IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) JOSEPH LAWRENCE LIGOS, ) ) Plaintiff, ) ) v. ) C.A. No. 2020-0435-SG ) ISRAMCO, INC., NAPHTHA ISRAEL ) PETROLEUM CORPORATION LTD., ) NAPHTHA HOLDING LTD., I.O.C. - ) ISRAEL OIL COMPANY, LTD., ) NAPHTHA US OIL, INC., HAIM ) TSUFF, ISRAMCO NEGEV 2 ) LIMITED PARTNERSHIP, JOSEPH ) FROM, MAX PRIDGEON, ASAF ) YARKONI, FRANS SLUITER, and NIR ) HASSON, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: May 21, 2021 Date Decided: August 31, 2021
Corinne Elise Amato, Kevin H. Davenport, Samuel L. Closic, Stephen D. Dargitz, and Jason W. Rigby, of PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Eric L. Zagar, J. Daniel Albert, Justin O. Reliford, and Christopher M. Windover, of KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania, Attorneys for Joseph Lawrence Ligos.
William B. Chandler III, Bradley D. Sorrels, Daniyal M. Iqbal, and Nora M. Crawford, of WILSON SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; OF COUNSEL: Steven Guggenheim, of WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants Max Pridgeon, Asaf Yarkoni, and Nir Hasson. S. Mark Hurd and Daniel T. Menken, of MORRIS NICHOLS ARSHT & TUNNEL, LLP, Wilmington, Delaware; OF COUNSEL: Danny David and Amy Pharr Hefley, of BAKER BOTTS L.L.P., Houston, Texas, Attorneys for Defendants Haim Tsuff, Naphtha Israel Petroleum Corporation Ltd., Naphtha Holding Ltd., I.O.C. - Israel Oil Company, Ltd., Naphtha US Oil, Inc., and Isramco Negev 2 LP.
Bradley R. Aronstam, Adam D. Gold, and Anthony M. Calvano, of ROSS ARONSTAM & MORITZ, Wilmington, Attorneys for Defendants Joseph From, Frans Sluiter, and Isramco, Inc.
GLASSCOCK, Vice Chancellor Before me is a complaint by Joseph Ligos, a former stockholder of a Delaware
corporation, Isramco, Inc. (“Isramco” or the “Company”), who was cashed out in a
merger in 2019. According to Ligos, the merger was unfair. Because the Company
was controlled, indirectly, through Defendant Haim Tsuff, and because Tsuff also
indirectly controlled the acquiror, Defendant Naphtha Israel Petroleum Corp.
(“Naphtha”) and its affiliates, entire fairness review of the transaction is the default
standard. Obviously, this is because of the agency problem created where a
controller stands on both sides of the transaction.
Nonetheless, the common law of corporations recognizes that conflicted
controller transactions may enhance firm value, and that the risk of litigation under
the high bar of entire fairness may discourage such value-enhancing deals.
Accordingly, the law has encouraged mechanisms to reduce the risk to the
principals—the stockholders—in such transactions, culminating in MFW and its
progeny. 1 Compliance with the MFW rubric allows conflicted transactions to
receive business judgment review, but given the agency risk, compliance with the
rubric is strictly construed. To avoid entire fairness review under MFW, the
company and its controller must demonstrate compliance with two conditions: First,
the deal must be subject ab initio to negotiation by a committee of independent and
disinterested directors, fully empowered and in compliance with the duties of loyalty
1 Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). and care. Second, the transaction must also be so subject to a “majority of the
minority” stockholder vote in favor, by a fully informed and uncoerced electorate.
If either of these conditions is absent, entire fairness review results.
Currently pending are numerous defendants’ motions to dismiss under Rules
12(b)(6) and 12(b)(2). This opinion addresses only Tsuff’s motion to dismiss under
Rule 12(b)(6), arguing that business judgment must apply because the transaction
was fully compliant with the MFW standard. For the following reasons, that motion
must be denied; it will necessarily inform the other motions under 12(b)(6), however.
The parties should inform me, in light of that finding, whether further briefing is
appropriate, and I will then address the remainder of the motions to dismiss.
The Plaintiff raises a number of ways in which he finds that the procedure
here fell short of that called for in MFW. I need address only one to resolve the
motions to dismiss.2 The MFW standard requires that the deal be conditioned on a
majority of the minority vote by stockholders who are uncoerced and fully informed.
Because I find that the record at this pleading stage, together with the Plaintiff-
friendly inferences therefrom, makes it plausible that the vote was materially
uninformed, entire fairness review is applicable, and dismissal under MFW is thus
inappropriate.
2 Left for another stage in the litigation is the question as to whether the burden of proof on entire fairness must shift to the Plaintiffs given the use of a special committee to negotiate the transaction.
2 The Complaint alleges that a material factor in arriving at a fair value of
Isramco was the value of certain overriding royalties in an offshore Israeli oil field,
the Tamar Field, in which another entity, Isramco Negev 2 Limited Partnership
(“Negev 2”) owns a working interest. The value of the royalties, in turn, was
dependent on when the right to receive royalties ripened, a matter on which Isramco
and Negev 2 disagree. The royalty issue was, at the time of the merger, in
arbitration. Negev 2 is yet another entity controlled by Tsuff. The value of the
royalties, and the value of the arbitration, were material to the deal price.
According to the merger proxy (the “Proxy”), some facts about the arbitration,
and the value of the arbitration assigned by the Special Committee’s financial
advisor, were disclosed to the minority stockholders. Stockholders were told that
Naphtha, the merger counterparty, held a controlling interest in Negev 2, which was
involved in the arbitration. What they were not told is the following. About the time
that Tsuff formed a desire for Naphtha to acquire Isramco, he approached the
Isramco board of directors (the “Board”) for permission to allow Tsuff himself to
participate in the arbitration. The Board agreed. Under the motion to dismiss
standard, I must assume that, having received permission of the Board to participate,
Tsuff did so, and that he pursued his own, conflicted, self-interest in that arbitration.
It is the Plaintiff’s theory that Tsuff’s self-interest included prolonging the
arbitration throughout the merger negotiations to keep Isramco’s value artificially
3 reduced. While that matter remains for decision on a record, what I can find at the
pleading stage is that both the Board’s agreement to allow Tsuff to participate, and
the participation itself, would have been material to a stockholder attempting to
evaluate the proposed merger. At this pleading stage, this makes business judgment
review under MFW unavailable.
A statement of the relevant facts alleged, and my reasoning, follow.
I. BACKGROUND3
A. The Parties and Relevant Non-Parties 4
Plaintiff Joseph Lawrence Ligos is a former stockholder of Isramco.5 He
continuously owned shares of Isramco stock from the announcement to the
consummation of the Buyout.6
3 Unless otherwise noted, the facts referenced in this Memorandum Opinion are drawn from the Verified Shareholder Class Action Complaint (referred to herein as the “Complaint”) and the documents incorporated therein. See generally Compl., Dkt. No. 1. I may also consider documents produced by the Defendants in response to the Plaintiff’s 8 Del. C. § 220 books and records demand “to ensure that the plaintiff has not misrepresented their contents and that any inference the plaintiff seeks to have drawn is a reasonable one.” Voigt v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb. 10, 2020). 4 The Plaintiff voluntarily dismissed J.O.E.L Jerusalem Oil Exploration Ltd. (“JOEL”), Equital, Ltd. (“Equital”), YHK Investment L.P. (“YHK”), YHK General Manager Ltd. (“YHK Manager”), and United Kingsway Ltd. (“Kingsway”) without prejudice on August 5, 2020. Notice of Voluntary Dismissal as to Certain Defs., Dkt. No. 10. Joseph From, Frans Sluiter, and Isramco, Inc. were also voluntarily dismissed from this action with prejudice on May 26, 2021. Order of Dismissal with Prejudice as to Certain Defs., Dkt. No. 62. 5 Compl. ¶ 13. 6 Id.
4 Non-party Isramco is a Delaware corporation headquartered in Houston,
Texas.7 In October 2019, Isramco’s controller—Defendant Naphtha—and its
affiliates consummated a going-private transaction by purchasing all of Isramco’s
unaffiliated stock for cash consideration (the “Buyout”).8 Prior to the consummation
of the Buyout, Isramco was publicly traded on the NASDAQ Capital Market. 9
Defendant Naphtha Holding LTD. (“NHL”) is an Israeli company wholly
owned by Naphtha.10 Prior to the Buyout, NHL directly owned approximately
58.6% of Isramco’s outstanding shares.11
Defendant I.O.C. – Israel Oil Company, LTD. (“I.O.C.”) is an Israeli private
company.12 Prior to the Buyout, I.O.C. directly owned approximately 12.1% of
Isramco’s outstanding shares. 13
Defendant Naphtha is an Israeli public company whose securities trade on the
Tel Aviv Stock Exchange. 14 Its principal businesses are exploration and production
of oil and natural gas. 15 Naphtha owns 99.9% of I.O.C. and 100% of NHL.16
7 Id. ¶ 14. 8 Id. at 1–2, ¶ 142. 9 Id. ¶ 14. 10 Id. ¶ 22. 11 Id. 12 Id. ¶ 23. 13 Id. 14 Id. ¶ 21. 15 Id. 16 Id. ¶¶ 22–23.
5 Accordingly, prior to the Buyout, Naphtha beneficially owned 70.7% of Isramco’s
outstanding common stock. 17
Defendant Naphtha US Oil, Inc. (“Merger Sub”) is a Delaware corporation
formed by I.O.C. to effectuate the Buyout.18 I.O.C. owns 100% of the outstanding
shares of common stock of Merger Sub.19
Defendant Haim Tsuff (“Tsuff”) served as Isramco’s President and the
Chairman of its Board from May 1996 until consummation of the Buyout on October
25, 2019.20 He served as the Company’s Chief Executive Officer (“CEO”) from
May 1996 until November 2017, and as Co-CEO from November 2017 until
consummation of the Buyout in October 2019.21 Tsuff is also a director of NHL,
I.O.C., Merger Sub, and Naphtha, and the Chairman of Naphtha’s board of
directors. 22 Prior to the Buyout, Tsuff directly owned 61,679 shares of Isramco
common stock and, through interests in Naphtha, indirectly owned an additional
1,922,517 shares, which collectively totaled approximately 73% of the Company’s
outstanding shares. 23 The relationship of the parties is graphically represented in
Figure 1.
17 Id. ¶ 21. 18 Id. ¶ 24. 19 Id. 20 Id. ¶ 25. 21 Id. 22 Id. ¶¶ 21–24. 23 Id. ¶ 15.
6 Tsuff, Naphtha, NHL, I.O.C., and Merger Sub are referred to collectively
herein as the “Purchaser Group Defendants.” According to the Proxy, Tsuff was “in
a position to indirectly determine the investment and voting decisions made by each
of the” Purchaser Group Defendants by virtue of his beneficial ownership of Isramco
stock and “the ownership and management structures” of the Purchaser
Defendants. 24
Defendant Negev 2 is an Israeli public limited partnership formed by Isramco
in 1989. 25 Tsuff is the Chairman of its board of directors. 26 Naphtha holds
controlling interests in Negev 2, and I.O.C. fully owns and controls Negev 2’s
general partner, a non-party.27 Negev 2 owns a working interest in the Tamar oil
and gas field located in the Levantine basin in the Mediterranean Sea (the “Tamar
Field”) from which Isramco receives a royalty stream (the “Tamar Royalty”).28 The
Tamar Royalty was the Company’s single largest source of revenue. 29 A dispute
between Negev 2 and Isramco as to the Tamar Royalty was in arbitration at the time
of the Buyout (the “Tamar Arbitration”). 30
Non-Party Eran Saar is the CEO of Naphtha and a director of Negev 2.31
24 Id. (quoting Proxy at 65). 25 Id. ¶¶ 27, 36. 26 Id. ¶ 26. 27 Id. ¶ 27. 28 Id. 29 Id. ¶ 3. 30 Id. ¶¶ 58–63. 31 Id. ¶¶ 72, 76
7 B. Factual Background
1. The Tamar Royalty
In May 2001, Isramco joined a partnership that held two offshore exploratory
licenses in the Tamar Field, known as the Matan and Michal licenses, which
generated the Tamar Royalty revenue stream. 32 By March 2007, when the Company
filed its 2006 Form 10-K, Isramco, through its interests in Negev 2, held a 27.5%
working interest and overriding royalties in the Matan and Michal licenses.33
In late 2007, however, the Company decided to close its Israel branch office
and focus instead on development and exploration in the United States. 34 The
Complaint alleges that Isramco’s shift towards operations in the United States was
part of a campaign by Tsuff to strip Isramco of its valuable interests in the Tamar
Field for the benefit of other Tsuff-controlled entities such as Naphtha and
Negev 2.35
In connection with this shift, Isramco and I.O.C. entered into an Israel Branch
Sale Agreement, pursuant to which Isramco sold to I.O.C. its Israel-based activities
and assets conducted and managed by the Company’s Israel branch office. 36 These
32 Id. ¶ 40. 33 Id. ¶ 41. 34 Id. ¶ 42. 35 Id. ¶¶ 42, 55, 57. 36 Id. ¶ 44.
8 assets included Isramco’s general and limited partnership interests in Negev 2, which
continued to own a working interest in the Tamar Field. 37
As a result, by the end of 2008, Isramco’s working interest in the Matan
license was reduced to zero, and its overriding royalties in the Matan license—i.e.,
the Tamar Royalty—were reduced to 1.4375% of the revenues received by Negev 2
from the Tamar Field. 38 The Tamar Royalty was set to increase to 2.7375%,
however, after the triggering of a payout date (the “Payout Date”).39 This
represented a 78% increase, which translated to an additional $8.84 per share in
royalty income. 40 The Payout Date was calculated based on the amount of certain
expenses incurred by Negev 2 relative to the revenue that Negev 2 received from the
Tamar Field.41 In other words, higher costs meant that more revenue was required
to reach the Payout Date.42
The Tamar Royalty was the Company’s single largest source of revenue, and
the Company disclosed in each of its Annual Reports dating back to 2014 that the
Tamar Royalty was “expected to be very significant to the Company for the
foreseeable future.”43
37 Id. ¶¶ 27, 44. 38 Id. ¶ 45. 39 Id. ¶¶ 3, 45. 40 Id. ¶ 3. 41 Id. ¶ 57. 42 Id. 43 Id. ¶¶ 3, 57.
9 2. Tamar Arbitration
According to the Complaint, beginning in late 2016, Tsuff, through his
beneficial ownership of Negev 2, attempted to delay the Payout Date by continually
adding expenses to the Payout Date calculation.44 Specifically, in 2016, Negev 2
added $39 million in “solo expenses,” such as legal and insurance expenses, to the
Payout Date equation, which pushed the Payout Date back from 2016 to the first
quarter of 2017.45 Then, in February 2017, Negev 2 asserted that the calculation
should also include “financing expenses.”46
In light of Negev 2’s shifting cost calculations, on February 26, 2017, the
Tamar Arbitration commenced between Isramco and Negev 2 concerning “what
costs should be included in the payout calculation” for the purposes of calculating
the timing of the Payout Date. 47 At a preliminary hearing on August 13, 2017,
Negev 2 again added “hundreds of millions of . . . dollars” in expenses to its
purported Payout Date calculation.48
In November 2017, as disclosed in the Proxy, Tsuff and Saar met with Baker
Botts L.L.P. (“Baker Botts”) to discuss a potential purchase by Naphtha of the
remaining Isramco shares. 49 The Proxy does not disclose, however, that, also in
44 Id. ¶¶ 3–4, 69–71. 45 Id. ¶ 71. 46 Id. ¶ 74. 47 Id. ¶¶ 59, 63 (quoting the Company’s 2016 Form 10-K). 48 Id. ¶ 75. 49 Id. ¶ 76 (citing Proxy at 12).
10 November 2017, the Company’s Board met and the Board’s Conflict Committee
“‘(i) reauthorized the limited involvement of Haim Tsuff in the Tamar [A]rbitration
and (ii) approved the assistance of Eran Saar . . . in the Tamar [A]rbitration.’” 50
On November 27, 2017, a few weeks after the Conflict Committee authorized
Tsuff’s and Saar’s involvement in the Tamar Arbitration, Negev 2 submitted a
revised position in the Tamar Arbitration asserting $950 million in additional
expenses to the Payout Date calculation, which it contended would delay the Payout
Date “until the end of 2019.”51 Isramco, in contrast, believed that the Payout Date
was “around the middle of 2015.” 52
Isramco and Negev 2 also disagreed as to the amount at stake in the Tamar
Arbitration. Specifically, Isramco disclosed in its 2016 Form 10-K that it believed
the scope of the disagreement was approximately $15 million, and it later disclosed
in its 2017 Form 10-K that it believed this figure to be $45 million, not including the
value of Isramco’s counterclaims against Negev 2.53 In contrast, Negev 2 estimated
the scope of disagreement to be approximately $73 million, before taxes.54
Isramco submitted a Statement of Claim in the Tamar Arbitration on February
25, 2018, and Negev 2 submitted its response on August 8, 2018. 55 The Company
50 Id. ¶ 77; Decl. of Daniel T. Menken in Support of Naphtha OB, Ex. 9 at 2. 51 Compl. ¶ 78. 52 Id. ¶ 61 (quoting the Company’s 2017 Form 10-K). 53 Id. ¶ 62. 54 Id. 55 Id. ¶ 63.
11 disclosed in its Form 10-Q for the quarter ended June 30, 2019 that the Tamar
Arbitration was “in its early stages with the parties expected to complete the
discovery process in the coming months,” and “[t]he Company expect[ed] the
discovery and evidentiary filings . . . to conclude in 2019, with evidentiary hearings
to occur in February of 2020.”56
3. The Buyout
On March 21, 2018, with the Tamar Arbitration still ongoing, and one month
after Isramco filed its Statement of Claim, the Purchaser Group Defendants filed an
amendment to their Schedule 13D disclosing that they were in the preliminary stages
of evaluating a potential acquisition of unaffiliated shares of Company stock or
another going-private transaction involving the Company.57 Naphtha thereafter
submitted a letter to the Board on May 24, 2018 indicating that it was interested in
exploring the possibility of a transaction involving Naphtha’s acquisition of all
unaffiliated shares of Isramco stock in exchange for cash (the “Indication of
Interest”). 58 The Indication of Interest stated that Naphtha expected “that the
Company’s board of directors will appoint a special committee of independent
56 Id. ¶ 63 (quoting the Company’s Q2 2019 10-Q). 57 Id. ¶ 80. 58 Id. ¶ 81.
12 directors to engage in this process and make a recommendation to the Company’s
board of directors with respect to any Transaction.” 59
On June 5, 2018, the Board met and appointed a special committee (the
“Special Committee”) to review, evaluate, and negotiate a potential transaction with
Naphtha. 60 On October 5, 2018, the Special Committee selected Duff & Phelps
Securities, LLC and Duff & Phelps, LLC (together, “Duff & Phelps”) as a financial
advisor. 61 The Board never reversed the November 2017 decision to authorize
Tsuff’s and Saar’s involvement in the Tamar Arbitration.62
On January 8, 2019, over a year after the Board reauthorized Tsuff and
authorized Saar to participate in the Tamar Arbitration, Naphtha submitted an initial
proposal to acquire the unaffiliated shares of Isramco stock for $110.36 per share in
cash. 63 The January 8, 2019 proposal stated that the transaction would be
conditioned on the Special Committee’s recommendation and a majority vote of the
Company’s minority stockholders.64 After three months of negotiations, which
included numerous discussions related to the Tamar Royalty and Tamar
Arbitration, 65 Naphtha increased its proposal to $121.40 per share on April 4, 2019,
59 Id. ¶ 82. 60 Id. ¶ 84. 61 Id. ¶ 87. 62 Id. ¶ 90. 63 Id. ¶ 91. 64 Id. ¶ 83. 65 See, e.g., id. ¶¶ 95–96, 98–100, 105–06, 108–16, 119–21, 124–25, 130–32, 134, 136.
13 which the Special Committee approved on the same day. 66 On May 20, 2019, Duff
& Phelps presented its fairness opinion to the Special Committee, which included
an assessment of various potential outcomes to the Tamar Arbitration.67 The Special
Committee then recommended that the Board approve the Buyout, and the Board
met, with Tsuff recused, and approved the Buyout and resolved to recommend to the
Company’s stockholders that they do the same. 68
On October 22, 2019, a majority of the unaffiliated Isramco stockholders
voted to approve the Buyout. 69 The Proxy described aspects of the Tamar
Arbitration, including Duff & Phelps’s assessment regarding the potential proceeds
from the arbitration, and that Naphtha controlled Negev 2,70 but it did not disclose
the Conflict Committee’s decision in November 2017 to reauthorize Tsuff’s
participation in the Tamar Arbitration.71
C. Procedural History
The Plaintiff initiated this action on June 4, 2020.72 The Complaint brings
claims for breach of fiduciary duty against the Purchaser Group Defendants (Count
66 Id. ¶¶ 136–38. 67 Id. ¶ 141. 68 Proxy at 21. 69 Compl. ¶ 142. 70 Proxy at 12, 31. 71 Compl. ¶ 148. 72 See Compl.
14 I) and the Director Defendants 73 (Count II), for unjust enrichment against the
Purchaser Group Defendants (Count III), and for aiding breaches of fiduciary duty
against Negev 2 (Count IV) and Kingsway, YHK Manager, YHK, Equital, JOEL,
Naphtha, I.O.C., and Merger Sub (Count V). 74 On August 5, 2020, the Plaintiff
dismissed his claims against JOEL, Equital, YHK, YHK Manager, and Kingsway
without prejudice.75
On September 21, 2020, three groups of defendants filed separate motions to
dismiss: (i) Naphtha, NHL, I.O.C., and Tsuff; 76 (ii) From, Sluiter, and Isramco (the
“Isramco Motion”); 77 and (iii) Pridgeon, Yarkoni, and Hasson.78 Negev 2 moved to
dismiss on December 14, 2020. 79 The parties fully briefed the four motions by
February 26, 2021.80
73 The Complaint defines the Director Defendants to include Tsuff, Joseph From, Max Pridgeon, Asaf Yarkoni, Frans Sluiter and Nir Hasson. Compl. ¶ 33. The Plaintiff subsequently dismissed From and Sluiter with prejudice on May 26, 2021. Order of Dismissal with Prejudice as to Certain Defs., Dkt. No. 62. 74 Compl. ¶ 159–87. 75 Notice of Voluntary Dismissal as to Certain Defs., Dkt. No. 10. 76 Mot. to Dismiss of Defs. Naphtha, Holdings, US Oil, and Tsuff, Dkt. No. 23 [hereinafter “Naphtha Mot.”]; Opening Br. in Supp. of Naphtha Mot., Dkt. No. 24 [hereinafter “Naphtha OB”]. 77 Defs. From, Sluiter, and Isramco’s Mot. to Dismiss, Dkt. No. 26 [hereinafter “Isramco Mot.”]; Opening Br. in Supp. of Isramco Mot., Dkt. No. 26. 78 Defs. Pridgeon, Yarkoni, and Hasson’s Motion to Dismiss, Dkt. No. 28 [hereinafter “Special Committee Mot.”]; Opening Br. in Supp. of Special Committee Mot., Dkt. No 28. 79 Def. Negev’s Mot. to Dismiss, Dkt. No. 39 [hereinafter “Negev 2 Mot.”]; Opening Br. in Supp. of Negev Mot., Dkt. No. 40 [hereinafter “Negev 2 OB”]. 80 Pl.’s Answering Br. in Opp’n to Naphtha Mot., Isramco Mot., and Special Committee Mot., Dkt. No. 36 [hereinafter “Pl.’s First Br.”]; Reply Br. in Further Supp. of Isramco Mot., Dkt. No. 45; Reply Br. in Further Supp. of Special Committee Mot., Dkt. No 46; Reply Br. in Supp. of Naphtha Mot., Dkt. No. 47; Pl.’s Answering Br. in Opp’n to Negev 2 Mot., Dkt. No. 52; Reply Br. in Supp. of Negev 2 Mot., Dkt. No. 54.
15 I heard oral argument on all motions to dismiss on May 21, 2021. 81 On May
26, 2021, the Plaintiff voluntarily dismissed From, Sluiter, and Isramco from this
action, mooting the Isramco Motion, and I consider the remaining motions submitted
for decision as of that date.82
II. ANALYSIS
A. Legal Standards
The Defendants seek dismissal under Rule 12(b)(6).83 At the pleading stage,
I must take as true all well-pled allegations and draw inferences therefrom in the
light most favorable to the Plaintiff.84 I may only grant the motions to dismiss if I
find it not “reasonably conceivable” that the Plaintiff may prevail. 85
When a controller exists on both sides of a merger, the default standard of
review is entire fairness.86 This is because the existence of a controller is likely to
undermine the dual statutory protections of disinterested board and stockholder
approval. 87 Under the rubric laid out in MFW, however, a controller can deploy
these dual procedural protections and gain the benefit of business judgment review
81 Tr. of Oral Arg. on Defs.’ Mots. to Dismiss, Dkt. No. 63. 82 Order of Dismissal with Prejudice as to Certain Defs., Dkt. No. 62. 83 Certain Defendants have also moved to dismiss for lack of personal jurisdiction under Rule 12(b)(2). See Naphtha OB § II; Negev 2 OB § II. Because this Memorandum Opinion decides only the motions to dismiss under Rule 12(b)(6) arguing that the transaction was fully compliant with the MFW rubric, I do not discuss the Rule 12(b)(2) standard in this opinion. 84 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536-37 (Del. 2011). 85 Id. at 537. 86 M & F Worldwide, 88 A.3d at 644. 87 Id.
16 of the transaction.88 Specifically, for a controller transaction to be subject to
business judgment review under MFW, the transaction must be (i) approved by an
independent and empowered special committee and (ii) by an uncoerced, informed
majority of the Company’s minority stockholders. 89
The Plaintiff attacks the Defendants’ compliance with the MFW protocol on
numerous grounds. The second requirement of MFW is dispositive here, I find,
because the minority stockholders were not adequately informed when they voted to
approve the Buyout.
B. The Minority Stockholder Vote Was Uninformed
The Plaintiff argues that the Proxy was incomplete because it did not disclose,
among other things, that the Conflict Committee reauthorized Tsuff’s participation
in the Tamar Arbitration. 90 The Plaintiff contends that it was material for
stockholders to know that Tsuff participated in a proceeding that impacted the
valuation of Isramco, especially given the temporal proximity between the
reauthorization, the initial meeting among Tsuff, Saar and Baker Botts to discuss a
potential Isramco transaction, and Negev 2’s submission of a revised position in the
arbitration that the Payout Date would not occur until the end of 2019. 91 The
88 Id. 89 Id. 654. 90 Compl. ¶ 148. 91 Pl.’s First Br. at 55–57.
17 Plaintiff also contends that this omission was material because Tsuff’s participation
created the reasonable impression that Naphtha used Tsuff’s knowledge of the
Tamar Arbitration to inform its Indication of Interest. 92
The Defendants argue that the Conflict Committee’s decision to reauthorize
Tsuff’s participation in the Tamar Arbitration adds nothing to the “total mix” of
information and is merely “cumulative to the information already disclosed”—i.e.,
that Negev 2 was involved in the proceedings, and Naphtha held a controlling
interest in Negev 2, as well as Isramco.93 The Defendants contend that because the
minority stockholders were informed of Naphtha’s controlling interest in Negev 2,
they already knew that Naphtha had a window into the Tamar Arbitration
proceedings.94
The Defendants also assert that, for the Plaintiff to establish that this omission
was material, the Complaint must have pled what Tsuff’s role was in the Tamar
Arbitration, what information he learned that he otherwise would not have known,
what information he passed on to Naphtha, and how that information affected
Naphtha’s Indication of Interest. 95
92 Compl. ¶ 148; Pl.’s First Br. at 56. 93 Naphtha OB at 45. See Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *12 (Del. Ch. June 30, 2014). 94 Naphtha OB at 45. 95 Naphtha OB at 44–45.
18 The Defendants seek to impose too high a bar at this stage of the proceedings.
Making all plaintiff-friendly inferences, it is plausible that after obtaining the
Conflict Committee’s reauthorization to participate in the proceedings, Tsuff did
participate. I can also infer at this stage that Tsuff, who, as the ultimate controller
of Isramco, Negev 2, and Naphtha, stood on both sides of the Buyout and the Tamar
Arbitration, acted for his own interests in the Tamar Arbitration.96 The Plaintiff
theorizes that Tsuff advanced his own interests by delaying the outcome of the
Tamar Arbitration—which concerned the Company’s largest revenue stream, the
Tamar Royalty—in order to artificially deflate the value that the Special Committee
ascribed to Isramco.97 Whether that is true is a matter to be developed by the record;
for now, it is enough to say that Tsuff’s participation in the Tamar Arbitration would
have been material to the minority stockholders attempting to evaluate the Buyout.98
Moreover, the Conflict Committee’s decision itself to reauthorize Tsuff’s
participation was also material to the minority stockholders. Absent a disclosure to
the contrary, the Isramco stockholders were entitled to presume that the Board would
act in the stockholders’ best interests, rather than the controller’s, especially in a
96 See Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *13 n.64 (Del. Ch. June 21, 2019) (“reasonable to infer that [potentially conflicted director] was acting in his own interests”). 97 Compl. ¶ 5. 98 See In re Tesla Motors, Inc. S’holder Litig., 2020 WL 553902, at *9 (Del. Ch. Feb. 4, 2020) (controller’s “involvement in the process beyond what was disclosed in the proxy would likely have been something a reasonable stockholder would have considered important when deciding whether to vote for the [m]erger”).
19 buyout that purportedly employed the dual protections against controller conflicts
laid out in MFW. 99 This included the Board’s acting to pursue Isramco’s interest in
the Tamar Arbitration. In other words, the independent stockholders would not
assume, absent disclosure, that the Board would permit the controller to participate
in the arbitration. The progress and likely outcome of the Tamar Arbitration, and its
effect on the timing and value of the Tamar Royalties, was material to the valuation
of the Company, which obviously is the overriding concern of a stockholder
contemplating a merger. That the Conflict Committee decided to allow Tsuff to
participate in the Tamar Arbitration, which plausibly impacted Isramco’s valuation,
was therefore material for stockholders to know. 100
I note that a finding, as here, that the Plaintiff has adequately pled an
uninformed stockholder vote is sufficient to negate the application of the business
judgement rule to the transaction under the MFW line of cases. A finding that the
Board did not adequately inform the stockholder vote is not enough, standing alone,
99 See In re GGP, Inc. S’holder Litig., 2021 WL 2102326, at *13 (Del. Ch. May 25, 2021) (“Delaware law presumes ‘that a director’s decision is based on the corporate merits of the subject matter before the board rather than extraneous considerations or influence,’” including in the controller context) (citing In re W. Nat. Corp. S’holders Litig., 2000 WL 710192, at *11 (Del. Ch. May 22, 2000)). 100 Cf. Chester Cty., 2019 WL 2564093, at *13 n.64 (accepting “reasonable . . . infer[ence] that [director’s] . . . own interests . . . or those of his management team or employees . . . overtook his duties to the stockholders when he was charged with obtaining the highest deal price,” “that information is material”).
20 to plead a breach of duty action against individual directors, however.101 Here,
Isramco has an exculpation clause for director liability. 102 Accordingly, a pleading
that any director breached a duty for failure to disclose or lack of candor, to
withstand a motion to dismiss, must allege facts making it “reasonably conceivable”
that such a failure to disclose was in bad faith or otherwise disloyal. This
determination awaits the parties’ review of this decision and any supplemental
briefing.
* * *
Defendant Tsuff’s motion to dismiss the Plaintiff’s breach of fiduciary duty
claim against him (Count I) rests solely on the argument that the Buyout met the
conditions laid out in MFW and should therefore be evaluated under the business
judgment rule. Because I have determined that application of business judgement
review under MFW is not available, Tsuff’s motion to dismiss is denied as to Count I.
The remaining motions to dismiss raise other distinct issues and therefore remain
outstanding.
III. CONCLUSION
For the foregoing reasons, Defendant Tsuff’s motion to dismiss is denied as
to Count I. The other Defendants’ motions to dismiss remain outstanding. The
101 Nor does the Conflict Committee’s decision to allow Tsuff’s participation in the Tamar Arbitration necessarily imply a breach of duty. 102 Isramco, Inc. Certificate of Incorporation at 16.
21 parties should confer, provide a form of order consistent with the decision above,
and inform me in light of this decision whether further briefing is appropriate.