Former shareholders in Riverstone National challenged a merger that extinguished a potential derivative claim against a majority of directors. Although the parties briefed the question of whether the shareholders lacked standing post-merger, the Delaware Chancery Court characterized the complaint as a standard, direct merger challenge. The plaintiffs' allegations that the directors were interested in the merger transaction sufficed to rebut the business judgment and withstand the defendants' motion to dismiss (In re Riverstone National, Inc. Stockholder Litigation, July 28, 2016, Glasscock, S.).
Acquirer waived claim. The merger allegedly foreclosed a threatened lawsuit for usurpation of corporate opportunity by a majority of the Riverstone board. The merger agreement waived the acquirer's right to pursue a usurpation claim. Therefore, according to the plaintiffs, the corporate asset was unaccounted for in the merger consideration, rendering that consideration unfair. The stockholder directors received the same benefit as other stockholders, but they also received a benefit that wasn't shared—the elimination of potential liability for the usurpation.
Direct challenge. The parties extensively briefed the esoteric issue of whether the plaintiffs had standing to sue under Primedia, a chancery court case considering whether litigation challenging a merger represented a direct claim of unfairness, rather than an improper attempt to pursue the derivative claim extinguished by the merger. To the court, though, this avenue was unnecessary; the matter involved a "garden variety allegation of director interest, in direct challenge to the merger as unfair."
Entire fairness review applied. The complaint adequately alleged that a majority of directors received a material benefit not shared by common shareholders. This claim was a direct attack on the merger's fairness, which the ex-shareholder plaintiffs had standing to make. Furthermore, the plaintiffs rebutted the business judgment rule by demonstrating that this majority was interested in the transaction. Finally, it was reasonably conceivable that the merger was not entirely fair because the consideration did not include value for the foregone usurpation claim. The court put the value of this claim at about 5 or 10 percent of the gross or net merger consideration, respectively, which was material.
The court would typically be wary of a conclusory allegation that directors were interested by virtue of orchestrating a merger that extinguished a possible derivative action. However, the plaintiffs pleaded particularized facts with respect to individual directors showing their interest in the transaction. Specifically, a majority of directors was interested because there was a pre-merger chose-in-action for usurpation of corporate opportunity; a derivative claim for usurpation would have withstood a motion to dismiss; the threat of action was known to the board; the implied liability was material to the directors threatened by it; and the merger agreement eliminated the threatened suit.
Classification-related claim dismissed. The defendants' motion to dismiss did succeed as to a challenge to the classification of contributions made by the acquirer prior to the merger. The plaintiffs failed to articulate how the classification eroded the fairness of the merger. The complaint also lacked a plausible explanation of the harm suffered by minority stockholders as a result of the alleged misclassification.
The case is No. 9796-VCG.
Attorneys: S. Mark Hurd (Morris, Nichols, Arsht & Tunnell LLP) for Michael C. Halpin. Kevin R. Shannon (Potter Anderson & Corroon LLP) for Nicholas C. Gould. Blake Rohrbacher (Richards, Layton & Finger, P.A.) for Riverstone National, Inc.
Companies: Riverstone National, Inc.
MainStory: TopStory DirectorsOfficers MergersAcquisitions DelawareNews
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