Michael Cohn v. SunCoke Energy Partners LP ( 2021 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 20-3069
_____________
MICHAEL COHN, Individually and on behalf of All Others Similarly Situated,
Appellant
v.
SUNCOKE ENERGY PARTNERS, L.P.; SUNCOKE ENERGY, INC.;
MICHAEL G. RIPPEY; ALVIN BLEDSOE; P. MICHAEL HARDESTY; JOHN W.
SOMERHALDER, II; FAY WEST; KATHERINE T. GATES; MARTHA CARNES;
JOHN W. ROWE; PETER B. HAMILTON; JAMES E. SWEETNAM; SUSAN R.
LANDAHL; ROBERT A. PEISER; SUNCOKE ENERGY PARTNERS GP LLC
____________
On Appeal from the United States District Court
for the District of Delaware
(D.C. No. 1:19-cv-00693)
District Judge: Honorable Colm F. Connolly
____________
Submitted Under Third Circuit L.A.R. 34.1(a)
May 24, 2021
Before: GREENAWAY, JR., SHWARTZ, Circuit Judges,
and KANE,* District Judge
(Filed: August 31, 2021)
_____________
OPINION**
_____________
*
Honorable Yvette Kane, District Judge, United States District Court for the
Middle District of Pennsylvania, sitting by designation.
**
This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does
not constitute binding precedent.
GREENAWAY, JR., Circuit Judge.
Securities transactions are highly regulated. Mergers require particular attention
so as to maintain public confidence. Allegations of impropriety must be assessed and
addressed. This securities class action lawsuit arises out of a stock-for-unit merger
transaction wherein SunCoke Energy, Inc. acquired all outstanding units of the target
entity, SunCoke Energy Partners, L.P. Public unitholders of the target entity challenged
the transaction, asserting that the organizational mechanism designed to protect against
conflicts of interest was fatally ineffective in this instance, rendering the merger
illegitimate. The District Court granted the Defendants’ motion to dismiss. We will
affirm.
I. Background
Michael Cohn was a unitholder of SunCoke Energy Partners, L.P. (“SXCP”). In
2019, SXCP was acquired by SunCoke Energy, Inc. (“SunCoke” or “SXC”). Prior to the
merger, SXCP traded independently of SunCoke on the New York Stock Exchange. The
merger involved SXCP’s sole General Partner, SunCoke Energy Partners, G.P. LLC
(“SXCP GP”), which was 100% owned by SunCoke through SunCoke’s wholly owned
subsidiary Sun Coal & Coke LLC (“SC&C”). SC&C was SXCP’s Organizational
Limited Partner. SC&C was also the record-holder and beneficial owner of 61.7% of
SXCP’s outstanding common units, which it had the right to vote.
2
SXCP was governed by a Limited Partnership Agreement (the “LPA”), to which
SXCP, SXCP GP, and SC&C were all signatories. The LPA included the following
provision at Section 7.9(c):
Whenever a potential conflict of interest exists or arises between the General
Partner or any Affiliates, on the one hand, and the Partnership, any Group
Member or any Partner, any other Person who acquires an interest in a
Partnership Interest or any other Person who is bound by this Agreement on
the other hand, the General Partner may in its discretion submit any
resolution or course of action with respect to such conflict of interest for
(i) Special Approval or (ii) approval by the vote of a majority of the Common
Units (excluding Common Units owned by the General Partner and its
Affiliates). If such course of action or resolution receives Special Approval
or approval of a majority of the Common Units (excluding Common Units
owned by the General Partner and its Affiliates), then such course of action
or resolution shall be conclusively deemed approved by the Partnership, all
the Partners, each Person who acquires an interest in a Partnership Interest
and each other Person who is bound by this Agreement, and shall not
constitute a breach of this Agreement, of any Group Member Agreement, of
any agreement contemplated herein or therein, or of any fiduciary or other
duty existing at law, in equity or otherwise or obligation of any type
whatsoever.
J.A. 296–97.1
The LPA defines “Special Approval” as “approval by a majority of the members
of the Conflicts Committee,” J.A. 250, which is in turn defined as a committee of the
Board of Directors comprising at least two independent directors, none of whom is an
officer or employee of SXCP GP or its affiliates or holds any ownership interest therein.
Pursuant to a merger agreement announced February 5, 2019, SunCoke acquired
all outstanding common units of SXCP not already owned by SunCoke in a stock-for-unit
transaction. The merger was approved by SXCP’s Board of Directors and a majority of
1
The parties refer to this language as the LPA’s “safe harbor provision.”
3
the members of the Conflicts Committee, as well as holders of a majority of the
outstanding SunCoke common shares and SXCP common units. Through SC&C,
SunCoke alone indirectly owned a sufficient percentage of the SXCP common units to
approve the transaction on behalf of SXCP common unitholders.
Several SXCP unitholders challenged the merger, and those suits were
consolidated in this action. The operative Consolidated Class Action Complaint (the
“Complaint”) alleges violations of Sections 14(a) and 20(a) of the Securities Exchange
Act of 1934 and rules promulgated thereunder, as well as violations of Delaware state
law.
The District Court granted the Defendants’ motion to dismiss, finding that the
Exchange Act claims necessarily failed because the Plaintiff did not plead transaction
causation, and the state law claims necessarily failed because the Defendants’ compliance
with Section 7.9(c)’s safe harbor provision insulated them from suit. In re SunCoke
Energy Partners, L.P., No. 19-CV-693-CFC, 2020 WL 5411286, at *3–4 (D. Del. Sept.
9, 2020).
Cohn timely appealed. D.C. Dkt. No. 63. Our review of the District Court’s
decision granting the motion to dismiss is plenary. Fowler v. UPMC Shadyside, 578 F.3d
203, 206 (3d Cir. 2009).
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II. Discussion2
A. Exchange Act Claims
1. Section 14(a)
Counts I and II of the Complaint allege violations of § 14(a) of the Exchange Act,
15 U.S.C. § 78n(a), and two rules and regulations promulgated thereunder: 17 C.F.R.
§ 244.100 and Rule 14a-9, respectively. Section 14(a) provides that it shall be unlawful
“to solicit any proxy or consent or authorization in respect of any security” in
contravention of the rules and regulations promulgated by the Securities and Exchange
Commission. 15 U.S.C. § 78n(a).
To prevail on a § 14(a) claim, a plaintiff must show “a causal relationship between
the violation and the injury for which he seeks redress,” which requires proof that “the
proxy solicitation itself, rather than the particular defect in the solicitation materials, was
an essential link in the accomplishment of the transaction.” Mills v. Elec. Auto-Lite Co.,
396 U.S. 375, 385 (1970). In other words, the solicitation must form the causal link
between “a directors’ proposal [and] the votes legally required to authorize the action
proposed.” Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1102 (1991). The
Complaint here fails to establish the requisite nexus.
In Scattergood v. Perelman, this Court relied on Virginia Bankshares in holding
that transaction causation could not be proven where the defendant “had the legal power
to effectuate [the challenged] freeze-out merger,” despite plaintiffs’ argument that the
2
The District Court had jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1367 and 15
U.S.C. § 78aa. We have jurisdiction pursuant to 28 U.S.C. § 1291.
5
defendant “would not have been willing to exercise that power” but for “its misleading
proxy statement.” 945 F.2d 618, 626 (3d Cir. 1991).
Appellant argues that the transaction causation requirement is satisfied here—even
though SunCoke controlled a majority of the outstanding units—because the Conflicts
Committee’s approval was required to authorize the merger, and the Conflicts Committee
acted on behalf of the minority unitholders.
However, the plain text of the LPA reveals that the Conflicts Committee’s
approval was not required to authorize the merger. In fact, consummation of the merger
was governed by a separate portion of the LPA. Article XIV is titled “Merger or
Consolidation”; Section 14.2 governs the “procedure for merger or consolidation,” and
provides that a merger requires the prior consent of SXCP GP. J.A. 319 (capitalization
omitted). Section 14.3(b), which governs “approval by limited partners,” reads:
Except as provided in Sections 14.3(d) and 14.3(e), the Merger Agreement
shall be approved upon receiving the affirmative vote or consent of the
holders of a Unit Majority unless the Merger Agreement contains any
provision that, if contained in an amendment to this Agreement, the
provisions of this Agreement or the Delaware Act would require for its
approval the vote or consent of a greater percentage of the Outstanding Units
or of any class of Limited Partners, in which case such greater percentage
vote or consent shall be required for approval of the Merger Agreement.
J.A. 321 (emphasis added; capitalization omitted).
The Amended Form S-4 Registration Statement, which forms the basis of
Appellant’s Exchange Act claims, in fact undermines those claims. It explained that
consummation of the merger by SXCP “requires the affirmative vote or consent of
holders of at least a majority of the outstanding SXCP Common Units”; that SC&C’s
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delivery of written consent to the merger would “be sufficient to approve the Merger
Agreement and the transactions contemplated thereby, including the Merger, on
behalf of SXCP”; and that SC&C had pledged to deliver its written consent in a Support
Agreement executed concurrently with the Merger Agreement. J.A. 18 (emphasis in
original); see also J.A. 33, 57, 62 (reiterating that SC&C’s written consent would be
sufficient to approve the merger on behalf of SXCP).3
As the District Court correctly found, Section 7.9(c) is merely an elective safe
harbor provision4 that, when utilized, provides a shield against liability for breach of
contract, fiduciary duty, or other duty or obligation. Its own terms make clear that it is
not a prerequisite to the consummation of a merger, and this conclusion is bolstered by
the absence of any reference to the Special Approval process in Article XIV.
It may be that Appellees would have opted not to finalize the merger absent
Special Approval in light of the potential exposure to legal liability. However, this
hypothetical has no more traction here than its analog did in Scattergood, where we
applied “Virginia Bankshares’ bar on nonvoting causation theories” to find that the
defendant’s “legal power to effectuate a freeze-out merger” precluded a showing of
transaction causation. 945 F.2d at 625–26. The critical fact is that SunCoke, through
SC&C, controlled a majority of the outstanding common units, and therefore had “the
3
The Complaint acknowledges that the Support Agreement “purport[ed] to make
the Merger a fait accompli.” J.A. 349.
4
Section 7.9(c) provides that where a potential conflict of interest arises, “the
General Partner may in its discretion submit any resolution or course of action with
respect to such conflict of interest for . . . special approval.” J.A. 297 (emphasis added).
7
votes legally required to authorize the action proposed.” Virginia Bankshares, 501 U.S.
at 1102.
The District Court correctly held that Appellant failed to plead transaction
causation here because the minority unitholders’ “votes were not needed to authorize the
merger.” In re SunCoke Energy Partners, L.P., 2020 WL 5411286, at *2.
2. Section 20(a)
Count III of the Complaint alleges violations of § 20(a) of the Exchange Act,
which provides for liability of controlling persons who aid and abet violations of the
Exchange Act. 15 U.S.C. § 78t(a). A violation of the Exchange Act is a predicate for
derivative liability under § 20(a), so Appellant’s failure to plead any such violation is
fatal to this claim. See City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159, 177 (3d
Cir. 2014); see also Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 252 (3d Cir.
2009).
B. State Law Claims
Counts IV and V of the Complaint allege that the SXCP GP’s Board members
breached their duty of good faith and fair dealing and their fiduciary duty. Counts VI and
VII allege that SXCP GP and its Board members are liable for breach of contract.
Finally, Count VIII of the Complaint alleges that SunCoke and its Board members are
liable for aiding and abetting breach of contract.
The District Court found that these claims were barred because the Special
Approval process entitled the Defendants “to the protection of the partnership
8
agreement’s safe harbor provision.” In re SunCoke Energy Partners, L.P., 2020 WL
5411286, at *4. We agree.
Appellant argues that Section 7.9(c) does not shield Appellees from suit because
the Conflicts Committee failed to comply with its requirements, rendering the Special
Approval process defective. He reasons that the Conflicts Committee’s alleged failure to
“act in the best interests of its principals ([i.e.,] the minority unitholders)” makes the
grant of Special Approval inadequate to satisfy Section 7.9(c)’s requirements. Appellant
Br. 22. This argument is based on the allegations that “the Conflicts Committee
(1) constrained itself by only using prospective financial information prepared by a
conflicted counterparty, (2) relied on a fairness opinion by a conflicted banker[,] and
(3) foreclosed itself from the ability to evaluate new information.” Id.Appellant submits that these allegations establish that the Conflicts Committee
breached its duty of good faith pursuant to Section 7.9(a) of the LPA, which governs the
Conflicts Committee’s conduct. That Section provides in relevant part:
Whenever the General Partner, the Board of Directors, or any committee of
the Board of Directors (including the Conflicts Committee), makes a
determination or takes or declines to take any other action, or any Affiliates
of the General Partner cause the General Partner to do so, in its capacity as
the general partner of the Partnership as opposed to in its individual capacity,
whether under this Agreement, any Group Member Agreement, or any other
agreement contemplated hereby or otherwise, then, unless another express
standard is provided for in this Agreement, the General Partner, the Board of
Directors, such committee or such Affiliates causing the General Partner to
do so, shall make such determination or take or decline to take such other
action in good faith and shall not be subject to any higher standard
contemplated hereby or under the Delaware Act or any other law, rule or
regulation or at equity. A determination, other action or failure to act by the
General Partner, the Board of Directors of the General Partner or any
committee thereof (including the Conflicts Committee) will be deemed to be
9
in good faith unless the General Partner, the Board of Directors of the
General Partner or any committee thereof including the Conflicts
Committee) believed such determination, other action or failure to act was
adverse to the interests of the partnership.
J.A. 296 (emphasis added). In a proceeding such as this one, the plaintiff bears “the
burden of proving that such determination, action or failure to act was not in good faith.”
Id.Appellant does not contest that the LPA validly disclaims default fiduciary duties
pursuant to Delaware law. See Brinckerhoff v. Enbridge Energy Co., Inc., 159 A.3d 242,
252 (Del. 2017), as revised (Mar. 28, 2017) (noting that Delaware law allows parties to
disclaim virtually all duties, with notable exception that an LPA drafter may not
“disclaim the implied covenant of good faith and fair dealing”).
The power to disclaim contains the freedom to modify. As Delaware’s Court of
Chancery has recognized, “the use of the unmodified verb ‘believe’ in the definition of
‘good faith’ . . . means that the good faith standard in the LP Agreement is subjective and
not objective.” Dieckman v. Regency GP LP, No. 11130-CB, 2021 WL 537325, at *17
(Del. Ch. Feb. 15, 2021) (“Dieckman II”) (citing Allen v. Encore Energy Partners, L.P.,
72 A.3d 93, 101, 104 (Del. 2013)). Here, Section 7.9(a) of the LPA adopts a subjective
standard, so Appellees have satisfied their duty of good faith if they subjectively believed
their conduct was in the best interests of the partnership. Id. at *17 n.222.
The allegations in this case do not establish that Appellees breached this duty.
The facts here are distinguishable from Dieckman v. Regency GP LP, where the
Delaware Supreme Court found that the special approval process did not afford the
10
defendants a safe harbor because the plaintiff pled that the conflicts committee was itself
conflicted, and the defendants had used deceptive means to disguise that conflict. 155
A.3d 358, 361–62, 369 (Del. 2017) (“Dieckman I”). We agree with the District Court
that, in contrast to Dieckman I, none of the allegations here “amount[s] to misleading or
deceptive conduct or call[s] into question the independence of the Conflicts Committee.”
In re SunCoke Energy Partners, L.P., 2020 WL 5411286, at *4; see also id. at *3
(“Reliance on incomplete and flawed information . . . does not constitute bad faith.”).
Because the express contractual requirements for Special Approval were satisfied,
Appellees will be shielded from suit absent a breach of the implied covenant of good
faith and fair dealing. As the Delaware Supreme Court has explained, the implied
covenant inheres in every contract and “is used to infer contract terms ‘to handle
developments or contractual gaps that the asserting party pleads neither party anticipated
[at the time of contracting].’”5 Dieckman I, 155 A.3d at 367 (quoting Nemec v. Shrader,
991 A.2d 1120, 1125 (Del. 2010)). It is a mechanism “to vindicate the apparent
intentions and reasonable expectations of the parties” and to protect the party asserting
the covenant from arbitrary or unreasonable conduct on the part of the counterparty. Id.Delaware’s Supreme Court has cautioned that the implied covenant “is not an
equitable remedy for rebalancing economic interests after events that could have been
5
In Dieckman I, the court reaffirmed that the implied covenant may be employed to
give force to terms too “obvious and provocative” for inclusion in a contract, such as:
“the General Partner will not mislead unitholders when seeking Unaffiliated Unitholder
Approval” and “the General Partner will not subvert the Special Approval process by
appointing conflicted members to the Conflicts Committee.” 155 A.3d at 368.
11
anticipated, but were not, that later adversely affected one party to a contract.” Nemec,
991 A.3d at 1128. To the contrary, it is a “limited and extraordinary legal remedy.” Id.
Further, “the implied covenant does not apply when the contract addresses the conduct at
issue, but only when the contract is truly silent concerning the matter at hand.” Oxbow
Carbon & Mins. Holdings, Inc. v. Crestview-Oxbow Acquisition, LCC, 202 A.3d 482,
507 (Del. 2019) (internal quotation marks and footnote omitted). These restraints on
applying the implied covenant have special force where “the parties are sophisticated
business persons or entities,” as is the case here. Id. at 508.
Here, Appellant fails to identify any contractual term that is absent from the LPA,
could not have been anticipated when the LPA was negotiated, and is necessary to protect
the reasonably expected fruits of the bargain. See Dieckman I, 155 A.3d at 367.
Consequently, no violation of the implied covenant of good faith and fair dealing has
been pleaded, and Appellees are entitled to the full protections of the LPA’s safe harbor
provision. Appellant’s remaining state law claims therefore fail.
III. Conclusion
For the foregoing reasons, we will affirm.
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