In re Columbia Pipeline Group, Inc. Merger Litigation ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE COLUMBIA PIPELINE GROUP, INC. ) Cons. C.A. No. 2018-0484-JTL
MERGER LITIGATION )
MEMORANDUM OPINION
Date Submitted: December 4, 2020
Date Decided: March 1, 2021
Ned Weinberger, Derrick Farrell, LABATON SUCHAROW LLP, Wilmington, Delaware;
Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP,
Wilmington, Delaware; Stephen E. Jenkins, Marie M. Degnan, ASHBY & GEDDES, P.A,
Wilmington, Delaware; Jeroen van Kwawegen, Christopher J. Orrico, Alla Zayenchik,
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York;
Attorneys for Plaintiffs.
Martin S. Lessner, James M. Yoch, Jr., Paul J. Loughman, Kevin P. Rickert, YOUNG
CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Brian J. Massengill,
Matthew C. Sostrin, Linda X. Shi, MAYER BROWN LLP, Chicago, Illinois; Attorneys for
Defendants.
LASTER, V.C.
The plaintiffs are former stockholders of Columbia Pipeline Group, Inc.
(“Columbia” or the “Company”). On July 1, 2016, TransCanada Corporation acquired the
Company (the “Merger”) under an agreement and plan of merger dated March 17, 2016
(the “Merger Agreement” or “MA”). Each share of Columbia common stock was converted
into the right to receive $25.50 in cash, subject to each stockholder’s right to eschew the
consideration and seek appraisal.
During the sale process, Robert Skaggs, Jr., served as the Company’s Chief
Executive Officer and as chairman of its board of directors (the “Board”). Steven Smith
served as the Company’s Executive Vice President and Chief Financial Officer. The
plaintiffs contend that Skaggs and Smith wanted to retire in 2016 and engineered a sale of
the Company so that they would receive their change-in-control benefits. The plaintiffs
contend that once TransCanada emerged as a committed bidder, Skaggs and Smith
persistently favored TransCanada during the sale process. The plaintiffs detail a series of
actions that Skaggs and Smith took which inferably undercut the Company’s bargaining
leverage with TransCanada and prevented the Company from developing other
transactional alternatives. As a result, during the final phases of the negotiations,
TransCanada was able to lower its bid below the range it had offered to obtain exclusivity,
demand an answer within three days, and threaten to announce publicly that merger
negotiations had terminated unless the Company accepted the lowered bid. Faced with the
bad situation that Smith and Skaggs had created, the Board entered into the Merger
Agreement.
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The plaintiffs contend that by taking these actions, Skaggs and Smith breached their
fiduciary duties. The plaintiffs contend that TransCanada knew that Skaggs and Smith were
breaching their duties, in part because their actions were so extreme, and exploited the
resulting opportunity, making TransCanada potentially liable for aiding and abetting the
breaches.
The defendants point out that this is the fourth lawsuit arising out of the Merger.
Immediately after the Merger was announced, a group of traditional stockholder plaintiffs
attacked the deal in this court (the “Original Fiduciary Action”). The defendants prevailed
on a motion to dismiss.
Next, a group of hedge funds pursued their appraisal rights (the “Appraisal
Proceeding”). That case was litigated through trial, resulting in a decision holding that the
Company’s fair value for purposes of appraisal was equal to the deal price of $25.50 per
share (the “Appraisal Decision”).
While the Appraisal Proceeding was moving forward, the plaintiffs in this action
filed suit, relying on discovery from the Appraisal Proceeding that had become publicly
available. The plaintiffs in this action sought to consolidate this litigation with the
Appraisal Proceeding and to have a single trial on all issues, but TransCanada—the real
part in interest in the Appraisal Proceeding—successfully opposed that result. This action
then lay dormant until after the issuance of the Appraisal Decision.
Finally, while the Appraisal Proceeding was moving forward, two other
stockholders filed an action in federal court that asserted claims under the federal securities
laws (the “Federal Securities Action”). The plaintiffs in the Federal Securities Action also
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asserted claims under Delaware law for breach of the fiduciary duty of disclosure. The
defendants prevailed on a motion to dismiss, but the federal court declined to reach the
claims for breach of fiduciary duty (the “Federal Securities Decision”).
Now, the plaintiffs in this action wish to proceed with their litigation. The
defendants have moved to dismiss the complaint, arguing that the Appraisal Decision and
the Federal Securities Decision mandate dismissal under principles of collateral estoppel.
The defendants understandably want those prior rulings to be binding, but the current
plaintiffs do not have a relationship with either the petitioners in the Appraisal Proceeding
or the plaintiffs in the Federal Securities Action that would support the application of issue
preclusion.
As a fallback, the defendants maintain that dismissal is warranted under the doctrine
of stare decisis because the Appraisal Decision and the Federal Securities Decision are
persuasive authorities that ruled on the issues presented in this case. Unfortunately for the
defendants, the Appraisal Decision addressed a narrow question: the fair value of the
Company as a standalone entity operating as a going concern. The Appraisal Decision held
that the sale process was sufficiently reliable that the deal price provided a sound indication
of the Company’s standalone value. The Appraisal Decision did not determine whether
Skaggs and Smith breached their fiduciary duties, nor did it address the claim that the
Company could have obtained a higher deal price from TransCanada or from a competing
bidder if Skaggs and Smith had not acted as they did. The rulings in the Federal Securities
Decision likewise do not translate to the current setting, because the district court applied
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the higher federal pleading standard of plausibility to address claims under the federal
securities laws that required the pleading of particularized facts.
The allegations of the complaint support a reasonably conceivable inference that
Skaggs and Smith breached their duty of loyalty. Although the allegations against
TransCanada are weaker, they support a reasonably conceivable inference that
TransCanada aided and abetted breaches of fiduciary duty by Skaggs and Smith. The
defendants’ motion to dismiss is denied.
I. FACTUAL BACKGROUND
The facts are drawn from the amended complaint (the “Complaint”), the documents
that it incorporates by reference, and pertinent public records that are subject to judicial
notice.1 At this procedural stage, the Complaint’s allegations are assumed to be true, and
the plaintiffs receive the benefit of all reasonable inferences.
A. The Company
At the time of the events giving rise to the Complaint, Columbia was a Delaware
corporation headquartered in Houston, Texas. The Company developed, owned, and
operated natural gas pipeline, storage, and other midstream assets. As a midstream
company, Columbia’s operations centered on the transportation and storage of oil and
1
See D.R.E. 201(b); In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563,
585 (Del. Ch. 2007) (noting that D.R.E. 201 permits a court to take judicial notice of
“documents [outside the pleadings] that are required by law to be filed, and are actually
filed, with federal or state officials”); In re Wheelabrator Techs., Inc. S’holders Litig., 1992
WL 212595, at *11–12 (Del. Ch. Sept. 1, 1992) (taking judicial notice of publicly filed
documents for purposes of motion to dismiss).
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natural gas. The Company’s success depended on its contracts with oil and gas producers,
known as counterparty agreements.
Columbia’s primary operating asset consisted of 15,000 miles of interstate gas
pipelines that served the strategically important Marcellus and Utica natural gas basins in
Appalachia. The Company’s management team had developed a growth-oriented business
plan that sought to exploit a production boom in the basins. The plan required substantial
capital investment, which in turn required large amounts of financing.
Columbia itself was a holding company. Its principal asset was an 84.3% interest in
the Columbia OpCo LP (“OpCo”), a Delaware limited partnership that owned the
Company’s operating assets. Columbia also owned 100% of the general partner interest
and 46.5% of the limited partner interest in Columbia Pipeline Partners, L.P. (“CPPL”), a
master limited partnership (“MLP”) whose common units traded on the New York Stock
Exchange. CPPL owned the other 15.7% interest in OpCo.
The Company used CPPL to raise capital. As a pass-through entity, CPPL could
raise funds at a lower cost of capital than the Company. CPPL raised capital by selling
limited partner interests to the public. For CPPL to raise capital efficiently, the trading price
of CPPL’s units needed to remain in line with management’s projections.
B. NiSource
Before the events challenged in the Complaint, Columbia was a wholly owned
subsidiary of NiSource Inc., a publicly traded utility headquartered in Indiana. Skaggs was
the CEO of NiSource and chairman of its board of directors. Smith was its CFO.
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Skaggs and Smith had been planning for retirement, and both had selected 2016 as
their target year. Skaggs had served as CEO since 2005, and he believed that a CEO had a
“shelf-life” of about ten years. Compl. ¶ 27. Skaggs’ personal financial advisor used March
31, 2016, as Skaggs’ anticipated retirement date for planning purposes. He told Skaggs that
“the single greatest risk” to the retirement plan was Skaggs’ “single company stock position
in NiSource.” Id. ¶ 28. Smith considered fifty-five to be the “magical age” to retire. Id. ¶
29. He would turn fifty-five in 2016.
Skaggs and Smith enjoyed compensation packages that included lucrative change-
in-control arrangements. Those arrangements would provide materially greater benefits if
their employment ended after a sale of NiSource. A sale of assets comprising more than
50% of NiSource’s book value satisfied the requirement for a sale. The midstream assets
that NiSource held through the Company comprised less than 50% of NiSource’s book
value, so a sale of the Company by NiSource would not trigger the change-in-control
benefits. But if NiSource spun off the Company and if Skaggs and Smith became
executives of the Company with similar change-in-control arrangements, then a sale of the
Company would trigger their benefits.
C. The Spinoff
In September 2014, NiSource announced that it would spin off the Company.
NiSource also announced the formation of CPPL as the primary funding source for the
Company’s business plan.
In December 2014, the NiSource board of directors approved having Skaggs and
Smith join the Company, with Skaggs as CEO and chairman of the board and Smith as
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CFO. Skaggs and Smith made the move in part because they did not “want to work forever”
and they saw an opportunity for a “sale in the near term.” Compl. ¶ 33. They entered into
change-in-control agreements with the Company that tracked their arrangements with
NiSource. Smith received greater benefits from the Company than he had with NiSource,
with the multiplier on his payout increasing from two times to three times his target annual
bonus.
Skaggs and Smith anticipated that the Company would become an acquisition
target. As part of their pre-transaction planning, management engaged Lazard Frères & Co.
as the Company’s financial advisor. In May 2015, Lazard gave a presentation to Company
management about strategic alternatives. The presentation identified possible acquirers,
including Dominion Energy Inc., Berkshire Hathaway Energy, Spectra Energy Corp., and
NextEra Energy Inc.
On May 28, 2015, Lazard contacted TransCanada and mentioned that the Company
might be for sale shortly after the spinoff. A contemporaneous memorandum from Skaggs’
personal financial advisor stated that the Company “could be purchased as early as Q3/Q4
of 2015.” Id. ¶ 39. He wrote, “I think they are already working on getting themselves sold
before they even split. This was the intention all along. [Skaggs] sees himself only staying
on through July of 2016.” Id. (alteration in original) (emphasis omitted).
In June 2015, Lazard advised TransCanada against “opening a dialogue” with the
Company until after the spinoff. Id. ¶ 37. Lazard warned that doing so could jeopardize the
tax-free status of the spinoff, which required that NiSource not have anticipated a sale.
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D. Early Interest From Possible Buyers
On July 1, 2015, NiSource completed the spinoff. That same month, the market for
oil and gas began a sharp, cyclical downturn. The drop in commodity prices exerted
downward pressure on the stock prices of midstream companies like CPPL.
On July 6, 2015, the CEO of Spectra contacted Skaggs to express interest in a deal.
Although Skaggs viewed Spectra as a credible bidder, he did not meet with Spectra’s CEO,
and the Company did not offer to execute a non-disclosure agreement (an “NDA”) with
Spectra or provide Spectra with any diligence. Skaggs believed that Spectra would use its
stock as an acquisition currency, and Skaggs wanted cash for his shares. He therefore
rebuffed Spectra.
On July 20, 2015, Dominion expressed interest in buying the Company for $32.50
to $35.50 per share in cash. Lazard’s contemporaneous discounted cash flow (“DCF”)
analysis valued the Company at $30.75 per share. Skaggs brought the proposal to the
Board, but the Board turned down Dominion’s offer because it failed to capture the value
of the “significant growth projects that [the Company] would be embarking on over the
next several years.” Compl. ¶ 50. Skaggs asked Dominion to raise its price to the “upper-
$30s.” Id.
On August 12, 2015, the Company and Dominion executed an NDA. The NDA
contained a standstill provision that prohibited Dominion from making an offer to purchase
the Company without a written invitation from the Board. The standstill provision
contained a feature colloquially known as a “don’t ask, don’t waive” provision (a
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“DADW”), which prohibited the counterparty from asking the Company to amend or waive
the standstill.
Meanwhile, TransCanada continued to examine the Company as an acquisition
target. TransCanada’s Vice President of Corporate Development, François Poirier, was
friends with Smith. In early October, Poirier called Smith to express interest in a potential
transaction.
E. The Dual-Track Strategy
During fall 2015, the energy markets continued to deteriorate. CPPL’s stock price
declined, undercutting its ability to serve as a vehicle for raising capital.
During a meeting of the Board in mid-October 2015, Skaggs recommended a dual-
track strategy. Along the first track, the Company would prepare for an equity offering.
Along the second track, the Company would engage in talks with potential acquirers and
financing partners. Columbia would move forward with an equity offering unless a
potential buyer offered to pay at least $28 per share. The Board endorsed Skaggs’ plan.
As part of the dual-track strategy, Skaggs engaged in further talks with Dominion.
On October 26, 2015, Skaggs told Dominion’s CEO that the Company soon would be
pursuing an equity offering and that Dominion would need to move quickly if it wanted to
acquire the Company. Dominion proposed a complex structure in which Dominion and
NextEra jointly would acquire the Company for a combination of cash and stock. The next
day, Skaggs met with his personal financial advisor to discuss his possible retirement in
July 2016, if not sooner. Compl. ¶ 57.
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In early November 2015, the Company entered into NDAs with Dominion, NextEra,
and Berkshire. Each contained a standstill and a DADW provision. The length of the
standstills varied, with most lasting eighteen months.
The potential buyers began conducting due diligence, but Skaggs and Smith did not
believe that the Company could delay an equity offering much longer. They understood
that if an acquirer perceived that the Company was running out of cash and could not
continue to pursue its business plan, then the acquirer would try to take advantage of that
situation. The Company either needed to enter into a transaction before it became cash
constrained, or it needed to raise capital to solidify its balance sheet.
On November 19, 2015, Skaggs and Smith invited TransCanada and Berkshire to
make a bid by November 24. They explained that if no one bid by that date, then the
Company would move forward with the equity offering. Skaggs and Smith did not inform
NextEra, Dominion, or Spectra about the bid deadline. A bid from the latter group of
companies likely would have included a stock component, and Skaggs and Smith preferred
a cash deal.
On November 24, 2015, TransCanada expressed interest in an acquisition at $25 to
$26 per share. Berkshire expressed interest in an acquisition at $23.50 per share. Skaggs
informed the Board that the Company’s management had received “no additional word”
from Dominion, NextEra, or Spectra. Id. ¶ 63. That technically was true, but Skaggs and
Smith failed to tell the Board that Dominion, NextEra, or Spectra did not know about the
deadline of November 24. The way Skaggs framed his report made it seem like those
potential acquirers were not interested in a deal, which was not true.
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On November 25, 2015, the Board decided that the indications of interest from
Berkshire and TransCanada were too low to pursue. The Board elected to terminate merger
talks and proceed with the equity offering. The Company sent letters to Dominion,
NextEra, Berkshire, and TransCanada instructing them to stop work on any potential
transaction and destroy the confidential information they had received. Dominion and
NextEra responded, “This was news to us—we were working on it.” Id. ¶ 67.
Demonstrating Dominion’s seriousness about making an acquisition, its CEO immediately
contacted a competitor of the Company, which Dominion purchased for $4.4 billion. By
failing to tell Dominion about the bid deadline of November 24, Skaggs and Smith
foreclosed any prospect of a merger with Dominion.
On the same day that the Company instructed the bidders to stop work, Smith told
Poirier that the Company “probably” would want to pick up merger talks again “in a few
months.” Id. ¶ 75. The Board did not authorize Smith to convey that message to
TransCanada, and Smith did not provide any other bidders with that information. Up until
this point, Skaggs and Smith had shown only slight, if any, favoritism towards
TransCanada. After this point, Skaggs and Smith increasingly would favor TransCanada.
F. The Equity Offering
After the market closed on December 1, 2015, the Company announced an equity
offering at $17.50 per share. The offering was oversubscribed and raised net proceeds of
$1.4 billion. The underwriters exercised their option to purchase an additional 10.725
million shares. The high demand suggested that market participants regarded the
Company’s stock as undervalued.
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Also on December 1, 2015, Wells Fargo published an analyst report that warned
about “near term . . . counterparty risk” for midstream energy companies. Compl. ¶ 42.
Many fossil fuel producers had fixed, take-or-pay contracts with midstream operators, so
a major decline in commodity prices created a risk that producers might not meet their
obligations to midstream operators like the Company. Shortly thereafter, Skaggs reported
to the Board that he had attended an energy conference marked by a “defensive (if not dark)
tone . . . given the negative outlook for commodity prices and the financial markets’ severe
dislocation.” Id. ¶ 43. Skaggs said that conference participants asked him repeatedly about
the Company’s counterparty risk. Later in December 2015, a major midstream company
cut its dividend by 75% and reduced its capital expenditures due to the decline in
commodity prices, reinforcing the pessimism that pervaded the market.
That same month, the Protecting Americans from Tax Hikes Act (the “PATH Act”)
became effective. The PATH Act reduced the Company’s effective tax rate, which in turn
increased the Company’s after-tax profits. The Company estimated that between 2018 and
2023, it would have approximately $1 billion more cash on hand than without the PATH
Act. Id. ¶ 73.
In mid-December 2015, Poirier called Smith to reiterate TransCanada’s interest in
a deal with the Company. TransCanada was bound by a standstill with a DADW provision,
and Poirier’s call violated the standstill.
Rather than treating Poirier’s call as a violation of the standstill, Smith scheduled a
meeting with Poirier for January 7, 2016. Smith told Skaggs about Poirier’s outreach, and
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they shared the information with Goldman Sachs & Co., one of the Company’s financial
advisors. No one told the Board.
In mid-December and early January, Skaggs began meeting with individual Board
members to prime them to support a sale of the Company. Skaggs told each director that
the Company’s business plan involved a “significant amount of execution risk (both
financial and operational).” Id. ¶ 77. Skaggs emphasized the “[n]eed to continue to consider
strategic alternatives.” Id. He also noted that the Company’s CEO succession plan called
for him to resign in just eight months on July 1, 2016. Without a sale, the Board would
need to find a new CEO.
G. The January 7 Meeting
On January 5, 2016, Smith emailed Poirier 190 pages of confidential information
about the Company. The package included updated financial projections and Columbia’s
counterparty agreements with its customers. Smith did not obtain Board approval before
sending this information to Poirier. The Company did not send similar information to any
of the other potential bidders who had terminated discussions in November 2015.
On January 7, 2016, Smith met with Poirier (the “January 7 Meeting”). In advance
of the meeting, Goldman had prepared a set of talking points for Smith to use with Poirier,
which Skaggs had approved. One of the talking points explained how TransCanada could
convince the Board to agree to a deal with TransCanada without putting the Company “in
play,” thereby avoiding a competitive auction. Compl. ¶ 87.
Smith literally handed Poirier the list of talking points. He then stressed that
TransCanada was unlikely to face competition from major strategic players, telling Poirier
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in substance that the Company had “eliminated the competition.” Id. ¶ 84. By doing so,
Smith contravened Goldman’s advice to the effect that “[c]ompetition (real or perceived)
is the best way to drive bidders to their point of indifference.” Id. ¶ 86.
The Board did not authorize Smith to meet with TransCanada, much less to give
TransCanada advice on how to avoid competing in an auction for the Company. It is
reasonable to infer that Smith’s assurance about TransCanada not facing competition
undermined the Company’s bargaining leverage with TransCanada.
H. TransCanada Obtains Exclusivity.
On January 25, 2016, TransCanada expressed interest in a transaction in the range
of $25 to $28 per share, comparable to what TransCanada had proposed in November 2015.
The Board had not waived the DADW standstill, nor had the Board invited TransCanada
to make an offer. The offer breached the standstill.
During a two-day meeting on January 28 and 29, 2016, the Board considered
TransCanada’s offer. Skaggs attempted to persuade the Board to enter into a deal with
TransCanada. As part of his efforts, Skaggs gave a presentation that overstated the near-
term risks to the Company and its business plan. He told the directors that to reject a price
of $26 per share, they would need to believe that the Company’s stock price would reach
$30.11 per share in the next year. In reality, the underlying analysis prepared by Goldman
indicated that the Board only would need to believe that the Company’s stock price would
reach $30.11 per share in the next twenty-three months. Compl. ¶ 92. Because the Company
was expanding rapidly, the difference was significant. Skaggs also did not inform the
directors that Goldman’s analysis indicated that to reject a price of $26 per share, they only
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had to believe that the Company’s stock price would reach $27.95 per share by the end of
2016. The Company’s stock price had traded above $27 per share only five months earlier.
Id. ¶ 93.
The Board ignored TransCanada’s breach of the DADW standstill provision and
directed management to grant TransCanada exclusivity through March 2, 2016. The
Company later extended the exclusivity period through March 8, 2016. During the
exclusivity period, the Company could not accept or facilitate an acquisition proposal from
anyone but TransCanada, except in response to a “bona fide written unsolicited Transaction
Proposal” that did not result from a breach of the exclusivity agreement. During the
exclusivity period, sixty-nine TransCanada employees conducted diligence on the
Company. Id. ¶ 96.
On February 11, 2016, Skaggs met with his personal financial advisor and reiterated
that he planned to retire on July 1, 2016. Id. ¶ 97.
I. The Board Demands A Price.
On March 4, 2016, the Board directed management to demand a formal merger
proposal from TransCanada. The Board also instructed Skaggs and Smith to waive the
standstill provisions in the NDAs between the Company and the other potential bidders.
Skaggs and Smith ignored the Board’s direction and did not inform the other bidders
that the Board was waiving their standstills. They did not carry out that instruction until
over a week later, on March 12, 2016, after the Board reiterated its directive. It is reasonable
to infer that Skaggs and Smith failed to carry out the Board’s instructions because they
favored a deal with TransCanada.
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On March 8, 2016, the Company learned that the Wall Street Journal was preparing
a story about TransCanada being in talks to acquire the Company. The exclusivity period
expired that night, so the Company could have used the expiration of the exclusivity period
and the publicity from the story to engage with other bidders.
On March 9, 2016, TransCanada offered to acquire the Company for $26 per share.
Under TransCanada’s proposal, 90% of the consideration would be in cash and 10% would
in TransCanada stock.
On March 10, 2016, The Wall Street Journal broke the story. That same day, the
Board convened to discuss TransCanada’s proposal. Skaggs reminded the Board that the
exclusivity period had expired and that the news story could lead to additional inbound
offers. The Board previously had instructed Skaggs and Smith to waive the DADW
standstill provisions in the NDAs with Dominion, NextEra, and Berkshire, but Skaggs and
Smith had disregarded that directive.
J. Spectra Tries To Engage.
On March 11, 2016, Spectra emailed Skaggs to start merger talks. Spectra’s CEO
asked Skaggs to let him know “as soon as possible when we may speak or get our teams
together to determine how best to realize the potential opportunities for our shareholders.”
Compl. ¶ 103 (alteration omitted).
Skaggs downplayed the seriousness of Spectra’s offer to the Board. He prepared a
script “to use with Spectra and other inbounds,” which the Board approved. Id. ¶ 105. The
script stated, “We will not comment on market speculation or rumors. With respect to
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indications of interest in pursuing a transaction, we will not respond to anything other than
serious written proposals.” Id.
Skaggs informed TransCanada that the Company had received “an inbound from a
credible, large, midstream player.” Id. ¶ 106. Skaggs then asked TransCanada to approve
the script, saying:
Our board has agreed to the renewal of the EA for one week subject to your
agreement that this scripted response would not violate the terms of the EA
(both in terms of the inbound received in the EA’s gap period and going
forward until signing, which unfortunately, given the leak, there is a potential
that we will receive additional inquiries). Please confirm via response to this
email that TransCanada is in agreement with this condition/interpretation and
we will send over the new EA.
Id. (alterations omitted). Skaggs offered to renew TransCanada’s exclusivity agreement
through March 18, 2016. Id. ¶ 104.
When Skaggs made this proposal, TransCanada and the Company no longer had an
exclusivity agreement, and Skaggs knew that. He nevertheless treated TransCanada as if
the exclusivity agreement remained in place. After receiving Skaggs’ message,
TransCanada demanded a “moral commitment” that the phrase “serious written proposal”
meant a “financed bid subject only to confirmatory” diligence. Id. ¶ 108. Skaggs agreed.
Id. ¶ 109. Smith understood this concept to require
[a] bona fide proposal that says I will pay you X for your company. Hard and
fast. No outs. No anything. No way to wiggle out of anything. This is going
to happen. You’re going to pay whatever you’re going to pay per share and
we’re going to sign that agreement and we’re done.
Id.
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The moral commitment to insist on a fully financed bid subject only to confirmatory
diligence established a condition that no competing bidder could meet. After August 2015,
when the energy markets began their cyclical downturn, the Company had not received a
serious written proposal from any potential bidder—much less a fully financed bid—
unless the bidder first conducted diligence. TransCanada had conducted diligence for over
a month before making its offer of $26 per share. Skaggs and Smith both understood that
it was highly unlikely that a potential bidder could meet this standard. Id. ¶ 111.
Also on March 11, 2016, the Board repeated its direction that management waive
the standstills with Berkshire, Dominion, and NextEra. Skaggs and Smith delayed sending
the emails until the following day. Id. ¶ 112.
Skaggs and Smith next instructed Goldman to screen Spectra’s calls so that Spectra
could not talk with management directly. On March 12, 2016, Spectra’s CFO and head of
M & A called Goldman, and Goldman read the script. Spectra’s CFO responded that
Spectra could “move quickly” and “be more specific subject to diligence.” Id. ¶ 114. But
the script did not contemplate that option, prompting one Goldman banker to ask, “Does
[Spectra] ‘get it’ that they aren’t going to get diligence without a written proposal?” Id.
(alteration in original). The inverted approach—requiring a fully financed proposal before
due diligence—effectively shut out Spectra.
Goldman informed Skaggs and Smith that the involvement of Spectra’s CFO meant
that Spectra was “get[ting] serious.” Id. ¶ 113. Later on March 12, Spectra’s CFO made a
follow-up call and told Goldman to expect a written offer in the “next few days” absent a
“major bust.” Id. ¶ 115. The banker who took the call found Spectra’s assurance credible,
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but Skaggs and Smith were not going to engage with Spectra without a serious written
proposal that met their restrictive definition. Spectra never made a written offer, and
TransCanada never faced competition from Spectra.
Meanwhile, the Company’s business was rebounding. The Company had
outperformed its internal projections, and CPPL was trading at levels sufficient for the
Company to use its equity to raise capital.
K. TransCanada Lowers Its Offer.
On March 14, 2016, TransCanada lowered its offer from $26 to $25.50. It is
reasonable to infer that the solicitude that Skaggs and Smith showed towards TransCanada
contributed to TransCanada’s conclusion that it could lower its bid.
By going backward on price, TransCanada caused the renewed exclusivity
agreement to terminate and freed the Company to engage with other bidders. But
TransCanada placed a three-day deadline on its offer and threatened that if the Company
did not accept the offer within that timeframe, then TransCanada would announce the
termination of negotiations. A public announcement of that sort could suggest that
TransCanada had uncovered problems with the Company, turning Columbia into damaged
goods and hurting the Board’s ability to secure an alternative transaction.
On March 16, 2016, the Board met to consider TransCanada’s offer. At the
conclusion of the meeting, the Board approved the Merger Agreement. The parties
executed the Merger Agreement the following day.
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L. The Merger Agreement
The Merger Agreement contained a no-shop provision that prohibited the Company
from contacting, engaging with, or providing confidential diligence materials to a
competing bidder except in response to a “Superior Proposal.” MA § 4.02. Before sharing
confidential diligence materials in response to a Superior Proposal, the Board had to
determine that failing to engage with the bidder would breach its fiduciary duties. In the
event of termination, the Merger Agreement required the Company to pay TransCanada a
termination fee of $309 million plus an expense reimbursement of up to $40 million. The
termination fee amounted to three percent of the Merger’s equity value, or seventy-seven
cents per share. The expense reimbursement added another ten cents per share.
The Merger Agreement provided TransCanada with matching rights. If the
Company received a Superior Proposal and the Board determined that its fiduciary duties
required it, then the Board could change its recommendation that stockholders vote their
shares in favor of the Merger or, if the Board wished, terminate the Merger Agreement to
enter into a definitive agreement with respect to a Superior Proposal. See id. §§ 4.02(c)–
(d). The Company had to give TransCanada four business days’ prior notice, and during
that period TransCanada could match the competing offer. Id. § 4.02(d)(i). TransCanada’s
matching right was unlimited, and any new or revised Superior Proposal triggered an
additional matching period of four business days. Id. § 4.02(d)(i).
Because TransCanada could match any competing bidder, an overbid could succeed
only by driving the bidding beyond TransCanada’s reserve price. Otherwise, a bidder could
cause TransCanada to pay more, but would not have a path to success. Anticipating this
20
outcome and reasoning backward, a competing bidder that did not believe it could outbid
the Company would not engage. And because TransCanada had conducted extensive due
diligence, any competing bidder faced the threat that it would suffer the “winner’s curse”
and could prevail only by overpaying.
M. The Merger Closes.
Despite the cyclical downturn in energy markets, the Company’s business
outperformed management’s internal forecasts. On May 10, 2016, Smith reported to the
Board that the Company’s performance was “strong” and that all of the Company’s projects
were proceeding as planned. Compl. ¶ 47.
On May 17, 2016, the Company issued a proxy statement (the “Proxy”) describing
the Merger and recommending that its stockholders approve it. Under the Merger
Agreement, TransCanada had the right to participate in drafting the Proxy and review its
contents before it was disseminated to the Company’s stockholders. The Merger
Agreement obligated TransCanada to provide to Columbia any information it possessed
that was required to be disclosed in the Proxy. MA §§ 5.01(a)–(b).
The Company held a special meeting of stockholders on June 22, 2016. Holders of
310,249,225 shares, representing 77.5% of the Company’s 400,406,668 shares
outstanding, were present in person or by proxy. Holders of 95.3% of those shares voted
in favor of the Merger. As a result, the Merger received support from holders of 73.9% of
the outstanding shares. See Columbia Pipeline Group, Inc., Current Report (Form 8-K)
(June 22, 2016).
21
The Merger closed on July 1, 2016. Shortly thereafter, Skaggs and Smith retired.
Skaggs received retirement benefits of approximately $26.84 million, representing $17.9
million more than he would have received without a sale of the Company. Smith received
$10.89 million, representing $7.5 million more than he would have received without a sale
of the Company.
N. The Deal-Related Litigation
The Merger gave rise to a procession of litigation. It began with the Original
Fiduciary Action, filed by different stockholder plaintiffs in this court. Other former
stockholders perfected their appraisal rights and pursued the Appraisal Proceeding. As the
Appraisal Proceeding was moving towards trial, the current stockholder plaintiffs brought
this proceeding and sought to consolidate the two lawsuits for purposes of trial.
TransCanada, which was the real party in interest in the Appraisal Proceeding, successfully
opposed that effort, and this action lay dormant until after the issuance of the Appraisal
Decision. Information uncovered in the Appraisal Proceeding also prompted a fourth set
of stockholders to attempt to assert federal securities claims, resulting in the Federal
Securities Action.
1. The Original Fiduciary Action
Shortly after the Merger was announced, four individual stockholders filed putative
class action lawsuits in this court. Stephen M. Vann and Dennis Zuke filed an action on
March 30, 2016. C.A. No. 12152-VCL, Dkt. 1. Anthony Baldino filed an action on April
7, 2016. C.A. No. 12179-VCL, Dkt. 1. Gerald Freeman and Joseph Gogolak joined Vann
22
and Zuke and sought consolidation. The court granted the motion, resulting in the Original
Fiduciary Action.
None of the parties to the Original Fiduciary Action moved to certify a class, and
the putative class never was certified. Before filing suit, none of the plaintiffs used Section
220 of the Delaware General Corporation Law to obtain books and records, nor did they
obtain any non-public information. The plaintiffs and their counsel simply read the Proxy
and reviewed public information, then drafted complaints. They named as defendants
Skaggs, Smith, and the other members of the Board.
The defendants moved to dismiss the consolidated complaint, and the court granted
the motion. In re Columbia Pipeline Gp., Inc. S’holder Litig., 2017 WL 898382 (Del. Ch.
Mar. 7, 2017) (ORDER). In their central argument, the plaintiffs contended that Skaggs,
Smith, and the directors “breached their duty of loyalty by engineering a spinoff and sale
of the Company as part of a self-interested plan to cash in on lucrative change-in-control
benefits.” Id. at *2. In seeking dismissal, the defendants relied on the Corwin doctrine,
which holds that when a majority of disinterested and fully informed stockholders have
approved a transaction, then the business judgment rule applies. See id. at *1 (citing Corwin
v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015)). Under Corwin,
[E]ven if [the] plaintiffs had pled facts from which it was reasonably
inferable that a majority of [the company’s] directors were not independent,
the business judgment standard of review still would apply to the merger
because it was approved by a majority of the shares held by disinterested
stockholders of [the company] in a vote that was fully informed.
Id. at *1 (alterations in original) (citation omitted). To defeat Corwin cleansing, a plaintiff
must plead the existence of a disclosure violation. See id. at *2.
23
After reviewing the complaint, the court agreed that “[t]he allegations of the
complaint in support of this theory are sufficiently detailed to state a pleadings-stage claim
for breach of the duty of loyalty against the defendants.” Id. But under Corwin, the question
was whether those facts were disclosed sufficiently.
[T]he plaintiffs contend[ed] that the Proxy failed to disclose that the
defendants engineered the spinoff as part of a plan to generate change-in-
control benefits. The plaintiffs also cite[d] disclosures that the defendants
made about the long-term value of the Company, and they allege[d] that the
directors also had an obligation to disclose that they had personal plans that
conflicted with pursuing a long-term strategy.
Id. at *3.
The court held that the Proxy disclosed sufficient information such that the plaintiffs
had not stated a claim on which relief could be granted. The plaintiffs conceded that “the
basic terms of Defendants’ compensation packages were publicly available,” and the Proxy
“disclosed that the total value of change-in-control benefits that Skaggs and Smith earned
through the TransCanada merger was higher than the benefits those individuals would have
received if NiSource had sold the Company without a spinoff.” Id. The court also observed
that
[t]he Proxy disclosed that the Company took steps before the completion of
the spinoff to prepare for potential acquisition offers. The Proxy disclosed
that on September 17, 2014, the Company engaged Lazard, effective as of
the completion of the spinoff, to provide financial advice. The Proxy also
disclosed that the Company engaged Goldman pursuant to engagement
letters dated March 19, 2015, and July 2, 2015. The Proxy disclosed that in
July 2015, just after the completion of the spinoff, Party A and Party B
approached the Company with expressions of interest. The Proxy described
that on August 3 and 4, 2015, the Board engaged in a comprehensive review
of the Company’s strategic alternatives. The Proxy continued with a detailed
description of the material steps in the process leading up to the Merger
Agreement in March 2016.
24
Id. Notably, the plaintiffs did not “allege that the Proxy failed to disclose any material facts
regarding the sequence of events between the announcement of the spinoff in September
2014 and the merger vote in June 2016.” Id. The plaintiffs merely contended that “the
defendants were obligated to disclose that they acted for selfish and self-interested
reasons.” Id.
The court explained that Delaware law only requires that fiduciaries disclose facts;
it does not demand that fiduciaries “engage in self-flagellation.” Id. The court observed
that “the Company’s stockholders had access to the same information as the plaintiffs” and
just as easily could “stitch together the facts to draw the inference that former NiSource
fiduciaries used the spinoff to benefit themselves.” Id. The court held that “[t]he material
facts were disclosed” and “[t]hat is all Delaware law requires.” Id.
The plaintiffs also asserted that Goldman, the Company’s financial advisor, faced a
conflict of interest because one of its affiliates—an asset manager that managed third-party
funds—owned shares of stock in TransCanada. The plaintiffs had located this information
in a publicly available filing, which disclosed both that Goldman’s ownership of
TransCanada stock amounted to “about nine thousandths of a percent (0.009%) of
[Goldman’s] overall reported positions” and that Goldman owned a much larger position
in the Company stock. Id. at *4. The court determined that it was not reasonably
conceivable that Goldman’s interests favored TransCanada, and that disclosure of
Goldman’s holdings was not required under extant precedent. Id.
Finally, the plaintiffs contended that the Proxy provided a partial and misleading
account of Spectra’s outreach, citing a story in the Wall Street Journal and a section of the
25
Proxy in which the Company’s financial advisors described an analysis of a range of
potential bids from a “Party A.” Id. The court rejected this claim, noting that Delaware law
does not require disclosure of preliminary discussions or the details of every analysis that
a financial advisor conducted. Id. at *5.
Because the plaintiffs had failed to plead a viable disclosure claim, the business
judgment rule applied, and the court dismissed the complaint. Id. The plaintiffs did not
appeal, and the order became final.
None of the plaintiffs from the Original Fiduciary Action are parties to this case.
Neither of the plaintiffs in this case were parties to the Original Fiduciary Action. No one
argues that the rulings in the Original Fiduciary Action have any effect on this case.
2. The Appraisal Proceeding
In September 2017, two groups of hedge funds filed petitions seeking appraisal. See
C.A. No. 12749-VCL, Dkt. 1; C.A. No. 12736-VCL, Dkt. 1. The petitioners collectively
held 7,963,478 shares of Company stock, worth $203 million at the deal price. The two
groups of appraisal petitioners jointly sought consolidation. The court granted the motion,
resulting in the Appraisal Proceeding.
The parties engaged in discovery for more than a year, generating a vast record. The
case proceeded to trial in October 2018. Over the course of five days, the parties submitted
1,472 exhibits, including twenty-one deposition transcripts. Nine fact witnesses and five
experts testified live.
On August 12, 2019, this court issued the Appraisal Decision, which held that the
fair value of the Company’s stock at the time of the Merger was equal to the deal price of
26
$25.50 per share. In re Appraisal of Columbia Pipeline Gp., Inc., 2019 WL 3778370, at *1
(Del. Ch. Aug. 12, 2019). In the course of reaching that conclusion, the court made a
number of factual findings and subsidiary legal rulings that the parties to the current action
seek to invoke or evade. Because this decision discusses those issues at length elsewhere,
it passes over them here.
None of the appraisal petitioners are parties to this case. Neither of the plaintiffs in
this case was a party to the Appraisal Proceeding.
3. This Lawsuit
On July 3, 2018, while the Appraisal Proceeding was pending, plaintiff Public
Employees Retirement System of Mississippi (“Mississippi PERS”) filed a lawsuit in this
court on behalf of a putative class of similarly situated stockholders. C.A. No. 2018-0484-
JTL, Dkt. 1. In its original complaint, Mississippi PERS named as defendants Skaggs,
Smith, and all of the former members of the Board, claiming that they breached their duty
of loyalty by “consciously failing to advance the best interests of [the Company’s]
stockholders” and by “disseminating a Proxy Statement that they knew was false and
misleading.” Dkt. 1 ¶¶ 92–93. Mississippi PERS also named TransCanada as a defendant
for aiding and abetting breaches of fiduciary duty by “colluding with Smith during the
process leading to the Merger to gain an unlawful advantage over other bidders.” Id. ¶ 97.
In contrast to the plaintiffs in the Original Fiduciary Action, who filed their lawsuits
based solely on the Proxy and publicly available information, Mississippi PERS conducted
a meaningful pre-suit investigation. Among other things, Mississippi PERS relied on
evidence developed in the Appraisal Proceeding that had become public during the course
27
of that litigation. In July 2018, Mississippi PERS moved to modify the confidentiality order
in the Appraisal Proceeding so that Mississippi PERS could gain access to the full,
unredacted discovery record. C.A. No. 12736-VCL, Dkt. 314. The appraisal petitioners
supported the motion and proposed to prosecute the Appraisal Proceeding and this action
jointly. C.A. No. 12736-VCL, Dkt. 315.
As the post-Merger owner of the Company, TransCanada was the real party in
interest in the Appraisal Proceeding. TransCanada opposed Mississippi PERS’ motion and
argued that the court should not even consider it until after the conclusion of the trial in the
Appraisal Proceeding. C.A. No. 12736-VCL, Dkt. 319. In response, Mississippi PERS
formally moved to consolidate its action with the Appraisal Proceeding. C.A. No. 12736-
VCL, Dkt. 328. The appraisal petitioners supported consolidation, citing considerations of
“economy and procedural fairness” and arguing that “much of the evidence” presented in
an appraisal proceeding “will be the same evidence presented during the equitable case.”
C.A. No. 12736-VCL, Dkt. 335 at 2 (citation and internal quotation marks omitted). Acting
through the Company, TransCanada opposed this motion as well, claiming that the
appraisal petitioners were trying to delay the appraisal trial. C.A. No. 12736-VCL, Dkt.
336. The court denied the motion, noting that consolidation would have required a
complete reset of the trial schedule in the Appraisal Proceeding. Dkt. 16.
After this ruling, the fiduciary litigation largely remained dormant until after the
issuance of the Appraisal Decision.
28
4. The Federal Securities Action
Meanwhile, in April 2018, a former stockholder of the Company named Henrietta
Ftikas filed a putative class action in the United States District Court for the Southern
District of New York (the “District Court”).2 Her complaint asserted that the Proxy
contained material misstatements and omissions in violation of Section 14(a) of the
Securities Exchange Act of 1934 and SEC Rule 14a-9, and she named as defendants the
Company, Skaggs, Smith, and Glen L. Kettering, the Company’s former President. Ftikas,
C.A. No. 1:18-cv-03670-GBD, Dkt. 1 ¶ 1. She also asserted a claim for violation of Section
20(a) of the Securities Exchange Act against the individual defendants in their capacities
as “control persons” of the Company. Id. On June 8, 2018, another former stockholder of
the Company, The Arbitrage Fund, filed a similar lawsuit that added a claim for breach of
the fiduciary duty of disclosure under Delaware law. See Arbitrage Fund v. Columbia
Pipeline Gp., Inc., C.A. No. 1:18-cv-07127-GBD, Dkt. 1 (S.D.N.Y. June 8, 2018). The two
actions were consolidated, resulting in the Federal Securities Action.
2
Ftikas v. Columbia Pipeline Gp., Inc., C.A. No. 1:18-cv-03670-GBD, Dkt. 1
(S.D.N.Y. Apr. 25, 2018). Ftikas originally filed a lawsuit challenging the Merger in May
2016, before the Merger closed, in the United States District Court for the Southern District
of Texas. See Class Action Compl., Ftikas v. Columbia Pipeline Gp., Inc., C.A. No. 4:16-
cv-01205 (S.D. Tex. May 2, 2016). She did not make any effort to pursue her lawsuit. Five
months later, in September 2016, she dismissed the action without prejudice. See Notice of
Dismissal, Ftikas v. Columbia Pipeline Gp., Inc., C.A. No. 4:16-cv-01205 (S.D. Tex. Sept.
7, 2016) (“Plaintiff . . . hereby dismisses this action without prejudice against all
Defendants.”); Order, Notice of Dismissal, Ftikas v. Columbia Pipeline Gp., Inc., C.A. No.
4:16-cv-01205 (S.D. Tex. Sept. 9, 2016) (“Pursuant to the Notice of Dismissal filed on
September 7, 2016, the above-styled action shall be and is hereby dismissed without
prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii).”).
29
No one asked the District Court to certify a class, and the putative class never was
certified. The plaintiffs subsequently filed an amended complaint that added the other
directors of the Company as defendants. The amended complaint continued to assert the
same claims under the federal securities laws as well as the claim for breach of the fiduciary
duty of disclosure under Delaware law. In re Columbia Pipeline Gp., Inc. Sec. Litig., C.A.
No. 1:18-cv-03670-GBD, Dkt. 35 at 1–2 (S.D.N.Y. Nov. 5, 2018). Like Mississippi PERS,
the federal plaintiffs relied in part on evidence developed in the Appraisal Proceeding that
had become public during the course of those proceedings.
The defendants responded to the consolidated complaint by moving to dismiss. The
District Court issued the Federal Securities Decision, which largely granted their motion.
In re Columbia Pipeline, Inc., 405 F. Supp. 3d 494 (S.D.N.Y. 2019). Like the Appraisal
Decision, the Federal Securities Decision contains rulings that the parties to the current
action seek to invoke or evade. Because this decision discusses those rulings at length
elsewhere, it passes over them here.
The plaintiffs in the Federal Securities Action did not appeal, and the Federal
Securities Decision became final. Neither of the stockholders in the Federal Securities
Action are parties to this case. Neither of the plaintiffs in this case were parties to the
Federal Securities Action.
5. This Litigation Resumes.
On February 24, 2020, Mississippi PERS filed the currently operative complaint.
Mississippi PERS dropped its claims against the members of the Board other than Skaggs;
it continued to assert claims against Skaggs, Smith, and TransCanada.
30
The Complaint contains five counts.
• Count I asserts that Skaggs and Smith breached their duty of candor by causing the
Company to issue a materially false and misleading Proxy in connection with the
Merger.
• Count II asserts that Skaggs and Smith breached their fiduciary duties as officers by
seeking to sell the Company so that they could retire with significant change-in-
control benefits, tilting the sale process in favor of TransCanada, and failing to
engage adequately with Spectra.
• Count III asserts that Skaggs breached his fiduciary duties as a director by pursuing
his personal interest in retirement, tilting the sale process in favor of TransCanada,
and failing to engage adequately with Spectra.
• Count IV asserts that TransCanada aided and abetted Skaggs’ and Smith’s breaches
of fiduciary duty by making an indicative offer despite knowing it was bound by a
DADW standstill, extracting a moral commitment from Skaggs and Smith that the
Company only would entertain a formal, written offer, and then lowering its offer
from $26 per share to $25.50 per share coupled with a three-day deadline and a
threat to make a public announcement that negotiations had terminated. Count IV
also asserts that TransCanada aided and abetted breaches of fiduciary duty by the
Board.
• Count V asserts that TransCanada was unjustly enriched as a result of the Merger.
In March 2020, Skaggs, Smith, and TransCanada moved to dismiss the Complaint for
failing to state a claim on which relief could be granted. Dkt. 33. Shortly thereafter,
Mississippi PERS moved for partial summary judgment on Counts I and IV. Dkt. 35.
Meanwhile, plaintiff Police & Fire Retirement System of the City of Detroit filed
its own lawsuit, asserting fundamentally the same claims as Mississippi PERS on behalf
of the same putative class of stockholders. See C.A. No. 2020-0179-JTL, Dkt. 1. The court
consolidated the two actions and designated both plaintiffs as co-lead plaintiffs. Dkt. 36.
This decision addresses the defendants’ motion to dismiss the Complaint. The court
will address the plaintiffs’ motion for summary judgment separately.
31
II. THE MOTION TO DISMISS STANDARD
The defendants have moved to dismiss the Complaint under Rule 12(b)(6) for
failure to state a claim on which relief can be granted. When considering a Rule 12(b)(6)
motion, the court (i) accepts as true all well-pleaded factual allegations in the complaint,
(ii) credits vague allegations if they give the opposing party notice of the claim, and
(iii) draws all reasonable inferences in favor of the plaintiffs. Cent. Mortg. Co. v. Morgan
Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). The court need not,
however, “accept conclusory allegations unsupported by specific facts or . . . draw
unreasonable inferences in favor of the non-moving party.” Price v. E.I. DuPont de
Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011), overruled on other grounds by Ramsey
v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018).
“[T]he governing pleading standard in Delaware to survive a motion to dismiss is
reasonable ‘conceivability.’” Cent. Mortg., 27 A.3d at 537. “The reasonable conceivability
standard asks whether there is a possibility of recovery.” Garfield v. BlackRock Mortg.
Ventures, LLC, 2019 WL 7168004, at *7 (Del. Ch. Dec. 20, 2019) (citing Cent. Mortg., 27
A.3d at 537 n.13 (“Our governing ‘conceivability’ standard is more akin to ‘possibility,’
while the federal ‘plausibility’ standard falls somewhere beyond mere ‘possibility’ but
short of ‘probability.’”)). Dismissal is inappropriate “unless the plaintiff would not be
entitled to recover under any reasonably conceivable set of circumstances.” Cent. Mortg.,
27 A.3d at 535.
32
III. ISSUE PRECLUSION
A threshold issue is whether the plaintiffs are bound by and precluded from re-
litigating either (i) the factual findings and legal rulings in the Appraisal Decision or (ii)
the legal rulings in the Federal Securities Decision. The defendants’ arguments in favor of
dismissal largely consist of assertions that the Appraisal Decision or the Federal Securities
Decision already decided each issue adversely to the plaintiffs.
The parties disagree on the legal principles that govern issue preclusion. The
plaintiffs invoke traditional black-letter principles drawn from the Restatement (Second) of
Judgments (the “Restatement”) and applied persuasively in Kohls v. Kenetech Corp., 791
A.2d 763 (Del. Ch. 2000), aff’d, 794 A.2d 1160 (Del. 2002) (ORDER). The defendants
argue that a special preclusion rule applies when appraisal proceedings and breach of
fiduciary duty actions arise out of the same transaction, relying on M.G. Bancorporation,
Inc. v. Le Beau, 737 A.2d 513 (Del. 1999). Alternatively, they argue that under
contemporary Delaware doctrine, non-parties to a prior action are bound by the result as
long as their interests were aligned with parties to the prior action and the prior parties
adequately litigated the case, relying on Aveta, Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch.
2010), and Brevan Howard Credit Catalyst Master Fund Ltd. v. Spanish Broadcasting
System, Inc., 2015 WL 2400712 (Del. Ch. May 19, 2015).
This decision concludes that the Restatement and Kohls articulate the operative
principles of preclusion law. Under those principles, the plaintiffs are not bound by the
rulings in the Appraisal Decision or the Federal Securities Decision.
33
A. The Law Governing Issue Preclusion
When analyzing issue preclusion, Delaware courts frequently rely on the
Restatement.3 That influential source describes the general rule of issue preclusion as
follows: “When an issue of fact or law is actually litigated and determined by a valid and
final judgment, and the determination is essential to the judgment, the determination is
conclusive in a subsequent action between the parties, whether on the same or a different
claim.”4 The Delaware Supreme Court has framed the same rule in slightly different terms:
“Under the doctrine of collateral estoppel, if a court has decided an issue of fact necessary
3
See, e.g., Verrastro v. Bayhospitalists, LLC, 208 A.3d 720, 728–29 (Del. 2019);
Cal. State Teachers’ Ret. Sys. v. Alvarez, 179 A.3d 824, 852–53 (Del. 2018); Pyott v. La.
Mun. Police Emps. Ret. Sys., 74 A.3d 612, 617–18 (Del. 2013); LaPoint v.
AmerisourceBergen Corp., 970 A.2d 185, 193 (Del. 2009); Messick v. Star Enters., 655
A.2d 1209, 1213 (Del. 1995); Orloff v. Shulman, 2005 WL 3272355, at *7 (Del. Ch. Nov.
23, 2005); Carlton Invs. v. TLC Beatrice Hldgs., Inc., 1997 WL 208962, at *2 (Del. Ch.
Apr. 21, 1997); In re RJR Nabisco, Inc. S’holders Litig., 576 A.2d 654, 659, 662 & n.15
(Del. Ch. 1990).
4
Restatement, supra, § 27; accord id. § 62 cmt. a (“It is a basic principle of law that
a person who is not a party to an action is not bound by the judgment in that action.”).
When a party seeks to re-litigate the same claim and is precluded from doing so, the effect
is described variously as claim preclusion, direct estoppel, or res judicata. See id. cmt. b;
see also Advanced Litig., LLC v. Herzka, 2006 WL 2338044, at *8 (Del. Ch. Aug. 10,
2006) (“Delaware courts have used the terms res judicata and claim preclusion
interchangeably.”). “If, as more frequently happens, the second action is brought on a
different claim,” then the effect is described variously as issue preclusion or collateral
estoppel. Restatement, supra, § 27 cmt. b; see Alvarez, 179 A.3d at 832 (using terms
“interchangeably”).
34
to its judgment, that decision precludes relitigation of the issue in a suit on a different cause
of action involving a party to the first case.” Messick, 655 A.2d at 1211.5
As these formulations make clear, issue preclusion generally applies only “where
the second action is between the same persons who were parties to the prior action.”
Restatement, supra, § 27 cmt. a. Conversely, a judgment does not bind a person who was
not a party to the prior action. Id. § 34(3).
Ordinarily, a person not a party to an action is not precluded from
subsequently asserting a claim relating to the subject matter of the action.
Generally speaking, the rules of procedure do not require that all persons
interested in a transaction be made parties to an action arising from it. The
premise is that claimants ordinarily should be free to assert their claims by
separate action if they wish.
Id. § 62 cmt. a.
The general rule that non-parties are not bound by a prior adjudication is subject to
three broad exceptions. First, a non-party is bound if validly and authoritatively represented
in the prior action. Second, a non-party is bound if a party and the non-party have a pre-
existing legal relationship, outside of the prior litigation, that is sufficient to cause the
adjudication to bind the non-party. Third, a non-party can be bound if the non-party takes
action with regard to the prior litigation that warrants binding them to the result. See id.
The Restatement contains detailed sections governing each of these exceptions.
5
The Messick decision concerned an “issue of fact.” Id. The Delaware Supreme
Court elsewhere has explained that preclusion extends to legal rulings. See Hercules Inc.
v. AIU Ins. Co., 783 A.2d 1275, 1278 (Del. 2000).
35
1. Represented Parties
Under the first exception, “a person who is represented by a party is bound by the
judgment in an action involving the representative party.” Id. Section 41 of the Restatement
identifies the following representatives as having the power to bind a non-party validly and
authoritatively to a judgment:
(a) The trustee of an estate or interest of which the person is a beneficiary;
or
(b) [A party] [i]nvested by the person with authority to represent him in
an action; or
(c) The executor, administrator, guardian, conservator, or similar
fiduciary manager of an interest of which the person is a beneficiary;
or
(d) An official or agency invested by law with authority to represent the
person’s interests; or
(e) The representative of a class of persons similarly situated, designated
as such with the approval of the court, of which the person is a
member.
Id. § 41.
When a valid form of representation otherwise would exist, Section 42 of the
Restatement identifies five exceptions that operate to defeat preclusion. Under these
exceptions, the non-party is not bound by the judgment if:
(a) Notice concerning the representation was required to be given to the
represented person, or others who might act to protect his interest, and
there was no substantial compliance with the requirement; or
(b) The subject matter of the action was not within the interests of the
represented person that the party is responsible for protecting; or
36
(c) Before rendition of the judgment the party was divested of
representative authority with respect to the matters as to which the
judgment is subsequently invoked; or
(d) With respect to the representative of a class, there was such a
substantial divergence of interest between him and the members of the
class, or a group within the class, that he could not fairly represent
them with respect to the matters as to which the judgment is
subsequently invoked; or
(e) The representative failed to prosecute or defend the action with due
diligence and reasonable prudence, and the opposing party was on
notice of facts making that failure apparent.
Id. § 42. For purposes of this case, the last two exceptions are pertinent. They recognize
that if a judgment against a representative otherwise could bind a non-party, preclusion
nevertheless will not operate if the representative had interests that diverged substantially
from the non-party’s or if the representative did not adequately represent the non-party’s
interests in the prior suit.
Importantly, the presence of aligned interests and the existence of adequate
representation does not create the possibility of preclusion. Rather, the absence of either
prerequisite can defeat preclusion where it otherwise might apply. As discussed in greater
detail below, I authored an overly broad sentence in Aveta that could be read as inverting
this relationship. See Aveta, 23 A.3d at 180 (stating that “[p]arties are in privity . . . when
their interests are identical or closely aligned such that they were actively and adequately
represented in the first suit”). The Brevan decision subsequently quoted this sentence, and
the defendants rely on those propositions here. But the relationship actually flows in the
opposite direction. Initially, a representation must exist that provides a valid basis for
preclusion. If so, then the represented party can avoid preclusion by showing a
37
misalignment of interests or inadequate representation. See Restatement, supra, § 42,
Reporter’s Note cmt. e.; id. § 42 cmts. e & f.
Consequently, under the Restatement, the fact that a party litigated a similar claim
that resulted in a judgment does not result in the judgment binding a similarly situated non-
party. For the prior judgment to have binding effect, the party to the prior case must serve
in a representative capacity. To represent a class of similarly situated parties, the
representative party must be appointed formally as a class representative. Id. § 41 cmt. e.
This latter requirement has constitutional dimensions, and the Supreme Court of the United
States has explained that to apply issue preclusion against members of a putative but
uncertified class violates the Due Process Clause in the Fourteenth Amendment to the
United States Constitution. See Smith v. Bayer Corp., 564 U.S. 299 (2011).
The Bayer litigation began in 2001, when a plaintiff named George McCollins sued
Bayer Corporation in West Virginia state court. His complaint asserted various state-law
claims relating to Baycol, a drug sold by Bayer. McCollins sought to represent a class
comprising all West Virginia residents who had purchased Baycol. A month later, another
West Virginia resident, Keith Smith, filed a similar action in a different county court.
Neither knew about the other’s suit. Bayer removed the McCollins case to federal court
based on diversity jurisdiction, but the Smith case remained in state court for lack of
complete diversity. Six years later, with both cases moving at roughly the same pace, the
federal court denied class certification in the McCollins action. Bayer then moved to have
the federal court enjoin the state court from certifying a class in the Smith action, arguing
that “the proposed class in Smith’s case was identical to the one the federal court had just
38
rejected.” Id. at 304. The federal court issued the injunction, and the United States Court
of Appeals for the Eighth Circuit affirmed.
The Supreme Court of the United States reversed based on an interpretation of the
Anti-Injunction Act. Id. at 307. The Court nevertheless went on to explain that under settled
principles of issue preclusion, “[n]either a proposed class action nor a rejected class action
may bind nonparties.” Id. at 315. In the course of its discussion, the Court disagreed with
Bayer’s argument that “Smith—an unnamed member of a proposed but uncertified class—
qualifies as a party to the McCollins litigation.” Id. at 313. The Court explained that this
argument “ill-comports with any proper understanding of what a ‘party’ is,” and that while
an unnamed member of a certified class can be considered a party for limited purposes, no
one would “advance the novel and surely erroneous argument that a nonnamed class
member is a party to the class-action litigation before that class is certified.” Id. (internal
quotation marks omitted). The Court emphasized that a decision properly authorizing the
plaintiff to represent a class would be a precondition for binding unnamed class members.
Id. at 315. See generally Taylor v. Sturgell, 553 U.S. 880, 898–901 (2008) (rejecting on
similar grounds the theory of preclusion by “virtual representation”).
Although the discussion in Bayer was technically dictum, subsequent decisions have
relied on it.6 Citing Bayer, the Supreme Court of the United States since has reiterated that
6
See, e.g., Bartel v. Tokyo Elec. Power Co., 371 F. Supp. 3d 769, 782 (S.D. Cal.
2019) (citing Bayer and holding issue preclusion did not apply because the putative class
in the prior action “was never certified” and “there were no special procedures . . . to ensure
any nonparty’s interests were protected,” which meant that allowing preclusion would
violate the plaintiffs’ due process rights); Rivera v. P.R. Elec. Power Auth., 4 F. Supp. 3d
39“a plaintiff who files a proposed class action cannot legally bind members of the proposed
class before the class is certified” Standard Fire Ins. Co. v. Knowles, 568 U.S. 588, 593
(2013).
2. Parties In Privity
A second exception to the general rule that a judgment will not bind non-parties
arises when the party and a non-party have a “pre-existing legal relationship[],” formed
independent of the prior litigation and distinct from one of the representative relationships,
that would warrant binding the non-party. Restatement, supra, § 62 cmt. a. Examples
342, 352–53 (D.P.R. 2014) (noting that preclusion “raises important constitutional rights
and due-process concerns” and rejecting the defendant’s attempt “to distinguish the holding
in Smith by highlighting . . . that said case involved the application of the Anti-Injunction
Act” because “Smith stands for the proposition that all proposed class actions, regardless
of the underlying substantive issue, may not bind nonparties absent certification”);
Browning v. Data Access Sys., Inc. 2012 WL 2054722, at *10 & n.11 (E.D. Pa. June 6,
2012) (holding that plaintiffs were not in privity with plaintiffs in prior action and holding
“[i]n the alternative . . . that notions of due process would necessitate the same result”); cf.
Hilton v. Apple Inc., 2013 WL 5487317, at *8–9 (N.D. Cal. Oct. 1, 2013) (ruling on a
motion to stay proceedings in favor of first-filed action, distinguishing Bayer by denying
that the “[d]ue process concerns” that would be raised “if a party could be bound to a
court’s judgment without having had an opportunity (either directly or through a properly
certified class representative) to be heard”); see also Woodards v. Chipotle Mexican Grill,
Inc., 2015 WL 3447438, at *3–4 (D. Minn. May 28, 2015) (holding plaintiff who consented
to join a putative class action but who was not included in the group of plaintiffs who were
certified conditionally as a class was not precluded from later bringing his own collective
action based on the same allegations); Philibotte v. Nisource Corp. Servs. Co., 2014 WL
6968441, at *2 n.2 (D. Mass Dec. 9, 2014) (“[I]ssue preclusion does not apply here because
[the plaintiff] is not in privity with the plaintiff in [a prior action] since that action was
never certified as a class action.” (citing Bayer, 564 U.S. at 316 n.11)); cf. Bridgeford v.
Pac. Health Corp., 202 Cal. App. 4th 1034, 1044 (Cal. App. 2012) (“We find the reasoning
in [Bayer] persuasive and conclude, under California law, that the denial of class
certification cannot establish collateral estoppel against unnamed, putative class members
. . . .”).
40
include bailor and bailee, predecessor and successor owners of property, or indemnitor and
indemnitee. Id. As the Restatement explains, these legal relationships “are the subject of
specific rules” that define when preclusion applies. See id. (citing pertinent sections of the
Restatement). Notably, in each case, the rights of one party derive to some extent or depend
upon the rights of the other. The relationships do not merely involve similarly situated
parties.
As the Restatement recognizes, “[t]hese relationships are often referred to as
involving ‘privity.’” Id. The Restatement cautions, however, against using the concept of
“privity” outside of these pre-existing legal relationships:
The difficulty with such an analysis is twofold. First, the term “privity,”
unless it refers to some definite legal relationship such as bailment or
assignment is so amorphous that it often operates as a conclusion rather than
an explanation. Second, the circumstance that persons have a close legal
relationship with each other (such as husband and wife or owners of
concurrent interests in property), or that one person helps another in
litigation, by itself does not justify imposing preclusion on one of them on
the basis of a judgment affecting the other.
Id. cmt. c (citations omitted). The fact that a close legal relationship like husband and wife
or the parallel interests of concurrent owners of property is not sufficient, standing alone,
to support privity emphasizes the narrow nature of this exception.
Delaware decisions have acknowledged that privity is a vague and unhelpful term.
See, e.g., Aveta, 23 A.3d at 180; Kohls, 791 A.2d at 769. Nevertheless, our decisions have
tended to use privity as a catch-all concept that describes any relationship that is sufficient
to impose preclusion, regardless of whether that relationship is based on a valid and
authorized form of representation, a pre-existing legal relationship outside of the prior
41
litigation, or other action relating to the prior litigation that warrants binding the non-party.
See, e.g., Foltz v. Pullman, Inc., 319 A.2d 38, 41 (Del. Super. 1974) (“The concept of
privity pertains to the relationship between a party to a suit and a person who was not a
party but whose interest in the action was such that he will be bound by the final judgment
as if he were a party.”), overruled on other grounds by Messick, 655 A.2d at 1213. In my
view, it would be helpful to curtail this practice and deploy the Restatement’s more
structured approach.
3. Action Regarding A Particular Case
The third exception to the general rule that a judgment will not bind non-parties
recognizes that
a person who is not a party to an action may be precluded by the judgment
in an action when he is involved with it in a way that falls short of becoming
a party but which justly should result in his being denied opportunity to
relitigate the matters previously in issue.
Restatement, supra, § 62 cmt. a. This exception does not contemplate a broad or
generalized inquiry into the equities of relitigating a particular issue; it rather involves
analyzing whether the non-party engaged in specific types of conduct with respect to the
prior litigation.
The most straightforward case for binding a non-party to a prior judgment arises
when the non-party agrees to be bound by the result. See id. § 40. Such a person is “bound
by the determination . . . in accordance with the terms of his agreement.” Id. The agreement
to be bound may be express or “implied from conduct and manifestations of intention,”
42
and it may concern “the determination of a claim, including all potential issues therein,” or
be limited to specific issues. Id. cmt. a.
A second common setting involves “[a] person who is not a party to an action but
who controls or substantially participates in the control of the presentation on behalf of a
party.” Id. § 39. In this scenario, the nonparty “is bound by the determination of issues
decided as though he were a party.” Id. A specific application of this rule involves a
corporation that “is closely held, in that one or a few persons hold substantially the entire
ownership in it.” Id. § 59(3). Under those circumstances, a judgment against the
corporation “is conclusive upon the holder of its ownership if he actively participated in
the action on behalf of the corporation, unless his interests and those of the corporation are
so different that he should have opportunity to relitigate the issue.” Id. In a comment, the
Restatement explains that
[w]hen the corporation is the party to the litigation, a controlling owner who
participates in the conduct of the litigation ordinarily has full opportunity and
adequate incentive to litigate issues commonly affecting him and the
corporation. This identity of interest is perhaps most likely when the
controlling owner is the parent of a subsidiary corporation, for in that case
what is usually involved is a single enterprise organized in multiple legal
forms. When the controlling owner is the party to the litigation, his
opportunity and incentive to litigate issues commonly affecting him and the
corporation is ordinarily sufficient to treat his participation as being on behalf
of the corporation as well. In these circumstances, therefore, the rule of issue
preclusion prima facie should apply.
Id. cmt. e.
A third setting involves a non-party who leads a party to believe that the non-party
will treat the adjudication as binding and thereby induces the party to forego taking action
43
that might have bound the non-party to the judgment. The Restatement frames the test as
follows:
A person not a party to an action who has a claim arising out of the
transaction that was the subject of the action, and who knew about the action
prior to the rendition of judgment therein, may not thereafter maintain an
action on his claim against a party to the original action if:
(1) The enforcement of the claim against that party would result in
subjecting him to inconsistent obligations or in a determination of his
rights and duties that is incompatible with the judgment in the original
action; and
(2) The claimant so conducted himself in relation to the original action
that the party against whom the second action is brought:
(a) Was reasonably induced to believe that the claimant would
make no claim concerning the transaction or that the claimant
would govern his conduct by the judgment in the original
action; and
(b) Justifiably abstained from employing procedures, such as
joinder of the claimant or commencement of another action in
which the claimant was made a party, that could have
determined the claimant’s claim.
Id. § 62.
The test for inducing reliance is difficult to meet: “Given the premise that a person
is ordinarily free to assert his claim by separate action, and given the opportunities for
joinder of third persons known to have claims arising out of the transaction through the
necessary party and other joinder rules . . . , denying a claimant opportunity to maintain his
action is warranted only in compelling circumstances.” Id. cmt. a. The Restatement
cautions that “a person should not be denied that opportunity simply because the opposing
party may have to relitigate a matter already adjudicated with another.” Id. It also is not
44
sufficient to warrant preclusion “that the claimant may have silently stood by while the
prior action was pending, aware that he would not be bound unless made a party and aware
also that he might benefit if the judgment was favorable to his position in the controversy.”
Id.
4. The Kohls Decision
The most persuasive and analogous decision that illustrates the proper application
of these principles is Kohls. The plaintiffs were holders of preferred stock who sought to
(i) enforce a right to a special distribution and (ii) prove that the corporation’s directors
breached their fiduciary duties by failing to ensure that the preferred stockholders received
their special distribution. A different preferred stockholder previously had pursued a
similar action, and “the court [had] held a trial involving virtually the same facts and legal
claims and ruled in the defendants’ favor.” Kohls, 791 A.2d at 765 (citing Quadrangle
Offshore (Cayman) LLC v. Kenetech Corp., 1999 WL 893575 (Del Ch. Oct. 13, 1998),
aff’d, 751 A.2d 878 (Del. 2000) (ORDER)). In light of the prior action, the defendants
moved to dismiss the Kohls action, claiming that collateral estoppel barred the Kohls
plaintiffs from asserting their claims. Id. at 767.
Vice Chancellor Lamb rejected the application of collateral estoppel. He started
with the basic proposition that the party invoking collateral estoppel as a defense “must
show ‘that the party against whom collateral estoppel is asserted was a previous party.’”
Id. at 768 (quoting Columbia Cas. Co. v. Playtex FP, Inc., 584 A.2d 1214, 1217 (Del.
1991)). The Kohls plaintiffs “were concededly not parties to the Quadrangle action.” Id.45
He next turned to the three broad exceptions recognized in the Restatement.
Focusing on the exception for representative proceedings, he noted that the Quadrangle
action had not been certified as a class action. That exception therefore was inapplicable.
Id. at 768 n.18. The defendants, however, argued that “if the interests of a party were
adequately represented in a prior litigation,” then preclusion would be appropriate. Id. at
768. Vice Chancellor Lamb rejected this argument as “largely irrelevant.” Id. at 768–69.
Returning to this issue later in the opinion, he explained that the Quadrangle plaintiff
needed to be appointed as a class representative. Absent that act,
it does not matter that Quadrangle would have been an adequate
representative, had it been appointed to such role. A representative party
must be granted such authority, either by the represented party itself (in
accordance with agency principles) or, in the class action context, by the
court. It is equally well-settled that a properly named class representative’s
failure to provide adequate notice to the purported class with respect to the
action (or to adequately represent the interests of the class) will render any
subsequent judgment non-binding upon the class. I thus find it self-evident
that if a litigant never seeks to and is never compelled to act in a
representative capacity, the class of people that theoretically could have been
represented by that litigant is in no way precluded from asserting their own
claims in a subsequent proceeding.
Id. at 769–70 (footnotes omitted).
Next, Vice Chancellor Lamb considered the exception for parties in privity,
observing that it applied only where the non-party had “a specific type of pre-existing legal
relationship with a named party, such as bailor and bailee, predecessor and successor or
indemnitor and indemnitee.” Id. at 769 (citing Restatement, supra, § 62 cmt. a). Echoing
the Restatement, he cautioned that “[h]aphazard use of the term ‘privity’ can lead to
improper findings of preclusion” and he noted that even a close relationship such as
46
husband and wife would not justify preclusion absent other factors. Id. He concluded that
“[b]eing fellow stockholders is plainly not the type of legal relationship that fits the second
exception listed above.” Id.
This left only the third exception—whether the Kohls plaintiffs had engaged in some
conduct in connection with the prior litigation that would warrant binding them to the
judgment, such as inducing the defendants “reasonably to suppose that the litigation will
firmly stabilize the latter’s legal obligations.” Id. (quoting Restatement, supra, § 60 cmt.
c). This exception also did not apply:
[T]he defendants do not claim that the Kohls knew about or actually did
anything in connection with the prior litigation. Thus, defendants cannot
assert that some affirmative conduct caused them to refrain from taking
action bind the present plaintiffs, or, for that matter, the other PRIDES
holders, to that action.
Id. He noted, for example, that the defendants could have moved to certify the Quadrangle
action as a class action, but chose not to pursue that option. Id. at 768 n.18.
Vice Chancellor Lamb consequently held that collateral estoppel was unavailable.
He nevertheless dismissed the plaintiffs’ claims, demonstrating that an expansive
application of preclusion principles is unnecessary and unwarranted. Vice Chancellor
Lamb reasoned that under the doctrine of stare decisis, the Kohls plaintiffs could not state
a claim on which relief can be granted “because the Kohls fail[ed] to distinguish their
claims, either factually or legally” from the claims that the Quadrangle plaintiffs litigated
and lost. Id. at 770. He concluded that “[n]ormal respect for the principle of stare decisis
and application of the general standard for deciding a motion under Rule 12(b)(6)” required
dismissal of the complaint. Id.
47
5. The Supposedly Special Rule Of Le Beau
In lieu of these established principles of black-letter law set out in the Restatement
and applied in Kohls, the defendants asserted at oral argument that under Le Beau, a special
preclusion rule governs when appraisal proceedings and breach of fiduciary duty actions
arise out of the same transaction. Under the special regime that the defendants perceive,
any factual finding or legal determination in one proceeding, regardless of which takes
places first, has preclusive effect in the second proceeding, irrespective of whether the
parties are the same. See Dkt. 57 at 7, 29–30. This reading misconstrues Le Beau, where
preclusion applied under the black-letter rule that a judgment involving a party that controls
an entity binds the entity itself.
The Le Beau litigation arose after a short-form merger between Southwest Bancorp,
Inc. and its 91%-owned subsidiary, M.G. Bancorporation, Inc. In the merger, each minority
share of M.G. Bancorporation stock was converted into the right to receive $41. Le Beau,
737 A.2d at 517. When determining the merger consideration, Southwest relied on a
valuation report prepared by its financial advisor. Id. at 518.
Certain minority stockholders pursued an appraisal, naming both Southwest and
M.G. Bancorporation as respondents.7 Other stockholders opted not to pursue an appraisal;
7
That is an odd fact. As the surviving corporation after the short-form merger,
Southwest was the proper respondent in the appraisal proceeding. See 8 Del. C. § 262(f).
As the constituent corporation that merged with and into Southwest, M.G. Bancorporation
no longer existed after the short-form merger. Its separate corporate existence had ceased.
See 8 Del. C. § 259 (“When any merger . . . shall have become effective under this chapter,
for all purposes of the laws of this State the separate existence of all the constituent
corporations . . . except the one into which the other or others . . . have been merged . . .
48
they instead filed a putative class action against Southwest in its capacity as the controlling
stockholder of M.G. Bancorporation. See Nebel v. Southwest Bancorp, Inc., 1995 WL
405750, at *1 (Del. Ch. July 5, 1995). The plaintiffs in that lawsuit contended that
Southwest breached its fiduciary duties as a controller by paying a price in the short-form
merger that was not entirely fair and by failing to disclose all material information.
Southwest moved to dismiss the complaint in the breach of fiduciary duty lawsuit.
One of the plaintiffs’ disclosure claims alleged that the notice of merger improperly stated
that Southwest had determined the “fair market value” of M.G. Bancorporation’s stock
rather than its “fair value.” Id. at *4. To support this assertion, the plaintiffs cited the
valuation report prepared by Southwest’s financial advisor, which was attached to the
notice of merger. The Court of Chancery held that these allegations failed to state a
disclosure claim, because the disclosures accurately described what the financial advisor
did. The advisor had valued “the 8.38% minority block of shares, not the entire corporation
as a going concern.” Id. The court held that “[m]anifestly that valuation methodology was
legally improper, but the Notice plainly disclosed that that (incorrect) valuation approach
had been employed.” Id. (citation omitted).
shall cease . . . .”). Yet for reasons that are not evident, the appraisal claimants also named
M.G. Bancorporation as a respondent. See Le Beau, 737 A.2d at 517. That outcome could
make sense if Southwest caused M.G. Bancorporation to merge with an intervening
subsidiary such that after the short-form merger, Southwest came to own 100% of M.G.
Bancorporation. This decision assumes that is what happened.
49
Meanwhile, the appraisal proceeding proceeded through trial, which took place in
1996. Southwest did not call its financial advisor as a witness, choosing to rely on a
different valuation expert. The Court of Chancery observed that the litigation expert’s
valuation opinion “serendipitously turned out to be only 90 cents per share more than [the
financial advisor’s] legally flawed $41 valuation,” which the court viewed as rendering
Southwest’s position “highly suspect and meriting the most careful judicial scrutiny.” Le
Beau v. M. G. Bancorporation, Inc., 1998 WL 44993, at *7 (Del. Ch. Jan. 29, 1998)
(subsequent history omitted). Elaborating, the Court of Chancery stated:
As a matter of plain common sense, it would appear evident that a proper
fair value determination based upon a going concern valuation of the entire
company, would significantly exceed a $41 per share fair market valuation
of only a minority block of its shares. If Respondents choose to contend
otherwise, it is their burden to persuade the Court that $41.90 per share
represents [M.G. Bancorporation]’s fair value. The Court concludes that the
Respondents have fallen far short of carrying their burden . . . .
Id. The Court of Chancery concluded that the fair value of M.G. Bancorporation was $85
per share. Id.On appeal, Southwest argued that the Court of Chancery had misallocated the
burden of proof. The Delaware Supreme Court rejected this assertion, holding that the trial
court’s ruling was “a proper application of the collateral estoppel doctrine.” Le Beau, 737
A.2d at 520. The high court noted that “[c]ollateral estoppel prevents a party from
relitigating a factual issue that was adjudicated previously.” Id. The Delaware Supreme
Court then observed:
It is not unusual, as in this case, for the same merger to be challenged in a
statutory appraisal action and in a separate breach of fiduciary duty damage
action. Irrespective of whether the breach of fiduciary duty damage action or
50
the statutory appraisal action is decided first, the doctrine of collateral
estoppel provides repose by preventing the relitigation of an issue of fact
previously decided. The test for applying the collateral estoppel doctrine
requires that (1) a question of fact essential to the judgment (2) be litigated
and (3) determined (4) by a valid and final judgment.
Id. (footnotes omitted).
Applying these principles, the Delaware Supreme Court explained that “[i]n the
context of this Merger, the breach of fiduciary duty damage action was adjudicated first.”
Id.8 The high court then held that “[a]ccordingly, the Court of Chancery’s prior holding in
the breach of fiduciary duty damage action collaterally estopped the Respondents from
relitigating the factual finding which rejected [the financial advisor’s] opinion that the $41
per share was the fair value of [M.G. Bancorporation]’s stock as of June 30, 1993.” Id.Later, the Delaware Supreme Court reiterated that
8
As the Delaware Supreme Court later recognized, describing the breach of
fiduciary duty action as having been “adjudicated first” was an overstatement. The Court
of Chancery’s ruling in the fiduciary duty action was not a final judgment, but rather the
denial of a motion to dismiss. See Nebel, 1995 WL 405750, at *1 (“This is the opinion of
the Court on the defendants’ motion to dismiss”). The plenary fiduciary duty action
remained pending, and just one month before the Delaware Supreme Court issued its ruling
in the appraisal proceeding, the Court of Chancery denied a motion to dismiss an amended
complaint filed by the stockholder plaintiffs. See Nebel v. Southwest Bancorp, Inc., 1999
WL 135259 (Del. Ch. Mar. 9, 1999). After the Delaware Supreme Court issued its decision
in Le Beau, Southwest sought reargument based on the interlocutory nature of the Court of
Chancery’s ruling. The Delaware Supreme Court denied the motion, stating that “the Court
of Chancery’s holding in the class action became the functional equivalent of a final
judgment by virtue of a stipulated pretrial order,” where the parties identified the financial
advisor’s use of a minority valuation as a fact that was “admitted and required no proof.”
Le Beau, 737 A.2d at 528. The Delaware Supreme Court reasoned that the stipulation made
the finding “final because it was no longer in dispute,” making the application of collateral
estoppel appropriate. Id. In light of this clarification, it is perhaps best to regard Le Beau
as a case involving the binding nature of a stipulation, rather than collateral estoppel.
51
the Respondents were collaterally estopped from arguing in the statutory
appraisal action that [the financial advisor’s] $41 determination represented
[M.G. Bancorporation]’s fair value per share, given the entry of the Court of
Chancery’s prior holding in the breach of fiduciary duty damage action
involving the same Merger. Consequently, it was entirely appropriate for the
Court of Chancery to require the Respondents to demonstrate how [their
expert]’s purportedly proper statutory appraisal valuation resulted in only a
90 cents (approximately 2%) per share increase over the legally improper . .
. valuation that had included a minority discount.
Id. at 520–21.
The defendants read Le Beau boldly, claiming it stands for the proposition that
whenever an appraisal proceeding and a breach of fiduciary duty action relate to the same
merger, any factual determination in one action has preclusive effect in the other. As the
defendants see it, the Delaware Supreme Court’s ruling dispenses with the need to analyze
whether the parties involved were the same or sufficiently related for collateral estoppel to
apply. See Dkt. 57 at 7, 29–30.
That is not a colorable reading of Le Beau. First, Le Beau plainly recognized party
status as a threshold issue for the application of issue preclusion, noting that “[c]ollateral
estoppel prohibits a party from relitigating a factual issue that was adjudicated previously.”
Le Beau, 737 A.2d at 520 (emphasis added). The high court’s subsequent recitation of the
elements for collateral estoppel assumed that the party requirement was met.
Second, the same-party requirement in Le Beau was satisfied easily. The question
was whether collateral estoppel precluded the respondents—Southwest and M.G.
Bancorporation—from relitigating the issue decided against Southwest in the fiduciary
action. Southwest was a party to both proceedings, so there was no question about the
same-party requirement for Southwest. M.G. Bancorporation was not a party in the
52
fiduciary duty action, but Southwest controlled M.G. Bancorporation. See Restatement,
supra, §§ 39, 59(3). Before the short-form merger, Southwest owned 91% of M.G.
Bancorporation’s stock. After the short-form merger, Southwest owned 100% of M.G.
Bancorporation. Preclusion therefore applied under the black-letter rule of law for
controlled affiliates.
Contrary to the defendants’ assertions, Le Beau did not address the application of
issue preclusion to successive groups of stockholder plaintiffs. The Le Beau opinion
accurately observed that the order of the proceedings would not matter for purposes of
preclusion, but other considerations certainly would, such as whether the same
stockholders were parties to both actions or properly were represented by those who were.
For example, if a properly certified class action asserting claims for breach of fiduciary
duty proceeded to judgment first, then there would be a strong argument in favor of
applying collateral estoppel against all class members. Le Beau did not involve these issues.
Le Beau thus does not establish a special preclusion rule whenever an appraisal
proceeding and a breach-of-fiduciary-duty action relate to the same merger. The
defendants’ reliance on Le Beau is unavailing.
6. The Supposedly Different Framework From Aveta and Brevan
In a second attempt to establish a different framework for preclusion, the defendants
maintain that the Restatement and Kohls are old and outdated, having been superseded by
Aveta and Brevan. Neither decision adopted a different framework for issue preclusion.
The Aveta decision involved a dispute between the acquirer of a privately held
company and two groups of former stockholders. The “Principal Shareholder Defendants”
53
comprised four individuals who had controlled the privately held company before the
acquisition. They had owned high-vote shares that carried a majority of the corporation’s
voting power; each personally had signed a purchase agreement under which the acquirer
purchased their high-vote shares, and they acted together to approve the merger. Aveta, 23
A.3d at 164. The purchase agreement appointed one of the four Principal Shareholder
Defendants—Bengoa—as the shareholders’ representative for all of the stockholders with
authority to resolve disputes under the agreement. The “Class B Defendants” consisted of
approximately one hundred employees and other individuals. They had owned low-vote
shares that carried a minority of the voting power. They did not sign the purchase
agreement, nor were they asked to vote in favor of the merger. They simply received the
merger consideration after the acquirer and the Principal Shareholder Defendants approved
the transaction.
The acquirer prevailed against Bengoa on certain disputes involving the purchase
agreement, including the question of whether a subsequent non-binding term sheet had
effected a novation of the purchase agreement. The other Principal Shareholder Defendants
and certain Class B Defendants then sought to relitigate the novation issue. I held that the
Principal Shareholder Defendants were “in privity with Bengoa” and bound by the prior
result, reasoning that the Principal Shareholder Defendants had been co-owners of the
company with Bengoa, worked closely with him to effectuate the transaction, and signed
the purchase agreement appointing him as the shareholder representative. Id. at 180.
I next turned to whether the preclusion principles also bound the Class B
Defendants. Employing the language on which the defendants now rely, I stated that
54
“[p]arties are in privity . . . when their interests are identical or closely aligned such that
they were actively and adequately represented in the first suit.” Id. Taken out of context,
that language is overly broad and could be read to dispense with the prerequisite that the
party have acted as a representative of the non-parties. Under the Restatement and as
explained in Kohls, a representative must have authority to represent the non-party. When
the representative party has that authority, then the non-party can avoid preclusion by
showing that the parties’ interests were not aligned or that the representative did not litigate
adequately. See Kohls, 791 A.2d at 768–79; Restatement, supra, §§ 39–40. The absence of
an alignment of interests or adequate litigation efforts thus can defeat preclusion; the
presence of those factors, standing alone, is not enough to support it.9
9
The two Delaware decisions that the Aveta decision cited in the supporting
footnote involved other considerations that warranted applying preclusion on their facts.
See Orloff, 2005 WL 3272355; Wilm. Hous. Auth. v. Nos. 500, 502 & 504 King St., & Nos.
503, 505 & 507 French St., Com. Tr. Co., 273 A.2d 280 (Del. Super. 1970). In Orloff, the
company in question was privately held, with its ownership divided between one family
that held a majority stake and other related individuals who constituted “one minority
shareholder group.” Orloff, 2005 WL 3272355, at *8. The successful stockholder plaintiffs
were mother and son, and the court found that on the facts presented, “the entire Orloff
family has long been intricately intertwined in this litigation.” Id. at *9. The court discussed
alignment of interests, but the principal basis for the holding was the non-party
involvement in the prior litigation to a degree sufficient to warrant binding the non-party.
See id.
In Wilmington Housing Authority, the plaintiff prevailed in condemnation
proceedings against a commercial trust company that owned various properties as a trustee.
The plaintiff subsequently filed suit against the tenant of one of the properties, who raised
the same defenses as the trust company. The court held that the tenant was in privity with
its landlord by virtue of its leasehold interest. Wilm. Hous. Auth., 273 A.2d at 281.
Although this finding was adequate to dispose of the tenant’s defenses, the court also noted
that the directors and officers of the tenant were “the beneficiaries of the trust agreement”
and therefore “held a financial interest in the results of the [prior] case.” Id. The court then
55
Importantly, the Aveta decision did not make a finding of privity, nor did it rely on
preclusion to enter judgment against the Class B Defendants. Instead, the decision
cautioned against a broad application of privity, quoting Kohls on that point. Aveta, 23
A.3d at 180. The opinion then relied on Kohls for a different proposition: the application
of stare decisis. As in Kohls, the Aveta decision ultimately held that stare decisis warranted
rejecting the Class B Defendants’ claims because they had not demonstrated how their
claims or arguments differed from Bengoa’s. Id. at 180–81. The unfortunate sentence from
Aveta thus constitutes dictum and does not withstand deeper scrutiny.
The defendants also rely on a letter opinion in the Brevan case, where this court
followed Aveta and reasoned similarly. The plaintiff was a preferred stockholder who
claimed that the issuer had breached two contractual obligations. Different preferred
stockholders previously had sued to enforce the same rights, and the court had entered a
final judgment against them based on the doctrine of acquiescence. Brevan, 2015 WL
2400712, at *1. The issuer moved to dismiss the complaint, arguing that principles of
collateral estoppel and stare decisis mandated the same outcome in the second action.
The court granted the motion, holding that as in Kohls and Aveta, the preferred
stockholder had not distinguished its claims in any way from the prior action, such that
remarked that “because they are the moving force behind [the tenant] and had the identical
interests actively defended in the [prior] case, they bind [the tenant] as a party in privity.”
Id. The court’s discussion of these issues was quite brief, but the court’s comments seem
to have been directed at reinforcing the finding of privity, not providing an independent
basis for establishing privity.
56
stare decisis applied. Id. at *3. But the court also quoted the overly broad language from
Aveta about privity potentially existing based on the alignment of interests between the two
groups of plaintiffs and the adequacy of the prior plaintiff’s litigation efforts. Id. n.14. The
decision characterized Aveta’s language as the “view adopted in more recent cases,” and
distinguished Kohls as applying “a narrow, contractual view of privity.” Id. at 3. Based on
the Aveta test, the Brevan court posited that preclusion was available. Because Brevan
relied on the overly broad dictum from Aveta, its observations on privity are subject to the
same criticisms. Because Brevan held that stare decisis applied in any event, the
observations were not necessary to the decision and also qualify as dicta.
The language in Aveta and Brevan about alignment of interests and adequate
litigation efforts should not be read as establishing a new test for privity. Such a test would
conflict with the black-letter rules in the Restatement and would generate due process
problems under Smith v. Bayer and other federal decisions. The rulings in Aveta and Brevan
do not establish a different or more lenient regime for privity than what the Restatement
and Kohls described.
B. Preclusion Versus The Plaintiffs
Under the foregoing legal principles, the plaintiffs are not bound by either (i) the
factual findings and legal rulings in the Appraisal Decision or (ii) the legal rulings in the
Federal Securities Decision. Those decisions may serve as persuasive authority or apply
under the doctrine of stare decisis, but neither is preclusive.
57
1. The Appraisal Decision
The plaintiffs were not parties to the Appraisal Proceeding. Issue preclusion
therefore does not apply unless the defendants can demonstrate that the plaintiffs fall into
one of the exceptions to the general rule that non-parties are not bound by a prior
adjudication.
The first exception applies when a party validly represented the non-party in the
prior proceeding. The only possible basis to invoke this exception would be if the Appraisal
Proceeding had been a properly certified class action and the plaintiffs were members of
the class. An appraisal proceeding is “in the nature of a class suit,”10 but the proceeding
operates as an opt-in class. Cf. Berger v. Pubco Corp., 976 A.2d 132, 136 (Del. 2009). The
judgment that the lead petitioner obtains binds the other appraisal claimants, but not
stockholders who did not seek appraisal. The plaintiffs did not seek appraisal, so the actions
of the appraisal petitioners did not bind them. Because the appraisal petitioners did not
have authority to represent the plaintiffs, it does not matter whether their interests were
aligned or whether the appraisal petitioners adequately pursued their claims. Those issues
are “largely irrelevant.” Kohls, 791 A.2d at 769. The first exception therefore does not
apply.
10
Ala. By–Prods. Corp. v. Cede & Co., 657 A.2d 254, 260 (Del. 1995); accord S.
Prods. Co., Inc. v. Sabath, 87 A.2d 128, 134 (Del. 1952); Sunrise P’rs Ltd. P’ship v. Rouse
Props., Inc., 2016 WL 7188104, at *4 (Del. Ch. Dec. 8, 2016).
58
The second exception applies when a party to the prior action and the non-party
have a pre-existing legal relationship, separate from the prior litigation, that is sufficient to
bind the non-party to the judgment. “Being fellow stockholders is plainly not the type of
legal relationship that fits the second exception listed above.” Id. The second exception
therefore does not apply.
The third exception applies when the non-party takes action with respect to the prior
litigation that induces a party to believe that the prior adjudication would be binding and,
as a result, the party does not take action to bind the non-party to the outcome. Conversely,
“[a] person who is excluded as a party prior to the rendition of judgment is not bound as to
the claims adjudicated, unless he remains represented by one who is a party. Exclusion as
a party may occur where the person’s petition to intervene has been rejected.” Restatement,
supra, § 34 cmt. b.
Here, the plaintiffs sought to consolidate this fiduciary duty action with the
Appraisal Proceeding and to have the two cases tried together. Acting through Columbia,
TransCanada opposed the motion. The court agreed with TransCanada. Having excluded
the plaintiffs from the appraisal proceeding, TransCanada cannot now contend that the
plaintiffs are bound by the Appraisal Decision.
There thus is no basis on which the factual findings and legal conclusions in the
Appraisal Decision could have preclusive effect on the plaintiffs in this case. The doctrine
of collateral estoppel does not apply to the plaintiffs.
59
2. The Federal Securities Decision
The same principles that prevent the Appraisal Decision from having preclusive
effect on the plaintiffs also apply to the Federal Securities Decision. The plaintiffs were
not parties to the Federal Securities Action, so issue preclusion does not apply unless the
defendants can demonstrate that the plaintiffs fall into one of the exceptions to the general
rule.
As with the Appraisal Decision, the first exception could apply only if the Federal
Securities Action had been properly certified as a class action. The Federal Securities
Action never was certified for class treatment.
As with the Appraisal Decision, the second exception could apply only if a named
plaintiff in the Federal Securities Action and the plaintiffs here had a pre-existing legal
relationship, separate from the prior litigation, that was sufficient to bind the plaintiffs to
the judgment. Here again, “[b]eing fellow stockholders is plainly not the type of legal
relationship that fits the second exception listed above.” Kohls, 791 A.2d at 769.
The third exception could apply only if the plaintiffs had engaged in some conduct
in connection with the Federal Securities Action that induced the defendants “reasonably
to suppose that the litigation will firmly stabilize the latter’s legal obligations.”
Restatement, supra, § 62 cmt. c. As in Kohls, the defendants have not pointed to any
affirmative conduct by the present plaintiffs that caused the defendants to refrain from
taking action to bind the present plaintiffs to a judgment in the Federal Securities Action.
The Federal Securities Action does not have prelusive effect for another reason as
well. “A judgment is not conclusive in a subsequent action as to issues which might have
60
been but were not litigated and determined in the prior action.” Restatement, supra, § 27
cmt. e. The District Court expressly disclaimed jurisdiction over the breach of fiduciary
duty claims arising under Delaware law. See Federal Securities Decision, 405 F. Supp. 3d
at 524–25.
There thus is no basis on which the factual findings and legal conclusions in the
Federal Securities Decision could have preclusive effect on the plaintiffs in this case. As
with the Appraisal Decision, the doctrine of collateral estoppel does not apply.
IV. THE SALE PROCESS CLAIMS
In their challenge to the sale process, the plaintiffs assert that Skaggs and Smith
sought to sell the Company for cash so that they could retire in 2016 with their full change-
in-control benefits. The Complaint alleges that once TransCanada emerged as a committed
cash bidder, Skaggs and Smith tilted the playing field in favor of TransCanada. They
repeatedly allowed TransCanada to breach its standstill agreement, provided TransCanada
with confidential information in advance of the January 7 Meeting, briefed TransCanada
about the status of the sale process during the January 7 Meeting, delayed releasing other
bidders from their standstill agreements, and then favored TransCanada with exclusivity,
even during periods when TransCanada’s right to exclusivity had terminated. In addition
to the formal exclusivity arrangement, Skaggs and Smith gave TransCanada a “moral
commitment” that they would not engage with or provide due diligence to any interested
party unless the Company received a fully financed, binding offer. That unwritten hurdle
was more onerous than the no-shop clause in the eventual Merger Agreement and
established a standard that no other party could meet. Based on their moral commitment,
61
Skaggs and Smith rebuffed Spectra, despite Spectra’s status as a serious potential buyer.
Although Skaggs and Smith made a show of keeping the Board informed, they misled the
Board about key events, such as the true nature of the January 7 Meeting and the delay in
releasing other bidders from their standstill agreements. The plaintiffs contend that through
these self-interested actions, Skaggs and Smith undercut the Company’s leverage with
TransCanada and prevented a competing bid from emerging. As a result, the Company was
only able to obtain a price of $25.50 per share, rather than the greater consideration that
loyal fiduciaries could have obtained.
The Complaint maintains that TransCanada aided and abetted Skaggs and Smith in
breaching their fiduciary duties. Knowing that Skaggs and Smith were eager for a deal so
that they could retire, TransCanada breached its standstill agreement with impunity,
thereby gaining a timing advantage over other bidders. During the January 7 Meeting,
TransCanada received confidential information from Smith that a loyal fiduciary would
not have provided. TransCanada then used its advantages to obtain exclusivity and extract
the unwritten “moral commitment” from Skaggs and Smith. After securing these
advantages, TransCanada lowered its bid below the range that it had offered to secure
exclusivity and threatened to break off talks and publicly announce the termination of
negotiations if the Company did not accept its lowered bid within three days. By knowingly
taking advantage of Skaggs’ and Smith’s breaches of fiduciary duty, TransCanada was able
to acquire the Company more cheaply than it otherwise could have.
These allegations state claims on which relief could be granted. It is reasonably
conceivable that Skaggs and Smith breached their duty of loyalty and, as a result, the
62
Company failed to obtain the best value reasonably available to stockholders. Although the
claims against TransCanada are weaker, it is reasonably conceivable that TransCanada
aided and abetted Skaggs and Smith in breaching their fiduciary duties. The defendants’
motion to dismiss the sale process claims therefore is denied.
A. The Standard Of Review For The Sale Process Claims
The starting point for analyzing a fiduciary breach is to determine the correct
standard of review. See Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014).
Delaware corporate law has three tiers of review: the business judgment rule, enhanced
scrutiny, and entire fairness. Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del.
Ch. 2011). The Merger is subject to enhanced scrutiny.
1. The Possible Standards Of Review
Delaware’s default standard of review is the business judgment rule, a principle of
non-review that “reflects and promotes the role of the board of directors as the proper body
to manage the business and affairs of the corporation.” In re Trados Inc. S’holder Litig.,
2009 WL 2225958, at *6 (Del. Ch. July 24, 2009). The rule presumes that “in making a
business decision the directors of a corporation acted on an informed basis, in good faith
and in the honest belief that the action taken was in the best interests of the company.”
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000). Unless one of its elements is rebutted, “the court merely
looks to see whether the business decision made was rational in the sense of being one
logical approach to advancing the corporation’s objectives.” In re Dollar Thrifty S’holder
Litig., 14 A.3d 573, 598 (Del. Ch. 2010). “Only when a decision lacks any rationally
63
conceivable basis will a court infer bad faith and a breach of duty.” In re Orchard Enters.,
Inc. S’holder Litig., 88 A.3d 1, 34 (Del. Ch. 2014).
“Entire fairness, Delaware’s most onerous standard, applies when the board labors
under actual conflicts of interest.” In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d
17, 44 (Del. Ch. 2013). Once entire fairness applies, the defendants must establish “to the
court’s satisfaction that the transaction was the product of both fair dealing and fair price.”
Cinerama, Inc. v. Technicolor, Inc. (Technicolor Plenary III), 663 A.2d 1156, 1163
(Del. 1995) (internal quotation marks omitted). “Not even an honest belief that the
transaction was entirely fair will be sufficient to establish entire fairness. Rather, the
transaction itself must be objectively fair, independent of the board’s beliefs.” Gesoff v. IIC
Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).
In between lies enhanced scrutiny, which is Delaware’s “intermediate standard of
review.” Trados II, 73 A.3d at 43. It governs “specific, recurring, and readily identifiable
situations involving potential conflicts of interest where the realities of the decisionmaking
context can subtly undermine the decisions of even independent and disinterested
directors.” Id. Framed generally, enhanced scrutiny requires that the fiduciary defendants
“bear the burden of persuasion to show that their motivations were proper and not selfish”
and that “their actions were reasonable in relation to their legitimate objective.” Mercier v.
Inter-Tel (Del.), Inc., 929 A.2d 786, 810 (Del. Ch. 2007).
In Revlon, the Delaware Supreme Court applied the intermediate standard of review
to the sale of a corporation. See Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506
A.2d 173, 179–82 (Del. 1986). Enhanced scrutiny applies in this setting because “the
64
potential sale of a corporation has enormous implications for corporate managers and
advisors, and a range of human motivations, including but by no means limited to greed,
can inspire fiduciaries and their advisors to be less than faithful.” In re El Paso Corp.
S’holder Litig., 41 A.3d 432, 439 (Del. Ch. 2012). Put differently,
[t]he heightened scrutiny that applies in the Revlon (and Unocal) contexts
[is], in large measure, rooted in a concern that the board might harbor
personal motivations in the sale context that differ from what is best for the
corporation and its stockholders. Most traditionally, there is the danger that
top corporate managers will resist a sale that might cost them their
managerial posts, or prefer a sale to one industry rival rather than another for
reasons having more to do with personal ego than with what is best for
stockholders.
Dollar Thrifty, 14 A.3d at 597 (footnote omitted). Consequently, “the predicate question”
of the fiduciary’s “true motivation” comes into play, and “[t]he court must take a nuanced
and realistic look at the possibility that personal interests short of pure self-dealing have
influenced” the fiduciary’s decision. Id. at 598.
To satisfy enhanced scrutiny in an M & A setting, directors must establish both
(i) the reasonableness of “the decisionmaking process employed by the directors, including
the information on which the directors based their decision” and (ii) “the reasonableness
of the directors’ action in light of the circumstances then existing.” Paramount Commc’ns,
Inc. v. QVC Network, Inc., 637 A.2d 34, 45 (Del. 1994). “Through this examination, the
court seeks to assure itself that the board acted reasonably, in the sense of taking a logical
and reasoned approach for the purpose of advancing a proper objective, and to thereby
smoke out mere pretextual justifications for improperly motivated decisions.” Dollar
Thrifty, 14 A.3d at 598.
65
“The reasonableness standard permits a reviewing court to address inequitable
action even when directors may have subjectively believed that they were acting properly.”
In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 830–31 (Del. Ch. 2011). The
reasonableness standard, however, does not permit a reviewing court to freely substitute
its own judgment for the directors’ judgment.
There are many business and financial considerations implicated in
investigating and selecting the best value reasonably available. The board of
directors is the corporate decisionmaking body best equipped to make these
judgments. Accordingly, a court applying enhanced judicial scrutiny should
be deciding whether the directors made a reasonable decision, not a perfect
decision. If a board selected one of several reasonable alternatives, a court
should not second-guess that choice even though it might have decided
otherwise or subsequent events may have cast doubt on the board’s
determination. Thus, courts will not substitute their business judgment for
that of the directors, but will determine if the directors’ decision was, on
balance, within a range of reasonableness.
QVC, 637 A.2d at 45 (emphasis omitted). Enhanced scrutiny “is not a license for law-
trained courts to second-guess reasonable, but debatable, tactical choices that directors
have made in good faith.” In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1000
(Del. Ch. 2005). “[A]t bottom Revlon is a test of reasonableness; directors are generally
free to select the path to value maximization, so long as they choose a reasonable route to
get there.” Dollar Thrifty, 14 A.3d at 595–96.
Because enhanced scrutiny asks whether the directors’ conduct fell within a range
of reasonableness, what typically drives a finding of breach “is evidence of self-interest,
undue favoritism or disdain towards a particular bidder, or a similar non-stockholder-
motivated influence that calls into question the integrity of the process.” Del Monte, 25
A.3d at 831. “[W]hen there is a reason to conclude that debatable tactical decisions were
66
motivated not by a principled evaluation of the risks and benefits to the company’s
stockholders, but by a fiduciary’s consideration of his own financial or other personal self-
interests, then the core animating principle of Revlon is implicated.” El Paso, 41 A.3d at
439.
Here, the Merger involved a sale of the Company for cash. Accordingly, enhanced
scrutiny provides the standard of review for evaluating the Merger. See QVC, 637 A.2d at
45. The plaintiffs thus can state a claim for breach of duty by pleading facts supporting a
reasonable inference that the Merger and the process that led to it fell outside the range of
reasonableness. Id.
2. Corwin Cleansing
The defendants argue that the business judgment rule applies. As part of a multi-
pronged response to an explosion of non-meritorious challenges to mergers, the Delaware
Supreme Court held in 2015 that “when a transaction not subject to the entire fairness
standard is approved by a fully informed, uncoerced vote of the disinterested stockholders,
the business judgment rule applies.” Corwin, 125 A.3d at 309. The Corwin decision
stands for the proposition that where the stockholder-owners of a corporation
are given an opportunity to approve a transaction, are fully informed of the
facts material to the transaction, and where the transaction is not coercive,
there is no agency problem for a court to review, and litigation challenging
the transaction is subject to dismissal under the business judgment rule.
In re USG Corp. S’holder Litig., 2020 WL 5126671, at *1 (Del. Ch. Aug. 31, 2020).
Among other limitations, Corwin cleansing applies only when the approval by
disinterested stockholders is “fully informed.” Corwin, 125 A.3d at 308–09. A vote is fully
informed when the corporation’s disclosures “apprised stockholders of all material
67
information and did not materially mislead them.” Morrison v. Berry, 191 A.3d 268, 282
(Del. 2018). A fact is material “if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.” 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)). The test does not require “a substantial likelihood that [the]
disclosure . . . would have caused the reasonable investor to change his vote.” Id. (same).
Rather, the question is whether there is “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.” Id. (same).
The defendants ultimately bear “the burden of demonstrating that the stockholders
were fully informed when relying on stockholder approval to cleanse a challenged
transaction.” In re Volcano Corp. S’holder Litig., 143 A.3d 727, 748 (Del. Ch. 2016), aff’d,
156 A.3d 697 (Del. 2017) (ORDER). It nevertheless is “sensible that a plaintiff challenging
the decision . . . first identify a deficiency in the operative disclosure document.” In re
Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017). At that
point, “the burden [falls] to defendants to establish that the alleged deficiency fails as a
matter of law in order to secure the cleansing effect of the vote.” Id.At the pleading stage, the operative question is whether the Complaint “supports a
rational inference that material facts were not disclosed or that the disclosed information
was otherwise materially misleading.” Morrison, 191 A.3d at 282. The resulting inquiry is
necessarily “fact-intensive, and the Court should deny a motion to dismiss when
developing the factual record may be necessary to make a materiality determination as a
68
matter of law.” Chester Cty. Empls.’ Ret. Fund v. KCG Hldgs., Inc., 2019 WL 2564093, at
*10 (Del. Ch. June 21, 2019).
a. The Rulings On Disclosure Issues In The Appraisal Decision
The Appraisal Decision found that “the Proxy contained material misstatements and
omissions.” Appraisal Decision, 2019 WL 3778370, at *36. The Appraisal Decision
identified three disclosure issues as the “most significant.” Id. at *35. For purposes of
Corwin cleansing, these findings and the evidence that supported them give rise to a
reasonable pleading-stage inference that the stockholder vote on the Merger was not fully
informed.
The first disclosure violation involved “an omission and a misleading partial
disclosure about Columbia’s NDAs.” Id.
The Proxy disclosed that Columbia had entered into NDAs in November
2015 with Parties B, C, and D, but the Proxy did not disclose that the NDAs
contained standstills, much less DADWs. The Proxy then disclosed
misleadingly that “[u]nlike TransCanada, none of Party B, Party C or Party
D sought to re-engage in discussions with [Columbia] after discussions were
terminated in November 2015.” The Proxy failed to provide the additional
disclosure that all four parties were subject to standstills with DADWs, that
TransCanada breached its standstill, and that Columbia opted to ignore
TransCanada’s breach.
Id. (alterations in original) (citations omitted). The Appraisal Decision found that “the
Proxy created the misleading impression that Parties B, C, and D were not bound by
standstills during the pre-signing period.” Id. The Appraisal Decision also found that the
disclosure problems surrounding the standstills were material. Id. at *36. “A reasonable
stockholder would have found it significant that TransCanada and Parties B, C, and D were
bound by standstills in fall 2015 and that TransCanada was permitted to breach its standstill
69
to pursue the Merger.” Id. Other Delaware precedent supports the inference that the failure
to disclose the DADW standstills was material. See In Ancestry.com Inc. S’holder Litig.,
Consol. C.A. No. 7988-CS, Dkt. 125 at 233–35 (Del. Ch. Dec. 17, 2012) (TRANSCRIPT)
(finding material omission where proxy statement did not disclose the existence of a
DADW standstill); In re Complete Genomics, Inc. S’holder Litig., Consol. C.A. No. 7888-
VCL, Dkt. 66 at 17–22 (Del. Ch. Dec. 27, 2012) (TRANSCRIPT) (holding that a failure to
disclose a DADW standstill constituted a failure to “disclose material information”).
The second disclosure issue relates to Skaggs’ and Smith’s plans to retire in 2016.
The Appraisal Decision found that Skaggs and Smith “wanted to [retire] and did.”
Appraisal Decision, 2019 WL 3778370, at *36. The Appraisal Decision further found that
“a reasonable stockholder would have regarded their plans as material.” Id. Delaware
precedent supports the inference that the omission of this fact was material. Under
Delaware law, stockholders are “entitled to know that certain of their fiduciaries ha[ve] a
self-interest that [is] arguably in conflict with their own.” Eisenberg v. Chi. Milwaukee
Corp., 537 A.2d 1051, 1061 (Del. Ch. 1987). This court previously held that a CEO’s
interest in securing his retirement nest egg was a material fact, noting that
a reasonable stockholder would want to know an important economic
motivation of the negotiator singularly employed by a board to obtain the
best price for the stockholders, when that motivation could rationally lead
that negotiator to favor a deal at a less than optimal price, because the
procession of a deal was more important to him, given his overall economic
interest, than only doing a deal at the right price.
70
In re Lear Corp. S’holder Litig., 926 A.2d 94, 114 (Del. Ch. 2007). Other precedents
support the materiality of information that sheds light on the financial incentives and
motivations of key members of management who are involved in negotiating the deal.11
The third and most glaring problem was the Proxy’s partial disclosure regarding the
January 7 Meeting, where “[t]he Proxy failed to mention that Smith invited a bid and told
Poirier that TransCanada did not face competition.” Appraisal Decision, 2019 WL
3778370, at *36. In the Appraisal Decision, the court held that the failure to disclose this
information was a material omission. Id. Delaware precedent supports the inference that a
proxy statement omits material information when it fails to provide a fair and accurate
11
See, e.g., City of Fort Myers Gen. Empls.’ Pension Fund v. Haley, 235 A.3d 702,
720 (Del. 2020) (holding that complaint stated claim that stockholder vote was not fully
informed where proxy failed to disclose CEO’s expectation of compensation from bidder
in light of its potential effect on his ability to negotiate for the stockholders); Morrison,
191 A.3d at 275 (holding that complaint stated claim that Schedule 14D-9 omitted material
information where it failed to disclose founder’s clear preference for a deal with a particular
bidder, including willingness only to rollover shares in a deal with that bidder); In re Xura,
Inc., S’holder Litig., 2018 WL 6498677, at *12–13 (Del. Ch. Dec. 10, 2018) (finding that
complaint stated claim for breach of the duty of disclosure where proxy failed to disclose
bidder’s communications with CEO regarding its intent to retain management, including
the CEO); van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. Nov. 30, 2017)
(declining to apply Corwin cleaning where proxy failed to disclose that “Opower
negotiators were Yates and Laskey, who each received post-transaction employment and
the conversion of unvested Opower options into unvested Oracle options”); Maric Cap.
Master Fund Ltd. v. Plato Learning, Inc., 11 A.3d 1175, 1179 (Del. Ch. 2010) (granting
preliminary injunction to address proxy’s disclosure that there were no compensation
“negotiations” between management and the acquirer when there had been “extended
discussions” about retaining management and the typical equity incentive package that
could be expected, and thus, the proxy statement created “the materially misleading
impression that management was given no expectations regarding the treatment they could
receive” from the acquirer).
71
description of significant meetings or other interactions between target management and a
bidder.12
b. The Rulings On Disclosure Issues In The Federal Securities
Decision
To argue against the existence of disclosure violations that defeat Corwin cleansing,
the defendants invoke the Federal Securities Decision. In the Federal Securities Action, the
federal plaintiffs contended that the Proxy contained material misstatements and omissions
in violation of Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9.
The federal plaintiffs also asserted a claim for breach of fiduciary duty under Delaware
law. The District Court addressed these theories in the Federal Securities Decision. The
District Court’s analysis diverged from this court’s findings in the Appraisal Decision in
12
See, e.g., Arnold v. Soc’y for Sav. Bancorp, 650 A.2d 1270, 1280–81 (Del. 1994)
(reversing a grant of summary judgment in favor of defendants on disclosure claim where
proxy failed to disclose the existence of a bid because “once defendants traveled down the
road of partial disclosure of the history leading up to the Merger and used the vague
language described, they had an obligation to provide the stockholders with an accurate,
full, and fair characterization of those historic events,” including the existence of the bid);
Firefighters’ Pension Sys. of Kansas City v. Presidio, Inc., 2021 WL 298141, at *27 (Del.
Ch. Jan. 29, 2021) (“It is reasonably conceivable that the existence of the tip was material
information that should have been disclosed to the stockholders. The Proxy made no
mention of LionTree’s tip to BCP.”); Xura, 2018 WL 6498677, at *13 (holding that
plaintiff adequately pled a claim for breach of the duty of disclosure where stockholders
appeared to lack information about private communications between CEO and bidders);
Alessi v. Beracha, 849 A.2d 939, 946 (Del. Ch. 2004) (holding that negotiations between
buyers and target’s CEO were material when the parties discussed “significant terms”
including “valuation”); see also In re PLX Tech. Inc. S’holders Litig., 2018 WL 5018535,
at *33–34 (Del. Ch. Oct. 16, 2018) (finding after trial that recommendation statement
omitted material information where it failed to disclose a communication between a
director and a potential bidder about the bidder’s interest in acquiring the company and the
likely timeframe for a bid), aff’d, 211 A.3d 137 (Del. 2019) (ORDER).
72
certain respects, and the defendants argue that the Federal Securities Decision is more
persuasive.
As a threshold matter, the District Court made a point in the Federal Securities
Decision of not ruling on the plaintiffs’ claims for breach of the fiduciary duty of disclosure
under Delaware law. The District Court held that “a determination from the Delaware
Chancery Court” on these issues “is much more appropriate” and declined to exercise
supplemental jurisdiction over those claims. Federal Securities Decision, 405 F. Supp. 3d
at 524–25. The Federal Securities Decision thus does not address the specific questions of
Delaware law that are pertinent to this proceeding.
The defendants nevertheless assert that the Federal Securities Decision held that the
disclosure issues cited in the Appraisal Decision were not material as a matter of law. What
the District Court actually held is that the complaint failed to plead any material
misstatements or omissions that would render the Proxy false or misleading under the
Exchange Act. Federal Securities Decision, 405 F. Supp. 3d at 498–99. In reaching this
conclusion, the District Court applied the plausibility standard adopted by the Supreme
Court of the United States, under which “a complaint must contain sufficient factual matter,
accepted as true, to state a claim for relief that is plausible on its face.” Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (internal quotation marks omitted). The Delaware Supreme Court
has rejected plausibility as the pleading standard under Delaware law, emphasizing that
“the governing pleading standard in Delaware to survive a motion to dismiss is reasonable
‘conceivability.’” Cent. Mortg., 27 A.3d at 537. For purposes of the motion to dismiss in
73
the current case, the plaintiffs need only plead facts supporting a possibility of recovery;
they need not go further and plead a claim that satisfies the federal plausibility standard.
In ruling on the Section 14(a) claim, the District Court further explained that “when
plaintiffs assert Section 14(a) claims grounded in alleged fraudulent conduct, they are
subject to heightened pleading requirements, . . . even if they disclaim reliance on a fraud
theory.” Federal Securities Decision, 405 F. Supp. 3d at 506 (omission in original)
(alteration and internal quotation marks omitted). The District Court noted that under the
Private Securities Litigation Reform Act, a complaint must “‘specify each statement
alleged to have been misleading, the reason or reasons why the statement is misleading,
and, if an allegation regarding the statement or omission is made on information and belief,
the complaint shall state with particularity all facts on which that belief is formed.’” Id.
(quoting 15 U.S.C. § 78u-4). The District Court further explained that a plaintiff can satisfy
this standard by meeting “the requirements of Federal Rule of Civil Procedure 9(b).” Id.
Like Court of Chancery Rule 9(b), the federal rule requires the complaint to “state with
particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b). By contrast, for
purposes of the motion to dismiss in the current case, the plaintiffs need not satisfy a
pleading standard that requires particularity.
Applying the federal pleading standards, the District Court held that the Proxy’s
failure to mention the DADW standstills was not a material omission for purposes of
federal law. Federal Securities Decision, 405 F. Supp. 3d at 516. In reaching this
conclusion, the District Court relied heavily on Kanit v. Elcher, 264 F.3d 131 (2d Cir.
2001), where the United States Court of Appeals for the Second Circuit found that the
74
failure to disclose the board’s decision to release a bidder from a three-year-old standstill
restriction did not rise to the level of recklessness because the case did not present “facts
indicating a clear duty to disclose.” Id. at 144. The District Court found Kanit persuasive
because the federal plaintiffs’ claim sounded in fraud and hence was “subject to a
heightened pleading standard.” Federal Securities Decision, 405 F. Supp. 3d at 516.
The District Court’s ruling regarding the immateriality of the failure to disclose the
DADW standstills does not translate to the current case. The plaintiffs’ allegations in this
case are not subject to a particularized pleading standard, nor is this court evaluating their
plausibility. This decision therefore follows the Delaware precedents regarding the
materiality of the failure to disclose the DADW standstills.
The District Court also rejected the claim that the Proxy contained a material
omission by failing to disclose that Skaggs and Smith “rush[ed] to sell the Company and
retire.” Id. at 522. Drawing on the Appraisal Decision, the District Court concluded that
Skaggs and Smith had not rushed the sale process. The District Court also concluded that
the officers’ intent to retire “even if material, would likely not significantly alter the total
mix [of information].” Id. at 523. The District Court further concluded that in light of this
court’s finding that the fair value of the Company for appraisal purposes was $25.50 per
share, “the argument can be made that there was no purported loss.” Id. n.8.
Again, the District Court’s ruling does not translate to the current case. In addition
to the differences in pleading standards, the question of whether the vote was fully
informed for purposes of Corwin cleansing does not involve the element of damages. This
decision also is not holding that the Proxy needed to disclose that Skaggs and Smith rushed
75
the sale process, which would involve self-flagellation. Under Delaware precedents,
however, the fact that Skaggs and Smith planned to retire to the point of targeting dates in
2016 was a material fact that needed to be disclosed. This decision hews to those
precedents.
Finally, the District Court rejected the contention that the Proxy contained a material
omission by failing to disclose that TransCanada engaged with the Company in violation
of its standstill, including during the January 7 Meeting. The District Court recognized that
this conduct could be material, but it concluded that the omissions were similar to a line of
federal cases holding that undisclosed discussions with bidders were “not so material as to
alter the total mix of information available.” Id. at 521. Yet again, the analysis does not
translate to the current case. The different pleading standards again loom large, and for
purposes of Delaware law, a material omission is by definition an omission that alters the
total mix of information available. For purposes of Delaware law, the failure to disclose
the January 7 Meeting and the preferential treatment that TransCanada received meet the
materiality requirement.
c. The Conclusion Regarding Corwin Cleansing
The Complaint tracks the findings in the Appraisal Decision when asserting
disclosure claims. Those findings and the evidence that supported them support a
reasonably inference that the Proxy contained three material omissions. “[O]ne violation is
sufficient to prevent application of Corwin.” Yates, 2017 WL 5953514, at *8 n.115.
Accordingly, the Corwin doctrine does not lower the standard of review.
76
3. The Temporal Starting Point For Enhanced Scrutiny
In a second attempt to avoid enhanced scrutiny, the defendants argue that “Revlon
duties were not triggered until March 4, 2016, when [the Company] first demanded a
written merger proposal from TransCanada.” Dkt. 40 at 27. By pushing out the date when
so-called “Revlon duties” apply, the defendants seek to avoid confronting many of the
actions challenged by the plaintiffs, such as the January 7 Meeting, TransCanada’s serial
breaches of its standstill agreement, and the Board’s decision to enter into exclusivity with
TransCanada.
As a threshold matter, the notion that Revlon imposes particular conduct obligations
on directors that manifest themselves as “Revlon duties” perpetuates a stereotypical
interpretation of Revlon that prevailed in the immediate aftermath of that decision. In its
landmark 1986 opinion, the Delaware Supreme Court stated that when a board of directors
stops resisting a hostile takeover and decides to sell the corporation, the directors’ role
changes “from defenders of the corporate bastion to auctioneers charged with getting the
best price for the stockholders at a sale of the company.” Revlon, 506 A.2d at 182. That
vivid metaphor suggested a set of affirmative conduct obligations (such as a duty to
auction) that the Delaware courts would impose and enforce.
Thirty-five years later, that interpretation no longer is viable. As discussed above,
Revlon now is understood to be a form of enhanced scrutiny, the innovative standard of
review created in Unocal. The Delaware Supreme court has held squarely and repeatedly
that Revlon does not create a duty to auction or require that directors adhere to judicially
77
prescribed steps to maximize stockholder value.13 The Delaware Supreme Court’s decision
in Lyondell dispensed with any lingering uncertainty. There, the Delaware Supreme Court
held that the Court of Chancery erred by identifying several possible means by which the
directors could have done more to explore alternatives before agreeing to a transaction. See
Lyondell, 970 A.2d at 242–43. The Delaware Supreme Court viewed the Court of Chancery
as having concluded erroneously “that directors must follow one of several courses of
action to satisfy their Revlon duties.” Id. at 242. In correcting that error, the Delaware
Supreme Court stated that “[n]o court can tell directors exactly how to accomplish [the
goal of obtaining the best value reasonably available] because they will be facing a unique
combination of circumstances, many of which will be outside their control.” Id. And if no
court can tell directors what to do when pursuing a negotiated acquisition, then Revlon
cannot impose specific conduct requirements.
13
See, e.g., Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (“In our view,
Revlon neither creates a new type of fiduciary duty in the sale-of-control context nor alters
the nature of the fiduciary duties that generally apply.”); see also Lyondell Chem. Co. v.
Ryan, 970 A.2d 235, 243 (Del. 2009) (“[T]here are no legally prescribed steps that directors
must follow to satisfy their Revlon duties.”); QVC, 637 A.2d at 43 (“The directors’
fiduciary duties in a sale of control context are those which generally attach. In short, the
directors must act in accordance with their fundamental duties of care and loyalty.”
(internal quotation marks omitted)); Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286
(Del. 1989) (“[T]he basic teaching of [Revlon and Unocal] is simply that the directors must
act in accordance with their fundamental duties of care and loyalty.”); In re Lukens Inc.
S’holders Litig., 757 A.2d 720, 731 (Del. Ch. 1999) (“‘Revlon duties’ refer only to a
director’s performance of his or her duties of care, good faith and loyalty in the unique
factual circumstance of a sale of control over the corporate enterprise.”).
78
Enhanced scrutiny in the M & A context addresses the situationally specific
pressures that boards of directors, their advisors, and management face when considering
a sale or similar strategic alternative that carries significant personal implications for those
individuals.14 For purposes of applying enhanced scrutiny, the operative question is when
those situational conflicts come into play. The Delaware Supreme Court has held that this
occurs
in at least the following three scenarios: (1) when a corporation initiates an
active bidding process seeking to sell itself or to effect a business
reorganization involving a clear break-up of the company, (2) where, in
response to a bidder’s offer, a target abandons its long-term strategy and
seeks an alternative transaction involving the break-up of the company, or
(3) when the approval of a transaction results in a sale or change of control.
14
See, e.g., El Paso, 41 A.3d at 439 (“[T]he potential sale of a corporation has
enormous implications for corporate managers and advisors, and a range of human
motivations, including but by no means limited to greed, can inspire fiduciaries and their
advisers to be less than faithful . . . .”); Dollar Thrifty, 14 A.3d at 597 (explaining that
“heightened scrutiny” under Revlon and Unocal applies because of concern about
“personal motivations in the sale context that differ from what is best for the corporation
and its stockholders” and that “[m]ost traditionally, there is the danger that top corporate
managers will resist a sale that might cost them their managerial posts, or prefer a sale to
one industry rival rather than another for reasons having more to do with personal ego than
with what is best for stockholders”); In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d
171, 194 (Del. Ch. 2007) (noting that executives may have “an incentive to favor a
particular bidder (or type of bidder),” especially if “some bidders might desire to retain
existing management or to provide them with future incentives while others might not.”);
cf. In re SS & C Techs., Inc. S’holders Litig., 911 A.2d 816, 820 (Del. Ch. 2006) (declining
to approve disclosure-only settlement where record supported inference that CEO
“instigated this transaction through the use of corporate resources, but without prior
authorization from the board of directors. . . . in order to identify a transaction in which he
could both realize a substantial cash payout for some of his shares and use his remaining
shares and options to fund a sizeable investment in the resulting entity”).
79
Arnold, 650 A.2d at 1290 (citations and internal quotation marks omitted). Notably, the
Delaware Supreme Court made clear that these scenarios are not exclusive (“at least the
following three scenarios”), and the high court subsequently recognized that enhanced
scrutiny applies to “a final-stage transaction for all shareholders.” McMullin v. Beran, 765
A.2d 910, 918 (Del. 2000).
The Delaware Supreme Court also has recognized that although usually it will be
the board that causes the corporation to initiate an active sale process, other corporate actors
can take action that implicates enhanced scrutiny. In McMullin, it was the company’s
controlling stockholder. Id. at 919. In RBC Capital Markets, LLC v. Jervis, it was the
chairman of a special committee and the company’s financial advisor. 129 A.3d 816, 851–
52 (Del. 2015). Rejecting the financial advisor’s argument that enhanced scrutiny could
not begin to apply until late in the sale process, after the board had definitive offers from
two bidders, the Delaware Supreme Court reasoned that “to sanction [the financial
advisor’s] contention would allow the Board to benefit from a more deferential standard of
review during the time when, due to its lack of oversight, the Special Committee and [the
financial advisor] engaged in a flawed and conflict-ridden sale process.” Id. at 853–54. The
high court noted that “‘Revlon requires us to examine whether a board’s overall course of
action was reasonable,’” not just the end product. Id. at 854 (quoting C&J Energy Servs.,
Inc. v. City of Miami Gen. Empls.’, 107 A.3d 1049, 1066 (Del. 2014)).
The defendants have moved to dismiss the Complaint for failing to state a claim on
which relief could be granted, making the operative question, “When is it reasonably
conceivable that the situational conflicts that animate enhanced scrutiny could have come
80
into play?” For purposes of the motion to dismiss, the pled facts support a reasonable
inference that enhanced scrutiny is warranted beginning not later than the January 7
Meeting. Indeed, although this decision does not rely on an earlier date, it is reasonably
conceivable that enhanced scrutiny could have started to apply as early as July 2015, when
NiSource completed the spinoff and the Company emerged as a public entity. Given the
pled facts, it would be reasonable to view the situational pressures that animate enhanced
scrutiny as having come into play immediately after the spinoff.
The pled facts support a reasonable inference that Skaggs and Smith began
contemplating a sale of the Company before the spinoff was completed, providing strong
support for an inference that the situational pressures would soon become manifest.
• In May 2015, Lazard gave a presentation to Company management about the
Company’s strategic alternatives. The presentation identified possible acquirers,
including Dominion, Berkshire, Spectra, and NextEra.
• Later in May 2015, Lazard contacted TransCanada and mentioned that the Company
might be for sale shortly after the spinoff. In June, Lazard advised TransCanada
against opening a dialogue with the Company until after the spinoff, warning that it
could jeopardize the tax-free status of the transaction.
• In a May 2015 memorandum, Skaggs’ personal financial advisor stated that the
Company “could be purchased as early as Q3/Q4 of 2015.” Compl. ¶ 39. He wrote,
“I think they are already working on getting themselves sold before they even split.
This was the intention all along. [Skaggs] sees himself only staying on through July
of 2016.” Id. (alteration in original) (emphasis omitted).
The pled facts, supported by evidence from the Appraisal Proceeding, support a
reasonable inference that immediately after the spinoff, the Company began engaging with
potential bidders and exploring alternatives in a context where enhanced scrutiny would
apply.
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• Less than a week after the spin-off, the CEO of Spectra contacted Skaggs to express
interest in a deal.
• On July 20, 2015, Dominion expressed interest in buying Columbia for $32.50 to
$35.50 per share.
• On August 12, 2015, Columbia and Dominion executed an NDA, and Dominion
began due diligence.
• In October 2015, Smith spoke with TransCanada, and Skaggs engaged in further
talks with Dominion.
• In early November 2015, Columbia entered into NDAs with Dominion, NextEra,
and Berkshire, and the potential buyers began conducting due diligence.
• On November 19, 2015, Skaggs and Smith invited TransCanada and Berkshire to
make a bid by November 24. They did not provide the bid deadline to the other
bidders.
• After receiving indications of interest from TransCanada and Berkshire, the Board
decided to pursue an equity offering.
Although it is possible to view the Company’s sale process as having started with
the spinoff, this decision does not draw that inference. Instead, this decision finds it
reasonably conceivable that enhanced scrutiny began to apply not later than the January 7
Meeting, when Smith provided confidential information to Poirier, indicated that
management had eliminated TransCanada’s competition, and invited a bid. These events
led directly to the Merger Agreement and the sale of the Company for cash. The pled facts
that support this inference include events leading up to, during, and after the January 7
Meeting.
• In mid-December 2015, Poirier called Smith to reiterate TransCanada’s interest in
a deal. Smith and Poirier agreed to the January 7 Meeting.
• During the same time frame, Skaggs began meeting with individual members of the
Board to encourage them to support a sale.
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• On January 5, 2016, Smith emailed Poirier 190 pages of confidential information.
• During the January 7 Meeting. Smith encouraged TransCanada to bid, conveying
the message that Columbia had “eliminated the competition.” Id. ¶ 84.
• On January 25, 2016, TransCanada expressed interest in a transaction in the range
of $25 to $28 per share.
• During a two-day meeting on January 28 and 29, 2016, Skaggs sought to persuade
the Board to enter into a deal with TransCanada. The Board directed management
to grant TransCanada exclusivity through March 2, 2016.
• On March 4, 2016, the Board directed management to demand a formal merger
proposal from TransCanada. The Board also instructed Skaggs and Smith to waive
the standstill provisions in the NDAs between Columbia and the other potential
bidders. Skaggs and Smith ignored the Board’s direction and did not inform the
other bidders that the Board was waiving their standstill provisions.
• On March 11, 2016, Spectra emailed Skaggs to start merger talks. Skaggs
downplayed the seriousness of Spectra’s interest and agreed on a script with
TransCanada that would insist on a serious written proposal. Skaggs and Smith gave
TransCanada a “moral commitment” that the phrase “serious written proposal”
meant a “financed bid subject only to confirmatory” diligence. Id. ¶ 108.
• Also on March 11, 2016, the Board repeated its direction that management waive
the standstills with Berkshire, Dominion, and NextEra. Skaggs and Smith delayed
sending the emails until the following day.
• On March 14, 2016, TransCanada lowered its offer from $26 to $25.50 and
threatened to make a public announcement that talks had terminated unless the
Company accepted its bid within three days.
• On March 16, 2016, the Board approved the Merger Agreement.
• The post-signing phase ended on July 1, 2016, when the Merger closed.
Given these events, it is reasonable to infer that Smith initiated a sale process through the
January 7 Meeting. The Board could have stopped the sale process that Smith initiated, but
Skaggs and Smith convinced the Board to proceed. Three months later, that process
83
resulted in the Merger Agreement. It is reasonable to infer that enhanced scrutiny applies
to the events that occurred during this period, as well as during the post-signing phase.
4. The Sale Process Under Enhanced Scrutiny
When the sale process is evaluated under enhanced scrutiny beginning with the
January 7 Meeting, the Complaint pleads facts supporting a reasonable inference that
Skaggs and Smith persistently favored TransCanada so that they could achieve a near-term
cash sale and retire with their full change-in-control benefits. At the pleading stage, it is
reasonably conceivable that the sale process fell outside the range of reasonableness and
generated a price below what TransCanada or another bidder otherwise would have paid.
Put differently, the Complaint supports a reasonable inference that the sale process did not
achieve “the best value reasonably available to the stockholders.” QVC, 637 A.2d at 43.
A board of directors may favor a bidder if “in good faith and advisedly it believes
shareholder interests would be thereby advanced.” In re Fort Howard Corp. S’holders
Litig., 1988 WL 83147, at *14 (Del. Ch. Aug. 8, 1988) (Allen, C.). “[A] board may not
favor one bidder over another for selfish or inappropriate reasons . . . .” Golden Cycle, LLC
v. Allan, 1998 WL 892631, at *14 (Del. Ch. Dec. 10, 1998). “[A]ny favoritism [directors]
display toward particular bidders must be justified solely by reference to the objective of
maximizing the price the stockholders receive for their shares.” In re Topps Co. S’holders
Litig., 926 A.2d 58, 64 (Del. Ch. 2007). A board “may tilt the playing field if, but only if,
it is in the shareholders’ interest to do so.” In re J.P. Stevens & Co. S’holders Litig., 542
A.2d 770, 782 (Del. Ch. 1988).
84
By contrast, it falls outside the range of reasonableness to tilt the playing field
against one bidder and in favor of another, not in a reasoned effort to maximize advantage
for the stockholders, but because the fiduciaries have personal reasons to prefer the favored
bidder. See Topps, 926 A.2d at 64. Consequently, “the paradigmatic context for a good
Revlon claim . . . is when a supine board under the sway of an overweening CEO bent on
a certain direction[] tilts the sales process for reasons inimical to the stockholders’ desire
for the best price.” Toys “R” Us, 877 A.2d at 1002. Vice Chancellor McCormick recently
reframed this observation more broadly to state that “the paradigmatic Revlon claim
involves a conflicted fiduciary who is insufficiently checked by the board and who tilts the
sale process toward his own personal interests in ways inconsistent with maximizing
stockholder value.” In re Mindbody, Inc., 2020 WL 5870084, at *13 (Del. Ch. Oct. 2,
2020).
The factual allegations of the Complaint support a reasonable inference that Skaggs
and Smith tilted the sale process in favor of TransCanada and against the other bidders so
that they could obtain a cash deal that would enable them to retire with their change-in-
control benefits. The favoritism that TransCanada received was persistent and substantial.
The favoritism towards TransCanada began in mid-December, in the lead-up to the
January 7 Meeting, when Poirier called Smith to reiterate TransCanada’s interest in a deal
with Columbia. As a result of the call, Smith scheduled the January 7 Meeting with Poirier.
Smith told Skaggs about Poirier’s outreach, and they shared the information with Goldman.
When Poirier made the call, TransCanada was bound by a standstill with a DADW
provision, and Poirier’s call violated the standstill. No one told the Board, and the Company
85
did not take any action to enforce the standstill. Although the favoritism during this
timeframe precedes the time when this decision assumes that enhanced scrutiny began to
apply, it provides context for what followed.
The January 7 Meeting that kicked off the renewed sale process itself was an act of
management-led favoritism towards TransCanada. On January 5, 2016, in anticipation of
the January 7 Meeting, Smith emailed Poirier 190 pages of confidential information,
including the Company’s updated financial projections and its counterparty agreements.
At the time, an abiding trough in commodity prices had caused market participants to
question whether midstream energy companies like Columbia faced near-term
counterparty risk, meaning that oil and gas companies might not be able to make their
payments under their long-term, fixed-price, take-or-pay contracts if commodity prices
remained low. By giving Poirier the Company’s customer agreements and an updated set
of projections, Smith provided TransCanada with critical information that enabled
TransCanada to assess the Company’s value and make a bid. Information is costly to
obtain, and when a seller gives a bidder preferential access to information, it subsidizes
that bidder’s efforts. See Jacob K. Goeree & Theo Offerman, Competitive Bidding in
Auctions with Private and Common Values, 113 Econ. J. 598, 600 (2003).
During the January 7 Meeting, the favoritism towards TransCanada became more
blatant. Skaggs, Smith, and Goldman had prepared a set of talking points for Smith to use
with TransCanada. Instead of deploying the talking points as intended, Smith literally
handed them to Poirier. Smith then stressed that TransCanada was unlikely to face
86
competition from any major strategic players, because Columbia had “eliminated the
competition.” Compl. ¶ 84.
It is reasonable to infer that the January 7 Meeting undercut the Company’s ability
to negotiate the best value reasonably available from TransCanada. The Board had not
authorized Smith to meet with TransCanada, much less to give TransCanada non-public
information plus advice on how to avoid a competitive sale process. Skaggs and Smith
never told the Board the full story about the January 7 Meeting or Smith’s unauthorized
disclosures. Although Skaggs generally was forthcoming with the Board, in this instance
he told the directors that TransCanada had reached out to Smith, without mentioning that
Smith met with Poirier and without reporting Smith’s unauthorized disclosures. See
Appraisal Decision, 2019 WL 3778370, at *33.
After the January 7 Meeting, the favoritism towards TransCanada continued. During
a two-day meeting on January 28 and 29, 2016, Skaggs attempted to persuade the Board to
pursue a deal with TransCanada. His presentation overstated the near-term risks to
Columbia and its business plan and claimed that for the directors to reject a price of $26
per share, they needed to believe that the Company’s stock price would reach $30.11 per
share in the next year. In reality, the underlying analysis indicated that the directors only
needed to believe that the Company’s stock price would reach $30.11 per share in the next
twenty-three months. To reject a price of $26 per share, they only had to believe that the
Company’s stock price would reach $27.95 per share by the end of 2016. Only five months
earlier, the Company’s stock price had traded above $27 per share.
87
Based on Skaggs’ presentation, the Board authorized management to grant
exclusivity to TransCanada through March 2, 2016, and that agreement subsequently was
extended until March 8. During the exclusivity period, sixty-nine TransCanada employees
conducted due diligence on the Company.
On March 4, 2016, the Board directed management to demand a formal merger
proposal from TransCanada. The Board also instructed Skaggs and Smith to waive the
standstill provisions in the NDAs between Columbia and the other potential bidders.
Skaggs and Smith did not carry out that instruction until over a week later, on March 12,
after the Board reiterated its directive. It is reasonable to infer that Skaggs and Smith failed
to carry out the Board’s instructions because they favored a deal with TransCanada.
On March 8, 2016, TransCanada’s exclusivity expired. On March 9, TransCanada
offered to acquire the Company for $26 per share. On March 10, the Wall Street Journal
broke a story about the talks. Skaggs reminded the Board that the exclusivity period had
expired and that the news story could lead to additional inbound offers.
On March 11, 2016, Spectra contacted Skaggs to pursue merger talks, but Skaggs
downplayed the seriousness of Spectra’s interest. Rather than engaging with Spectra and
using the threat of competition to negotiate a higher bid from TransCanada, Skaggs offered
to act as if TransCanada’s exclusivity arrangement had never ended and would continue
for another week, conditioned on TransCanada agreeing that the Company could tell
interested parties that it would respond only to a “serious written proposal.” That
negotiating position favored TransCanada’s interests. Nevertheless, TransCanada
demanded a “moral commitment” from Skaggs and Smith that the phrase “serious written
88
proposal” meant a “financed bid subject only to confirmatory” diligence. Compl. ¶ 108.
Skaggs agreed, and Smith understood this concept to require
[a] bona fide proposal that says I will pay you X for your company. Hard and
fast. No outs. No anything. No way to wiggle out of anything. This is going
to happen. You’re going to pay whatever you’re going to pay per share and
we’re going to sign that agreement and we’re done.
Id. ¶¶ 12, 109, 128.
By making this moral commitment, Skaggs and Smith established a requirement
that arguably was more onerous than the no-shop clause in the eventual Merger Agreement.
Under the no-shop provision, the Company could provide information to or engage in
discussions with any person who made a bona fide written Acquisition Proposal, defined
as any proposal or offer involving 15% or more of the Company’s equity or assets, without
any requirement that the Acquisition Proposal be fully financed, binding, and actionable.
See MA §§ 4.02(a)–(b). Before doing so, the Board had to determine in good faith that the
failure to do so “would reasonably be expected to result in a breach of the directors’
fiduciary duties” and that the Acquisition Proposal either constituted “or could reasonably
be expected to result in” a Superior Proposal. Id. § 4.02(a). The definition of “Superior
Proposal” contemplated an acquisition or purchase involving 50% or more of the
Company’s equity or assets that was “reasonably likely to be consummated in accordance
with its terms.” Id. § 4.02(b)(ii). The definition of “Superior Proposal” permitted the Board
to consider whether the proposal was contingent on third-party financing, but did not
require a fully financed, binding offer with no outs.
89
The moral commitment that Skaggs and Smith gave to TransCanada imposed a
standard that no competing bidder could meet. With the dislocation in the energy markets,
no bidder would make a proposal that met this test without conducting due diligence.
TransCanada deployed nearly seventy people who conducted diligence for over a month
before making its offer of $26 per share.
After making their moral commitment to TransCanada, Skaggs and Smith brushed
off Spectra’s interest. They referred Spectra’s CFO to Goldman, who read the script.
Spectra’s CFO told Goldman that Spectra could “move quickly” and “be more specific
subject to diligence.” Compl. ¶ 114. The script and management’s “moral commitment” to
TransCanada foreclosed that option; Spectra would need to provide a fully committed
proposal before getting any diligence. Goldman believed that Spectra was a serious bidder,
but Skaggs and Smith would not engage.
These events culminated on March 14, 2016, when TransCanada lowered its price
from $26 to $25.50. TransCanada placed a three-day deadline on its offer and threatened
to make a public announcement that negotiations had terminated if the Company did not
accept by the deadline. A public announcement of that sort could suggest that TransCanada
had uncovered problems with Columbia, turning Columbia into damaged goods and
hurting Columbia’s ability to secure an alternative transaction. It is reasonable to infer that
the solicitude that Skaggs and Smith showed towards TransCanada contributed to
TransCanada’s decision to lower its bid.
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TransCanada’s lower offer caused the exclusivity agreement to terminate and freed
the Company to engage with other bidders, but the Company did not take advantage of the
opportunity. On March 16, 2016, the Board approved the Merger Agreement.
At the pleading stage, this pattern of behavior supports a reasonable inference that
Skaggs and Smith tilted the playing field towards TransCanada in pursuit of a cash deal
that would maximize the value of their retirement benefits. It is reasonable to infer that
without the favoritism that Skaggs and Smith showed to TransCanada, the Company would
have had greater negotiating leverage vis-à-vis TransCanada, either as a result of
developing other alternatives or simply because Company management would not have
signaled so strongly that they wanted a deal. It is reasonable to infer that the Company
could have extracted a better price from TransCanada or obtained a superior deal from a
third party, such as Spectra.
5. The Appraisal Decision’s Findings Regarding The Sale Process
To argue that the factual allegations of the Complaint do not support a reasonable
inference that the sale process fell short under enhanced scrutiny, the defendants return to
the Appraisal Decision, stressing that this court held in the Appraisal Decision that the
Board oversaw a sale process that resulted in a transaction price that provided reliable
evidence of fair value. Arguing that the rulings in the Appraisal Decision require dismissal
under the doctrine of stare decisis, the defendants contend that this finding necessarily
means that the sale process could not have been inadequate.
The defect in this argument is that the Appraisal Decision focused exclusively on
whether the sale process “was sufficiently reliable to make the deal price a persuasive
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indicator of fair value.” Appraisal Decision, 2019 WL 3778370, at *24. The Appraisal
Decision did not examine whether the sale process resulted in “the best value reasonably
available for the stockholders.” QVC, 637 A.3d at 46. As a result, the Appraisal Decision
did not evaluate the possibility of a fiduciary breach based on the prospects for a better
price from TransCanada or a higher bid from a third party.
To state the obvious, the Appraisal Decision was rendered in the context of a
statutory appraisal proceeding. “An appraisal is a limited legislative remedy intended to
provide shareholders dissenting from a merger on grounds of inadequacy of the offering
price with a judicial determination of the intrinsic worth (fair value) of their
shareholdings.” Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988). Under
the appraisal statute, fair value means the value of the company as a standalone entity.15
To determine the company’s fair value, the court values the corporation as a going concern
based on its operative reality at the point in time when the merger closed.16 The court looks
15
Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 20 (Del.
2017) (explaining that when valuing a corporation in an appraisal, “the court should first
envisage the entire pre-merger company as a ‘going concern,’ as a standalone entity, and
assess its value as such” (quoting Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144 (Del.
1989)); accord Brigade Leveraged Cap. Structures Fund Ltd. v. Stillwater Mining Co., 240
A.3d 3, 10 (Del. 2020); In re Appraisal of AOL Inc., 2018 WL 1037450, at *8 (Del. Ch.
Feb. 23, 2018).
16
Le Beau, 737 A.2d at 525 (explaining that in an appraisal, the corporation “must
be valued as a going concern based upon the ‘operative reality’ of the company at the time
of the merger”) (quoting Cede & Co. v. Technicolor, Inc. (Technicolor IV), 684 A.2d 289,
298 (Del. 1996)); see Verition P’rs Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d
128, 132–33 (Del. 2019) (“Fair value is . . . the value of the company to the stockholder as
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to the company’s standalone value as a going concern because “[t]he underlying
assumption in an appraisal valuation is that the dissenting shareholders would be willing
to maintain their investment position had the merger not occurred.”17 In summary, the trial
court assesses “the value of the company . . . as a going concern, rather than its value to a
third party as an acquisition.” M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del.
1999).
As recently as four months before the issuance of the Appraisal Decision, the
Delaware Supreme Court had released the third installment in a trilogy of rulings that
provided pointed guidance as to how a trial court should approach the relationship between
a going concern,” i.e., the stockholder’s “proportionate interest in a going concern.”
(internal quotation marks omitted)).
17
Technicolor IV, 684 A.2d at 298; see Tri-Continental Corp.v. Battye, 74 A.2d 71,
72 (Del. 1950) (“The basic concept of value under the appraisal statute is that the
stockholder is entitled to be paid for that which has been taken from him, viz., his
proportionate interest in a going concern.”). The going-concern standard also tracks the
judicially endorsed account in which the appraisal statute arose “as a means to compensate
shareholders of Delaware corporations for the loss of their common law right to prevent a
merger or consolidation by refusal to consent to such transactions.” See, e.g., Ala. By-
Prods., 657 A.2d at 258. As explained in the seminal Delaware Supreme Court decision on
the going-concern standard, the appraisal statute calls for valuing the corporation as a going
concern, using its operative reality as it then existed as a standalone entity, because that is
the alternative that the dissenters wished to maintain. Battye, 74 A.2d at 72. Commentators
have questioned the accuracy of the historical trade-off, but it remains part of the
foundational understanding that has informed the concept of fair value. See Lawrence A.
Hamermesh & Michael L. Wachter, The Fair Value of Cornfields in Delaware Appraisal
Law, 31 J. Corp. L. 119, 130 n.52 (2005) (“The historical accuracy of this trade-off story
is questionable, however, given the fact that the appraisal remedy was often added well
after the adoption of statutes permitting mergers without unanimous consent.” (citing
Robert B. Thompson, Exit, Liquidity, and Majority Rule: Appraisal’s Role in Corporate
Law, 84 Geo. L.J. 1, 14 (1995))).
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fair value in an appraisal and the deal price in a third-party transaction that offered a
premium over the unaffected market price.18 The Delaware Supreme Court stressed that
“[t]he issue in an appraisal is not whether a negotiator has extracted the highest possible
bid. Rather, the key inquiry is whether the dissenters got fair value and were not exploited.”
Dell, 177 A.3d at 33. “[F]air value is just that, ‘fair.’ It does not mean the highest possible
price that a company might have sold for had Warren Buffett negotiated for it on his best
day....” DFC, 172 A.3d at 370.
Capitalism is rough and ready, and the purpose of an appraisal is not to make
sure that the petitioners get the highest conceivable value that might have
been procedure had every domino fallen out of the company’s way; rather, it
is to make sure that they receive fair compensation for their shares in the
sense that it reflects what they deserve to receive based on what would fairly
be given to them in an arm’s-length transaction.
Id. at 370–71.
With these principles in mind, the Appraisal Decision focused on “fair value” for
purposes of an appraisal. See Appraisal Decision, 2019 WL 3778370, at *14–17 (quoting
8 Del C. § 262(h) and discussing valuation standard). Adhering to the standards set forth
18
See Aruba, 210 A.3d at 142 (reversing trial court’s finding on fair value and
determining fair value using deal price less the acquirer’s estimate of synergies); Dell, 177
A.2d at 23 (reversing trial court’s finding on fair value where sale process was sufficiently
good that the deal price deserved “heavy, if not dispositive, weight”); DFC Glob. Corp. v.
Muirfield Value P’rs, 172 A.3d 346, 388–89 (Del. 2017) (reversing trial court’s finding on
fair value where sale process was sufficiently good that the Court of Chancery’s “decision
to give one-third weight to each metric was unexplained and in tension with the Court of
Chancery’s own findings about the robustness of the market check”). The Delaware
Supreme Court issued its decision in Aruba on April 16, 2019. This court held post-trial
oral argument in the Appraisal Proceeding on May 16, 2019, and issued its decision on
August 12, 2019.
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in Dell, DFC, and Aruba, the Appraisal Decision evaluated whether the petitioners had
been exploited in the sense of being deprived of what would fairly be given to them in an
arm’s-length transaction. After surveying the high court trilogy, the Appraisal Decision
noted that when applying the arm’s-length transaction test, the Delaware Supreme Court
had cited “objective indicia” of arm’s-length status. Id. at *24 (citing Dell, 177 A.3d at 28,
and DFC, 172 A.3d at 376). These indicia included:
• Whether the acquirer was a third party, see id. at *25 (citing DFC, 172 A.3d at 349);
• Whether the Board had a majority of disinterested and independent directors, see id.
(citing Dell, 177 A.3d at 28);
• Whether the acquirer conducted due diligence and received confidential
information, see id. (citing Aruba, 210 A.3d at 140);
• Whether the target and the buyer negotiated over the price, see id. (citing Aruba,
210 A.3d at 139; and Dell, 177 A.3d at 28);
• Whether the target contacted other buyers who declined to pursue a transaction
during the pre-signing phase, see id. (citing Aruba, 210 A.3d at 136–39, 142; Dell,
177 A.3d at 28, and DFC, 172 A.3d at 350, 376); and
• Whether any bidders emerged during the post-signing phase, see id. (citing Aruba,
210 A.3d at 136; Dell, 177 A.3d at 29, 33).
The Appraisal Decision deployed these objective indicia when determining whether the
deal price provided a reliable indication of standalone value. The Merger exhibited these
objective indicia, and the Appraisal Decision therefore regarded the deal price as a reliable
indicator of standalone value.
The use of these relatively straightforward factors as a heuristic for evaluating a
transaction makes sense when the question is whether the deal price establishes a
persuasive upper bound on standalone value. As the Delaware Supreme Court has noted,
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“it is widely assumed that the sale price in many M & A deals includes a portion of the
buyer’s expected synergy gains, which is part of the premium the winning buyer must pay
to prevail and obtain control.” DFC, 172 A.3d at 371. A deal that exhibits the objective
indicia cited by the Delaware Supreme Court and which reflects a premium over the
unaffected trading price therefore likely exceeds standalone value. Real-world market
realities make it unlikely that delving deeper into the transactional dynamics would
uncover a deal price below standalone value.
The same straightforward factors may not be dispositive when evaluating whether
a deal price provides “the best value reasonably available to the stockholders.” QVC, 637
A.2d at 43. Because of the limitations of an appraisal proceeding, the court does not
evaluate the possibility of a higher negotiated price or the potential for an offer from an
alternative bidder, except to the extent that those factors touch on the relationship between
the deal price and standalone value. In this instance, the Appraisal Decision did not
evaluate whether the sale process resulted in the best value reasonably available to
stockholders, and the Appraisal Decision did not determine whether management’s
conduct undermined the Board’s ability to obtain a higher price from TransCanada or a
different bidder. The outcome in the Appraisal Proceeding therefore does not defeat the
reasonable inference of an enhanced scrutiny breach under the doctrine of stare decisis.
6. The Appraisal Decision’s Findings Regarding Specific Flaws In The
Sale Process
In addition to invoking the bottom-line conclusion in the Appraisal Decision, the
defendants also rely on its analysis of various flaws in the sale process, asserting in each
96
case that the Appraisal Decision found that the flaw did not taint the result. The problem
again for the defendants is that in each case, the Appraisal Decision examined the factual
record to determine whether the alleged flaw undermined the reliability of the deal price as
a persuasive indicator of standalone value using the criteria that the Delaware Supreme
Court deployed in Aruba, Dell, and DFC. The court did not evaluate whether the flaws
prevented the Board from securing the best value reasonably available for stockholders in
the sense of a higher price from TransCanada or a better deal from a competing bidder.
First, the court considered whether Skaggs and Smith initiated and then influenced
the sale process to generate personal benefits. The Appraisal Decision noted that both
executives had targeted a 2016 retirement date, that both had change-in-control agreements
that paid out triple the sum of their base salary and target annual bonus if they retired after
a sale of Columbia, but if the sale occurred after July 1, 2018, then the multiple would drop
from triple to double. The Appraisal Decision observed that when Columbia separated from
NiSource, both joined Columbia knowing that it was likely to be an acquisition target, and
that both had made statements that evidenced their desire for an imminent sale. The
Appraisal Decision found that Skaggs and Smith in fact harbored conflicting interests, but
for purposes of measuring the deal price against standalone value, the Appraisal Decision
evaluated the seriousness of their conflicts against the conflicts of interest present in Aruba
and Dell, which had not been sufficient to undermine the reliability of the deal price as an
indicator of standalone value. The Appraisal Decision ultimately rejected the idea that
Skaggs’ and Smith’s conflicts resulted in a deal price below standalone value, holding that
Skaggs and Smith “were not going to arrange a fire sale for below Columbia’s standalone
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value, and the Board would not have let them.” Appraisal Decision, 2019 WL 3778370, at
*28. The Appraisal Decision did not consider the conflicts in terms of whether the sale
process achieved the best value reasonably available to stockholders.
The Appraisal Decision considered the January 7 Meeting from a similar
perspective. Describing this meeting as the “most troubling event in the deal timeline,” the
court found that there was “some evidence” that the Board might have negotiated a higher
price without Smith’s tip. Id. at *29. But relying on the Delaware Supreme Court’s
observation in Dell that fair value is not a measure of “whether a negotiator has extracted
the highest possible bid,” the Appraisal Decision concluded that the prospect of a higher
deal price was “insufficient to undermine the deal price for appraisal purposes.” Id.
(quoting Dell, 177 A.3d at 33). As the decision explained,
The evidence does not convince me that the Skaggs, Smith, and the Board
accepted a deal price that left a portion of Columbia’s fundamental value on
the table. As in Aruba, perhaps different negotiators could have done better.
If they had, then the higher price would have resulted in TransCanada sharing
a portion of the anticipated synergies with Columbia’s stockholders. It would
not have affected whether Columbia’s stockholders received fair value.
Id. at *29. The Appraisal Decision did not make any finding about the effect of Smith’s tip
on the Board’s ability to obtain the best value reasonably available, whether from
TransCanada or another bidder.
Next, the court considered whether the Company’s favoritism of TransCanada
undermined the persuasiveness of the deal price as an indicator of standalone value. The
Appraisal Decision described various instances of favoritism, including the January 7
Meeting, the decision to grant exclusivity to TransCanada, and the decision to treat the
98
exclusivity agreement as remaining in place even after it had terminated. The Appraisal
Decision compared these events with the facts of Aruba and DFC, concluding that the
problems during the pre-signing phase were comparable to what had been present in those
decisions. The Appraisal Decision found that “[a]s with their arguments about management
incentives, the petitioners have mustered evidence that supports their theory of bidder
favoritism, but they failed to show that Columbia favored TransCanada to a degree that
left fundamental value on the table.” Id. at *31 (emphasis added). The Appraisal Decision
did not make a determination as to whether the persistent favoritism of TransCanada
undercut the Company’s negotiating leverage vis-à-vis TransCanada and hurt the
Company’s ability to extract a higher price.
Relatedly, the court examined the effect on the sale process of the Company’s
treatment of its standstills. The petitioners argued that Columbia permitted TransCanada
to breach its standstill, while at the same time failing to waive the standstills that bound
rival bidders. Although the Board ultimately waived the standstills for the three other
bidders, the petitioners argued that by the time it did so, TransCanada had an
insurmountable head start towards a transaction. The Appraisal Decision found that
“TransCanada breached its standstill several times.” Id. at *32. The Appraisal Decision
noted that although Columbia did not waive the standstills for the other bidders in March
2016, those other bidders could have bid during the post-signing phase. For purposes of
the Merger’s exposure to potential overbids during the post-signing phase, the sale process
resembled the passive market checks that the Delaware Supreme Court endorsed in Aruba
and DFC. Id. The court concluded that for purposes of validating the sale price as an upper
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bound on standalone value, the Company’s treatment of its standstills did not undermine
the deal price. Id. at *33.
The Appraisal Decision also considered the petitioners’ arguments that “Skaggs and
Smith misled the Board or otherwise ran the sale process unsupervised.” Id. The court
accepted that there might be a situation in which “fraud on the board could lead to a deal
price below fair value,” but found that the petitioners’ arguments did not support that
argument on the facts presented. Id. Instead, if credited, the petitioners’ arguments “would
show that the Board could have gotten more than fair value, but they would not show that
the deal price fell below that mark.” Id. (citing DFC, 172 A.3d at 370).
When analyzing the petitioners’ specific arguments about fraud on the Board, the
Appraisal Decision largely rejected the petitioners’ assertions that Skaggs misled the Board
during the period leading up to the equity offering in December 2015. The decision
recognized that evidence existed to support the petitioners’ theory, but concluded that
“[t]he better view of the evidence” was that Skaggs broadly sought to generate interest
before the Company pivoted to its equity offering in December. Id. By contrast, the
Appraisal Decision credited the petitioners’ claims about the January 7 Meeting, noting
that during this meeting,
Smith sent Poirier confidential due diligence materials and assured him that
TransCanada faced no competition. The Board did not authorize the meeting
or the disclosures. And although Skaggs generally was forthcoming with the
Board, in this instance Skaggs told the Board that TransCanada had reached
out to Smith, without mentioning that Smith met with Poirier and without
reporting Smith’s unauthorized disclosures.
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Id. (footnote omitted). The court nevertheless found that the petitioners had failed to prove
that Smith’s tip and the officers’ partial description of the meeting “led to a price below
fair value.” Id. at *34. The court did not address whether or not these factors affected the
Board’s ability to obtain the best value reasonably available to stockholders.
Finally, the court considered whether the deal protection measures in the Merger
Agreement called into question the reliability of the deal price as an indicator of standalone
value. The court found that the deal protections “did not undermine the sale process for
appraisal purposes.” Id. at *40. The language of this portion of the Appraisal Decision is
the most favorable for the defendants, because the court referenced commentators who
have perceived “that under the Delaware Supreme Court’s recent appraisal decisions, a sale
process will function as a reliable indicator of fair value if it would pass muster if reviewed
under enhanced scrutiny in a breach of fiduciary duty case.” Id. The court then observed
that “[t]he combination of deal protection measures would not have supported a claim for
breach of fiduciary duty.” Id. And that remains true: a challenge to the sale process based
on the deal protection measures alone would not state a claim for breach of fiduciary duty.
The current plaintiffs, however, do not challenge the deal protection measures alone.
They challenge the sale process as a whole, including the January 7 Meeting. Notably, the
current plaintiffs do not contend that the officers breached their fiduciary duties by
inducing the Board to accept a price below standalone value or otherwise to forego a
standalone alternative. They contend that the officers breached their fiduciary duties by
inducing the Board to accept a price from TransCanada that was not the best value
reasonably available.
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At this stage of the case, it is not clear as a matter of law that the post-signing market
check described in the Appraisal Decision could validate the Merger for purposes of
enhanced scrutiny. At a minimum, the termination fee and expense reimbursement create
uncertainty about the outcome. Assuming a topping bidder wanted to make a superior
proposal, if the Company terminated the Merger Agreement, then the Company would
have to pay TransCanada a termination fee of $309 million, or seventy-seven cents per
share, plus expense reimbursement capped at $40 million representing another ten cents
per share. Those amounts would reduce the Company’s value to the acquirer, eliminating
any incentive for any acquirer to bid unless the acquirer valued the Company at more than
$26.37 per share. Skaggs and Smith thus could have cost the stockholders up to $349
million, and TransCanada could have benefitted by that amount, without market forces
coming into play as a corrective.
The later stages of the negotiations with TransCanada involved pricing increments
of fifty cents, within the zone that market forces would not police. Moreover, the point at
which a competing bidder would intervene and provide a check against opportunism
actually is higher, not only because a competing bidder would incur expenses of its own to
make the competing bid, but also because TransCanada had an open-ended match right. As
a result of TransCanada’s open-ended match right, a competing bidder would have to
anticipate that TransCanada would match any bid up to its reserve price. Unless a
competing bidder believed that it placed a higher value on the Company than TransCanada
(including synergies), the competing bidder would not have a viable path to success.
Reasoning backward from that outcome, a competing bidder would not expend the funds
102
to intervene unless it thought it could outbid TransCanada, and market forces would not
address the mispricing resulting from the fiduciary breach. See Merion Cap. L.P. v. Lender
Processing Servs., Inc., 2016 WL 7324170, at *24–25 (Del. Ch. Dec. 16, 2016).
The Appraisal Decision ultimately concluded that the post-signing market check
validated the deal price as “a persuasive indicator of fair value,” meaning as a persuasive
indicator that the deal price represented an upper bound on the Company’s standalone
value. Appraisal Decision, 2019 WL 3778370, at *42. When evaluating the sale process
and when viewing the petitioners’ objections individually and collectively, the court
considered the sale process from this perspective, which is the court’s function in an
appraisal proceeding. The court did not consider whether the officers breached their duties
in a manner that undercut the Board’s negotiating leverage and resulted in TransCanada
paying less than it otherwise would have. To the contrary, the court cited evidence
indicating that loyal negotiators could have bargained for more by extracting a greater share
of the synergies from TransCanada. See id. at *44–45.
Viewed through the lens of stare decisis, the Appraisal Decision does not support a
pleading-stage dismissal of the plaintiffs’ claims. The Appraisal Decision neither
addressed nor resolved the theory of the case that the plaintiffs advance.
7. The Complaint’s Allegations Support An Inference Of Fiduciary
Breach.
At the pleading stage, it is reasonably conceivable that “the adequacy of the
decisionmaking process employed by the directors, including the information on which the
directors based their decision” fell outside the range of reasonableness. QVC, 637 A.2d at
103
45. It is reasonably conceivable that as a result of a flawed process, the Merger did not
yield “the best value reasonably available to the stockholders.” Id. at 43.
B. The Damages Claim Against Skaggs And Smith
When applying enhanced scrutiny, Delaware law distinguishes between “the
transactional justification” setting and the “personal liability” setting.19 “Delaware courts
routinely apply enhanced scrutiny in the transactional justification setting to evaluate the
question of breach when determining whether to enjoin a transaction from closing pending
trial.” Presidio, 2021 WL 298141, at *19 (collecting authorities). Delaware courts likewise
apply enhanced scrutiny after trial to determine whether to issue equitable relief that
operates on a transactional basis, such as a mandatory injunction, a permanent prohibitive
injunction, rescission, or an equitable reformation of or modification to the transaction’s
terms. See id. (collecting authorities).
19
Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1374–75 (Del. 1995)
(distinguishing between the “transactional justification” setting, in which enhanced
scrutiny applies, and “personal liability” setting, in which the business judgment rule
applies); see Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261, 1284 n.32 (Del. 1989)
(distinguishing between “the traditional concept of protecting the decision itself” and the
question of the “directors’ personal liability for these challenged decisions”); Revlon, 506
A.2d at 180 n.10 (embracing the “distinction between the business judgment rule, which
insulates directors and management from personal liability for their business decisions, and
the business judgment doctrine, which protects the decision itself from attack” and noting
that in “transactional justification cases,” Delaware decisions had not observed the
distinction in terminology, but nevertheless “may be understood to embrace the concept of
the doctrine”); see also Kahn v. Stern, 2018 WL 1341719, at *1 n.3, 183 A.3d 715 (Del.
Mar. 15, 2018) (ORDER) (“Revlon remains applicable [in a post-closing case] as a context-
specific articulation of the directors’ duties but directors may only be held liable for a non-
exculpated breach of their Revlon duties.”).
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In a setting where enhanced scrutiny applies, establishing a breach of duty under the
enhanced scrutiny standard is necessary but not sufficient to impose personal liability
against a fiduciary. “Although the Revlon doctrine imposes enhanced judicial scrutiny of
certain transactions involving a sale of control, it does not eliminate the requirement that
plaintiffs plead sufficient facts to support the underlying claims for a breach of fiduciary
duties in conducting the sale.” Malpiede, 780 A.2d at 1083–84. “The fact that a corporate
board has decided to engage in a change of control transaction invoking so-called Revlon
duties does not change the showing of culpability a plaintiff must make in order to hold the
directors liable for monetary damages.” McMillan v. Intercargo Corp., 768 A.2d 492, 502
(Del. Ch. 2000).
“When assessing personal liability, a court must determine whether the fiduciary
breached either the duty of loyalty, including its subsidiary element of good faith, or the
duty of care.” Presidio, 2021 WL 298141, at *20 (collecting authorities). A plaintiff can
recover monetary damages for a breach of the duty of loyalty only by proving that the
fiduciary “harbored self-interest adverse to the stockholders’ interests, acted to advance the
self-interest of an interested party . . . , or [otherwise] acted in bad faith.”20 When enhanced
scrutiny applies, a plaintiff must plead and later prove that the fiduciary failed to act
reasonably to obtain the best value reasonably available due to interestedness, because of
20
In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1180 (Del.
2015); see In re Tangoe, Inc. S’holders Litig., 2018 WL 6074435, at *12 (Del. Ch. Nov.
20, 2018); Venhill Ltd. P’ship v. Hillman, 2008 WL 2270488, at *22 (Del. Ch. June 3,
2008); McMillan, 768 A.2d at 502.
105
a lack of independence, or in bad faith. USG, 2020 WL 5126671, at *29; see McMillan,
768 A.2d at 502.
A plaintiff can recover monetary damages for a breach of the duty of care only by
establishing that the fiduciary was grossly negligent.21 In the corporate context, gross
negligence means “reckless indifference to or a deliberate disregard of the whole body of
stockholders or actions which are without the bounds of reason.”22 When enhanced scrutiny
21
Singh v. Attenborough, 137 A.3d 151, 151 (Del. 2016) (ORDER) (“Absent a
stockholder vote and absent an exculpatory charter provision, the damages liability
standard for an independent director or other disinterested fiduciary for breach of the duty
of care is gross negligence, even if the transaction was a change-of-control transaction.”);
RBC, 129 A.3d at 857 (“When disinterested directors themselves face liability, the law, for
policy reasons, requires that they be deemed to have acted with gross negligence in order
to sustain a monetary judgment against them.”); McMillan, 768 A.2d at 505 n.56 (asserting
in a case involving a post-closing damages claim that “[i]n the absence of the exculpatory
charter provision, the plaintiffs would still have been required to plead facts supporting an
inference of gross negligence in order to state a damages claim”); see Corwin, 125 A.3d at
312 (noting that the range-of-reasonableness standard under enhanced scrutiny “do[es] not
match the gross negligence standard for director due care liability under Van Gorkom”).
22
Tomczak v. Morton Thiokol, Inc., 1990 WL 42607 (Del. Ch. Apr. 5, 1990)
(internal quotation marks omitted); see Albert v. Alex Brown Mgmt. Servs., Inc., 2005 WL
2130607, at *4 (Del. Ch. Aug. 26, 2005) (“Gross negligence has a stringent meaning under
Delaware corporate (and partnership) law, one which involves a devil-may-care attitude or
indifference to duty amounting to recklessness.” (internal quotation marks omitted)). Gross
negligence in the corporate context thus means conduct that goes beyond the various
species of negligence and requires a showing of recklessness. By contrast, in civil cases
not involving business entities, the Delaware Supreme Court has defined gross negligence
as “a higher level of negligence representing ‘an extreme departure from the ordinary
standard of care.’” Browne v. Robb, 583 A.2d 949, 953 (Del. 1999) (quoting W. Prosser,
Handbook of the Law of Torts 150 (2d ed. 1955)), cert. denied, 499 U.S. 952 (1991).
Outside of the corporate context, gross negligence “signifies more than ordinary
inadvertence or inattention,” but it is “nevertheless a degree of negligence, while
recklessness connotes a different type of conduct akin to the intentional infliction of harm.”
Jardel Co., Inc. v. Hughes, 523 A.2d 518, 530 (Del. 1987).
106
applies, a plaintiff must plead and later prove that when failing to obtain the best value
reasonably available, a non-exculpated fiduciary acted recklessly. For an exculpated
fiduciary, the care claim is irrelevant. Corwin, 125 A.3d at 312.
For the reasons discussed above, enhanced scrutiny provides the standard of review
for evaluating the Merger, and this decision has held that the Complaint pleads facts
sufficient to state a claim for breach of duty by supporting a reasonable inference that the
Merger and the process that led to it fell outside the range of reasonableness. The next
question is whether the Complaint has pled a viable claim for damages against a fiduciary
defendant, where “an allegation implying that a Defendant failed to satisfy Revlon is
insufficient.” USG, 2020 WL 5126671, at *2.
1. The Claim For Damages Against Skaggs and Smith In Their Capacities
As Officers
The Complaint’s allegations state a claim for money damages against Skaggs and
Smith as officers. Under Gantler v. Stephens, the standards that govern a claim for a breach
of the duty of loyalty against an officer are the same as the standards that govern a similar
claim against a director. 965 A.2d 695, 708–09 (Del. 2009). At the pleading stage, it is
reasonably conceivable that Skaggs and Smith breached their duty of loyalty by tilting the
sale process in favor of TransCanada for self-interested reasons.
The reality that a care claim requires recklessness warrants re-conceptualizing what
exculpation accomplishes. Exculpation does not eliminate liability for negligence, because
that form of liability does not exist in the first place. In the corporate context, a breach of
the duty of care requires recklessness. The real function of exculpation is to eliminate
liability for recklessness.
107
The defendants argue that the Complaint cannot state a claim unless it pleads a non-
exculpated claim against a majority of the Board. Dkt. 40 at 41–43. That argument
misunderstands Delaware law. “A plaintiff need not allege that a majority of the board
committed a non-exculpated breach . . . in order to state a claim against a disloyal CEO.”
Xura, 2018 WL 6498677, at *13. A plaintiff can plead a claim against an officer by
showing that the officer committed a fraud on the board by withholding material
information from the directors that would have affected their decision-making or by taking
action that materially and adversely affected the sale process without informing the board.23
23
See Haley, 235 A.3d at 723–24 (holding that complaint stated claim against
target’s CEO and lead negotiator who failed to inform the board that he had received a
proposed compensation package from the acquirer); RBC, 123 A3d at 865 (explaining that
trial court’s award of money damages against financial advisor “was premised on [the
financial advisor]’s ‘fraud on the Board’”); Technicolor Plenary III, 663 A.2d at 1170 n.25
(“[T]he manipulation of the disinterested majority by an interested director vitiates the
majority’s ability to act as a neutral decision-making body.”); Macmillan, 559 A.2d at1283–84 & n.33 (describing knowing silence of management and financial advisor about
a tip as “a fraud upon the Board”); Mindbody, 2020 WL 5870084, at *24–25 (holding that
complaint stated claim against CEO for fraud on the board where CEO failed to inform
board about his efforts to kick-start a sale process and then guide the deal to his favored
bidder); Del Monte, 25 A.3d at 836 (holding that investment bank’s knowing silence about
its buy-side intentions, its involvement with the successful bidder, and its violation of a no-
teaming provision misled the board); Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1069
(Del. Ch. 2004) (holding if directors were “purposely duped,” then there “was fraud on the
board” and the directors’ actions were subject to equitable challenge), aff’d, 872 A.2d 559(Del. 2005); HMG/Courtland Props., Inc. v. Gray, 749 A.2d 94, 119 (Del. Ch. 1999)
(holding that two directors were guilty of fraud on the board where they kept the self-
interest of one of them in certain transactions being considered by the board secret from
the rest of the board); see also In re Am. Int’l Gp., Inc. Consol. Deriv. Litig. 965 A.2d 763,
806–07 (Del. Ch. 2009) (“In colloquial terms, a fraud on the board has long been a fiduciary
violation under our law and typically involves the failure of insiders to come clean to the
independent directors about their own wrongdoing, the wrongdoing of other insiders, or
information that the insiders fear will be used by the independent directors to take actions
108
In Xura, the complaint alleged that a CEO met privately with representatives of a
private equity firm to discuss the terms of the firm’s buyout proposal, first during a lunch
meeting and subsequently during a dinner meeting. 2018 WL 6498677, at *2. The CEO
also engaged in other communications with the private equity firm. In a lawsuit challenging
the eventual transaction, the court held that the complaint stated a claim for breach of
fiduciary duty against the CEO and that the Board’s lack of knowledge about the full scope
of the CEO’s activities meant that the disinterestedness and independence of a majority of
the other directors could not defeat the claim. Id. at *13.
For purposes of the claim for breach of fiduciary duty in their capacity as officers
of Columbia, the Complaint supports a reasonable inference that Skaggs and Smith
impaired the sale process through their interactions with TransCanada, including through
the January 7 Meeting, that they did so for self-interested reasons, and that the Board was
not informed sufficiently about their activities to defeat the claim. To defeat each step in
this chain of inference, the defendants return yet again to the Appraisal Decision.
First, to defeat the inference that Skaggs and Smith impaired the sale process, the
defendants cite the finding in the Appraisal Decision that the petitioners there failed to
show that additional competition would have changed the result. See, e.g., Appraisal
Decision, 2019 WL 3778370, at *29. As discussed, the court made this finding for the
purpose of evaluating the deal price against standalone value. The court recognized that
contrary to the insiders’ wishes.”). See generally Joel Edan Friedlander, Confronting the
Problem of Fraud on the Board, 75 Bus. Law. 1441 (2020).
109
there was evidence that the Board might have extracted a higher price from TransCanada
without Smith’s tip, concluding only that the prospect of a higher deal price was
“insufficient to undermine the deal price for appraisal purposes.” Id.Next, to defeat the inference that Skaggs and Smith wanted to retire and focused on
their change-in-control benefits, the defendants point to the court’s observation in the
Appraisal Decision that “[a]lthough Skaggs and Smith wanted to retire, they were
professionals who took pride in their jobs and wanted to do the right thing. They were not
going to arrange a fire sale for below Columbia’s standalone value, and the Board would
not have let them.” Id. at *28. As noted previously, this finding only determined that
Skaggs and Smith “were not going to arrange a fire sale for below Columbia’s standalone
value,” which was the issue in the Appraisal Decision. At the pleading stage, the finding
supports the plaintiffs’ claims by determining that “Skaggs and Smith wanted to retire.”
Last, to defeat the inference that Skaggs and Smith failed to keep the Board
informed, the defendants quote selectively from the Appraisal Decision, claiming that this
court found that there was no “fraud on the board” and that “[t]he Board received a steady
flow of information” and was not “misled or deprived of material information.” Id. at *33–
34. The Appraisal Decision did find that the Board “received a steady flow of information,
with Skaggs regularly keeping the directors informed through written memos,
presentations during meetings, and one-on-one communications.” Id. at *33. But the court
found that Skaggs and Smith had not been fully candid with the Board about the January 7
Meeting or their related dealings with TransCanada and agreed that this was a “flaw in the
process.” Id. at *33–34. Although the court rejected the argument that Skaggs’ and Smith’s
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activities led to a price below Columbia’s standalone value, the Appraisal Decision did not
address the possibility that their activities undermined the Company’s ability to extract a
higher price from TransCanada or another bidder.
2. The Claim For Damages Against Skaggs His Capacity As A Director
The Complaint’s allegations also state a claim for money damages against Skaggs
in his capacity as a director. The analysis tracks the claim against him in his capacity as an
officer. The claim against Skaggs as a director arguably is superfluous; Skaggs seems
principally to have acted as an officer during the course of the sale process, and his primary
exposure lies in that capacity.
The principal difference between the two theories of recovery is the potential
availability of exculpation for Skaggs in his capacity as a director. But because the
Complaint pleads a claim for breach of the duty of loyalty against Skaggs, he is not entitled
to exculpation. See 8 Del. C. § 102(b)(7). The analysis of the claim against Skaggs as a
director therefore tracks the claim against him as an officer.
C. The Claim For Damages Against TransCanada
The Complaint pleads a claim for damages against TransCanada for aiding and
abetting breaches of fiduciary duty. To plead a reasonably conceivable claim, the
Complaint must allege facts addressing four elements: (i) the existence of a fiduciary
relationship, (ii) a breach of the fiduciary’s duty, (iii) knowing participation in that breach
by a non-fiduciary defendant, and (iv) damages proximately caused by the breach.
Malpiede, 780 A.2d at 1096. Although a claim against an acquirer for aiding and abetting
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is difficult to plead and prove, it is reasonable to infer that TransCanada knew that Skaggs
and Smith acted wrongfully and exploited their conflicts.
The first two elements of the claim are pled easily. Skaggs and Smith were officers
who, like directors, “owe fiduciary duties of care and loyalty.” Gantler, 965 A.2d at 708–
09. As discussed, the Complaint pleads facts supporting a reasonable inference that Skaggs
and Smith breached their fiduciary duties when engaging in a sale process that fell short
under enhanced scrutiny, which is the standard for evaluating breach for purposes of an
aiding and abetting claim. Presidio, 2021 WL 298141, at *38 (citing RBC, 129 A.3d at
857, and Singh, 137 A.3d at 153). This decision already has concluded that the Complaint
states a claim that the sale process fell outside the range of reasonableness for purposes of
enhanced scrutiny. The third and fourth elements warrant more detailed discussion.
1. Knowing Participation In The Breach
The critical element for an aiding-and-abetting claim is the defendant’s knowing
participation in the breach. This element protects the alleged aider and abettor by ensuring
that the alleged aider and abettor still will not face potential liability absent pled facts that
support an inference of scienter. See Singh, 137 A.3d at 152–53. “[T]he requirement that
the aider and abettor act with scienter makes an aiding and abetting claim among the most
difficult to prove.” RBC, 129 A.3d at 865–66.
The element of knowing participation involves two concepts: knowledge and
participation. To establish knowledge, “the plaintiff must demonstrate that the aider and
abettor had actual or constructive knowledge that their conduct was legally improper.”
RBC, 129 A.3d at 862 (internal quotation marks omitted). “[T]he question of whether a
112
defendant acted with scienter is a factual determination.” Id. Under Rule 9(b), a plaintiff
can plead knowledge generally; “there is no requirement that knowing participation be pled
with particularity.” Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *17 (Del. Ch. June
30, 2014). For purposes of a motion to dismiss under Rule 12(b)(6), a complaint need only
plead facts supporting a reasonable inference of knowledge. See id.; see also Wells Fargo
& Co. v. First Interstate Bancorp, 1996 WL 32169, at *11 (Del. Ch. Jan. 18, 1996) (Allen,
C.) (“[O]n the question of pleading knowledge, however, Rule[] 12(b)(6) and Rule 9(b) are
very sympathetic to plaintiffs.”).
To satisfy the requirement of knowing participation, a plaintiff can plead that the
third party “participated in the board’s decisions, conspired with [the] board, or otherwise
caused the board to make the decisions at issue.” Malpiede, 780 A.2d at 1098. In particular,
a third party can participate in a fiduciary breach by facilitating or inducing a breach of the
duty of care. PLX, 2018 WL 5018535, at *48. A third party may facilitate a breach by
misleading the fiduciary with false or materially misleading information.24 Or a third party
24
See Goodwin v. Live Ent., Inc., 1999 WL 64265, at *28 (Del. Ch. Jan. 25, 1999)
(granting summary judgment in favor of defendants charged with aiding and abetting a
breach of the duty of care but suggesting that such a claim could proceed if “third-parties,
for improper motives of their own, intentionally duped the Live directors into breaching
their duty of care”); see also In re Wayport, Inc. Litig., 76 A.3d 296, 322 n.3 (Del. Ch.
2013) (noting that “a non-fiduciary aider and abetter” could be exposed to liability “if, for
example, the non-fiduciary misled unwitting directors to achieve a desired result”).
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can facilitate a breach by withholding information in a manner that misleads the fiduciary
on a material point.25
Consistent with these principles, the Restatement (Second) of Torts explains that a
defendant can be secondarily liable for “harm resulting . . . from the tortious conduct of
another” if the defendant
(a) does a tortious act in concert with the other or pursuant to a common
design with him, or
(b) knows that the other’s conduct constitutes a breach of duty and gives
substantial assistance or encouragement to the other so to conduct
himself, or
25
See Macmillan, 559 A.2d at 1283–84, 1284 n.33 (describing management’s
knowing silence about a tip as “a fraud upon the Board”); FrontFour Cap. Gp. LLC v.
Taube, 2019 WL 1313408, at *26 (Del. Ch. Mar. 11, 2019) (“In the events leading up to
the Proposed Transactions, the Taube brothers created an informational vacuum, which
they then exploited.”); Mesirov v. Enbridge Energy Co., 2018 WL 4182204, at *13–16
(Del. Ch. Aug. 29, 2018) (sustaining claim for aiding and abetting against financial advisor
for preparing misleading analyses and creating an informational vacuum that misled
board); In re TIBCO Software Inc. S’holders Litig., 2015 WL 6155894, at *25–27 (Del.
Ch. Oct. 20, 2015) (same); In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at
*48 (Del. Ch. Sept. 4, 2014) (holding that interested director aided and abetted breach of
duty by failing to explain valuation adequately, thereby misleading the board), aff’d sub
nom. Fuchs v. Wren Hldgs., LLC, 129 A.3d 882 (Del. 2015) (ORDER); Rural Metro, 88
A.3d at 99 (holding that investment banker knowingly participated in board’s breach of
duty where “RBC created the unreasonable process and informational gaps that led to the
Board’s breach of duty”); Del Monte, 25 A.3d at 836–37 (holding that investment bank’s
knowing silence about its buy-side intentions, its involvement with the successful bidder,
and its violation of a no-teaming provision misled the board); cf. Technicolor Plenary III,
663 A.2d at 1170 n.25 (“[T]he manipulation of the disinterested majority by an interested
director vitiates the majority’s ability to act as a neutral decision-making body.”); El Paso,
41 A.3d at 443 (“Worst of all was that the supposedly well-motivated and expert CEO
entrusted with all the key price negotiations kept from the Board his interest in pursuing a
management buy-out of the Company’s E & P business.”).
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(c) gives substantial assistance to the other in accomplishing a tortious
result and his own conduct, separately considered, constitutes a breach
of duty to the third person.
Restatement (Second) of Torts § 876 (1979). A comment on clause (b) states: “If the
encouragement or assistance is a substantial factor in causing the resulting tort, the one
giving it is himself a tortfeasor and is responsible for the consequences of the other’s act.”
Id. cmt. d. Under the Restatement, giving “substantial assistance or encouragement” to the
fiduciary in breaching its duty is sufficient to satisfy the participation requirement.
“A third-party bidder who negotiates at arms’ length rarely faces a viable claim for
aiding and abetting.” Del Monte, 25 A.3d at 837. The general rule is that “arm’s-length
bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary
wrongdoing, constitute aiding and abetting.” Morgan v. Cash, 2010 WL 2803746, at *8
(Del. Ch. July 16, 2010). The pleading burden to establish knowing participation against a
third-party acquirer accordingly is high. A difficult pleading standard “aids target
stockholders by ensuring that potential acquirors are not deterred from making bids by the
potential for suffering litigation costs and risks on top of the considerable risk that already
accompanies [a transaction].” Id.A high pleading standard, however, is not an insuperable one. The pled facts support
a pleading-stage inference that TransCanada knew that Skaggs and Smith were breaching
their fiduciary duties and sought to take advantage of the situation. The constellation of
allegations that supports this inference includes TransCanada’s repeated violations of its
standstill agreement, Smith’s extreme behavior during the January 7 Meeting, Skaggs’
decision to treat TransCanada as if its exclusivity agreement remained in effect even after
115
it had terminated, the “moral commitment” that Skaggs and Smith gave TransCanada not
to consider anything less than a fully financed offer, and TransCanada’s last-minute
lowering of its bid.
Viewed in isolation, none of these incidents would support a claim for aiding and
abetting. Taken together, they support a pleading stage inference that TransCanada knew
that Skaggs and Smith were compromised. This decision has detailed at length how Skaggs
and Smith favored TransCanada. Evidencing its understanding of their situation,
TransCanada extracted a “moral commitment” from Skaggs and Smith that the phrase
“serious written proposal” meant a “financed bid subject only to confirmatory” diligence.
Compl. ¶ 108. TransCanada then again took advantage of Skaggs’ and Smith’s
compromised position by lowering its offer from $26 to $25.50, combined with a three-
day deadline and a threat to publicly announce the breaking off of talks if the Company did
not accept.
At the pleading stage, it is reasonable to infer that TransCanada sought to take
advantage of the situation that it had worked with Skaggs and Smith to create. For pleading
purposes, the constellation of facts present in this case supports an inference of knowing
participation.
2. Damages
Finally, a claim for aiding and abetting also requires that the Complaint plead the
existence of damages. At the pleading stage, a plaintiff need not specify a monetary
amount. The plaintiff can plead the existence of damages generally as long as the
Complaint supports a reasonable inference of harm. See, e.g., In re EZCORP Inc.
116
Consulting Agr. Deriv. Litig., 2016 WL 301245, at *30 (Del. Ch. Jan. 25, 2016); NACCO
Indus., Inc. v. Applica Inc., 997 A.2d 1, 19 (Del. Ch. 2009). The Complaint supports a
reasonable inference that the stockholders lost out on a higher valued transaction due to the
actions that Skaggs, Smith, and TransCanada took, which is sufficient at the pleading stage.
In response, the defendants return to the Appraisal Decision and argue that the
Company’s stockholders could not have suffered damages if they received an amount that
this court found to be the standalone value of the Company. That damages remedy is not
what the plaintiffs are seeking. They contend that stockholders lost out on the difference
between the $25.50 that they received and the higher amount that TransCanada or another
bidder would have paid. “If the plaintiffs prove that the defendants could have sold the
corporation to the same or to a different acquirer for a higher price, then the measure of
damages should be based on the lost transaction price.”26 The plaintiffs have articulated a
26
PLX, 2018 WL 5018535, at *51; see In re Dole Food Co., Inc. S’holder Litig.,
2015 WL 5052214, at *46 (Del. Ch. Aug. 27, 2015) (awarding damages of $2.74 per share,
which suggested that “Murdock and Carter’s pre-proposal efforts to drive down the market
price and their fraud during the negotiations reduced the ultimate deal price by 16.9%”);
Gray, 749 A.2d at 117 (finding that although price fell within lower range of fairness, “[t]he
defendants have failed to persuade me that HMG would not have gotten a materially higher
value for Wallingford and the Grossman’s Portfolio had Gray and Fieber come clean about
Gray’s interest. That is, they have not convinced me that their misconduct did not taint the
price to HMG’s disadvantage”); see also Bomarko, Inc. v. Int’l Telecharge, Inc., 794 A.2d
1161, 1184–85 (Del. Ch. 1999) (holding that although the “uncertainty [about] whether or
not ITI could secure financing and restructure” lowered the value of the plaintiffs’ shares,
the plaintiffs were entitled to a damages award that reflected the possibility that the
company might have succeeded absent the fiduciary’s disloyal acts), aff’d, 766 A.2d 437(Del. 2000).
117
viable theory of damages and have pled all of the elements of a claim for aiding and
abetting a breach of fiduciary duty.27
V. THE DISCLOSURE CLAIMS
In addition to the sale process claims, the plaintiffs contend that Skaggs and Smith
breached their duty of disclosure. The plaintiffs maintain that TransCanada knowingly
participated in Skaggs’ and Smith’s breaches of the duty of disclosure, exposing
TransCanada to liability for aiding and abetting.
A. The Disclosure Claim Against Skaggs And Smith
As officers, Skaggs and Smith owed fiduciary duties that were “the same as those
of directors.” Gantler, 965 A.2d at 709. Directors owe a “fiduciary duty to disclose fully
and fairly all material information within the board’s control when it seeks shareholder
action,” as when requesting stockholder approval for a merger. Stroud v. Grace, 606 A.2d
75, 84 (Del. 1992). The same duty applies to officers. See, e.g., City of Warren Gen. Empls.’
27
The plaintiffs separately have alleged that TransCanada was unjustly enriched
because it was able to acquire the Company on the cheap. Unjust enrichment is “the unjust
retention of a benefit to the loss of another, or the retention of money or property of another
against the fundamental principles of justice or equity and good conscience.” Fleer Corp.
v. Topps Chewing Gum, Inc., 539 A.2d 1060, 1062 (Del. 1988) (internal quotation marks
omitted). “The elements of unjust enrichment are: (1) an enrichment, (2) an
impoverishment, (3) a relation between the enrichment and impoverishment, (4) the
absence of justification, and (5) the absence of a remedy provided by law.” Nemec v.
Shrader, 991 A.2d 1120, 1130 (Del. 2010). Unless TransCanada engaged in wrongful
conduct, such as by aiding and abetting a breach of fiduciary duty, TransCanada was
entitled to seek to negotiate the best deal it could for itself. The plaintiffs have not identified
any separate basis on which unjust enrichment might need to be employed to prevent
injustice. The claim for unjust enrichment therefore is dismissed.
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Ret. Sys. v. Roche, 2020 WL 7023896, at *19–23 (Del. Ch. Nov. 30, 2020); In re Baker
Hughes, Inc. Merger Litig., 2020 WL 6281427, at *15–16 (Del. Ch. Oct. 27, 2020).
When seeking injunctive relief for a breach of the duty of disclosure in connection
with a request for stockholder action, a plaintiff need only show a material misstatement
or omission. When seeking post-closing damages for a breach of the duty of disclosure,
however, the plaintiffs must prove quantifiable damages that are “logically and reasonably
related to the harm or injury for which compensation is being awarded.” In re J.P. Morgan
Chase & Co. S’holder Litig., 906 A.2d 766, 773 (Del. 2006).
The duty of disclosure arises because of “the application in a specific context of the
board’s fiduciary duties.” Malpiede, 780 A.2d at 1086. The “duty of disclosure is not an
independent duty, but derives from the duties of care and loyalty.” Pfeffer v. Redstone, 965
A.2d 676, 684 (Del. 2009) (internal quotation marks omitted). A plaintiff that seeks to
recover damages for a breach of the duty of disclosure also must establish that the fiduciary
acted with “a culpable state of mind” or engaged in “non-exculpated gross negligence.”
Wayport, 76 A.3d at 315.
The first step in pleading a claim for damages for breach of the duty of disclosure is
to plead facts supporting an inference that the fiduciary failed to disclose material
information. The Appraisal Decision determined that for purposes of Delaware law, the
Proxy failed to disclose material information. This decision already has held that the
Complaint supports a pleading-stage inference of three disclosure violations.
To support a damages claim, the plaintiffs next must plead facts supporting an
inference that Skaggs or Smith withheld the information knowingly or because of non-
119
exculpated gross negligence. Under this standard, the claims against Skaggs and Smith are
not subject to dismissal. It is reasonably conceivable that their interest in early retirement
and the benefits conferred by the Merger tainted their decisions about what to disclose,
supporting a reasonable inference that their failure to disclose information resulted from a
breach of the duty of loyalty. See Orman v. Cullman, 794 A.2d 5, 41 (Del. Ch. 2002)
(refusing to find defendants who “decided what information to include in the Proxy” only
breached their duty of care where the complaint sufficiently pled that they were conflicted).
The disclosure violations also concerned Skaggs’ and Smith’s own actions, supporting an
inference that they knew the Proxy was false when issued. The Complaint therefore
supports a reasonable inference that Skaggs and Smith breached the subsidiary element of
the duty of loyalty by failing to act in good faith. See In re Hansen Med., Inc. S’holders
Litig., 2018 WL 3030808, at *11 (Del. Ch. June 18, 2018) (finding it reasonably
conceivable that a fiduciary “breached his duty of loyalty by allowing the Proxy to go to
stockholders” where complaint’s allegations supported a reasonable inference that the
fiduciary “knew the Proxy was materially misleading”). At a minimum, the Complaint
supports a reasonable inference that Skaggs and Smith acted recklessly. Because they are
not entitled to exculpation in their capacities as officers, the Complaint therefore states
claims against them. See Roche, 2020 WL 7023896, at *19–23 (denying motion to dismiss
breach of fiduciary duty claim seeking compensatory damages against officer for
disclosures in proxy statement); Baker Hughes, 2020 WL 6281427, at *15–16 (same).
The Complaint also satisfies the remaining elements of a claim for breach of the
duty of disclosure. At the pleading stage, the Complaint need not prove “actual reliance on
120
the disclosure, but simply that there was a material misdisclosure.” Metro Commc’n Corp.
BVI v. Adv. Mobilecomm Techs. Inc., 854 A.2d 121, 156 (Del. Ch. 2004). “The Complaint
need not plead that omissions or misleading disclosures were so material that they would
cause a reasonable investor to change his vote.” Roche, 2020 WL 7023896, at *24. By
pleading that the disclosures were materially misleading, the plaintiffs have pled a claim
that satisfies the elements of reliance and causation.
Finally, the Complaint also adequately pleads damages. Ordinarily, a plaintiff can
plead damages generally, and with further “consideration of damages await[ing] a
developed record.” Morrison v. Berry, 2019 WL 7369431, at *22 n.273 (Del. Ch. Dec. 31,
2019). In light of the Appraisal Decision, the defendants argue that the plaintiffs cannot
prove damages under a quasi-appraisal theory, because the court already has held that the
deal price exceeded standalone value. If the plaintiffs only sought quasi-appraisal as a
remedy, then the Appraisal Decision would provide persuasive authority that damages did
not exist under the doctrine of stare decisis. See PLX, 2018 WL 5018535, at *50–51.
In this case, however, the plaintiffs are not seeking quasi-appraisal damages. They
are seeking rescissory damages, which can be awarded for fraud or for a disloyal breach of
the duty of disclosure. See Orchard Enters., 88 A.3d at 40 (Del. Ch. 2014); Turner v.
Bernstein, 768 A.2d 24, 39 (Del. Ch. 2000). The plaintiffs also are not necessarily seeking
broad rescissory damages on a transaction-wide basis; they have identified disgorgement
of transaction-related benefits as one possible form of rescissory remedy. The defendants
argue that rescissory damages could never be awarded on these facts, but it is premature to
make that determination at this stage. See Orchard Enters., 88 A.3d at 41–42 (declining to
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rule out rescissory damages on motion for summary judgment). If the plaintiffs proved that
Skaggs or Smith knowingly misrepresented facts in the Proxy, then a rescissory award
might be available.
B. The Aiding-And-Abetting Claim Against TransCanada
The plaintiffs maintain that TransCanada aided and abetted the breaches of the duty
of disclosure committed by Skaggs and Smith. Because the Complaint pleads viable claims
for breach against Skaggs and Smith, the only element in dispute is knowing participation.
The disclosure violations in this case included the omissions regarding the January
7 Meeting and TransCanada’s breaches of its own DADW standstill. Under the Merger
Agreement, TransCanada and its affiliates were obligated to “furnish all information
concerning themselves and their Affiliates that is required to be included in the Proxy
Statement.” MA § 5.01(a). They further agreed that
none of the information supplied by each of them or any of their respective
Subsidiaries (as applicable) for inclusion or incorporation by reference in the
Proxy Statement will, at the date of mailing to stockholders of the Company
or at the time of the Stockholders Meeting, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Id. TransCanada and its affiliates thus were obligated to furnish accurate and complete
information for inclusion in the Proxy. TransCanada also undertook an obligation to inform
the Company if there was any issue in the Proxy that needed to be addressed
so that the Proxy Statement or the other filings shall not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
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Id. § 5.01(b).
Two of the disclosure violations concern TransCanada’s breaches of the DADW
standstills and its interactions with Skaggs and Smith in connection with the January 7
Meeting. TransCanada necessarily knew about its own conduct. TransCanada was
contractually obligated to take action so that the Proxy did not contain untrue or materially
misleading statements of fact.
Under the circumstances, it is reasonable to infer at this stage that TransCanada
knowingly participated in the material omissions in the Proxy that concerned
TransCanada’s own conduct. The Complaint therefore states a claim against TransCanada
for aiding and abetting these disclosure violations.
VI. CONCLUSION
The Complaint pleads claims for breach of fiduciary duty against Skaggs and Smith.
It pleads a claim for aiding and abetting breaches of fiduciary duty against TransCanada.
The defendants’ motion to dismiss is therefore denied.
123