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Robotti & Co., LLC v. Liddell, C.A. No. 3128-VCN (Del. Ch. Jan. 14, 2010)

January 14, 2010

In this memorandum opinion, Vice Chancellor Noble considered certain direct and derivative claims relating to a stockholder rights offering and the triggering of the anti-dilution provisions of options and warrants. The Court dismissed such claims for failure to state a claim upon which relief could be granted and failure to plead demand excusal under Chancery Court Rules 12(b)(6) and 23.1, respectively.

Plaintiff Robotti and Company, LLC (“Robotti”) brought a class and derivative action challenging a stockholder rights offering by nominal defendant Gulfport Energy Corporation (“Gulfport”). The stated purpose of the offering was to raise capital to fund a proposed drilling program and repay an outstanding balance on a line of credit. The offering permitted current stockholders to purchase additional shares, and because the price of the offering was below the then-market value of Gulfport shares, it triggered an anti-dilution provision permitting holders of outstanding options and warrants to exercise the options and warrants at reduced prices per share. Plaintiff alleged that the directors, as option holders, breached their fiduciary duty of loyalty by engaging in self-dealing and obtaining a personal financial benefit, resulting in a dilution in the value of the company and therefore the public stockholders’ shares.

Because plaintiff brought both direct and derivative claims, the Court analyzed the claims under Gentile. The Delaware Supreme Court held in Gentile that claims were both direct and derivative where a transaction resulting in a stock overpayment to the controlling stockholder caused harm to both the corporation (by exchanging corporate property for less than it was worth) and to public stockholders (by having economic value and voting power “ ‘redistributed’ to the controlling shareholder out of the minority interest”). In the present case, the Court noted the similar dual nature of the plaintiff’s claims, but found that plaintiff had not adequately pled self-dealing by the defendant directors. Although plaintiff alleged that the anti-dilution provision that was triggered by the offering permitted the directors to increase their equity position in the corporation, the provision merely permitted the directors to maintain the same ownership percentage they had before the offering, at a price set by their pre-offering option agreements. Therefore, the directors received no personal benefit that did not also accrue to the public stockholders.

As to the derivative claim, the Court found that the plaintiff’s allegations of bad faith on the part of the board in implementing the offering simply did not meet the high standard set by Lyondell. The record showed that the board met several times to discuss the offering and considered alternative methods of obtaining capital, and therefore “did not completely abdicate their fiduciary responsibilities.” Because plaintiff failed to plead that the defendant directors either received a personal benefit or consciously disregarded their duties, the Court held the decision to initiate the offering was protected by the business judgment rule. Additionally, plaintiff failed to meet the requirements of Rule 23.1 for demand excusal because plaintiff did not allege facts sufficient to raise a doubt that a majority of the board was independent and disinterested.

Lastly, the Court noted in a lengthy footnote that plaintiff likely had a claim that the defendant directors were dominated by Gulfport’s controlling stockholder, but neglected to plead such a claim. The effect of the offering on the options and warrants was quite different, but plaintiff failed to analyze the effect of the offering on the warrants held by the controlling stockholder. While the options held by the defendant directors only permitted them to buy additional shares to maintain their ownership percentage in Gulfport, the warrants permitted the controlling stockholder to increase its ownership percentage significantly. Additionally, the offering perated so that the lower the price set by the offering, the more shares the controlling stockholder could acquire pursuant to the warrants. The Court stated that those alleged facts may have supported a claim for breach of the duty of loyalty against the directors for being beholden to, and acting for, the controlling stockholder, but plaintiff had not properly brought such a claim before the Court. Accordingly, the Court dismissed all claims.

The full opinion is available here