MICHAEL C. HALPIN v. RIVERSTONE NATIONAL, INC. ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MICHAEL C. HALPIN and MICHAEL A.
CHRISTIAN,
Petitioners,
V.
RIVERSTONE NATIONAL, INC. a Delaware
corporation,
Respondent.
CA. No. 9796—VCG
RIVERSTONE NATIONAL, INC,
Counteroiairn Plaintiff/Third-Party Plaintiff,
V.
MICHAEL C. HALPIN and MICHAEL A.
CHRISTIAN,
Counterclairn Defendants,
— and —
WALTER SMITH, STEPHEN DAVIS, and PAL H.
OTTESEN,
vvvvvvvvvvvvvvvvvvvvvvvvvvvvvv
Third-Party Defendants.
MEMORANDUM OPINION
Date Submitted: November 5, 2014
Date Decided: February 26, 2015
S. Mark Hurd and Christopher P. Quinn, of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Danny David and Amy
Pharr Hefley, of BAKER BOTTS LLP, Houston, Texas; Attorneys for
PetitionerS/Counierclaim~DefendaniS Michael C. Halpin and Michael A. Christian.
Blake Rohrbacher and Andrew J. Peach, of RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; OF COUNSEL: Harry H. Schneider, of PERKINS
COIE LLP, Seattle, Washington; Attorneys for Respondent and Counterclaim
PlainiiWThird—Party PlainiiflRiverstone National, Inc.
Samuel T. Hirzel, II and Dawn Kurtz Crompton, of PROCTOR HEYMAN LLP,
Wilmington, Delaware; Attorneys for Third-Party Defendants Walter Smith,
Stephen Davis, and P631 H. Otiesen.
GLASSCOCK, Vice Chancellor
counterclaims to add the same specific performance claim against third parties
Smith, Davis, and Ottesen. The Minority Stockholders brought Motions to
Dismiss the amended counterclaims and third-party claims pursuant to Court of
Chancery Rule 12(13)(6),15 and Riverstone responded by filing a Motion for
Summary Judgment. I heard oral argument on these motions together on
November 5, 2014. At that time, the parties agreed that the matter had been fully
submitted and should be treated as on cross—motions for summary judgment on a
stipulated record. 36
1]. STANDARD OF REVIEW
A motion for summary judgment pursuant to Court of Chancery Rule 56(b)
will be granted only where the record reflects that there is no genuine issue as to
any material fact and that the moving party is entitled to judgment as a matter of
law.E7 Where the parties have submitted cross~moti0ns for summary judgment on
15 The Third—Party Defendants originally sought dismissal under Court of Chancery Rules
12(b)(2), (3), and (5), but they later amended their Motion to Dismiss to drop these defenses.
See Third—Party Defs.’ Am. Mot. to Dismiss the Third—Party Compl, at 2.
16 See Oral Arg. Tr. 29:6—30220. By citing and arguing material outside the Amended
Counterciaims and Third—Party Complaint, the Minority Stockholders have converted their
Motions to Dismiss into Motions tbr Summary Judgment. See, e.g., In re General Motors
(Hughes) S ’holder Ling, 897 A.2d 162, 168 (Del. 2006) (“When the trial court considers matters
outside of the complaint, a motion to dismiss is usually converted into a motion for summary
judgment and the parties are permitted to expand the record”); Ct. Ch. R. 12(b). Additional time
to expand the record is not necessary, as the parties have stipulated that the record before me is
complete. See Oral Arg. Tr. 29:6m30:20.
l7 E.g., QC Comma ’ns Inc. v. Quartarone, 2014 WL 3974525, at *8 (Del. Ch. Aug. 15, 2014).
9
a stipulated record, as the parties have done here, I may treat the matter as
submitted for a decision on the merits.18
iII. ANALYSIS
Riverstone’s Amended Counterclaims and Third-Party Complaint seek
specific performance of the Minority Stockholders’ obligations under the Drag—
Along. Specifically, Riverstone asks the Court to order the Minority Stockholders
to execute the Written Consent and accept the Merger consideration, thereby
waiving the Minority Stockholders” rights to appraisal.
Specific performance is “an equitable remedy designed to protect a party’s
expectations under a contract by compelling the other party to perform its agreed
upon obligation.”19 A party seeking specific performance must establish that (l) a
valid contract exists entitling her to the performance sought, (2) she is ready,
willing, and able to perform under the contract, and (3) the balance of equities tips
in her favor.20 This Court views specific performance as an extraordinary remedy,
not to be awarded lightly,21 and thus a party seeking specific performance must
prove by clear and convincing evidence that she is entitled to specific performance
18 E. g, id.
1" Eg, West Willow-Bay Court, LLC v. Robina-Bay Court Plaza LLC, 2007 WL 3317551, at *12
(Del. Ch. Nov. 2, 2007).
20 Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1158 (Del. 2010).
2‘ id; West Willow-Bay Court, LLC, 2007 WL 3317551, at *12.
10
and that she has no adequate remedy at law.22 Because I find that Riverstone has
failed to show that the Drag-Along requires the Minority Stockholders to execute
the Written Consent and accept the Merger consideration, I deny Riverstone’s
request for specific performance.
A. T he Parties" Contentions
The Minority Stockholders advance several theories as to why the Drag—
Along fails to prescribe the performance sought by Riverstone.
1. Waiver of Appraisal
First, The Minority Stockholders argue that a common stockholder cannot
waive its statutory right to appraisal ex ante——here, in a stockholders agreement in
return for consideration that is to be set later by the controlling stockholder.
Riverstone disagrees, citing a line of Delaware cases permitting preferred
stockhoiders to contract out of their appraisal rights.23 In any event, Riverstone
argues, this Court need not reach this question of law, because the Minority
Stockholders did not expressly waive their rights to seek appraisal; rather, they
merely “agree[d] to take actions that result in the loss oftheir appraisal rights.”24
22 Osborn, 991 A.2d at 1158; see also In re 1131), Inc. S’holders Litig, 789 A.2.d 14, 52 (Der. Ch.
2001) (“Delaware law . . . requires that a plaintiff demonstrate its entitlement to specific
performance by clear and convincing evidence”).
23 See Riverstone National, Inc’s Br. in Supp. of Its Mot. for Summ. J. and Answering Br. in
Opp’n to Mots. to Dismiss, at 7w8 (citing In re Appraisal ofFord Holdings, Inc. Preferred
Stock, 698 A.2d 973 (Del. Ch. 1997);1n re Appraisal Metromedia Int’l Grp., Inc, 971 A.2d 893(Del. Ch. 2009)).
24 Riverstonc National, Inc’s Reply Br. in Further Supp. of Its Mot. for Summ. J. at 6—7.
ll
2. Prospective vs. Retrospective Drag~Along
Second, the Minority Stockholders argue that, even if such a waiver is
enforceable, Riverstone’s effort to invoke the Drag-Along here was ineffective.
Specifically, the Minority Stockholders argue that the Drag-Along could only be
employed against the Minority Stockholders in transactions that had not yet been
consummated, according to both the plain, prospective language of the contract
and the operation of Delaware law. Both the Participation Right and the Voting
Right state that Riverstone may invoke the rights when it “proposes” to enter into a
Change-in-Control Transaction, and both set forth a requirement that Riverstone
provide the Minority Stockholders notice in advance of the forced tender or vote.25
The Minority Stockholders contend that this language establishes a prospective—
26 A prospective scheme makes sense, and is
not retrospective—scheme of rights.
in fact the only scenario in which these rights could be enforced, the Minority
Stockholders argue, in light of the principle of Delaware law that once a merger
becomes effective the shares of the acquired corporation are cancelled, having been
legally converted into the right to receive cash or seek appraisal.27 There being no
actual shares left to vote or tender, the Minority Stockholders conclude that
25 Am. Countercls. and Third-Party Compl. Ex. A (Stockholders Agreement), at 2—3.
2“ See Oral Arg. Tr. 11:23m12:13.
27 Pet’rs’/Countercl.—Deis.’ Opening Br. in Supp. of Their Mot. to Dismiss the Am. Countercls.,
at 879 (citing Crown Books Corp. v. Bookstop, Inc, 1990 WL 26166, at *4 (Del. Ch. Feb. 28,
1990); Shields v. Shields, 498 A.2d 161, 168 (Del. Ch. 1985)).
12
Riverstone’s attempt to exercise the Drag-Along a week after the Merger closed
was ineffective.28
Riverstone counters that the Merger did not have the effect of neutralizing
the Drag-Along. Riverstone distinguishes the cases relied upon by the Minority
Stockholders for the principle that a merger cancels the underlying shares, arguing
that this Merger had no such effect.29 Even if it would have had such an effect,
Riverstone argues, the parties nevertheless contracted around this result by stating
in the Stockholders Agreement that, if the shares are converted into another form
of property through a merger, “this Agreement shall inure to the benefit of the
Company’s successor, and this Agreement shall apply to the securities or other
property received upon such conversion . . . in the same manner and to the same
extent as the Shares.”30 In the Company’s opinion, this language “provides that the
[Minority] Stockholders can be required to comply with their drag-along
obligations, even after the Merger.”31
2“ See mt; Oral Arg. Tr. 1235—13116.
29 See Riverstone National, Inc’s Br. in Supp. of Its Mot. for Surnm. J. and Answering Br. in
Opp’n to Mots. to Dismiss, at 15—16 (distinguishing Shields v. Shields, 498 A.2d 161 (Del. Ch.
1985), on grounds that, unlike in Shields, here “the Merger was not a stock-for—stock merger, and
Riverstone is the surviving corporation”).
30 Am. Countercls. and Third—Party Compl. Ex. A (Stockholders Agreement), at 5.
3] Riverstone National, Inc’s Br. in Supp. of Its Mot. for Summ. J. and Answering Br. in Opp’n
to Mots. to Dismiss, at 18.
13
3. Adequate Notice
Third, the Minority Stockholders argue that, even if the Drag—Along can be
invoked post-merger, Riverstone faiied to do so by not abiding by the provision’s
notice requirement. As mentioned above, both the Participation Right and the
Voting Right require Riverstone to notify the Minority Stockholders before the
right can take effect: the Participation Right requires notice “at least ten days in
advance of the date of the transaction or the date that tender is required,” while the
Voting Right requires notice “within the time prescribed by law and the
Company’s Certificate of incorporation and By~Laws for giving notice of a
meeting of shareholders called for the purpose of approving such transaction.”32
Noting that the different notice periods may have practical implications here,
the parties dispute which of the rights under the Drag—Along Riverstone triggered
through the Information Statement. If Riverstone invoked the Participation Right,
3
which it maintains it did by exercising the entire Drag-Along} it arguably
complied with the requisite ten—«day gap (or, could cure any fault by simply
32 Am. Countercls. and Third—Party Compl. Ex. A (Stockholders Agreement), at 2—3.
33 See Riverstone National, Inc’s Br. in Supp. of Its Mot. for Summ. J. and Answering Br. in
Opp’n to Mots. to Dismiss, at 23 (“[The information Statement] did not state that only the
voting—rights portion of the drag~aiong right were [sic] being exercised. 1t referred generally to
the “‘drag—aiong right” provided for in Section 3 of the Stockholders Agreement,’ which includes
both the requirement that the Stockholders vote for the Merger and the requirement that the
Stockholders tender their shares into the Merger. . . . if Riverstone were oniy seeking to exercise
the votingurights portion of the drag—along right, it would not have used the word ‘and.’ The
word ‘and’ would be meaningless if the first half of the paragraph meant the exact same thing as
the second half”).
14
extending the requested tender date).34 However, the Minority Stockholders
contend that Riverstone only attempted. to invoke the Voting Right, as evidenced
by the language in the Information Statement that “Riverstone has exercised the
‘drag—along right” provided for in Section 3 of the Stockholders Agreement . . . and
specifically is requiring you to vote to approve the adoption of the Merger
Agreement by executing and delivering the Written Consent,”35 and further by the
language of the sole resolution in the attached Written Consent, indicative of a
voting requirement, that “the Merger Agreement be, and it hereby is, adopted,
approved and ratified in all respects.”36 Since the Voting Right required notice
before the vote on the Merger,” but Riverstone’s controlling stockholder approved
the Merger by written consent pursuant to Section 228, the Minority Stockholders
conclude that Riverstone did not (and no longer can) literally comply with the
requirements to exercise the Voting Right.
34 See Am. Countercls. and Third—Party Comp]. Ex. B (Information Statement), at l (requiring, in
a letter dated June 9, 2014, that the Minority Stockholders execute and deliver the consent
“within 10 days after the date of this docurnent”); Oral Arg. Tr. 46:19—m23 (“So because we
exercised a participation right, we did so exactiy and literally within the period of time provided,
which was ten days in advance of the time tender was required. Tender was asked for by June
19th. We sent [the Information Statement] on June 9th.”).
35 Am. Countercls. and Third—Party Compl. Ex. B (Information Statement), at 1 (emphasis
added).
3" 1d. at 3.
37 Specifically, the Minority Stockholders contend that the Merger was carried out pursuant to 8
Del. C. § 251, and thus requires notice to stockholders 20 days in advance of the stockholders
meeting called for the purpose of approving the Merger. See 8 Del. C. § 251(c).
15
In addition to arguing that it exercised the Participation Rightmand thus
satisfied the literal language of the Participation Right’s ten~day notice provision~—
Riverstone argues that its substantial compliance with the Voting Right’s notice
provision is sufficient to activate the Voting Right. Riverstone points to Delaware
case law that permits substantial compliance with a contract provision where literal
compliance is impossible and substantial compliance “provides the important and
a: 38
essential benefits of the contract The Company reasons that “[b]ecause literal
compliance with [the Voting Right] portion of the notice provision would have
been impossible—since no meeting was ever held—Delaware law allows
substantial compliance [in this situation].”39 Considering the Merger was approved
by written consent in lieu of a stockholders meeting, Riverstone suggests that the
“prompt notice” requirement found in Section 228(e)40 is as an appropriate gauge
of substantial compliance under the circumstances, and concludes that it satisfied
that requirement by notifying the Minority Stockholders of their obligation under
the Drag—Along promptly following the Merger.4i
38 Riverstone Nationai, Inc’s Br. in Supp. of Its Mot. for Summ. J. and Answering Br. in Opp’n
to Mots. to Dismiss, at 18w19 (quoting Gildor v. Optical Solutions, Inc, 2006 WL 4782348, at
*7 (Del. Ch. June 5, 2006)).
39 1d. at 21.
40 See 8 Del. C. § 228(e) (“Prompt notice of the taking of the corporate action without a meeting
by less than unanimous consent shall be given to those stockholders or members who have not
consented in writing . . . .”).
4' See Riverstoue National, Inc’s Br. in Supp. of Its Mot. for Summ. J. and Answering Br. in
Opp’n to Mots. to Dismiss, at 21.
16
4. Qualifying Transaction
Fourth, the Minority Stockholders argue that, even if Riverstone successfully
invoked the Participation Right, that right is nevertheless inapplicable to this
specific transaction. The Participation Right embedded in the Drag-Along is
qualified by the condition that the Minority Stockholders must tender their shares
only in transactions where they are offered the same price, terms, and conditions as
the approving majority stockholders.42 The Minority Stockholders argue that the
Merger does not fit this description, because in connection with the Merger, CAS
negotiated a benefit for itself that did not accrue to the Minority Stockholders:
“Greystar and its direct and. indirect subsidiaries (including Riverstone, as the
surviving entity of the Merger) agreed to release any and all claims (including
derivative claims) against CAS, its affiliates and each of its and their past, present,
and future directors, officers, shareholders and representatives,” including two of
the directors of Riverstone who are the principal stockholders of CAS’s corporate
parent.43 Considering CAS’s self—interest in obtaining this release, particularly in
light of Halpin and Christian’s then-pending investigation into Riverstone’s board
for potential breaches of fiduciary duty, the Minority Stockholders contend that the
42 Am. Countercls. and Thiranarty Compl. Ex. A (Stockholders Agreement), at 3.
43 Pct’rs’fCountercl.-Defs.’ Reply Br. in Further Supp. of Their Mot. to Dismiss the Am.
Countercis. and Answering Br. in Opp’n to Resp’t’s Mot. for Summ. 3. Ex. 1 (information about
the merger suppiied as Annex C to Information Statement), at 7', see also Oral Arg. Tr. 21:14“
22:6.
17
Merger does not qualify under the Participation Right as a transaction offering the
same terms to the Minority Stockholders.
Riverstone rejects the notion that the release of derivative claims against
individuals associated with CAS constitutes disparity between the terms offered
CAS and the Minority Stockholders, especially here, where all that exists are
undeveloped allegations of wrongdoing.‘114 If such a release constituted unequal
terms, Riverstone argues, “no drag-along right [with an ‘equal-terms’ provision] in
any corporate context could hold,” as presumably any disgruntled stockholder
bound by a drag—along could break the provision’s grip by making allegations of
5 Furthermore, Riverstone points out that even if the
breach of fiduciary duty.4
Minority Stockholders’ fiduciary duty claim was ripe, Delaware law provides
stockholders with avenues to attack a merger if the merger was pursued to
extinguish a derivative claim, which the Minority Stockholders are free to, but
have yet failed to, pursue.46
5. Implied Covenant
Finally, as a means to supplement its arguments against any technical
deficiencies in exercising the Drag-Along, Riverstone argues that the Minority
Stockhoiders must consent to the Merger because of the implied covenant of good
4“ See Oral Arg. Tr. 35:1 1n36zi3, 392141 :6.
45 See id. at 39:21—40:43.
4" See id. at 36:13—20.
18
The right to statutory appraisal is the right to have this Court determine the
fair value of shares of corporate stock subject to conversion, without the
stockholder’s consent, into other property by merger. A stockholder in such a
situation may opt to forgo the consideration offered in the merger, in favor of fair
value as it is determined in an appraisal action in this Court. The rights of holders
of preferred stock are largely contractual, and this Court has found that such
stockholders may waive appraisal rights ex ante by contract. However, the
relationships between the common stockholders (the residual owners of the
corporation), the directors (the fiduciaries managing the corporation on those
owners’ behalf), and the majority stockholder—4f any—having voting control over
the corporation (who also stands as a fiduciary to the minority stockholders in
certain situations) are in the main governed by the Delaware General Corporation
Law and the common law of fiduciary relationships. The question of whether
common. stockholders can, ex ante and by contract, waive the right to seek statutory
appraisal in the case of a squeeze-out merger of the corporation is therefore more
nuanced than is the case with preferred stockholders. That question has not yet
been answered by a court of this jurisdiction.
In this action, minority common stockholders of a corporation seek appraisal
of their shares after a June 20M acquisition of the corporation by a third party,
which was approved by the written consent of the corporation’s 91% controlling
faith and fair dealing. Riverstone contends that by entering into the Stockholders
Agreement, including Specifically granting Riverstone the Drag-Along, the
Minority Stockholders implicitly “agreed they would participate in any third-party
merger supported by Riverstone’s controlling stockholder,” and not just in those
instances explicitly called for in the contract.47 The bargainedufor consequence of
such an arrangement, indeed the very reason why the Drag-Along exists,
Riverstone argues, is that the Minority Stockholders would forfeit their rights to
appraisal.48 To the extent that this arrangement is not given effect in these
circumstances by the express terms of the Drag~Along-~for instance, because
Riverstone exercised the Drag-«Along after the Merger, or the Merger was
approved by written consent pursuant to Section 228——Riverstone argues that the
Court should “fill the gap” by enforcing the implied covenant on the Minority
Stockholders, requiring them to execute the Written Consent and accept the
Merger consideration.
47 1d. at 30:24m3112', see also Riverstone National, Inc’s Reply Br. in Further Supp. of Its Mot.
for Summ. J., at 9~10 (“The Stockholders Agreement contains an implied obligation that the
Stockholders could be forced to consent to any qualifying mergeraaregardless of Whether it was
approved by a vote at a stockholder meeting or by written consent pursuant to 8 Del. C. § 228.”).
4 See Oral Arg. Tr. 4212443216 (“Because CAS was a 91 percent stockholder, there is no
reason for these drag—along rights other than to get rid of appraisal. Because CAS did not need
{the Minority Stockholders’} consent. CAS did not need to solicit consents or do anything to get
a merger done. . . . So there’s no purpose to this provision other than to avoid us standing here
today. And, frankly, that’s what most drag-along provisions are fen”); Riverstone National,
Inc’s Reply Br. in Further Supp. of Its Mot. for Summ. 3., at 10 (“The [Minoritfl Stockholders
breached this implied obligation, in violation of the purpose of the Stockholders Agreement, and
thereby deprived Riverstone of the fruits of its bargain”).
l9
B. Riverstone IS Not Entitled to Specific Performance
Although this case raises an interesting legal issue as to whether a common
stockholder may contractually waive its statutory appraisal rights for consideration
to be set later by a controlling stockholder, I do not find it necessary to resolve that
legal question here. For the purposes of my analysis, it is sufficient to assume that
a common stockholder may waive its appraisal rights ex ante. Employing this
assumption, I am still left with the question of whether these common stockholders
actually have waived their appraisal rights through the Stockholders Agreement.
A contractual waiver of a statutory right, where permitted, is effective only to the
-49
extent clearly set forth in the parties” contract. Here, construction of the
unambiguous contract provision does not clearly demonstrate that the Company is
entitled to force a waiver of appraisal; rather, it demonstrates the oppositewunder
the circumstances, the Minority Stockholders have not breached the Stockholders
49 See In re Appraisal QfFord Holdings, Inc. Pre erred Stock, 698 A..2d 973, 979 (Del. Ch. 1997)
(noting, after finding that a preferred stockholder may waive its right to appraisal, that “[s]ince
Section 262 represents a statutorily conferred right, it may be effectively waived in the
documents creating the security only when that result is quite clearly set forth when interpreting
the relevant document under generally applicable principles of construction,” and ultimately
holding that the indirect language in the relevant documents was “too frail a base upon which to
rest the claim that there has been a contractual. relinquishment of rights under Section 262”);
Libeau 1.2. Fox, 880 A.2d 1049, 1057 (Del. Ch. 2005) (“To ensure that the statutory right to
partition is not arbitrarily lost, Delaware requires that any contractual relinquishment of the
partition right be by clear affirmative words or actions. . . . The waiving contract need not
contain an explicit disclaimer of partition rights. Rather, the contract need only contain a
procedure for the co—owners to sell their interests that is inconsistent with the later maintenance
of a partition action.” (footnotes and internal quotation marks omitted)).
20
Agreement by seeking appraisal, and thus the Company is not entitled to specific
performance.
The parties hotly contest which of the two components of the Drag—Along
the Company sought to trigger through the Information Statement—“the
Participation Right, the Voting Right, or both. As noted above, the Participation
Right requires the Minority Stockholders to tender their shares into the Merger,
While the Voting Right requires them to vote their shares in favor of the Merger. I
assume for purposes of this Opinion that any defect in notice was not fatal to the
Company’s attempt to exercise the Drag—Along, and as a consequence this
disagreement loses much of its relevance. For the sake of clarity, though, I note
that the right Riverstone attempted to invoke is the right to compel a favorable
vote. Both the language of the Information Statement and the attached Written
Consent are limited to that action. The Information Statement states that
“Riverstone has exercised the “drag-along right’ provided for in Section 3 of the
Stockholders Agreement . . . and specifically is requiring [the Minority
Stockholders] to vote to approve the adoption of the merger Agreement by
executing and delivering the Written Consent.”50 The Written Consent, the
50 Am. Countercls. and Third—Party Compl. EX. B (Information Statement), at l (emphasis
added). At oral argument, in support of its argument that the interpretation 1 have adopted would
render the “an ” in the sentence superfluous, see infra note 33, Riverstone offered the anaiogy
that “if . . . a parent tells a child, ‘Clean your room, and specifically get under your bed,’ the
parent would not want to come back to a dirty room with a clean spot under the bed.” Oral Arg.
Tr. 45:1 144. However, I don’t find that to be an appropriate analogy under these
21
document designated to carry out that specific order, is accordingly limited to one
resolution that “the Merger Agreement be, and it hereby is, adopted, approved and
7951
ratified. in all respects. Notably, neither document, at any point, mentions the
Minority Stockholders” obligation to tender shares, nor does either document
specify the number of shares for which tender is being required, as is explicitly
contemplated by the Stockholders Agreement.52 Consequently, I find that
Riverstone only invoked the Voting Right of the Drag-Along.
Next, I consider whether the Voting Right requires the Minority
Stockholders to engage in the specific performance Riverstone requests——
executing a written consent in favor of a previously consummated merger. I
assume, as the Company argues, that the only purpose of the Drag—Along is to
circumstances; rather, in specifying which portion of the Drag-Along the Company sought to
enforce, the Company appears more like the customer who visits a diner and tells her waiter, “I’d
like to order breakfast, and specifically I’d like to order pancakes.” The customer would not
expect the waiter to return with the entire breakfast lineup; indeed, if she did expect that, it
would render the specific pancake order superfluous.
5 I Am. Countercls. and Third—Party Comp]. Ex. B (Information Statement), at 3.
52 See Am. Countercls. and Third—Party Comp]. Ex. A (Stockholders Agreement), at 3 (“[T]he
Company may require the Minority Stockholders to participate in such Change—ianontrol
Transaction with respect to all or such number (if the Minority Stockholders’ Shares as the
Company may specify in its discretion . . . . [T]he Minority Stockholders shall tender the
specified number of ' Shares . . . .” (emphasis added)). The Company argues that the documents
specifically addressed tendering shares through the portion of the Written Consent that asked the
Minority Stockholders to provide wire transfer instructions, which the Company argues would
only be for the purpose of tendering shares. See Oral Arg. Tr. 46:1w8 (“You don’t need wire
transfer instructions to vote in favor of something. That is absolutely the tender; that’s the
participation part. The Written Consent . . . shows exactly we were trying to do two things here:
the vote to approve, and then the wire transfer instructions, which could only be related to the
participation and tender portion of Section 3.”). However, I do not find that a request for
instructions regarding payment, which I assume would be an obligatory step once the Minority
Stockholders had voted in favor of the Merger, constitutes the Company’s invocation of its
contractual right to tender.
22
waive the Minority Stockholders’ appraisal rights. However, as the Company
concedes,53 rather than explicitly waive appraisal rights, the parties opted instead to
contract for acts by the Minority Stockholders that would have the effect of
waiving appraisal rights—either a forced tender or vote. The Drag-Along’s
unambiguous language defining these acts is entirely prospective in nature: the
Minority Stockholders agreed to, upon advanced notice, tender into or vote in
favor of a merger that has been “propose[d];” the Minority Stockholders did not
agree to, upon notice after the fact, consent to a merger that has been
consummated. The Company bargained for a right it did not exercise, and not the
similar right it attempted to exercise. 54 In other words, because the Company
would have gotten result X had it exercised its rights does not mean the Company
is entitled to result X when it failed to exercise those rights. Rather, the Company
is limited to the benefit of its bargain, which, according to the literal language of
the Drag-Along, does not include the power to require the Minority Stockholders
to consent to a transaction that has already taken place.55 Thus, the Company is
53 See infra note 24 and accompanying text.
54 Although the Company attempts to categorize the consent it seeks as a “vote” in favor of the
Merger, the actual stockholder vote on the Merger has already taken place and the transaction
already closed. The fact that the Minority Stockholders cannot actually now participate in that
stockholder vote is further proofthat the rights under the Drag—Along were prospective, and that
the Voting Right does not encompass the relief that the Company now seeks.
55 in an attempt to sidestep the clear, prospective language of the Drag—Along, the Company
points to language in the Stockholders Agreement providing that, if the Minority Stockholders”
shares are converted into another form of property, “this Agreement shall apply to the securities
or other property received upon such conversion . . . in the same manner and to the same extent
23
not entitled to specific performance according to the express terms of the
contractual right it invoked.56
Finally, 1 consider whether Riverstone is entitled to the performance it seeks
based on the covenant of good faith and fair dealing implicit in the Stockholders
57
Agreement. An implied covenant of good faith and fair dealing “attaches to
every contract,” and “requires a party in a contractual relationship to refrain from
arbitrary or unreasonable conduct which has the effect of preventing the other
9358
party to the contract from receiving the fruits of the bargain. The implied
covenant is “a commitment to deal fairly[,] in the sense of consistently with the
terms of the parties” agreement and its purpose,” and thus the Court will find a
breach of the covenant where “it is clear from what was expressly agreed upon that
the parties who negotiated the express terms of the contract would have agreed to
proscribe the act later complained of as a breach of the implied covenant of good
as the Shares,” arguing that this language allows the prospective drag-along rights granted in the
Stockholders Agreement to be exercised retrospectively. Considering the Company is seeking
specific performance of its contractual right to force waiver of common stockholders’ statutorily
conferred rights, I find that this language lacks the clarity to compel a waiver.
56 Because of this finding, 1 need not reach a number of arguments raised by the Minority
Stockholders, including that the Company did not provide contractually adequate noticemwliicli,
as stated above, I have presumed not to be the case for purposes of this Opinionmand that the
Merger does not quaiify under the Participation Right as a “transaction on equal terms” in light
of the liability release granted to CAS. 1 also note that, although I have determined that the
Company only exercised the Voting Right, my analysis as to that right being limited to
prospective mergers would apply with equal force to the Participation Right, had the Company
exercised that right as well.
57 At oral argument l noted that additional discovery may be necessary to resolve the implied
covenant issue, but upon further review I find that no further extrinsic evidence is needed.
5" Dunlap v. State Farm Fire and Cas. C0,, 878 A.2d 434, 441—42 (Del. 2005) (footnote and
internal quotatiOn marks omitted).
24
59
” As our
faith—whad they thought to negotiate with respect to that matter.
Supreme Court has oft~expressed in recent years, the implied covenant is a gap
filler: “The covenant is best understood as a way of implying terms in the
agreement, whether employed to analyze unanticipated developments or to fill
gaps in the contract’s provisions.”60
The implied covenant does not come to Riverstone’s aid here, as it is not
clear that the Minority Stockholders’ refusal to consent to the Merger is arbitrary
or unreasonable in the sense that the parties wouid have agreed to prescribe such
conduct had they thought to negotiate the matter. This is not a case where one
party is attempting to take advantage of a situation that was unanticipated or
unforeseeable at the time of contracting. Both Riverstone and the Minority
Stockholders are sophisticated parties, and both are charged with knowledge as to
the various ways Riverstone could have carried. out a merger under Delaware law,
including by written consent pursuant to Section 228. Yet, with full awareness that
it could consummate a merger by written consent, without the Minority
Stockholders’ knowledge or involvement, Riverstone agreed to drag-along rights
that by their unambiguous terms did not apply to this retrospective scenariof’1
59 Gerber 12. Enter. Products Holdings, LLC, 67 A.3d 400, 418719 (Del. 2013) (internal
guotation marks omitted).
" Dunlap, 878 A.2d at 441; see also Nemec v. Shrader, 991 A.2d 1 120, 1 126 n.17 (2010).
6' Although it is not necessary to my conclusion here, I note that the Minority Stockholders point
out that such an arrangement is not inexplicable, asserting that there is good reason why the
Minority Stockholders would have wanted to limit the scope of the Drag—Along to prospective
25
Nevertheless, having failed to exercise its drag-along rights as provided by
contract—~at no fault of the Minority Stockholders—~Riverstone now seeks to
exercise that analogous, but different, retrospective right.
Our Supreme Court has made clear that the gap-filling function of the
implied covenant does not provide relief in a situation such as this, where the
Company asks the Court to imply a right for which it did not contract and should
have foreseen. In Nemec v. Shrader, the Court found that “[t]he implied covenant
only applies to developments that could not be anticipated, not developments that
the parties simply failed to consider.”62 Applying the Nemec Court’s guidance to
these facts, it is clear that there is no gap for this Court to fill in the parties” drag—
along arrangement, but rather a clearly delineated balance between the Minority
Stockholders” statutory appraisal rights and Riverstone’s contractual ability to
force a waiver of those rights. Having not exercised its contractual rights
according to the Stockholders Agreement, Riverstone now finds itself within the
realm of appraisal rights retained by the Minority Stockholders. Therefore, I do
not find that the implied covenant requires the Minority Stockholders to now
execute the Written Consent and accept the Merger consideration.
mergers, and would have resisted an obligation to consent to a merger that has already been
consummated: in a prospective scheme, the Minority Stockholders would be able to seek to
avoid an oppressive merger by application to this Court. See Oral Arg. Tr. 1618—17, 52:5—5316.
62 Nemec, 991 A.2d at 1126.
26
IV. CONCLUSION
For the foregoing reasons, the Minority Stockholders’ Motions for Summary
Judgment63 are granted, and Riverstone’s Motion for Summary Judgment is
denied. The parties should submit an appropriate form of order.
63 See infra note 16.
27
stockholder in May 2014. For the purposes of this Memorandum Opinion, I
presume that the Petitioners have perfected their right to appraisal under Section
262 of the DGCL. The corporation has counterclaimed, however, and seeks
summary judgment in its favor on the appraisal claims based on a stockholders
agreement between the corporation and certain minority stockholders, including
the Petitioners, entered into in 2009. That agreement provided the corporation
with “drag-along” rights in case of a change in control, including the right to
compel the minority stockholders to vote in favor of certain change-in-control
transactions. Such a favorable vote would make the minority stockholders
ineligible for appraisal rights, and indeed the corporation considers the
stockholders agreement as embodying a right to force a waiver of appraisal on the
minority common stockholders, which the corporation seeks to enforce specifically
here. This would appear to raise the question limned above: may common
stockholders, ex ante, contractually commit to a waiver of the appraisal rights
provided by statute? I need not reach that question, however, because the
unambiguous language of the stockholders agreement at issue only provides for the
dragnalong rights to be exercised prospectivelymnot after a merger has been
accomplished. Since the corporation did not demand a vote in favor of a change in
control in the manner explicitly required by the stockholders agreement, it may not
specifically enforce the drag-along rights here, even if I assume that the waiver of
appraisai was otherwise enforceable. The stockholders agreement, accordingly,
does not prevent the Petitioners from proceeding to appraisal.
I. BACKGROUND FACTS
A. Parties and Relevant Non-Parties
Respondent, Counterclaim Plaintiff, and Third-Party Plaintiff Riverstone
National, Inc. (“Riverstone” or the “Company”) is a Delaware corporation.1
Petitioners and Counterclaim Defendants Michael C. Halpin and Michael A.
Christian, and Third~Party Defendants Walter Smith, Stephen Davis, and Pa] H.
Ottesen (together, the “Minority Stockholders”), were individual stockholders of
Riverstone during the period relevant to this dispute.
Non-party CAS Capital Limited (“CA8”), a private limited company
organized under the laws of England and Wales, was the holder of a majority of
the issued and outstanding shares of Riverstone’s common stock—approximately
91%7during the period relevant to this dispute.
B. The Stockholders Agreement
On June 5, 2009, the Minority Stockholders entered into an agreement with
Riverstone, then known as Consolidated American Services, Inc., setting forth
certain rights and obligations of the Minority Stockholders (the “Stockholders
1 Unless otherwise indicated, the undisputed facts set forth herein are taken from Petitioners’
Verified Petition for Appraisal of Stock and RespOndent’s Answer to Verified Petition for
Appraisal of Stock and Verified Amended Counterclaims and Third~Party Complaint, as weil as
the documents incorporated into these filings by reference.
3
Agreement”). Relevant here, Section 3 of the Stockholders Agreement granted
Riverstone the power, subject to certain restrictions, to require the Minority
Stockholders to tender and/or vote their shares in favor of a “Change-in-Control
Transaction”2 approved by a majority of Riverstone’s stockholders (the “Drag-
Aiong”). Specifically, Section 3 states, in relevant part:
[I]f at any time any stockholder of the Company, or group of
stockholders, owning a majority or more of the voting capital stock of
the Company (hereinafter, collectively the “Transferring
Stockholders”) proposes to enter into any [Changemin—Control
Transaction], the Company may require the Minority Stockholders to
participate in such Change-in-Control Transaction with respect to all
or such number of the Minority Stockholders” Shares as the Company
may specify in its discretion, by giving the Minority Stockholders
written notice thereof at least ten days in advance of the date of the
transaction or the date that tender is required, as the case may be.
Upon receipt of such notice, the Minority Stockholders shall tender
the specified number of Shares, at the same price and upon the same
terms and conditions applicable to the Transferring Stockholders in
the transaction or, in the discretion of the acquirer or successor to the
Company, upon payment of the purchase price to the Minority
Stockholders in immediately available funds [(the “Participation
Right”)]. In addition, if at any time the Company and/or any
Transferring Stockholders propose to enter into any such Change—in.—
Control Transaction, the Company may require the Minority
Stockholders to vote in favor of such transaction, where approval of
2 The Stockholders Agreement defines a “Change—in~Control Transaction” as
any transaction involving (a) a sale of more than 50% of the outstanding voting
capital stock of the Company in a non-public sale or (b) any merger, share
exchange, consolidation or other reorganization or business combination of the
Company immediately after which a majority of the directors of the surviving
entity is not comprised of persons who were directors of the Company
immediately prior to such transaction or after which persons who hold a majority
of the voting capital stock of the surviving entity are not persons who held voting
capital stock of the Company immediately prior to such transaction.
Am. Countercls. and Third-Party Comp]. Ex. A (Stockholders Agreement), at 2M3.
4
the shareholders is required by law or otherwise sought, by giving the
Minority Stockholders notice thereof within the time prescribed by
law and the Company ’5‘ Certificate of Incorporation and By-Laws for
giving notice of a meeting of shareholders called for the purpose of
approving such transaction [(the “Voting Right”)]. if the Company
requires such vote, the Minority Stockholder agrees that he or she
wiil, if requested, deliver his or her proxy to the person designated by
the Company to vote his or her Shares in favor of such Change—in—
Control Transaction}
C. Section 220 Action.
On May 20, 2014, Halpin and Christian made a demand for books and
records on Riverstone pursuant to 8 Del. C. § 220, purportedly “to investigate
potential self—dealing by the Company’s directors and officerswnamely whether
such directors and officers usurped for themselves the Company’s corporate
opportunity to acquire equity in Invitation Homes, LP (“Invitation Homes”) and
B2R Finance, LP (‘B2R’).”4 When Riverstone failed to answer the demand,
Halpin and Christian filed a Section 220 action in this Court, on May 30, 2014.5
The Section 220 complaint alleges that “certain directors and officers of the
Company obtained. the opportunity to acquire equity in Invitation Homes—~21
valuable opportunity that flows directly from the business relationship between the
Company and its subsidiaries, on the one hand, and Invitation Homes and 82R, on
3 1d. (emphasis added and omitted).
4 Compl. for Inspection of Books and Records 1|' 5, Halpin v. Riverstone National, Inc, CA. No.
9720-VCG (Del. Ch. May 30, 2014), Trans. ID 55522638; see also Pet’rs’lCountercl.—Defs.’
Opening Br. in Supp. ofTheir Mot. to Dismiss the Am. Countercls., at 4~5.
5 See Compl. for Inspection of Books and Records 1m 9m] 1, Halpin v. Riverstone National, Inc,
CA. No. 9720—VCG (Del. Ch. May 30, 2014), Trans. 1D 55522638.
5
the other hand.”(’ Although the Section 220 compiaint acknowledges that the
Company recognized and attempted to waive the “conflicts of interest inherent in
the contemplated transactions,” it nonetheless alleges that “the transactions were
not approved in accordance with Delaware law.”7
D. The Merger and Information Statement
Following the filing of the Section 220 action, on June 9, 2014, Riverstone
sent a letter to its stockholders (the “Information Statement”), including the
Minority Stockholders, informing them that on May 29, 2014, without notice to the
Minority Stockholders, Riverstone’s 91% majority stockholder CAS had provided
its written consent pursuant to 8 Del. C. § 228 for the Company to enter into a
merger agreement with Greystar Real Estate Partners, LLC (“Greystar”) and its
wholly—owned subsidiary (“Greystar Sub”), whereby Greystar Sub was to be
merged into Riverstone and each share of Riverstone was to be converted into a
right to receive cash (the “Merger Agreement”).8 The Information Statement
explained that—also unbeknownst to the Minority Stockholders—Riverstone,
Greystar, and Greystar Sub executed the Merger Agreement the following day, on
6 Id. 1] 6.
7 1d.
8 Am. Countercis. and Third-Party Comp}. Ex. B (Information Statement), at l.
6
May 30, 2014, and the Merger became effective upon the filing of a certificate of
merger with the Secretary of State of the State of Deiaware, on June 2, 2014.9
The Information Statement provided additional guidance to Riverstone
stockholders regarding their rights and obligations in connection with the Merger.
First, the Information Statement attempted to invoke the DraguAlong to compel
compliance with the Voting Right:
Riverstone has exercised the “drag-along right” provided for in
Section 3 of the Stockholders Agreement, dated June 5, 2009, . . . by
and among Riverstone, Waiter Smith, Stephen Davis, Pal [sic] H.
Ottesen, Michael C. Halpin, and Michael A. Christian and specifically
is requiring you to vote to approve the adoption of the Merger
Agreement by executing and delivering the Written Consent, which is
provided. herewith . . . within 10 days after the date ofthis document“)
Next, the Information Statement advised. stockhoiders that each share of the
Company had been converted into a right to receive $4.44, plus any additional
contingent payments that may become payable pursuant to the Merger Agreement.
Finally, the Information Statement provided that stockholders “may be entitled to
exercise appraisal rights under Section 262 of the DGCL,“1 but that the
abovementioned cash payment would only be available to stockholders who
relinquished that right by executing the attached written consent pursuant to
9 1d.
‘0 Id.
” Id.
Section 228 (the “Written Consent”). In the paragraph outlining the stockholders”
appraisal rights, the Information Statement explained:
Riverstone has determined that if you execute and return the Written
Consent provided herewith you will not be entitled to exercise
appraisal rights. Riverstone further has determined that if you fail to
execute and return the Written Consent you will be in breach of the
provisions of the Stockholders Agreement referred to above, in which
event Riverstone reserves all of its rights at law or in equity.‘2
E. Procedural History
Upon receiving the Information Statement, Halpin and Christian “voluntarily
dismissed their Section 220 action in favor of pursuing their rights to appraisal.”13
On June 18, 2014, the five Minority Stockholders delivered to Riverstone separate
written demands for appraisal of their respective shares pursuant to 8 Del. C. §
262~—-1'-Ialpin, Christian, and Smith each demanding appraisal of 132,265 shares,
and Davis and Ottesen each demanding appraisal of 49,599 shares (totaling
495,993 shares).i4 The foliowing day, on June 1.9, 2014, Halpin and Christian filed
their Verified Petition for Appraisal in this action.
Riverstone answered the Petition for Appraisal on July 23, 2014, and
brought counterclaims seeking to have the Drag-Along specifically enforced
against Halpin and Christian. On August 8, 2014, Riverstone amended its
12
1d. at 2.
13 Pet’rs’fCountercl.—Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss the Am. Countercls.,
at 6; see also Notice of Voluntary Dismissal, Halpin v. Riverstone National, Inc, CA. No. 9720—
VCG (Del. Ch. June 23, 2014), Trans. ID 55631691.
:4 See Am. Countercls. and Third—Party Compl. Ex. C (appraisal demand letters).
8