102, 122 (Del. Ch. 2017) (quoting DeBonaventura v. Nationwide Mut. Ins. Co., 419 A.2d 942, 947 (Del. Ch. 1980)); accord Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 886–87 (Del. Ch. 2009). 899 See Soterion Corp. v. Soteria Mezzanine Corp., 2012 WL 5378251, at *13 (Del. Ch. Oct. 31, 2012) (quoting Agilent Techs., Inc. v. Kirkland, 2009 WL 119865, at *7 (Del. Ch. Jan. 20, 2009)) (noting the specific parties offering the business opportunity “performed extensive due diligence,” executed multiple term sheets “outlin[ing] the major terms of the contemplated transaction[],” and had not “identified any business reasons for not proceeding with the transaction[]”).
210 it would not have but for Riverstone’s conduct.900 The Entity Defendants assert it is
the Company that proximately caused Brookfield to walk away, by declining
exclusivity or by requiring Brookfield to submit its best and final offer within
twenty-four hours, complete with an agreement with Riverstone about
Developer 2.901 “Except in rare cases, the issue of proximate cause is uniquely a fact
issue.”902 Viewing Plaintiff’s pleadings in the light most favorable to her, it is
reasonably conceivable that the Entity Defendants’ challenged actions drove
Brookfield away.
Thus, in a world in which the Entity Defendants are not fiduciaries, Plaintiff
has pled aiding and abetting, conspiracy, and tortious interference. These claims
may still be dismissed if Plaintiff establishes the Entity Defendants are fiduciaries.
900 See id. at *17 (“Delaware recognizes the traditional “but for” definition of proximate causation. . . . Our understanding of proximate cause evolved from circumstances in which a tortfeasor caused something to happen that harmed the victim. The harm might have had more than one possible cause. A supervening cause might be considered the ‘real cause’ if it took over control from yet another cause that might otherwise eventually have resulted in the same (or similar) harm.”). 901 See D.I. 72 at 50–52. 902 Good Tech., 2017 WL 2537347, at *2 (alteration omitted) (quoting DiOssi v. Maroney, 548 A.2d 1361, 1368 (Del. 1988)); accord Everest Props. II, L.L.C. v. Am. Tax Credit Props. II, L.P., 2000 WL 145757, at *6–7 (Del. Super. Jan 7, 2000) (noting proximate cause need not be pled with precision, but rather need only put defendants on notice of the claims against them).
211 III. CONCLUSION
The Motions are granted and denied in part. The Individual Defendants’
Motion is DENIED as to Counts I and II. The Entity Defendants’ Motion is
DENIED as to Count IV. Counts III, V, VI are held in abeyance. With the exception
of Count VI, all claims are DISMISSED as to Armistead and Pedersen. The parties
shall submit an implementing order within twenty days of this decision.
Related
Cite This Page — Counsel Stack
In Re: Pattern Energy Group Inc. Stockholders Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-pattern-energy-group-inc-stockholders-litigation-delch-2021.