IRA Trust FBO Bobbie Ahmed v. David Crane
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) IRA TRUST FBO BOBBIE AHMED, ) on behalf of similarly situated Class A ) stockholders of NRG YIELD, INC., ) ) Plaintiff, ) ) v. ) CONSOLIDATED ) C.A. No. 12742-CB DAVID CRANE, JOHN F. ) CHLEBOWSKI, MAURICIO ) GUTIERREZ, KIRKLAND B. ) ANDREWS, BRIAN R. FORD, ) FERRELL P. MCCLEAN, ) CHRISTOPHER S. SOTOS and NRG ) ENERGY, INC., ) ) Defendants. ) )
OPINION
Date Submitted: September 22, 2017 Date Decided: December 11, 2017
Peter B. Andrews, Craig J. Springer & David M. Sborz of ANDREWS & SPRINGER LLC, Wilmington, Delaware; Jeremy S. Friedman, Spencer Oster & David Tejtel of FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Jason M. Leviton & Joel Fleming of BLOCK & LEVITON LLP, Boston, Massachusetts; Counsel for Plaintiff.
William M. Lafferty & D. McKinley Measley of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Counsel for Defendants John F. Chlebowski, Brian R. Ford, and Ferrell P. McClean. Brian C. Ralston, Andrew H. Sauder & Mathew A. Golden of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Defendants David Crane, Mauricio Gutierrez, Kirkland B. Andrews, Christopher S. Sotos, and NRG Energy, Inc.
BOUCHARD, C. This action arises out of a reclassification of the shares of NRG Yield, Inc.
(“Yield” or the “Company”) that went into effect in May 2015. Yield’s business
model is to own a portfolio of income-producing energy generation and
infrastructure assets from which dividends can be distributed to public
stockholders—a model often referred to as a “yieldco.” Since its formation in 2012,
Yield has been controlled by NRG Energy, Inc. (“NRG”), which manages Yield’s
day-to-day affairs and is responsible for identifying and placing assets into Yield.
After its initial public offering in 2013, Yield had two classes of stock, both
of which were entitled to one vote per share. NRG then held approximately 65% of
Yield’s voting power through its ownership of all of Yield’s Class B shares, and
public stockholders held approximately 45% of Yield’s voting power through their
ownership of Class A shares. The prospectus for the Class A shares stated that NRG
intended to maintain its controlling interest in Yield.
By 2015, NRG’s voting control of Yield had been diluted to approximately
55% as a result of Class A shares being issued to acquire assets to transfer to Yield.
Concerned that its voting control of Yield was in jeopardy if Yield continued to fund
asset acquisitions with Class A shares, NRG proposed that Yield undertake a
recapitalization where Class A stockholders would be issued one share of a new class
of non-voting common stock for each Class A share they held. NRG intended for
Yield to use the non-voting common stock as currency to acquire assets in the future. NRG’s proposal was conditioned from the beginning on the receipt of the
approval of a majority of the outstanding shares of Yield not affiliated with NRG,
meaning a majority of Yield’s outstanding Class A shares. Upon receipt of the
proposal, Yield’s board delegated to its standing Conflicts Committee the authority
to evaluate and negotiate the proposal. The independence of the three members of
the Conflicts Committee is not challenged.
Through negotiations with the Conflicts Committee, NRG’s proposal was
revised so that newly-created Class C and Class D shares would be issued on a one-
for-one basis to Class A and Class B stockholders, respectively, i.e., stockholders
would receive one Class C share for every Class A share and one Class D share for
every Class B share. The Class C and Class D shares would have the right to 1/100
of one vote per share instead of being non-voting, as initially proposed. NRG also
agreed to amend a contract, under which Yield had a right of first offer on certain
NRG assets, to include some additional assets. As finally negotiated, the proposal
is referred to herein as the “Reclassification.” In May 2015, the Reclassification
received the necessary stockholder approvals and went into effect that same month.
In September 2016, a Class A stockholder filed this action asserting that the
members of the Yield board breached their fiduciary duties in connection with their
approval of the Reclassification, and that NRG breached its fiduciary duty as a
2 controlling stockholder by causing Yield to undertake the Reclassification.
Defendants moved to dismiss the complaint for failure to state a claim for relief.
Resolution of this motion implicates three questions: (1) Is the
Reclassification a conflicted transaction subject to entire fairness review even
though it nominally involved a pro rata distribution of shares? (2) If so, should the
analytical framework articulated in Kahn v. M&F Worldwide, Corp.,1 a squeeze-out
merger case, apply to the Reclassification? (3) If so, has that framework been
satisfied in this case from the face of the pleadings? For the reasons explained
below, I conclude that the answer to each of these questions is yes, and thus the
Complaint must be dismissed for failure to state a claim for relief.
I. BACKGROUND
Unless noted otherwise, the facts in this decision are drawn from the Verified
Class Action Complaint (the “Complaint”) and documents incorporated therein,2
which include documents produced to plaintiff in response to a books and record
1 88 A.3d 635 (Del. 2014). 2 See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citations omitted) (“[P]laintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms” in connection with a motion to dismiss).
3 demand made under 8 Del. C. § 220.3 Any additional facts are either not subject to
reasonable dispute or subject to judicial notice.
A. The Parties and Relevant Non-Parties Plaintiff IRA Trust FBO Bobbie Ahmed alleges it was a Class A stockholder
of Yield at all relevant times.
Defendant NRG is a power company that produces, sells, and delivers energy,
energy products, and energy services in the United States. NRG is headquartered in
both West Windsor Township, New Jersey, and Houston, Texas. Non-party Yield,
a Delaware corporation, owns a portfolio of energy generation and infrastructure
assets in the United States. As a result of the Reclassification, Yield now has four
classes of common stock. The Company’s Class A and C shares are listed on the
New York Stock Exchange. The Company’s Class B and D shares are held by NRG
and not publicly traded.
When it approved the Reclassification, Yield’s board (the “Board”) was
comprised of the seven individual defendants: David Crane, John F. Chlebowksi,
Mauricio Gutierrez, Kirkland B. Andrews, Brian R. Ford, Ferrell P. McClean, and
Christopher S. Sotos. Four of the directors (Crane, Andrews, Gutierrez, and Sotos)
were members of Yield’s management at the time, and each of them held executive
3 In connection with its Section 220 demand, plaintiff agreed that documents produced by Yield “shall be deemed incorporated by reference into the operative version of the complaint.” Defs.’ Opening Br. 12 n.4.
4 positions with NRG at various times.4 The other three directors (Chlebowksi, Ford,
and McClean) were not members of Yield’s management and served on the Conflicts
Committee (defined below) that evaluated and approved the Reclassification.5 Their
independence is not challenged.
B.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) IRA TRUST FBO BOBBIE AHMED, ) on behalf of similarly situated Class A ) stockholders of NRG YIELD, INC., ) ) Plaintiff, ) ) v. ) CONSOLIDATED ) C.A. No. 12742-CB DAVID CRANE, JOHN F. ) CHLEBOWSKI, MAURICIO ) GUTIERREZ, KIRKLAND B. ) ANDREWS, BRIAN R. FORD, ) FERRELL P. MCCLEAN, ) CHRISTOPHER S. SOTOS and NRG ) ENERGY, INC., ) ) Defendants. ) )
OPINION
Date Submitted: September 22, 2017 Date Decided: December 11, 2017
Peter B. Andrews, Craig J. Springer & David M. Sborz of ANDREWS & SPRINGER LLC, Wilmington, Delaware; Jeremy S. Friedman, Spencer Oster & David Tejtel of FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Jason M. Leviton & Joel Fleming of BLOCK & LEVITON LLP, Boston, Massachusetts; Counsel for Plaintiff.
William M. Lafferty & D. McKinley Measley of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Counsel for Defendants John F. Chlebowski, Brian R. Ford, and Ferrell P. McClean. Brian C. Ralston, Andrew H. Sauder & Mathew A. Golden of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Defendants David Crane, Mauricio Gutierrez, Kirkland B. Andrews, Christopher S. Sotos, and NRG Energy, Inc.
BOUCHARD, C. This action arises out of a reclassification of the shares of NRG Yield, Inc.
(“Yield” or the “Company”) that went into effect in May 2015. Yield’s business
model is to own a portfolio of income-producing energy generation and
infrastructure assets from which dividends can be distributed to public
stockholders—a model often referred to as a “yieldco.” Since its formation in 2012,
Yield has been controlled by NRG Energy, Inc. (“NRG”), which manages Yield’s
day-to-day affairs and is responsible for identifying and placing assets into Yield.
After its initial public offering in 2013, Yield had two classes of stock, both
of which were entitled to one vote per share. NRG then held approximately 65% of
Yield’s voting power through its ownership of all of Yield’s Class B shares, and
public stockholders held approximately 45% of Yield’s voting power through their
ownership of Class A shares. The prospectus for the Class A shares stated that NRG
intended to maintain its controlling interest in Yield.
By 2015, NRG’s voting control of Yield had been diluted to approximately
55% as a result of Class A shares being issued to acquire assets to transfer to Yield.
Concerned that its voting control of Yield was in jeopardy if Yield continued to fund
asset acquisitions with Class A shares, NRG proposed that Yield undertake a
recapitalization where Class A stockholders would be issued one share of a new class
of non-voting common stock for each Class A share they held. NRG intended for
Yield to use the non-voting common stock as currency to acquire assets in the future. NRG’s proposal was conditioned from the beginning on the receipt of the
approval of a majority of the outstanding shares of Yield not affiliated with NRG,
meaning a majority of Yield’s outstanding Class A shares. Upon receipt of the
proposal, Yield’s board delegated to its standing Conflicts Committee the authority
to evaluate and negotiate the proposal. The independence of the three members of
the Conflicts Committee is not challenged.
Through negotiations with the Conflicts Committee, NRG’s proposal was
revised so that newly-created Class C and Class D shares would be issued on a one-
for-one basis to Class A and Class B stockholders, respectively, i.e., stockholders
would receive one Class C share for every Class A share and one Class D share for
every Class B share. The Class C and Class D shares would have the right to 1/100
of one vote per share instead of being non-voting, as initially proposed. NRG also
agreed to amend a contract, under which Yield had a right of first offer on certain
NRG assets, to include some additional assets. As finally negotiated, the proposal
is referred to herein as the “Reclassification.” In May 2015, the Reclassification
received the necessary stockholder approvals and went into effect that same month.
In September 2016, a Class A stockholder filed this action asserting that the
members of the Yield board breached their fiduciary duties in connection with their
approval of the Reclassification, and that NRG breached its fiduciary duty as a
2 controlling stockholder by causing Yield to undertake the Reclassification.
Defendants moved to dismiss the complaint for failure to state a claim for relief.
Resolution of this motion implicates three questions: (1) Is the
Reclassification a conflicted transaction subject to entire fairness review even
though it nominally involved a pro rata distribution of shares? (2) If so, should the
analytical framework articulated in Kahn v. M&F Worldwide, Corp.,1 a squeeze-out
merger case, apply to the Reclassification? (3) If so, has that framework been
satisfied in this case from the face of the pleadings? For the reasons explained
below, I conclude that the answer to each of these questions is yes, and thus the
Complaint must be dismissed for failure to state a claim for relief.
I. BACKGROUND
Unless noted otherwise, the facts in this decision are drawn from the Verified
Class Action Complaint (the “Complaint”) and documents incorporated therein,2
which include documents produced to plaintiff in response to a books and record
1 88 A.3d 635 (Del. 2014). 2 See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citations omitted) (“[P]laintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms” in connection with a motion to dismiss).
3 demand made under 8 Del. C. § 220.3 Any additional facts are either not subject to
reasonable dispute or subject to judicial notice.
A. The Parties and Relevant Non-Parties Plaintiff IRA Trust FBO Bobbie Ahmed alleges it was a Class A stockholder
of Yield at all relevant times.
Defendant NRG is a power company that produces, sells, and delivers energy,
energy products, and energy services in the United States. NRG is headquartered in
both West Windsor Township, New Jersey, and Houston, Texas. Non-party Yield,
a Delaware corporation, owns a portfolio of energy generation and infrastructure
assets in the United States. As a result of the Reclassification, Yield now has four
classes of common stock. The Company’s Class A and C shares are listed on the
New York Stock Exchange. The Company’s Class B and D shares are held by NRG
and not publicly traded.
When it approved the Reclassification, Yield’s board (the “Board”) was
comprised of the seven individual defendants: David Crane, John F. Chlebowksi,
Mauricio Gutierrez, Kirkland B. Andrews, Brian R. Ford, Ferrell P. McClean, and
Christopher S. Sotos. Four of the directors (Crane, Andrews, Gutierrez, and Sotos)
were members of Yield’s management at the time, and each of them held executive
3 In connection with its Section 220 demand, plaintiff agreed that documents produced by Yield “shall be deemed incorporated by reference into the operative version of the complaint.” Defs.’ Opening Br. 12 n.4.
4 positions with NRG at various times.4 The other three directors (Chlebowksi, Ford,
and McClean) were not members of Yield’s management and served on the Conflicts
Committee (defined below) that evaluated and approved the Reclassification.5 Their
independence is not challenged.
B. The Yield Business Model On December 20, 2012, NRG incorporated Yield as a dividend growth-
oriented company to serve as the primary vehicle through which NRG would own,
operate, and acquire energy generation and infrastructure assets.6 Under a
Management Services Agreement, NRG or its affiliates provide services to Yield,
including carrying out all day-to-day management, accounting, banking, treasury,
administrative, liaison, representative, regulatory, and reporting functions and
obligations. The Management Services Agreement also allows NRG to make
recommendations with respect to the payment of dividends and the exercise of any
voting rights to which Yield is entitled with respect to its subsidiaries. For the fiscal
year ended December 31, 2015, NRG received approximately $8 million in
management fees and reimbursement for expenses under the Management Services
Agreement.
4 Compl. ¶¶ 12, 14, 16, 18. 5 Compl. ¶¶ 13, 15, 17. Chlebowski is Yield’s Lead Independent Director and previously served as a director of NRG from December 2003 until July 2013. Compl. ¶ 13. 6 Compl. ¶ 21; Transmittal Aff. of Glenn R. McGillivray (“McGillivray Aff.”) Ex. C at 1.
5 On July 22, 2013, Yield closed an initial public offering of 22,511,250 shares
of Class A stock. NRG retained 42,738,750 shares of Class B stock, which were
never offered to the public. Both classes of stock entitle their holders to one vote
per share on all matters. NRG’s Class B shares represented about 65% of Yield’s
total voting power at the completion of its initial public offering.
In connection with its IPO, Yield established a standing Corporate
Governance, Conflicts and Nominating Committee (the “Conflicts Committee”) to
review and approve proposed conflicted transactions between Yield and NRG.7 The
Conflict Committee’s charter requires that “its members satisfy the requirements for
independence under applicable law and regulations of the SEC and NYSE standards
for directors and nominating committee members.”8
The prospectus for the IPO disclosed to prospective investors in Class A
shares that “NRG will be our controlling stockholder and will exercise substantial
influence over Yield and we are highly dependent on NRG.”9 The prospectus
further explained NRG’s intention to maintain its controlling interest and the
consequences of that control:
NRG has also expressed its intention to maintain a controlling interest in us. As a result of this ownership, NRG will continue to have a substantial influence on our affairs and its voting power will constitute
7 McGillivray Aff. Ex. A at 22. 8 Id. 9 McGillivray Aff. Ex. C at 43 (emphasis in original).
6 a large percentage of any quorum of our stockholders voting on any matter requiring the approval of our stockholders. Such matters include the election of directors, the adoption of amendments to our amended and restated certificate of incorporation and bylaws and approval of mergers or sale of all or substantially all of our assets. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. In addition, NRG will have the right to appoint all of our directors. NRG may cause corporate actions to be taken even if their interests conflict with the interests of our other stockholders (including holders of our Class A common stock).10 From its inception, NRG always has appointed Yield’s senior executives, and
Yield has depended on NRG as a source for its income-producing assets. To
facilitate these related-party transactions, NRG granted Yield and its affiliates a
contractual right of first offer (the “ROFO Agreement”) on any proposed sale of
certain enumerated NRG assets. Yield distributes to stockholders the profits
generated by its acquisitions through cash dividends. As explained in the prospectus
for the Class A offering, Yield’s “ability to grow through acquisitions depends, in
part, on NRG’s ability to identify and present us with acquisition opportunities.”11
To finance acquisitions, Yield frequently needs to raise new capital. Issuing
equity or convertible notes dilutes all of the Company’s common stockholders, but
NRG suffers a unique detriment in that each new issuance also reduces its controlling
10 Id. at 43-44. 11 Id. at 44.
7 stake in Yield. A dual-class voting structure was allegedly not implemented at the
time of the IPO because NRG did not anticipate Yield’s pace of acquisitions and
rapid growth.12 Between the July 2013 IPO and the fall of 2014, NRG’s voting
power fell from approximately 65% to approximately 55% due to equity issuances.13
C. NRG and Yield Seek to Preserve NRG’s Control Over Yield On October 8, 2014, NRG management presented to the Board several
alternatives that would allow Yield to continue raising capital for acquisitions while
preserving NRG’s control. The proposed alternatives included issuing low or non-
voting common stock, entering into a stockholder agreement that would allow NRG
to maintain control over significant corporate events, issuing preferred stock in the
Company or non-voting units in an LLC, merging Yield into a limited partnership
structure, and having NRG invest 50% of the equity value in future Yield
acquisitions.14
On December 15, 2014, David Crane, Yield’s then-Chief Executive Officer,
and Kirkland Andrews, Yield’s Chief Financial Officer, presented their fellow Board
members with a proposal to create a new Class C stock that would carry no voting
rights.15 From the outset, the proposal was conditioned on obtaining the approval of
12 Compl. ¶ 44. 13 Compl. ¶ 31. 14 Compl. ¶¶ 33, 52. 15 Compl. ¶ 34.
8 Yield’s public stockholders or a “majority of the minority” of the outstanding shares
of Class A stock not affiliated with NRG.16 The slide deck that accompanied the
presentation indicated that issuing non-voting stock would “[p]reserve[] NRG’s
voting control of [Yield] above 50%” and “[b]etter manage future potential voting
dilution.”17 At the end of the meeting, the Board authorized its Conflicts Committee,
composed of Chlebowski, Ford, and McClean, to evaluate and negotiate the
proposed reclassification with NRG.18 The Conflicts Committee was advised by
Crowell & Moring LLP as its legal counsel, and Moelis & Company LLC (“Moelis”)
as its financial advisor.
On January 30, 2015, NRG presented the Conflicts Committee a proposal
for Yield to issue a new class of non-voting common stock in connection with the
proposed reclassification.19 On February 6, 2015, NRG sent the Conflicts
Committee a formal reclassification proposal where Class A stockholders would
receive one share of a new class of non-voting common stock for each share of Class
A stock held.20
16 McGillivray Aff. Ex. H at NRGY-220_00000917; Ex. I at NRGY-220_00000276. 17 Compl. ¶ 35; McGillivray Aff. Ex. H NRGY-220_00000918. 18 Compl. ¶ 37; McGillivray Aff. Ex. G NRGY-220_00000900. 19 Compl. ¶ 38. 20 Compl. ¶ 39.
9 On February 9, 2015, after reviewing the February 6 proposal with its
advisors, the Conflicts Committee rejected the proposal and made a counteroffer to
NRG.21 The counteroffer included four amendments to the February 6 proposal: (1)
the addition of assets to the ROFO Agreement; (2) a special dividend or “true-up”
to compensate Class C stockholders for the potential difference in the trading price
of Class A and Class C shares; (3) dividend enhancements or protections for Class
C stockholders; and (4) rights for Class C stockholders to convert their shares into
voting shares upon the occurrence of certain events.22
On February 17, 2015, the Conflicts Committee received a revised proposal
from NRG under which: (1) the proposed new class of stock would entitle holders
to 1/100 of one vote per share, rather than no vote at all; and (2) NRG would make
additional assets available to Yield for purchase under a new ROFO Agreement (the
“Amended ROFO Agreement”).23 On February 19, 2015, the Conflicts Committee
met with its advisors and NRG to discuss the February 17 proposal.24
On February 24, 2015, the Conflicts Committee met again with its advisors
and NRG to discuss the February 17 proposal.25 After NRG left the room, Moelis
21 Compl. ¶ 40. 22 Compl. ¶ 40. 23 Compl. ¶¶ 41-42. 24 Compl. ¶¶ 44-45. 25 Compl. ¶¶ 44-46
10 made a presentation that stated, absent any reclassification, “NRG’s ownership could
be reduced below 50.1% as early as 2015.”26 At the conclusion of the meeting, the
Conflicts Committee approved the February 17 proposal.27 Under the final terms of
the transaction, Yield would establish two new classes of common stock (Class C
and Class D) and distribute shares of Class C and Class D stock to holders of then
outstanding Class A and Class B shares, respectively, through a stock split.28 Yield
and NRG also would enter into the Amended ROFO Agreement, making additional
assets potentially available to Yield.29
D. Stockholder Approval of the Reclassification On March 26, 2015, Yield issued a proxy statement (the “Proxy”) to solicit
stockholder approval of the Reclassification, which was conditioned on the approval
of two separate proposals: (1) a proposal to approve the adoption of amendments to
Yield’s certificate of incorporation to establish new series of Class C and Class D
26 Compl. ¶¶ 54-55. 27 Compl. ¶ 46. 28 Compl. ¶ 47. 29 Compl. ¶ 47. The Proxy describes these assets as those “NRG previously acquired from Edison Mission Energy, up to $250 million of equity investment in residential and distributed generation solar portfolios, and the Carlsbad and Mandalay projects . . . Based on NRG’s analysis as provided to the Conflicts Committee, NRG stated its belief that the enhanced ROFO arrangement would have the effect of extending the average life of NRG ROFO Assets from 17 to 20 years.” McGillivray Aff. Ex. A at 23.
11 stock; and (2) a proposal to approve the adoption of amendments to Yield’s
certificate of incorporation to effectuate the stock split.30
The Proxy stated that the Board, upon the unanimous recommendation of the
Conflicts Committee, unanimously determined to recommend the Reclassification.
The Board’s rationale for approving the Reclassification included the Conflicts
Committee’s belief that the transaction would provide a means to continue raising
capital through future equity issuances as well as to maintain Yield’s relationship
with NRG.31 The Proxy explained that the Reclassification could prolong the period
over which NRG could exercise a controlling influence over Yield, but that the
Board believed that NRG’s controlling influence would provide significant
benefits.32
At Yield’s annual stockholders meeting held on May 5, 2015, over 80% of the
outstanding shares of common stock (Class A and B) voted to approve both
proposals concerning the Reclassification.33 Additionally, a majority of the
outstanding shares of Class A stock unaffiliated with NRG voted in favor of both
30 McGillivray Aff. Ex. A at 20-21. 31 Id. at 24-28. 32 See Id. at 26, 28 (“We believe our relationship with NRG, including NRG’s expressed intention to maintain a controlling interest in the Company, provides significant benefits, including management and operational expertise, and future growth opportunities.”). 33 Compl. ¶ 68; McGillivray Aff. Ex. P at 2.
12 proposals.34 The Reclassification was effected on May 14, 2015. The next day the
Class C shares began trading on the New York Stock Exchange.35
II. PROCEDURAL HISTORY
On September 12, 2016, plaintiff filed the Complaint on behalf of a putative
class of Class A stockholders, asserting two claims. Count I asserts that the members
of the Board breached their fiduciary duties in connection with their approval of the
Reclassification. Count II asserts that NRG breached its fiduciary duty as the
controlling stockholder of Yield by causing Yield to undertake the Reclassification.
On November 4, 2016, defendants filed a motion to dismiss the Complaint
under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. The
Court heard the motion on June 20, 2017. At the Court’s request, the parties
submitted supplemental briefing on September 22, 2017 to address Vice Chancellor
Slights’s decision in In re Martha Stewart Living Omnimedia, Inc. Stockholder
Litig.,36 which was rendered after the oral argument.
34 McGillivray Aff. Ex. P at 2. 35 Compl. ¶ 68; McGillivray Aff. Ex. P. 36 2017 WL 3568089 (Del. Ch. Aug. 18, 2017).
13 III. ANALYSIS
The standards governing a motion to dismiss for failure to state a claim for
relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the “plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.”37
The standards are minimal, but the Court “will not credit conclusory allegations or
draw unreasonable inferences in favor of the Plaintiffs.”38
The Court’s consideration of this motion hinges on what standard of review
governs plaintiff’s claims. Plaintiff argues that the Reclassification was a conflicted
transaction that is subject to entire fairness review. According to plaintiff, NRG
obtained a unique benefit in the Reclassification that the minority stockholders did
not enjoy because the transaction perpetuated NRG’s majority stake in Yield at a
time when that control was slipping away.
Defendants argue that the business judgment rule should apply for two
reasons. First, defendants argue that the Reclassification was a pro rata transaction
that affected all of Yield’s stockholders equally. In other words, defendants contend
37 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted). 38 In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *5 (Del. Ch. Jan. 31, 2013) (citation omitted).
14 that NRG did not receive a unique benefit from the Reclassification so that it was
not a conflicted transaction.
Second, defendants posit that even if, arguendo, the Reclassification was a
conflicted transaction, the business judgment rule still applies because the
framework set forth in Kahn v. M&F Worldwide, Corp. (“MFW”) should apply to
the Reclassification, and plaintiff has failed to plead sufficient non-conclusory facts
that any of the elements of that framework was not satisfied.39
I address each of these arguments in turn.
A. Plaintiff Has Pled Sufficient Facts to Warrant Review of the Reclassification as a Conflicted Controller Transaction One of the most fundamental principles of Delaware corporate law is that
directors are presumed to have acted “independently, with due care, in good faith
and in the honest belief that [their] actions were in the stockholders’ best interests.”40
Because of this presumption, controlling stockholders are not automatically subject
to entire fairness review when a controlled corporation effectuates a transaction.
Rather, the “controller also must engage in a conflicted transaction” for entire
fairness to apply.41
39 88 A.3d at 645. 40 Williams v. Geier, 671 A.2d 1368, 1376 (Del. 1996) (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). 41 In re Crimson Expl. Inc. Stockholder Litig., 2014 WL 5449419, at *12 (Del. Ch. Oct. 24, 2014).
15 Conflicted transactions come in many forms. In In re Crimson Expl. Inc.
Stockholder Litig., the Court identified two categories of conflicted transactions
involving controlling stockholders that have triggered entire fairness review in the
context of a merger or acquisition: “transactions where the controller stands on both
sides,” such as a parent-subsidiary merger, and “transactions where the controller
competes with the common stockholders for consideration” in a sale of the
corporation to a third party.42 The Court also identified three examples within the
second category: (1) where the controller receives greater monetary consideration
for its shares than the minority stockholders;43 (2) where the controller takes a
different form of consideration than the minority stockholders;44 and (3) where the
controller gets a “unique benefit” by extracting “something uniquely valuable to the
controller, even if the controller nominally receives the same consideration as all
other stockholders.”45
42 Id. at *12. 43 See, e.g., In re Delphi Fin. Gp. S’holder Litig., 2012 WL 729232, at *12 n.57 (Del. Ch. Mar. 6, 2012) (merger where a substantial premium was paid for controller-owned high- vote stock). 44 See, e.g., In re John Q. Hammons Hotels Inc. S’holders Litig., 2009 WL 3165613, at *7- 8, 12 (Del. Ch. Oct. 2, 2009) (controller received, among other consideration, a continuing equity stake in the surviving entity, and the minority stockholders received cash); In re NLR Prop. Corp. S’holders Litig., 896 A.2d 169, 178 (Del. Ch. 2005) (controller rolled over part of transaction proceeds into equity stake in surviving corporation). 45 Crimson, 2014 WL 5449419, at *13-14 (citing In re Primedia, Inc. S’holder Litig., 67 A.3d 455, 462-67, 472-76, 482 (Del. Ch. 2013)).
16 More recently, in In re EZCORP Inc. Consulting Agreement Derivative Litig.,
Vice Chancellor Laster comprehensively reviewed Delaware case law and identified
numerous types of transactions involving controlling stockholders outside the
context of a merger or acquisition that have triggered entire fairness review. 46 He
explained that, in all of these transactions, the controller extracted “a non-ratable
benefit” that warranted heightened scrutiny.47 Examples of “non-ratable benefit”
transactions he identified include: (1) security issuances, purchases, and
repurchases;48 (2) asset leases and acquisitions;49 (3) compensation arrangements,
consulting agreements, and service agreements;50 (4) settlements of derivative
46 2016 WL 301245, at *11-15 (Del. Ch. Jan. 25, 2016). 47 Id. at *12. 48 Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993); In re Loral Space & Commc’ns Inc., 2008 WL 4293781 (Del. Ch. Sept. 19, 2008) (Strine, V.C.); Flight Options Int’l, Inc. v. Flight Options, LLC, 2005 WL 5756537 (Del. Ch. July 11, 2005); Strassburger v. Earley, 752 A.2d 557 (Del. Ch. 2000); In re Dairy Mart Convenience Stores, Inc., 1999 WL 350473 (Del. Ch. May 24, 1999); Harbor Fin. Partners v. Sugarman, 1997 WL 162175 (Del. Ch. Apr. 3, 1997); Kahn v. Tremont Corp., 1996 WL 145452 (Del. Ch. Mar. 21, 1996) (Allen, C.), rev’d on other grounds, 694 A.2d 422 (Del. 1997). 49 Summa Corp. v. Trans World Airline, Inc., 540 A.2d 403 (Del. 1988); Shandler v. DLJ Merch. Banking, Inc., 2010 WL 2929654 (Del. Ch. July 26, 2010) (Strine, V.C.). 50 Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155 (Del. Ch. 2014); Dweck v. Nasser, 2012 WL 161590 (Del. Ch. Jan. 18, 2012); Monroe Cty. Emps.’ Ret. Sys. v. Carlson, 2010 WL 2376890 (Del. Ch. June 7, 2010); Carlson v. Hallinan, 925 A.2d 506 (Del. Ch. 2006); T. Rowe Price Recovery Fund, L.P. v. Rubin, 770 A.2d 536 (Del. Ch. 2000).
17 actions;51 and (5) recapitalizations.52 Applying its “non-ratable benefit” rationale,
the Court held that a derivative challenge to three advisory agreements between
EZCORP and an entity affiliated with its controlling stockholder was governed by
the entire fairness standard.53
Turning to this case, plaintiff argues that the entire fairness standard applies
because NRG received a uniquely valuable or “non-ratable” benefit in connection
with the Reclassification that was not shared with the Company’s other stockholders,
namely the ability to perpetuate its majority control over Yield.54 In this vein, the
Complaint alleges that, “[b]y the fall of 2014, it became clear to NRG that it would
lose majority control over Yield as early as 2015,” and thus NRG “hatched” the
Reclassification “to solve this problem.”55
51 In re MAXXAM, Inc., 659 A.2d 760 (Del. Ch. 1995). 52 Levco Alt. Fund Ltd. v. Readers’ Digest Ass’n, Inc., 803 A.2d 428 (Del. 2002) (TABLE). 53 EZCORP, 2016 WL 30125, at *15. 54 That control of a corporation has value is well-accepted. A controlling stockholder reaps a number of benefits from its position, including the ability to determine the outcome of director elections, to control the business operations of the corporation, and to seek a premium for its control block of shares. See, e.g., In re Books-A-Million, Inc. Stockholders Litig., 2016 WL 5874974, at *14 (Del. Ch. Oct. 10, 2016) aff’d, 164 A.3d 56 (Del. 2017) (TABLE) (“The law has acknowledged . . . the legitimacy of the acceptance by controlling shareholders of a control premium.”); Ronald J. Gilson & Jeffery N. Gordon, Controlling Controlling Shareholders, 152 U. PA. L. REV. 785, 786 (2005) (“[A] controlling shareholder may extract private benefits of control in one of three ways: by taking a disproportionate amount of the corporation’s ongoing earnings, by freezing out the minority, or by selling control.”). 55 Compl. ¶ 3.
18 In an effort to avoid the presumptive application of entire fairness review,
defendants make essentially three arguments as to why NRG did not obtain a unique
benefit in connection with the Reclassification. I find none of them convincing, at
least at this stage of the case where I must accept plaintiff’s allegations as true and
draw all reasonable inferences in its favor.
First, defendants point to Sinclair Oil Corp. v. Levien56 for the proposition that
“[a]s a general matter, entire fairness does not apply to a pro rata dividend paid to
all stockholders.”57 In Sinclair, a parent corporation caused its 97%-owned
subsidiary to pay large cash dividends on a pro rata basis to each of its stockholders.
The Court determined that, because the cash was distributed on a pro rata basis,
entire fairness did not apply “[s]ince the parent received nothing from the subsidiary
to the exclusion of the minority stockholders of the subsidiary.”58 In reaching this
conclusion, the Court cautioned that “[w]e do not accept the argument that the
intrinsic fairness test can never be applied to a dividend declaration by a dominated
board.”59 Here, unlike in Sinclair, the well-pled allegations of the Complaint show
that NRG did receive something from Yield to the exclusion of the minority
56 280 A.2d 717, 720 (Del. 1971). 57 Defs.’ Opening Br. 27. 58 Sinclair, 280 A.2d at 720. 59 Id. at 271.
19 stockholders—the means to perpetuate its control position by financing future
acquisitions with the low-vote Class C stock authorized in the Reclassification.
Second, defendants argue that “Delaware courts have applied entire fairness
to nominally pro rata transactions in only a limited circumstance—where the
controlling stockholder receives a unique benefit.”60 They point to examples such
as where the sale of the corporation to a third-party terminated derivative claims the
corporation had against the controller,61 and where a controlling stockholder’s
immediate need for liquidity resulted in the sale of the corporation for a sub-optimal
price.62 Relying on our Supreme Court’s decision in Williams v. Geier,63 defendants
argue that this line of precedent should not be extended to this case.
In Williams, a controlled corporation was recapitalized to:
provide for a form of “tenure voting” whereby holders of common stock on the record date would receive ten votes per share. Upon sale or other transfer . . . each share would revert to one-vote-per-share status until that share is held by its owner for three years. The Reclassification applied to every stockholder, whether a stockholder was a minority stockholder or part of the majority bloc.64
60 Defs.’ Opening Br. 28. 61 Primedia, 67 A.3d at 487. 62 N.J. Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888, at *9-11 (Del. Ch. Oct. 6, 2011). 63 671 A.2d 1368 (Del. 1996). 64 Id. at 1370.
20 The plaintiff argued that entire fairness should apply because the reclassification
impermissibly favored the majority bloc by entrenching its control.65 On appeal
from the Court of Chancery’s grant of partial summary judgment in defendants’
favor “[a]fter discovery was nearly complete,”66 the Delaware Supreme Court
applied business judgment review because it found plaintiff’s claims to be
“conclusory” and to “have no factual support in this record.”67 As the Court
explained:
There was on this record: (1) no non-pro rata or disproportionate benefit which accrued to the Family Group on the face of the Reclassification, although the dynamics of how the Plan would work in practice had the effect of strengthening the Family Group’s control; (2) no evidence adduced to show that a majority of the Board was interested or acted for purposes of entrenching themselves in office; (3) no evidence offered to show that the Board was dominated or controlled by the Family Group; and (4) no violation of fiduciary duty by the Board.68
This case and Williams both involve a nominally pro rata distribution of new
shares. But here, unlike in Williams, the case is at the pleadings stage and no
discovery has been taken. This distinction is significant because the Supreme Court
65 Id. at 1378. The Supreme Court assumed, without deciding, that a group consisting of members of a family and certain employee benefit plans that owned or controlled in excess of 50% of the corporation’s voting power “represents a controlling bloc for purposes of this decision.” Id. at 1371. 66 Id. at 1375. 67 Id. at 1378 (emphasis added). 68 Id. (emphasis added).
21 in Williams did not stop its analysis once it found that the tenure voting
recapitalization was pro rata. Instead, as the above quotation reflects, the Supreme
Court specifically considered the board’s motivations and other factors based on a
developed factual record, including that there was “no evidence offered to show that
the Board was dominated or controlled by the Family Group.”69 Notably, during a
settlement hearing concerning Google’s pro rata issuance of non-voting stock to
perpetuate the founders’ control of the company, then-Chancellor Strine commented
that, if Williams applied, “a big part of what the trial [would be] about” would be
whether the defendants “were well-motivated independent directors . . . who
believed [the reclassification] was the right thing for [the company’s] public
stockholders.”70 Because the parties have not developed a factual record from which
the motivations of defendants can be assessed, and because NRG’s control over the
Board is self-evident here, Williams is not dispositive and it would be premature for
me to apply its reasoning at the pleadings stage.71
69 Id. at 1378. 70 In re Google Inc. Class C S’holder Litig., C.A. No. 7469-CS, at 95-96 (Del. Ch. Oct. 28, 2013) (Strine, C.) (TRANSCRIPT). 71 In a footnote, defendants argue that “[f]ollowing Williams, the Court of Chancery repeatedly has held that an equity offering that affects all stockholders equally does not give rise to a claim for breach of fiduciary duty.” Defs.’ Opening Br. 29 n.10 (citing Robotti & Co., LLC v. Liddell, 2010 WL 157474, at *9-10 (Del. Ch. Jan. 14, 2010) and H- M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 135-37 (Del. Ch. 2003)). These cases are inapposite. In Robotti, the Court dismissed plaintiff’s claims relating to a rights offering open to all stockholders, in part, “[b]ecause the Court cannot reasonably infer from the facts as alleged that the triggering of the anti-dilution provisions provided the Defendants 22 Third, defendants argue that NRG’s extension of control was not a unique
benefit because “[n]o reasonable stockholder could have expected control to shift to
the minority through dilution caused by voluntary issuances.”72 According to
defendants, Yield’s public filings undermine such an expectation, the “yieldco”
structure is premised on a parent-subsidiary relationship that benefits all
stockholders, and NRG had no duty to allow its controlling position to be sacrificed
through equity issuances.73 This argument fails in my view.
Notwithstanding defendants’ contentions, plaintiff has pled non-conclusory
facts to support a reasonable inference that, whatever may have been the intentions
behind Yield’s original business model, NRG nevertheless was on the cusp of losing
its control position in Yield when it undertook the Reclassification, which admittedly
was done to perpetuate that control. Although “Delaware law does not . . . impose
on controlling stockholders a duty to engage in self-sacrifice for the benefit of
minority shareholders,”74 a refusal to require that a controller be altruistic is not
relevant to what standard of review should apply to a transaction in which the
controller “extracts something uniquely valuable to the controller, even if the
a material benefit not shared by the remaining shareholders.” 2010 WL 157474, at *6. H- M Wexford did not involve a controlling stockholder. 72 Defs.’ Opening Br. 32. 73 Id. 32-34. 74 In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1040 (Del. Ch. 2012) (Strine, C.).
23 controller nominally receives the same consideration as all other stockholders.”75
Here, that “something” was a means for NRG to ensure it would be able to retain
voting control of Yield well into the future without abandoning a key aspect of its
original business model, i.e., using Yield equity to acquire income-producing assets.
Thus, plaintiff has pled sufficient facts for purposes of this motion to warrant review
of the Reclassification as a conflicted controller transaction that presumptively
would be subject to entire fairness review.
B. The MFW Framework Applies to the Reclassification Having decided that the Reclassification should be analyzed as a conflicted
controller transaction, the next issue is whether the MFW framework should be
applied to analyze plaintiff’s challenge to the transaction. I conclude that it should
for the reasons discussed below.
In MFW, our Supreme Court held that the business judgment rule is the
appropriate standard of review for a challenge to a squeeze-out merger by a
controlling stockholder if the transaction satisfies certain procedural protections:
We hold that business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee
75 GAMCO Asset Mgmt. Inc. v. iHeartMedia Inc., 2016 WL 6892802, at *16 (Del. Ch. Nov. 23, 2016) (citing Crimson, 2014 WL 5449419, at *13).
24 that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.76
The Supreme Court enumerated several reasons for its holding. One is that the
“simultaneous deployment of [these] procedural protections . . . create[s] a
countervailing, offsetting influence of equal—if not greater—force” than the
undermining influence of a controller.77 Another is that the dual protections of
special committee review and the approval of a majority of the minority stockholders
are “consistent with the central tradition of Delaware law, which defers to the
informed decisions of impartial directors, especially when those decisions have been
approved by the disinterested stockholders on full information and without
coercion.”78 Although MFW itself was decided after discovery on a motion for
summary judgment, its framework has been applied at the pleadings stage as well.79
Two years after the Supreme Court’s MFW decision, Vice Chancellor Laster
in EZCORP endorsed using the MFW framework outside of the context of a squeeze-
out merger. As discussed above, he explained that the entire fairness standard
presumptively governs “any transaction between a controller and the controlled
76 88 A.3d at 644. 77 Id. 78 Id. (quoting In re MFW S’holders Litig., 67 A.3d 496, 528 (Del. Ch. 2013) (Strine, C.)). 79 See Books-A-Million, 2016 WL 5874974, aff’d, 164 A.3d 56; Swomley v. Schlecht, C.A. No. 9355-VCL (Del. Ch. Aug. 27, 2014) (TRANSCRIPT), aff’d, 128 A.3d 992 (Del. 2015) (TABLE).
25 corporation in which the controller receives a non-ratable benefit.”80 He further
reasoned that the MFW framework should apply to all transactions where the
controller receives a non-ratable benefit to potentially lower the standard of review:
If a controller agrees up front, before any negotiations begin, that the controller will not proceed with the proposed transaction without both (i) the affirmative recommendation of a sufficiently authorized board committee composed of independent and disinterested directors and (ii) the affirmative vote of a majority of the shares owned by stockholders who are not affiliated with the controller, then the controller has sufficiently disabled itself such that it no longer stands on both sides of the transaction, thereby making the business judgment rule the operative standard of review. [MFW], 88 A.3d at 644. If a controller agrees to use only one of the protections, or does not agree to both protections up front, then the most that the controller can achieve is a shift in the burden of proof such that the plaintiff challenging the transaction must prove unfairness.81
The Court in EZCORP ultimately did not apply the MFW framework because the
advisory agreements at issue were not subject to a majority-of-the-minority vote.82
Nevertheless, the decision is a broad endorsement of the application of the MFW
framework to any form of conflicted controller transaction.
80 EZCORP, 2016 WL 301245 at *11. 81 Id. at *11; see also id. at *23 (“If a controller chooses the corporate form and issues equity, then the controller need not serve as a compensated executive or consultant. Even at that point, the controller[] can obtain business judgment review by following [MFW], having a committee approve the compensation arrangement, and then submitting it to the disinterested stockholders for approval at the next annual meeting. Only if the controller makes choices in a way that invites entire fairness review will that framework come into play.”). 82 Id. at *30.
26 Earlier this year, in In re Martha Stewart Living Omnimedia, Inc. Stockholder
Litig.,83 Vice Chancellor Slights also endorsed the application of the MFW
framework to a transaction other than a squeeze-out merger, which was the factual
context before the Court in MFW. Martha Stewart involved a challenge to a
controlling stockholder’s alleged receipt of disparate consideration through “side
deals” in a sale of the corporation to a third party.84 The Court ultimately held that
the business judgment rule was the appropriate standard of review because “the
Complaint does not adequately plead that Stewart, as a controlling stockholder,
engaged in a conflicted transaction.”85 In the course of its analysis, however, the
Court opined that, had it found the transaction to be conflicted, the MFW framework
would have applied because it could “see no principled basis to conclude that it
would be somehow less important” that the controller and the third-party acquirer
“be incentivized from the outset of their negotiations to take positions and to reach
side deals that will be acceptable to the other stockholders than it would be if” the
controller was negotiating to acquire the company herself:86
In both instances, the key is to ensure that all involved in the transaction, on both sides, appreciate from the outset that the terms of the deal will be negotiated and approved by a special committee free of the controller’s influence and that a majority of the minority 83 2017 WL 3568089. 84 Id. at *2. 85 Id. 86 Id. at *18.
27 stockholders will have the final say on whether the deal will go forward. Regardless of which side of the transaction a conflicted controller stands, it is critical that the process is designed from the outset to incentivize the special committee and the controller to take positions at every turn of the negotiations . . . which will later score the approval of the majority of other stockholders. Only then is it appropriate to reward the controller with pleadings-stage business judgment rule deference.87
The broad application of the MFW framework to a range of transactions
involving controllers would parallel the evolution of MFW’s doctrinal predecessor,
Kahn v. Lynch Commc’n Sys., Inc.88 In Lynch, our Supreme Court held, in the
context of a parent-subsidiary merger, that “approval of the transaction by an
independent committee of directors or an informed majority of minority
shareholders shifts the burden of proof on the issue of fairness from the controlling
or dominating shareholder to the challenging shareholder-plaintiff.”89 Two years
later, in Kahn v. Tremont Corp., Chancellor Allen applied the burden shift endorsed
in Lynch to a transaction where a controller caused a subsidiary to purchase shares
of a related entity from its parent company.90 In doing so, the Chancellor explained
87 Id. at *17. 88 638 A.2d 1110 (Del. 1994). 89 Id. at 1117 (emphasis added). 90 1996 WL 145452, rev’d on other grounds, 694 A.2d 422. In its reversal opinion, the Supreme Court implicitly endorsed Chancellor Allen’s burden shift holding, but reversed on factual grounds because it concluded “that the Special Committee did not operate in a manner which entitled the defendants to shift from themselves the burden which encumbers a controlled transaction.” 694 A.2d at 430.
28 that “no plausible rationale for a distinction between mergers and other corporate
transactions” had been offered and that he “in principle [could] perceive none.”91
I find the reasoning of EZCORP, Martha Stewart, and Tremont persuasive
and hold that the MFW framework should apply to the Reclassification, as I can see
no principled basis on which to conclude that the dual protections in the MFW
framework should apply to squeeze-out mergers but not to other forms of controller
transactions. The animating principle of the MFW framework is that, if followed
properly, the controlled company replicates an arm’s-length bargaining process in
negotiating and executing a transaction.92 In my opinion, the use of these types of
protections should be encouraged to protect the interests of minority stockholders in
transactions involving controllers, whether it be a squeeze-out merger (MFW), a
merger with a third party (Martha Stewart), or one in which the minority
stockholders retain their interests in the corporation (EZCORP).
Plaintiff makes essentially two arguments why the MFW framework should
not apply to the Reclassification, neither of which I find persuasive. First, plaintiff
argues that the framework applies only to mergers because of “the Supreme Court’s
91 1996 WL 145452, at *7. 92 In re MFW, 67 A.3d at 528 (“The ‘both’ structure . . . replicates the arm’s-length merger steps of the DGCL by ‘requir[ing] two independent approvals, which it is fair to say serve independent integrity-enforcing functions.’”) (quoting In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618 (Del. Ch. 2005) (Strine, V.C.)).
29 repeated emphasis that its holding applied in the context of mergers between a
controlling stockholder and its subsidiary.”93 The repeated use of the word “merger”
in the MFW opinion, however, simply reflects the factual scenario that was before
the Court. The Supreme Court’s decision never indicated that the rationale for its
holding only applied to mergers and, to repeat, I see no principled reason why that
rationale would not apply equally to other conflicted controller transactions. Put
differently, the Supreme Court’s silence as to other potential applications for the
framework does not preclude an evolution of the doctrine.
Second, plaintiff argues that the MFW framework should not apply outside of
the “controller merger scenario” because of other “protections” that may be present
in that context but were not present in the Reclassification.94 Plaintiff names three:
(1) appraisal rights; (2) the provision of a fairness opinion; and (3) the loss of seats
held by “directors of the controlled subsidiary.”95
The lack-of-appraisal-rights argument is a non sequitur because the
Reclassification was not a game-ending transaction. In defined circumstances,
appraisal rights are available for minority stockholders who have lost their interest
in a company as a result of a merger.96 The principle behind appraisal is “that the
93 Pl.’s Answering Br. 22. 94 Id. 23. 95 Id. 23-27. 96 8 Del C. § 262.
30 stockholder is entitled to be paid for that which has been taken from him, viz., his
proportionate interest in a going concern.”97 Here, Yield’s minority stockholders did
not lose their proportionate interest in the Company and, unlike in a squeeze-out
merger, they still have the choice whether to remain owners of Yield.
Plaintiff’s assertion that MFW should not apply because Moelis did not
provide a fairness opinion is equally unconvincing. As plaintiff concedes, fairness
opinions are not required for any form of transaction, including mergers.98 Indeed,
the six-element framework laid out in MFW does not require the provision of a
fairness opinion even for a squeeze-out merger.99
Plaintiff’s last point—concerning the loss of director seats—is puzzling.
Plaintiff contends that, “in the merger context, some (and often all) of the directors
of the controlled subsidiary will lose their board seats,” and those “who will lose
their board seats are less susceptible . . . to future retribution by the controller.”100
97 Tri-Continental Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950). 98 Pl.’s Answering Br. 25; see also Crescent/Mach I Partners, L.P. v. Turner, 846 A.2d 963, 984 (Del. Ch. 2000) (“[F]airness opinions prepared by independent investment bankers are generally not essential, as a matter of law, to support an informed business judgment.”). 99 88 A.3d at 645. As noted below, plaintiff makes a one-sentence argument in a footnote that the failure to obtain a fairness opinion here was a breach of the duty of care. This argument is wholly conclusory and does not come close to supporting a reasonably conceivable inference that the members of the Conflicts Committee were grossly negligent in failing to obtain one. See infra. n.102. 100 Pl.’s Answering Br. 26.
31 This is not a legally-created protection and plaintiff offers no support for this
contention. Attempting to predict whether a person will lose a director seat as a
result of a transaction is purely conjectural. In any event, the issue is irrelevant here,
where the independence of the members of the Conflicts Committee who negotiated
and approved the Reclassification is unchallenged.
Because the MFW framework applies to the Reclassification, the operative
question is whether the process implemented here satisfied that framework. I turn
to that issue next.
C. Application of the MFW Framework The MFW Court laid out six elements that are required for the business
judgment standard of review to apply to a conflicted transaction:
(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.101
Plaintiff’s only serious challenge to the application of the MFW framework
concerns the fifth element.102 According to plaintiff, the vote of the minority in
101 88 A.3d at 645. 102 In a footnote, plaintiff devotes one sentence to assert that “the Committee’s failure to demand a fairness opinion was, under the facts here, a breach of its duty of care in negotiating a fair price.” Pl.’s Answering Br. 25 n.28 (internal quotation omitted). This assertion is wholly conclusory. “For purposes of applying the [MFW] framework on a 32 support of the Reclassification was not informed because there were disclosure
deficiencies in the Proxy.103
“[D]irectors of Delaware corporations are under a fiduciary duty to disclose
fully and fairly all material information within the board’s control when it seeks
shareholder action.”104 A fact is material if “there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote.”105
Stated differently, material facts are those that, if disclosed, would “significantly
alter[] the ‘total mix’ of information made available.”106
“The application of [the materiality] standard does not require a blow-by-blow
description of the proposed transaction. That is, the directors are ‘not required to
motion to dismiss, the standard of review for measuring compliance with the duty of care is whether the complaint has alleged facts supporting a reasonably conceivable inference that the directors were grossly negligent.” Books-A-Million, 2016 WL 5874974, at *17, aff’d, 164 A.3d 56. Fairness opinions are not essential to satisfy the duty of care, and plaintiff has failed to allege any facts supporting a reasonably conceivable inference that the members of the Conflicts Committee were grossly negligent in failing to obtain one here. See Crescent/Mach I Partners, 846 A.2d at 984 (“[F]airness opinions prepared by independent investment bankers are generally not essential, as a matter of law, to support an informed business judgment.”). It also is far from clear what a fairness opinion would look like for this type of transaction. 103 See In re MFW, 67 A.3d at 501 (“[I]f the majority-of-the-minority vote were tainted by a disclosure violation . . . the defendants’ motion would fail” and entire fairness review would apply). 104 Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992). 105 Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 106 Arnold v. Soc’y for Savings Bancorp, Inc., 650 A.2d 1270, 1277 (Del. 1994).
33 disclose all available information,’ but only that information necessary to make the
disclosure of their recommendation materially accurate and complete.”107 That said,
“[w]hen fiduciaries undertake to describe events, they must do so in a balanced and
accurate fashion, which does not create a materially misleading impression.”108
Plaintiff’s disclosure challenges fall into five categories: (1) potential
alternatives to the Reclassification; (2) the additional assets that were added to the
ROFO pipeline; (3) the value of the Reclassification to NRG; (4) the tenuous status
of NRG’s majority position in Yield before the Reclassification and the
characterization of the Class C shares as a “sunset provision”; and (5) potential
conflicts involving Moelis. I address each category, in turn, below.
1. Potential Alternatives to the Reclassification Plaintiff argues that the Proxy’s failure to disclose certain alternatives to the
Reclassification that NRG discussed with the Board constitutes a material
omission.109 These alternatives were presented to the Board at an October 8, 2014
meeting, more than two months before the Board delegated to the Conflicts
107 Matador Capital Mgmt. Corp. v. BRC Hldgs, Inc., 729 A.2d 280, 295 (Del. Ch. 1998) (internal citation omitted). 108 Clements v. Rogers, 790 A.2d 1222, 1240 (Del. Ch. 2001) (Strine, V.C.). 109 Pl.’s Answering Br. 27-28.
34 Committee the task of evaluating and making a recommendation whether to approve
the Reclassification.110
Plaintiff’s argument ignores the well-settled principle that “Delaware law
does not require management to discuss the panoply of possible alternatives to the
course of action it is proposing.”111 Directors are required to provide stockholders
with “an accurate, full, and fair characterization of the events leading to a board’s
decision,” but they do not have to provide a “play-by-play description of every
consideration or action taken by a Board.”112 “[R]equiring disclosure of every
material event that occurred and every decision not to pursue another option would
make proxy statements so voluminous that they would be practically useless.”113
Relatedly, “Delaware law does not require disclosure of inherently unreliable or
speculative information which would tend to confuse stockholders.”114
110 Compl. ¶¶ 33, 37; McGillivray Aff. Ex. G NRGY-220_00000900. 111 In re 3Com S’holders Litig., 2009 WL 5173804, at *6 (Del. Ch. Dec. 18, 2009) (citation and quotation marks omitted). 112 In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 511-12 (Del. Ch. 2010). 113 In re Lukens Inc. S’holders Litig., 757 A.2d 720, 736 (Del. Ch. 1999) (emphasis in original). 114 Arnold, 650 A.2d at 1280; see also Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 145 (Del. 1997) (“Speculation is not an appropriate subject for a proxy disclosure.”). Here, although the pleadings are not clear on the issue, the relevant slide in the board book is entitled “Potential Solutions to 50% Control Threshold,” suggesting that the alternatives discussed may not have been fully-formed or actual possibilities. Compl. ¶ 52 (emphasis added).
35 Delaware courts repeatedly have held that management’s failure to inform
stockholders of other strategic alternatives it was considering at the time of the
transaction in question is not a breach of fiduciary duty. For instance, in 3Com, the
plaintiff alleged that “the Proxy fails to disclose any details regarding [the target
company’s] stand-alone plan and other strategic initiatives considered by the Board
as an alternative to the [cash-out] Merger.”115 In the context of deciding a motion to
expedite discovery, Chancellor Chandler found that the claim failed to satisfy the
low standard of colorability:
This is not a disclosure violation. Delaware law does not require management “to discuss the panoply of possible alternatives to the course of action it is proposing….” This is consistent with the principle that too much information can be as misleading as too little. Moreover, under our law stockholders have a veto power over fundamental corporate changes (such as a merger) but entrust management with evaluating the alternatives and deciding which fundamental changes to propose.116
In response to this authority, plaintiff relies on three cases, each of which is
factually distinguishable. In the first case, Paramount Commc’ns Inc. v. QVC
115 2009 WL 5173804, at *2. 116 Id. at *6 (quoting Seibert v. Harper & Row, Publishers, Inc., 1984 WL 21874, at *5 (Del. Ch. Dec. 5, 1984)); see also Neustadt v. INX Inc., C.A. No. 7017-VCG, at 30-31 (Del. Ch. Dec. 16, 2011) (TRANSCRIPT) (“The plaintiff repeatedly alleges disclosure violations with respect to possible strategic alternatives, bid negotiations that fell through, and other transactions or opportunities that never were. It is settled, however, that the details of transactions that might have been are not material to the consideration of how to vote on the proposed transaction. Such details might be relevant to a claim that the directors were derelict in their Revlon duties or a similar allegation, but no colorable claim on those grounds have been alleged here.”).
36 Network Inc., the Delaware Supreme Court discussed what information would be
relevant to directors in fulfilling their duty of care in selling control of a
corporation.117 The Court did not address the issue of disclosure to stockholders.
The second case, In re Saba Software, Inc. Stockholder Litigation, involved a
highly unusual situation where the Securities and Exchange Commission
deregistered shares of the corporation just before the stockholders were asked to
approve a cash-out merger at a discount to the market price for the shares before the
transaction was announced.118 The Court expressly acknowledged that the rule in
3Com, quoted above, “holds true in a typical case,” before explaining that the
“hardly typical” situation before it warranted the disclosure of “what alternatives to
the Merger existed” in connection with the stockholders’ consideration of whether
the corporation “was viable as a going-concern without the Merger.”119
Finally, plaintiff cites Arnold v. Soc’y for Savings Bancorp, Inc. 120 There, our
Supreme Court held that the failure to disclose a bid for a particular asset was a
117 637 A.2d 34, 48 (Del. 1994) (“Under the facts of this case, the Paramount directors had the obligation . . . to obtain, and act with due care on, all material information reasonably available, including information necessary to compare the two offers to determine which of these transactions, or an alternative course of action, would provide the best value reasonably available to the stockholders.”). 118 2017 WL 1201108, at *6, 13 (Del. Ch. Mar. 31, 2017) as revised (Apr. 11, 2017). 119 Id. at *13. 120 650 A.2d 1270.
37 material omission.121 This holding, however, “turn[ed] on [a] partial disclosure
issue.”122 “[D]irectors are under a fiduciary obligation to avoid misleading partial
disclosures.”123 Therefore, “once defendants travel[] down the road of partial
disclosure . . . they . . . [have] an obligation to provide the stockholders with an
accurate, full, and fair characterization of those historic events.”124 Here, plaintiff
has not alleged that there was partial or incomplete disclosure of alternatives to the
Reclassification but, rather, that “none of the alternatives to the Reclassification
were disclosed to Yield’s Class A stockholders.”125 Thus, plaintiff’s invocation of
the partial disclosure doctrine is inapt.
In sum, Yield stockholders were asked to vote on the Reclassification. They
were not asked to weigh possible alternatives, which is the responsibility of the
Board; they were not asked to approve a sale of control, which has unique
implications under Revlon and its progeny;126 and no allegation has been made that
121 Id. at 1280-81. 122 Id. at 1277 (emphasis added). 123 Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996). 124 Arnold, 650 A.2d at 1280. 125 Pl.’s Answering Br. 31 (emphasis added). 126 For example, the existence of a viable higher bid is an alternative that would be material to a stockholder’s decision to approve a sale of control of the company. See, e.g., Jewel Cos., Inc. v. Pay Less Drug Stores Nw., Inc., 741 F.2d 1555, 1564 (9th Cir. 1984) (“Even after the merger agreement is signed a board may not, consistent with its fiduciary obligations to its shareholders, withhold information regarding a potentially more attractive competing offer.”); Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1295 (2d Cir. 1973) 38 they were provided partial, potentially misleading information about the alternatives.
Under the circumstances here, where the Proxy fully disclosed the Conflict
Committee’s deliberations, including its negotiation of improvements to the
Reclassification as originally proposed, the failure to disclose different potential
strategic alternatives to the Reclassification that the stockholders were not asked to
approve does not state a disclosure claim under well-established precedent.
2. Additions to the ROFO Pipeline Plaintiff argues that the Board had a duty to disclose: (1) the generation
capacity of the new assets available under the Amended ROFO Agreement; and (2)
their potential impact on cash available for distribution (“CAFD”), as estimated by
Moelis. With respect to the generation capacity, the issue is academic because the
Proxy in fact disclosed the generation capacity for each of the additional assets that
was made available under the Amended ROFO Agreement.127
With respect to the CAFD estimates, plaintiff’s challenge is ironic given its
position that “it may not have mattered that these assets were in the pipeline” since
including them “does not dictate whether they will find their way to Yield” and, as
(“[W]hen endorsing one offer [management] must inform stockholders of any better ones.”). 127 McGillivray Aff. Ex. A at 27.
39 “the proxy supports,” there “have, in fact been situations where assets flowed from
NRG to Yield from outside the pipeline.”128
More importantly, the potential impact of the new ROFO assets on CAFD was
not material information because such an estimate would be speculative.129 As
plaintiff recognizes, the Amended ROFO Agreement only listed assets that NRG
may offer to Yield at some point in the future. Because of the uncertainty
surrounding which, if any, of these assets would be offered to Yield and when those
assets may be made available, the estimated impact on CAFD would be too
conjectural to significantly alter the total mix of information available.
Plaintiff cannot salvage its disclosure claim by arguing that the impact of the
additional assets on CAFD is material because Chlebowski asked about it in an email
to Moelis. This contention fails because whether a director analyzes a particular
piece of information for purposes of fulfilling his fiduciary obligations is a very
different matter than the standard for materiality applicable to a stockholder vote.
128 Tr. 114 (June 20, 2017) (Dkt. 31). 129 See Loudon, 700 A.2d at 145 (“Such a disclosure requirement would oblige the Committee to speculate about its future plans. Speculation is not an appropriate subject for proxy disclosure.”); Arnold, 650 A.2d at 1280 (“Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders.”).
40 As this Court has stated, “not every document reviewed by the board is material” to
a stockholder vote.130
3. Value of the Reclassification to NRG Plaintiff contends that the Board had a duty to disclose “Moelis’s failure to
perform any analysis concerning the potential value transfer to NRG as a result of
the Recapitalization.”131 Although an analysis of the potential value transfer to NRG
as a result of the Reclassification (i.e., the value of perpetuating control) certainly
could be material, negative disclosure is not required under Delaware law.
In In re JCC Holding Co., Inc., plaintiffs argued that there was a disclosure
violation because the proxy statement did not disclose that the investment banker
was not required to perform a DCF valuation in connection with a transaction.132
The Court easily disposed of this argument:
Put bluntly, this speculative argument does not set forth a viable disclosure claim. . . . Under Delaware law, there is no obligation on the part of a board to disclose information that simply does not exist—in
130 Wayne Cty. Emps. Ret. Sys. v. Corti, 954 A.2d 319, 332 (Del. Ch. 2008). See id. (“‘[T]he fact that something is included in materials that are presented to a board of directors does not, ipso facto, make that something material. Otherwise every book that’s given to the board and every presentation made to the board would have to be part of the proxy material that follows the board’s approval of a transaction. That certainly is not the law.’”) (quoting In re BEA Sys., Inc. S’holder Litig., C.A. No. 3298-VCL, at 100 (Del. Ch. Mar. 26, 2008) (TRANSCRIPT)). 131 Pl.’s Answering Br. 33. 132 843 A.2d 713, 720 (Del. Ch. 2003) (Strine, V.C.).
41 this case, a non-existent DCF valuation and other non-existent information that plaintiffs identify in the complaint.133
Although plaintiff acknowledges “that Moelis and the committee did not, in
fact, analyze the give from Yield in this transaction,”134 plaintiff nevertheless tries to
save its disclosure claim by arguing that “the Proxy contained misleading, partial
disclosures that would have misled reasonable stockholders into believing that
Moelis analyzed the relative ‘give’ and ‘get’ of the Reclassification.”135 Specifically,
plaintiff points to the following two passages in the Proxy:
“[T]he Conflicts Committee and its advisors . . . reviewed a presentation by Moelis discussing the potential financial impact of the February 17 Revised Proposal as well as comparing the revised proposal to reclassifications undertaken by other companies with dual-class capital structures.”
“[T]he Conflicts Committee informed NRG that, after review and analysis of the February 17 Revised Proposal with assistance of Moelis and [Crowell & Moring], the Conflicts Committee determined that such proposal was acceptable to the Conflicts Committee and unanimously approved the February 17 Revised Proposal.”136
133 Id. at 720-21; see also In re Sauer-Danfoss Inc. S’holders Litig., 65 A.3d 1116, 1132 (Del. Ch. 2011) (“If a disclosure document does not say that the board or its advisors did something, then the reader can infer that it did not happen.”); In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 204 (Del. Ch. 2007) (Strine, V.C.) (“[T]his court has noted that so long as what the investment banker did is fairly disclosed, there is no obligation to disclose what the investment banker did not do.”); La. Mun. Police Emps.’ Ret. Sys. v. Crawford, 918 A.2d 1172, 1186-87 (Del. Ch. 2007) (holding that defendants were not required to make a “negative disclosure”). 134 Tr. 119 (June 20, 2017) (Dkt. 31). 135 Pl.’s Answering Br. 34. 136 Id. 34-35 (citing McGillivray Aff. Ex. A at 24).
42 I do not see where the passages quoted above suggest that Moelis analyzed
the value NRG would receive from the Reclassification. If anything, these passages
indicate simply that the Board and its advisors discussed the impact of the
Reclassification on Yield. Accordingly, there was no partial disclosure violation
concerning a non-existent analysis by Moelis of the value that may have been
transferred to NRG.137
4. Disclosures Concerning NRG’s Majority Position in Yield and the Class C Stock as a “Sunset Provision” Plaintiff asserts that the Proxy materially misled stockholders regarding the
probable timeframes by which NRG would lose its majority voting position in Yield
both before and after the Reclassification. I address each issue in turn.
a. NRG’s Majority Position Before the Reclassification Plaintiff asserts the Proxy failed to disclose that “in the absence of the
Recapitalization, NRG’s ownership could have been reduced below 50.1% as early
as 2015 without additional Yield equity issued to NRG . . . and that to maintain
voting control (at least 50.1% ownership) in Yield, NRG would have had to take
137 Plaintiff cites Gantler v. Stephens, 965 A.2d 695 (Del. 2009) in support of its claim that Moelis’s failure to analyze the value transferred to NRG is material information that should have been disclosed to stockholders. Gantler is distinguishable because the Court found that there was an affirmative misrepresentation in the proxy statement. See id. at 710-11 (“a board cannot properly claim in a proxy statement that it had carefully deliberated and decided that its preferred transaction better served the corporation than the alternative, if in fact the Board rejected the alternative transaction without serious consideration.”). Here, plaintiff has not pointed to any affirmative misrepresentation in the Proxy regarding a non- existent analysis of the value transfer to NRG.
43 back ~$118mm in Yield stock for scheduled dropdowns through 2019.”138
Plaintiff’s claim fails because this scenario is a hypothetical that is inherently
speculative and thus not required to be disclosed under Delaware law.139
The speculative nature of the scenario is demonstrated by disclosures in the
Proxy explaining that the Company had been employing methods to manage voting
dilution: “We currently have several ways to manage voting dilution to the extent
that the Board deems it appropriate, including using cash to finance acquisitions,
repurchasing shares of Class A common stock in the market and granting cash-
138 Pl.’s Answering Br. 36 (emphasis added) (quotation marks and alternations omitted). Plaintiff’s suggestion that the Proxy misled anyone about the prospect that NRG could lose its majority position in the near future also is at odds with its contention that “this should not have come as too much of a surprise” to stockholders reading the Proxy. Tr. 75 (June 20, 2017) (Dkt. 31). 139 See, e.g., In re Family Dollar Stores, Inc. Stockholder Litig., 2014 WL 7246436, at *21 (Del. Ch. Dec. 19, 2014) (citation and quotation marks omitted) (“Because the magnitude of potential synergies is dependent, at least in part, on the magnitude of divestitures, and because the required divestitures are not currently known, any statement in the Proxy about potential synergies would amount to speculation, which is not an appropriate subject for a proxy disclosure.”); Cty. of York Emps. Ret. Plan v. Merrill Lynch & Co., Inc., 2008 WL 4824053, at *13 (Del. Ch. Oct. 28, 2008) (“That the proxy does not discuss the Plaintiff’s hypothetical scenarios regarding what impact the negotiations concerning the Chairman’s employment and compensation might have had on the merger negotiations is of no moment.”); Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *12 (Del. Ch. Jan. 25, 1999) (Strine, V.C.) (holding that “[t]he disclosure of a hypothetical—and therefore inherently tentative—concluded market value” of shares was not required because, inter alia, “[t]he risk that an unreliable analysis could lead stockholders to reject a good deal based on the false hope that a better deal was around the corner is one a board must consider in assessing whether to disclose. Further disclosure therefore may have made the Proxy Statement less, not more, reliable.” (citing Arnold, 650 A.2d at 1283; In re Vitalink, 1991 WL 238816, at *13 (Del. Ch. Nov. 8, 1991))).
44 settled equity incentives.”140 Thus, in addition to the fact that there is an inherent
level of uncertainty in predicting which transactions might close in the future and
when they might close, Yield had been employing options to manage voting dilution
that call into question how those transactions might be structured and make it
anyone’s guess whether the hypothetical plaintiff identifies would have come to
pass.
Furthermore, the Proxy did disclose the certain, known information
concerning the status of NRG’s ownership in Yield that existed as of the record date
for the stockholder vote on the Reclassification (March 16, 2015), including that
“NRG beneficially owned 42,738,750 shares of Class B common stock, representing
55.3% of [Yield’s] total outstanding voting power,” and that absent the
Reclassification, “NRG would hold less than a majority of [Yield’s] outstanding
voting power after issuing approximately eight million additional shares of Class A
common stock.”141 Thus, the Proxy did indicate how close NRG was to losing
majority control, and stated the specific amount of additional equity issuances that
would cause NRG to lose control. A hypothetical timeline of when NRG might lose
control would not have significantly altered the “total mix” of information already
available to stockholders and thus is immaterial.
140 McGillivray Aff. Ex. A at 25. 141 Id. at 28.
45 b. Class C Stock as a “Sunset Provision” Plaintiff argues that the Proxy’s characterization of the Class C stock as a
“sunset provision” on NRG’s control is materially misleading. The relevant
sentence appears in the section of the Proxy describing the background of the
transaction that compares the differences between the proposal NRG made on
February 6, 2017, with the one it made on February 17. It states as follows:
On February 17, 2015, the Conflicts Committee received an updated proposal from NRG in response to the Conflicts Committee’s proposed amendments to NRG’s February 6 Proposal. . . . Under the February 17 Revised Proposal, in response to the Conflict Committee’s suggested amendments, NRG agreed to expand the current pipeline of assets available for purchase by us from NRG under the Original ROFO Agreement . . . In addition to the enhanced ROFO arrangement, the February 17 Revised Proposal provided that the proposed new class of stock be issued to the holders of Class A shares in the recapitalization would entitle to holders of such shares to 1/100 of a vote per share, rather than no votes as contemplated in the February 6 Proposal, which would effectively function as a sunset provision as NRG would lose majority voting control when its economic interest was diluted to approximately 8.7%.142
On one hand, read in isolation, the above reference to a “sunset provision”
could be understood to imply that NRG’s control might end at some reasonably
foreseeable point in time if the Reclassification is approved. The reality, however,
is that Yield would have to issue 823.4 million new shares of Class C stock, more
142 Id. at 23-24 (emphasis added).
46 than ten times the number of shares outstanding before the Reclassification, for
NRG’s economic interest to be diluted enough (by 8.7%) for it to lose control.143
On the other hand, the Proxy does not define the term “sunset provision,” and
the disclosure appears in the context of explaining the difference between NRG’s
original proposal to issue non-voting shares—which presumably would have
ensured NRG permanent voting control—and its revised proposal to issue shares
with 1/100 of a vote per share, which indeed could lead to an eventual loss of control
for NRG, i.e., “effectively function as a sunset provision.” Although the eventual
loss of voting control would occur only after a very large amount of equity issuances,
that fact should have been intuitively obvious given that the new Class C shares
would have only 1/100 of a vote per share.
In any event, whether the “sunset” characterization read in isolation may have
been misleading is not dispositive. When determining whether there has been a
disclosure violation, a proxy statement should be read as a whole.144 When the Proxy
is read in full, I do not believe the “sunset” characterization was materially
misleading because the Proxy makes clear that the Conflicts Committee and the
Board believed it was important to Yield’s success that NRG continue to be Yield’s
143 Compl. ¶ 60. 144 See In re MONY Grp. Inc. S’holder Litig., 852 A.2d 9, 31 (Del. Ch. 2004), as revised (Apr. 14, 2004) (emphasizing that the proxy statement should be “[r]ead fully” and “read in full”).
47 controlling stockholder and that NRG would not be in danger of losing control any
time soon after the Reclassification. For example:
“In the view of the Conflicts Committee . . . NRG’s influence—in part through voting control—has been an important element of our success.”145
“We believe our relationship with NRG, including NRG’s expressed intention to maintain a controlling interest in the Company, provides significant benefits, including management and operational expertise, and future growth opportunities.”146
“The Recapitalization Could Prolong the Period of Time During Which NRG Can Exercise a Controlling Influence on Most Corporate Matters.”147
“NRG currently has, and following the Recapitalization will continue to have, the voting power required to decide the outcome of most matters submitted for a vote of our stockholders.”148
In addition, the Proxy provided sufficient information that would allow a
stockholder to calculate when the “sun would set.” The Proxy explains “NRG will
. . . lose voting power when it sells or transfers shares of Class B common stock or
Class D common stock or when [Yield] issue[s] additional shares of Class A or Class
C common stock in an amount sufficient to reduce NRG’s voting ownership to a
minority stake.”149 The Proxy also includes the number of Class A and Class B
145 McGillivray Aff. Ex. A at 25. 146 Id. at 26 (emphasis added). 147 Id. at 28 (emphasis in original). 148 Id. at 28-29. 149 Id. at 28.
48 shares outstanding as of the record date, how the Class C and Class D shares would
be distributed in the Reclassification, and the relative voting power of each class of
shares.150 Therefore, the Proxy provides all the inputs necessary for one to
determine, after the Reclassification, how many Class C shares Yield would have to
issue for NRG to lose control, i.e., when its economic interest in Yield fell below
8.7%.151 Indeed, the disclosure of these inputs presumably was the basis for
plaintiff’s allegation that Yield would have to issue 823.4 million new Class C shares
for this to occur.152
5. Moelis’s Potential Conflicts and Compensation Plaintiff argues that “the Proxy failed to disclose material information about
Moelis’s incentives and conflicts, including [1] any of Moelis’s past investment
banking or capital markets services provided to NRG, Yield or the Conflicts
150 Id. at 2, 20, 21. 151 See, e.g., In re Trulia, Inc. Stockholder Litig., 129 A.3d 884, 905 (Del. Ch. 2016) (finding supplemental disclosures regarding individual company EBITDA and revenue multiples not to be material, in part, because the information was publicly available); MONY, 853 A.2d at 683 (citation and internal quotation marks omitted) (“Proxy statements need not disclose facts known or reasonably available to the stockholders.”). Relying on Doppelt v. Windstream Holdings, Inc., 2016 WL 612929, at *5 (Del. Ch. Feb. 5, 2016), plaintiff argues that having stockholders go through this mathematical exercise does not cure the Proxy’s failure to disclose the number of Class C shares that Yield would have to issue for NRG to lose control. In Doppelt, however, the stockholder had to go outside the proxy statement and look to press releases, investor presentations, and information statements to gather the information in question. Id. Here, all of the inputs necessary to compute how many Class C shares would need to be issued to dilute NRG’s economic interest below 8.7% is contained in the Proxy itself. 152 Compl. ¶ 60.
49 Committee or [2] any details about the size or nature of Moelis’s fee for advising the
Conflicts Committee in connection with the Reclassification.”153
As to the first issue, plaintiff’s claim is wholly conclusory. In Loudon, the
Delaware Supreme Court reiterated the well-settled principle that “it is inherent in
disclosure cases that the misstated or omitted facts be identified and that the
pleadings not be merely conclusory.”154 In that case, plaintiff alleged that the “Proxy
Statement failed to disclose all of the material facts concerning the Board’s conflicts
of interest and lack of independence.”155 Reasoning that “some factual basis must
be provided from which the Court can infer materiality of an identified omitted fact,”
which “is inherently a requirement for a disclosure claim,” the Court agreed with the
trial court that “this conclusory allegation had failed to state a cognizable claim.” 156
Here, despite seeking books and records from Yield through a Section 220
demand, plaintiff fails to plead any facts to substantiate that Moelis provided any
advisory services to NRG, Yield, or the Conflicts Committee in the past, much less
any that could be said to have created a conflict of interest with respect to the advice
it provided the Conflicts Committee concerning the Reclassification. Accordingly,
153 Pl.’s Answering Br. 38. 154 700 A.2d at 140. 155 Id. at 145. 156 Id. at 145-46. See also York Emps. Ret. Plan, 2008 WL 4824053, at *11 (finding allegation that proxy did not “adequately disclose the inherent conflicts that [the financial advisor] faced” was “conclusory” and “not colorable”).
50 plaintiff’s disclosure claim with regard to Moelis’s potentially undisclosed past
advisory services is conclusory and fails to state a claim for relief.
As to the second issue, the failure to disclose the size and nature of Moelis’s
fee does not constitute a disclosure violation under the specific circumstances of this
case. Best practice certainly would be to disclose the size and nature of a financial
advisor’s compensation.157 Best practice, however, does not necessarily equate to
materiality. Plaintiff points to a number of decisions where Delaware courts have
found the fees paid to financial advisors to be material to stockholders.158 In each of
those cases, however, the specific compensation in question was at least partially
157 See Leo E. Strine, Jr, Documenting the Deal: How Quality Control and Candor Can Improve Boardroom Decision-Making and Reduce the Litigation Target Zone, 70 BUS. LAW. 679, 692-93 (2015) (noting that, in a challenged transaction, the plaintiffs’ bar “will pose probing questions,” including those about the nature and size of the financial advisor’s compensation, and “[h]ow well you are able to answer these questions can be the difference between getting a case resolved early and having it haunt you for a long time”). 158 See, e.g., Frank v. Elgamal, 2014 WL 957550, at *33 (Del. Ch. Mar. 10, 2014) (citations omitted) (“The compensation and potential conflicts of a financial advisor are most likely material information that the board should generally disclose.”); In re Atheros Commc’ns, Inc. S’holder Litig., 2011 WL 864928, at *8 (Del. Ch. Mar. 4, 2011) (“Not disclosed in the Proxy Statement is the amount of compensation that Qatalyst will receive. Perhaps more importantly, also not disclosed in the Proxy Statement is a quantification of the amount of the fee that is contingent.”); In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 832 (Del. Ch. 2011) (citations omitted) (“Because of the central role played by investment banks in the evaluation, exploration, selection, and implementation of strategic alternatives, this Court has required full disclosure of investment banker compensation and potential conflicts.”); Hammons, 2009 WL 3165613, at *17 (“[T]he compensation and potential conflicts of interest of the special committee’s advisors are important facts that generally must be disclosed to stockholders before a vote.”).
51 contingent in nature.159 Contingent fee arrangements obviously can be problematic
because they may incentivize advisors to prioritize the closing of the transaction over
getting the best deal possible for stockholders.160
But this concern is not present here. It is beyond dispute that Moelis’s
compensation was non-contingent.161 The Conflicts Committee hired Moelis to be
its “financial and capital markets advisor.”162 Thus, whatever amount the Conflicts
Committee decided to pay its outside adviser on a non-contingent basis falls squarely
159 See Frank, 2014 WL 957550, at *34 (noting a $350,000 contingency fee); Atheros, 2011 WL 864928, at *8 (“The ‘portion’ of the fee that will be paid regardless of whether the Transaction closes is roughly only two percent. Thus, the compensation that Qatalyst will receive if the Transaction closes is nearly fifty times the fee that it would receive if there is no closing.”); Del Monte, 25 A.3d at 835 (explaining the conflict of interest where an investment bank served as both a sell-side advisor and a buy-side lender, since “[i]f another bidder declined or did not need Barclays’s financing, the bank would lose half of the approximately $44.5 to $47.5 million that Barclays stands to earn from its dual role”); Hammons, 2009 WL 3165613, at *16 (pointing out that the firm that was alleged to have “played a substantial role in negotiations between” the two parties to a merger also provided the acquirer financing to complete the transaction). 160 See Atheros, 2011 WL 864928, at *8 (citations omitted) (“Contingent fees are undoubtedly routine; they reduce the target’s expense if a deal is not completed; perhaps, they properly incentivize the financial advisor to focus on the appropriate outcome. Here, however, the differential between compensation scenarios may fairly raise questions about the financial advisor’s objectivity and self-interest. Stockholders should know that their financial advisor, upon whom they are being asked to rely, stands to reap a large reward only if the transaction closes and, as a practical matter, only if the financial advisor renders a fairness opinion in favor of the transaction.”). 161 Although plaintiff did not avail itself of the opportunity to determine if Moelis’s compensation was paid on a non-contingent basis before filing its complaint by, for example, requesting a copy of Moelis’s engagement letter in connection with its Section 220 demand, defendants represented (and plaintiff does not contest) that Moelis was paid on a non-contingent basis. Tr. 69 (June 20, 2017) (Dkt. 31). 162 McGillivray Aff. Ex. A at 23.
52 within the Conflicts Committee’s business judgment. In short, the failure to disclose
the specifics of Moelis’s compensation does not constitute a material omission under
the circumstances of this case because there was no potential for a conflict of interest,
and directors do not have an obligation to disclose information about the non-
existence of misaligned incentives.163
*****
In sum, for the reasons stated above, plaintiff has failed to plead facts
sufficient to call into question satisfaction of any of the six elements set forth in the
MFW framework. Thus, the Reclassification is subject to the business judgment
rule, which plaintiff has made no effort to overcome. Accordingly, both of plaintiff’s
fiduciary duty claims fail to state a claim for relief.164
IV. CONCLUSION
For the foregoing reasons, defendants’ motion to dismiss the Complaint with
prejudice is GRANTED.
IT IS SO ORDERED.
163 See JCC Holding, 843 A.2d at 721 (“Under Delaware law, there is no obligation on the part of a board to disclose information that simply does not exist.”). 164 Even if I had concluded that the stockholder vote was not informed so that entire fairness would apply, the claim against the three members of the Conflicts Committee would be subject to dismissal due to the presence of a Section 102(b)(7) provision in Yield’s certificate of incorporation (McGillivray Aff. Ex. W Art. Nine) and the absence of any allegations against them amounting to bad faith or disloyalty. In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1187 (Del. 2015) (Strine, C.J.).
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