In re Baker Hughes, a GE Company, Derivative Litigation ( 2023 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE BAKER HUGHES, A GE )
COMPANY, DERIVATIVE ) C.A. No. 2019-0201-LWW
LITIGATION )
MEMORANDUM OPINION
Date Submitted: December 19, 2022
Date Decided: April 17, 2023
Michael J. Barry, Jason M. Avellino & Kelly L. Tucker, GRANT & EISENHOFER,
P.A., Wilmington, Delaware; Peter B. Andrews, Craig J. Springer, David M. Sborz
& Andrew J. Peach, ANDREWS & SPRINGER LLC, Wilmington, Delaware;
Jeremy S. Friedman, David F.E. Tejtel & Christopher M. Windover, FRIEDMAN
OSTER & TEJTEL PLLC, Bedford Hills, New York; Counsel for Plaintiffs City of
Riviera Beach Police Pension Fund and Richard Schippnick
A. Thompson Bayliss & Matthew L. Miller, ABRAMS & BAYLISS LLP,
Wilmington, Delaware; Karl Stern & Elizabeth M. Devaney, QUINN EMANUEL
URQUHART & SULLIVAN LLP, Houston, Texas; Counsel for the Special
Litigation Committee of Baker Hughes Company
WILL, Vice Chancellor
Delaware corporate law centers around the principle that a board of directors
manages the business and affairs of a corporation. This managerial authority
includes the right to decide whether to pursue a claim on the corporation’s behalf.
Although directors may be disqualified from exercising judgment with respect to a
suit, the board is not powerless. It may authorize a special litigation committee to
investigate and determine whether pressing derivative claims is in the company’s
best interests.
A special litigation committee is a potent tool for a corporation to retain
control of a derivative suit, so long as it meets several guidelines. The committee
must consist of disinterested and independent directors. The committee, often with
assistance from advisors, must undertake a diligent and good faith investigation. It
must carefully apply the relevant legal standards to the evidence it uncovers and
draw conclusions supported by reasonable bases. If the committee follows these
standards, the court will generally support its judgment.
In October 2019, the board of directors of Baker Hughes delegated its
authority over the derivative claims in this action to a special litigation committee.
It did so after the court made a pleadings stage determination that demand was futile.
The sole member of the committee lacked disabling ties to conflicted parties or
interests in the underlying transactions and joined the board after motions to dismiss
1
had been filed. The committee retained independent advisors and performed a
nine-month investigation.
After completing its investigation, the committee concluded that the court
would likely hold that the transactions at issue were entirely fair to Baker Hughes.
Given that conclusion, and the costs and burdens incumbent in litigating an entire
fairness suit, the committee determined that further prosecution would not be in the
best interests of Baker Hughes or its stockholders. A motion to terminate the action
followed in October 2020.
The plaintiffs took discovery before filing a brief opposing the motion to
terminate. Their opposition raises various challenges to the committee’s
independence, process, and conclusions. On independence, the plaintiffs scrutinize
matters from causal acquaintanceships with non-defendant directors to gifts of wine
for virtual happy hours. On process, the plaintiffs critique the committee’s decisions
about report drafting, document collection, and witness interview tactics. And on
conclusions, the plaintiffs mount a series of merits-based attacks. These arguments
are strong in number but weak in substance.
To be sure, the committee was imperfect. Having a single member is not
ideal. Nor is the fact that the member exchanged a handful of messages with an
investigation subject. The committee’s report also omits any discussion of the
2
potential transaction advisor conflicts it investigated. But despite these flaws, the
committee’s independence, the thoroughness of its investigation, and the
reasonableness of its conclusions are not in doubt.
The record before me, including live testimony of the committee member,
demonstrates that the special litigation committee has met its burden. The motion
to terminate is therefore granted.
I. FACTUAL BACKGROUND
The following background is drawn from the record submitted by the special
litigation committee (the “SLC”) and the plaintiffs. This record includes the SLC’s
report, exhibits to the report, additional documents produced by the SLC to the
plaintiffs, three deposition transcripts, and live testimony of the SLC member.1
A. The 2017 Transactions
On October 30, 2016, Baker Hughes Incorporated (“BHI”) and GE Oil & Gas
UK Limited (“GE Oil & Gas”) entered into a merger agreement.2 BHI, a Delaware
1
See Opening Br. in Supp. of Special Litigation Committee’s Mot. to Terminate (Dkt. 105)
Ex. A (“SLC Rep.”). Citations in the form of “Pls.’ Answering Br. Ex. __” refer to exhibits
to the Transmittal Affidavit of Michael J. Barry in Support of Plaintiffs’ Answering Brief
in Opposition to the Special Litigation Committee’s Motion to Terminate. Dkts. 138-47.
Citations in the form of “SLC’s Reply Br. Ex. __” refer to exhibits to the Transmittal
Affidavit of Matthew L. Miller in Support of Special Litigation Committee’s Reply Brief
in Further Support of its Motion to Terminate. Dkt. 150. Where an exhibit lacks internal
pagination, pin citations reflect the last three digits of the exhibit’s Bates stamp.
2
SLC Rep. 7, 13. BHI stockholders approved the merger agreement on June 30, 2017.
3
corporation, was an energy technology and services company.3 GE Oil & Gas was
a wholly-owned oil and gas subsidiary of General Electric Company (“GE”).4
On July 3, 2017, a series of transactions contemplated by the merger
agreement closed (the “2017 Transactions”).5 BHI was converted into a Delaware
limited liability company called Baker Hughes, a GE company, LLC (“BHGE,
LLC”).6 BHGE, LLC became an operating entity under a newly-formed Delaware
corporation called Baker Hughes, a GE company (“Baker Hughes”).7 GE
contributed GE Oil & Gas’s assets to BHGE, LLC.8 As consideration for the merger,
BHI stockholders received a cash dividend and Baker Hughes Class A common
shares, which would trade publicly on the New York Stock Exchange.9 GE received
Baker Hughes Class B common shares and BHGE, LLC common units.10
3
Id. at 3.
4
Id. at 6.
5
Id. at 13.
6
Baker Hughes, a GE company, Current Report (Form 8-K12B) (July 3, 2017) at
Introduction.
7
SLC Rep. 13. On October 15, 2019, Baker Hughes, a GE company changed its name to
Baker Hughes Company. See Baker Hughes Company, Current Report (Form 8-K) (Oct.
17, 2019) at Item 5.03. Baker Hughes Company is also referred to as “Baker Hughes” in
this decision.
8
SLC Rep. 13-14.
9
Id. at 14-15. GE contributed $7.4 billion to fund substantially all of the special dividend.
10
Id.
4
As a result of the 2017 Transactions, GE held 62.5% of the voting rights in
Baker Hughes and BHI stockholders held the remaining 37.5%.11 BHGE, LLC
common units were owned by GE (about 62.5%) and Baker Hughes (about 37.5%),
and Baker Hughes managed BHGE, LLC.12 Lorenzo Simonelli and Brian Worrell
became the Chief Executive Officer and Chief Financial Officer, respectively, of
Baker Hughes.13
GE and Baker Hughes executed a Stockholders Agreement on the same day
the 2017 Transactions closed. The Stockholders Agreement gave GE the right to
designate six of the eleven members of Baker Hughes’s board of directors (the
“Board”), including the Chairman.14 GE would retain that right until a “Trigger
Date” on which GE or its affiliates owned less than 50% of Baker Hughes’s voting
power and GE could no longer consolidate Baker Hughes on its financial
statements.15 The Board’s other five members included BHI’s Chief Executive
11
Id. at 15. BHI stockholders held 100% of the economic rights in Baker Hughes; GE held
none. Economic rights included the right to distributions in the event of a liquidation and
the right to dividends. See Baker Hughes, a GE company, Current Report (Form 8-K12B)
(July 3, 2017) at Ex. 3.1 § 4(C) (Baker Hughes certificate of incorporation describing the
difference between Class A and Class B common stock).
12
SLC Rep. 14-15.
13
Id. at 20. Before assuming positions at Baker Hughes, Simonelli and Worrell were GE
Oil & Gas’s CEO and CFO, respectively.
14
Pls.’ Answering Br. Ex. 5 (“Stockholders Agreement”) § 3.1(a); see SLC Rep. 17.
15
SLC Rep. 17; Stockholders Agreement §§ 1.1 (defining “Trigger Date”), 3.1(b).
5
Officer and four “Independent Directors.”16 The Independent Directors would be
designated by BHI, “reasonably acceptable to GE,” and independent under New
York Stock Exchange rules.17
GE nominated Jeffrey Immelt (who served as Chairman), W. Geoffrey
Beattie, Jamie S. Miller, James J. Mulva, John G. Rice, and Lorenzo Simonelli to
the Board.18 BHI CEO Martin Craighead also joined the Board, along with
Independent Directors Gregory D. Brenneman, Clarence P. Cazalot, Jr., Lynn L.
Elsenhans, and J. Larry Nichols.19
The Stockholders Agreement further provided for the formation of a Conflicts
Committee—a subcommittee of the Board’s Governance & Nominating
Committee.20 The Conflicts Committee consisted of all “Company Independent
Directors,” meaning the Independent Directors with no substantial ties to GE.21 The
16
Stockholders Agreement § 3.1(a); see SLC Rep. 17.
17
Stockholders Agreement §§ 1.1 (defining “Independent Director”), 3.1(a); see SLC
Rep. 17.
18
SLC Rep. 18.
19
Id.
20
Id.; Stockholders Agreement § 3.3(d).
21
Stockholders Agreement §§ 1.1 (defining “Company Independent Director”), 3.3(d); see
SLC Rep. 18-19. The Governance & Nominating Committee designated each Company
Independent Director after determining that the director: (1) was independent under New
York Stock Exchange rules; (2) was not a GE board member; (3) was not an officer or
employee of GE or its affiliates; and (4) had no other past or present substantial relationship
with GE or its affiliates. Stockholders Agreement § 1.1; see SLC Rep. 18-19.
6
Conflicts Committee’s mandate included reviewing and approving related party
transactions.22
The Stockholders Agreement imposed a multistage lockup on GE’s ability to
sell its Baker Hughes stock (the “Lockup”).23 From July 3, 2017 to July 3, 2019, GE
could not sell its Baker Hughes stock without Conflicts Committee approval.24 From
July 3, 2019 to July 3, 2022, GE could not sell its Baker Hughes stock in a
transaction that would result in any person or group beneficially owning more than
15% voting power.25 After July 3, 2022, GE could sell freely.26
B. The Original Master Agreement Framework
In connection with the 2017 Transactions, Baker Hughes entered into an array
of commercial and other agreements with GE and GE’s subsidiaries, known as the
Master Agreement Framework.27 Key aspects of the Master Agreement Framework
22
SLC Rep. 18-19 & n.61; Stockholders Agreement §§ 3.3(d), 4.2(a), 4.5(a).
23
SLC Rep. 19; Stockholders Agreement § 4.2(a).
24
SLC Rep. 19; Stockholders Agreement § 4.2(a)(i).
25
SLC Rep. 19; Stockholders Agreement § 4.2(a)(ii).
26
There were two minor conditions on GE’s sale of its Baker Hughes shares after that
point: (1) any buyer must make an offer to other, non-GE stockholders of Baker Hughes
on substantially the same terms as those between GE and the buyer; and (2) if the buyer
did not offer to buy 100% of Baker Hughes’s common stock, then the buyer must agree to
assume GE’s obligations under the Stockholders Agreement or enter into a stockholders
agreement with Baker Hughes on substantially the same terms as the Stockholders
Agreement. Stockholders Agreement § 4.2(a)(iii).
27
SLC Rep. 20-26.
7
included: the Supply Agreement, through which GE supplied Baker Hughes with a
range of products and services—such as gas turbines;28 the GE Digital Master
Products and Services Agreement, under which Baker Hughes obtained certain GE
Digital products and services;29 and the Intercompany Services Agreement, in which
GE agreed to provide corporate services to Baker Hughes.30 Many components of
the Master Agreement Framework would terminate on or soon after the Trigger
Date.31
C. GE’s Strategy Shift
GE was facing a financial crisis around the time the 2017 Transactions closed.
The company had accumulated massive debt and saw its stock price plummet.32 A
managerial overhaul and strategic adjustment followed. On August 1, 2017, John
Flannery replaced Immelt as GE’s CEO.33 A few months later, on October 2,
28
Id. at 21-22.
29
Id. at 24.
30
Id. at 24-25. Other parts of the Master Agreement Framework included the
Non-Competition Agreement, the Channel Agreement, the Intellectual Property
Cross-License Agreement, and the Tax Matters Agreement. Id. at 20-26.
31
Id.
32
Id. at 27-28 & tbl.2; Verified Deriv. Compl. (Dkt. 1) (“Compl.”) ¶¶ 29-33.
33
SLC Rep. 28; Pls.’ Answering Br. Ex. 14.
8
Flannery replaced Immelt as GE’s Chairman.34 And on November 1, Miller became
GE’s CFO.35
Around the same time, two directors resigned from the Baker Hughes Board:
Immelt, a GE designee, and Nichols, Chairman of the Conflicts Committee.36 GE
and Baker Hughes consequently amended the Stockholders Agreement to reduce the
Baker Hughes Board from eleven to nine members and the number of GE-designated
directors from six to five.37 Simonelli became Chairman of the Board and Cazalot
became Chairman of the Conflicts Committee.38
On November 13, 2017, Flannery announced a restructuring plan for GE to
raise $20 billion through asset sales over the next few years.39 He specified that GE
was evaluating its “exit options” with respect to Baker Hughes.40 This
announcement put GE and Baker Hughes’s relationship on unsettled ground, sowing
worry among Baker Hughes investors, customers, and employees.41 Market analysts
34
SLC Rep. 28.
35
Pls.’ Answering Br. Ex. 15.
36
SLC Rep. 29.
37
Id. at 30.
38
Id. at 29.
39
Id. at 32-33.
40
Id. at 32.
41
Id. at 33-38.
9
described the uncertainty over GE’s position as a “contagion” on Baker Hughes
stock.42 Baker Hughes believed that the GE overhang depressed the price of its
shares relative to that of its peers.43
D. Project SAW
From October 2, 2017 to May 10, 2019, the Baker Hughes Board consisted of
Brenneman, Cazalot, Craighead, Elsenhans, Beattie, Miller, Mulva, Rice, and
Simonelli.44 The latter five were GE designees and current or former GE executives
and directors.45 The Conflicts Committee consisted of Brenneman, Cazalot, and
Elsenhans.46
On December 21, 2017, the Conflicts Committee met with Baker Hughes
management, including CEO Simonelli and CFO Worrell, to discuss GE’s potential
exit from Baker Hughes and the retention of outside advisors.47 After
recommendations from Baker Hughes management, the Conflicts Committee
42
Id. at 34.
43
Id. at 34-36; see id. App. A.
44
Id. at 30.
45
Beattie had been a GE director since 2009. Miller had been GE’s CFO since October
2017 and held various high-level roles at GE since 2008. Mulva had been a GE director
since 2008. Rice held various high-level roles at GE since 1978. Simonelli held various
high-level roles at GE beginning in 1994 but left GE to become Baker Hughes’s CEO on
July 3, 2017. See Compl. ¶¶ 12, 17-20; SLC Rep. 295-98.
46
SLC Rep. 29, 211.
47
Id. at 38-39.
10
retained Lazard Frères & Co. as its financial advisor and Simpson Thacher & Bartlett
LLP as its legal advisor.48 Baker Hughes selected J.P. Morgan Securities LLC as its
financial advisor and Davis Polk & Wardwell LLP as its legal advisor.49
In early 2018, Baker Hughes management and the Conflicts Committee
launched “Project SAW” to evaluate a potential separation from GE. 50 The
objectives of Project SAW were to minimize uncertainty and any resulting negative
effects on Baker Hughes’s equity story, limit the overhang caused by GE’s
ownership stake, reduce operational disruption, renegotiate key commercial
agreements, and maintain a strong balance sheet and low leverage.51
E. The Separation Proposal
During the first five months of 2018, Baker Hughes attempted to engage with
GE about a potential separation.52 GE was unresponsive, so Baker Hughes decided
to prepare a separation proposal on its own.53 This approach was driven by Baker
Hughes and the Conflicts Committee’s view that Baker Hughes had the upper hand
48
Id. at 40.
49
Id.
50
“SAW” was an acronym for “spin and win”—a reference to the fact that GE might spin
off its Baker Hughes stake. Id. at 41 & n.148.
51
Id.
52
Id. at 54.
53
Id. at 55.
11
due to the Lockup and GE’s need to address its financial woes.54 Baker Hughes’s
leverage would become less potent as the expiration of the Lockup approached,
incentivizing it to act quickly to secure favorable terms.55
On June 5, 2018, Simonelli sent Flannery an initial separation proposal.56
Baker Hughes suggested a three-part strategy involving: (1) amendments to the
Master Agreement Framework; (2) capital markets transactions that would provide
GE with up to $6 billion in liquidity and reduce GE’s Baker Hughes stake to just
over 50%; and (3) public communication of a “mutually agreed path to separation,”
potentially through a spin-off or split-off.57
F. The Separation Negotiations
Flannery and Simonelli met on June 8 to discuss Baker Hughes’s proposal.58
A few weeks later, GE announced that it would work towards “an orderly separation
from [Baker Hughes] over the next two to three years.”59
54
Id.; see also id. at 81-84, 227-31; supra Section I.C (describing GE’s financial troubles).
55
SLC Rep. 84; see also id. at 228.
56
Id. at 62.
57
Id. at 64.
58
Id. at 67.
59
Id. at 68.
12
Negotiations proceeded over the ensuing months. Baker Hughes
management—specifically, Simonelli and Worrell—led Project SAW’s day-to-day
efforts with assistance from J.P. Morgan and Davis Polk.60 The Conflicts Committee
oversaw Project SAW, advised by Lazard and Simpson Thacher.61 The Conflicts
Committee held fourteen formal meetings during this period.62
A key aspect of the negotiations involved the aeroderivative gas turbine
(AGT) and heavy-duty gas turbine (HDGT) components of the Master Agreement
Framework.63 GE sold AGTs and HDGTs that Baker Hughes installed and serviced
for customers.64 Because the servicing business was highly profitable, Baker
Hughes sought to secure long-term access to GE products and technology.65 Baker
Hughes also wanted to serve as the exclusive supplier of GE turbine-based solutions
60
Id. at 78-79.
61
Id.
62
Id. at 79.
63
Id. at 85-93; see also id. at 259.
64
AGTs and HDGTs are modified jet engine turbines used in oil and gas compression
systems and power generation, respectively. See Pls.’ Answering Br. Ex. 82 (“Forgione
Interview Mem.”) at 3.
65
See SLC Rep. 88-91 & nn.333, 345 (noting that up to $1 billion of contribution margin
was at risk with AGTs and HDGTs, with most of that coming from the servicing business).
13
for the oil and gas industry and to obtain a return on its investments in researching
and developing turbine technology.66
As the parties negotiated changes to the Master Agreement Framework, they
also discussed capital markets transactions by which GE would liquidate a portion
of its Baker Hughes stock. On September 20, 2018, the parties’ financial advisors
jointly recommended two “Capital Markets Transactions”: (1) Baker Hughes’s
repurchase of its shares from GE (the “Repurchase”); and (2) GE’s sale of Baker
Hughes shares in a secondary offering to the public (the “Secondary Public
Offering”).67 The Conflicts Committee consistently refused to waive the Lockup
and permit the Capital Markets Transactions until GE agreed to acceptable
amendments to the Master Agreement Framework.68
In the midst of negotiations, on September 30, GE replaced its Chairman and
CEO Flannery with Larry Culp.69
66
Id. at 86-87.
67
Id. at 131-32.
68
Id. at 133-36.
69
Id. at 74.
14
G. The 2018 Transactions
In early November 2018, the parties reached agreement on the Repurchase,
the Secondary Public Offering, amendments to the Master Agreement Framework
(together, the “2018 Transactions”).70
On November 12, the Conflicts Committee met to review the 2018
Transactions.71 Representatives from Lazard, Simpson Thacher, Baker Hughes
management, J.P. Morgan, and Davis Polk also attended the meeting.72 After
presentations from management and the advisors, the Conflicts Committee approved
the 2018 Transactions and a waiver of the Lockup.73 Later that day, the Baker
Hughes Board approved the 2018 Transactions.74
70
Id. at 140-46. The Lockup was waived through an amendment to the Stockholders
Agreement. Only the first stage (not the second or third stages) of the Lockup was waived.
See Baker Hughes, a GE company, Current Report (Form 8-K) (Nov. 13, 2018) at Ex. 10.4
§ 4.2(a).
71
SLC Rep. 140. Approval by the Conflicts Committee was required for related party
transactions between Baker Hughes and GE and for amendments to the Stockholders
Agreement. See Stockholders Agreement §§ 4.5, 7.8. The Conflicts Committee’s
“non-approval [was] binding on the [Baker Hughes] Board.” Id. § 3.3(d).
72
SLC Rep. 140.
73
Id. at 142-44.
74
Id. at 144-46.
15
H. The Announcement
On November 13, 2018, Baker Hughes announced the 2018 Transactions.75
Baker Hughes estimated that the amendments to the Master Agreement Framework
would cause it to incur “one-time charges related to separation from GE” of
approximately $200 to $300 million over three years.76 The amendments would also
have a “slight negative impact” on the company’s annual operating margin rates of
“approximately 20 to 40 basis points.”77 Baker Hughes estimated that the
amendments to the AGT components of the Master Agreement Framework would
have the most negative long-term effect on its margins.78
Under the original Master Agreement Framework, GE Aviation sold AGTs to
Baker Hughes at cost.79 Under the amended Master Agreement Framework, GE
Aviation sold AGTs at a 10% to 25% margin.80 Baker Hughes expected the higher
AGT prices to hurt its business outlook.81 Still, Baker Hughes believed that it had
75
Id. at 146-47.
76
Id.
77
Id. at 147; see also id. at 111-12.
78
Id. at 111-12.
79
Id. at 21.
80
In the 2018 Transactions, Baker Hughes and GE Power contributed assets to form a joint
venture for their AGT products and services. This joint venture entered into a new AGT
supply agreement with GE Aviation. Id. at 96-101, 107.
81
Id. at 260-65.
16
obtained better-than-market terms and other substantial benefits through the
AGT-related amendments.82
Other Master Agreement Framework amendments included: a new supply
agreement for HDGTs; a transfer of Baker Hughes’s industrial steam turbine
business to GE; an extension of the original Supply Agreement for certain controls
products and services; amendments to the GE Digital Master Products and Services
Agreement; a transfer of certain pension liabilities to Baker Hughes; and
amendments to the Intercompany Services Agreement.83
The Secondary Public Offering (in which GE sold approximately $2.3 billion
of its Baker Hughes shares) and the Repurchase (in which Baker Hughes
repurchased about $1.5 billion of its shares from GE) closed on November 16,
2018.84 GE’s stake in Baker Hughes was reduced to 50.4%.
82
For example, Baker Hughes obtained exclusivity provisions, shifted AGT warranties and
liabilities to GE Aviation, and received significant intellectual property rights. Id. at
112-13, 260-70. With respect to pricing, the SLC determined that “it would have been
impossible for [Baker Hughes] to negotiate better pricing on most AGT aspects of the 2017
Supply Agreement [because] GE Aviation received no margin” under the original Master
Agreement Framework. Id. at 261 (emphasis in original). The original Master Agreement
Framework “reflected legacy pricing from GE [Oil & Gas]’s, and then [Baker Hughes’s],
status as a subsidiary of GE. . . . [Baker Hughes] expected that a change in its GE subsidiary
status would result in pricing changes reflecting [Baker Hughes’s] status as a third party
vis-a-vis GE.” Id. at 262.
83
Id. at 114-27.
84
Id. at 148-49, 151 & tbl.11.
17
I. The Derivative Litigation
On March 13 and 14, 2019, two Baker Hughes Class A stockholders filed
separate derivative actions in this court.85 Both complaints challenged the fairness
of the 2018 Transactions and named GE and the members of the Baker Hughes
Board as defendants.86 On March 21, the court entered a stipulated proposed order
consolidating the actions (the “Action”) and designating the operative Complaint.87
The thesis of the Complaint is that GE, driven by its “desperate need for liquidity,”
exercised its control over Baker Hughes to force Baker Hughes to agree to the 2018
Transactions, which unfairly favored GE.88
The Complaint advances three derivative claims. In Count I, the plaintiffs
allege that GE breached its duty of loyalty as the controlling stockholder of Baker
Hughes.89 In Count II, the plaintiffs allege that the nine members of the Board
85
Id. at 156-58. These actions were originally captioned Schippnick v. Beattie et al., C.A.
No. 2019-0201-AGB (Del. Ch.) and City of Riviera Beach Police Pension Fund v. Beattie
et al., C.A. No. 2019-0205-AGB (Del. Ch.).
86
SLC Rep. 156-58.
87
Dkt. 10.
88
Compl. ¶¶ 1-8.
89
Id. ¶¶ 71-74.
18
breached their fiduciary duties by agreeing to the 2018 Transactions. 90 Count III is
a claim for unjust enrichment against GE.91
On May 10, Conflicts Committee members Brenneman, Cazalot, and
Elsenhans were voluntarily dismissed from the Action without prejudice.92
Craighead was voluntarily dismissed without prejudice on May 16.93 The remaining
defendants are GE and GE-designated Board members Beattie, Miller, Mulva, Rice,
and Simonelli.
On June 7, the defendants filed motions to dismiss the Complaint.94 Nominal
defendant Baker Hughes moved to dismiss the Complaint for failure to plead
demand futility under Court of Chancery Rule 23.1.95 GE and the individual
defendants sought dismissal for failure to plead demand futility and for failure to
state a claim under Rule 12(b)(6).96
90
Id. ¶¶ 75-78.
91
Id. ¶¶ 79-82.
92
Dkt. 29.
93
Dkt. 32.
94
Dkts. 34-37.
95
Dkt. 34.
96
GE, Beattie, Miller, Mulva, and Rice filed a single motion. Dkt. 35. Simonelli moved
separately and joined the other motions. Dkts. 36-37.
19
On October 8, 2019, Chancellor Bouchard issued a bench ruling that granted
the motions in part and denied them in part.97 He determined that the Complaint
adequately pleaded demand futility.98 He denied the Rule 12(b)(6) motion as to
Counts I and II but granted dismissal of Count III.99 He also observed that the burden
of proving entire fairness might shift to the plaintiffs due to the Conflicts
Committee’s role in negotiating the 2018 Transactions.100
J. The Special Litigation Committee
On October 31, 2019, the Board unanimously adopted resolutions forming a
special litigation committee.101 The resolutions vested the SLC with “the full power
and authority of the Board” to investigate and evaluate the allegations and issues
raised in the Action.102 They directed the SLC to “prepare such reports, arrive at
such decisions and take such other actions in connection with the [Action] as the
[SLC] deems appropriate and in the best interests of [Baker Hughes] and its
stockholders, all to the fullest extent that such powers and authority may be
97
In re Baker Hughes, a GE Co. Deriv. Litig., Consol. C.A. No. 2019-0201-AGB (Del.
Ch. Oct. 8, 2019) (TRANSCRIPT) (Dkt. 66) (“MTD Ruling”).
98
Id. at 97.
99
Id. at 89.
100
Id. at 102 (citing Kahn v. Lynch, 638 A.2d 1110, 1117 (Del. 1994)).
101
SLC Rep. 170; id. Ex. 1.
102
Id. at 170.
20
delegated under Delaware law.”103 The resolutions stated that “the determinations
made by the [SLC] shall be final and binding upon [Baker Hughes].”104
Gregory L. Ebel was appointed the SLC’s sole member.105 Ebel had joined
the Board on May 10, 2019 to replace Craighead, who had retired. 106 Ebel is the
Chairman of the Board’s Audit Committee and a member of its Governance &
Nominating Committee.107 He has served in various officer and director roles with
several energy companies.108 Ebel was paid $15,000 annually for his service on the
SLC.109
103
Id. The resolutions also authorized the SLC to “engage such accountants and advisors,
including its own independent legal counsel and financial advisor, as the [SLC] shall deem
necessary or desirable in order to assist it in the discharge of its responsibilities” and
provided that Baker Hughes would bear the costs of any advisors retained by the SLC. Id.
at 170-71. The resolutions required the company’s officers and employees to “supply the
[SLC] and its legal counsel and/or advisors with any and all information requested by the
[SLC] or its legal counsel and/or advisors and to cooperate in all respects with the requests
of the [SLC].” Id. at 171.
104
Id. at 170.
105
Id. at 171; id. Ex. 1.
106
Id. at 171; see Baker Hughes, a GE company, Proxy Statement (Schedule 14A) (Mar.
25, 2019) at Cover Page, 7-11; Baker Hughes, a GE company, Current Report (Form 8-K)
(May 13, 2019) at Item 5.07.
107
SLC Rep. 171.
108
Id. at 171-73.
109
Id. at 173.
21
The SLC retained Quinn Emanuel Urquhart & Sullivan LLP and Abrams &
Bayliss LLP to serve as its legal advisors.110 The SLC selected Quinn Emmanuel
based on the firm’s representation of Ebel in an unrelated case.111 The SLC retained
The Brattle Group as its financial advisor.112
On November 12, 2019, the SLC moved for a stay,113 which the plaintiffs did
not oppose.114 On December 3, the court granted a stay of the Action until June
1, 2020.115 The parties agreed to extend the stay twice—first to October 1, 2020,
and then to October 15.116
K. The SLC Investigation and Report
The SLC’s investigation lasted nine months.117 The SLC held seventeen
minuted meetings between December 6, 2019 and September 24, 2020.118 Its
110
Id. at 174.
111
Pls.’ Answering Br. Ex. 89 (“Ebel Dep.”) at 30-31; Pls.’ Answering Br. Ex. 77 at 36
(identifying the prior case as Morris v. Spectra Energy P’rs (DE) GP, LP, C.A. No.
12110-VCG (Del. Ch.)).
112
SLC Rep. 174.
113
Dkt. 73.
114
See Dkt. 78.
115
Dkt. 79.
116
Dkts. 82-83, 96-97.
117
SLC Rep. 2, 177.
118
Id. at 186-87.
22
investigation concluded on October 13, 2020 when the SLC prepared a written
report, which was revised on January 15, 2021.119 The report details the SLC’s
factual assessments, the applicable legal standards, the merits of the plaintiffs’
claims, and other factors considered by the SLC.
The SLC concluded that the court would likely hold that the 2018
Transactions were entirely fair to Baker Hughes.120 The SLC weighed the potential
costs that the continued prosecution of the Action could have on Baker Hughes,
including indemnification and advancement costs, diversion of company resources,
and negative publicity.121 After considering the factors it deemed relevant, the SLC
concluded that “terminating the [] Action with prejudice would best serve the
interests of the Company and its stockholders.”122
119
The revised report dated January 15, 2021 is substantively identical to the October 13,
2020 original report. See Opening Br. in Supp. of the Special Litigation Committee’s Mot.
to Terminate (“SLC’s Opening Br.”) (Dkt. 105) at Ex. B (providing a blackline between
the revised and the original report).
120
SLC Rep. 320; see also id. at 289-90.
121
Id. at 306-19.
122
Id. at 319-20.
23
L. The Motion to Terminate and the Opposition
On October 13, 2020, the SLC moved for an order terminating the Action.123
The SLC filed an opening brief in support on January 15, 2021. 124 The plaintiffs
then pursued discovery to test the independence, good faith, and reasonableness of
the SLC’s investigation and its conclusions. The SLC produced 12,190 pages of
documents to the plaintiffs.125 The plaintiffs also deposed Ebel and two
representatives of Brattle.126
On January 12, 2022, the plaintiffs moved to compel additional discovery.127
I denied this motion except as to documents from Ebel’s custodial files focused on
his recruitment to the Board.128
123
Dkt. 98.
124
Dkt. 105.
125
These documents included: the SLC report and exhibits; all other documents the SLC
reviewed or relied on in reaching its conclusions; interview memoranda and exhibits; the
SLC’s minutes and resolutions (redacting work product); Board minutes reflecting Ebel’s
appointment as a director and SLC member; and all communications between the SLC and
others about the investigation. See In re Baker Hughes, a GE co. Deriv. Litig., Consol.
C.A. No. 2019-0201-LWW (Del. Ch. Feb. 25, 2022) (TRANSCRIPT) (Dkt. 129) (“MTC
Ruling”) at 53-54.
126
The two Brattle representatives were Yvette Austin Smith, Chairman and a Principal of
Brattle, and David Hutchings, a Principal of Brattle. See Pls.’ Answering Br. Ex. 86
(“Hutchings Dep.”); Pls.’ Answering Br. Ex. 87 (“Smith Dep.”).
127
Dkt. 122.
128
MTC Ruling 60; see Dkt. 128. This Action was reassigned to me in May 2021 after
Chancellor Bouchard retired from the bench.
24
On August 25, the plaintiffs filed an answering brief opposing the SLC’s
motion to terminate, attaching 109 exhibits.129 On October 4, the SLC filed a reply
brief in further support of its motion to terminate along with seventeen additional
exhibits.130
On December 19, 2022, I heard oral argument on the motion to terminate.131
At the hearing, Ebel provided live testimony and was cross-examined by the
plaintiffs’ counsel.132
II. LEGAL ANALYSIS
Section 141(a) of the Delaware General Corporation Law empowers a board
of directors “to make decisions regarding corporate litigation.”133 “Like a fleet of
trucks or a factory, a lawsuit is a corporate asset that must be managed by the board
consistent with its fiduciary duties.”134 Pleadings stage allegations of board-level
129
Pls.’ Answering Br. in Opp’n to the Special Litigation Committee’s Mot. to Terminate
(Dkt. 137) (“Pls.’ Answering Br.”).
130
Reply Br. in Further Supp. of the Special Litigation Committee’s Mot. to Terminate
(Dkt. 150) (“SLC’s Reply Br.”).
131
See Dkt. 154.
132
Trans. of Oral Arg. on Special Litigation Committee’s Mot. to Terminate (Dkt. 157)
(“Oral Arg. Tr.”).
133
Zapata Corp. v. Maldonado, 430 A.2d 779, 786 (Del. 1981); see 8 Del. C. § 141(a)
(“The business and affairs of every corporation organized under this chapter shall be
managed by or under the direction of a board of directors.”).
134
Diep v. Trimaran Pollo P’rs, L.L.C., 280 A.3d 133, 149 (Del. 2022).
25
conflicts can excuse a stockholder’s failure to make a pre-suit demand but do not
strip the board of its authority. “The problem is one of member disqualification, not
the absence of power in the board.”135 The board still has “one final arrow in its
quiver to gain control of the derivative litigation—the special litigation
committee.”136
In Zapata Corp. v. Maldonado, the Delaware Supreme Court considered the
tension between the board’s responsibility under Section 141 to control a
corporation’s litigation assets and the risk that a conflicted board would seek to
terminate a beneficial derivative action.137 The court crafted a two-step analysis “to
find a balancing point where bona fide stockholder power to bring corporate causes
of action cannot be unfairly trampled on by the board of directors, but the corporation
can rid itself of detrimental litigation.”138
135
Zapata, 430 A.2d at 786.
136
Diep, 280 A.3d at 151; see Zapata, 430 A.2d at 786; 8 Del. C. § 141(c).
137
430 A.2d at 786-77.
138
Id. at 787; see In re Oracle Corp. Deriv. Litig., 808 A.2d 1206, 1210-11 (Del. Ch. 2002)
[hereinafter “Oracle I”] (“[T]he Zapata procedure takes the case away from the
[derivative] plaintiff” and “turns his allegations over to special agents appointed on behalf
of the corporation for the purpose of making an [] internal investigation of his charges.”
(quoting Kaplan v. Wyatt, 484 A.2d 501, 509 (Del. Ch. 1984), aff’d, 499 A.2d 1184 (Del.
1985))).
26
The first step of the analysis requires the court to “review[] the independence
of SLC members and consider[] whether the SLC conducted a good faith
investigation of reasonable scope that yielded reasonable bases supporting its
conclusions.”139 This step is often dispositive.140 If the special litigation committee
meets its burden under step one, the court can grant dismissal or proceed to the
discretionary second step.141 In the second step, the court applies “its own business
judgment” to determine whether dismissal would serve the company’s best
interests.142
A. The First Step of Zapata
“The first prong of the Zapata standard analyzes the independence and good
faith of committee members, the quality of its investigation, and the reasonableness
of its conclusions.”143 The SLC bears “the burden of demonstrating that there are
139
London v. Tyrrell, 2010 WL 877528, at *11 (Del. Ch. Mar. 11, 2010) (citing Zapata,
430 A.2d at 789).
140
See, e.g., Katell v. Morgan Stanley Grp., Inc., 1995 WL 376952, at *13 (Del. Ch. June
15, 1995) (granting a special litigation committee’s motion to terminate after a step one
analysis); Kindt v. Lund, 2003 WL 21453879, at *5 (Del. Ch. May 30, 2003) [hereinafter
“Kindt II”] (same).
Kaplan, 499 A.2d at 1192 (“Proceeding to the second step of the Zapata analysis is
141
wholly within the discretion of the court.”).
142
London, 2010 WL 877528, at *11 (citing Zapata, 430 A.2d at 789).
143
In re WeWork Litig., 250 A.3d 976, 997 (Del. Ch. 2020) (quoting Kahn v. Kohlberg
Kravis Roberts & Co., L.P., 23 A.3d 831, 836 (Del. 2011)).
27
no genuine issues of material fact as to its independence, the reasonableness and
good faith of its investigation and that there are reasonable bases for its
conclusions.”144 A “procedural standard akin to a summary judgment inquiry” is
applied.145 The court considers whether there are disputed issues of material fact
about the SLC’s independence, the scope of its investigation, or the reasonableness
of its conclusions—not about the merits of the claims.146
1. The SLC Is Independent.
The court’s independence inquiry under Zapata is both broad and nuanced. It
looks “beyond determining whether SLC members are under the ‘dominion and
control’ of an interested director” to consider whether any “lesser affiliations” create
“a material question of fact as to whether the SLC member can make a totally
144
London, 2010 WL 877528, at *11 (citing Kaplan, 484 A.2d at 507).
145
In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 928 (Del. Ch. 2003) [hereinafter,
“Oracle II”]; see Zapata, 430 A.2d at 788 (explaining that an SLC “should be prepared to
meet the normal burden under Rule 56 that there is no genuine issue as to any material fact
and that the moving party is entitled to dismiss as a matter of law”); Lewis v. Fuqua, 502
A.2d 962, 966 (Del. Ch. 1985) (same).
146
See, e.g., Diep, 280 A.3d at 156; Kaplan, 484 A.2d at 519 (“[I]t is the conduct and
activity of the [SLC] in making its evaluation of the factual allegations and contentions
contained in the plaintiff’s complaint which provide the measure for the [SLC’s]
independence, good faith and investigatory thoroughness. This is because it is the [SLC]
which is under examination at this first-step stage of the proceedings, and not the merits of
the plaintiff’s cause of action.”).
28
unbiased decision.”147 “The question of independence ‘turns on whether a director
is, for any substantial reason, incapable of making a decision with only the best
interests of the corporation in mind.’”148 The court need not conclude that an actual
conflict made the SLC “less inclined to find [the plaintiffs’ claims] meritorious, only
that the connections identified would be on the mind of the SLC members in a way
that generates an unacceptable risk of bias.”149
Although the “substantive contours of the independence doctrine” are similar
in the pre-suit demand and special litigation committee contexts, “SLC members are
not given the benefit of the doubt as to their impartiality and objectivity.”150 Rather,
the SLC must prove its independence. That burden is particularly hefty if a single
147
London, 2010 WL 877528, at *12 (quoting Oracle II, 824 A.2d at 937); Katell, 1995
WL 376952, at *7 (explaining that an SLC is “independent when it can base its decision
on ‘the merits of the issue rather than being governed by extraneous consideration or
influences’” (quoting Kaplan, 499 A.2d at 1189)).
148
Oracle II, 824 A.2d at 920 (citation and emphasis omitted).
149
Id. at 947.
150
London, 2010 WL 877528, at *13.
29
member SLC is used.151 “[T]he sole member of a one-person special litigation
committee” must “meet unyielding standards of diligence and independence.”152
Here, the Board delegated to the SLC its full authority and power with respect
to the Action.153 The SLC was authorized to retain independent advisors at Baker
Hughes’s expense.154 Ebel was appointed to the SLC after the Board determined he
was uninvolved in the 2018 Transactions and had no personal or business ties to any
defendant that compromised his independence.155
151
See Lewis, 502 A.2d at 967 (“If a single member committee is to be used, the member
should, like Caesar’s wife, be above reproach.”). In Lewis, the court concluded that a
one-member special litigation committee had not met its burden of demonstrating its
independence. Id. at 936. The committee member was on the board at the time of the
challenged actions, was a named defendant in the lawsuit, and had “numerous political and
financial dealings” with the principal defendant who served as CEO and “allegedly
control[led] the board.” Id. at 966. The special litigation committee member was also the
president of a university that had received a substantial pledge from the company and its
CEO. Id. at 967. Ebel lacks any comparable conflicts.
152
Sutherland v. Sutherland, 2007 WL 1954444, at *3 n.10 (Del. Ch. July 2, 2007)
[hereinafter “Sutherland I”].
153
See SLC Rep. 170-71; id. Ex. 1; supra Section I.J. The plaintiffs argue that the “SLC
was formed with the goal of seeking dismissal of Plaintiffs’ claims.” Pls.’ Answering Br.
73. The only facts cited in support concern, one, the timing of the SLC’s formation shortly
after the court’s motion to dismiss decision and, two, the role of Baker Hughes’s outside
counsel in advising the Board on forming the SLC. Id. at 73-74. But this is typically when
and how special litigation committees are created in the first place. See Zapata, 430 A.2d
at 786 (observing that “the board, tainted by the self-interest of a majority of its members,
can legally delegate its authority to a committee of two disinterested directors”); Diep, 280
A.3d at 151 (“[T]he special litigation committee typically comes into existence after
demand is excused.”).
154
SLC Rep. 170-71; id. Ex. 1.
155
SLC Rep. 172.
30
Ebel’s lack of any disabling self-interest in the challenged events is not in
dispute. He did not stand to receive “a personal financial benefit” or face “a
materially detrimental impact” from the 2018 Transactions, and he has no ties to
GE.156 He was also unconflicted with respect to the Action, having joined the Board
on May 10, 2019—after the defendants moved for dismissal.157 Thus, the focus of
my independence inquiry is on Ebel’s relationships with interested parties.158
“Independence can be impaired by . . . affiliations [with interested parties] . . .
[if] those affiliations are substantial enough to present a material question of fact as
to whether the SLC member can make a totally unbiased decision.”159 The plaintiffs
point to three affiliations: (1) Ebel’s relationship with Simonelli; (2) Ebel’s
relationship with Cazalot; and (3) the SLC advisors’ relationships with GE. I take
each in turn and conclude that none raises a genuine issue of material fact about the
156
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993); see Oral Arg. Tr. 9 (Ebel testifying
that he has no ties to GE).
157
SLC Rep. 171-73; see Sandys v. Pincus, C.A. No. 9512-CB, at 52 (Del. Ch. Jan. 18,
2019) (TRANSCRIPT) (holding that special litigation members who joined the board after
the challenged transactions were independent for Zapata purposes). Before joining the
SLC, Ebel knew “[v]ery little” about the Action and had no “views about the merits.” Oral
Arg. Tr. 11-12; see Ebel Dep. 25-26.
158
See London, 2010 WL 877528, at *12 (“When an SLC member has no personal interest
in the disputed transactions, the Court scrutinizes the members’ relationship with the
interested directors, as that would be the source of any independence impairment that might
exist.”).
159
Id.31
SLC’s independence. The SLC has met its burden of establishing its impartiality
and objectivity with respect to the Action.
a. Ebel’s Relationship with Simonelli
The plaintiffs’ primary challenge to Ebel’s independence concerns his
relationship with Simonelli. Before joining the Board, Ebel had met Simonelli—as
well as Elsenhans and Craighead160—at industry events while they were oil and gas
industry executives in the Houston, Texas area. Ebel’s relationship with Simonelli
is best described as an acquaintanceship.161
The plaintiffs assert that several emails exchanged between Ebel and
Simonelli during the SLC investigation create a material fact issue about Ebel’s
ability to impartially investigate Simonelli. To be sure, certain of these
160
The plaintiffs voluntarily dismissed Elsenhans and Craighead without prejudice. To the
extent that Ebel’s relationships with these former defendants are relevant, they are merely
acquaintanceships. See infra note 161 and accompanying text. Simonelli remains a
defendant.
161
See Kaplan, 484 A.2d at 512-13 (determining that an SLC member was independent
despite business associations, which exceeded millions of dollars, between entities
affiliated with the SLC member and the company where a defendant served as chairman
and CEO); Beam v. Stewart, 845 A.2d 1040, 1051 (Del. 2004) (concluding in the demand
futility context that alleging an interested party and “other directors moved in the same
social circles” or “developed business relationships before joining the board” did not
provide a basis to infer that the directors lacked independence); cf. Oracle II, 824 A.2d at
942-93. This case is unlike Oracle, where the court determined that special litigation
committee members could not be impartial when considering whether to press insider
trading claims against a fellow professor at the university where they taught. Oracle II,
824 A.2d at 942-93.
32
communications should not have occurred.162 But each is non-substantive, and none
impugns Ebel’s objectivity or the SLC’s integrity.163
i. The Board Expansion Exchanges
Between early March and late May 2020, Ebel had three exchanges with
Simonelli about the logistics of potentially expanding the SLC. The Board was
considering adding directors around this time, which created the possibility of those
new directors joining the SLC.164 Although an expansion of the SLC was a matter
of discussion for Ebel and his counsel, the addition of new directors to the Board
was a threshold topic.165 As such, Ebel asked Simonelli—the Board’s Chairman—
for information.166
162
See In re Primedia Deriv. Litig., C.A. No. 1808-VCL, at 54 (Del. Ch. May 12, 2008)
(TRANSCRIPT) (“[C]ommunications from the defendants . . . to the committee with
respect to the committee’s work . . . should be a null set.”).
163
In Diep, the Delaware Supreme Court affirmed the Court of Chancery’s determination
that a special litigation committee was independent. The Court of Chancery held that
communications between committee members and interested parties about aspects of the
matters under investigation did not give rise to material fact issues. 280 A.3d at 152. One
committee member had discussed the derivative action with the manager of the defendant
controller. Id. at 143. Two other committee members attended a board meeting where the
board, including the defendant directors, discussed the derivative action. Id. at 153. The
communications raised here are even further removed from the merits.
164
See SLC’s Reply Br. Ex. A at 1-2; SLC’s Reply Br. Ex. C at 2; Ebel Dep. 76-77.
165
Oral Arg. Tr. 57 (Ebel testifying that “[he] discussed [with Simonelli] the logistics of
new directors coming on, not about expanding the SLC”); see also id. at 27, 29, 35; Ebel
Dep. 105.
166
Oral Arg. Tr. 27 (Ebel testifying that he “need[ed] information from Mr. Simonelli in
connection with [the] consideration of adding another board member . . . just purely
33
The SLC first assessed the possibility of an expansion at a March 2, 2020 SLC
meeting.167 Ebel informed his counsel that Baker Hughes might add a director “in
connection with the Baker Hughes annual stockholders meeting in May 2020” or as
early as “the next Board meeting in March 2020.”168 Ebel and the SLC’s counsel
“discussed their preliminary views on the possibility of expanding the SLC to
include a new director.”169 The SLC’s next steps would depend upon whether and
when a new director was added to the Board.170
Four days later, on March 6, Ebel emailed Simonelli: “I do need to speak to
you about an SLC matter. Your thoughts would be helpful before I reach out to
Geoff B[eattie].”171 Ebel credibly testified that he sought to obtain details about the
timing of the potential Board additions.172 This would have been crucial to whether
logistics from that perspective” and “what [he] could [] expect to see in terms of new
directors coming on the Baker Hughes board”); see also id. at 35; Ebel Dep. 105.
167
SLC’s Reply Br. Ex. A at 1-2.
168
See id. at 1. Ebel testified that he learned of the potential Board expansion through
general Board-level discussions. Oral Arg. Tr. 24.
169
SLC’s Reply Br. Ex. A at 1-2.
170
Oral Arg. Tr. 32-33.
171
Pls.’ Answering Br. Ex. 90 at -077. As Chair of the Governance & Nominating
Committee, Beattie was involved in new director recruitment. See Pls.’ Answering Br. Ex.
77 at 19-20. Ebel could not recall whether he spoke with Beattie but believed that he never
had to reach out to him. Ebel Dep. 106.
172
See Oral Arg. Tr. 27. According to the plaintiffs, Ebel’s memory gap about this email
puts his independence in doubt. In a February 9, 2022 declaration, Ebel said that the “SLC
matter” in his March 6, 2020 email could refer to difficulties in scheduling interviews or
34
the SLC expanded, given the time it would take to bring a new member up to speed
and the looming end of the litigation stay on June 1.173
The SLC continued to mull a potential expansion. At a March 16 SLC
meeting, Ebel told the SLC’s counsel that any additions to the Board were unlikely
to occur until May 2020.174 He “also noted the potential difficulties in getting a new
SLC member up to speed.”175 Ten days later, Baker Hughes sent stockholders the
proxy for its upcoming annual meeting, soliciting votes on the election of two new
directors.176
to the SLC’s potential expansion. Unsworn Decl. of Gregory L. Ebel (“Ebel Decl.”) (Dkt.
124) ¶ 11(a). Later, during his April 27, 2022 deposition, Ebel testified that the “SLC
matter” was the SLC’s potential expansion. Ebel Dep. 104. His testimony during the
December 19, 2022 hearing was consistent with that given at his deposition. Oral Arg. Tr.
24-25. Ebel also explained that “[h]aving reviewed various communications [since the
declaration], [he] felt more comfortable being definitive” during his deposition and at the
hearing. Id. at 29.
In this context, Ebel’s inability to remember with absolute certainty the context of
an email sent years earlier is hardly a material fact. Independence is not a memory test.
Cf. In re Freeport-McMoran Sulphur, Inc. S’holder Litig., 2005 WL 1653923, at *10 (Del.
Ch. June 30, 2005) (concluding that a director’s “inability to recall important facts” created
an issue of material fact about his independence where the director did not recall working
for a company affiliated with conflicted directors or attending board meetings for that
affiliate). In any event, Ebel has consistently maintained that he did not discuss the
substantive details of the SLC investigation with Simonelli—or anyone else aside from his
advisors. See Ebel Decl. ¶ 12; Ebel Dep. 105, 109; Oral Arg. Tr. 35.
173
Oral Arg. Tr. 24-25; see also id. at 32-33.
174
SLC’s Reply Br. Ex. C at 2.
175
Id.
176
Baker Hughes Company, Proxy Statement (Schedule 14A) (Mar. 26, 2020).
35
Ebel reached out to Simonelli again on April 19, 2020, asking “to speak with
[Simonelli] th[at] week about the special litigation committee.”177 Ebel wrote: “All
good just some delays (for obvious reasons) and, as such, lawyers are wondering
about whether we should revisit membership given b[oa]rd changes.”178 Simonelli
replied, “let me know when convenient to connect on the SLC.”179 The two
subsequently had a brief conversation.180
This email was a follow-up to Ebel and Simonelli’s prior exchange.181 Ebel
was concerned about “how long [new Board members] would take to get up to
speed” given the time needed to complete the SLC’s investigation.182 Just a few
days earlier, at an April 13 meeting, the SLC and its counsel had discussed the need
for “an extension of at least three months” to complete their process.183
177
Pls.’ Answering Br. Ex. 92 at -070.
178
Id.
179
Id. at -069.
180
See Ebel Dep. 104-05; see also Oral Arg. Tr. 26-27, 31-32.
181
See Ebel Dep. 109.
182
Oral Arg. Tr. 32.
183
The Special Litigation Committee’s Opp’n to Pls.’ Jan. 12, 2022 Mot. to Compel
(Dkt. 124) Ex. O at 2. At the next SLC meeting on April 27, 2020, the SLC decided to ask
the plaintiffs’ counsel to agree to a four-month extension to the stay.
36
Baker Hughes’s stockholders subsequently elected two new directors at the
May 14 annual meeting.184 On May 20, the court granted a stipulated order to extend
the stay of the Action until October 1.185
The next day, on May 21, Simonelli texted Ebel “let me know when you have
a few minutes to connect on [the] SLC.”186 Ebel responded that he could speak that
evening or the next.187 Ebel could not recall the details of this communication
during the litigation, but he believed that it “may have been in connection with a
potential expansion of the SLC.”188 Given the context, Ebel’s explanation is both
logical and credible. It was not “strange” that Simonelli reached out because
Simonelli knew from prior exchanges that Ebel was interested in the logistics of the
Board expansion.189
184
Baker Hughes Company, Current Report (Form 8-K) (May 14, 2020) at Item 5.07.
185
Dkt. 83.
186
Pls.’ Answering Br. Ex. 93 at -056.
187
Pls.’ Answering Br. Ex. 94 at -057.
188
Ebel Dep. 111; see Oral Arg. Tr. 34-35, 60. When Ebel submitted a declaration on
February 9, 2022, he could “not recall what Mr. Simonelli wanted to discuss,” though he
noted that the May 21, 2020 text was sent just after the company’s annual meeting. Ebel
Decl. ¶ 11(d). He remained uncertain at his April 27, 2022 deposition. Ebel’s inability to
recall with precision a communication occurring more than two years earlier does not
impugn his independence. See supra note 172.
189
Oral Arg. Tr. 59; see also id. at 34-35.
37
The SLC ultimately did not add another member.190 By this point, the SLC’s
investigation was well underway, and the time left to complete its work grew
short.191 The SLC felt that adding another member would cause delay, especially
given the logistical difficulties created by the COVID-19 pandemic.192
ii. The Lockdown Interview Update
On April 8, 2020, Ebel emailed Simonelli to discuss predicted European
demand for liquified natural gas amid the COVID-19 pandemic.193 Simonelli
replied, offering his thoughts on the subject.194 Ebel then sent a three-paragraph
response to Simonelli.195 The first paragraph of that response addressed industry
predictions. The second paragraph addressed Baker Hughes public disclosures
about the pandemic. The third paragraph stated:
Also had a good interview today with [Baker Hughes
Managing Director] Marco Forgione in Florence[, Italy]
on the special litigation front. Good outcome despite
taking 3 hours. You can tell thing are getting old with the
lockdown [t]here.196
190
See id. at 35; Ebel Decl. ¶ 10.
191
By May 20, 2020, the SLC had completed ten interviews. See SLC Rep. App. C.
192
See Oral Arg. Tr. 35.
193
Pls.’ Answering Br. Ex. 91 at -068.
194
Id. at -067.
195
Id.
196
Id.
38
Ebel’s description of a “[g]ood outcome” did not refer to the substance of
Forgione’s interview or the SLC’s investigation. Rather, Ebel credibly testified that
it referred to the interview having been completed despite the COVID-19 lockdown
in Italy.197 His testimony is corroborated by the documentary evidence. Ebel’s reply
itself was part of a chain about Baker Hughes’s pandemic response. Further, the
Forgione interview memorandum notes that the interview was beset by a spotty
internet connection.198
The April 8 email does not—as the plaintiffs suggest—show that Simonelli
and Ebel are friends or that they “regularly” communicated about the SLC’s
investigation.199 Undoubtedly, Ebel had no reason to tell Simonelli about the quality
of the SLC’s interview.200 But the email was non-substantive and innocuous. It does
not raise a meaningful question about Ebel’s independence from Simonelli.
197
Oral Arg. Tr. 37-38; see also Ebel Decl. ¶ 11(b); Ebel Dep. 106-08. Around this time,
Italy announced a nationwide lockdown due to the pandemic. See Allison McCann, Nadja
Popovich, & Jin Wu, Italy’s Virus Shutdown Came Too Late. What Happens Now?, N.Y.
Times (Apr. 5, 2020).
198
Forgione Interview Mem. 1 n.2.
199
Pls.’ Answering Br. 52-53.
200
See Oral Arg. Tr. 56.
39
iii. “Thanks for the Wine”
On June 30, 2020, Ebel texted Simonelli:
Excellent discussion I thought. Seems like a really good
choice. I am on an slc video interview for next 3 hours
with Geoff Beattie and a bunch of lawyers (lucky me).
Perhaps we can chat later in day quickly. Say 4:30. If not
perhaps tomorrow. Thanks for the wine btw!201
Ebel testified that the first two sentences referred to recruiting a new executive.202
A further discussion about the potential hire would be delayed because of the SLC
interview.
The plaintiffs appear to accept this premise but say that the text raises two
concerns. First, they argue that the text suggests Ebel failed to investigate with “full
vigor.”203 This contention is belied by the record. Ebel participated in most of the
SLC interviews, which he prepared for alongside his counsel.204 He oversaw the
investigation, reviewed documents gathered by counsel, and routinely met with his
201
Pls.’ Answering Br. Ex. 95 at -063.
202
Oral Arg. Tr. 39, 61; see also Ebel Decl. ¶ 11(e); Ebel Dep. 113.
203
Pls.’ Answering Br. 55 (quoting Oracle II, 824 A.2d at 941 (noting the “dangers posed
by investigators who harbor reasons not to pursue the investigation’s targets with full
vigor”)).
204
See SLC Rep. App. C. Scheduling conflicts prevented Ebel from attending two of the
twenty-two interviews. Id. at 181; see Alpha Venture Cap. P’rs. v. Pourhassan, C.A. No.
2020-0307-PAF, at 27-28 (Del. Ch. Apr. 19, 2021) (TRANSCRIPT) (citing directors’
attendance at interviews as demonstrating engagement); Kikis v. McRoberts, C.A. No.
9654-CB, at 93 (Del. Ch. May 19, 2016) (TRANSCRIPT) (same). By the time of the June
30 text, the SLC had completed twelve interviews. See SLC Rep. App. C.
40
advisors.205 Ebel understood that “[he] had a task to do and did it.”206 He was simply
not thrilled about spending three more hours with a “bunch of lawyers.”207
Second, the plaintiffs aver that Simonelli’s gift of wine creates “a clear
material fact issue as to whether that friendly relationship ‘would be on the mind of
[Ebel] in a way that generates an unfair risk of bias.’”208 But it was not as though
Ebel were singled out. Simonelli had organized virtual “social events” for the full
Board during the pandemic and sent wine to each director to share together over
video.209 “[I]t would be a strained and artificial rule requiring a director to be
unacquainted or uninvolved with fellow directors in order to be regarded as
independent.”210
205
See infra note 232 and accompanying text.
206
Ebel Dep. 113.
207
Id.; see Oral Arg. Tr. 39 (“[Q.] What were you communicating there? A. [Ebel].
Nothing other than it was -- there were a lot of interviews in going through that, and it was
just not a choice event. I would just say it was long, drawn-out things over Zoom and
Teams, et cetera.”).
208
Pls.’ Answering Br. 56 (quoting Oracle II, 824 A.2d at 947).
209
Oral Arg Tr. 40; see also Ebel Dep. 113-14. If anything, it would have been strange for
Simonelli to exclude Ebel from the Board social event.
210
Diep, 280 A.3d at 152 (quoting Sutherland v. Sutherland, 958 A.2d 235, 241 (Del. Ch.
2008) [hereinafter “Sutherland II”]).
41
b. Ebel’s Relationship with Cazalot
Next, the plaintiffs aver that connections to Cazalot undercut Ebel’s
independence. Cazalot and Ebel served together on another board from 2013 until
2019.211 Cazalot recommended Ebel as one of several possible Board candidates
with industry experience who could replace Craighead.212
Cazalot was not, however, a defendant in the Action during the SLC
investigation.213 The plaintiffs assert that Cazalot remained interested because he
hypothetically could have become a defendant again.214 But he never did. Even if
Cazalot were a defendant, his overlapping board service with and recommendation
of Ebel would not raise a genuine issue of fact about Ebel’s independence.215
211
In November 2013, Cazalot joined the board of Spectra Energy Corp., while Ebel served
as Spectra’s Chairman, CEO, and President. In 2018, Spectra merged with Enbridge, Inc.,
and both Cazalot and Ebel joined the Enbridge board—with Ebel becoming the Chairman.
Cazalot left the Enbridge board in 2019. See SLC Rep. 171-73; Oral Arg. Tr. 8-9.
212
Pls.’ Answering Br. Ex. 77 at 18-20.
213
See Dkt. 29.
214
Pls.’ Answering Br. 56-57.
215
See Carlton Invs. v. TLC Beatrice Int’l Hldgs., Inc., 1997 WL 305829, at *11 (Del. Ch.
May 30, 1997) (rejecting the plaintiffs’ challenge to an SLC member’s independence based
on the manner in which he was recommended for board service); see also Highland Legacy
Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006) (holding in the demand
futility context that directors were independent despite having “served together” with an
interested director “on a few boards of unaffiliated companies”); McElrath v. Kalanick,
224 A.3d 982, 995 (Del. 2020) (explaining in the demand futility context that “being
nominated or elected by a director who controls the outcome is insufficient by itself to
reasonably doubt a director’s independence because that is the usual way a person becomes
a corporate director” (internal quotation marks omitted)); In re MFW S’holders Litig., 67
42
c. The SLC’s Counsel
Finally, the plaintiffs argue that the SLC’s counsel lack independence. The
only basis for that assertion is that other Quinn Emmanuel and Abrams & Bayliss
attorneys uninvolved with the SLC investigation previously represented GE.216 The
SLC’s counsel repeatedly stated that none of the attorneys working on the SLC
engagement had represented GE.217 The SLC’s counsel also represented that they
were willing to sue GE.218 In fact, both Quinn Emmanuel and Abrams & Bayliss
have done so in the past.219 There is no indication that the SLC’s counsel were biased
or acted with impropriety during the investigation.220
A.3d 496, 511 (Del. Ch. 2013) (observing that “allegations of friendliness,” including that
a director asked a special committee member to serve on the board, were “exactly of the
immaterial and insubstantial kind our Supreme Court held were not material in Beam v.
Stewart”), aff’d sub nom. Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014); supra
note 161.
216
Pls.’ Answering Br. Exs. 96-105.
217
See SLC’s Reply Br. 14-15; SLC Rep. 174; Oral Arg. Tr. 14.
218
Oral Arg. Tr. 106.
219
See, e.g., Monument Peak Ventures, LLC v. GE Healthcare, Inc., No. 18-CV-1158 JLS
(S.D. Cal.); Gen. Elec. Co. v. Monument Peak Ventures, LLC, No. IPR2019-00993
(P.T.A.B.); Wind Point P’rs VII-A, L.P. v. Insight Equity A.P. X Co., LLC, C.A. No. N19C-
08-260 EMD CCLD (Del. Super.).
220
See Kaplan, 499 A.2d at 1190 (rejecting an argument that a special litigation committee
did not act in good faith where the committee’s legal advisors were named defendants in
another action brought by the plaintiff’s counsel and contributed to the $50 million
settlement of that action).
43
2. The SLC Conducted a Thorough Investigation in Good Faith.
The SLC also bears the burden of proving that it “acted in good faith and
conducted a thorough investigation.”221 A good faith investigation is one that is
pursued in an unbiased manner and without a predetermined conclusion.222 “[T]he
SLC must investigate all theories of recovery asserted in the . . . complaint” by
“explor[ing] all relevant facts and sources of information that bear on the central
allegations.”223
The SLC and its advisors spent more than 6,300 hours on the investigation.224
The SLC began its process by meeting with the plaintiffs’ counsel to understand the
plaintiffs’ theories of the Action.225 The SLC then engaged in extensive fact
gathering, which involved reviewing more than 110,000 documents and
interviewing 22 witnesses.226 The SLC investigated not only the claims and
221
Kindt II, 2003 WL 21453879, at *3 (Del. Ch. May 30, 2003); Diep, 280 A.3d at 155
(explaining that the court must consider “whether disputed issues of material fact were
raised about the scope of the investigation”).
222
See Biondi v. Scrushy, 820 A.2d 1148, 1156 (Del. Ch. 2003), aff’d sub nom. In re
HealthSouth Corp. S’holders Litig., 847 A.2d 1121 (Del. 2004); London, 2010 WL 877528,
at *15.
223
London, 2010 WL 877528, at *17.
224
SLC Rep. 2.
225
Id. at 184-85; see id. Ex. 216.
226
See infra note 281 (describing the topics and sources of information collected and
reviewed). The interviewees included: (1) Simonelli; (2) Worrell; (3) current and former
Baker Hughes directors, including the members of the Conflicts Committee; (4) Baker
44
allegations in the Complaint but also issues not raised by the plaintiffs.227 There is
no evidence indicating that the SLC worked toward a predetermined conclusion.228
Hughes employees involved in negotiating the 2018 Transactions; (5) GE CFO Miller; (6)
a senior GE in-house attorney who was involved in negotiating the 2018 Transactions; (7)
a senior GE employee who was involved in negotiating amendments to the Master
Agreement Framework on behalf of GE Aviation; (8) representatives of the financial
advisors for Baker Hughes, the Conflicts Committee, and GE; and (9) a representative of
Baker Hughes’s outside counsel for the 2018 Transactions. SLC Rep. 181-83. The SLC
determined that the witnesses appeared credible and (with one exception) were
forthcoming. Mulva, GE designee to the Board, declined to answer any questions relating
to his role as a GE board member or GE’s internal deliberations about its negotiating
positions. He responded to all other questions. Id.227
For example, the Complaint lacks any allegations about the Conflicts Committee’s
process. Yet the SLC investigated whether GE attempted to undermine it. SLC Rep. 218-
21. The SLC also examined potential weaknesses in the process leading to the 2018
Transactions that were not addressed in the Complaint. Id. at 237-52. Similarly, the SLC
investigated Simonelli’s actions as a Baker Hughes officer, even though the Complaint did
not advance a claim against Simonelli in that capacity. Id. at 303-05. See Kindt II, 2003
WL 21453879, at *4 (concluding that an SLC acted in good faith because, among other
things, the “SLC also rooted out additional facts not even alleged by plaintiff”); cf.
Sutherland II, 958 A.2d 242-44 (holding that an SLC failed to demonstrate its good faith
where it did not address a central transaction, produced interview summaries with limited
information, and reviewed evidence in a cursory manner).
228
See Oral Arg. Tr. 11-12; Ebel Dep. 25-26, 123-24; see also Katell, 1995 WL 376952,
at *9 (rejecting the plaintiffs’ assertion that an SLC “sought to uncover as little evidence
as possible, and then reach the predetermined conclusion to dismiss the lawsuit”); Kaplan,
484 A.2d at 514-15, 519 (rejecting the plaintiffs’ challenge to an SLC’s good faith based
on the purported animosity the SLC’s counsel had toward the plaintiff’s counsel and the
failure to investigate key issues). The plaintiffs suggest that the SLC prejudged the
outcome of its investigation because it began drafting the report before the SLC met with
Brattle or reached formal conclusions. Pls.’ Answering Br. 73. But the SLC’s counsel had
only prepared a draft fact section of the report, which was provided to Ebel before the
SLC’s September 22, 2020 meeting. See Ebel Dep. 118-19, 152-53; Hutchings Dep. 128;
Smith Dep. 172; SLC’s Reply Br. Ex. E at 1. This is neither unusual nor inappropriate
given the time and effort required to prepare a thorough report and the “static” factual
narrative. See Oral Arg. Tr. 107. The SLC’s preliminary draft did not contain any
conclusions or recommendations; it summarized the facts found by the SLC. See SLC’s
45
Its work resulted in a 320-page report that cites to 242 exhibits and 22 witness
interview memoranda.
Nonetheless, the plaintiffs contend that the SLC cannot meet its burden for
several reasons. They assert that the SLC hid behind privilege, that the SLC did not
adequately investigate advisor conflicts, and that certain information sources were
overlooked.229 None of these issues raise material questions of facts about whether
the SLC’s investigation was reasonable in scope and conducted in good faith.
a. The Cloak of Privilege
According to the plaintiffs, the SLC “chose to cloak the investigation in
privilege and shield information necessary for an adequate evaluation of the
investigation.”230 First, the plaintiffs complain that the SLC’s counsel—not Ebel—
led the investigation. There is, however, no legitimate issue of fact that would lead
me to “second guess the SLC’s decisions regarding the role which counsel
Reply Br. Ex. E at 1; Ebel Dep. 123-24. The SLC did not decide whether to terminate the
Action until its September 24, 2020 meeting. See Pls.’ Answering Br. Ex. 88 (SLC meeting
minutes); Ebel Dep. 123-24.
229
Certain arguments raised by the plaintiffs about the SLC’s process restate those made
about the SLC’s independence. The plaintiffs again aver that Ebel lacked “enthusiasm”
and that Ebel’s communications with Simonelli put the SLC’s good faith in doubt. These
arguments fail for the reasons discussed above. See supra notes 203-07 and accompanying
text.
230
Pls.’ Answering Br. 60-61.
46
played.”231 The SLC report, SLC meeting minutes, and Ebel’s testimony
demonstrate his active oversight of counsel and the investigation.232 The SLC’s
reliance on experienced advisors “is not only allowed but is ‘evidence [of] good faith
and the overall fairness of the process.’”233
Relatedly, the plaintiffs find fault with the SLC’s counsel serving as an
intermediary between Ebel and Brattle, which they characterize as forgoing
“education” for “insulation.”234 Brattle’s model evaluating the economic terms of
the 2018 Transactions, for example, was not provided to Ebel or included in the SLC
report. But Ebel was not required to independently review Brattle’s model or its
231
Carlton, 1997 WL 305829, at *12. The plaintiffs imply that the SLC’s counsel
interacted with Baker Hughes’s counsel at Davis Polk too frequently. See Pls.’ Answering
Br. 38-39. But the SLC’s counsel communicated with Davis Polk only to obtain document
discovery, to set up interviews, and for other administrative issues. See SLC Rep. 184; see
also Kaplan, 484 A.2d at 513, 519 (rejecting attacks to a special litigation committee’s
process based on the involvement of the nominal defendants’ counsel). Ebel testified that
Davis Polk played no role in the substance of the SLC’s investigation. Oral Arg. Tr. 68.
232
See SLC Rep. 176; Oral Arg. Tr. 15-20; Ebel Dep. 11-13, 37-39, 47-49, 72-75, 121-23.
Although the SLC’s counsel was primarily responsible for writing the report, Ebel directed
the drafting process and reviewed the report before approving it. Ebel Dep. 93, 155, 213-
14; see SLC’s Reply Br. Ex. E at 1.
233
In re W. Nat’l Corp. S’holders Litig., 2000 WL 710192, at *23 n.67 (Del. Ch. May 22,
2000) (quoting Cinerama Inc. v. Technicolor, Inc., 663 A.2d 1134, 1142 (Del. Ch. 1994),
aff’d, 663 A.2d 1156 (Del. 1995)); see Carlton, 1997 WL 305829, at *12 (“While the
directors bear ultimate responsibility for making informed judgments, good faith reliance
by a SLC on independent, competent counsel to assist the SLC in investigating claims is
legally acceptable, practical, and often necessary.”).
234
Pls.’ Answering Br. 62-63, 70-71; see also Oral Arg. Tr. 140-41.
47
internal communications.235 He periodically received updates from counsel about
Brattle’s progress and met with Brattle before reaching his conclusions.236 This
approach was reasonable and consistent with the SLC’s good faith reliance on its
advisors.237
Next, the plaintiffs say that certain documents, including drafts of the SLC
report and materials prepared by Brattle, were withheld from them. The SLC opted
not to assert privilege against the plaintiffs. It relied on work product protection for
a limited set of documents.238
In any event, the plaintiffs’ desired documents fall outside the limits of Zapata
discovery.239 The discovery the plaintiffs obtained—12,190 pages of documents and
235
See Kikis, C.A. No. 9654-CB, at 59, 67-68, 110 (rejecting an argument that an SLC had
to analyze purported comparables underlying expert’s conclusions). Brattle’s work for the
SLC was consistent with Brattle’s regular practice of coordinating with counsel before
providing information to the ultimate client. See Smith Dep. 79-80; Hutchings Dep. 84.
236
See Oral Arg. Tr. 19; Ebel Dep. 121-23; SLC’s Reply Br. Exs. D-F. Ebel directly
interacted with Brattle at a September 22, 2020 SLC meeting. During this meeting, Brattle
presented its analyses of the 2018 Transactions and Ebel asked Brattle questions. See Pls.’
Answering Br. Ex. 109 at 1-3; see also Ebel Dep. 128-51; Smith Dep. 188-89, 198-200;
Hutchings Dep. 183-89.
237
See supra note 233 and accompanying text.
238
The SLC produced meeting minutes to the plaintiffs without work product redactions.
See Dkt. 132. It also chose to produce its interview memoranda rather than assert work
product protection. See In re Oracle Corp. Deriv. Litig., 2020 WL 3867407, at *6 (Del.
Ch. July 9, 2020) [hereinafter “Oracle NetSuite”] (“The contents of the Interview
Memoranda . . . easily fit within the recognized bounds of work product.”).
239
Earlier, the plaintiffs filed a motion to compel documents between the SLC’s counsel
and anyone other than the SLC, its counsel, or its financial expert about the SLC process.
48
depositions of Ebel and two Brattle representatives—was sufficient to explore the
adequacy of the SLC’s investigation.240 Zapata discovery “must be limited in scope
. . . and focused in light of its purpose, i.e., verification of the independence and good
faith of the committee.”241 The plaintiffs were not entitled to a fishing expedition or
the sort of broad discovery available in a plenary dispute.242
b. The Adequacy of the Investigation
The plaintiffs next argue that the SLC performed an inadequate and selective
investigation into their entire fairness claims. In particular, the plaintiffs focus on
whether the SLC addressed the independence of the 2018 Transactions advisors.
More generally, they aver that the SLC’s process excluded certain sources of
information.
I denied this motion because the SLC had already produced sufficient information about
the investigation. There was “no need for the plaintiffs to sift through the granularities of
every discovery decision made by the SLC and its counsel.” MTC Ruling 53-54. Delaware
courts have declined to compel the production of the sort of documents the plaintiffs
complain were withheld from them. See, e.g., Oracle NetSuite, 2020 WL 3867407, at *8-
9; Kindt I, 2001 WL 1671438, at *2; Sutherland I, 2007 WL 1954444, at *4; Primedia,
C.A. No. 1808-VCL, at 53; Cincinnati Bell Cellular Sys. Co. v. Ameritech Mobile Phone
Servs. of Cincinnati, Inc., 1995 WL 347799, at *3 (Del. Ch. May 17, 1995); Rohm & Haas
Co. v. Dow Chem. Co., 2009 WL 537195, at *2 (Del. Ch. Feb. 26, 2009).
240
See MTC Ruling 53-54; supra notes 125-26 and accompanying text.
241
Kindt v. Lund, 2001 WL 1671438, at *1 (Del. Ch. Dec. 14, 2001) [hereinafter “Kindt I”];
see MTC Ruling 55-56.
242
See Sutherland I, 2007 WL 1954444, at *3.
49
i. Advisor Conflicts
Certain advisors to the 2018 Transactions—J.P. Morgan and Davis Polk for
Baker Hughes, and Lazard for the Conflicts Committee—had represented GE and
its affiliates on other transactions.243 The SLC report highlights that the Conflicts
Committee had “Access To Independent And Knowledgeable Advisors” but does
not address the advisors’ relationships with GE.244 The plaintiffs argue that this
omission raises a genuine question of material fact about the thoroughness of the
SLC’s investigation. Although the SLC report does not explicitly address the
transaction advisors’ independence, the SLC has shown that it reasonably
investigated these potential conflicts in good faith.
243
See, e.g., In re Dollar Thrifty S’holders Litig., 14 A.3d 573, 582 (Del. Ch. 2010)
(explaining that an investment banker having a business relationship with a counterparty
“is evidence of one of the facts of business life—that most of the top, if not all, banks have
relationships with the major private equity firms”); see also Pls.’ Answering Br. Ex. 84
(“Jannis Interview Mem.”) at 8 (Baker Hughes Head of Business Development explaining
he believed “GE was probably working with every major law firm in New York City in
some way”).
244
SLC Rep. 216-17; see also id. at 191, 211; Oral Arg. Tr. 68, 74-75.
50
J.P. Morgan. J.P. Morgan served as Baker Hughes’s financial advisor for the
2018 Transactions.245 It did not represent the Conflicts Committee.246 The plaintiffs
argue that the SLC overlooked the length and scope of J.P. Morgan’s relationship
with GE. In particular, the plaintiffs say the SLC did not consider certain documents
reflecting the amount of work J.P. Morgan performed for or the fees J.P. Morgan
received from GE.247 But the SLC demonstrated that it appropriately evaluated this
matter.248
245
J.P. Morgan principally advised Baker Hughes on the Capital Markets Transactions.
Oral Arg. Tr. 75, 112. J.P. Morgan did not “engag[e] directly in negotiations” over the
amendments to the Master Agreement Framework. Pls.’ Answering Br. Ex. 107 at 4
(“Weir Interview Mem.”) (summarizing the interview of the J.P. Morgan Managing
Director who led the team advising Baker Hughes in the 2018 Transactions); see SLC Rep.
130-32. Rather, J.P. Morgan performed valuation analyses on the terms of the
amendments. See Weir Interview Mem. 3-4; SLC Rep. 106-08 & figs. 13-14.
246
SLC Rep. 216-17; see also Pls.’ Answering Br. Ex. 17 (“Brenneman Interview Mem.”)
at 10; Pls.’ Answering Br. Ex. 37 (“Scott Interview Mem.”) at 4-5 (summarizing the
interview of the Lazard Director who advised the Conflicts Committee in the 2018
Transactions).
247
Pls.’ Answering Br. Exs. 20-22.
248
Ebel testified at his deposition that “the SLC [did nothing] to vet JP Morgan’s
independence in connection with its investigation of the 2018 [Transactions].” Ebel Dep.
183. When testifying before the court, he stated that “[the SLC] asked [the advisors] what
process they had followed, you know, had the advisors had a process in particular
[regarding conflicts].” Oral Arg. Tr. 48. He “remember[ed the SLC] had the J.P. Morgan
folks walk through what their process was to make sure there weren’t conflicts.” Id. This
testimony is corroborated by the documentary evidence showing that the SLC inquired into
this potential conflict. See infra notes 249-52 and accompanying text.
51
The SLC reviewed thousands of documents produced by J.P. Morgan. 249 It
asked interviewees about J.P. Morgan’s potential conflicts and interactions with the
Conflicts Committee.250 A J.P. Morgan Managing Director told the SLC that
J.P. Morgan has a “strict and rigorous conflicts process” and confirmed that no
member of the J.P. Morgan team represented GE while working on Project SAW.251
A representative of Baker Hughes management also told the SLC that he had “no
concerns” about J.P. Morgan’s work or loyalties.252 The SLC’s failure to focus on
specific documents the plaintiffs would have highlighted does not invalidate the
SLC’s investigation.253
249
SLC Rep. 177-78; see Oral Arg. Tr. 109.
250
See Weir Interview Mem. 3; Jannis Interview Mem. 7; Pls.’ Answering Br. Ex. 108
(“Harbour Interview Mem.”) at 3-4 (summarizing the interview of the Lazard Managing
Director who advised Baker Hughes in the 2018 Transactions).
251
Weir Interview Mem. 3.
252
Jannis Interview Mem. 7; id. Ex. 5 at -719. The SLC identified a December 2017 email
from J.P. Morgan to the interviewee stating that J.P. Morgan’s work for Baker Hughes did
not prevent another J.P. Morgan team from “pursuing other related opportunities within
GE.” Id. Ex. 5 at -719. The interviewee told the SLC that he was aware that J.P. Morgan
was not prevented from seeking work from GE in separate matters. Id. at 7.
253
See Carlton, 1997 WL 305829, at *19 (“While in an ideal world the SLC would have
been aware of this document prior to the settlement, it is understandable that a document
of potential relevance could have been overlooked or misplaced in an investigation
involving the magnitude of documents produced in this action. . . . This alone does not
suggest that the SLC failed to perform an adequate investigation or acted in bad faith.”).
52
Davis Polk. Baker Hughes retained its “long-time attorneys at Davis Polk”
for Project SAW.254 While advising Baker Hughes on the 2018 Transactions, Davis
Polk separately advised GE on other matters.255 In July 2018—months before the
2018 Transactions were finalized—a GE representative told a Baker Hughes
executive that Davis Polk “ha[d] been doing an enormous amount of work for GE”
and could not be expected “to be adverse to GE.”256 The Conflicts Committee
subsequently charged Simpson Thacher with “taking the lead in negotiations with
GE.”257
The record demonstrates that the SLC meaningfully examined Davis Polk’s
potential conflict. The SLC interviewed Davis Polk’s lead attorney on the
engagement and asked him whether Davis Polk was conflicted with respect to
Project SAW.258 He told the SLC that “Davis Polk did not believe it had an actual
conflict” but that Davis Polk had “recommended that the Conflicts Committee retain
independent counsel to avoid even the appearance of a potential conflict.”259 The
254
Brenneman Interview Mem. 5.
255
Pls.’ Answering Br. Exs. 23-25.
256
Pls.’ Answering Br. Ex. 26 at -066.
257
Pls.’ Answering Br. Ex. 27 at -317.
258
Pls.’ Answering Br. Ex. 79 (Bason Interview Mem.) at 6.
259
Id.53
SLC also asked Baker Hughes’s Head of Business Development about the
company’s retention of Davis Polk. This executive told the SLC that he “was not
concerned that Davis Polk’s work for GE might have affected its work for [Baker
Hughes].”260 The SLC further explored the role Simpson Thacher played as the
Conflicts Committee’s independent legal advisor.261
The plaintiffs also assert that Davis Polk’s purported conflicts infected the
SLC itself because Davis Polk advised the Board on the SLC’s formation and
engaged with the SLC during its investigation.262 This hardly impugns the good
faith of the SLC’s process. An independent SLC, represented by independent
counsel, was formed to remove the taint of any Board-level conflicts.263 Beyond
that, Davis Polk’s “interact[ion]” with the SLC “to identify key participants in the
relevant transactions, coordinate interviews, and follow up on information requested
during interviews” was appropriately aimed at gathering information. 264 Ebel’s
Jannis Interview Mem. 8-9; see also SLC’s Reply Br. Ex. H (Craighead Interview
260
Mem.) at 5-6 n.7.
261
See SLC Rep. 214 (noting that the Conflicts Committee held executive sessions with
only its advisors and without Davis Polk); Scott Interview Mem. 4; see also Brenneman
Interview Mem. 10; Harbour Interview Mem. 4.
262
See Dkts. 34, 45, 66; Pls.’ Answering Br. Ex. 77 at 25-26.
263
See Zapata, 430 A.2d at 786 (explaining that “the board, tainted by the self-interest of
a majority of its members, can legally delegate its authority to a committee of two
disinterested directors”).
264
SLC Rep. 184; supra note 231.
54
testimony confirmed that Davis Polk did not assist the SLC in the substance of the
investigation.265
Lazard. Lazard advised the Conflicts Committee on the 2018 Transactions.266
The plaintiffs assert that the SLC neglected to assess whether Lazard’s work for GE
before and concurrently with the 2018 Transactions created a conflict.267 The SLC
has, however, demonstrated that it adequately investigated Lazard’s independence.
The SLC questioned Baker Hughes management and each member of the
Conflicts Committee about the retention of Lazard.268 None of the interviewees
identified issues with Lazard’s role.269 Conflicts Committee member Cazalot, for
example, told the SLC that he “had no concerns” that Lazard was not providing
265
Oral Arg. Tr. 68.
266
Like J.P. Morgan, Lazard was “not directly involved in the commercial negotiations”
over the amendments to the Master Agreement Framework. Harbor Interview Mem. 3; see
also Scott Interview Mem. 3-4 (stating that “she did not know of any Lazard bankers
directly negotiating with GE or its advisors”). Lazard primarily advised Baker Hughes on
the Capital Markets Transactions and worked on valuing the financial effects of the
amendments to the Master Agreement Framework. See Oral Arg. Tr. 75, 112; SLC Rep.
140-42.
267
Pls.’ Answering Br. Exs. 38-39; see Scott Interview Mem. 2.
268
Pls.’ Answering Br. Ex. 11 (“Cazalot Interview Mem.”) at 6; Jannis Interview Mem. 7-
8; Brenneman Interview Mem. 5-6; Pls.’ Answering Br. Ex. 18 (“Elsenhans Interview
Mem.”) at 5.
269
Cazalot Interview Mem. 10 n.11; Jannis Interview Mem. 8; see also Brenneman
Interview Mem. 5-6; Elsenhans Interview Mem. 5
55
“independent advice.”270 The SLC also interviewed two Lazard representatives
about Lazard’s work for GE and neither was aware of any conflicts on their teams.271
* * *
Although the SLC report’s silence on the independence of J.P. Morgan, Davis
Polk, and Lazard is unfortunate, it is not fatal.272 The SLC has shown that it
uncovered relevant documents and inquired into whether the 2018 Transactions
advisors were conflicted. The SLC’s counsel represented to the court that the report
did not address the purported conflicts because “[the SLC] did not identify [them]
as a weakness in the process.”273 There is no issue of material fact putting in doubt
the SLC’s good faith investigation of these issues.
A comparison to Sutherland v. Sutherland is instructive.274 There, a special
litigation committee’s report lacked any mention of suspicious payments, even
270
Cazalot Interview Mem. 10 n.11.
271
Scott Interview Mem. 2 (stating that Scott told the SLC that she “was not involved in
any representations of GE or its affiliates” after “a minor role” in a 2014 GE transaction);
Harbour Interview Mem. 2 (stating that Harbour told the SLC that he “was not aware of
Lazard’s prior relationships, if any, with GE”).
272
Notably, the SLC report dedicated a full section to weaknesses in the negotiation
process of the 2018 Transactions. SLC Rep. 237-53.
273
Oral Arg. Tr. 111.
274
Sutherland II, 958 A.2d at 235; see also Sutherland v. Sutherland, 968 A.2d 1027, 1030
(Del. Ch. 2008) [hereinafter “Sutherland III”] (denying a motion for reargument of the
Sutherland I decision).
56
though “they represented the very sort of suspected activity that motivated [the
plaintiff] to file the complaint and were the largest identified payments by the
companies to any of the individual defendants.”275 The SLC omitted this
problematic information while “includ[ing] exculpatory information of a similar
character.”276 The plaintiff only learned about the payments after she “won a
hard-fought motion to compel.”277 The court concluded that this seemingly
intentional omission, which went “to the very heart” of the complaint, cast doubt on
whether the single-member committee had conducted a good faith investigation.278
Here, by contrast, there is no reason to suspect that the SLC concealed
evidence. The SLC report details flaws in the transaction process. The SLC
voluntarily produced documents discussing its investigation into potential conflicts.
Even if the plaintiffs were right that the SLC’s assessment of these issues was
inadequate, the outcome of the present motion would not change. The independence
of the negotiating parties’ advisors would be a single factor in the holistic analysis
of whether the 2018 Transactions were entirely fair.279 As discussed below, the SLC
275
Sutherland III, 968 A.2d at 1030.
276
Sutherland II, 958 A.2d at 243.
277
Sutherland III, 968 A.2d at 1030.
278
Id.; see Sutherland II, 958 A.2d at 243.
279
These purported conflicts were not mentioned in the Complaint or the plaintiffs’
December 17, 2019 presentation to the SLC.
57
concluded—after weighing the process strengths and weaknesses—that the court
would likely find the 2018 Transactions resulted from a fair process. The fact that
an advisor had done work for GE would not make that conclusion unreasonable.280
ii. Information Sources
The plaintiffs also critique the SLC’s document collection and review efforts.
The SLC reviewed documents from numerous sources that covered a range of
relevant topics.281 Despite this, the plaintiffs fault the SLC for not obtaining text
messages from any custodian or emails from Mulva, a GE designee to the Board.
280
The financial advisors primarily worked on the Capital Market Transactions, which
were “largely at market, where they’re not all that reliant on the bankers to get the number
right.” SLC Rep. 112; see also id. at 75; SLC Rep. 273-83. Similarly, the negotiations
over the Master Agreement Framework were “the domain of specialized industry experts”
rather than lawyers or bankers. Oral Arg. Tr. 113; see also SLC Rep. 85-127, 235-36; see
infra Section II.A.3.a (discussing the presence of reasonable bases for the SLC’s
conclusions).
281
These topics included: (1) the original Master Agreement Framework; (2) GE’s
November 2017 announcement, and Baker Hughes’s reaction to that announcement;
(3) GE’s strategic review of its Baker Hughes stake; (4) Baker Hughes’s ordinary course
stock repurchase program; (5) Baker Hughes’s negotiation preparations, including the
analyses Baker Hughes management, J.P. Morgan, and Lazard performed; (6) Baker
Hughes’s proposals to and negotiations with GE and its subsidiaries related to the 2018
Transactions; (7) GE’s negotiation of the 2018 Transactions; (8) the Conflicts Committee’s
actions in connection with Baker Hughes’s ordinary course stock repurchase program and
the 2018 Transactions; (9) the Baker Hughes Board’s actions in connection with Baker
Hughes’s ordinary course stock repurchase program and the 2018 Transactions; (10) GE’s
financial position during November 2017 to November 2018, including market
commentary; and (11) the market’s reaction to the 2018 Transactions. SLC Rep. 177-78.
The document sources included: (1) Conflicts Committee members; (2) Lazard;
(3) Simpson Thacher; (4) current and former Baker Hughes directors; (5) current and
former Baker Hughes officers and employees; (6) J.P. Morgan; (7) Davis Polk; (8) current
58
The SLC initially requested text messages from certain custodians but opted
not to insist on their production.282 In reaching that decision, the SLC considered
the extensive record available from emails and other electronic documents, and
representations that certain custodians did not use text messages for business
communications.283 The SLC weighed the likelihood that substantive text messages
existed against the distraction, burden, and delay of collecting data from multiple
custodians’ personal devices.284 Given the substantial record that it reviewed, there
are no grounds to conclude that the SLC’s reasoned choice not to collect text
messages creates a genuine dispute about the completeness of its investigation.
The SLC’s decision not to collect Mulva’s email is similarly inconsequential.
Mulva did not produce emails to the SLC because his general practice “going back
30 years” is to delete them soon after receipt.285 He did not change this practice in
response to a litigation hold notice.286 The SLC considered numerous factors in
deciding how to respond, including the availability of documents from other GE
and former GE directors, officers, and employees; (9) Morgan Stanley, GE’s financial
advisor; and (10) Shearman & Sterling LLP, GE’s legal advisor. Id. at 177.
282
The SLC collected and produced Ebel’s text messages.
283
Id. at 180.
284
Id.
285
Id. at 179.
286
Id.
59
Board designees and GE’s agreement to produce internal communications.287 This
approach was reasonable.288
3. The SLC Reached Reasonable Conclusions.
The third inquiry under Zapata’s first step is whether the special litigation
committee had reasonable grounds for its conclusions.289 “In reviewing the
[committee’s] conclusions, the Court does not take an independent look at the merits
of lawsuit.”290 A reasonable conclusion is not necessarily an objectively correct
one.291 The court also need not assess every subsidiary conclusion made by a special
litigation committee.292 Instead, the court looks to whether “the result as a whole is
287
Id. at 179-80.
288
See Kikis, C.A. No. 9654-CB, at 102-03 (rejecting quibbles with SLC’s investigative
approach); Katell, 1995 WL 376952, at *9 (same); Kaplan, 484 A.2d at 515-16 (same);
Carlton, 1997 WL 305829, at *8 n.38 (addressing the SLC’s inability to interview certain
potential witnesses); Ironworkers Dist. Council of Phila. & Vicinity Ret. & Pension Plan
v. Andreotti, 2015 WL 2270673, at *26 n.255 (Del. Ch. May 8, 2015) (concluding that a
demand review committee’s investigation was reasonable though the committee did not
interview current and former CEOs), aff’d, 132 A.3d 748 (Del. 2016).
289
See Kindt II, 2003 WL 21453879, at *3 (citing Zapata, 430 A.2d at 788).
290
Katell, 1995 WL 376952, at *12; see also London, 2010 WL 877528, at *18 (explaining
that the court must “avoid considering the merits of plaintiffs’ claims”).
291
See Carlton, 1997 WL 305829, at *16 (concluding that the SLC’s determinations were
“one reasonable interpretation of the record” and explaining that “[w]hether they were
correct is not in issue at this stage”).
292
See id. at *20; Kikis, C.A. No. 9654-CB, at 98, 107.
60
reasonable and the product of independent, informed action of directors acting in
good faith.”293
To meet its burden, a special litigation committee “must show that it correctly
understood the law relevant to the case” and reasonably applied the law to the
facts.294 Here, the SLC appropriately identified that entire fairness review would
apply to the plaintiffs’ claims.295 The SLC also reasonably determined that the
burden of proof would shift to the plaintiffs because of the Conflicts Committee’s
role in negotiating the 2018 Transactions.296
The SLC concluded that process leading to the 2018 Transactions “proceeded
fairly and pursuant to a process that simulated arms’-length bargaining.”297 The SLC
also concluded that “the economic terms of the 2018 Transactions fell within the
293
Carlton, 1997 WL 305829, at *20.
294
London, 2010 WL 877528, at *17; see also Katell, 1995 WL 376952, at *12 (“The
Special Committee has to demonstrate the reasonableness of the bases of its conclusions
with undisputed facts. This requires the Special Committee to show that Plaintiffs do not
dispute the existence of information or evidence relied on by the Special Committee, but it
does not require the Special Committee to show that the parties do not dispute material
facts regarding Plaintiffs’ allegations. The Special Committee can use undisputed
information to form its own conclusions as to factual disputes concerning Plaintiffs’
allegations.”).
295
SLC Rep. 223-25; see MTD Ruling 101.
296
SLC Rep. 221-22; see MTD Ruling 102 (noting the possible application of Kahn, 638
A.2d at 1117).
297
SLC Rep. 226; see id. at 226-53.
61
range of fairness.”298 It determined that “[b]ased on the evidence it reviewed, . . .
the ‘process’ and price’ of the 2018 Transactions mutually reenforced the SLC’s
conclusions . . . that each of [the challenged] transactions likely fell within the range
of fairness.”299 The SLC therefore explained that “Baker Hughes could not
reasonably expect to recover meaningful damages or settlement payments from the
prosecution of Plaintiffs’ claims.”300 The SLC “determined in the exercise of its
business judgment that terminating the [Action] with prejudice would best serve the
interests of [Baker Hughes] and its stockholders.”301
The plaintiffs take a scattershot approach to challenging the reasonableness of
these conclusions.302 They raise, by my count, at least twelve separate criticisms
that largely amount to disagreements with the SLC’s analyses.303 The first step of
Zapata is not, however, an opportunity for the plaintiffs to litigate the merits of their
298
Id. at 289; see id. at 253-89.
299
Id. at 289-90.
300
Id. at 319.
301
Id. at 320.
302
See Kaplan, 484 A.2d at 511 (describing the analytical difficulties presented when
plaintiffs “pull out all stops” and “throw every possible argument imaginable into the
controversy, no matter how minor or picayune”); see also Auriga Cap. Corp. v. Gatz
Props., 40 A.3d 839, 882 n.184 (Del. Ch. 2012) (“[I]t is more time-consuming to clean up
the pizza thrown at a wall than it is to throw it.”), aff’d, 59 A.3d 1206 (Del. 2012).
303
See Kaplan, 484 A.2d at 519 (“[I]t is the Special Litigation Committee which is under
examination at this first-step stage of the proceedings, and not the merits of the plaintiff’s
cause of action.”).
62
claims. “[T]he question is not whether there were disputed issues of material fact
about the merits-based issues raised” by the plaintiffs.304 Rather, the relevant inquiry
is “whether disputed issues of material fact were raised about . . . the reasonableness
of the SLC’s conclusions.”305
a. Fair Process
The SLC evaluated the strengths and weaknesses of the 2018 Transactions
process. Strengths included the leverage Baker Hughes held over GE while the
Lockup remained, Baker Hughes’s proactive and prepared approach to the
negotiations, the Conflicts Committee’s assertiveness, and the industry expertise of
the Baker Hughes negotiators.306 Flaws included the negotiators’ status as legacy
GE employees, the potential disclosure of Baker Hughes confidential information to
GE, GE’s potential non-disclosure of information to Baker Hughes, and rumors that
GE might fire Simonelli.307 The SLC viewed the process as “imperfect” but
concluded that it was fair.308
304
Diep, 280 A.3d at 155.
305
Id.
306
SLC Rep. 226-37.
307
Id. at 237-52.
308
Id. at 252-53; see In re BGC P’rs, Inc. Deriv. Litig., 2022 WL 3581641, at *18 (Del.
Ch. Aug. 19, 2022) (holding that an “imperfect” process was fair).
63
The plaintiffs raise multiple objections to this conclusion, most of which ask
the court to substitute the plaintiffs’ judgment for that of the SLC.309 Though it
would suffice to say that a debate on the merits is inappropriate under Zapata, I
briefly consider each of the plaintiffs’ arguments for the sake of completeness.310
None raises a genuine issue of material fact about the reasonable bases supporting
the SLC’s conclusion that the process was fair.
Baker Hughes’s Negotiating Leverage. The plaintiffs aver that the SLC
unreasonably ”concluded that [Baker Hughes] lacked meaningful negotiating
leverage over GE.”311 The SLC, however, found that Baker Hughes had leverage.312
The SLC report recounts Baker Hughes and the Conflicts Committee’s belief that
the Lockup gave Baker Hughes the upper hand.313 The SLC described this leverage
as a “melting ice cube” that would disappear once the Lockup expired in July
309
Pls.’ Answering Br. 74-80. Among other contentions, the plaintiffs make a
one-sentence argument that the SLC’s conclusion is unreasonable because it “utterly failed
to adequately investigate the independence of the advisors on the Transactions.” Id. at 76.
I have already considered and rejected this argument. See supra Section II.A.2.b.i.
310
See Kikis, C.A. No. 9654-CB, at 96-97.
311
Pls.’ Answering Br. 76.
312
SLC Rep. 81-85, 227.
313
Id.
64
2019.314 Thus, according to the SLC, Baker Hughes was incentivized to act
promptly.315
Beattie’s Actions. The SLC identified the Conflicts Committee’s
assertiveness as a strength of the process leading to the 2018 Transactions.316 The
SLC devoted a section of its report to assessing whether GE attempted to undermine
the Conflicts Committee.317 It found there was “no evidence that GE threatened the
Conflicts Committee, attempted to remove the Conflicts Committee’s authority, or
attempted to circumvent the Conflicts Committee’s veto over the 2018
Transactions.”318
The plaintiffs disagree. They contend that the SLC ignored two emails
suggesting that Beattie (a GE-designated Board member) was actively involved in
314
Id. at 83-85, 228.
315
Id. The plaintiffs argue that a “smoking gun” document undermines the SLC’s
conclusion. Pls.’ Answering Br. 76. But the plaintiffs misrepresent and selectively quote
from the relevant document. Read in full, the document recognizes that the Conflicts
Committee’s leverage would end in July 2019. It states: “OPEN QUESTION: DOESN’T
THE CONFLICTS COMMITTEE HOLD ALL OF THE CARDS ANYWAY? IE. CAN’T
THEY DISALLOW ANY SELLDOWN OF GE HOLDINGS UNTIL JULY 2019?” Pls.’
Answering Br. Ex. 1 at -000; see Pls.’ Answering Br. 76 (omitting the “OPEN
QUESTION” text in suggesting that the statement was a definitive conclusion).
316
SLC Rep. 231-34. The SLC report describes the Conflicts Committee members as
proactive and assertive against GE during negotiations. Id. at 38-41, 44-51, 54-58, 78, 134,
229-31, 274-75.
317
Id. at 218-21.
318
Id. at 220.
65
the process and sought to limit the Conflicts Committee’s involvement.319
Reasonable minds may differ about which documents the SLC should have relied
on.320 Yet neither document indicates that the SLC’s conclusion was
unreasonable.321
Simonelli’s Relationship with GE. The SLC report identified Baker Hughes’s
negotiators—namely, CEO Simonelli and CFO Worrell—as legacy GE
employees.322 The SLC considered whether these roles created a weakness in the
process, but “identified no evidence that this was the case.”323 The SLC found that
these negotiators “did not pull their punches with GE negotiations” and that they
were incentivized to push for Baker Hughes’s best interests because they were
compensated based on Baker Hughes’s performance.324
319
Pls.’ Answering Br. 77.
320
See Carlton, 1997 WL 305829, at *20 (“While reasonable minds might differ over any
number of decisions . . . I conclude that the result as a whole is reasonable and the product
of independent, informed action of directors acting in good faith.”).
321
In the first email, Beattie wrote that he would bring the Conflicts Committee “into the
discussion so they feel part of it.” Pls.’ Answering Br. Ex. 54 at -911. In the second email,
Beattie expressed his desire to avoid “negotiation.” Pls.’ Answering Br. Ex. 4 at -913.
Beattie’s statement to the SLC that “his role was limited to connecting key decision-makers
so that they could work through roadblocks” is consistent with these documents. SLC
Rep. 81; see Pls.’ Answering Br. Ex. 12 (Beattie Interview Mem.) 6-9 (same).
322
SLC Rep. 237-38.
323
Id. at 238.
324
Id.; see id at 78-79.
66
The plaintiffs refute this assessment, citing evidence that Simonelli worked
closely with GE, Miller, and Beattie on the 2018 Transactions.325 It is unsurprising
that Simonelli communicated with his counterparty. In all, the plaintiffs’ arguments
amount to a dispute over how the SLC construed and weighed the available
evidence, which does not create a genuine issue of fact as to the reasonableness of
the SLC’s conclusion.326
GE’s Disclosures to Baker Hughes. The plaintiffs question the SLC’s
conclusion that the process was fair despite GE’s failure to disclose material
information to Baker Hughes.327 The SLC report unequivocally states that the SLC
“considered whether GE wrongfully withheld any information from [Baker
Hughes].”328 The report addresses two specific non-disclosures that the SLC
325
Pls.’ Answering Br. 23-30 (citing Pls.’ Answering Br. Exs. 4, 57, 65-66, 69); id. at 77-
78 (citing Pls.’ Answering Br. Exs. 8-9).
326
See SLC’s Reply Br. 39-42 (discussing the evidence on which the SLC relied); SLC
Rep. 77-78, 109, 136, 235-36, 238-39.
The plaintiffs also maintain that Simonelli’s personal relationships with Beattie and
Rice impaired his impartiality during negotiations. Pls.’ Answering Br. 78-79. The SLC
investigated this issue, and its conclusion is supported by the evidence summarized in the
interview memoranda. See Pls.’ Answering Br. Ex. 6 (Rice Interview Mem.) 6 (explaining
that Simonelli “left no friends” at GE and drove a “very hard bargain.”), Pls.’ Answering
Br. Ex. 8 (Simonelli Interview Mem.) 2-3 (describing Simonelli’s relationships with
Beattie and Rice).
327
Pls.’ Answering Br. 79. The plaintiffs focus on negative information about GE Power’s
performance in the fall of 2018. Id. at 26, 79.
328
SLC Rep. 245.
67
identified.329 It also explains that “Delaware law would likely not require
negotiating counterparties to disclose potential weaknesses in their financial position
during arms’-length bargaining.”330
Worrell’s Job Security. Another potential process flaw considered by the SLC
involved rumors that GE might fire Simonelli.331 The SLC determined this issue did
not affect the fairness of the process.332
The plaintiffs criticize the SLC for not also addressing whether GE considered
firing Baker Hughes CFO Worrell, who was involved in negotiating the 2018
Transactions.333 This objection does not call into question the reasonableness of the
SLC’s conclusion. The SLC asked Worrell whether GE pressured him in connection
with the 2018 Transactions; he confirmed that GE did not.334 The SLC also observed
that GE lacked the power to unilaterally fire Baker Hughes officers.335
329
Id. at 245-47.
330
Id. at 247; see id. at 247 n.876 (citing authorities).
331
Id. at 249-52.
332
Id.
333
Pls.’ Answering Br. 79-80.
334
Pls.’ Answering Br. Ex. 49 (Worrell Interview Mem.) 7 & n.6.
335
SLC Rep. 251.
68
b. Fair Price
The SLC analyzed the economic terms of the 2018 Transactions with the
assistance of its advisors. Its assessment included specific aspects of the overall
deal—such as the AGT components of the amendments to the Master Agreement
Framework, the HDGT Supply Agreement, the Secondary Offering, and the
Repurchase. The SLC concluded that the terms as a whole fell within the range of
fairness.336
The plaintiffs contend that this conclusion “suffers from multiple flaws,”
mostly due to purported shortcomings in Brattle’s analysis.337 Their objections
ignore that the SLC was entitled to rely on Brattle and to evaluate Brattle’s analyses
with advice from the SLC’s counsel. The plaintiffs’ arguments are also unsupported,
and none raise a genuine issue of material fact about the reasonableness of the SLC’s
conclusion that the price was fair.
The SLC’s Frame of Reference. The SLC determined that the appropriate
frame of reference for its analysis was a comparison between the economic terms of
the 2018 Transactions and those Baker Hughes “would likely have received in an
arms’-length negotiation with GE (or another turbine supplier) after the Trigger Date
336
See id. at 253-89.
337
Pls.’ Answering Br. 80.
69
occurred.”338 The plaintiffs insist that the SLC should have compared the terms of
the amended Master Agreement Framework to the original Master Agreement
Framework.339
Irrespective of its accuracy, the SLC’s approach was reasonable. The SLC
report explained that parts of the original Master Agreement Framework would
expire at or near the Trigger Date. “After the Lockup expired on July 3, 2019,
[Baker Hughes] could not prevent the Trigger Date.”340 The SLC also interviewed
multiple witnesses who supported the SLC’s frame of reference.341
The plaintiffs fault this approach because the SLC did not identify any
contemporaneous model from 2018 that adopted it, other than a Boston Consulting
Group report commissioned by GE “in support of GE Aviation’s proposed [AGT]
pricing.”342 But the SLC merely considered the Boston Consulting Group report to
338
SLC Rep. 256 (emphasis in original).
339
Pls.’ Answering Br. 82; cf. SLC Rep. 253-58, 262. The SLC and Brattle also considered
the terms Baker Hughes might receive from non-GE suppliers. See SLC Rep. 87-88, 115,
256 58, 267-68, 287-88; Hutchings Dep. 175, 275-76. “[W]itnesses uniformly stated that
[Baker Hughes] could not have changed turbine manufacturers in the short term without
exposing itself to significant risk.” SLC Rep. 267.
340
SLC Rep. 255.
341
Id.
342
Id. at 104, 257-58; see also Pls.’ Answering Br. Ex. 3.
70
be “helpful” and accounted for its potential biases.343 According to the SLC report,
the AGT pricing margins Baker Hughes negotiated in the Master Agreement
Framework amendments were “significantly lower than the margins BCG identified
as ‘market’ or ‘more optimal [for GE].’”344
The SLC further considered a contemporaneous internal analysis that Baker
Hughes used to evaluate a hypothetical “no deal” scenario, in which Baker Hughes
could not extend the supply agreements for AGTs and HDGTs before the Master
Agreement Framework terminated.345 This scenario was “pretty close” to the SLC’s
frame of reference.346 Compared to the projected financial effect of the Master
Agreement Framework amendments, the “no deal” scenario “reflected substantially
lower financial performance for [Baker Hughes].”347
343
SLC Rep. 258, 264-65; see Pls.’ Answering Br. Ex. 7 (Godsman Interview Mem.) 5 &
n.5 (GE Aviation executive describing his view that the Boston Consulting Group report
was unfavorable to GE Aviation in some respects).
344
That is, the AGT pricing margins in the 2018 Transactions were more favorable to Baker
Hughes than those margins identified as “market” or “more optimal” in the Boston
Consulting Group report. SLC Rep. 264-65.
345
See id. at 91-93, 256-58; Jannis Interview Mem. 8.
346
Hutchings Dep. 312. The “no deal” scenario was arguably optimistic compared to the
SLC’s frame of reference because the former assumed that Baker Hughes still had free,
total access to GE intellectual property. In other words, if the 2018 Transactions compared
favorably to the “no deal” scenario, they would also compare favorably to the SLC’s frame
of reference. See SLC Rep. 257.
347
Id.
71
Brattle’s “Bifurcated” Analysis. Brattle tasked different experts with
addressing the Capital Markets Transactions and the amendments to the Master
Agreement Framework.348 The plaintiffs submit that this approach meant Brattle’s
economic analysis of the amendments did not consider Baker Hughes’s leverage in
negotiating the Capital Markets Transactions.349 The record shows, however, that
Brattle considered the negotiating parties’ relative leverage.350 The SLC reasonably
relied on each Brattle expert and drew conclusions about Baker Hughes’s leverage
based on the record as a whole.351
Damages from the Capital Markets Transactions. The SLC report explains
that Baker Hughes prevailed on all negotiating points affecting the Capital Markets
Transactions, including the key issue of the Repurchase price.352 The SLC
determined that the Repurchase occurred at a favorable time because a drop in Baker
Hughes’s stock price lowered its repurchase price and limited the amount of stock
348
Hutchings Dep. 277-81, 295-96; Smith Dep. 194-95.
349
Pls.’ Answering Br. 80.
350
See Hutchings Dep. 276-80; Ebel Dep. 131-33; SLC Rep. 112, 269, 273-75, 289. The
minutes of the penultimate SLC meeting state that Brattle representatives “summarized
their analyses of the amendments to the Master Agreement Framework, including their
analyses of . . . evidence concerning the parties’ relative leverage in negotiations.” Pls.’
Answering Br. Ex. 109 at 1.
351
See SLC Rep. 112, 269.
352
Id. at 132-39, 273-83; see also Smith Dep. 196-97.
72
GE would sell in the Secondary Public Offering.353 The Repurchase also minimized
downward pressure on Baker Hughes stock from the Secondary Public Offering.354
The SLC further found that the Capital Markets Transactions worked toward
addressing the GE overhang on Baker Hughes stock, and that GE’s liquidity needs
enabled Baker Hughes to obtain beneficial amendments to the Master Agreement
Framework.355
Despite this record, the plaintiffs contend that the SLC’s economic analysis
lacks a reasonable foundation because Brattle did not perform a damages analysis of
the Capital Markets Transactions.356 Brattle’s expert testified that it “did not
quantify damages because [Brattle] did not come to a financial or economic opinion
that there were damages.”357 The plaintiffs’ disagreement with this opinion does not
amount to a meritorious challenge to the SLC’s conclusion.
c. The Decision to Terminate the Action
Because it determined that the 2018 Transactions fell within the range of
fairness, the SLC concluded the derivative claims asserted against GE and the
353
SLC Rep. 132, 149-50, 279 n.978.
354
Id. at 129-30; Smith Dep. 220-22.
355
SLC Rep. 34-35, 42-44, 129-30, 133-36, 269, 275-79.
356
Pls.’ Answering Br. 80-81.
357
Smith Dep. 204; see also id. at 209-11.
73
remaining director defendants “were unlikely to have value” as a litigation asset of
Baker Hughes.358 The SLC also considered the monetary, operational, and
reputational costs associated with continued litigation.359 On balance, the SLC
determined that terminating the Action would best serve Baker Hughes and its
stockholders.360
The plaintiffs insist that this conclusion was unreasonable because the SLC
did not value the plaintiffs’ claims.361 There is no requirement that an SLC conduct
an expected-value calculation.362 Even if there were some potential for a positive
monetary recovery, the SLC was not obliged to pursue the litigation if its good faith
judgment indicated that doing so was not best for the corporation.363 “The whole
point of recognizing the board’s authority and responsibility in this context is to
358
SLC Rep. 290, 292, 305-06, 319; see also id. at 226, 319.
359
Id. at 316-19; see supra at 23 (describing factors considered by the SLC).
360
Id. at 320; see id. at 316-20.
361
Pls.’ Answering Br. 69-70.
362
If anything, the SLC would have valued the recoverable monetary damages to be zero
because it concluded that the 2018 Transactions likely fell within the range of fairness. See
SLC Rep. 290, 305-06, 319-20; Smith Dep. 204, 209-11.
363
Carlton, 1997 WL 305829, at *11 (“[T]he SLC is not required to attempt to maximize
returns from the lawsuit.”). Parties often settle entire fairness cases after the pleadings
stage if defense costs exceed a settlement payment.
74
allow the board’s judgment concerning what is in the long-run best interest of the
corporation to be acted upon.”364
B. The Second Zapata Step
“Proceeding to the second step of the Zapata analysis is wholly within the
discretion of the court.”365 If the court chooses to do so, it applies “its own business
judgment to the facts to determine whether the corporation’s best interests would be
served by dismissing the suit.”366 “The second step is intended to thwart instances
where corporate actions meet the criteria of [Zapata’s] step one, but the result does
not appear to satisfy its spirit, or where corporate actions would simply prematurely
terminate a stockholder grievance deserving of further consideration in the
corporation’s interest.”367
I have carefully reviewed the evidentiary record and, after an exhaustive
analysis, determined that the SLC has met its burden under step one of Zapata. The
SLC has demonstrated its independence, that its process was thorough and unbiased,
364
Id. (emphasis in original).
365
Kaplan, 499 A.2d at 1192; see also Diep, 280 A.3d at 158.
366
London, 2010 WL 877528, at *11.
367
Kaplan, 484 A.2d at 508; see Biondi, 820 A.2d at 1164 n.40 (“Although this is said to
be an oxymoronic judicial exercise of ‘business judgment,’ its purpose is to provide a
safeguard against the danger that the difficult-to-detect influence of fellow-feeling among
directors (i.e., so-called ‘structural bias’) does not cause cessation of meritorious litigation
valuable to the company.”).
75
and that its conclusions rest on reasonable bases. I have no reason to believe that
termination of the litigation is “‘irrational’ or ‘egregious’ or some other extreme
word.”368 Accordingly, I decline to conduct an independent evaluation of the
merits.369
III. CONCLUSION
The SLC has met its burden of proof. The SLC’s motion to terminate the
Action is therefore granted.
368
Carlton, 1997 WL 305829, at *2 (describing the “conceptual[] difficult[y]” of Zapata’s
second step as “designed to offer protection for cases in which, while the court could not
consciously determine on the first leg of the analysis that there was no want of
independence or good faith, it nevertheless ‘felt’ that the result reached” was unsound); see
also Kindt II, 2003 WL 21453879, at *5.
369
See Kikis, C.A. No. 9654-CB, at 106-07 (explaining, in an entire fairness action, that
the court was “not . . . compelled” to conduct a Zapata step two analysis after concluding
the special litigation committee satisfied step one).
76