Arkansas Teacher Retirement System v. Alon USA Energy, Inc. ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ARKANSAS TEACHER )
RETIREMENT SYSTEM, on Behalf of )
Itself and All Others Similarly Situated, )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0453-KSJM
)
ALON USA ENERGY, INC., DELEK )
US HOLDINGS, INC., DELEK )
HOLDCO, INC., EZRA UZI YEMIN, )
ILAN COHEN, ASSAF GINZBURG, )
FREDEREC GREEN, RON W. )
HADDOCK, WILLIAM J. KACAL, )
ZALMAN SEGAL, MAKR D. SMITH, )
AVIGAL SOREQ, FRANKLIN )
WHEELER, and DAVID WIESSMAN, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: March 27, 2019
Date Decided: June 28, 2019
Michael Hanrahan, Stephen D. Dargitz, Paul A. Fioravanti, Jr., Corinne Elise
Amato, Kevin H. Davenport, Eric J. Juray, PRICKETT, JONES & ELLIOTT, P.A.,
Wilmington, Delaware; Lee D. Rudy, Michael C. Wagner, J. Daniel Albert, Grant
D. Goodhart III, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor,
Pennsylvania; Counsel for Plaintiff Arkansas Teacher Retirement System.
David J. Teklits, Thomas P. Will, MORRIS, NICHOLS, ARSHT & TUNNELL
LLP, Wilmington, Delaware; Mark Oakes, William Patrick Courtney, Ryan Metzer,
NORTON ROSE FULBRIGHT US LLP, Austin, Texas; Counsel for Defendants
Alon USA Energy, Inc., Delek US Holdings, Inc., Delek HoldCo, Inc., Ezra Uzi
Yemin, Assaf Ginzburg, Frederec Green, Mark D. Smith, and Avigal Soreq.
Raymond J. DiCamillo, Brian F. Morris, Sara C. Hunter, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; Colin B. Davis, GIBSON, DUNN &
CRUTCHER LLP, Irvine, California; Mark H. Mixon, Jr., GIBSON, DUNN &
CRUTCHER LLP, New York, New York; Counsel for Defendants David Wiessman,
Ilan Cohen, Ron W. Haddock, William J. Kacal, Zalman Segal, and Franklin
Wheeler.
McCORMICK, V.C.
Section 203 of the Delaware General Corporation Law prohibits a stockholder
from engaging in a business combination with a company within three years from
the date it acquires 15% or more of the company’s outstanding voting equity. The
statute’s prohibitions do not apply under certain circumstances, including when the
company’s board pre-approves the transaction by which the stockholder acquires
15% or more of the outstanding voting equity.
In 2015, Delek US Holdings, Inc. (“Delek”) acquired 48% of the common
stock of Alon USA Energy, Inc. (“Alon”) from Alon’s largest stockholder. Delek
paid approximately $16.99 per share. At the time of this stock purchase, Delek was
interested in acquiring the entirety of Alon’s outstanding stock. To avoid the three-
year standstill period imposed by Section 203, Delek requested that the Alon board
pre-approve the stock purchase. Alon’s board granted Section 203 approval, but
conditioned that approval on Delek entering into a stockholder agreement. The
stockholder agreement established anti-takeover protections like those imposed by
Section 203, but for a period of only a year. The agreement’s prohibitions were
broadly worded; they prevented Delek and its affiliates not only from acquiring over
a majority of Alon’s equity, but also from “seek[ing] to” acquire stock over a
majority or otherwise circumventing the contractual restrictions.
According to the plaintiff, shortly after Delek executed the stockholder
agreement, Delek began violating its terms.
1
During the stockholder agreement’s one-year standstill period: Delek’s CEO,
who also served on Alon’s board, publicly announced Delek’s intent to acquire the
remaining 52% of Alon’s outstanding equity. In light of Delek’s public statements,
Alon’s eleven-person board formed a special committee comprised of the six
directors without direct ties to Delek. Representatives of Delek and the committee
met six times, engaged in substantive negotiations, settled on all-stock consideration,
and apparently agreed that the exchange ratio need not be at a premium to Alon’s
trading price. Near the end of the standstill period, the committee made a formal
proposal to Delek.
After the standstill period expired in May 2016, the special committee issued
two additional formal proposals to Delek, each on terms more favorable to Delek
than the last. Delek had made no formal counteroffers, so the committee was
effectively bidding against itself. In response to the third proposal, Delek delivered
its first formal counteroffer, proposing an exchange ratio that equated to
approximately $7.62 per Alon share. The special committee negotiated with Delek
in the months that followed, focusing its efforts on improving the exchange ratio.
By late December 2016, Delek made its best and final offer including an exchange
ratio that equated to approximately $12.13 per Alon share, significantly less than the
price paid by Delek only two years before. The committee received a fairness
opinion from its financial advisor. Although certain of the advisor’s analyses
2
yielded price ranges above the merger price, the committee and ultimately the board
approved the merger. The merger was agreed to in January 2017, approved by
Alon’s stockholders in June 2017, and consummated in July 2017.
On behalf of itself and a class of Alon’s common stockholders, the plaintiff
asserts claims against Alon’s board and Delek challenging the merger. The
defendants have moved to dismiss the complaint, and this decision denies most of
that motion.
Alongside the familiar fiduciary duty claims, the plaintiff pursues a less
customary claim for breach of the stockholder agreement. The plaintiff alleges that
Delek breached the stockholder agreement by seeking to enter into the merger during
the standstill period. As its primary defense, Delek argues that the plaintiff is not a
third-party beneficiary of the stockholder agreement and thus lacks standing to
enforce it.
Under Delaware law, a third party to a contract may sue to enforce its terms
if: the contracting parties intended to confer a benefit directly to that third party;
they conveyed the benefit as a gift or in satisfaction of a pre-existing obligation; and
conveying the benefit was a material part of the purpose for entering into the
agreement. The stockholder agreement’s relationship to Section 203 renders each
of these elements easily satisfied. The stockholder agreement replicates aspects of
the anti-takeover protections of Section 203, which provide a direct benefit to
3
stockholders of a Delaware corporation. The stockholder agreement therefore
provides a direct benefit to the plaintiff. Those benefits were established in place of
Section 203’s pre-existing protections, or at minimum, intended as a gift to the
stockholders. Because the purpose of the stockholder agreement is to restrict
Delek’s ability to acquire Alon, without the anti-takeover provisions, the agreement
would not achieve that purpose. The anti-takeover provisions are therefore material,
and the plaintiff has standing to enforce the stockholder agreement.
The plaintiff adequately alleges that Delek breached the stockholder
agreement. Delek publicly announced its intent to acquire Alon stock, met with the
special committee’s chairperson six times, negotiated substantive terms, and
proposed a deal structure, all before the standstill period expired. These acts are
sufficient to state a claim that Delek breached the broadly worded anti-takeover
protections of the stockholder agreement.
In another creative twist, the plaintiff asserts claims under Section 203,
contending that Delek’s breaches of the stockholder agreement vitiated the Alon
board’s Section 203 approval and restored the protections of Section 203. Under
Section 203(a)(3), a business combination otherwise prohibited by the statute may
be effected if it is approved by the board and authorized by at least two-thirds of the
outstanding voting stock. The defendants contend that the approval of the merger
by Alon’s board and stockholders satisfied Section 203(a)(3). Yet for stockholder
4
approval of any corporate action to be valid, the vote must be fully informed. The
defendants’ argument thus fails because the plaintiff has adequately alleged multiple
deficiencies in the disclosures relating to the merger. Those deficiencies include
failing to fully and fairly describe the stockholder agreement, only partially
disclosing facts and flaws relating to the special committee’s formation, and
neglecting to mention that the special committee’s financial advisor increased its
stock holdings in the acquirer by 60% while advising the special committee. These
deficiencies not only foreclose the defendants’ Section 203 defense but also support
a standalone claim for breach of the duty of disclosure.
The plaintiff’s claims for breach of fiduciary duty are equally viable. It is
reasonably conceivable that Delek’s 48% equity interest, employment of five of
Alon’s eleven board members, and influence over a sixth, renders Delek a controller
with concomitant fiduciary duties. The merger, therefore, is presumptively subject
to the entire fairness standard. The defendants argue that the business judgment
standard applies under Kahn v. M & F Worldwide Corp. (“MFW”) 1 because both the
special committee’s initial proposal and Delek’s initial counterproposal conditioned
the merger on the approval of a special committee and a majority of the minority
stockholders. Leaving aside the uninformed nature of the stockholder vote, the
defendants’ argument fails in light of two recent Delaware Supreme Court decisions
1
88 A.3d 635 (Del. 2014).
5
clarifying that a controller must impose MFW conditions before the start of
substantive economic negotiations. 2 Because the complaint adequately alleges that
Delek engaged in substantive economic negotiations months before any MFW
conditions were established, the defendants are not entitled to application of the
business judgment standard of review at the pleadings stage.
The complaint adequately alleges unfair process and unfair price sufficient to
state a claim under the entire fairness standard. In support of its unfair process
assertion, the complaint alleges that Delek disregarded contractual obligations
prohibiting negotiation of the merger during the standstill period. The scope of the
special committee’s authority to explore alternative transactions was unclear at
critical stages of the negotiations. At Delek’s insistence, the Alon board replaced
two of the six special committee members over the course of negotiations. And the
special committee’s chairperson’s alleged ties to Delek cast doubt on his
independence. In support of its unfair price assertion, the complaint alleges that the
merger consideration was keyed to the values of Alon and Delek stock, which Delek
manipulated through public statements made before the merger. Also, the implied
per-share merger price was at the low end of value ranges presented by the special
2
Flood v. Synutra Int’l, Inc., 195 A.3d 754, 763 (Del. 2018); Olenik v. Lodzinski, -- A.3d
--, 2019 WL 1497167, at *1 (Del. Apr. 11, 2019).
6
committee’s financial advisor. These allegations are sufficient to establish unfair
process and price at the pleadings stage.
I. FACTUAL BACKGROUND
The facts are drawn from the Second Amended Verified Class Action
Complaint (the “Complaint”) 3 and documents it incorporates.
A. Delek’s Initial Acquisition of Alon Stock
Alon is an independent retailer and marketer of petroleum products. In early
2015, Alon Israel Oil Company, Ltd. (“Alon Israel”) owned approximately 48% of
Alon’s outstanding common stock.4 Because of Alon Israel’s financial difficulties,
Alon Israel determined to sell its interest in Alon, and reached out to Delek, a
diversified downstream energy company, to explore interest in a stock purchase.
After about a month of negotiations, Delek requested that the Alon board of directors
(the “Board”) approve Delek’s stock purchase for purposes of 8 Del. C. § 203.
The Alon Board formed a special committee to evaluate and negotiate the
Section 203 issue. On March 19, 2015, the Board approved Delek’s acquisition, but
conditioned that approval on Delek executing a stockholder agreement. Delek
executed a stockholder agreement that same day.
3
C.A. No. 2017-0453-KSJM Docket (“Dkt.”) 37 (cited as “Second Am. Compl.”).
4
Alon Israel owned a 55% interest in Alon before it sold 7% on the open market in
February 2015.
7
On April 14, 2015, Delek agreed to purchase Alon Israel’s 48% stake in Alon
for a total of $572.4 million or approximately $16.99 per share. That transaction
(the “initial stock purchase”) closed on May 14, 2015.
After the transaction closed, five of Alon’s eleven directors resigned from the
Board and Delek appointed five Delek executives to fill the positions: Delek CEO
and President Ezra Uzi Yemin; Delek CFO Assaf Ginzburg; and three Delek
Executive Vice Presidents, Frederec Green, Mark D. Smith, and Avigal Soreq
(collectively, the “Delek Directors”). The remaining six directors were David
Wiessman, Ilhan Cohen, Ron W. Haddock, Zalman Segal, Jeff Morris, and
Yeshayahu Pery. 5 Yemin became the Executive Chairman of the Board, replacing
the prior chairman, Wiessman.
B. The Amended Stockholder Agreement
Shortly after the initial stock purchase, Delek and Alon amended the
stockholder agreement (the “Amended Stockholder Agreement” or the
“Agreement”).6 The Agreement prevented Delek, for the year following the initial
stock purchase (the “Standstill Period”), from acquiring more than 49.99% of Alon’s
5
As discussed below, Morris and Pery were replaced by William Kacal and Franklin
Wheeler. Kacal and Wheeler, along with Wiessman, Cohen, Haddock, and Segal, are
collectively referred to as the “Special Committee Defendants.” The Special Committee
Defendants and the Delek Directors are together referred to as the “Director Defendants.”
6
Dkt. 26, Transmittal Aff. of Thomas P. Will in Supp. of the Opening Br. in Support of
the Delek Defs.’ Mot. to Dismiss Second Am. Compl. (“Will Aff.”) Ex. D (cited as “Am.
S’holder Agr.”).
8
outstanding equity or entering into any material contract with Alon unless Delek first
obtained approval from an “Independent Director Committee.”7
This restriction took the form of a web of overlapping contractual provisions.
The “Standstill Provision” (§ 1.01(a)) prohibited Delek from acquiring—or
proposing or seeking to acquire—any Alon equity that would cause Delek’s stake in
Alon’s total equity to exceed 49.99%.8 The “No Merger Provision” (§1.05(h))
prohibited Delek from “enter[ing] into or agree[ing], offer[ing], publicly propos[ing]
or seek[ing] to enter into, or otherwise be[ing] involved in or part of, any acquisition
transaction, merger or other business combination relating to all or part of
[Alon] . . . .” 9 The “No Circumvention Provision” (§ 1.05(k)) prohibited Delek from
“tak[ing] any action intended to circumvent any of the restrictions” in Section 1.05.10
And the “No Material Transactions Provision” (§ 2.02(a)) prohibited Delek from
entering into any “material transaction” with Alon. 11 All of these restrictions also
expressly applied to Delek’s affiliates.
The Independent Director Committee exception appears in Section 2.02(a)’s
“No Material Transactions Provision,” which provides that “any material transaction
7
Am. S’holder Agr. §§ 1.01(a), 2.02(a), 4.
8
Id. § 1.01(a).
9
Id. § 1.05(h).
10
Id. § 1.05(k).
11
Id. § 2.02(a).
9
between [Alon] . . . on the one hand, and [Delek] . . . on the other hand, and any
action or transaction relating to this Agreement shall not be taken without prior
Independent Director Approval or Unaffiliated Stockholder Approval.” 12 A version
of this exception also appears in Section 1.05(i)’s “Proposal Exception,” which
states that Delek can confidentially propose to the Independent Director Committee
transactions otherwise prohibited by Section 1.05.13
“Independent Director Approval” is defined as “the approval of the majority
of the members of the Independent Director Committee.”14 “Independent Director
Committee” is defined as a Board committee “comprised solely of two or more
Independent Directors that is duly authorized to consider and act upon the matters
that require the Independent Director Approval” under the Amended Stockholder
Agreement. 15 “Independent Director” is defined to exclude any directors affiliated
with Alon Israel and Delek. It is undisputed that Wiessman is not an Independent
Director as defined in the Agreement, Alon never formed an Independent Director
Committee, and thus Delek never obtained Independent Director Approval.
12
Id. § 2.02(a).
13
Id. § 1.05(i).
14
Id. § 4.
15
Id.
10
C. Events Leading to the Challenged Merger
1. Actions taken during the Standstill Period
According to the Complaint, Delek desired to own 100% of Alon’s equity
since the initial stock purchase. In early 2015, however, Alon Israel’s financial
difficulties propelled Delek away from a “full merger” and caused the parties to work
to close the initial stock purchase “as quickly as possible,” as Delek’s Yemin
publicly stated during a May 2015 earnings call.16
In July 2015, Wiessman proposed that the Board form a special committee of
directors to respond quickly to any transaction offers received from Delek (the
“Special Committee”). Wiessman proposed appointing to the Special Committee all
directors except for the five Delek Directors. The Board did not take formal action
to constitute the Special Committee at the July meeting.
In August 2015, Yemin commented during a public earnings call on Delek’s
intention to acquire the remaining Alon stock, stating that “obviously . . . we are not
in the business of holding 48% in a company.” 17
Although the Board had not formally constituted or empowered the Special
Committee, the committee members met on September 29, 2015. At that meeting,
the committee appointed Wiessman as chairman. On October 8, Wiessman
16
Second Am. Compl. ¶ 36.
17
Id. ¶ 59.
11
contacted Yemin and inquired “whether there was a transaction that Delek would
contemplate in the near term of which the Special Committee should be aware.”18
Yemin and Wiessman met on October 30, and Yemin told Wiessman that “any deal
between Delek and Alon would need to be a stock-for-stock deal due to leverage
limitations[.]” 19
Alon’s public disclosures elliptically state that by October 30, 2015,
“questions had arisen ‘among Alon Board members regarding the establishment of
the Special Committee.’” 20 Alon did not disclose the questions or who specifically
raised them. On October 30, the Board formally approved the formation of the
Special Committee and authorized the Special Committee to engage advisors. The
committee retained J.P. Morgan Securities LLC (“J.P. Morgan”) as its financial
advisor and Gibson, Dunn & Crutcher LLP as its legal counsel.
Although the Board formally constituted the Special Committee in October
2015, the Board did not fully delineate the committee’s powers until October 2016—
a year later. It was unclear during that period whether the Committee had the
authority to explore alternative transactions or reject a deal with Delek.
18
Id. ¶ 61.
19
Id. ¶ 62.
20
Id. ¶ 63.
12
In December 2015, Yemin told Wiessman that “any deal with Alon would
need to be at an exchange ratio reflecting a discount to current Alon market price.”21
Wiessman responded by raising the prospect of Alon issuing its stockholders a one-
time cash dividend to offset such a discount. Yemin stated that Delek was unlikely
to support a special dividend. Later that month, Delek and Alon entered into a
confidentiality agreement allowing the exchange of non-public information. And
Wiessman and Yemin discussed a set of Special Committee talking points on
potential transaction terms, including terms related to price and a special dividend.
By January 2016, Delek released an investor presentation that included
information on Delek’s plans to either acquire the remaining 52% or acquire an
additional 3% of Alon stock. The latter transaction would give Alon Israel majority
stock ownership. Internally, Delek commenced a process for the eventual
disposition of its retail business to alleviate potential antitrust hurdles to a business
combination with Alon and provide liquidity for any cash component of the deal.
That month, negotiations between Yemin and Wiessman continued. On
January 27, 2016, Yemin told Wiessman that Delek disfavored a stock-for-stock deal
at then-current market prices and that the exchange ratio would need to be at a
discount to Alon’s stock price.
21
Id. ¶ 66.
13
That same day, Yemin proposed replacing two Alon directors—Morris and
Pery—with two directors selected by Delek, Kacal and Wheeler. Soon after, Delek
and Alon amended the Amended Stockholder Agreement on January 29, 2016, to
nominate Kacal and Wheeler to the Board. 22 That same day, Delek informed Alon
that it would provide “at least 14-days’ notice” before increasing its ownership stake
above 50%. 23
In February 2016, Yemin shifted gears, telling Wiessman that Delek was
exploring paying 80% of the merger consideration in cash.24 Wiessman responded
that the Special Committee would expect a premium on the cash consideration.
Then, the Special Committee met on February 23, 2016, and decided to prepare a
proposal letter for Delek suggesting a stock-for-stock merger. They decided to
propose an exchange ratio based on then-current market prices instead of any
premium deal. The Special Committee left it to Wiessman to determine whether to
deliver the letter based on the outcome of a meeting with Yemin.
22
The amendment to the Amended Stockholder Agreement also included Board
resolutions determining that the Delek Directors were independent and amending Alon’s
bylaws to extend supermajority voting requirements for the removal or replacement of
Yemin as Alon’s Board Chairman. It further added, revised and replaced various
provisions of the Amended Stockholder Agreement relating to the nomination of directors,
termination of the Amended Stockholder Agreement and Board composition. Delek’s
proposed Board nominees Kacal and Wheeler were later elected to the Board and appointed
to the Special Committee in May 2016.
23
Second Am. Compl. ¶ 82.
24
Id. ¶ 86.
14
In March 2016, Yemin revised its message again, informing Wiessman that
Delek was exploring paying 50% of the merger consideration in cash, and that Delek
understood (based on their previous discussions) that such a structure would require
a premium. Wiessman rejected the proposal, although it would involve a premium,
responding that such a structure was not acceptable because it would trigger “make
whole” payments under Alon’s debt covenants and be a taxable event for Alon’s
stockholders.25 Wiessman again proposed a special dividend, which Yemin again
rejected.
In April 2016, the Special Committee, through Wiessman, delivered a letter
to Delek proposing an acquisition of Alon in a stock-for-stock deal with an at-the-
market exchange ratio of 0.687 shares of Delek stock for each share of Alon common
stock. This proposal raised for the first time that any deal should be conditioned on
Special Committee approval and a majority-of-the-minority vote. The proposal also
asserted that synergies would generate at least $100 million in annual cost savings
between the companies. Yemin rejected the proposed market-price-based exchange
ratio and disputed the Special Committee’s assertion as to expected cost synergies.
On May 6, 2016, Yemin confirmed on Delek’s quarterly earnings call that
these negotiations had taken place. Yemin further stated that “the independent
directors of Alon understood that ‘it doesn’t make sense’ for there to be a transaction
25
Id. ¶ 89.
15
at an exchange ratio based on current market prices.”26 The next day, Alon’s stock
price fell by 7%, thereby pushing any exchange ratio in Delek’s favor. The Special
Committee expressed its desire to respond publicly to Yemin’s comments, but Delek
demanded that the Special Committee refrain. A reasonable inference is that
Yemin’s public comments and muzzling of the Special Committee were intended to
manufacture market conditions favorable to Delek in a stock-for-stock transaction.
2. Actions taken after the Standstill Period
The Standstill Period expired on May 15, 2016. Three days later, Delek sent
the Special Committee a letter informing it that Delek would be in contact when
market conditions improved. Ignoring Delek’s “we’ll be in touch” communication,
on May 25, 2016, the Special Committee sent a new written proposal to Delek
lowering the proposed stock-for-stock exchange ratio to 0.615 in Delek’s favor.
By June 13, 2016, Delek had yet to provide a substantive response to either
one of the Special Committee’s two written proposals. The Special Committee
considered issuing a press release announcing that it was authorized to explore
strategic alternatives. Again, Delek sought to restrict Alon’s public statements.
Yemin objected to the press release, contending that the Special Committee lacked
the authority to explore strategic alternatives that did not involve Delek. The Special
Committee capitulated to Yemin’s demands, issuing a revised press release.
26
Id. ¶ 94.
16
On October 13, 2016, the Special Committee submitted a third written
proposal, bidding against itself again by lowering the proposed exchange ratio to a
range of 0.527 to 0.563.
The next day, Delek delivered its buyout proposal to the Special Committee,
which called for an all-stock transaction with a fixed exchange ratio of 0.44 Delek
shares for each Alon share, then-equating to $7.62 per Alon share based on Delek’s
closing price of $17.32. Delek’s proposal provided that the transaction would
require approval “by a special committee . . . comprised entirely of directors that are
independent of Delek” and the holders of a majority of the non-Delek-affiliated Alon
stock. 27
About two weeks later, on October 27, 2016, the Board adopted resolutions
that permitted the Special Committee “to decline any proposal from Delek and to
review and evaluate strategic alternatives[.]” 28 This adoption came after Yemin
communicated at least twenty-six times with Wiessman or the Special Committee,
and the parties had largely agreed upon deal structure.
In December 2016, Delek sought prompt consummation of the deal, but J.P.
Morgan provided a financial analysis showing that Delek’s October 14 offer
understated Alon’s intrinsic value.
27
Id. ¶ 111.
28
Id. ¶ 115.
17
By December 24, 2016, Wiessman had suggested to Yemin that the Special
Committee would be willing to agree upon an exchange ratio of 0.539. After
consulting with J.P. Morgan, on December 27, 2016, Wiessman proposed a 0.504
exchange ratio. The next day, Yemin provided Wiessman with Delek’s “best and
final” offer reflecting the 0.504 exchange ratio.29 The Special Committee then
instructed its legal counsel and Wiessman to move forward with finalizing the other
deal points and a merger agreement.
On January 2, 2017, the Special Committee met to discuss the merger
agreement and deal terms. J.P. Morgan presented its financial analysis and delivered
an opinion that the exchange ratio was fair to Alon stockholders. Although J.P.
Morgan provided a fairness opinion, certain of J.P. Morgan’s analysis also did not
support the merger consideration. The exchange ratio implied a per share merger
price of $12.13, representing only a 6.6% premium to Alon’s closing price on the
same day. By contrast, J.P. Morgan’s sum-of-the-parts analysis yielded a per share
price range of $15.60 to $18.90, and J.P. Morgan’s two discounted cash flow
analyses yielded price ranges above the merger price. In assessing price, the Special
Committee relied in part on a “relative valuation” methodology, which focused on
the trading prices of Alon’s stock and Delek’s stock as opposed to the intrinsic value
29
Will Aff. Ex. A, Alon USA Energy, Inc., Proxy Statement (Schedule 14A) (May 30,
2017) (cited as the “Proxy”) at 115.
18
of Alon. This valuation approach did not account for potential manipulation of the
companies’ stock trading prices. The Complaint alleges other problems affected J.P.
Morgan’s analysis and the projections on which it was based.30
Also, according to the Complaint, and unbeknownst to the Special Committee,
between August 8, 2016 and November 4, 2016, J.P. Morgan and its affiliates had
increased their holdings in Delek by almost 60%.31
On January 2, the Special Committee unanimously adopted resolutions
determining that the deal was advisable, fair, and in the best interests of Alon and its
public stockholders, approving the deal, and recommending it to the Board.32
Shortly after that, the Board met and adopted resolutions approving the deal and
recommending that Alon’s stockholders vote in favor of the deal. 33
30
The Complaint also alleges that the Special Committee failed to inform itself that: (1) the
Delek Directors participated in the creation of Alon’s financial forecasts used in
negotiations with Delek. Second Am. Compl. ¶¶ 144, 206. (2) The Special Committee
commissioned projections that “excluded management’s best estimates of the positive
future revenue impact of planned growth initiatives.” Id. ¶ 121; see also id. ¶¶ 150, 155.
And (3) J.P. Morgan’s valuation analyses did not account for the value of acquiring limited
partner interests in Alon USA Partners, LP, discussed below. Id. ¶¶ 157–59, 207.
31
J.P. Morgan and its affiliates purchased 573,154 shares of Delek stock, bringing their
overall beneficial ownership to 1,542,001 shares and raising their ownership stake to 2.5%.
32
Proxy at 118.
33
See id. The parties dispute whether the Delek Directors recused themselves from the
vote.
19
In connection with the transaction, Wiessman and Haddock secured post-
merger directorships with Delek entities, and Wiessman retained his executive
chairman role at Alon Partners G.P.
Before the parties announced the merger, Delek developed a plan to capitalize
on Alon’s interests in Alon USA Partners, LP (the “Partnership”), the entity through
which Alon operates its wholesale marketing and certain refining operations. Alon
wholly owned the Partnership’s general partner and owned 81.6% of the
Partnership’s limited partner interests. The remaining 18.4% of the Partnership’s
limited partner interests were publicly held. According to the Complaint, Delek and
Alon also negotiated Delek’s post-merger acquisition of the remaining 18.4% of the
limited partner interests contemporaneously while negotiating the merger. Also
according to the Complaint, Wiessman’s son served on the board of the Partnership’s
general partner.
D. The Merger
On January 3, 2017, Alon and Delek announced their entry into the Agreement
and Plan of Merger. The merger price represented a 6.6% premium to Alon’s closing
price on the day of the announcement. On May 30, 2017, Alon issued a Proxy
Statement (“Proxy”) 34 informing its stockholders of the proposed merger. At a
special meeting of Alon stockholders, held on June 28, 2017, holders of
34
Will Aff. Ex. A.
20
approximately 89% of Alon’s total outstanding shares voted in favor of the merger.
According to Alon, stockholders unaffiliated with Delek owned 79% of the
outstanding shares voted in favor of the merger.35
E. Ensuing Stockholder Litigation
Six months after Alon and Delek announced the proposed merger, and weeks
before the stockholder vote, stockholders filed three lawsuits in two federal district
courts alleging disclosure deficiencies in violation of Section 14(a) of the Securities
Exchange Act of 1934.36 The plaintiff in the first-filed federal case moved for
injunctive relief. Shortly after, the Arkansas Teacher Retirement System
(“Plaintiff”) commenced this lawsuit.
Alon opted to supplement the Proxy voluntarily. On June 16, 2017, Alon
issued a supplemental disclosure describing all four lawsuits and attaching complete
copies of the complaints as exhibits. Alon issued another supplemental disclosure
five days later (the “June 21 8-K”). 37 The plaintiffs in the federal actions voluntarily
dismissed their claims.
The merger closed on July 1, 2017.
35
Will Aff. Ex. L at 8.
36
See Page v. Alon USA Energy, Inc., Case No. 1:17-cv-00671 (D. Del. June 2, 2017)
(Complaint); Adler v. Alon USA Energy, Inc., Case No. 1:17-cv-00742 (D. Del. June 13,
2017) (Complaint); Phelps v. Delek US Hldgs., Inc., Case No. 3:17-cv-00910 (M.D. Tenn.
June 2, 2017) (Complaint).
37
Will Aff. Ex. K.
21
Plaintiff amended its complaint on May 8, 2018, and the defendants
(“Defendants”) moved to dismiss the complaint on July 9, 2018. Plaintiff again
amended its complaint on September 18, 2018, and Defendants again moved to
dismiss. The parties completed briefing on December 3, 2018, 38 and the Court heard
oral argument on March 27, 2019.
II. LEGAL ANALYSIS
Plaintiff’s Second Amended Verified Class Action Complaint (“Complaint”)
asserts five counts: Count I claims that all Defendants breached the Amended
Stockholder Agreement.39 Count II claims that Defendants’ breaches of the
Amended Stockholder Agreement vitiated the Board’s waiver of Section 203;
consequently, Delek, Alon, and Holdco, Inc. (“Holdco”), an entity formed for the
purpose of the merger, were subject to the prohibitions set forth in 8 Del. C. § 203,
which they violated.40 Count III claims that Delek, Alon, and Holdco committed
conversion by taking possession over the stockholder class’s Alon shares through
38
Dkt. 41, Opening Br. in Supp. of the Delek Defs.’ Mot. to Dismiss Second Am. Compl.
(“Delek Defs.’ Opening Br.”); Dkt. 43, Opening Br. in Supp. of the Special Comm. Defs.’
Mot. to Dismiss the Second Am. Verified Class Action Compl. (“Special Comm. Defs.’
Opening Br.”); Dkt. 49, Pl.’s Omnibus Answering Br. in Opp’n to Defs.’ Mot to Dismiss
(“Pl.’s Ans. Br.”); Dkt. 54, Reply Br. in Supp. of the Delek Defs.’ Mot. to Dismiss Second
Am. Compl. (“Delek Defs.’ Reply Br.”); Dkt. 55, Reply Br. in Supp. of the Special Comm.
Defs.’ Mot. to Dismiss the Second Am. Verified Class Action Compl. (“Special Comm.
Defs.’ Reply Br.”).
39
Second Am. Compl. ¶¶ 179–86.
40
Id. ¶¶ 187–91.
22
the merger. 41 Count IV claims that Delek, Holdco, and the Director Defendants
breached their fiduciary duties to Plaintiff and the class by consummating the
merger. 42 Count V claims that the Director Defendants breached their fiduciary
duties to Plaintiff and the class by violating and failing to enforce the Amended
Stockholder Agreement and Section 203 and by making materially false and
incomplete disclosures in the Proxy and June 21 8-K. 43
Defendants moved to dismiss the Complaint pursuant to Court of Chancery
Rule 12(b)(6). On a motion pursuant to Rule 12(b)(6), the Court accepts “all well-
pleaded factual allegations in the Complaint as true, [and] accept[s] even vague
allegations in the Complaint as ‘well-pleaded’ if they provide the defendant[s] notice
of the claim[.]” 44 “A trial court is not, however, required to accept as true conclusory
allegations ‘without specific supporting factual allegations.’” 45 The Court “draw[s]
all reasonable inferences in favor of the plaintiff, and den[ies] the motion unless the
41
Id. ¶¶ 192–94.
42
Id. ¶¶ 195–200. Count IV also asserts a disclosure claim against Delek.
43
Id. ¶¶ 201–12.
44
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del.
2011) (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).
45
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (first citing
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 65–66 (Del. 1995); then citing
Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 38 (Del. 1996)).
23
plaintiff could not recover under any reasonably conceivable set of circumstances
susceptible of proof.”46
A. Breach of the Amended Stockholder Agreement
Through Count I, Plaintiff claims that Defendants breached several provisions
of the Amended Stockholder Agreement: the Standstill Provision (§ 1.01(a)), No
Merger Provision (§ 1.05(h)), and No Material Transactions Provision (§ 2.02(a)).47
“To state a claim for breach of contract, [Plaintiff] ‘must demonstrate: first, the
existence of the contract, whether express or implied; second, the breach of an
obligation imposed by that contract; and third, the resultant damage to the
plaintiff.’” 48
Defendants do not challenge the existence of the Amended Stockholder
Agreement but contend that Plaintiff lacks standing to claim breach. They further
argue that Plaintiff has failed to plead that Delek breached any provision of the
Agreement. Finally, Defendants assert that Plaintiff has failed to plead damages
adequately.
46
Cent. Mortg., 27 A.3d at 536 (citing Savor, 812 A.2d at 896–97).
47
Second Am. Compl. ¶¶ 5, 8, 182.
48
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 883 (Del. Ch. 2009) (quoting VLIW Tech.,
LLC v. Hewlett-Packard Co., 840 A.2d 606, 612 (Del. 2003)).
24
1. Plaintiff has standing to sue for breach of the Amended
Stockholder Agreement.
Under Delaware law, only parties to a contract and intended third-party
beneficiaries have standing to sue for breach of the contract.49 Plaintiff is not a party
to the Amended Stockholder Agreement but argues that it has standing as a third-
party beneficiary.
Plaintiff must demonstrate three elements to qualify as a third-party
beneficiary of the Agreement:
(i) the contracting parties must have intended that the third
party beneficiary benefit from the contract, (ii) the benefit
must have been intended as a gift or in satisfaction of a
pre-existing obligation to that person, and (iii) the intent to
benefit the third party must be a material part of the
parties’ purpose in entering into the contract. 50
49
NAMA Hldgs., LLC v. Related World Mkt. Ctr., LLC, 922 A.2d 417, 434 (Del. Ch. 2007)
(citing Comrie v. Enterasys Networks, Inc., 2004 WL 293337, at *2 (Del. Ch. Feb. 17,
2004)); see also Amirsaleh v. Bd. of Trade of City of New York, Inc., 2008 WL 4182998,
at *4 (Del. Ch. Sept. 11, 2008).
50
Madison Realty P’rs 7, LLC v. Ag ISA, LLC, 2001 WL 406268, at *5 (Del. Ch. Apr. 17,
2001) (citing Guardian Constr. Co. v. Tetra Tech Richardson, Inc., 583 A.2d 1378, 1386–
87 (Del. Super. 1990)). See also Oliver B. Cannon & Son, Inc. v. Dorr-Oliver, Inc., 336
A.2d 211, 215–16 (Del. 1975) (finding third party was “intended to be a third-party-
creditor beneficiary of the [sub]contract” where the “subcontract manifest[ed] the requisite
intent that [plaintiff’s] proper performance of the subcontract would, to that extent,
discharge [defendant’s] duty to [the third-party]”); Blair v. Anderson, 325 A.2d 94, 96–97
(Del. 1974) (“Generally, the rights of third-party beneficiaries are those specified in the
contract; but if performance of the promise [in the contract] will satisfy a legal obligation
which a promisee owes a beneficiary, the latter is a creditor beneficiary with standing to
sue.” (citing Astle v. Wenke, 297 A.2d 45, 47 (Del. 1972)); Dolan v. Altice USA, Inc.,
C.A. No. 2018-0651-JRS, slip op. at 18 (Del. Ch. June 27, 2019) (holding that corporate
founders had standing to enforce a merger provision as third-party beneficiaries where the
provision “intended ‘to give the[m] (as beneficiar[ies]) the benefit of the promised
25
As their first line of defense, Defendants argue generally that stockholders are
not intended beneficiaries of corporate contracts simply by virtue of their stake in
the entity. 51 They observe that this Court has “previously bristled at the notion that
a stockholder could have ‘directly enforceable rights as third-party beneficiaries to
corporate contracts.’” 52 They urge caution in conferring third-party beneficiary
status to a stockholder. Like other corporate decisions, the decision of whether to
enforce a corporate contract falls within the business judgment of the board of
directors. If the board fails to exercise that judgment consistent with its fiduciary
obligations, a stockholder’s sole recourse should be to sue the directors for breach
of fiduciary duties, Defendants say. 53
performance’” (citing Restatement (Second) of Contracts § 302 cmt. c (1981))); Insituform
of N. Am., Inc. v. Chandler, 534 A.2d 257, 270 (Del. Ch. 1987) (“In order for third party
beneficiary rights to be created, not only is it necessary that performance of the contract
confer a benefit upon third parties that was intended, but the conferring of a beneficial
effect on such third party-whether it be a creditor of the promisee or an object of his or her
generosity-should be a material part of the contract’s purpose.” (emphasis in original)).
51
See generally Delek Defs.’ Opening Br. at 27–28. The Special Committee Defendants
joined in and incorporated the arguments set forth in the briefing submitted by Delek,
Holdco, Alon, and the Delek Directors. Special Comm. Defs.’ Opening Br. at 1 n.1;
Special Comm. Defs.’ Reply Br. at 2.
52
Amirsaleh, 2008 WL 4182998, at *4 (quoting Orban v. Field, 1993 WL 547187, at *9
(Del. Ch. Dec. 30, 1993)).
53
See Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 928 (Del. 2003) (“The
business judgment rule embodies the deference that is accorded to managerial decisions of
a board of directors. ‘Under normal circumstances, neither the courts nor the stockholders
should interfere with the managerial decision of the directors.’”).
26
Delaware courts, however, have recognized stockholders receiving direct
benefits from corporate contracts as third-party beneficiaries with standing to
enforce those contracts.54 For example, in Amirsaleh, this Court held that members
of a target company were third-party beneficiaries of a merger agreement.55 The
merger agreement granted merger consideration directly to the members, with the
substance of the consideration to be determined “at the election” of each member.56
Based on this provision, the Court found that the merger agreement “manifest[ed]
an unambiguous intent to benefit the [target’s] Members” and that there was
therefore “little legitimate question that the members . . . were intended beneficiaries
. . . .” 57 The Court further held that the plaintiff member had standing to “enforce
54
See, e.g., Amirsaleh, 2008 WL 4182998, at *4 (finding that members of a company were
intended beneficiaries of merger agreement entered into by the company because “the
Agreement manifests an unambiguous intent to benefit the [company’s] [m]embers”);
NAMA Hldgs., 922 A.2d at 424 (“While not a signatory to that [venture] agreement, section
12.18(j) explicitly states that NAMA is a third-party beneficiary of section 12.18 in its
entirety.”); Hadley v. Shaffer, 2003 WL 21960406, at *5 (D. Del. Aug. 12, 2003) (finding
shareholders to be third-party beneficiaries of a merger agreement that required stockholder
approval and contained a stockholder payment provision). See also Comrie, 2004 WL
293337, at *3–5 (finding employees to be intended third-party beneficiaries of stock
purchase agreement that directed the grant of options directly to the employees).
55
Amirsaleh, 2008 WL 4182998, at *4–5.
56
Id. at *4.
57
Id. (“[A]s the United States District Court for the District of Delaware has ruled, former
shareholders of a corporation are intended third party beneficiaries where the merger
agreement provided that the shareholders would receive compensation for their shares and
the merger required shareholder approval.” (citing Hadley, 2003 WL 21960406, at *5)).
The Court further distinguished the Orban v. Field case, cited by Defendants here, as
involving a “wholly incidental” benefit—the right to a class vote. Id. (citing Orban, 1993
WL 547187, at *9).
27
his right to elect the form of his consideration under the Merger Agreement”—a
“right ‘clearly provided by the Agreement.’” 58 The Court reached this conclusion
although the merger agreement expressly disclaimed third-party beneficiaries.59
Thus, a stockholder’s equity stake neither automatically confers nor
automatically disqualifies a stockholder from demonstrating third-party beneficiary
status to a corporate contract. Plaintiff is eligible for third-party beneficiary status
if Plaintiff demonstrates the three required elements, as the plaintiff did in
Armisaleh.
Turning to the first element, Plaintiff must to demonstrate that the Agreement
confers an intended benefit to Plaintiff. As part of this analysis, Plaintiff must show
that it received a direct as opposed to an incidental benefit from the Agreement.
Third parties who “happen[] to benefit from the performance of the promise either
coincidentally or indirectly”—i.e., incidental beneficiaries—“will be held to have no
enforceable rights under the contract.”60 “[A] benefit need not be pecuniary to
58
Amirsaleh, 2008 WL 4182998, at *5.
59
Id.
60
Insituform, 534 A.2d at 269 (citations omitted); see also Comrie, 2004 WL 293337, at
*4 (“Where the effect on a third party, ‘while a benefit to [that party] and intended, [is]
merely a means through which the benefit that motivated the contract was sought to be
achieved for the signatories,’ even if that third party is not merely incidental to the contract,
that third party takes no rights under the contract.” (alterations in original) (citation
omitted)).
28
constitute a direct benefit.”61 To determine whether the Amended Stockholder
Agreement confers a direct benefit to Plaintiff, the Court looks to the terms of the
contract.62
The terms of the Agreement adopt in modified form the protections of Section
203. As reflected in its recitals, the Agreement adopts the intent of the original
stockholder agreement, which was entered into “in connection with and as a
condition to Delek receiving approval for purposes of Section 203[.]” 63 And the
terms of the Agreement mimic Section 203’s anti-takeover protections by preventing
Delek from entering into transactions with Alon. 64
61
Baker v. Impact Hldg., Inc., 2010 WL 1931032, at *4 (Del. Ch. May 13, 2010) (finding
that a stockholders agreement conferring a board seat to a third party provided a direct
benefit to that third party).
62
See Comrie, 2004 WL 293337, at *3 (finding contracting party’s intent to bestow rights
on third parties was “plain from the face of the Agreement” where the agreement directed
the grant of benefits to the third parties); Hadley, 2003 WL 21960406, at *5 (citing Grant
St. Artists v. Gen. Elec. Co., 19 F. Supp. 2d 242, 253 (D.N.J. 1998)).
63
Am. S’holder Agr. at 1 (second “WHEREAS” clause); see also id. Ex. B (“subject to
and contingent upon Delek and the Company entering into the Stockholder Agreement,
any acquisition of ‘ownership’ of ‘voting stock’ . . . of the Company by Delek or its
Affiliates resulting solely by reason of the Stock Purchase Transaction . . . is hereby
approved, so that the restrictions on business combinations contained in Section 203 will
not apply to Delek or its Affiliates and Associates solely as a result of the Stock Purchase
Transaction”).
64
Compare 8 Del. C. § 203(a) (“[A] corporation shall not engage in any business
combination with any interested stockholder for a period of 3 years following the time that
such stockholder became an interested stockholder” unless certain conditions are present.),
with Am. S’holders Agr. § 1.01(a) (“Delek covenants and agrees that Delek shall not . . .
own, acquire, offer or propose to acquire, or agree or seek to acquire, or solicit the
acquisition of, by purchase or otherwise, any Company Capital Stock or equity-linked
securities . . . if, following such acquisition or due to such ownership, Delek . . . would own
29
Section 203 protections directly benefit stockholders of a Delaware
corporation. Like all provisions of the Delaware General Corporation Law, Section
203 is part of a contract between Delaware corporations and their stockholders and
thus provides enforceable benefits to those stockholders. 65 The current version of
Section 203, in substantial part, was approved and became effective in 1988, in the
wake of the United States Supreme Court upholding as constitutional, in CTS Corp.
v. Dynamics Corp. of America, an Indiana act created for the “primary purpose” of
“protect[ing] the shareholders of Indiana corporations” against hostile corporate
Company Capital Stock in excess of the Threshold Amount.”), and id. § 1.05(h) (Other
than as permitted in certain sections, “Delek shall not . . . enter into or agree, offer, publicly
propose or seek to enter into, or otherwise be involved in or part of, any acquisition
transaction, merger or other business combination relating to all or part of the Company or
any of its Subsidiaries or any acquisition transaction for all or part of the assets of the
Company or any of its Subsidiaries or any of their respective businesses.”), and id.
§ 2.02(a) (“[T]he parties agree that, until the first anniversary of the Closing, any material
transaction between the Company or its Subsidiaries, on the one hand, and Delek . . . , on
the other hand, and any action or transaction relating to this Agreement shall not be taken
without prior Independent Director Approval or Unaffiliated Stockholder Approval.”).
65
See In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1050 (Del. Ch. 2015)
(“Stockholders similarly can sue directly to enforce contractual constraints on a board’s
authority under the charter, bylaws, and provisions of the DGCL. The availability of a
direct cause of action in these situations comports with the Delaware Supreme Court’s
longstanding recognition that the DGCL, the certificate of incorporation, and the bylaws
together constitute a multi-party contract among the directors, officers, and stockholders
of the corporation. As parties to the contract, stockholders can enforce it.” (internal
footnotes omitted)); see also Espinoza v. Zuckerberg, 124 A.3d 47, 65 (Del. Ch. 2015)
(“Although minority stockholders have no power to alter a controlling stockholder’s
binding decisions absent a fiduciary breach, they are entitled to the benefits of the
formalities imposed by the DGCL[.]”); Fed. United Corp. v. Havender, 11 A.2d 331, 333
(Del. 1940) (“It is elementary that [the DGCL] provisions are written into every corporate
charter.”).
30
takeovers.66 Similar to the Indiana act, the stated purpose of Section 203 is to confer
a benefit to stockholders by striking “a balance between the benefits of an unfettered
market for corporate shares and the well documented and judicially recognized need
to limit abusive takeover tactics” and to “encourage a full and fair offer.”67
In sum, the Agreement adopts the protections of Section 203, and the
protections of Section 203 directly benefit stockholders. It follows that the
Agreement provides direct benefits to stockholders. Further, Plaintiff was an Alon
stockholder; thus, Plaintiff received direct benefits from the Agreement.
It is reasonable to infer that direct benefits conferred to Plaintiff by the
Agreement were intended. “To determine whether the parties intended to make an
individual a third-party beneficiary, the Court must look to the terms of the contract
and the surrounding circumstances.”68 Here, the terms and the surrounding
circumstances of the Agreement reflect that the Agreement was entered into to
replicate aspects of Section 203’s protections. The benefits of those protections to
Plaintiff, therefore, were not mere coincidence; they were clearly intended.
66
481 U.S. 69, 91 (1987).
67
2 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations &
Business Organizations § 203, at VI-31 (3d ed. 2019) (Comment to Section 203 effective
Feb. 2, 1988).
68
Hadley, 2003 WL 21960406, at *5.
31
Turning to the second element, it is reasonable to infer that the benefits
conferred by the Agreement were intended to satisfy pre-existing legal obligations—
those provided by Section 203—and are otherwise a gift.
Turning to the third element, the anti-takeover protections in the Agreement
are a material part of its purpose. The provisions at issue in this lawsuit appear in
prominently in the first two sections of the Agreement. The recitals of the
Agreement reflect as its purpose Alon’s desire to impose conditions to Delek’s future
stock purchases. The contract generally reflects an intent to steer any Delek offer to
the Alon Board to avoid a creeping takeover deleterious to stockholder value.
Without the anti-takeover provisions, the Agreement would not achieve that
purpose.
Because Plaintiff has pled facts sufficient to support all three elements
required to achieve third-party beneficiary status, Plaintiff has standing to sue for
breach of the Agreement.
2. The Complaint adequately alleges that Delek breached the
Amended Stockholder Agreement.
The Complaint claims that Delek breached the Standstill Provision, which
states that Delek shall not “own, acquire, offer or propose to acquire, or agree or
32
seek to acquire, or solicit the acquisition of” Alon stock during the Standstill
Period.69
Defendants contend that the acts proscribed by the Standstill Provision require
“affirmative conduct by Delek.” 70 They focus their argument on “offering or
proposing to acquire,” contending that “offer” means “to present for acceptance or
rejection” and “propose” means “to put forward for consideration, discussion, or
adoption; suggest.”71 Defendants further define “seek” as “to endeavor to obtain or
reach” and “solicit” as “to seek or obtain by persuasion, entreaty, or formal
application[;]” 72 Defendants contend that these verbs all require some affirmative
action by Delek.73
Even accepting Defendants’ position and proffered definitions as accurate for
the sake of argument, 74 the Complaint alleges facts sufficient to support a claim for
breach of the Standstill Provision. The Complaint alleges that during the Standstill
Period, Delek:
69
Am. S’holder Agr. § 1.01(a).
70
Delek Defs.’ Opening Br. at 19; Delek Defs.’ Reply Br. at 4–5.
71
Delek Defs.’ Opening Br. at 19.
72
Id. at 19–20.
73
Delek Defs.’ Reply Br. at 4–5.
74
The Court faced a similar standstill provision in In re TD Banknorth Stockholders
Litigation, where it adopted an arguably broader definition of propose: “to form a purpose
or intention, or to offer up a plan or scheme.” 938 A.2d 654, 665 (Del Ch. 2007).
33
• Publicly announced its intent to acquire Alon;75
• Entered into a confidentiality agreement to permit the exchange of non-
public information;76
• Met with Wiessman six times and over the course of several months to
negotiate substantive terms of the merger prior to the expiration of the
Standstill Period;77 and
• Suggested several terms, including a stock-for-stock merger structure
and “an exchange ratio reflecting a discount to current Alon market
price.”78
These are all affirmative actions. And considering these allegations as a
whole, it is reasonably conceivable that Delek was seeking to acquire Alon during
the Standstill Period.
The finding that Plaintiff has adequately alleged a breach of the Standstill
Provision has a domino effect in this analysis, because the other provisions at issue
parrot the verbiage and encompass the actions prohibited by the Standstill Provision.
The No Merger Provision states that Delek shall not during the Standstill
Period “offer . . . or seek to enter into, or otherwise be involved in or part of, any
acquisition transaction, merger or other business combination relating to all or part
75
Second Am. Compl. ¶¶ 59, 72.
76
Id. ¶ 68.
77
See id. ¶ 62 (Oct. 30, 2015 meeting); id. ¶ 66 (Dec. 15, 2015 meeting); id. ¶ 70 (Dec. 31,
2015 meeting); id. ¶ 74 (Jan. 27, 2016 meeting); id. ¶ 86 (mid-February 2016 meeting); id.
¶ 89 (Mar. 22, 2016 meeting).
78
Id. ¶¶ 62, 66, 74, 86, 89, 96.
34
of the Company . . . .” 79 The actions prohibited by the No Merger Provision
encompass the actions prohibited by the Standstill Provision, as seeking to acquiring
stock is an acquisition transaction “relating to” Alon.80 Because Plaintiff has pled
facts sufficient to support a claim for breach of the Standstill Provision, Plaintiff has
adequately alleged a breach of the No Merger Provision. 81
The No Material Transactions Provision states that Delek shall not take or
enter into “any action or transaction relating to this [Amended Stockholder]
Agreement” during the Standstill Period “without prior Independent Director
Approval or Unaffiliated Stockholder Approval.”82 It is undisputed that Alon never
formed an Independent Director Committee, which is required under the Agreement
to obtain Independent Director Approval.83 It is also undisputed that Alon never
obtained Unaffiliated Stockholder Approval. Thus, the Complaint states a claim that
79
Am. S’holder Agr. § 1.05(h).
80
Medtronic Vascular, Inc. v. NanoMedSystems, Inc., 2014 WL 795077, at *1 (Del. Ch.
Jan. 27, 2014) (recognizing that the contractual term “related to” has a “broad scope”);
Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P., 2011 WL 549163, at *5 (Del.
Ch. Feb. 16, 2011) (“[O]ur courts have considered the connector ‘relating to’ to be
‘paradigmatically broad[.]’”).
81
The Complaint also states a claim that Delek breached the No Circumvention Provision,
which states that Delek shall not “take any action intended to circumvent” the No Merger
Provision. Am. S’holder Agr. § 1.05(k).
82
Am. S’holder Agr. § 2.02(a).
83
See Delek Defs.’ Opening Br. at 22 n.10; Delek Defs.’ Reply Br. at 10.
35
Delek breached the No Material Transactions Provision if it adequately alleges that
Delek took actions for which approval is required.
Like the No Merger Provision, the No Material Transactions Provision’s
prohibition on Delek taking “any action . . . relating to this Agreement” without
approval must be read to prohibit Delek from taking actions prohibited by the
Standstill Provision—an action plainly “relating to” the Agreement. 84 Thus, a
violation of the Standstill Provision also violates the No Material Transactions
Provision. Because the former is well pled, so too is the latter. 85
3. The Complaint adequately alleges damages.
Delek argues that Count I must be dismissed, even if it is reasonably
conceivable that Delek violated its contractual obligations, because the Complaint
fails to adequately allege damages. The Court disagrees. At the pleadings stage, it
is sufficient for the Complaint to aver damages resulting from the alleged contractual
breaches generally. 86 And the Complaint has met this standard.
84
See supra n.80.
85
Delek’s entry into the First Amendment to the Amended Stockholder Agreement also
breached the No Material Transactions Provision, as such an agreement certainly “relates
to” the Amended Stockholder Agreement and was thus subject to the approval
requirements. See Am. S’holder Agr. § 4.
86
See, e.g., In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *30
(Del. Ch. Jan. 25, 2016) (“Allegations regarding damages can be pled generally.”). To
argue that Plaintiff’s damages allegations are inadequate and should result in dismissal,
Defendants cite H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129 (Del. Ch. 2003). Delek
Defs.’ Opening Br. at 25. In that case, the Court applied a particularity standard to a motion
to dismiss the plaintiff’s fraudulent inducement claim (which it denied), but not to the
36
As Defendants acknowledge, the Complaint alleges that Delek’s breaches of
the Amended Stockholder Agreement “resulted in Delek acquiring the shares of the
Alon stockholders [in July 2017] on terms far less favorable to Alon stockholders
than if the terms of the [Agreement] had been honored.” 87 Even beyond this general
allegation, the Complaint alleges facts supporting an inference that Delek’s alleged
breaches, including its public statements, depressed Alon’s stock price, thereby
manufacturing more favorable market conditions for Delek in the July 2017
merger. 88 These allegations are sufficient to plead damages resulting from Delek’s
alleged contractual breaches.
4. The Complaint fails to state a claim for breach of the
Amended Stockholder Agreement against the Director
Defendants.
Count I fails to state a claim as to the Director Defendants because they are
not parties to the Agreement. “It is a general principle of contract law that only a
party to a contract may be sued for breach of that contract.” 89 Here, only Alon and
contract claim. See 832 A.2d at 143–46 & n.28 (“The defendants have also claimed that
Wexford has not adequately pleaded damages for the purported breach, however, based on
the facts that Wexford has alleged, it can reasonably be inferred that, if those facts are true,
Wexford suffered damages in the form of an overpayment for its investment in Encorp.”).
87
Delek Defs.’ Reply Br. at 13 (quoting Second Am. Compl. ¶ 182).
88
See Second Am. Compl. ¶¶ 13, 60, 94, 98.
89
Wallace ex rel. Cencom Cable Income P’rs II, L.P. v. Wood, 752 A.2d 1175, 1180 (Del.
Ch. 1999) (citation omitted); see also Huff Energy Fund, L.P. v. Gershen,
2016 WL 5462958, at *7–8 (Del. Ch. Sept. 29, 2016) (holding that directors who signed
shareholders agreement in a representative capacity could not be held liable for breach of
the agreement). While a non-party to a contract generally cannot be sued for breach of the
37
Delek are parties to the Agreement. 90 The Director Defendants are not personally
obligated to perform under the Agreement and, absent rare circumstances not pled
here, cannot be held liable for breach of the Agreement. 91 Count I is dismissed as to
the Director Defendants. 92
B. Violation of Section 203 and Conversion
Count II asserts that Delek, Holdco, and Alon violated Section 203 by entering
into the merger. Count III asserts that because Section 203 prohibited the merger,
the merger was void ab initio and thus constituted an act of conversion.
contract, as discussed above, the law recognizes that an intended third-party beneficiary of
a contract may have standing to sue for breach of the contract.
90
Am. S’holder Agr. at pp. 1, 39.
91
See Huff Energy, 2016 WL 5462958, at *7–8 (“The Director Defendants were not
personally obligated to perform under the contract and cannot be held liable for breach of
the contract.”). Indeed, Plaintiff concedes that the Director Defendants cannot be
personally liable for breaches of the Amended Stockholder Agreement. Pl.’s Ans. Br. at
25–26 n.30. Plaintiff nevertheless asserts that the Director Defendants should be joined
as parties to the breach of contract claim. According to Plaintiff, the Director Defendants,
as the persons through whom Delek and Alon can act to fulfill the Amended Stockholder
Agreement, are necessary to any equitable relief this Court awards against Delek and Alon.
This argument fails. This Court can award equitable relief against a company without the
company’s directors being parties to the litigation. See, e.g., QC Hldgs., Inc. v. Allconnect,
Inc., 2018 WL 4091721, at *11 (Del. Ch. Aug. 28, 2018) (awarding “specific performance
compelling the Company to use the Escrow Agreement to fulfill its obligations under the
Put Agreement” where the company’s directors were not joined as parties).
92
Defendants do not include in their briefing any argument on Count I as pled against Alon
and Holdco. This failure waives Defendants’ motion for dismissal as to Count I as pled
against Alon and Holdco. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999)
(“Issues not briefed are deemed waived.”).
38
Plaintiff predicates Counts II and III on the notion that Section 203 applied to
the merger despite the Board’s Section 203 approval. As its primary argument for
why Section 203 applies, Plaintiff contends that by violating the Amended
Stockholder Agreement, Delek vitiated Alon’s Section 203 approval, and thereby
restored Section 203’s protections. This creative argument takes many logical leaps,
which might not ultimately land. At the pleadings stage, however, the claims
survive, solely because the remedy for any breach of the Amended Stockholder
Agreement is not a pleadings-stage determination.
Defendants offer a silver bullet to Counts II and III. Section 203(a)(3) permits
a board and disinterested stockholders to approve by a two-thirds vote transactions
otherwise prohibited by Section 203.93 Both Alon’s Board and roughly 89% of the
Alon stockholders approved the merger. 94 Thus, Defendants say that even if Section
203 applies to the merger, the satisfaction of Section 203(a)(3)’s requirements
warrants dismissal of Counts II and III. Yet, “[f]or stockholder approval of any
93
8 Del. C. § 203(a)(3). See generally Craig B. Smith & Clark W. Furlow, Guide to
Takeover Law of Delaware, 28–32 (BNA Corporate Practice Series 1988) (discussing
8 Del. C. § 203(a)(3)).
94
The Court may consider the stockholder vote at the pleadings stage. In re TIBCO
Software Inc. S’holders Litig., 2015 WL 6155894, at *22 n.90 (Del. Ch. Oct. 20, 2015)
(“The Court may take judicial notice of the results of the vote reported in . . . SEC filings
because they are not reasonably subject to dispute.”).
39
corporate action to be valid, the vote of the stockholders must be fully informed.”95
Because Plaintiff has adequately alleged that the stockholder vote was not fully
informed as discussed below, Defendants cannot argue that the stockholder vote
results in dismissal of Plaintiff’s Section 203 claims.
C. Breach of Fiduciary Duty Against Delek and the Director
Defendants 96
Counts IV and V respectively assert that by approving the merger, Delek
breached its fiduciary duties as a controlling stockholder and the individual
defendants breached their fiduciary duties as directors. Plaintiff contends that
Delek’s position as a controlling stockholder standing on both sides of the merger
subjects the merger to the entire fairness standard of review, and that the possibility
that the entire fairness standard may apply is sufficient to defeat a motion to dismiss.
Defendants’ fourfold response is: (1) The Complaint does not adequately
allege that Delek was a controlling stockholder. (2) Even if the Complaint supports
a finding that Delek was a controlling stockholder, Defendants sufficiently restored
the business judgment standard by invoking the MFW conditions. 97 (3) Even if the
95
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 999 (Del. Ch. 2014) (citing
Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490, 502–03 (Del. Ch. 1990)), aff’d
sub nom. Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
96
Count IV is also asserted against Holdco, but the Complaint pleads no facts from which
it can be understood how Plaintiff contends Holdco, the entity into which Alon and later
Delek were merged, owed fiduciary duties to Alon’s stockholders or breached them.
97
See supra n.1.
40
entire fairness standard applies, the Complaint fails to allege facts sufficient to
support a finding of unfair process or unfair price. (4) The Complaint fails to state
a non-exculpated claim for breach against the Director Defendants in all events.
1. It is reasonably conceivable that Delek exercised control
over Alon.
“Entire fairness, Delaware’s most onerous standard” of review, arises when
the board labors under actual conflicts of interest, 98 such as when a controlling
stockholder stands on both sides of a challenged transaction.99
Although a majority stockholder is a controlling stockholder as a matter of
law, 100 a minority stockholder can also be deemed a controller.101 Under Delaware
law, a plaintiff can demonstrate that a minority stockholder exercised de facto
control by showing that: (a) the stockholder “actually dominated and controlled the
majority of the board generally”; 102 or (b) the stockholder “actually dominated and
98
In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. Aug. 16, 2013); see also Reiss
v. Hazelett Strip Casting Corp., 28 A.3d 442, 460 (Del. Ch. 2011).
99
Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997); Kahn v. Lynch Commc’n Sys.,
Inc., 638 A.2d 1110, 1115 (Del. 1994); Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del.
1983).
100
See, e.g., Lynch, 638 A.2d at 1113 (observing that a stockholder becomes a fiduciary if
it “owns a majority interest in . . . the corporation” (internal quotation marks omitted)).
101
See id. (observing that a stockholder becomes a fiduciary if it “exercises control over
the business affairs of the corporation” (emphasis original)).
102
In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *13 (Del. Ch. Mar. 28,
2018); In re Rouse Props., Inc., 2018 WL 1226015, at *12 (Del. Ch. Mar. 9, 2018) (first
citing Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2325152, at *17 (Del. Ch.
May 31, 2017); then citing In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 531 (Del. Ch.
2003), and then citing Lynch, 638 A.2d at 1114–15); see In re Primedia Inc. Deriv. Litig.,
41
controlled the corporation, its board or the deciding committee with respect to the
challenged transaction.” 103 “[T]he question of whether a large block holder is so
powerful as to have obtained the status of a ‘controlling stockholder’ is intensely
factual, [and] is a difficult one to resolve on the pleadings.” 104
Plaintiff contends that Delek exercised actual control over Alon prior to the
merger. 105 In support, Plaintiff alleges: “Delek owned approximately 48% of Alon’s
outstanding common stock.” 106 Five of Alon’s eleven directors at the time of the
merger were directly affiliated with Delek.107 And one of the remaining six
directors, Wiessman, was beholden to and therefore lacked independence from
Delek. As to Wiessman, Plaintiff specifically alleges that “Wiessman was beholden
910 A.2d 248, 257 (Del. Ch. 2006) (“[T]he plaintiffs need not demonstrate that [the alleged
controller] oversaw the day-to-day operations of Primedia. Allegations of control over the
particular transaction at issue are enough.”).
103
Cysive, 836 A.2d at 550–51; see also Rouse, 2018 WL 1226015, at *12 (citing
Williamson, 2006 WL 1586375, at *4); Tesla, 2018 WL 1560293, at *13; Basho Techs.
Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *27 (Del. Ch.
July 6, 2018) (“Broader indicia of effective control also play a role in evaluating whether
a defendant exercised actual control over a decision. Examples of broader indicia include
ownership of a significant equity stake (albeit less than a majority), the right to designate
directors (albeit less than a majority), decisional rules in governing documents that enhance
the power of minority stockholder or board-level position, and the ability to exercise
outsized influence in the board room, such as through high-status roles like CEO,
Chairman, or founder.” (footnotes omitted)).
104
Tesla, 2018 WL 1560293, at *13–14 (citation omitted) (concluding that the facts alleged
supported a reasonable inference that 22.1% stockholder exercised de facto control).
105
Second Am. Compl. ¶ 133.
106
Id.
107
Id. (“Five of Alon’s eleven directors were Delek executives[.]”).
42
to Delek” because, among other things, Wiessman, as the CEO and stockholder of
the owner of approximately 50% of Alon Israel, benefitted from Delek’s purchase
of Alon Israel’s Alon stock at a time when Wiessman’s business interests were
“crumbling.” 108 Wiessman and his daughter received salaries from Alon and an
indirect subsidiary of Alon, thereby indirectly benefitting from Delek’s status as
Alon’s controlling stockholder.109 And after the merger, Wiessman was appointed
to Holdco’s board of directors and allowed to continue on as the Executive Chairman
of Alon Partners GP. 110
The allegations concerning Wiessman, coupled with Wiessman’s actions
during the process leading up to the merger, are sufficient to cast doubt on
Wiessman’s independence from Delek at the pleadings stage. But even if Wiessman
were independent from Delek, it is reasonably conceivable that Delek exercised
actual control over Alon. The Complaint alleges facts from which it can be
reasonably inferred that Delek dominated Alon’s corporate affairs. Specifically, the
Complaint alleges that Delek: exercised its influence to remove and replace two
directors of the Board in order to work the same change upon the composition of the
108
Id. ¶ 26; see also id. ¶ 33.
109
Id. ¶ 26.
110
Id.
43
Special Committee; 111 dictated the timing, structure, and price of the merger; 112 and
effectively muzzled the Special Committee’s public statements to serve Delek’s
interests.113
This finding of reasonable conceivability as to Delek’s actual control over
Alon comports with the holding of Kahn v. Lynch Communication Systems, in which
the Delaware Supreme Court affirmed a post-trial holding that a 43.3% stockholder
that had designated five of eleven directors was a controlling stockholder.114 The
Supreme Court based this affirmance on the Court of Chancery’s “factual finding
that ‘the . . . [board’s independent] directors deferred to [the 43.3% stockholder on
a corporate decision] because of its position as a significant stockholder and not
because they decided in the exercise of their own business judgment that [the 43.3%
stockholder’s] position was correct.’” 115
For these reasons, it is reasonably conceivable that Delek is a controlling
stockholder, and the entire fairness standard of review therefore presumptively
applies to the approval of the merger. 116
111
Second Am. Compl. ¶¶ 75–78.
112
Id. ¶¶ 105, 110, 114, 118–20, 136, 142, 145.
113
Id. ¶ 106.
114
638 A.2d at 1111.
115
Id. at 1115.
116
As an alternative basis for applying entire fairness, Plaintiff contends that the majority
of the Board lacked independence from Delek or was interested in the merger. Pl.’s Ans.
Br. at 41, 45–49. Defendants contend that Plaintiff’s allegations do not support a finding
44
2. It is reasonably conceivable that the business judgment
standard was not restored under MFW.
Under MFW, in controller buyouts, the business judgment standard of review
will be restored where “the controller conditions the procession of the transaction on
the approval of both a Special Committee and a majority of the minority
stockholders.”117 Additional conditions must be met to restore the business
judgment standard under MFW, 118 but Defendants’ dismissal argument stands and
falls on this requirement.
For the business judgment standard to apply under MFW, Delek needed to
have invoked the MFW conditions “ab initio” or at the outset of the process.119
According to Defendants, MFW was properly invoked because the Special
Committee’s first formal offer and Delek’s first formal counteroffer conditioned the
merger on Special Committee approval and a majority-of-the-minority vote.120
that the majority of the Board is conflicted. Delek Defs.’ Reply Br. at 27–30. Because this
decision concludes that Count IV adequately states a claim for breach of fiduciary duty
under a controlling stockholder theory, I do not address Plaintiff’s alternative basis for
invoking entire fairness or Defendants’ response to that alternative argument.
117
MFW, 88 A.3d at 645.
118
Id. (a proponent must demonstrate that “(i) the controller conditions the procession of
the transaction on the approval of both a Special Committee and a majority of the minority
stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is
empowered to freely select its own advisors and to say no definitively; (iv) the Special
Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is
informed; and (vi) there is no coercion of the minority”).
119
Id. at 642.
120
Delek Defs.’ Reply Br. at 35–36 (citing Second Am. Compl. ¶¶ 11, 90, 124). Delek
also claims that “Plaintiff . . . admits that the very first offer that was made in connection
45
Defendants’ argument is inconsistent with recent Delaware Supreme Court cases
clarifying the timing requirements of MFW—Flood v. Synutra International, Inc.121
and Olenik v. Lodzinski. 122
In Synutra, the board considered a preliminary proposal that “did not
condition a potential transaction on both a favorable committee recommendation and
approval by a majority of the disinterested stockholders.” 123 Before the board had
substantively evaluated the proposal, however, the bidder sent a follow-up letter
reaffirming its initial offer and “expressly condition[ing] the transaction on the
approval of the Special Committee and a majority of the minority stockholders.”124
The Court of Chancery held that this timing sufficed to invoke the MFW
protections. 125 The Delaware Supreme Court affirmed the trial court’s holding,
with the Transaction was authorized by the Special Committee and was explicitly
conditioned on majority-of-the-minority approval.” Delek Defs.’ Opening Br. at 41 (citing
Proxy at 89–91). Plaintiff neither authored the Proxy nor made any such admission. In
addition, a proxy cannot be offered on a motion to dismiss for the truth of the matters set
forth therein. White v. Panic, 783 A.2d 543, 547 n.5 (Del. 2001) (“[T]he court may not
employ assertions in documents outside the complaint to decide issues of fact against the
plaintiff without the benefit of an appropriate factual record.”).
121
195 A.3d 754 (Del. 2018).
122
-- A.3d ---, 2019 WL 1497167, at *1 (Del. Apr. 5, 2019).
123
Flood v. Synutra Int’l, Inc., 2018 WL 705702, at *2 (Del. Ch. Feb. 2, 2018) (ORDER),
aff’d, 195 A.3d 754 (Del. 2018).
124
Id. at *2.
125
Id. at *3 (“The prompt sending of the Follow-up Letter prevented the Buyer Group from
using the M&F Worldwide conditions as bargaining chips. . . . The plaintiff has not pled
facts sufficient to call into question compliance with the ab initio requirement.”).
46
concluding that the timing requirements of MFW are satisfied “so long as the
controller conditions its offer on the key protections at the germination stage of the
Special Committee process, when [the committee] is selecting its advisors,
establishing its method of proceeding, beginning its due diligence, and has not
commenced substantive economic negotiations with the controller[.]” 126
In Olenik, the Court of Chancery determined that the timing requirements of
MFW had been satisfied where negotiations commenced between the parties eight
months before the controller imposed the MFW conditions because those
negotiations were merely “exploratory in nature.”127 The Delaware Supreme Court
reversed the holding because the MFW requirements “were not put in place early
and before substantive economic negotiation took place.” 128 The Court found that
“preliminary discussions transitioned to substantive economic negotiations when the
parties engaged in a joint exercise to value” the target, months before the MFW
conditions were imposed.129
126
195 A.3d at 763.
127
2018 WL 3493092, at *5, *16 (Del. Ch. July 20, 2018), aff’d in part, rev’d in part, 2019
WL 1497167.
128
2019 WL 1497167, at *8.
129
Id. at *9.
47
Applying the guidance of Synutra and Olenik, Plaintiff has pled facts
supporting a reasonable inferenced that Delek engaged in substantive economic
negotiations before Delek imposed the MFW conditions.
The Special Committee first raised the MFW conditions in its April 2016
proposal and Delek effectively agreed to this aspect of the proposal through its
October 2016 counteroffer.130 In the six months prior, Yemin on behalf of Delek
met with Wiessman six times to discuss potential deal terms. 131 At the first and
second of these meetings, Yemin is alleged to have proposed a “stock-for-stock
deal” structure and “an exchange ratio reflecting a discount” to Alon’s market
price. 132 Wiessman, on behalf of Alon, responded with price and other deal terms,
“including no discount to Alon’s market price and a $4 per share special
dividend.” 133 Yemin in turn responded that absent an exchange ratio reflecting “a
significant discount to Alon’s stock price[,]” a stock-for-stock deal would not be
attractive, and suggested a “cash-and-stock” deal.134 Wiessman reacted to the
concept of cash-and-stock deal by stating that the Special Committee would expect
130
See Second Am. Compl. ¶¶ 90, 110–12.
131
See supra n.77.
132
Second Am. Compl. ¶¶ 62, 66.
133
Id. ¶ 67.
134
Id. ¶¶ 74, 86, 89.
48
a “cash-based premium.” 135 But later, Wiessman rejected the proposed cash-and-
stock deal due to tax consequences and again proposed a special dividend. 136 These
negotiations were substantive in nature. They concerned the deal structure,
exchange ratio, and price terms. 137 Further, before the Special Committee first
proposed and Delek purportedly agreed to self-disable, the Special Committee
already had engaged J.P. Morgan as its financial advisor and Gibson, Dunn &
Crutcher LLP as its legal counsel,138 and Delek and Alon had “entered into a
confidentiality agreement to permit the exchange of non-public information.”139
Thus, it is reasonably conceivable that the MFW conditions were not imposed
at the “germination stage,” but rather, many months after. For this reason,
Defendants are not entitled to business judgment review at the pleadings stage, and
135
Id. ¶ 86.
136
Id. ¶ 89.
137
The first formal proposal Wiessman delivered on April 1, 2016 sought an all-stock deal,
based on an at-the-market exchange ratio of 0.687 Delek shares for each share of Alon
common stock. Second Am. Compl. ¶ 90. Because Plaintiff alleges that the parties
negotiated an exchange ratio for a stock-for-stock transaction and price terms prior to
April 1, 2016, a reasonable inference can be drawn that the April 1 formal proposal merely
reiterates the terms Wiessman and Yemin already negotiated. See Olenik,
2018 WL 3493092, at *15–16 nn.199, 206 (noting a justified concern could arise on a
record where a controller “negotiate[s] the material terms of a transaction before submitting
a formal offer, and then claim[s] ab initio status by sweeping those terms, along with the
MFW conditions into its first (and final) formal proposal”).
138
See Second Am. Compl. ¶ 56.
139
Id. ¶ 68.
49
it is reasonably conceivable that the merger will be subject to the entire fairness
standard. 140
3. The Complaint adequately alleges unfair process and unfair
price.
“The possibility that the entire fairness standard of review may apply tends to
preclude the Court from granting a motion to dismiss under Rule 12(b)(6) unless the
alleged controlling stockholder is able to show, conclusively, that the challenged
transaction was entirely fair based solely on the allegations of the complaint and the
documents integral to it.”141 “The concept of fairness has two basic aspects: fair
dealing and fair price.” 142 Fair dealing addresses “questions of when the transaction
was timed, how it was initiated, structured, negotiated, disclosed to the directors, and
how the approvals of the directors and the stockholders were obtained.” 143 Fair price
140
Plaintiff also disputes that the Special Committee was sufficiently independent and
effective so as to satisfy the MFW standard. It also disputes that the stockholder vote
prevailed by a majority of the truly unaffiliated stockholders. Pls.’ Ans. Br. at 70–72;
id. at 19 (“The 4,412,582 million shares collectively held by Morris and Wiessman
constituted approximately 6.2% of the Company’s stock and 11.6% of the non-Delek
public shares, giving Delek a substantial head start toward fulfilling the unaffiliated
stockholder vote requirement.”). Because this decision determines that the facts alleged
support a reasonable inference that Delek failed to invoke the MFW protections at the
relevant time, this decision does not resolve these other arguments.
141
Klein v. H.I.G. Capital, LLC, 2018 WL 6719717, at *16 (Del. Ch. Dec. 19, 2018). See
also Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *15 (Del. Ch.
July 26, 2018) (applying entire fairness “typically precludes dismissal of a complaint
under Rule 12(b)(6)” (citing Orman v. Cullman, 794 A.2d 5, 21 n.36 (Del. Ch. 2002))).
142
Weinberger, 457 A.2d at 711.
143
Id.
50
concerns “the economic and financial considerations of the proposed merger,
including all relevant factors: assets, market value, earnings, future prospects, and
any other elements that affect the intrinsic or inherent value of a company’s
stock.”144 “A strong record of fair dealing can influence the fair price inquiry,
reinforcing the unitary nature of the entire fairness test. The converse is equally true:
process can infect price.” 145
The Complaint pleads facts supporting a reasonable inference that the process
leading to the merger was unfair. According to the Complaint, significant aspects
of the merger were negotiated at a time when Delek was contractually precluded
from making an offer. 146 The Special Committee process was suboptimal. At
critical stages, the committee’s authority was unclear. By design, two directors were
removed from the Alon Board early in the process and replaced with individuals
selected by Delek. 147 The committee allowed negotiations to be conducted by
Wiessman, whose independence and disinterest were questionable.148 Further, the
144
Id.
145
Reis, 28 A.3d at 467 (citation omitted). See also Basho, 2018 WL 3326693, at *37
(“[A]n unfair process can taint the price.” (citations omitted)).
146
See, e.g., Second Am. Compl. ¶¶ 55, 74.
147
Id. ¶ 78.
148
See, e.g., id.
51
Complaint contains non-conclusory allegations suggesting that the Special
Committee failed to inform itself adequately. 149
The Complaint also pleads facts supporting a reasonable inference that the
merger consideration was unfair. According to the Complaint, the merger price paid
failed to capture the “fair intrinsic value” of Alon’s stock for multiple reasons.150
The price was tied to the companies’ respective stock values. 151 As a result, any
decline in Delek’s stock price affected the merger price negatively, 152 and Delek
made multiple public statements that had the effect of pushing down the merger
price. 153 Furthermore, the merger price was at the “low end of the value ranges for
Alon’s common stock” reflected in J.P. Morgan’s analyses, which are in turn alleged
to have undervalued Alon’s common stock. 154 For example, the Complaint asserts
that one set of projections J.P. Morgan relied upon improperly excluded
management’s best estimates of the future impact of planned growth projects.155
And the Complaint alleges that J.P. Morgan’s discounted cash flow analyses
149
See supra n.30.
150
Second Am. Compl. ¶ 147. The Complaint alleges that the price “was a substantial
discount” to the price originally paid by Delek for Alon Israel’s stock two years earlier. Id.
¶ 145.
151
See id. ¶¶ 145–46.
152
Id. ¶ 146.
153
Id. ¶¶ 145, 197.
154
Id. ¶ 148.
155
Id. ¶¶ 148–55.
52
“employed an unreasonably low perpetual growth rate for Alon, which exerted
additional downward pressure on the resulting valuations.” 156 Finally, the
Complaint alleges that the price failed to reflect the value of the planned acquisition
of the Partnership interests as well as the value of the Partnership’s market
capitalization, and certain Alon assets.157
Given these alleged problems, it is reasonably conceivable that Delek and the
Director Defendants did not engage in a fair process or negotiate a fair price for
Plaintiff and the class, and thereby breached their fiduciary duties.
4. The Complaint states a claim for breach of fiduciary duties
against the Director Defendants.
Defendants contend that the “fiduciary duty claims against the Delek
Directors must . . . be dismissed because they recused themselves as directors of
Alon from the Special Committee’s and Board’s process of approving” the
merger. 158 In support of this argument, Defendants appear to rely on the Proxy’s
statement that the Delek Defendants recused themselves from the adoption of Board
resolutions approving and recommending the merger. 159 Leaving aside that this
argument finds no basis in the Complaint, merely recusing oneself from the ultimate
156
Id. ¶ 156.
157
Id. ¶¶ 157–59.
158
Delek Defs.’ Opening Br. at 32 n.14. In support of this argument,
159
See, e.g., Proxy at 118.
53
decision does not absolve a director of his or her fiduciary duties. 160 Here, the
Complaint alleges facts from which it can be reasonably inferred that the Delek
Defendants participated in the process leading to and the approval of the merger.161
Defendants’ recusal argument fails.
Relying on the exculpatory provision contained in Alon’s charter, the Special
Committee Defendants contend that the Complaint has failed to allege a non-
exculpated claim against them. 162 They argue that the Complaint states only
“conclusory criticisms of the Special Committee process” that do not demonstrate
that the Special Committee acted in bad faith.163 The Special Committee Defendnats
make a good point, and the allegations against the committee members aside from
Wiessman are not extensive. Still, based on the above-discussed deficiencies in the
160
In support of their recusal argument, the Delek Defendants rely on In re Tri-Star
Pictures, Inc. Litigation, 1995 WL 106520 (Del. Ch. 9, 1995) and Citron v. E.I. Du Pont
de Nemours & Co., 584 A.2d 490 (Del. Ch. 1990). In both of these cases, however, the
directors found to have not breached their fiduciary duties had played no role in the board’s
decision-making process; they had not merely recused themselves from the ultimate
decision rendered. 1995 WL 106520, at *3–4; 584 A.2d at 499. Indeed, the Court in Tri-
Star expressly noted that there is “no per se rule [that] unqualifiedly and categorically
relieves a director from liability solely because that director refrains from voting on the
challenged transaction.” 1995 WL 106520, at *3. In so opining, the Court contemplated
“a scenario in which certain members of the board of directors conspire with others to
formulate a transaction that is later claimed to be wrongful. . . [and] those directors then
deliberately absent themselves from the directors’ meeting at which the proposal is to be
voted upon, specifically to shield themselves from any exposure to liability.” Id.
161
See, e.g., Second Am. Compl. ¶ 92, 116, 120, 134.
162
See Special Comm. Defs.’ Opening Br. at 17–18.
163
Id. at 17–20 (characterizing the Complaint’s allegations as “nitpicking”).
54
Special Committee’s process and issues concerning the merger price, and the below-
discussed disclosure violations, it is reasonably conceivable that the Special
Committee Defendants acted in bad faith. The Complaint therefore states a breach
of fiduciary duty of loyalty claim against the Special Committee Defendants as well
as the other Director Defendants in connection with the merger.
D. Disclosure Claims 164
Through Count V, Plaintiff alleges that the Director Defendants breached their
fiduciary duties due to material misstatements and omissions in the Proxy and
June 21 8-K. 165
“[D]irectors of a Delaware corporation have a fiduciary duty to disclose fully
and fairly all material information . . . .” 166 “Under Delaware law, when a board
chooses to disclose a course of events or to discuss a specific subject, it has long
been understood that it cannot do so in a materially misleading way, by disclosing
164
Through Count IV, the Complaint asserts that Delek also breached its fiduciary duties
due to material deficiencies and omissions in Alon’s Proxy. Second Am. Compl. ¶ 198.
Plaintiff does not brief its disclosure claims as pled against Delek; this aspect of Plaintiff’s
Count IV is therefore dismissed. Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc.,
2007 WL 2982247, at *11 (Del. Ch. Oct. 9, 2007) (“The plaintiffs have waived these
claims by failing to brief them in their opposition to the motion to dismiss.”).
165
Second Am. Compl. ¶¶ 210–11. Count V also alleges that the Director Defendants
breached their fiduciary duties by failing to enforce the Amended Stockholder Agreement
and violating Section 203. Second Am. Compl. ¶ 203. Defendants did not brief this aspect
of Count V, and Defendants’ motion to dismiss this portion of Count V is therefore waived.
See Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed are deemed waived.”).
166
Appel v. Berkman, 180 A.3d 1055, 1060 (Del. 2018) (alteration in original) (citation
omitted).
55
only part of the story, and leaving the reader with a distorted impression.”167
“Disclosures must ‘provide a balanced, truthful account of all matters they disclose.’
Partial disclosure, in which some material facts are not disclosed or are presented in
an ambiguous, incomplete, or misleading manner, is not sufficient to meet a
fiduciary’s disclosure obligations.”168 “An omitted fact is material if there is a
substantial likelihood that a reasonable shareholder would consider it important in
deciding how to vote.” 169 “Put another way, there must be a substantial likelihood
that the disclosure of the omitted fact would have been viewed by the reasonable
investor as having significantly altered the ‘total mix’ of information made
available.”170
Plaintiff identifies seven categories of allegedly deficient disclosures. Six of
these categories hit the mark.
1. The stockholder agreement, the Amended Stockholder
Agreement, and the amendment to the Amended
Stockholder Agreement
The Proxy discloses the existence of the original stockholder agreement, the
Amended Stockholder Agreement, and the amendment to the Amended Stockholder
167
Id. at 1064.
168
Id. (footnote omitted).
169
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)).
170
Id. (quoting TSC Indus., 426 U.S. at 449).
56
Agreement. Neither the Proxy nor June 21 8-K describe the terms of the original
stockholder agreement.171 As for the Amended Stockholder Agreement, the Proxy
states that it included “a ‘standstill’ provision prohibiting Delek from acquiring
additional shares that would result in Delek owning more than 49.99% of the
outstanding Alon common stock” before the end of the Standstill Period. 172 The
Proxy does not disclose that Delek was prohibited from taking a host of other broadly
described actions, including “seek[ing] to” acquire Alon common stock. The June
21 8-K provides little additional detail.173 As for the amendment to the Amended
Stockholder Agreement, the Proxy states that it permitted the nomination of Wheeler
and Kacal as directors. 174
These disclosures are materially incomplete. The stockholder agreement and
its various amendments were put in place to protect stockholders, and a reasonable
stockholder would consider it important to have a full and fair description of these
agreements in deciding how to vote on the merger.
Defendants note that the Proxy directs stockholders to a May 26, 2015
Schedule 13D attaching a copy of the Amended Stockholder Agreement and a
171
See generally Proxy at 82.
172
Id. at 83. The Proxy states, misleadingly, that the Agreement permitted Delek to
nominate its own slate of directors for Alon’s 2016 annual stockholder meeting. Id.
173
See generally June 21 8-K. This 8-K deletes the Proxy’s allegedly misleading statement
regarding Delek’s ability to nominate its own director slate
174
See Proxy at 87–88.
57
February 3, 2016 Schedule 13D attaching a copy of the amendment to the Amended
Stockholder Agreement. Disclosures are not supposed to take the form of a
scavenger hunt. Including directions of where to find copies of some, but not all, of
the relevant agreements did not satisfy the Director Defendants’ disclosure
obligations.175
2. J.P. Morgan’s conflict of interests
The Proxy discloses that J.P. Morgan and its affiliates, in the ordinary course
of their businesses, “may actively trade the debt and equity securities or financial
instruments . . . of Alon or Delek for their own accounts or for the accounts of their
customers . . . .” 176 Plaintiff contends that the language “may actively trade . . .
equity securities” is materially misleading given that J.P. Morgan actually increased
its position in Delek by almost 60% while providing financial advice to the Special
175
See ODS Techs., L.P. v. Marshall, 832 A.2d 1254, 1262 (Del. Ch. 2003) (“[A]lthough
those agreements are disclosed in the Form 10-KSB, the portions of those agreements
relevant to a reasonable shareholder are neither highlighted nor mentioned directly in
connection with the Amendments.”); see also In re Ebix, Inc. S’holder Litig.,
2014 WL 3696655, at *10 (Del. Ch. July 24, 2014) (“Discovering the alleged harm would
have required a careful and close reading of multiple SEC filings and incorporated exhibits
by a stockholder strongly suspicious of the Board’s disclosures. The Court cannot say, at
the pleading stage, that such effort is required of a reasonably diligent stockholder for
laches purposes.”).
176
Proxy at 151. Annex F to the Proxy further discloses that J.P. Morgan and its affiliates
“hold on a proprietary basis, less than 1% of the outstanding common stock of each of”
Alon and Delek. Proxy, Annex F at 2–3.
58
Committee during merger negotiations.177 In deciding how to vote on the merger, a
reasonable stockholder would consider it important that the Special Committee’s
financial advisor increased its stake in the acquirer significantly while advising in
negotiations against the acquirer.
3. The Board’s formation of the Special Committee
The Proxy discloses that “the Special Committee had been operating on the
understanding that the Alon Board had established the Special Committee at its
meeting on July 31, 2015,” but that later “questions arose among the Alon Board
members regarding the establishment of the Special Committee.” 178 The Proxy
further discloses that “the Alon Board formally approved the formation of the
Special Committee and the authority of the Special Committee to engage financial
and legal advisers” on October 30, 2015. 179 The Proxy also discloses that “on
October 27, 2016, the Alon Board adopted resolutions delineating the power and
authority of the Special Committee, including the power to decline any proposal
from Delek and to review and evaluate strategic alternatives[.]” 180
177
Pl.’s Ans. Br. at 58 (emphasis added); see also Second Am. Compl. ¶ 141 (“JP Morgan
increased its Delek position by almost 60% between August 8, 2016 and November 4,
2016[.]”).
178
Proxy at 84.
179
Id.
180
Id. at 108.
59
These partial disclosures raise more queries than they answer. Any reasonable
stockholder reading these statements would consider it important to know: What
“questions” were raised at the October 30, 2015 meeting, who raised them, and were
they resolved? Any reasonable stockholder would also consider it important to know
whether the Special Committee understood the scope of its authority before the
Board adopted resolutions on October 27, 2016. The partial nature of the disclosures
on this issue create an ambiguous and potentially misleading narrative and are
insufficient to meet the Director Defendants’ fiduciary obligations.
4. Delek’s nomination of Kacal and Wheeler to the Board
The Proxy discloses that on January 27, 2016, Yemin proposed that “the
current Alon Board largely be renominated, with two new independent directors
replacing two of the current members of the Alon Board at such time.” 181 The Proxy
further discloses that in February 2015, Wiessman and Yemin discussed replacing
Morris, an Alon employee, “[i]n an effort to ensure compliance with . . . NYSE
listing standards.” 182 Still further, the Proxy discloses that Yemin provided
Wiessman with the names of two individuals—Kacal and Wheeler—who had been
recommended to Delek through industry contacts and Delek Board members. 183
181
Id. at 87.
182
Id.
183
Id.
60
Plaintiff contends that the Proxy’s disclosures about Kacal’s and Wheeler’s
nomination to the Board are “demonstrably false,”184 and that the “only reason
Wiessman and the rest of the Alon Board approved Wheeler and Kacal to replace
Morris and Pery was that Delek demanded the change.”185 This is inferable because
Morris’s replacement could not conceivably ensure compliance with NYSE listing
standards, according to Plaintiff.
Accepting Plaintiff’s allegations as true, it is reasonably conceivable that the
disclosures concerning Morris and Pery are deficient. Development of the factual
record will be required to confirm or disabuse Plaintiff’s theory of materiality on this
topic.
5. The Confidentiality Agreement
The Proxy discloses that “Alon and Delek entered into a confidentiality
agreement to permit the exchange of certain non-public information” on
December 23, 2015, and then amended that agreement on July 8, 2016. 186 Because
“Delek invoked the terms of the Confidentiality Agreement when seeking to bar the
Special Committee from publicly disclosing its proposal to merge with Delek,”187
Plaintiff argues that a reasonable stockholder would consider it important to know
184
Pl.’s Ans. Br. at 61.
185
Second Am. Compl. ¶ 78.
186
Proxy at 86, 100.
187
Pl.’s Ans. Br. at 63.
61
the terms of the original and amended confidentiality agreement, as well as the
circumstances necessitating the amendment.
Defendants respond that whether the December 2015 amended Schedule 13D
discloses the execution of the confidentiality agreement is “irrelevant, because the
Proxy does.”188 Defendants further respond that information regarding the reasons
for and terms of the amended confidentiality agreement are not material because the
“Proxy makes clear that the parties exchanged confidential information to facilitate
their respective analyses, particularly regarding synergies.”189 On this point,
Plaintiff fails to state a disclosure deficiency. Disclosing “why” the confidentiality
agreement was amended is unlikely to alter the total mix of information available to
stockholders.190
6. Wiessman and Haddock’s post-merger Board service
The Special Committee negotiated for the right to appoint post-merger a
director on each of the boards of Holdco and a Delek affiliate, Delek Logistics, and
that Wiessman and Haddock would fill these positions, which the Proxy discloses.191
188
Delek Defs.’ Opening Br. at 67 (emphasis omitted).
189
Id.
190
In re Sauer-Danfoss Inc. S’holders Litig., 65 A.3d 1116, 1131 (Del. Ch. 2011) (“Asking
‘why’ does not state a meritorious disclosure claim.”).
191
Proxy at 165 (“Alon’s directors and executive officers have interests in the Alon Merger
that may be different from, or in addition to, those of other stockholders of Alon generally.
In the case of Alon’s directors, these interests include . . . potential service on the Delek
Board or the board of directors of the general partner of Delek Logistics if selected by the
62
The Proxy, however, fails to disclose the compensation Wiessman and Haddock
were set to receive for their post-merger Board service and that Wiessman would
continue as Executive Chairman of Alon Partners G.P. It is reasonably conceivable
that Alon’s stockholders would view the post-merger compensation provided to
Alon’s lead negotiator, Wiessman, to be material in deciding how to vote on the
merger. 192
7. Delek’s planned post-merger acquisition of the Partnership
Plaintiff alleges that before the parties announced the merger, Delek
developed a plan to acquire the remaining 18.4% of the Partnership’s publicly held
limited partner interests. The Proxy and June 21 8-K, however, do not disclose that
planned acquisition. Plaintiff contends this omission is material because Delek
negotiated the acquisition contemporaneously with the merger, and a reasonable
stockholder would find this information important in evaluating the terms of the
merger. 193
Special Committee pursuant to its right to nominate one person to each such board of
directors, as described in the merger agreement[.]”).
192
See In re Xura, Inc., S’holder Litig., 2018 WL 6498677, at *12 (Del. Ch. Dec. 10, 2018)
(disclosure violation pled where it was reasonably conceivable that the public disclosures
failed to disclose that the acquirer’s affiliate “made clear its intention to work with [the
target’s] management . . . after consummation of the Transaction in all of its offer letters
to the Company”).
193
Pl.’s Ans. Br. at 64–65.
63
Taking Plaintiffs allegations as true, Alon’s interest in the Partnership was a
material asset. It is reasonably conceivable that a plan to build upon that asset for
the benefit of the post-merger entity would be material to a stockholder deciding
how to vote on the merger. That the plan was publicly disclosed separate and apart
from the Proxy does not absolve the Director Defendants of their responsibility to
include all material information regarding the merger in the Proxy. 194
III. CONCLUSION
Count I is dismissed as to the Director Defendants. Count IV is dismissed to
the extent it is pled against Holdco and to the extent it asserts a disclosure claim
against Delek. Count V is dismissed to the extent it asserts a disclosure claim with
respect to the confidentiality agreement. Defendants’ motions to dismiss are
otherwise DENIED.
194
See In re Trans World Airlines, Inc. S’holders Litig., 1988 WL 111271, at *10 (Del. Ch.
Oct. 21, 1988) (rejecting argument that failure to disclose fair market value figure in proxy
was cured by its public disclosure in SEC filings), abrogated on other grounds by Lynch,
638 A.2d at 1115–17.
64