IN RE TERRAFORM POWER, INC. STOCKHOLDER LITIGATION
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE TERRAFORM POWER, INC. ) CONSOLIDATED STOCKHOLDERS LITIGATION ) C.A. No. 2019-0757-SG
MEMORANDUM OPINION
Date Submitted: July 16, 2020 Date Decided: October 30, 2020
Ned Weinberger, Derrick Farrell, and Mark Richardson, of LABATON SUCHAROW LLP, Wilmington, Delaware; Peter B. Andrews, Craig J. Springer, and Davis M. Sborz, of ANDREWS & SPRINGER LLC, Wilmington Delaware; OF COUNSEL: Jeremy S. Friedman and David F.E. Tejtel, of FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York; Steven J. Purcell, Douglas E. Julie, Robert H. Lefkowitz, and Kaitlyn T. Devenyns, of PURCELL JULIE & LEFKOWITZ LLP, New York, New York, Attorneys for Lead Plaintiffs City of Dearborn Police and Fire Revised Retirement System (Chapter 23) and Martin Rosson.
Kevin G. Abrams, Eric A. Veres, and Stephen C. Childs, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: John A. Neuwirth, Stefania D. Venezia, and Amanda K. Pooler, of WEIL, GOTSHAL & MANGES LLP, New York, New York, Attorneys for Defendants Brookfield Asset Management Inc., Orion US Holdings 1 L.P., Brookfield BRP Holdings (Canada) Inc., Brian Lawson, Harry Goldgut, Richard Legault, Sachin Shah, and John Stinebaugh.
Brian C. Ralston, Seth R. Tangman, and Caneel Radinson-Blasucci, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Daniel M. Sullivan, of HOLWELL SHUSTER & GOLDBERG LLP, New York, New York, Attorneys for Nominal Defendant TerraForm Power, Inc.
GLASSCOCK, Vice Chancellor This matter involves a purported direct action by stockholders against
the corporate controller and certain directors for breach of fiduciary duty. The
Plaintiffs allege that the controller caused the entity to issue it stock for inadequate
value, diluting both the financial and voting interest of the minority stockholders.
Although the Plaintiffs initially asserted both direct and derivative claims, they
subsequently ceased to be stockholders of the entity after the company was acquired
in a merger. The merger ended any viable derivative claims, leaving the Plaintiffs
with only their direct claims to pursue. Unlike derivative claims, a merger does not
terminate a plaintiff’s standing to pursue direct claims. Therefore, any direct claims
survive the merger.
The Defendants have moved to dismiss for lack of standing, arguing that
dilution claims are quintessential derivative claims that belong to the corporation
under the standard articulated in Tooley v. Donaldson, Lufkin & Jenrette, Inc.1 The
Plaintiffs counter that their claims are dual natured under the more specific rubric
established by Gentile v. Rossette, and that their direct claims thus persist.2
The facts of this case are strikingly similar to those of Gentile. The
Defendants do not dispute this. Instead, because Gentile has been both criticized and
1 See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). 2 See Gentile v. Rossette, 906 A.2d 91 (Del. 2006). 1 applied narrowly in a number of judicial opinions, they urge me to disregard it as
precedent.
It may be tempting for a bench judge to think that a common law that is
composed solely of his best judgement would itself be the perfect expression of the
law. Fear of hubris and its condign results should dissuade any judge from such an
error. More fundamentally, the value of the common law is that it provides for
incremental change only, so that decision makers have a sense of certainty and
predictability in taking actions under its framework. This value requires a careful
balance. Prior decisions by those at the same judicial level, on the same facts, have
strong persuasive value, and a judge should disregard them only when convinced
that the prior conclusions of her colleague were erroneous. Prior on-point decisions
of higher tribunals, by contrast, are controlling. If a plaintiff is to prevail against
such prior case law, then, it must be via appeal.
This principle of stare decisis is the balance by which our common-law system
enables flexibility without sacrificing predictability. Here, Gentile is the controlling
precedent, under which I find that the Plaintiffs have adequately pled a direct claim,
and the Defendants’ Motion to Dismiss must be denied.
I amplify my reasoning, below.
2 I. BACKGROUND 3
A. The Parties
Nominal Defendant TerraForm Power, Inc. (“TerraForm”) is a Delaware
corporation headquartered in New York.4 TerraForm is a publicly traded company
that acquires, owns, and operates solar and wind assets in North America and
Western Europe.5
Defendant Brookfield Asset Management, Inc. (“Brookfield”) is a Canadian
corporation headquartered in Toronto.6 Brookfield is an alternative asset manager
that primarily conducts business through direct and indirect subsidiaries. 7 At the
time the Complaint was filed, Brookfield and its affiliates beneficially owned 61.5%
of TerraForm. 8 Pursuant to TerraForm’s then-operative Certificate of Incorporation
(the “Charter”), Brookfield also had the power to designate four members of
Brookfield’s senior management to TerraForm’s Board of Directors.9
3 The facts, except where otherwise noted, are drawn from the designated operative Verified Stockholder Derivative and Class Action Complaint, C.A. No. 2020-0050-SG, Dkt. No. 1 (the “Complaint” or “Compl.”), and are presumed true for the purposes of evaluating the Defendants’ Motion to Dismiss. See Stip. and Order of Consolidation and Appointment of Lead Pls. and Co- Lead Counsel ¶ 14, Dkt. No. 19. 4 Compl. ¶ 13. 5 Id. Terraform’s common stock trades on the NASDAQ under the ticker “TERP.” Id. 6 Id. ¶ 14. 7 Id. ¶¶ 14–15. 8 Id. ¶ 14. 9 Id. ¶ 2.
3 Defendant Orion US Holdings 1 L.P. (“Orion Holdings”) is a Delaware
limited partnership and an affiliate of Brookfield.10 Orion Holdings is one of
Brookfield’s affiliates through which Brookfield has held beneficial voting and
dispositive power over Brookfield’s TerraForm shares.11
Defendant Brookfield BRP Holdings (Canada) Inc. (“BRP Holdings”) is a
Canadian corporation and an affiliate of Brookfield.12 BRP Holdings’ sole purpose
appears to be holding stock in TerraForm. 13
Defendant Brian Lawson is a director of TerraForm and Senior Managing
Partner and Chief Financial Officer (“CFO”) of Brookfield.14
Defendant Harry Goldgut is a director of TerraForm and Vice Chair of
Brookfield’s Renewable Group and Brookfield’s Infrastructure Group. 15
Defendant Richard Legault is a director of TerraForm and Vice Chairman of
Brookfield.16
10 Id. ¶ 17. 11 Id. ¶ 14 n.5. 12 Id. ¶ 18. 13 Id. 14 Id. ¶ 19. 15 Id. ¶ 20. 16 Id. ¶ 21.
4 Defendant Sachin Shah is a director of TerraForm and a Managing Partner of
Brookfield.17 Shah also serves as Chief Executive Officer (“CEO”) of Brookfield
Renewable Partners and BRP Holdings. 18
Defendant John Stinebaugh is TerraForm’s CEO. 19 Stinebaugh was
appointed as TerraForm’s CEO by Brookfield and is employed as a Managing
Partner of Brookfield.20 Stinebaugh receives no direct compensation from
TerraForm for his services as CEO and instead receives his compensation solely
from Brookfield. 21
Plaintiff City of Dearborn Police and Fire Revised Retirement System
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE TERRAFORM POWER, INC. ) CONSOLIDATED STOCKHOLDERS LITIGATION ) C.A. No. 2019-0757-SG
MEMORANDUM OPINION
Date Submitted: July 16, 2020 Date Decided: October 30, 2020
Ned Weinberger, Derrick Farrell, and Mark Richardson, of LABATON SUCHAROW LLP, Wilmington, Delaware; Peter B. Andrews, Craig J. Springer, and Davis M. Sborz, of ANDREWS & SPRINGER LLC, Wilmington Delaware; OF COUNSEL: Jeremy S. Friedman and David F.E. Tejtel, of FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York; Steven J. Purcell, Douglas E. Julie, Robert H. Lefkowitz, and Kaitlyn T. Devenyns, of PURCELL JULIE & LEFKOWITZ LLP, New York, New York, Attorneys for Lead Plaintiffs City of Dearborn Police and Fire Revised Retirement System (Chapter 23) and Martin Rosson.
Kevin G. Abrams, Eric A. Veres, and Stephen C. Childs, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: John A. Neuwirth, Stefania D. Venezia, and Amanda K. Pooler, of WEIL, GOTSHAL & MANGES LLP, New York, New York, Attorneys for Defendants Brookfield Asset Management Inc., Orion US Holdings 1 L.P., Brookfield BRP Holdings (Canada) Inc., Brian Lawson, Harry Goldgut, Richard Legault, Sachin Shah, and John Stinebaugh.
Brian C. Ralston, Seth R. Tangman, and Caneel Radinson-Blasucci, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Daniel M. Sullivan, of HOLWELL SHUSTER & GOLDBERG LLP, New York, New York, Attorneys for Nominal Defendant TerraForm Power, Inc.
GLASSCOCK, Vice Chancellor This matter involves a purported direct action by stockholders against
the corporate controller and certain directors for breach of fiduciary duty. The
Plaintiffs allege that the controller caused the entity to issue it stock for inadequate
value, diluting both the financial and voting interest of the minority stockholders.
Although the Plaintiffs initially asserted both direct and derivative claims, they
subsequently ceased to be stockholders of the entity after the company was acquired
in a merger. The merger ended any viable derivative claims, leaving the Plaintiffs
with only their direct claims to pursue. Unlike derivative claims, a merger does not
terminate a plaintiff’s standing to pursue direct claims. Therefore, any direct claims
survive the merger.
The Defendants have moved to dismiss for lack of standing, arguing that
dilution claims are quintessential derivative claims that belong to the corporation
under the standard articulated in Tooley v. Donaldson, Lufkin & Jenrette, Inc.1 The
Plaintiffs counter that their claims are dual natured under the more specific rubric
established by Gentile v. Rossette, and that their direct claims thus persist.2
The facts of this case are strikingly similar to those of Gentile. The
Defendants do not dispute this. Instead, because Gentile has been both criticized and
1 See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004). 2 See Gentile v. Rossette, 906 A.2d 91 (Del. 2006). 1 applied narrowly in a number of judicial opinions, they urge me to disregard it as
precedent.
It may be tempting for a bench judge to think that a common law that is
composed solely of his best judgement would itself be the perfect expression of the
law. Fear of hubris and its condign results should dissuade any judge from such an
error. More fundamentally, the value of the common law is that it provides for
incremental change only, so that decision makers have a sense of certainty and
predictability in taking actions under its framework. This value requires a careful
balance. Prior decisions by those at the same judicial level, on the same facts, have
strong persuasive value, and a judge should disregard them only when convinced
that the prior conclusions of her colleague were erroneous. Prior on-point decisions
of higher tribunals, by contrast, are controlling. If a plaintiff is to prevail against
such prior case law, then, it must be via appeal.
This principle of stare decisis is the balance by which our common-law system
enables flexibility without sacrificing predictability. Here, Gentile is the controlling
precedent, under which I find that the Plaintiffs have adequately pled a direct claim,
and the Defendants’ Motion to Dismiss must be denied.
I amplify my reasoning, below.
2 I. BACKGROUND 3
A. The Parties
Nominal Defendant TerraForm Power, Inc. (“TerraForm”) is a Delaware
corporation headquartered in New York.4 TerraForm is a publicly traded company
that acquires, owns, and operates solar and wind assets in North America and
Western Europe.5
Defendant Brookfield Asset Management, Inc. (“Brookfield”) is a Canadian
corporation headquartered in Toronto.6 Brookfield is an alternative asset manager
that primarily conducts business through direct and indirect subsidiaries. 7 At the
time the Complaint was filed, Brookfield and its affiliates beneficially owned 61.5%
of TerraForm. 8 Pursuant to TerraForm’s then-operative Certificate of Incorporation
(the “Charter”), Brookfield also had the power to designate four members of
Brookfield’s senior management to TerraForm’s Board of Directors.9
3 The facts, except where otherwise noted, are drawn from the designated operative Verified Stockholder Derivative and Class Action Complaint, C.A. No. 2020-0050-SG, Dkt. No. 1 (the “Complaint” or “Compl.”), and are presumed true for the purposes of evaluating the Defendants’ Motion to Dismiss. See Stip. and Order of Consolidation and Appointment of Lead Pls. and Co- Lead Counsel ¶ 14, Dkt. No. 19. 4 Compl. ¶ 13. 5 Id. Terraform’s common stock trades on the NASDAQ under the ticker “TERP.” Id. 6 Id. ¶ 14. 7 Id. ¶¶ 14–15. 8 Id. ¶ 14. 9 Id. ¶ 2.
3 Defendant Orion US Holdings 1 L.P. (“Orion Holdings”) is a Delaware
limited partnership and an affiliate of Brookfield.10 Orion Holdings is one of
Brookfield’s affiliates through which Brookfield has held beneficial voting and
dispositive power over Brookfield’s TerraForm shares.11
Defendant Brookfield BRP Holdings (Canada) Inc. (“BRP Holdings”) is a
Canadian corporation and an affiliate of Brookfield.12 BRP Holdings’ sole purpose
appears to be holding stock in TerraForm. 13
Defendant Brian Lawson is a director of TerraForm and Senior Managing
Partner and Chief Financial Officer (“CFO”) of Brookfield.14
Defendant Harry Goldgut is a director of TerraForm and Vice Chair of
Brookfield’s Renewable Group and Brookfield’s Infrastructure Group. 15
Defendant Richard Legault is a director of TerraForm and Vice Chairman of
Brookfield.16
10 Id. ¶ 17. 11 Id. ¶ 14 n.5. 12 Id. ¶ 18. 13 Id. 14 Id. ¶ 19. 15 Id. ¶ 20. 16 Id. ¶ 21.
4 Defendant Sachin Shah is a director of TerraForm and a Managing Partner of
Brookfield.17 Shah also serves as Chief Executive Officer (“CEO”) of Brookfield
Renewable Partners and BRP Holdings. 18
Defendant John Stinebaugh is TerraForm’s CEO. 19 Stinebaugh was
appointed as TerraForm’s CEO by Brookfield and is employed as a Managing
Partner of Brookfield.20 Stinebaugh receives no direct compensation from
TerraForm for his services as CEO and instead receives his compensation solely
from Brookfield. 21
Plaintiff City of Dearborn Police and Fire Revised Retirement System
(Chapter 23) (“City of Dearborn”) has continuously owned shares of TerraForm
Class A common stock at all times relevant to this action.22
Plaintiff Martin Rosson has continuously owned shares of TerraForm Class A
common stock since January 2018. 23
17 Id. ¶ 22. 18 Id. 19 Id. ¶ 23. 20 Id. 21 Id. 22 Id. ¶ 12. 23 Verified Stockholder Derivative and Class Action Complaint for Breach of Fiduciary Duties ¶ 10, C.A. No. 2019-0757, Dkt. No. 1.
5 B. Brookfield Becomes TerraForm’s Controlling Stockholder; TerraForm’s Governance
TerraForm was formed on January 15, 2014 as a wholly-owned indirect
subsidiary of SunEdison, Inc. (“SunEdison”).24 TerraForm completed an initial
public offering (“IPO”) on July 23, 2014.25 Subsequent to its IPO, SunEdison was
TerraForm’s controlling stockholder with 91% of the combined voting power of
Terraform. 26 In April 2016, SunEdison filed for production under Chapter 11 of the
United States Bankruptcy Code.27 Because SunEdison was not performing certain
obligations (including management and administrative services) owed to TerraForm,
TerraForm initiated a process to explore and evaluate strategic alternatives.28
Brookfield ultimately agreed to purchase a controlling interest in Terraform
(the “Merger”).29 As a result of the Merger, Brookfield became TerraForm’s
controlling stockholder, holding through its affiliates 51% of TerraForm’s
outstanding common stock.30 The Merger was effectuated by a Merger and
Sponsorship Transaction Agreement (the “Transaction Agreement”) entered into by
TerraForm and two Brookfield affiliates: Orion Holdings and BRE TERP Holdings,
24 Compl. ¶ 25. TerraForm’s original name was SunEdison Yieldco, Inc.—the company’s name was changed to TerraForm on May 22, 2014. Id. 25 Id. ¶ 26. 26 Id. ¶ 27. 27 Id. ¶ 29. 28 Id. 29 Id. ¶ 32. 30 Id.
6 Inc. (“Merger Sub”). 31 In connection with the Merger, TerraForm eliminated its
previous share structure—which included three classes of stock—and instead now
has only a single class of stock: Class A, which is entitled to one vote per share.32
Brookfield and several of its affiliates, including Orion Holdings, also entered
into several sponsorship arrangements with Terraform. 33 Pursuant to a Master
Services Agreement between TerraForm, Brookfield, and several Brookfield
affiliates (the “Master Services Agreement”), Brookfield agreed to provide certain
management and administrative services to TerraForm. 34 A Governance Agreement
between TerraForm and Brookfield (through Orion Holdings) (the “Governance
Agreement”) fixed certain rights and obligations of TerraForm and Brookfield
related to TerraForm’s governance. 35
The Master Services Agreement and Governance Agreement granted
Brookfield the exclusive power to appoint TerraForm’s CEO, CFO, and General
Counsel. 36 Following the Merger, Brookfield appointed Defendant Stinebaugh as
TerraForm’s CEO, a position he currently retains.37 Brookfield also appointed
31 Id. ¶ 30. 32 Id. ¶ 31. 33 Id. ¶ 33. 34 Id. ¶ 34. 35 Id. 36 Id. ¶ 35. 37 Id. ¶ 36.
7 TerraForm’s CFO and General Counsel, both of whom, along with Stinebaugh, were
Brookfield employees. 38
Also in connection with the Merger, Terraform amended its Charter; fixing
the size of TerraForm’s Board of Directors (the “Board”) to seven members. 39 The
amended Charter provided that, for so long as Brookfield remains TerraForm’s
controlling stockholder under stock exchange listing rules, Brookfield will have the
right to designate four of the seven Board members. 40 Upon the consummation of
the Merger, Brookfield appointed four members of its senior management to the
Board—Defendants Lawson, Goldgut, Legault, and Shah.41
Pursuant to TerraForm’s Charter, the remaining three directors of TerraForm
must be “independent” under SEC and NASDAQ rules and regulations. 42 The
Governance Agreement requires that TerraForm have a Conflicts Committee
composed of the three non-Brookfield directors (the “Conflicts Committee”). 43 The
Conflicts Committee is responsible for reviewing and approving material
transactions and matters in which a conflict of interest exists between TerraForm
and Brookfield (and its affiliates).44 Since May 23, 2018, Mark McFarland,
38 Id. 39 Id. ¶ 37. 40 Id. 41 Id. ¶ 38. 42 Id. ¶ 39. 43 Id. ¶ 40. 44 Id.
8 Christian S. Fong, and Carol Burke have comprised the Conflicts Committee.45
McFarland was appointed as a non-Brookfield designee, but Brookfield “requested
that [TerraForm] consider appointing” McFarland to the Board following the
Merger. 46
TerraForm acknowledges that it is a “‘controlled company,’ controlled by
Brookfield and its affiliates, whose interest in [TerraForm’s] business may be
different from [TerraForm’s] or other holders of [TerraForm’s] Class A common
stock.”47
C. TerraForm Determines to Acquire Saeta Yield S.A.; Planned Equity Offering
In or around January 2018, Brookfield approached TerraForm regarding an
opportunity to acquire Saeta Yield, S.A. (“Saeta”), a publicly-traded Spanish yieldco
with 1.0+ gigawatts of contracted onshore wind and solar assets for $1.2 billion (the
“Saeta Acquisition”).48 Saeta had a high-quality operating portfolio and represented
an attractive acquisition target in line with TerraForm’s growth mandate. 49
45 Id. ¶ 41. 46 Id. ¶ 39. 47 Id. ¶ 43. 48 Id. ¶ 44. A “yieldco” is a company formed to own operating assets that produce a predictable cash flow, primarily through long-term contracts. Id. ¶ 3 n.2. 49 Id. ¶ 45.
9 TerraForm had the debt capacity to fund most—if not all—of the $1.2 billion
price of the Saeta Acquisition. 50 Notwithstanding this debt capacity, Brookfield
steered TerraForm towards funding a significant portion of the purchase price with
a backstopped equity offering. 51 On January 23, 2018 Brookfield and TerraForm
informed the Conflicts Committee that, in addition to funding the Saeta Acquisition
with debt, TerraForm would raise approximately $600–$700 million of equity in the
public markets.52 Brookfield indicated that in addition to participating up to it’s pro
rata portion of the equity offering—that is, 51%—it was willing to backstop part of
the equity offering. 53
The Conflicts Committee initially did not retain its own financial advisor in
connection with the proposed equity offering and instead relied on the advice of
Barclays, who was serving as TerraForm’s financial advisor.54 Barclays had a
history of advising Brookfield and its affiliates on significant transactions, and,
additionally, Brookfield owns Barclays’ London headquarters and Barclays is
Brookfield’s third-largest tenant. 55 Board and Conflict Committee meeting minutes
50 Id. ¶ 52. 51 Id. ¶ 53. 52 Id. ¶ 54. 53 Id. TerraForm’s management recommended that Brookfield receive a 2.625% upfront free for providing the equity back-stop. Id. 54 Id. ¶ 55. 55 Id. ¶ 56.
10 do not reflect any discussion, deliberation, or questioning concerning Barclays’s
affiliation with Brookfield.56
The Conflicts Committee met on January 26, 2018 to discuss a proposed $650
million equity offering backstopped in part by Brookfield (the “Equity Offering”).57
The Conflicts Committee tasked Committee member Fong with seeking additional
detail as to the reasons why a funding plan with more debt and less equity was not
as advantageous to TerraForm as the proposed funding plan—Fong was to seek such
information from TerraForm’s CEO Stinebaugh.58
The Conflicts Committee met again on January 29, 2018 at which time it
determined that the proposed backstop was advisable and in TerraForm’s best
interests.59 In forming this conclusion the Conflicts Committee relied on
TerraForm’s management and Brookfield for advice. 60 The Conflicts Committee
still had not engaged or consulted with a financial advisor.61
As of February 6, 2018 the funding plan for the Saeta Acquisition had been
updated to reduce the Equity Offering from $650 million to $400 million due to,
among other things, recent stock market volatility. 62 Brookfield offered to backstop
56 Id. 57 Id. ¶ 57. 58 Id. 59 Id. ¶ 58. 60 Id. 61 Id. 62 Id. ¶ 60.
11 the full amount of the anticipated $400 million Equity Offering for no fee, so long
as the offering price was equal to the five-day volume weighted average price ending
the trading day prior to TerraForm’s announcement of the Saeta Acquisition. 63 At a
meeting that day the Conflicts Committee approved the equity backstop on these
terms, as documented in a support agreement between TerraForm and Brookfield
(the “Support Agreement”).64
The Support Agreement provided that TerraForm’s funding of the Saeta
Acquisition via tender offer might include an equity offering of TerraForm common
stock “on a pro rata basis to existing TerraForm stockholders of up to approximately
$400 million.”65 Brookfield agreed in the Support Agreement to backstop the Equity
Offering if the offering price equaled TerraForm’s five-day weighted average price
ending February 6, 2018, which was $10.66 per share. 66 Brookfield’s backstop
obligations were subject to successful commencement of the tender offer under
applicable Spanish law and to prior effectiveness of the necessary TerraForm
registration statement, if required.67 TerraForm and Brookfield agreed that the
pricing, size, and timing of the Equity Offering—including the decision to use the
63 Id. 64 Id. ¶ 61. 65 Id. ¶ 62. 66 Id. ¶ 63. 67 Id. ¶ 64.
12 backstop—would be subject to prior review and approval of the Conflicts
Committee, together with any other necessary approvals. 68 Finally, it was agreed in
the Support Agreement that TerraForm and the Conflicts Committee would retain
an independent financial advisor—meaning independent from Brookfield—to
provide advice regarding the Equity Offering.69
On February 7, 2018, TerraForm announced that it intended to launch a tender
offer to acquire 100% of Saeta’s outstanding shares for an aggregate purchase price
of approximately $1.2 billion (the “Tender Offer”) and that TerraForm expected to
fund the Tender Offer by (1) conducting a $400 million equity issuance of
TerraForm’s Class A common stock (the Equity Offering) and (2) providing the
remaining $800 million using its available liquidity. 70 On May 3, 2018, TerraForm
commenced the Tender Offer. 71
TerraForm had filed a preliminary Form S-1 registration statement with the
Securities and Exchange Commission (“SEC”) on March 19, 2018 in connection
with the planned public offering of $400 million in TerraForm Class A Common
stock. 72 On May 10, 2018 TerraForm filed its definitive proxy statement with the
68 Id. ¶ 65. The Complaint notes that “[t]he Support Agreement did not ‘require TerraForm to make or complete any [e]quity [o]ffering’ nor ‘commit TerraForm to an [e]quity [o]ffering at any particular price, of any particular size or at any particular time.’” Id. 69 Id. ¶ 66. 70 Id. ¶ 67. 71 Id. ¶ 69. 72 Id. ¶ 68.
13 SEC seeking stockholder approval for the issuance of up to 61 million shares of
Class A Common stock in connection with the planned Equity Offering.73
TerraForm’s stockholders approved the share issuance on May 23, 2018 at
TerraForm’s annual stockholder meeting.74
D. TerraForm Enters Into Private Placement with Brookfield
Immediately after TerraForm’s May 23, 2018 annual meeting, the Board met
to discuss the Equity Offering and backstop.75 TerraForm’s CEO Stinebaugh
proposed TerraForm raise $650 million—rather than $400 million—through the sale
of equity because “the market expect[ed] a $650 million total equity offering and
that the impact to the returns on the Saeta transaction would not be material.”76
TerraForm director Shah—also a Brookfield appointee—indicated that Brookfield
would be prepared to increase the size of the backstop from $400 million back up to
$650 million. 77 Stinebaugh then proposed that if the Equity Offering presented too
much market risk, the full amount be offered to Brookfield through a private
placement at $10.66 per share.78 At the conclusion of the meeting, TerraForm’s
73 Id. ¶ 70. 74 Id. ¶ 71. 75 Id. ¶ 73. 76 Id. 77 Id. ¶ 74. 78 Id.
14 Board determined that the Conflicts Committee should consider Brookfield’s
proposal to increase the size of the backstop to $650 million.79
At the conclusion of the full Board meeting on May 23, 2018, the Conflicts
Committee met to discuss the information that had just been presented.80 There was
no discussion of the proposed private placement and only a discussion of the
proposed increase to the equity offering (to $650 million) and commensurate
increase in Brookfield’s backstop.81
That same day, the Conflicts Committee had its first meeting with an
independent financial advisor, Greentech Capital Advisors, LLC (“Greentech”).82
The Conflict Committee’s minutes do not indicate when the Conflicts Committee
determined to retain Greentech, why the Conflicts Committee chose to retain
Greentech specifically, or whether the Conflicts Committee considered retaining
other financial advisors.83 Greentech’s written presentation to the Conflicts
Committee contemplated that Brookfield would backstop the full $650 million even
though, according to meeting minutes, Brookfield first suggested the increased
backstop only a few hours earlier.84 Greentech’s materials do not address or provide
79 Id. ¶ 76. 80 Id. ¶ 77. 81 Id. 82 Id. ¶ 78. 83 Id. ¶ 77. 84 Id. ¶ 78.
15 advice related to the fairness of a private placement with Brookfield.85 At the
conclusion of the meeting, the Conflicts Committee directed Greentech to
“coordinate” with Barclays. 86
The Conflicts Committee met again the following day—May 24, 2018—and
Greentech reviewed with the Conflicts Committee the materials provided the
previous day. 87 The Greentech materials remarked that “a $650 million offering
would be less favorable to [TerraForm] than a $400 million offering because it would
‘significantly reduce returns’ and ‘reduce the accretion from Saeta.’” 88 The
materials continued that the precedent transactions for the Equity Offering implied
a total discount of 4%–7% which “would lead to a discounted stock price lower than
Brookfield’s backstop of $10.66.”89 Nonetheless, Greentech advised the Conflicts
Committee that it would be “difficult to predict the price at which the Equity
Offering could be executed (and whether it could be executed at a price above
[$10.66]).” 90 Greentech also noted that a backstop covering the full amount of the
Equity Offering “was very beneficial.” 91 As with the previous day’s meeting, there
85 Id. 86 Id. 87 Id. ¶ 79. 88 Id. ¶ 80. 89 Id. ¶ 81. 90 Id. ¶ 82. 91 Id. ¶ 83.
16 was no discussion of the proposed private placement. 92 At the conclusion of the
meeting, the Conflicts Committee approved an increase of the backstop to $650
million and amendment to the Support Agreement reflecting such increase.93
On May 25, 2018, the Conflicts Committee met once again, and, following
discussion with Greentech concerning the Equity Offering and backstop, the
Conflicts Committee invited Stinebaugh and other Brookfield representatives to join
the meeting.94 The meeting minutes suggest that Brookfield viewed the backstop
and the private placement as one in the same—i.e. that that backstop was an
agreement to sell $650 million in stock to Brookfield regardless of whether
TerraForm sold any equity to the public. 95 The Conflicts Committee however
received no advice concerning whether a private placement with Brookfield was in
TerraForm’s best interests or in any way superior to other financing alternatives
besides the Equity Offering.96 Both Barclays and Greentech did opine that the
Equity Offering would likely be priced below TerraForm’s trading price (and thus
below the backstop price).97 However, the Complaint criticizes both Barclays’ and
Greentech’s comparable transactions analyses on which they respectively relied in
92 Id. 93 Id. ¶ 84. 94 Id. ¶ 85. 95 Id. 96 Id. ¶ 86. 97 Id. ¶ 87.
17 forming this conclusion. 98 At the conclusion of the May 25, 2018 meeting, the
Conflicts Committee reaffirmed its approval of the increase in the backstop to $650
million. 99
The Conflicts Committee reconvened on May 29, 2018. 100 The meeting was
attended by representatives of Brookfield, including Stinebaugh and Shah, as well
as Barclays. 101 Barclays and the Conflicts Committee discussed certain qualitative
benefits of the Equity Offering, but Barclays advised the Conflicts Committee that
a marketed equity offering would likely be at a 5%–8% discount to TerraForm’s
trading price and therefore below the backstop price ($10.66).102 Barclays stated
that they did not recommend proceeding with the Equity Offering unless the
Conflicts Committee was comfortable with the Equity Offering pricing at an 8%
discount to market price (that is, the high range of Barclays’ projected discount).103
The Conflicts Committee met again on June 4, 2018, at which time it was
clear that Spanish authorities required all funding for the Saeta Acquisition to be in
98 Id. ¶¶ 81, 87. 99 Id. ¶ 88. 100 Id. ¶ 90. 101 Id. 102 Id. ¶ 91. The qualitative benefits included “(i) providing [TerraForm]with an opportunity directly to address the investor community and communicate [TerraForm’s] story and fundamental value, (ii) increasing [TerraForm’s] public float and reducing equity overhang, (iii) building and diversifying [TerraForm’s] stockholder base and (iv) paving a pathway for subsequent offerings.” Id. 103 Id.
18 place within a week (by June 11, 2018).104 Barclays reiterated their view on the
likely discount should TerraForm proceed with the Equity Offering even though
Barclays had not received any “price feedback” from investors.105 Barclays also told
the Conflicts Committee that Barclays “was not willing to proceed with the Equity
Offering unless [TerraForm] was willing to forego exercising the [backstop] after
the Equity Offering had been launched and to consummate the Equity Offering at
the per share price fixed by the market.” 106 TerraForm’s management advised the
Conflicts Committee that it recommended that TerraForm exercise the backstop in
lieu of proceeding with the Equity Offering.107 That is, though the backstop was
originally conceived to “backstop” any amount of the Equity Offering that was not
purchased by existing TerraForm stockholders, TerraForm management
recommended doing away with the public offering aspect and instead simply sell the
entire amount of the proposed offering directly to Brookfield. Despite the fact that
the Conflicts Committee never received advice concerning a private placement with
Brookfield, the Conflicts Committee accepted TerraForm management’s
recommendation and approved full exercise of the backstop—that is, a private
placement of $650 million of TerraForm stock with Brookfield at $10.66 per share
104 Id. ¶ 92. 105 Id. 106 Id. 107 Id. ¶ 93.
19 (the “Private Placement”). 108 Upon completion of the Private Placement, Brookfield
(through its affiliates) owned 65.3% of TerraForm’s outstanding common stock.109
With the $650 million received from Brookfield, and $471 million in available
liquidity, TerraForm acquired approximately 95% of Saeta’s shares for an aggregate
of $1.12 billion.110 Following the tender offer, TerraForm completed a squeeze-out
under Spanish law for the remaining shares of Saeta that were not tendered.111
TerraForm’s stock increased in the aftermath of the Saeta Acquisition and by June
25, 2018 TerraForm’s stock was trading at $11.77 per share (more than 10% higher
than the Private Placement price). 112
In October 2019, TerraForm conducted a $250 million public offering for
14,907,573 shares of common stock at a price of $16.77 per share.113 Concurrent
with this offering, Brookfield entered into a second private placement, purchasing
2,981,514 shares of common stock for $16.77 per share. 114 Brookfield did not
purchase enough shares in this offering to maintain its equity percentage, which
subsequently decreased from 65.3% to 61.5%. 115
108 Id. 109 Id. ¶ 94. 110 Id. ¶¶ 95–96. 111 Id. ¶ 97. 112 Id. ¶ 98. 113 Id. ¶ 106 n.19. 114 Id. 115 Id. ¶¶105–06.
20 E. Procedural History
Plaintiff Rosson filed a complaint challenging Private Placement on
September 19, 2019 alleging breach of fiduciary against Brookfield, and its affiliates
(Orion Holdings and BRP Holdings).116 Plaintiff City of Dearborn Police and Fire
Revised Retirement System (Chapter 23) filed a separate complaint on January 27,
2020 also challenging the Private Placement and bringing fiduciary duty claims
against Brookfield and the same affiliates, but additionally bringing breach of
fiduciary duty claims against Brookfield’s director appointees (Lawson, Goldgut,
Legault, and Shah), and TerraForm’s CEO (Stinebaugh). On February 13, 2020, the
Rosson and City of Dearborn actions were consolidated, Rosson and City of
Dearborn were appointed as Lead Plaintiffs, and City of Dearborn’s complaint was
designated as the operative Complaint. 117
The Complaint alleges three counts of breach of fiduciary duty. Count I is
brought against Brookfield, Orion Holdings, and BRP Holdings as controlling
stockholders.118 Count II is brought against Lawson, Goldgut, Legault, and Shah.119
116 See Verified Stockholder Derivative and Class Action Complaint for Breach of Fiduciary Duties, C.A. No. 2019-0757, Dkt. No. 1. 117 See generally Stip. and Order of Consolidation and Appointment of Lead Pls. and Co-Lead Counsel, Dkt. No. 19. 118 See Compl. ¶¶ 131–41. 119 See id. ¶¶ 142–45.
21 Count III is brought against Stinebaugh.120 All three counts were brought both
derivatively and directly.
On March 26, 2020, the Defendants moved to dismiss the Plaintiffs’ direct
claims and stay the Plaintiffs’ derivative claims. 121 On April 23, 2020, I denied the
motion to stay the derivative claims orally. 122 On May 27, 2020, the Plaintiffs moved
to strike certain of the affirmative defenses in the Defendants’ Partial Answer.123 On
July 16, 2020, I heard Oral Argument on the Motion to Dismiss and Motion to Strike
and considered the matters submitted for decision on that date. 124 On July 31, 2020,
all outstanding TerraForm shares not already owned by Brookfield were acquired by
Brookfield affiliates Brookfield Renewable Partners L.P. and Brookfield Renewable
Corporation.125 In light of that merger, I granted an order dismissing the derivative
counts of the Complaint. 126 Because the Plaintiffs’ previous Motion to Strike was
exclusively concerned with the Defendants’ affirmative defenses to the derivative
claims, 127 the Order of Partial Dismissal renders the Motion to Strike moot.
Accordingly, this Opinion addresses only the Defendants’ Motion to Dismiss.
120 See id. ¶¶ 146–49. 121 See generally Defs.’ Mot to Dismiss and Stay, Dkt. No. 24. 122 See generally Tr. of Oral Arg., Dkt. No. 78. 123 See generally Pls.’ Mot. to Strike, Dkt. No. 50. 124 See generally Tr. of Oral Arg., Dkt. No. 78. 125 See generally Stip. and Order of Partial Dismissal, Dkt. No. 80. 126 See generally id. 127 See generally Defs.’ Partial Answer and Affirmative Defenses, Dkt. No. 43.
22 II. ANALYSIS
“A controlling stockholder owes fiduciary duties to the corporation and its
minority stockholders, and it is ‘prohibited from exercising corporate power . . . so
as to advantage itself while disadvantaging the corporation.’” 128 This Memorandum
Opinion resolves whether the Plaintiffs have adequately alleged that the Private
Placement breached fiduciary duties Brookfield owed directly to TerraForm’s
minority stockholders, or whether the Plaintiffs have instead alleged claims of harm
to TerraForm directly, and the minority stockholders only derivatively.
A. Relevant Legal Standard
The Defendants have moved to dismiss this action pursuant to Court of
Chancery Rule 12(b)(6).129 The path to dismissal under Rule 12(b)(6) motion is
well-worn:
(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 nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof. 130
128 Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *22 (Del. Ch. Mar. 26, 2018) (quoting Thorpe v. CERBCO, Inc., 1995 WL 478954, at *8 (Del. Ch. Aug. 9, 1995). 129 Ct. Ch. R. 12(b)(6). 130 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation marks omitted).
23 When reviewing a motion to dismiss, the Court may take into consideration
documents incorporated into the pleadings by reference and judicially noticeable
facts available in public SEC filings. 131
The Defendants suggest that the Plaintiffs lack standing to seek redress for the
injury they allege. The issue of whether the Plaintiffs have standing is an issue
precedent to consideration of a complaint, and is an issue of law. 132
B. Standing
The doctrinal front on which this Motion is contested is whether the Plaintiffs
have standing to pursue direct claims against Brookfield for breach of fiduciary duty.
Standing “refers to the right of a party to invoke the jurisdiction of a court to enforce
a claim or to redress a grievance” and “is a threshold question that must be answered
by a court affirmatively to ensure that the litigation before the tribunal is a case or
controversy that is appropriate for the exercise of the court’s judicial powers.”133
In support of their Motion to Dismiss, the Defendants contend that the
Plaintiffs’ claims are exclusively derivative claims belonging to Terraform.
Consequently, the Plaintiffs lack standing to pursue such claims directly. In Tooley
v. Donaldson, Lufkin & Jenrette, Inc.,134 the Delaware Supreme Court held that the
131 Reith v. Lichtenstein, 2019 WL 2714065, at *1 (Del. Ch. June 28, 2019). 132 El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1256 (Del. 2016). 133 Dover Historical Soc’y. v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110 (Del. 2003) (citations and internal quotation marks omitted). 134 845 A.2d 1031 (Del. 2004).
24 determination of whether a stockholder’s claim is direct or derivative “must turn
solely on the following questions: (1) who suffered the alleged harm (the corporation
or the suing stockholders, individually); and (2) who would receive the benefit of
any recovery or other remedy (the corporation or the stockholders, individually)?”135
Per the Defendants, the claims asserted—though purportedly brought directly—are
derivative under Tooley, and hence, the Plaintiffs can have no “right to bring an
individual action for injuries affecting [their] legal rights as [] stockholder[s].” 136
The Plaintiffs’ retort is twofold. First, the Complaint states direct claims
under Gentile v. Rossette.137 Second, the Complaint states direct claims under
Tooley alone—even without relying on Gentile. I evaluate these arguments in
reverse order below, finding first that the Complaint does not state direct claims
without Gentile, but that it does state direct claims under Gentile’s rationale. I note
ongoing uncertainty over whether Gentile remains good law, but find that it is
binding Delaware Supreme Court precedent, and thus controlling here.
C. The Complaint Does Not State Direct Claims under a Classic Tooley Analysis
The Plaintiffs argue that they have made adequate direct claims without
relying on the Gentile doctrine. They allege that the Private Placement inflicted
135 Id. at 1033. 136 Id. at 1036. 137 906 A.2d 91 (Del. 2006).
25 direct harm on TerraForm’s minority stockholders based on the increase in
Brookfield’s voting power from 51% to 65.3%. Specifically, the Complaint pleads
that the Private Placement “solidified Brookfield’s control” over TerraForm. 138 In
briefing, the Plaintiffs contend that without the Private Placement Brookfield would
have eventually lost absolute majority control. They also maintain that Brookfield’s
increased voting power gave it the ability to eliminate or change minority
stockholder protections in TerraForm’s Charter.139 Thus, per the Plaintiffs, the
Private Placement worked a direct injury on the minority stockholders.
I note that, because I find Gentile controlling below, I could simply deny the
Motion to Dismiss on that basis. Because the Tooley analysis necessarily informs
the Defendants’ argument that Gentile is no longer viable precedent, and because of
the procedural posture here, which seems likely to involve a request for interlocutory
appellate relief, I find it appropriate to first briefly examine the Motion to Dismiss
under the rubric set out in Tooley.
1. Dilution is Typically a Derivative Claim Under Tooley
Under Tooley, in order to plead a direct claim a “stockholder must
demonstrate that the duty breached was owed to the stockholder and that he or she
138 Compl. ¶ 10. 139 Pls.’ Answering Br. in Opp’n to Defs.’ Mot. to Dismiss, Dkt. No. 44, at 22–23.
26 can prevail without showing an injury to the corporation.”140 Ordinarily, claims of
corporate overpayment 141 are not regarded as direct “because any dilution in value
of the corporation’s stock is merely the unavoidable result (from an accounting
standpoint) of the reduction in the value of the entire corporate entity, of which each
share of equity represents an equal fraction.” 142 In fact, corporate overpayment is
the quintessence of a claim belonging to an entity: that fiduciaries, acting in a way
that breaches their duties, have caused the entity to exchange assets at a loss. This
rationale extends even where a controlling stockholder allegedly causes a corporate
overpayment in stock and consequent dilution of the minority interest. This claim
is still derivative. If the issuance was for adequate value, obviously, it did not work
a detriment to the stockholder. In that case, the minority simply beneficially owns a
smaller percentage of a bigger corporate pie, enlarged by the proceeds of the sale of
equity; the value of its slice remains the same. If the transaction was for inadequate
value, the worth of the stockholder’s interest is reduced to the extent the entity was
harmed, a classic derivative claim.
The harm is suffered by the entity, and restoring value to the entity would
make both it and, derivatively, its stockholders, whole. While the situation
140 Tooley, 845 A.2d at 1039. 141 That is, claims that the corporation has overpaid for the asset received, and that the controller underpaid. 142 Gentile, 906 A.2d at 99.
27 addressed in Gentile represents a “species of corporate overpayment claim,” as I
discuss infra, a direct claim does not arise “wherever a controlling stockholder
extracts economic value from an entity to its benefit and to the detriment of the
minority stockholders.” 143 Consequently, a claim that the Private Placement injured
stockholders simply because it diluted their ownership interest in TerraForm is alone
insufficient to state a direct claim under Tooley. 144
2. The Plaintiffs’ Entrenchment Argument Fails Reasonable Conceivability
In their non-Gentile argument, the Plaintiffs contend that the Private
Placement did not constitute run-of-the-mill dilution giving rise to solely derivative
claims. Instead, the Plaintiffs contend that the Private Placement entrenched
Brookfield as TerraForm’s controlling stockholder, and thus TerraForm’s minority
stockholders suffered a distinct harm, apart from the indirect injury of value and
voting dilution.
The Plaintiffs’ theory is that Brookfield sought to further entrench itself
through the Private Placement as protection against losing its voting majority when
TerraForm conducted a $250 million public offering in October 2019.145 This theory
143 El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1263 n.76 (Del. 2016); see also In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 818 (Del. Ch. 2005); Avacus Partners, L.P. v. Brian, 1990 WL 161909, at *6 (Del. Ch. Oct. 24, 1990) (“[I]f a board of directors authorizes the issuance of stock for no or grossly inadequate consideration, the corporation is directly injured and shareholders are injured derivatively.”). 144 See Gentile, 906 A.2d at 99–100. 145 Compl. ¶¶ 105–06.
28 is somewhat convoluted: Brookfield theoretically entrenched itself in 2018 in
anticipation of failing to purchase sufficient stock to maintain control in 2019. The
Plaintiffs point to the fact that Brookfield did not purchase enough stock in the 2019
offering to maintain its voting percentage, thereby decreasing its equity ownership
from 65.3 to 61.5% following the offering. 146 In other words, had it not increased
its majority interest in 2018 from 51% to 65.3%, and if it had acted in that
hypothetical situation as it did in fact—not participating pro rata in the 2019 offering
(which occurred over a year after the Private Placement)—Brookfield would have
lost control of TerraForm.
It is not reasonably conceivable that the Plaintiffs’ allegations regarding the
2019 offering state a claim. The Plaintiffs do not allege that anyone knew in June,
2018 that TerraForm would conduct an offering in October, 2019. Moreover, for
the Plaintiffs to state a claim under this theory, it would have to be reasonably
conceivable that even had the Private Placement not occurred, Brookfield would
not have participated on a pro rata basis in the 2019 offering, thereby choosing to
forgo its majority stake. Thus, to adopt the Plaintiffs’ view, I must find it reasonably
conceivable that Brookfield, as controller of TerraForm, would have allowed
TerraForm to issue stock and decrease Brookfield’s ownership stake whereby
Brookfield would then lose its majority stake in TerraForm without compensation.
146 Id. ¶ 106.
29 It is only under such a scenario that the Private Placement could be viewed as
entrenchment, under the threat that the 2019 offering— an offering that Brookfield
as TerraForm’s controller ostensibly approved—would otherwise strip Brookfield
of its majority position.
Given that a control premium has value—and likely significant value at
that147—I find it not reasonably conceivable that Brookfield would have declined to
participate in the 2019 offering if such an action would have cost Brookfield its
majority stake in TerraForm, thereby forfeiting control of a majority of the voting
power of TerraForm for no premium. The required secondary inference imbedded
in such a theory—that the 2018 Private Placement was done in anticipation of the
2019 public offering—is likewise unsupported in the record. Consequently, it is not
reasonably conceivable that the Private Placement constituted Brookfield’s
entrenchment in view of the 2019 offering.
The Plaintiffs in briefing made a second argument. They pointed out that
Article Thirteen of Terraform’s Charter provides that the affirmative vote of at least
66.6% of the combined voting power of all of TerraForm’s outstanding shares is
required to alter, amend, or repeal certain provisions of the Charter (the
“Supermajority Voting Requirement or SVR”).148 The Complaint pleads that
147 See In re Books-A-Million, Inc. S’holders Litig., 2016 WL 5874974, at *13–*14, *16 n.16 (Del. Ch. Oct. 10, 2016). 148 Compl. ¶ 109.
30 Brookfield intends to use its increased voting power—65.3%, reduced to 61.5% after
Brookfield permitted itself to be diluted in the 2019 offering—to remove the
Supermajority Voting Requirement.149 Thus, according to the Plaintiffs, the Private
Placement put their rights under the SVR at risk, which was a direct injury not shared
by Terraform. There are three defects to this argument: (1) Brookfield never
achieved the level of control necessary to unilaterally remove the SVR rights; (2)
Brookfield never attempted to abrogate the rights and through the 2019 placement
moved further from the ability to do so; and (3) the merger has mooted the issue and
no damages could attach to any such claim.
To recapitulate, the Plaintiffs have argued that their claims are direct under
Tooley without invoking Gentile, citing allegations that Brookfield used the Private
Placement to entrench itself to the detriment of TerraForm’s minority stockholders.
In other words, the Plaintiffs remained minority stockholders in a controlled entity
post-Placement; nonetheless, they argue that Brookfield increased its control via the
Private Placement in a way that directly harmed the minority independent of any
harm to the entity. However, as set out above, I find it not reasonably conceivable
that the Private Placement served to entrench Brookfield’s control of TerraForm.
Without an adequate pleading of entrenchment, the Plaintiffs’ claims are for harm
149 Id. ¶¶ 113–14.
31 that devolved upon the minority as “equity holder[s] in the form of the proportionally
reduced value of [their] units—a classically derivative injury.” 150 Thus, under
Tooley alone, the Plaintiffs’ overpayment claims neatly fall into the derivative
category.
D. The Plaintiffs State Direct Claims under Gentile
What follows is the heart of the Plaintiffs’ argument. It is simple and
compelling: (1) our Supreme Court in Gentile found that where a controller has
caused the corporation to issue stock to it for inadequate compensation, the
stockholders have a direct claim for relief, and (2) the facts here are indistinguishable
from Gentile. Gentile involved a corporation’s CEO and controlling stockholder
who forgave debt the corporation owed to him personally in exchange for additional
equity in the corporation.151 The debt was convertible contractually, but the CEO
and the corporation’s board (the CEO and one other individual) agreed to a lower
conversion price per share, which had the effect of allowing the CEO to obtain more
shares.152 A special stockholders meeting was called to authorize the additional
shares, but the stockholders were not informed of the underlying purpose: to convert
the CEO’s debt to equity. 153 Before the conversion, the CEO held approximately
150 El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1261 (Del. 2016). 151 Gentile v. Rossette, 906 A.2d 91, 94 (Del. 2006). 152 Id. at 94–95. 153 Id. at 95.
32 61.19% of the corporation’s equity—after the conversion, the CEO held 93.49%.154
The CEO later negotiated an acquisition of the corporation whereby he received
“unique benefits.”155 This Court dismissed the minority stockholders’ claim for
breach of fiduciary duty against the CEO arising out of the debt conversion because
it found that the claim was solely derivative under Tooley, and the stockholders lost
standing to pursue claims on the corporate behalf after the merger. 156 The appeal to
our Supreme Court concerned only the dismissal via summary judgment of the
breach of fiduciary duty claim arising from the debt conversion; “the issue before
the court [was] whether that claim was exclusively derivative in character.” 157
Gentile noted that the plaintiffs pled two independent harms arising from the
transaction: (1) that the corporation was caused to overpay (in stock) for the debt
forgiveness, and (2), the minority stockholders lost a significant portion of the cash
value and voting power of their minority interest.158 The Supreme Court continued
that, as noted, supra, claims of corporate overpayment are “[n]ormally . . . treated as
causing harm solely to the corporation and, thus, are regarded as derivative” because,
“in Tooley terms . . . the corporation is both the party that suffers the injury (a
154 Id. 155 Id. 156 Id. at 96–97. 157 Id. at 97. 158 Id. at 99.
33 reduction in its assets or their value) as well as the party to whom the remedy (a
restoration of the improperly reduced value) would flow.” 159 The proportionate
injury resulting from a corporate overpayment—“the reduction in the value of the
entire corporate entity, of which each share of equity represents an equal fraction”—
“is not viewed as, or equated with, harm to specific shareholders individually.” 160
But Gentile continued that there is “at least one transactional paradigm,”
which is “a species of corporate overpayment claim” that is both direct and
derivative in character. 161 A breach of fiduciary duty claim with this dual character
arises where:
(1) a stockholder having majority or effective control causes the corporation to issue “excessive” shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and (2) the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.162
Of course, such a transaction gives rise to a derivative claim because the means to
achieve the result is an overpayment of shares to the controller, and the corporation
159 Id. 160 Id. 161 Id. 162 Id. at 100. “[T]he Gentile paradigm only applies when a stockholder already possessing majority or effective control causes the corporation to issue more shares to it for inadequate consideration.” Cirillo Family Tr. v. Moezinia, 2018 WL 3388398, at *16 (Del. Ch. July 11, 2018), aff’d, 220 A.3d 912 (Del. 2019) (TABLE) (italics omitted).
34 is harmed to the extent of the overpayment. 163 The derivative nature of this claim is
consistent with the dilution-as-derivative rationale explained, supra.
However, the Gentile court found that the minority stockholders also had a
separate direct claim arising out of this transactional paradigm. “Because the shares
representing the ‘overpayment’ embody both economic value and voting power, the
end result of this type of transaction is an improper transfer—or expropriation—of
economic value and voting power from the public shareholders to the majority or
controlling stockholder.” 164 Consequently, the harm arising from such a transaction
is not limited to an equal dilution of the economic value and voting power of each
minority-held share—instead, “[a] separate harm also results: an extraction from the
public shareholders, and a redistribution to the controlling shareholder, of a portion
of the economic value and voting power embodied in the minority interest.”165 For
these reasons, the minority stockholders are harmed “uniquely and individually” to
the same extent the controller benefits and are entitled to recover the value
represented by the overpayment directly.166
The facts alleged in the Complaint fit Gentile’s transactional paradigm to a T.
The Plaintiffs allege that Brookfield—TerraForm’s controlling stockholder—caused
163 Gentile, 906 A.2d at 100. 164 Id. 165 Id. 166 Id.
35 TerraForm to proceed with the Private Placement and issue shares to Brookfield at
an inadequate price. 167 The Complaint also alleges that the Private Placement caused
Brookfield’s percentage of shares in TerraForm to increase from 51% to 65.3%.168
TerraForm’s minority stockholders suffered a corresponding decrease in their
ownership stake in TerraForm.
The Defendants concede that the facts here are consistent with Gentile;
nonetheless, they argue that I need not follow Gentile and instead should engage in
a Tooley analysis.
The Defendants contend that Gentile is not controlling precedent because it
“explicitly relied upon and expanded the application” of In re Tri-Star Pictures, Inc.,
Litigation, 169 a case which was disapproved of in Tooley. 170 However, Gentile was
decided after Tooley, and Gentile holds that the decision therein “fits comfortably
within the analytical framework mandated by Tooley.” 171 Consequently, to the
extent that Gentile can be said to rely on Tri-Star, the Gentile decision itself
167 Compl. ¶¶ 100–04. 168 Id. ¶ 105. 169 634 A.2d 319 (Del. 1993). 170 Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1038 n.21 (Del. 2004) (“In the Tri-Star case, however, this Court lapsed back into the ‘special injury’ concept, which we now discard.”). 171 Gentile, 906 A.2d at 102.
36 forecloses any argument that Gentile’s citation of Tri-Star renders Gentile
irreconcilable with Tooley.172
Ultimately, the Defendants are left to argue that I need not follow Gentile
because it was improperly decided. They point to criticism of and limitations on the
decision in our courts, which I briefly summarize below.
Gentile has been much discussed, and often distinguished, in the case law,
particularly in light of the simple test posed in Tooley for determining whether a
claim is direct or derivative: who has suffered the injury and to whom will the
recovery flow? “Post-Gentile, Delaware courts have struggled to define the
boundaries of dual-natured claims.” 173 In Gentile’s immediate aftermath, this Court
in one decision found it “clear” that the Gentile court intended to confine the scope
of its rulings to only those situations where a controlling stockholder exists because
“any other interpretation would swallow the general rule that equity dilution claims
172 The Defendants in briefing suggested that Gentile is distinguishable from the facts alleged here because in Gentile the plaintiffs no longer held any stock due to a liquidation in bankruptcy. Gentile does recognize that in the “specific case” presented there “the sole relief that is presently available would benefit only the minority stockholders.” Id. at 103. In my view, this does not mean that the claim was not derivative in character as well; the Supreme Court noted that “under Tooley the claim could be brought derivatively or directly.” Id. (emphasis added). Nothing in Gentile limits its application to those instances where the plaintiff stockholders lack standing to bring derivative claims. Thus, Gentile would not be distinguishable from the facts pled here on the grounds that the Plaintiffs here continue to hold TerraForm stock. In any event, the point is moot; the post-complaint merger resulted in the loss of the Plaintiffs’ stock and the extinguishment of the derivative claims, which have been voluntarily dismissed. 173 Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *7 (Del. Ch. July 26, 2018).
37 are solely derivative, and would cast great doubt on the continuing vitality of the
Tooley framework.” 174 Via El Paso, the Supreme Court has adopted this reasoning,
holding that “the Gentile paradigm only applies when a stockholder already
possessing majority or effective control causes the corporation to issue more shares
to it for inadequate consideration.”175
However, Gentile’s limited application to controller transactions was not
forgone or obvious. This Court in Carsanaro v. Bloodhound Technologies, Inc.,176
for instance, disagreed with a “line in the sand” limiting Gentile to cases involving
a majority stockholder. 177 Instead, Carsanaro held that Gentile also applies to self-
interested stock issuances effectuated by a board lacking a disinterested and
independent majority. 178 Carsanaro noted that the “core insight of [the] dual injury”
framework is “the real-world impact of the transaction upon the shareholder value
and voting power embedded in the (pre-transaction) minority interest, and the
uniqueness of the resulting harm to the minority shareholders individually.” 179 The
Court reasoned that what Gentile termed expropriation applied with equal force
174 Feldman v. Cutaia, 956 A.2d 644, 657 (Del. Ch. 2007), aff’d, 951 A.2d 727 (Del. 2008). 175 Cirillo Family Tr. v. Moezinia, 2018 WL 3388398, at *16 (Del. Ch. July 11, 2018); Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *9 (Del. Ch. Mar. 26, 2018); Feldman, 956 A.2d at 657. 176 65 A.3d 618 (Del. Ch. 2013). 177 Id. at 658. 178 Id. 179 See id. at 657–58
38 where (for example) a self-interested board issued itself stock at a price below
current market value. 180 Per Carsanaro, Gentile should logically extend to any
situation where “defendant fiduciaries (i) had the ability to use the levers of corporate
control to benefit themselves and (ii) took advantage of the opportunity,” 181 resulting
in expropriation from the minority.
In re Nine Systems Corporation Shareholders Litigation 182 echoed
Carsanaro, finding that if the reasoning of Gentile were to be respected, “it [would
make] little sense to hold a controlling stockholder to account to the minority for
improper expropriation after a merger but to deny standing for stockholders to
challenge a similar expropriation by a board of directors after a merger.” 183 The
board of directors, after all, has the exclusive authority to manage and direct the
corporation’s business affairs, including the power to issue stock. 184 Why then,
asked Nine Systems, should Delaware law hold controlling stockholders to a higher
standard than the board of directors? 185
180 Id. at 658. 181 Id. at 658–59. 182 2014 WL 4383127 (Del. Ch. Sept. 4, 2014). 183 Id. at *28. 184 See id. (citing 8 Del. C. §§ 141(a), 151–53, 157, 161, 166). 185 Id. at *28. Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *10 (Del. Ch. July 26, 2018), noted that “El Paso . . . implicitly rejected the reasoning of decisions such as . . . Nine Systems, which had extended Gentile to any dilutive issuance approved by a conflicted board.”
39 Carsanaro and Nine Systems were an attempt reconcile Tooley and Gentile.
Those cases, since abrogated, along with the reversed trial court decision in El Paso,
reasoned that the doctrinally consistent way to read Gentile (given Tooley’s
directive) is that Gentile stands for the dual-natured character of an expropriation
claim. Thus, Carsanaro reasoned that both Tooley questions could be answered
either way for a dilutive issuance. 186 Vice Chancellor Noble, in Nine Systems,
“struggled to articulate” why an expropriation transaction effected by a controller
should give rise to dual-natured claims, but an expropriation transaction effected by
a board was a solely derivative dilution claim. 187 Citing Carsanaro and Nine
Systems, the reversed trial court opinion in El Paso remarked that “Gentile’s core
insight applies to any insider stock issuance where the value transferred directly to
the insider exceeds the share of the loss that the insider suffers through its stock
ownership.” This line of cases can thus be read as attempts to place Gentile within
Tooley’s overarching framework.
In a concurring opinion in El Paso, former Chief Justice Strine proposed
resolving this tension in the opposite way. He wrote that Gentile “is a confusing
decision, which muddies the clarity of our law in an important context.” 188 Instead
186 Carsanaro, 65 A.3d at 656. 187 In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *28. 188 El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1265–66 (Del. 2016) (Strine, C.J., concurring).
40 of backing the Carsanaro and Nine Systems approach—searching for a way to read
Gentile as consistent with Tooley—Chief Justice Strine directly questioned the
soundness of Gentile and its ongoing viability, remarking that it “cannot be
reconciled with the strong weight of our precedent.”189
Chief Justice Strine reasoned that a dilution claim is a “quintessential example
of a derivative claim,” that “[a]ll dilution claims involve, by definition, dilution,”
and that “[t]o suggest that, in any situation where other investors have less voting
power after a dilutive transaction, a direct claim also exists turns the most traditional
type of derivative claim—an argument that the entity got too little value in exchange
for shares—into one always able to be prosecuted directly.” 190 The concern
enunciated by Chief Justice Strine in his El Paso concurrence is that Gentile is
inconsistent with Tooley and that no sound reason exists to permit this awkward
carve-out to an otherwise straightforward doctrine.
I have previously noted that limiting Gentile to controller situations, rather
than “expanding it to conflicted board non-controller dilution cases, or overruling it
entirely, is, as a matter of doctrine, unsatisfying”191 for the reasons just articulated.
The El Paso court was able to resolve the issue there narrowly without addressing
189 Id. at 1266. 190 Id. at 1265–66. 191 Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *10 n.147 (Del. Ch. July 26, 2018).
41 the overarching doctrinal issue. The Supreme Court majority in El Paso “decline[d]
the invitation to further expand the universe of claims that can be asserted ‘dually’
to hold here that the extraction of solely economic value from the minority by a
controlling stockholder constitutes direct injury.” This allowed the El Paso court to
preserve the Tooley framework and avoid “largely swallow[ing] the rule that claims
of corporate overpayment are derivative [which would result from] permitting
stockholders to ‘maintain a suit directly whenever the corporation transacts with a
controller on allegedly unfair terms.’” 192
In his El Paso concurrence, Chief Justice Strine agreed with the majority that
the case at hand—involving a limited partnership—did not require the Supreme
Court to consider Gentile’s ongoing viability in the corporate context.193 But the
logic of his dissent has been echoed in this Court in El Paso’s aftermath: “[w]hether
Gentile is still good law is debatable;”194 “the viability of [the Gentile] doctrine has
been called into doubt;”195 “there is reason to question whether Gentile will remain
the law of Delaware.” 196
192 El Paso, 152 A.3d at 1264. 193 Id. at 1266 (Strine, C.J., concurring). 194 ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *26 n.206 (Del. Ch. July 21, 2017). 195 Cirillo Family Tr. v. Moezinia, 2018 WL 3388398, at *16 n.156 (Del. Ch. July 11, 2018). 196 Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *8 n.77 (Del. Ch. Aug. 29, 2018).
42 Based upon this case history of Gentile, and notwithstanding the factual
congruence of that case with the one before me, the Plaintiffs argue that stare decisis
is inapplicable here. “Stare decisis . . . is the legal term for fidelity to precedent.”197
The concept is “well established in Delaware jurisprudence,” and “[o]nce a point of
law has been settled by decision of [the Supreme Court], ‘it forms a precedent which
is not afterwards to be departed from or lightly overruled or set aside and it should
be followed except for urgent reasons and upon clear manifestation of error.’”198
Thus, unless Gentile somehow departs from the stare decisis paradigm, it is binding
precedent here. The Defendants maintain that Gentile is not consistently applied and
is not settled law, for the reasons laid out above, and thus stare decisis does not
mandate denial of the outstanding Motion.
“There is no question that, if the Supreme Court has clearly spoken on a
question of law necessary to deciding a case before it, this court must follow its
answer.” 199 In El Paso, 200 the Delaware Supreme Court declined to extend Gentile
to instances where the expropriation of economic value to a controller was not
coupled with any voting rights dilution. 201 El Paso held that the claims there—
197 Fanin v. UMTH Land Development, L.P., 2020 WL 4384230, at *18 (Del. Ch. July 31, 2020). 198 Account v. Hilton Hotels Corp., 780 A.2d 245, 248 (Del. 2001) (quoting Oscar George, Inc. v. Potts, 115 A.2d 479, 481 (Del. 1955)). 199 In re MFW S’holders Litig., 67 A.3d 496, 520 (Del. Ch. 2013). 200 152 A.3d 1248 (Del. 2016). 201 Id. at 1264.
43 involving a limited partner’s claim that the partnership had overpaid the controlling
general partner for assets held by the general partner’s parent—did not “satisfy the
unique circumstances presented by the Gentile ‘species of corporate overpayment
claim[s].’” 202 The takeaway from El Paso is that “Gentile and its progeny should be
construed narrowly,” 203 and that “Gentile must be limited to its facts, which involved
a dilutive stock issuance to a controlling stockholder.” 204 But El Paso did not
overrule Gentile.
I have laid out above the cases involving criticism of Gentile, upon which the
Defendants rely to argue that I am at liberty to disregard the case.
The Defendants argue stoutly that the Gentile doctrine, in light of the case
analysis above, is moribund, and that I should disregard it. That argument is
misplaced. Our system does not work that way, and if it did, the results would bleed
value from the orderly development of the common law. As a trial court judge, I am
not free to decide cases in a way that deviates from binding Supreme Court
precedent. 205 This is not merely a matter of respect for superior authority; the proper
development of the common law, and its utility, rest on a balance of judicial
202 Id. (quoting Gentile v. Rossette, 906 A.2d 91, 99 (Del. 2006)). Notably, the limited partner “never alleged and did not prove” that the partnership’s overpayment increased the general partner’s or the general partner’s parent’s control at the expense of the limited partners. Id. 203 Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *8 n.77 (Del. Ch. Aug. 29, 2018). 204 Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *10 (Del. Ch. July 26, 2018). 205 See, e.g., In re Cornerstone Therapeutics Inc. Stockholder Litig., 2014 WL 4418169 (Del. Ch. Sept. 10, 2014), rev’d sub nom, In re Cornerstone Therapeutics Inc, Stockholder Litig., 115 A.3d 1173 (Del. 2015).
44 responsiveness and certainty, as represented by employing the doctrine of stare
decisis to bind the trial courts. Under this rubric, if law settled by our Supreme Court
is to be changed, it requires a reasoned analysis by that Court; under this rubric, our
common law develops in an orderly way 206 that provides that consistency that is
itself an attribute of justice. 207
Where a Supreme Court precedent inexorably commands a result, my
obligation as a trial court judge is to follow the Supreme Court’s directive. Here,
the facts alleged are doctrinally indistinguishable from those facts to which Gentile
is limited, a circumstance that the Defendants do not contest. This is the rare case
that perfectly fits the narrow Gentile paradigm, and Gentile mandates that the direct
claims pled survive the Defendant’s Motion to Dismiss.
Consistent with Gentile, the Plaintiffs have made a sufficient pleading that
Brookfield is TerraForm’s controller, that Brookfield caused TerraForm to issue
excessive shares of its stock in exchange for insufficient consideration, and that the
exchange caused an increase in the percentage of the outstanding shares owned by
Brookfield, and a corresponding decrease in the share percentage owned by the
public (minority) stockholders. Such a pleading is sufficient, under controlling
206 E.g Payne v. Tennessee, 501 U.S. 808, 827 (1991) (holding that stare decisis promotes the “evenhanded, predicable and consistent development” of the law). 207 See State v. Barnes, 116 A.3d 883, 890–911 (Del. 2015) (explaining that “[t]he doctrine of stare decisis exists to protect the settled expectations of citizens because ‘[e]lementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and conform their conduct accordingly’) (citing Landgraf v. USI Film Products, 511 U.S. 244, 256 (1994)).
45 Supreme Court precedent, to withstand the Defendant’s Motion to Dismiss the
Plaintiffs’ direct claims.
III. CONCLUSION
The Defendants’ Motion to Dismiss is DENIED. The parties should submit a
form of order consistent with this Memorandum Opinion.
Related
Cite This Page — Counsel Stack
IN RE TERRAFORM POWER, INC. STOCKHOLDER LITIGATION, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-terraform-power-inc-stockholder-litigation-delch-2020.