In re Riverstone National, Inc. Stockholder Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE RIVERSTONE NATIONAL, ) INC. STOCKHOLDER ) Consol. C.A. No. 9796-VCG LITIGATION )
MEMORANDUM OPINION
Date Submitted: April 6, 2016 Date Decided: July 28, 2016
S. Mark Hurd and Ryan D. Stottmann, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Danny David and Amy Pharr Hefley, of BAKER BOTTS L.L.P., Houston, Texas, Attorneys for Plaintiffs Michael C. Halpin and Michael A. Christian.
Kevin R. Shannon and Christopher N. Kelly, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Anthony M. Candido, Robert C. Myers, and Sarah A. Sulkowski, of CLIFFORD CHANCE US LLP, New York, New York, Attorneys for Defendants Nicholas C. Gould, Peter E. Gould, CAS Capital Limited, and Michael Pearson.
Blake Rohrbacher, Robert L. Burns, and Andrew J. Peach, of RICHARDS, LAYTON & FINGER, PA, Wilmington, Delaware; OF COUNSEL: Harry H. Schneider, of PERKINS COIE LLP, Seattle, Washington, Attorneys for Defendants Riverstone National, Inc., Terry Danner, and MarySusan Wanich.
GLASSCOCK, Vice Chancellor This litigation principally concerns an allegation that a board of directors
disloyally facilitated a merger, which merger forestalled a suit against them by
stockholders acting derivatively on behalf of the company. That potential litigation,
threatened but not yet pending as of the merger date, involved an alleged usurpation
of corporate opportunity by a majority of the directors. The merger was
consummated, and the acquirer, purchaser of the purported chose-in-action, waived
the right to pursue such action in the merger agreement. Thus, according to the ex-
stockholder plaintiffs, the corporate asset was lost and was not accounted for in the
merger consideration, which as a result was unfair. At the same time, the defendant
directors—to the extent they were stockholders—received the same benefit as the
other stockholders, but they received an additional benefit not so shared: they were
relieved of potential liability they faced in the usurpation claim.
Thus framed, the current motions to dismiss are rather simple to resolve. In
briefing, the parties approached the Plaintiffs’ claim as one controlled by this Court’s
reasoning in In re Primedia, Inc. Shareholders Litigation.1 That case involved
stockholders pursuing a derivative claim against a corporate controller at the time of
a merger. The derivative claim was extinguished by the merger. Primedia
considered whether the ex-stockholders’ subsequent litigation challenging the
merger represented a direct claim of unfairness, rather than an improper attempt to
1 67 A.3d 455 (Del. Ch. 2013).
1 pursue the extinguished derivative claim; the Court thus undertook a careful
examination of the plaintiffs’ standing to proceed. The parties here disagree as to
whether the Plaintiffs lack standing under the test announced in Primedia; in
briefing, the parties engaged heavily on this esoteric issue. To my mind, the issue
here is more fundamental: this matter involves a common or garden variety
allegation of director interest, in direct challenge to the merger as unfair. As I find
below, the complaint pleads, plausibly, that a chose-in-action against a majority of
directors existed, pre-merger, for usurpation of corporate opportunity; that a claim
brought on that ground derivatively would have withstood a motion to dismiss; that
such an action by stockholders was threatened, and that threat was known to the
board, at the time the company contemplated and negotiated the merger; that the
implied liability was material to the directors so threatened; and that the merger
agreement the directors obtained and recommended both eliminated the threatened
derivative suit by operation of law, and eliminated any pursuit of the matter as a
corporate asset purchased by the acquirer, as a matter of contract. Thus, the
complaint adequately alleges, under these particular facts, that a majority of the
Defendant directors received a material benefit from the merger not shared by the
common stockholders. Since this majority was interested in the transaction, they
must demonstrate that the merger was entirely fair to the stockholders, in light of a
plausible allegation of unfair price. This matter, therefore, involves a direct attack
2 on the fairness of the merger. Any potential derivative actions have been
extinguished; what remains are the Plaintiffs’ allegations that the Defendant
directors were interested in the merger and that the price was unfair, a direct claim
belonging to the Plaintiffs. For the reasons limned above and discussed in detail
below, the Defendants’ motions to dismiss are largely denied. My reasoning
follows.
I. BACKGROUND2
A. The Parties
Plaintiffs Michael C. Halpin and Michael A. Christian are former minority
stockholders of Defendant Riverstone National Inc. (“Riverstone” or the
“Company”).3
Defendant CAS Capital Limited (“CAS Capital”) was the majority
stockholder of Riverstone.4 CAS Capital is a private limited company organized
under the laws of England and Wales, with its principal place of business in London.5
At the time of the merger at issue here, Defendants Nicholas Gould, Peter
2 The facts are drawn from the Plaintiffs’ Verified Complaint filed on October 9, 2015 (the “Complaint” or “Compl.”) and are presumed true for purposes of evaluating the Defendants’ Motions to Dismiss. 3 Compl. ¶ 1. The Complaint states that the Plaintiffs together owned 132,625 shares of common stock. Id. at ¶ 4. While the Plaintiffs allege that their stock represented 1.2698% of the Company following a transaction that was completed in 2009, id. at ¶ 20, their percentage ownership at the time of the merger is unclear from the pleadings. 4 Id. at ¶ 7. The Complaint does not state CAS Capital’s percentage ownership in Riverstone. According to the Defendants’ opening brief, it owned 91.5542% of the outstanding shares at the time of the merger. Defs’ Opening Br. 4. 5 Compl. ¶ 7.
3 Gould, Michael Pearson, Terry Danner, and MarySusan Wanich constituted the
board of directors of Riverstone (the “Director Defendants”).6 Furthermore, Danner
was the Company’s CEO and Wanich was its COO at the time of the merger.7
Nicholas Gould and Peter Gould (together, the “Goulds”) owned and controlled CAS
Capital, Riverstone’s aforementioned majority stockholder, as well as its non-party
affiliate Regis Group Plc (“Regis”), at the time of the merger.8
B. Riverstone’s Involvement with Invitation Homes and B2R
Headquartered in Dallas, Texas,9 Riverstone was the nation’s second largest
privately owned, fee-based apartment property management company as of 2008.10
Following the financial crises of 2008, Riverstone became interested in the single-
family property market, as opposed to the multi-family property market in which it
had traditionally focused.11 According to the Complaint, the Company saw an
opportunity to take advantage of depressed home prices by “purchasing,
rehabilitating, and leasing homes and, thereafter, managing the leases.”12
On January 30, 2012, Riverstone hired Paul Carbone as an independent
contractor to create a financial model to assess the “financial feasibility of
6 Id. at ¶¶ 5–6, 8–10. 7 Id. at ¶¶ 9–10. 8 Id. at ¶¶ 5–6, 36. 9 Id. at ¶ 11. 10 Id.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE RIVERSTONE NATIONAL, ) INC. STOCKHOLDER ) Consol. C.A. No. 9796-VCG LITIGATION )
MEMORANDUM OPINION
Date Submitted: April 6, 2016 Date Decided: July 28, 2016
S. Mark Hurd and Ryan D. Stottmann, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Danny David and Amy Pharr Hefley, of BAKER BOTTS L.L.P., Houston, Texas, Attorneys for Plaintiffs Michael C. Halpin and Michael A. Christian.
Kevin R. Shannon and Christopher N. Kelly, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Anthony M. Candido, Robert C. Myers, and Sarah A. Sulkowski, of CLIFFORD CHANCE US LLP, New York, New York, Attorneys for Defendants Nicholas C. Gould, Peter E. Gould, CAS Capital Limited, and Michael Pearson.
Blake Rohrbacher, Robert L. Burns, and Andrew J. Peach, of RICHARDS, LAYTON & FINGER, PA, Wilmington, Delaware; OF COUNSEL: Harry H. Schneider, of PERKINS COIE LLP, Seattle, Washington, Attorneys for Defendants Riverstone National, Inc., Terry Danner, and MarySusan Wanich.
GLASSCOCK, Vice Chancellor This litigation principally concerns an allegation that a board of directors
disloyally facilitated a merger, which merger forestalled a suit against them by
stockholders acting derivatively on behalf of the company. That potential litigation,
threatened but not yet pending as of the merger date, involved an alleged usurpation
of corporate opportunity by a majority of the directors. The merger was
consummated, and the acquirer, purchaser of the purported chose-in-action, waived
the right to pursue such action in the merger agreement. Thus, according to the ex-
stockholder plaintiffs, the corporate asset was lost and was not accounted for in the
merger consideration, which as a result was unfair. At the same time, the defendant
directors—to the extent they were stockholders—received the same benefit as the
other stockholders, but they received an additional benefit not so shared: they were
relieved of potential liability they faced in the usurpation claim.
Thus framed, the current motions to dismiss are rather simple to resolve. In
briefing, the parties approached the Plaintiffs’ claim as one controlled by this Court’s
reasoning in In re Primedia, Inc. Shareholders Litigation.1 That case involved
stockholders pursuing a derivative claim against a corporate controller at the time of
a merger. The derivative claim was extinguished by the merger. Primedia
considered whether the ex-stockholders’ subsequent litigation challenging the
merger represented a direct claim of unfairness, rather than an improper attempt to
1 67 A.3d 455 (Del. Ch. 2013).
1 pursue the extinguished derivative claim; the Court thus undertook a careful
examination of the plaintiffs’ standing to proceed. The parties here disagree as to
whether the Plaintiffs lack standing under the test announced in Primedia; in
briefing, the parties engaged heavily on this esoteric issue. To my mind, the issue
here is more fundamental: this matter involves a common or garden variety
allegation of director interest, in direct challenge to the merger as unfair. As I find
below, the complaint pleads, plausibly, that a chose-in-action against a majority of
directors existed, pre-merger, for usurpation of corporate opportunity; that a claim
brought on that ground derivatively would have withstood a motion to dismiss; that
such an action by stockholders was threatened, and that threat was known to the
board, at the time the company contemplated and negotiated the merger; that the
implied liability was material to the directors so threatened; and that the merger
agreement the directors obtained and recommended both eliminated the threatened
derivative suit by operation of law, and eliminated any pursuit of the matter as a
corporate asset purchased by the acquirer, as a matter of contract. Thus, the
complaint adequately alleges, under these particular facts, that a majority of the
Defendant directors received a material benefit from the merger not shared by the
common stockholders. Since this majority was interested in the transaction, they
must demonstrate that the merger was entirely fair to the stockholders, in light of a
plausible allegation of unfair price. This matter, therefore, involves a direct attack
2 on the fairness of the merger. Any potential derivative actions have been
extinguished; what remains are the Plaintiffs’ allegations that the Defendant
directors were interested in the merger and that the price was unfair, a direct claim
belonging to the Plaintiffs. For the reasons limned above and discussed in detail
below, the Defendants’ motions to dismiss are largely denied. My reasoning
follows.
I. BACKGROUND2
A. The Parties
Plaintiffs Michael C. Halpin and Michael A. Christian are former minority
stockholders of Defendant Riverstone National Inc. (“Riverstone” or the
“Company”).3
Defendant CAS Capital Limited (“CAS Capital”) was the majority
stockholder of Riverstone.4 CAS Capital is a private limited company organized
under the laws of England and Wales, with its principal place of business in London.5
At the time of the merger at issue here, Defendants Nicholas Gould, Peter
2 The facts are drawn from the Plaintiffs’ Verified Complaint filed on October 9, 2015 (the “Complaint” or “Compl.”) and are presumed true for purposes of evaluating the Defendants’ Motions to Dismiss. 3 Compl. ¶ 1. The Complaint states that the Plaintiffs together owned 132,625 shares of common stock. Id. at ¶ 4. While the Plaintiffs allege that their stock represented 1.2698% of the Company following a transaction that was completed in 2009, id. at ¶ 20, their percentage ownership at the time of the merger is unclear from the pleadings. 4 Id. at ¶ 7. The Complaint does not state CAS Capital’s percentage ownership in Riverstone. According to the Defendants’ opening brief, it owned 91.5542% of the outstanding shares at the time of the merger. Defs’ Opening Br. 4. 5 Compl. ¶ 7.
3 Gould, Michael Pearson, Terry Danner, and MarySusan Wanich constituted the
board of directors of Riverstone (the “Director Defendants”).6 Furthermore, Danner
was the Company’s CEO and Wanich was its COO at the time of the merger.7
Nicholas Gould and Peter Gould (together, the “Goulds”) owned and controlled CAS
Capital, Riverstone’s aforementioned majority stockholder, as well as its non-party
affiliate Regis Group Plc (“Regis”), at the time of the merger.8
B. Riverstone’s Involvement with Invitation Homes and B2R
Headquartered in Dallas, Texas,9 Riverstone was the nation’s second largest
privately owned, fee-based apartment property management company as of 2008.10
Following the financial crises of 2008, Riverstone became interested in the single-
family property market, as opposed to the multi-family property market in which it
had traditionally focused.11 According to the Complaint, the Company saw an
opportunity to take advantage of depressed home prices by “purchasing,
rehabilitating, and leasing homes and, thereafter, managing the leases.”12
On January 30, 2012, Riverstone hired Paul Carbone as an independent
contractor to create a financial model to assess the “financial feasibility of
6 Id. at ¶¶ 5–6, 8–10. 7 Id. at ¶¶ 9–10. 8 Id. at ¶¶ 5–6, 36. 9 Id. at ¶ 11. 10 Id. at ¶ 16. According to the Complaint, Riverstone is included in the action as a necessary party and to “ensure the Court’s ability to grant complete relief to Plaintiffs.” Id. at ¶ 11. 11 Id. at ¶ 21. 12 Id.
4 [Riverstone] successfully implementing the acquisition and management of a large-
scale portfolio of Single Family Residences in multiple U.S. markets and to create a
Business Plan that will serve as a framework for the execution of the potential
business venture.”13 Shortly thereafter, Riverstone hired Jefferies & Company Inc.
(“Jefferies”) to locate institutional investors to further its business plan to purchase
single-family residences on a large scale.14 Pursuant to the engagement, Jefferies
developed a presentation for the “Riverstone Residential Group,” in which it
outlined a representative structure for the business that included Riverstone
“functioning as both a limited partner of the proposed fund, entitled to receive
preferred returns, and as the general partner for the fund, with management
responsibilities and the right to receive promoted or carried interest.”15
Jefferies soon advised Riverstone to partner with an “operator” with
experience buying homes and then together seek to raise additional capital.16
Jefferies introduced Riverstone to such an operator, the Treehouse Group
(“Treehouse”), an Arizona-based company that had experience acquiring and
renovating single-family homes on a smaller scale than the business plan envisioned
13 Id. at ¶ 22 (quotation marks omitted). 14 Id. at ¶ 23. 15 Id. The Complaint does not define the “promoted or carried interest” in detail. I note that a “promote” interest generally refers to a share of the profits of a fund. According to the Defendants, such interests are “commonly given to senior management in private-equity-backed businesses.” Defs’ Opening Br. 10. 16 Compl. ¶ 24.
5 by Riverstone.17 The two companies ultimately partnered together to execute
Riverstone’s business plan.18
In March 2012, Riverstone, together with Treehouse, Jefferies, and Regis—a
CAS Capital affiliate—worked to develop a model to present to institutional
investors.19 Together, the group devised the Treehouse Residential Fund, LP
(“Treehouse Residential”).20 Treehouse Residential was marketed to institutional
investors as a “national platform with the proven ability to acquire, renovate, lease,
and manage single-family rental homes to an institutional standard.”21 Although a
separate entity, Treehouse Residential drew from Riverstone’s expertise and
resources, and relied heavily on the Company’s national infrastructure to swiftly
“enter markets and build scale.”22
Riverstone, Treehouse, Jefferies, and Regis pitched Treehouse Residential to
several institutional investors in late March 2012.23 Ultimately, Blackstone Group
LP (“Blackstone”) agreed to “help execute” the Treehouse Residential business plan
which, in the months that followed, would come to be known as Invitation Homes.24
Formed as a Delaware limited partnership in June 2012, Invitation Homes
17 Id. 18 Id. 19 Id. at ¶ 25. 20 Id. 21 Id. 22 Id. at ¶ 26. 23 Id. at ¶ 27. 24 Id.
6 quickly grew to be the nation’s largest single-family rental company.25 In sum,
Blackstone spent over $7.5 billion amassing a portfolio of approximately 45,000
single-family homes through Invitation Homes.26
In addition to its role in Invitation Homes, Riverstone “assisted” Blackstone
in the development of B2R, also a Delaware limited partnership.27 B2R provides
“residential buy-to-rent mortgages for property investors” who are focused on
amassing large single-family home portfolios.28
Although Riverstone never received an ownership interest in Invitation
Homes, it “remained integral to the Invitation Homes business model.”29 In its
marketing materials prepared for banks, for example, Invitation Homes described
Riverstone as supporting its “comprehensive national platform” and indicated that it
planned to rely on Riverstone’s “capabilities and systems,” such as Riverstone’s
nationwide office locations, to support its business.30 In this regard, Riverstone
entered into a series of agreements with Blackstone to serve as its property manager.
On April 13, 2012, Riverstone Residential CA, Inc., a Riverstone subsidiary, entered
into an Interim Management Agreement with THR California, LLC, a Blackstone
entity, pursuant to which Riverstone agreed to “supervise and direct the management
25 Id. at ¶ 28. 26 Id. 27 Id. at ¶ 29. 28 Id. 29 Id. at ¶ 30. 30 Id.
7 and operation” of the properties.31 Eventually, Riverstone and Blackstone, through
various subsidiaries, executed a formal Management Agreement.32 Later, on
October 11, 2012, Riverstone, through its subsidiary CAS Residential, LLC, entered
into a Services Agreement with THR Property Management, LP, a Blackstone entity
and Invitation Homes affiliate, to serve as property manager for the properties
acquired by Invitation Homes.33
Due to its early involvement in developing Invitation Homes, and through its
various services agreements, the Invitation Homes concept quickly became integral
to Riverstone’s business. By July 2012, Riverstone had created a separate division
solely dedicated to the management of the single-family properties purchased by
Invitation Homes.34 In addition, Riverstone advanced significant funds to develop
Invitation Homes. During the early months of 2012, for example, Riverstone
advanced more than $200,000 for “various services and expenses in furtherance of
the Invitation Homes project.”35
During this time, some of Riverstone’s directors were providing services
directly to Invitation Homes. In some instances, Riverstone would facilitate
payments to those directors for services rendered to Invitation Homes, and for
31 Id. at ¶ 31. 32 Id. 33 Id. at ¶ 32. 34 Id. at ¶ 34. 35 Id. at ¶ 35.
8 reimbursement of expenses incurred on Invitation Homes’ behalf. For example, to
facilitate payments to the Goulds for services rendered to Invitation Homes,
Riverstone would pay Regis—an entity controlled by the Goulds—for “Consultancy
Services,” and Riverstone would in turn seek reimbursement from Invitation
Homes.36 Riverstone also paid for an apartment rented by Peter Gould and later
sought reimbursement from Invitation Homes.37 Likewise, Riverstone paid Pearson
for services rendered directly to Invitation Homes and Riverstone would thereafter
seek reimbursement from Invitation Homes.38
Riverstone similarly supported B2R. In June and July 2013, the Company
advanced more than $390,000 for “B2R-related costs, including, among others,
salaries, travel expenses, legal fees, and marketing costs.”39 In addition, Jeff
Tennyson, B2R’s eventual COO, was initially paid by Riverstone and worked out of
its offices.40
C. Riverstone Directors and Officers Receive Ownership Interests in Invitation Homes
While Riverstone never received an ownership interest in Invitation Homes,
many of Riverstone’s directors and officers were given that opportunity and did
invest. During a special board meeting in October 2012, the Riverstone board
36 Id. at ¶ 36. 37 Id. 38 Id. at ¶ 37. 39 Id. at ¶ 39. 40 Id.
9 “acknowledged that certain members of the Board, officers and executives of the
[Company] and its affiliates may elect to acquire ownership interests in Invitation
Homes.”41 At the meeting were Defendants Nicholas Gould, Peter Gould, Michael
Pearson, as well as non-party directors Walter Smith and Pål Ottesen, and
Riverstone’s General Counsel Michael Hoffman.42 Each of the directors and officers
present at the meeting had already received an opportunity to acquire an ownership
interest in Invitation Homes.43 Defendant Terry Danner, who did not attend or
participate in the meeting, did not receive an opportunity to acquire an ownership
interest in Invitation Homes.44 Defendant MarySusan Wanich, I note, was not yet a
director of the Company.
According to the Plaintiff, the board knew that the opportunity to invest in
Invitation Homes presented a conflict of interest in connection with directors and
officers taking the opportunity for themselves.45 Accordingly, in “approving the
acquisitions” of Invitation Homes, the board “purported to waive any actual or
potential conflict of interest.”46
According to the Amended and Restated Limited Partnership Agreement of
Invitation Homes dated October 11, 2012, all of the members of the Riverstone
41 Id. at ¶ 43 (quotation marks omitted). 42 Id. 43 Id. 44 Id. 45 Id. at ¶ 44. 46 Id.; see infra note 123.
10 board at that time, with the exception of Danner, were listed as Class A Limited
Partners of Invitation Homes.47 In addition, each was given the opportunity to
receive Class B and C units, which entitle holders to derive “promote” or “carried
interest” from Invitation Homes’ operations.48 In order to receive Class B and C
units, the Class A Limited Partners were required to make deferred capital
contributions.49 Certain Riverstone officers were also offered Class B and C units;
Steve Donohue, Riverstone’s President of the Single-Family Homes Division, and
Michael Hoffman, Riverstone’s General Counsel, were each given the opportunity
to purchase Class B and C units in exchange for deferred capital contributions.50 In
total, Riverstone’s officers and directors were offered approximately 70% of
Invitation Homes’ Class B and C units.51 All of the officers and directors noted
above, with the exception of then-directors Smith and Ottesen, made the required
deferred capital contributions in exchange for Class B and C units.52
In addition to their interests in Invitation Homes, Nicholas and Peter Gould
47 Compl. ¶ 41. 48 Id. 49 Id. at ¶ 45. The Complaint does not describe the nature of the deferred capital contributions. 50 Id. at ¶ 42. 51 Id. 52 Id. at ¶ 45. Notably, the following deferred capital contributions were required: $1,900,000 from Nicholas Gould, $2,600,000 from Peter Gould, and $150,000 from Michael Pearson. Id. at ¶ 41. In order to receive the Class B and C units, the Plaintiffs explain, the Goulds were also required to make additional contributions of $9,500 and $500, respectively, and Pearson was required to make additional contributions of $1,490 and $78, respectively. Id.
11 were offered ownership interests in B2R.53 The Goulds and Pearson were also
offered positions at Invitation Homes and B2R: all three became officers of
Invitation Homes,54 and Nicholas Gould was appointed to serve as B2R’s Executive
Chairman.55 Moreover, Regis listed both Invitation Homes and B2R among its
United States businesses at the time of the Complaint.56
D. Challenged Contributions to Riverstone
The Complaint also challenges the classification of certain contributions to
Riverstone. At the time of the Complaint, CAS Capital and Regis had made various
contributions—as characterized by the Plaintiffs—to Riverstone that totaled
approximately $20 million (the “Contributions”).57 Although Riverstone recorded
the Contributions as debts “due to affiliates,” there are no written loan agreements
stating the terms and conditions of the “loans.”58 Furthermore, there is no
documentation indicating that these “loans” were approved by the board.59
According to the Plaintiffs, the Contributions were improperly classified as
indebtedness and should have been classified as paid-in capital (or equity) instead.60
53 Id. at ¶ 49. 54 Id. at ¶ 41. 55 Id. 56 Id. 57 Id. at ¶ 51. 58 Id. 59 Id. 60 Id. at ¶ 52.
12 E. Plaintiffs Demand Books and Records from Riverstone
On May 20, 2014, the Plaintiffs informed Riverstone of their claim that
Riverstone’s directors and officers breached their fiduciary duty by improperly
usurping the opportunity to invest in Invitation Homes.61 The Plaintiffs demanded
that all of the equity interests in Invitation Homes owned by Riverstone directors,
officers, employees, and affiliates be assigned and transferred to Riverstone.62 The
Plaintiffs also demanded that they be allowed to inspect Riverstone’s books and
records.63 In response, the Company refused to make books and records available
to the Plaintiffs.64
The Plaintiffs sent a second books and records demand letter on May 29,
2014.65 In its second demand, the Plaintiffs requested information regarding the
Contributions and demanded a written confirmation that the Contributions would be
treated as equity contributions rather than debt.66
On May 30, 2014, the Plaintiffs initiated a suit under Section 220 of the
Delaware General Corporate Law (“DGCL”), seeking an order compelling
Riverstone to provide the Plaintiffs with certain books and records relating to the
61 Id. at ¶ 53. 62 Id. 63 Id. 64 Id. 65 Id. at ¶ 54. 66 Id.
13 demands discussed above.67
F. Riverstone Merges with Greystar
On May 30, 2014, the same day the Plaintiffs filed their 220 action, Riverstone
executed an Agreement and Plan of Merger (the “Merger Agreement”) among
Greystar Real Estate Partners, LLC (“Greystar”), Greystar Merger Sub Inc.
(“Greystar Merger Sub”), and CAS Capital.68 The Merger Agreement provided that
Greystar Merger Sub would merge with and into Riverstone (the “Merger”), and all
of Riverstone’s issued and outstanding shares of common stock would be converted
into the right to receive cash.69 Meanwhile, on the previous day, CAS Capital, as
majority stockholder of Riverstone, had executed and delivered its written consent
to the Merger.70
Pursuant to the Merger Agreement, Riverstone’s stockholders were entitled to
a right to receive cash equal to their pro-rata share of the $94 million purchase price
less certain adjustments to be made for Riverstone’s “indebtedness and working
capital at the time of closing and any escrow amounts.”71 Accordingly, the contested
Contributions, which were accounted for as “unsecured debts due affiliates,” served
to reduce the amount of cash consideration available for distribution to
67 Id. at ¶ 55. 68 Id. at ¶ 57. 69 Id. 70 Id. 71 Id. at ¶¶ 57–58.
14 stockholders.72 As of the date of the Merger Agreement, the estimated closing
payment after adjustments totaled $50,379,882.73 The Merger later closed on June
2, 2014.74 According to the June 9, 2014 Information Statement provided to
Riverstone’s stockholders, any stockholder who relinquished their rights to seek
appraisal was entitled to receive $4.44 per share.75
At the time of the Merger, the Riverstone board consisted of Nicholas Gould,
Peter Gould, Pearson, Danner, and Wanich (collectively, the “Merger Board”).76
The Plaintiffs assert that, at the time of the Merger, the Merger Board, along with
CAS Capital, and Greystar, were aware of the Plaintiffs’ claims regarding the
usurpation of corporate opportunities and the misclassification of the
Contributions.77 Nonetheless, according to the Plaintiffs, the Merger Agreement
provided that the acquirers would release such claims.78
G. Procedural History
Following the Merger, the Plaintiffs filed an appraisal action in this Court on
June 19, 2014. More than a year later, on October 9, 2015, the Plaintiffs filed a
separate action, asserting claims of breach of fiduciary duties in connection with the
72 Id. at ¶ 58. 73 Id. 74 Id. 75 Id. 76 Id. at ¶ 59. 77 Id. 78 Id. at ¶ 63.
15 Merger. The two cases were consolidated on March 16, 2016.79 Before me are the
causes of action for breach of fiduciary duties; the appraisal portion of the
consolidated action remains pending and is not at issue here.
The Plaintiffs’ Verified Complaint dated October 9, 2015 asserts two causes
of action for breach of fiduciary duties. Count I is alleged against the Director
Defendants. The Plaintiffs assert that Riverstone officers and directors, including
Pearson and the Goulds, breached their fiduciary duties and usurped a corporate
opportunity owed to Riverstone by investing in Invitation Homes and B2R (the
“Usurpation Claims”). In addition, they assert that the Director Defendants breached
their fiduciary duties when they either directed or acquiesced in the improper
classification of the Contributions (the “Misclassification Claim”). Accordingly, the
Plaintiffs allege that the Director Defendants, who composed the Merger Board,
violated their fiduciary duties in connection with the Merger when they failed to
obtain consideration for the value of the Usurpation and Misclassification Claims.
According to the Plaintiffs, the value of those claims are material in the context of
the Merger and thus the price is unfair.
Count II is alleged against CAS Capital and follows the claims asserted in
Count I. The Plaintiffs assert that CAS Capital was the controlling stockholder of
79 See In re Riverstone Nat’l, Inc. S’holder Litig., C.A. No. 9796-VCG (Del. Ch. Mar. 16, 2016) (ORDER).
16 Riverstone and therefore owed fiduciary duties to the Plaintiffs. They allege that
CAS Capital breached its fiduciary duties in connection with the Merger when it
failed to obtain any value for the Usurpation and Misclassification Claims.
In relief, the Plaintiffs seek an order directing the Defendants to account for
all damages resulting from their breaches; an award of compensatory damages
against the Defendants arising from their breaches; an order directing disgorgement
and/or the creation of a constructive trust with respect to any benefit received by any
of the Defendants as the result of their breaches; and an award equal to the Plaintiffs’
fees and expenses associated with this action.
The Defendants filed separate Motions to Dismiss the Complaint on
December 16, 2015. Following combined briefing on the motions, I held oral
argument on April 6, 2016. This is my Memorandum Opinion.
II. ANALYSIS
When evaluating a motion to dismiss, the Court accepts all well-pleaded
factual allegations as true and draws all reasonable inferences in favor of the
plaintiff.80 The motion will be denied unless the plaintiff could not recover under
any reasonably conceivable set of circumstances susceptible of proof.81
The Plaintiffs attack the fairness of the merger price and process. They allege
80 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 537 (Del. 2011). 81 Id.
17 that the Defendants were interested in the Merger and that the merger consideration
was unfair to the minority stockholders. Specifically, the Plaintiffs argue that the
Defendants failed to obtain value for two potential derivative claims, assertable
against the Defendants and owned by Riverstone pre-merger, which were
extinguished pursuant to the terms of the Merger Agreement. My analysis begins
with the applicable standard of review. I conclude that the Complaint adequately
alleges that a majority of the Director Defendants were interested in the Merger, and
that the Plaintiffs have alleged sufficient facts to show that the Merger was unfair.
Accordingly, entire fairness review applies. The fact that the issue of standing
consumed most of the briefing notwithstanding, I need not address whether the
Plaintiffs have standing under Primedia, having already determined that the
Plaintiffs have stated a direct claim for which entire fairness applies.
Second, I address the Plaintiffs’ allegation that the Defendants misclassified
the Contributions, concluding that the Plaintiffs have failed to state a claim on which
relief may be granted. Finally, I turn to the parties’ arguments regarding the
uninterested Director Defendants, CAS Capital, and Riverstone, concluding that the
latter is dismissed. My analysis follows.
A. Entire Fairness Review Applies to the Merger
The Defendants argue that the Plaintiffs’ claims must be dismissed because
they are subject to the presumption of the business judgment rule. It is fundamental
18 to our model of corporate law that the directors, and not the stockholders—the
owners—control the corporation. It is equally fundamental that such control is not
shared by the courts, in pursuit of which salutary rule the business judgment rule
exists. Directors are presumed to act in the best interest of the corporation, and their
independent and disinterested actions in that regard are therefore largely insulated
from review.82 Where grounds to rebut the business judgment rule are adequately
pled, however, a court may hold directors accountable for corporate decisions.83 It
is true that, in the context of a merger, challenged before consummation, this Court
will apply a higher standard of review—enhanced scrutiny—which allows
injunctive relief to protect the stockholder’s interest in receiving best value for their
shares.84 Even in the merger context, however, where, as here, ex-stockholders
challenge the fairness of a merger and seek damages from the directors, the
stockholders must plead facts that, if true, rebut business judgment and demonstrate
a non-exculpated breach of duty; otherwise judicial review ends.85 Where the
82 Excepting only actions deemed waste or in bad faith. See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (citations omitted), overruled on other grounds by Brehn v. Eisner, 746 A.2d 244 (Del. 2000). 83 Id. 84 Once directors have made the decision to sell the company, their focus must shift to one objective: obtaining the best price for stockholders. See, e.g., Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182 (Del. 1986). In this scenario, our case law provides for enhanced judicial scrutiny, pre-merger, to ensure a reasonable process has been followed to that aim, and to ensure that injunctive relief (as opposed to post-merger damages, which typically imply a breach of the duty of loyalty) is available to protect the stockholders. See Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015). 85 See Corwin, 125 A.3d at 312 (noting that enhanced scrutiny is incompatible with a damages action, post-closing); see also Sing v. Attenborough, 2016 WL 2765312, at *1 (Del. May 6, 2016)
19 stockholders do plead particularized facts in connection with a board action which,
if true, demonstrate that the directors acted in a way that strips them of the
protections of the business judgment rule—as where their loyalty is divided between
corporate interest and material self-interest—then the standard of review is entire
fairness, and the directors must demonstrate that the merger developed a fair price
from a fair process.86
Relevant to this case is whether a majority of the directors were disinterested
and independent. A director may be interested in a transaction where she appears
on both sides of a transaction or expects to derive a personal financial benefit
separate from the benefits bestowed to stockholders generally.87 Similarly, a director
may lack independence if, rather than basing a decision on the merits to the
corporation, she grounds a decision on “extraneous considerations or influences.”88
Here, the Plaintiffs allege that the Director Defendants had acted disloyally
by usurping a corporate opportunity, and that as a result the Company held as an
asset a chose-in-action against them for breach of duty. The Director Defendants,
however, negotiated a merger, in which all assets passed to the acquirer, but in
(ORDER) (noting that the damages liability standard for a disinterested fiduciary for breach of the duty of care is gross negligence, even in a change-of-control transaction). 86 E.g., New Jersey Carpenters Pension Fund v. Infogroup, Inc., 2011 WL 4825888, at *8 (Del. Ch. Sept. 30, 2011) (citing In re Trados Inc. S'holder Litig., 2009 WL 2225958, at *6 (Del. Ch. July 24, 2009)). 87 Aronson, 473 A.2d at 812 (citations omitted). 88 Id. at 816.
20 connection with which the acquirer agreed not to pursue litigation including,
implicitly, the Usurpation Claims. Thus, the chose-in-action, as an asset, was not
sold, but was obliterated, and the directors received a special benefit by the sale:
relief from potential liability. Thus, according to the Complaint, the Director
Defendants are not disinterested actors in the merger, and they are not entitled to the
business judgment presumption.
The Defendants first try to characterize the Plaintiffs’ Complaint as a
disguised pursuit of the Usurpation Claims, which were derivative in nature and thus
extinguished by the Merger. The Plaintiffs hotly contest that characterization,
arguing that they have standing under this Court’s analysis in Primedia.89 I need not
consider that issue further here. Primedia involved an existing derivative suit
against a corporate controller, which was extinguished by merger. The plaintiff ex-
stockholders then sought to pursue the matter as a direct action, alleging that no
value had been negotiated for the litigation asset, and that the acquirer did not intend
to pursue it. The question followed whether the ex-stockholders had standing to
pursue that claim directly, in challenge to the merger.
Here, by contrast, the ex-stockholders bring a direct claim: that the merger
was unfair. They undoubtedly have standing to do so.90 If they can demonstrate, in
89 67 A.3d 455. 90 E.g., Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999) (“A stockholder who directly attacks the fairness or validity of a merger alleges an injury to the stockholders, not the
21 light of plausible allegations of self-interest, that the business judgment rule is
inapplicable, the burden will fall on the Defendants to show entire fairness. The
Complaint alleges facts in line with the analysis above: that by orchestrating a
merger that extinguished a possible derivative action, the Director Defendants
obtained a special benefit for themselves, and were thus interested in the transaction.
The Court must be wary of such an allegation. If a conclusory allegation—
that a potential derivative suit against directors existed, but was extinguished by a
merger—was sufficient to show that directors were interested in the merger, much
ground for strike suits and other mischief would be possible. Here, however, the
Plaintiffs plead particularized facts with respect to individual directors showing the
existence of a chose-in-action against the directors which, if brought as a claim
would have survived a motion to dismiss; that the director at the time of negotiating
and recommending the merger was aware of the potential action; that the potential
for liability was material to the director; and that the directors obtained and
recommended an agreement that extinguished the claim directly by contract. Where,
as here, such a pleading is made with respect to a majority of the directors, the
complaint is sufficient to rebut the business judgement rule. In evaluating the
motions to dismiss below, I examine each factor above, in turn, finding that entire
corporation, and may pursue such a claim even after the merger at issue has been consummated.”) (citations omitted).
22 fairness review applies.
1. A chose in action for usurpation of a corporate opportunity was a viable claim pre-merger.
In their Complaint, the Plaintiffs assert that they have pled the pre-merger
existence of a reasonably conceivable claim for usurpation of corporate
opportunities in breach of the duty of loyalty. The Plaintiffs contend that at least
three individual directors constituting a majority of the board—Nicholas Gould,
Peter Gould, and Michael Pearson—took for themselves opportunities properly
belonging to the Riverstone. I address this inchoate claim in light of a theoretical
motion to dismiss.
To plead a claim for usurpation of corporate opportunities, a plaintiff must
plead that the fiduciary has seized for himself an opportunity that, because of its
nature, loyalty dictates should have been presented to his corporation. Four factors
have been identified by our Supreme Court as important to this analysis:
(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.91
The Plaintiffs have identified two purported corporate opportunities which
they allege a majority of the Director Defendants usurped: they argue that the
91 Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 155 (Del. 1996).
23 Defendants took for themselves the investments in Invitation Homes and B2R. I
analyze the Usurpation Claims in light of the four elements that support a claim for
usurpation of a corporate opportunity, below.
a. Financial Viability of the Opportunity
In order to plead a claim for usurpation of corporate opportunities, the
corporation must be financially able to exploit the opportunity at issue. The court, I
note, is given flexibility in determining whether such an opportunity is financially
viable. In Yiannatsis v. Stephanis,92 the Delaware Supreme Court declined to adopt
an “insolvency-in-fact” test and noted that a court can consider various options and
standards for determining financial ability.93 Since Yiannatsis, Delaware courts have
applied various standards to determine a corporation’s financial ability, including
the “insolvency-in-fact” test,94 as well as considering whether the corporation is in a
position to commit capital, notwithstanding the fact that the corporation is actually
solvent.95 Consistent with the discretion afforded the court to determine financial
92 653 A.2d 275 (Del. 1995). 93 Id. at 279 n.2. 94 See Gen. Video Corp. v. Kertesz, 2008 WL 5247120, at *19 (Del. Ch. Dec. 17, 2008) (“It has been said, however, that such financial inability must amount to insolvency to the point where the corporation is practically defunct. Mere technical insolvency, such as inability to pay current bills when due or mere inability to secure credit, will not suffice. The corporation must be actually insolvent (quoting Yiannatsis, 1993 WL 437487, at *4)) (footnotes and citations omitted). 95 Compare Balin v. Amerimar Realty Co., 1996 WL 684377, at *9 (Del. Ch. Nov. 15, 1996) (“[A]s the Supreme Court has recognized, even a solvent corporation may be deemed financially incapable of availing itself of an opportunity, where the corporation ‘was not in the position to commit capital to the acquisition of new assets.’”) (citing Broz, 673 A.2d at 155), with Gen. Video Corp., 2008 WL 5247120, at *19.
24 ability, such a determination is a fact-intensive inquiry that generally requires a
developed record.96
The Plaintiffs plead that the capital contributions required from Riverstone
officers and directors to invest in Class B and Class C units of Invitation Homes—
the “corporate opportunity”—total $5,495,100.97 The Plaintiffs assert that
“Riverstone was financially able to exploit the opportunity for itself,” pointing
exclusively to the fact that Riverstone’s financial statements reveal that the
Company had more than $72 million in assets and over $18 million in current assets
at the end of 2012.98 According to the Defendants, however, Riverstone’s assets
barely covered its liabilities: as of December 31, 2012, Riverstone’s liabilities
totaled over $71 million, and it had negative working capital of $30 million. 99 In
addition, the Defendants point to other portions of the Company’s financial
statements to illustrate Riverstone’s supposed financial distress.100
96 See generally Gen. Video Corp., 2008 WL 5247120 (financial ability determined post-trial); Balin, 1996 WL 684377 (same); see also Broz, 673 A.2d 148 (considering an appeal of a lower court’s post-trial determination); Yiannatsis, 653 A.2d 275 (same). 97 Compl. ¶ 47. The Plaintiffs plead that the total includes deferred capital contributions for Class A units. Id. I note that the total amount paid by the Director Defendants appears to be closer to $4.65 million. See supra note 52. 98 Compl. ¶ 47; see also Defs’ Opening Br., Ex. 1 (“2012 Financial Statements”), at 3. While the 2012 Financial Statements were not attached to the Plaintiffs’ Complaint, the Plaintiffs refer to the financial statements in their pleadings. The 2012 Financial Statements are integral to the Complaint and I therefore find it appropriate to consider them as part of my analysis of the motions here. See Orman v. Cullman, 794 A.2d 5, 15 (Del. Ch. 2002). 99 2012 Financial Statements, at 3. 100 In its 2012 Financial Statements, Riverstone discloses that “CAS Capital has represented to the Company that, if necessary, it has the ability and intent to provide financial support.” Id. at 9. In its section regarding related-party transactions, moreover, Riverstone discloses that it has recorded
25 The issue presented, at this (hypothetical) motion to dismiss stage, is whether
the Complaint pleads facts making it reasonably conceivable that Riverstone was
financially able to pursue an approximate $5 million dollar opportunity. While
Riverstone’s financial statements may indicate that the Company was facing
financial challenges, I conclude that it was reasonably conceivable that Riverstone
was financially capable of investing in Invitation Homes and B2R, sufficient for a
complaint to have withstood a motion to dismiss.
b. Opportunity in the Corporation’s Line of Business
The second requirement in a claim for usurpation of corporate opportunities
is that the alleged opportunity must be in the corporation’s line of business. The
phrase “line of business,” is not bound by a precise formula.101 The court’s inquiry
is flexible and should be applied “reasonably and sensibly to the facts and
circumstances of the particular case.”102
The Delaware Supreme Court described a corporation’s line of business as
follows:
Where a corporation is engaged in a certain business, and an opportunity is presented to it embracing an activity as to which it has fundamental knowledge, practical experience and ability to pursue, which, logically and naturally, is adaptable to its business having regard for its financial position, and is one that is consonant with its reasonable
a liability of nearly $20 million payable to CAS Capital, which liability is “primarily composed of cash advances to fund operating shortfalls and other miscellaneous payments made on behalf of the Company.” Id. at 28. 101 Guth v. Loft, Inc., 5 A.2d 503, 514 (Del. 1939). 102 Id.
26 needs and aspirations for expansion, it may be properly said that the opportunity is in the line of the corporation's business.103
Accordingly, the nature of the corporation’s business should be interpreted broadly,
giving latitude to the corporation for development and expansion.104 This liberal
analysis, to my mind, is in line with the nature of the inquiry, which involves director
loyalty to the entity she serves as fiduciary.
The opportunities in question here are investments in Invitation Homes and
B2R, which are funds that invest in residential real estate and mortgages,
respectively. According to the Defendants, Riverstone never was, nor did it plan to
enter, the business of investing in real estate or in funds that invest in real estate.
Instead, the Defendants argue that Riverstone was and continues to be a “fee-based
property management company.”
The Plaintiffs assert that the Defendants ignore its pleadings that allege the
investment opportunities were conceived, developed, financed, and operated by
Riverstone. They argue that Riverstone has a history of purchasing real estate
companies,105 and that it is reasonable to infer that Riverstone sought to expand its
core fee-based multi-family management business into the single-family home
103 Id. 104 See Dweck v. Nasser, 2012 WL 161590, at *13 (Del. Ch. Jan. 18, 2012) (citing Guth, 5 A.2d at 514). 105 I note that the Defendants argue that the entirety of Riverstone’s previous acquisitions were in either the multi-family management business, or other related service businesses, all of which are in Riverstone’s traditional core line of business. See Defs’ Reply Br. 17–18.
27 investment market. The Plaintiffs allege that the investment idea was devised by
Riverstone. Following the 2008 financial crises, “Riverstone saw an opportunity to
profit from the single-family property market while prices were depressed by
purchasing, rehabilitating, and leasing homes and, thereafter managing the
leases.”106 The Company therefore hired an independent contractor to study the
financial feasibility of implementing that vision,107 and hired Jefferies to help it
locate institutional investors.108 According to the Plaintiffs’ pleadings, the Company
“envisioned Riverstone, either directly or through its subsidiaries, functioning as
both a limited partner of the proposed fund, entitled to receive preferred returns, and
as the general partner of the fund, with management responsibilities and the right to
receive promoted or carried interest.”109 Together with Treehouse, it then devised a
fund, Treehouse Residential, that was promoted as “a national platform with the
proven ability to acquire, renovate, lease, and manage single-family rental homes to
an institutional standard.”110 Eventually, after Riverstone had developed the
business model and devoted to that model its personnel and infrastructure,
Blackstone took over the business by creating Invitation Homes.111 In sum, the
Plaintiffs assert that Riverstone expended “tremendous energy establishing
106 Compl. ¶ 21. 107 Id. at ¶ 22. 108 Id. at ¶ 23. 109 Id. 110 Id. at ¶ 25. 111 Id. at ¶¶ 27–28.
28 Invitation Homes,” providing “employees, resources, and funds” to “develop,
advance, and execute the Invitation Homes business plan and business model.”112
Based on the facts as alleged in the Complaint, it is reasonably conceivable
that Riverstone sought to expand its traditional line of business into the market for
investing in single-family homes. I recognize that the Complaint is scant of facts
that indicate Riverstone had actually invested in that market in the past, nor do the
allegations indicate that Riverstone made a formal declaration that it planned to enter
the investment business. I also acknowledge that it is reasonably conceivable that
Riverstone—consistent with a “management only” business model—acted to
establish Invitation Homes to increase its management business, eschewing an
ownership role. Assuming the truthfulness of the facts as alleged, however, it is
reasonably conceivable to infer that Riverstone expended significant resources in
developing the business model with an expectation that it would expand its business
into ownership; in other words, that investment in home ownership was within
Riverstone’s line of business.
c. Interest or Expectancy in the Opportunity
The third requirement is that the corporation had an interest or expectancy in
the opportunity. “[F]or the corporation to have an actual or expectant interest in any
specific property, there must be some tie between that property and the nature of the
112 Id. at ¶ 46.
29 corporate business.”113 In Broz v. Cellular Information Systems, Inc.,114 the
Delaware Supreme Court found that the company had no interest or expectancy in
the opportunity at issue. In so finding, the Court examined the company’s
“articulated business plans” as well as trial testimony that it found indicated the
alleged opportunity “would not have been of interest” to the company.115
The Defendants argue that Riverstone consistently articulated a business plan
limited to acting as a property manager, which did not include investment activities.
They point to various presentations made to investors and lenders by
Treehouse/Invitation Homes that contemplate that Riverstone would act as a
property manager.116 On the other hand, the Plaintiffs point to a different
presentation, one that was given in the earliest stages of the facts at issue, in which
Jefferies presented a representative structure that envisioned Riverstone
participating in an ownership capacity. The Plaintiffs also argue that the fact that
Riverstone contemplated acting as property manager to Invitation Homes—as
expressed in the presentations cited by the Defendants—does not preclude
Riverstone from also pursuing other interests in the business.
Based on the pleadings cited in my analysis of the second (line of business)
113 Broz, 673 A.2d at 156 (quoting Johnston v. Green, 121 A.2d 919, 924 (Del. 1956)). 114 673 A.2d 148 (Del. 1996). 115 Id. at 156. 116 I note that that the presentations were attached to the Defendants’ opening brief but were not included in the Complaint.
30 element discussed above, I find it reasonably conceivable that Riverstone had an
interest or expectancy in an investment in Invitation Homes and B2R. That is, it is
not beyond reasonable conceivability that, based on the facts as alleged, Riverstone
devoted significant time and resources to the development of a business model with
the expectation that it would obtain an ownership interest therein, and not merely for
the purpose of attaining a servicing role.
I note that the Defendants point to this Court’s findings in Balin v. Amerimar
Realty Co.,117 in which the Court found that a real estate services company had no
expectation in an investment of real property.118 While the Defendants are quick to
identify many similarities between the facts in Balin and the facts at issue here, I
find it important to note the procedural posture of that case. Balin was decided
following a trial in which the Court benefited from live testimony, exhibit evidence,
and post-trial briefing. On a motion to dismiss, where the Plaintiffs’ allegations are
taken as true, it would not be appropriate to weigh the conflicting evidence pointed
to by the parties, and the benefit of the dispute would go to the Plaintiffs.
d. Inimicable Positions
The fourth and final requirement in a claim for usurpation of corporate
opportunities is that by taking the opportunity for their own, the corporate fiduciaries
117 1996 WL 684377 (Del. Ch. Nov. 15, 1996). 118 Id.
31 were thereby placed in a position in conflict to their duties to the corporation. In
Broz, the Court found that “[t]he corporate opportunity doctrine is implicated only
in cases where the fiduciary's seizure of an opportunity results in a conflict between
the fiduciary's duties to the corporation and the self-interest of the director as
actualized by the exploitation of the opportunity.”119
The Defendants argue that the Complaint fails to show that the Defendants’
investments in Invitation Homes and B2R were inconsistent with their duties to
Riverstone. They proceed to clarify the structure of the entities owned by the Goulds
in relation to Invitation Homes. According to the Defendants, Invitation Homes
arose as a partnership between Treehouse and the Regis Group, and not Riverstone.
The Goulds, who owned the Regis Group and indirectly controlled Riverstone, were
in the business of investing in real estate. Riverstone, on the other hand, was merely
a related entity selected to be the property manager. In other words, the investments
at issue correspond with the overarching structure of the Gould’s various business
interests, in which certain entities invest in real estate, while others, such as
Riverstone, merely service real estate. An investment by the former, therefore,
cannot be inimical to the interests of the latter.
The Plaintiffs argue, to the contrary, that by taking the opportunities for
themselves, certain Defendants were placed in a position conflicting with their duties
119 Broz, 673 A.2d at 157.
32 to the Company. They argue that the “Defendants made liberal use of Riverstone’s
resources in developing and advancing the Invitation Homes and B2R opportunities,
but seek to claim all the benefits—including the promote interest in Invitation
Homes—for themselves.”120 Moreover, the Plaintiffs assert that the Defendants’
inimical position is confirmed by the fact that the board found it necessary to waive
any actual or potential conflicts of interest caused by their individual investments in
Invitation Homes.121
The fourth and final element, in the circumstances here, is inextricably
intertwined with the elements that precede it. I find that the Defendants’ argument
that a “no-ownership” role for Riverstone is consonant with the Gould’s
“overarching structure” is irrelevant, at best; the directors’ loyalty runs to Riverstone
and its stockholders, not the interest of the controller. If the Plaintiffs can show that
Riverstone was financially able to invest in Invitation Homes, that such an
investment was part of the Company’s plans to enter a new market, and that the
Company expected to obtain an ownership interest in the ultimate business model
120 Pls’ Answering Br. at 37. 121 I note that the Defendants have offered a significantly different, and plausible, account of the board vote. According to the Defendants, the board met in 2012 to approve the property- management agreement between Invitation Homes and Riverstone. Defs’ Reply Br. at 21. Recognizing that certain Riverstone directors already had direct financial interests in Invitation Homes, the board waived any potential conflicts in order to approve the property-management agreement. Id. Therefore, the potential conflict, according to the Defendants, was not in the actual investment in Invitation Homes, but arose when Riverstone sought to enter a property-management agreement with Invitation Homes, a company in which the Directors had already invested.
33 (i.e., Invitation Homes and B2R), then it is reasonably conceivable that certain
Director Defendants, by directing the investments away from Riverstone and
towards themselves, are now in a position hostile to the interests of the Company to
which they are fiduciaries. That is, it is reasonably conceivable that, due to the
actions of its fiduciaries, the Company has missed a valuable opportunity. 122
*****
For the foregoing reasons, I conclude that it is reasonably conceivable, based
on the pleadings, that the Defendants usurped corporate opportunities that belonged
to Riverstone. Therefore, a viable cause of action against the Defendant directors
existed at the time of the Merger, and was a corporate asset.
2. The Director Defendants were aware of the potential that they were liable for the Usurpation Claims at the time of the Merger.
Here, the Company’s directors were aware of an investigation regarding
specific allegations that could evolve into personal liability. On May 20, 2014, ten
days before the Merger Agreement was executed, counsel for Plaintiffs notified
Riverstone of the Plaintiffs’ claims that Riverstone directors and officers breached
their fiduciary duties by usurping the opportunity to invest in Invitation Homes. The
Plaintiffs demanded that they be allowed to inspect Riverstone’s books and records,
122 Defendants point out that the Complaint does not plead that the Defendants’ investments precluded Riverstone from also investing. Such an assertion is unnecessary here, since, at least with respect to the interests that Defendants acquired, Riverstone was so precluded.
34 including documentation related to B2R. After their request was rejected, the
Plaintiffs sent an additional books and records demand letter on May 29, 2014, this
time requesting records regarding the classification of the Contributions. Finally, on
May 30, 2014, the day the Merger Agreement was executed, the Plaintiffs filed suit
under Section 220 of the DGCL, seeking an order compelling the Company to
provide them with certain books and records. Shortly after the Merger Board was
notified of the Plaintiffs’ investigation, the Merger Board executed the Merger
Agreement, dated May 30, 2014, that purportedly released all potential liability
concerning the Usurpation Claims that may have followed from that investigation.123
I conclude, in light of these facts, that the Defendant Directors were aware of
the existence of the Usurpation Claims and of the likelihood that these claims would
be brought derivatively at the time the Company negotiated the Merger.
3. The Complaint sufficiently alleges that the potential Usurpation Claim liability was material to Nicholas Gould, Peter Gould, and Michael Pearson.
According to the Complaint, the value of the Derivative Claims exceed
“hundreds of millions of dollars.”124 The Plaintiffs reach this value based on
optimistic inference. First, they allege that “modeling of the potential value by
123 In their answering brief, the Plaintiffs assert that a “Mutual Release” was included as Exhibit E to the Merger Agreement. Pls’ Answering Br. 40. Neither the Merger Agreement nor the “Mutual Release” were attached to the Complaint. I thus rely on the Plaintiffs’ characterization of the release of liability as alleged in the Complaint. 124 Compl. ¶ 60.
35 Jefferies in the first quarter of 2012 suggests that the interests in Invitation Homes
usurped by certain Riverstone officers and directors were worth hundreds of millions
of dollars to more than $1 billion.”125 Second, the Plaintiffs allege that Riverstone
officers and directors were offered approximately 70% of the “promoted,” or carried
interest in Invitation Homes.126 In light of Invitation Homes’ portfolio, allegedly
worth more than $7.5 billion, “the claims against Riverstone’s officers and directors
were easily worth hundreds of millions of dollars.”127
The Defendants argue that the Plaintiffs’ “fantastic allegations” regarding the
value of the derivative claims are “without any grounding whatsoever.”128 To the
extent the Plaintiffs rely on an alleged early-stage model created by Jefferies, the
Defendants explain, that model would have valued an entity with a structure that is
far different from the structure actually implemented by Blackstone in Invitation
Homes. Jefferies’ early model, therefore, does not accurately represent the “promote
interests” offered to Riverstone’s officers and directors.
The Plaintiffs’ factual support for their alleged valuation in its Complaint is
far from replete, and I approach their Brobdingnagian assertions of materiality with
skepticism. Moreover, I recognize that the Defendants have rightly identified
125 Id. at ¶ 48. 126 Id. at ¶ 42. 127 Pls’ Answering Br. at 39. 128 Defs’ Reply Br. at 24.
36 reasons to discount the validity of Jefferies’ early valuation model. Nonetheless,
the Plaintiffs have alleged that certain Director Defendants were required to make
investments funded, in part, by the following deferred capital contributions:
$1,900,000 from Nicholas Gould; $2,600,000 from Peter Gould; and $150,000 from
Michael Pearson.129 I can assume, for the purposes of the motions here, that the
value of the usurped opportunity approximates or exceeds these investments, which
total $4.65 million.130 Based on those values, and the Plaintiffs’ allegations as to
damages, I conclude that the Plaintiffs have sufficiently pled particularized facts
sufficient to find that the potential liability of the Usurpation Claims was material to
Pearson and the Goulds.131
4. The Usurpation Claims were extinguished in the Merger.
Shortly after the Merger Board was notified of the Plaintiffs’ investigation,
129 See supra note 52. 130 Of course, the extent of potential damages would be net of investment costs. I point to this figure simply to indicate that the size of the venture makes its materiality reasonably conceivable. 131 For the first time at oral argument, the Defendants asserted that the Plaintiffs’ actions (or inactions) in association with a bid for the Company imply that the derivative claims were not as valuable as the Plaintiffs allege here; in fact, that they were not material at all. Oral Arg. Tr. 25– 26. According to the Defendants, the Plaintiffs were part-owners of a joint venture that submitted an indication of interest to purchase Riverstone. The joint venture was outbid by Greystar, who purchased the Company for $94 million. It follows, according to the Defendants, that the derivative claims cannot be worth hundreds of millions of dollars or else the Plaintiffs would have been eager to increase their bid to secure the valuable derivative claims. Other than a broad reference to “various indications of interest,” however, the Complaint does not refer to the Plaintiffs’ specific indication of interest, which is not integral to their allegations. The Defendants, moreover, did not raise the argument in their briefing. I therefore decline to consider the Defendants’ argument concerning the Plaintiffs’ foregone bid for Riverstone at this stage of the litigation. I note, however, that it may prove significant at later stages of the litigation.
37 the Merger Board executed the Merger Agreement, dated May 30, 2014, that
purportedly released all potential liability concerning the Usurpation Claims that
may have followed from that investigation.132 Thus the terms of the Merger
Agreement render the buyer incapable of pursuing such a claim.
5. The pleadings are sufficient to demonstrate, at the motion to dismiss stage, that the majority of the Merger Board was interested in the Merger.
For the reasons above, the Plaintiffs have pled with particularity that, at least,
Pearson and the Goulds were aware that they faced a derivative claim at the time
they were considering the Merger, that the claim was viable, and that potential
liability was material to them. They approved a merger which precluded prosecution
of those claims derivatively, as a matter of law, and precluded the acquirer’s pursuit
of the claims as a matter of contract. They thus secured a valuable benefit from the
Merger not shared by the stockholders. In light of this self-interest, their duty of
loyalty is implicated, and the presumption of the exercise of business judgment
overcome.
B. It is Reasonably Conceivable that the Merger was Not Entirely Fair
Once a plaintiff rebuts the business judgment rule, the burden shifts to the
defendant to establish that the merger was the product of both fair dealing and fair
132 See supra note 123.
38 price.133 The applicability of the entire fairness standard “normally will preclude a
dismissal of a complaint on a Rule 12(b)(6) motion to dismiss.”134 However, “[e]ven
in a self-interested transaction in order to state a claim a shareholder must allege
some facts that tend to show that the transaction was not fair.”135
The Plaintiffs allege that the merger price was unfair because it did not include
value for the foregone derivative claims, which, the Plaintiffs allege, were material
in light of the size of the Merger. The Defendants disagree that any potential claims
were material. I have already discussed the materiality of the Usurpation Claims to
the Director Defendants in connection with my analysis of the standard of review.
The investment made by the Defendant Directors totaled approximately $4.65
million. Assuming, as I did above, that the investments made by the Defendants
provide some indicia of the value of the Usurpation Claims, 136 the usurped
investments represent approximately 5% of the gross merger consideration, and
approximately 10% of the merger consideration net of post-closing adjustments. I
find that it is reasonably conceivable, in light of the relatively modest merger
133 Calma ex rel. Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 589 (Del. Ch.2015) (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993)). 134 Id. (quoting Orman, 794 A.2d at 20 n.36). 135 Id. (quoting Solomon v. Pathe Commc'ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995), aff'd, 672 A.2d 35 (Del. 1996)). 136 Again, I acknowledge that the value of the chose-in-action would be the value of the litigation asset net of investment.
39 consideration, that the Usurpation Claims are material in the context of the Merger.
Thus, it is reasonably conceivable that the Merger was not entirely fair.
I conclude, therefore, that the Plaintiffs have adequately pled facts indicating
that entire fairness applies and that the transaction was not entirely fair, sufficient to
withstand the Defendants’ Motions to Dismiss.
C. The Other Director Defendants and CAS Capital
While the Plaintiffs have sufficiently pled that three of the five Director
Defendants lacked independence—sufficient to invoke entire fairness review—the
other two Director Defendants, Danner and Wanich,137 are also named as
Defendants, as is the controller, CAS Capital. I do not address whether the
Complaint states a claim against those Defendants in this Memorandum Opinion.
That is because the Defendants did not seek to dismiss them in their motions or
opening brief, outside of the context of the standing arguments and the determination
of the standard of review addressed above. In their reply brief, I note, the Defendants
devote a separate section to Danner and Wanich. They argue that, regardless of the
standard of review, Danner and Wanich acted independently and, in light of the
137 In their Complaint, the Plaintiffs argue that Danner and Wanich were unable to act independently because, as officers of Riverstone, they were dependent upon the Goulds, who own and control the Company’s majority stockholder, for their livelihoods. Compl. ¶ 61.
40 Company’s exculpation clause, they should be dismissed.138 The Defendants’
argument, however, is untimely, and I therefore do not consider it here. Nothing in
this opinion should prevent the Defendants from seeking summary judgment in their
favor, as appropriate.
D. Riverstone as a Defendant
In their Complaint, the Plaintiffs allege that Riverstone is “named as a
necessary party and to ensure the Court’s ability to grant complete relief to
Plaintiffs.”139 In their opening brief, the Defendants assert that there is no reasonably
conceivable basis for including Riverstone in the fiduciary portion of this action.
They argue that Riverstone is not named in any of the specific counts of the
Complaint and that the entity itself did not owe stockholders any fiduciary duty.
In their answering brief, the Plaintiffs respond by arguing that Riverstone “as
an entity is integral to this case” although concede that they “have not sought to
improperly shift liability onto Riverstone.” The Plaintiffs assert that they would like
to take discovery from Riverstone, and that dismissal invites “complexity and
formality where [it is] unnecessary to the fair and efficient procession of
138 See In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1179 (Del. 2015) (“[P]laintiffs must plead a non-exculpated claim for breach of fiduciary duty against an independent director protected by an exculpatory charter provision, or that director will be entitled to be dismissed from the suit. That rule applies regardless of the underlying standard of review for the transaction.”). 139 Compl. ¶ 11.
41 litigation.”140
Under Delaware law, fiduciary duties are owed by the directors and officers
of a corporation and not by the corporation itself.141 Therefore, Riverstone cannot
be held liable for any of the claims pled by the Plaintiffs based in breach of fiduciary
duty. I also note that, despite their contentions in the briefing, the Plaintiffs failed
to address their theory against Riverstone at oral argument. The claims asserted
against Riverstone for breach of fiduciary duty, to the extent they exist, are
accordingly dismissed.
E. The Misclassification Claim
In their Complaint, the Plaintiffs challenge the classification of the
Contributions made by CAS Capital and/or its affiliate, Regis, pre-merger. While
the bulk of the Complaint is devoted to the alleged usurpation of corporate
opportunities, only three paragraphs are used to describe the allegedly misclassified
contributions.142 According to the Complaint, CAS Capital and Regis made
contributions to Riverstone pre-merger. As of the date of the Merger, those
140 The Plaintiffs quote then-Vice Chancellor Strine’s decision in Nagy v. Bistricer, 770 A.2d 43, 56 (Del. 2000). In Nagy, the Court determined that appraisal and fiduciary duty claims do not have to be brought in separate actions. In making that determination, the Court noted that in that particular case, “it would disserve judicial and litigative efficiency to require separate complaints.” Id. at 58. The Court did not conclude, however, that a plaintiff could continue to pursue a claim against a defendant that cannot be held liable—supposed judicial and plaintiff economy notwithstanding. 141 See Buttonwood Tree Value Partners, L.P. v. R.L Polk & Co., Inc., 2014 WL 3954987, at *4 (Del. Ch. Aug. 7, 2014) (citing In re Wayport, Inc. Litig., 76 A.3d 296, 322–23 (Del. Ch. 2013)). 142 Compl. ¶¶ 50–52.
42 contributions totaled $20,319,896 and were recorded on Riverstone’s books as debts
“due to affiliates”—a liability.143 Per the Complaint, the base purchase price for the
Merger was reduced by Riverstone’s indebtedness, which included the contested
Contributions, as part of a post-close adjustment.144 In the words of the Plaintiff,
“the Goulds were able to cause these amounts to be treated as unsecured debts due
to their affiliates in the Merger,” despite the fact that “there [was] no documentation
that would indicate [the] ‘loans’ were approved by the board.”145 The Plaintiffs
contend that the Contributions should have been classified as paid-in-capital—
equity, rather than debt—and should not have reduced the merger consideration. It
therefore follows, Plaintiffs argue, that “the Goulds, through CAS Capital and Regis,
were able to increase the distributions they received from the Merger by ensuring
that these amounts would be paid for their benefit before any distribution of merger
consideration to Riverstone’s minority stockholders.”146
Despite those allegations, I find the Classification Claim incomprehensible as
an attack on the fairness of the merger. The Plaintiffs fail to articulate how the
“merger terms were tainted by unfair dealing.”147 The Complaint merely includes a
conclusory allegation that the Goulds, through their affiliates, “caused” the
143 Id. at ¶ 51. 144 Id. at ¶ 58. 145 Id. 146 Id. at ¶ 52. 147 Golaine v. Edwards, 1999 WL 1271882, at *7 (Del. Ch. Dec. 21, 1999) (emphasis added).
43 misclassification of the Contributions, to the detriment of minority stockholders.
Absent from the Complaint are facts indicating when the alleged Contributions were
made; and whether the accounting treatment changed between the times the
Contributions were made and the time of the Merger, or whether the change was
made in light of the Merger. Without more, it is not reasonably conceivable that the
Defendants misclassified the contributions as part of the merger, thereby breaching
their fiduciary duties.
Also missing from the Complaint is a plausible explanation of the harm
suffered by minority stockholders as a result of the alleged misclassification. At the
time of the Merger, CAS Capital was the Company’s majority stockholder, owning
over 90% of Riverstone’s stock. If the Plaintiffs’ are correct—that CAS Capital’s
$20 million contribution should have been classified as equity—CAS Capital would
have received stock, or some other form of equity. Considering the comparative
value of the contribution ($20 million) to the value of the Company implied in the
Merger ($94 million), CAS Capital’s ownership interest would have likely increased
substantially, thereby diluting the Plaintiffs’ interest. It is unclear, based on the facts
alleged, that the Plaintiffs’ share of the additional $20 million in merger
consideration would have outweighed the dilution of the Plaintiffs’ interest.
Moreover, to the extent the misclassification harmed stockholders, greater than 90%
of that harm fell on CAS Capital.
44 Having failed to challenge the terms of the merger, or plausibly allege
resulting unfair price, the Plaintiffs’ misclassification claim is dismissed. I note that
the Plaintiffs’ recovery for any wrongful misclassification is not forfeit, however.
Having already found above that a majority of the Merger Board was interested in
the Merger, the Defendants will bear the burden of showing that the Merger was
entirely fair. Presumably, couched within that determination will be the value of the
Company’s assets and liabilities, the latter of which may require consideration of the
classification of the challenged Contributions.
III. CONCLUSION
Based on the foregoing, the Plaintiffs’ claim that the Merger was unfair based
on the Defendants’ breach of fiduciary duty survives the motions to dismiss. All of
the fiduciary claims related to the failure to obtain value for the Classification Claim,
however, are dismissed. The Plaintiffs’ claims based in fiduciary duty asserted
against Defendant Riverstone National, Inc. are also dismissed. The parties should
provide a form of order consistent with this decision.
Related
Cite This Page — Counsel Stack
In re Riverstone National, Inc. Stockholder Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-riverstone-national-inc-stockholder-litigation-delch-2016.