Chancery Upholds Fiduciary Duty Claims Arising Out Of Deal Involving an Alleged Control Group That Included Non-Stockholders and a Sale Process Managed By a Disinterested and Independent Special Committee
In re Pattern Energy Grp. Inc. Stockholders Litig., C.A. No. 2020-0357-MTZ (Del. Ch. May 6, 2021)
This decision mostly denying a motion to dismiss examines several important issues in post-closing M&A fiduciary duty litigation relevant to stating a claim and overcoming an otherwise claim-cleansing stockholder vote under the Corwin doctrine. These include what it takes to adequately plead the existence of a control group, a fraud-on-the-board theory, a bad faith breach of fiduciary duty by admittedly disinterested and independent directors charged with managing a sale process and overseeing potential conflicts, and claims against individual officers. Core to the plaintiff’s well-pled complaint in this action were allegations that the committee and certain officers favored a buyer preferred by a private equity fund, which, among other things, formed the company, controlled its upstream supplier, and held significant contractual consent rights.
Regarding the existence of a control group, the Court found the plaintiff’s allegations sufficient at the dismissal stage to support a theory of control, relying on the aforementioned private equity fund ties as sources of “soft power.” In reaching that conclusion, the Court observed the “open question” of whether the private equity entity defendants—who did not own stock in the company—could be a part of a control group under Delaware law. After examining relevant authority and “considering evolving market realities and corporate structures affording effective control,” the Court determined that “Delaware law may countenance extending controller status and fiduciary duties to a nonstockholder that holds and exercises soft power that displaces the will of the board with respect to a particular decision or transaction.”
Regarding bad faith in the context of Revlon enhanced scrutiny, while the special committee hired an independent financial advisor, implemented protocols to manage fiduciary conflicts, and actively engaged in discussions with potential bidders, it was reasonably conceivable from the plaintiff’s allegations that the committee’s work was tainted by conflicts, which the committee failed to oversee, and that the defendants placed third party interests over the stockholders’ interests in the sale process, eventually choosing an admittedly inferior bid. Further, allegations that the committee delegated responsibility for the deal proxy to conflicted management, failed to review the proxy before filing, and failed to correct misstatements thereafter in supplemental disclosures also supported a bad faith claim.
Finally, regarding Corwin, the Court declined to include in the requisite 50% vote computation the shares of a preferred stockholder that was contractually obligated to approve the merger in advance. Among other issues, that stockholder’s vote could not be considered voluntary.Share