Corporate Property Associates v. CHR Holding Corp., C.A. No. 3231-VCS (Del. Ch. April 10, 2008)
Plaintiffs Corporate Property Associates held three warrants (the “Warrants”) in defendant CHR Holding Corporation, a wholly owned subsidiary of defendant Platinum. The warrants allowed Corporate Property Associates to purchase up to 50,000 shares of CHR Holding Corporate Stock (150,000 in total) at an exercise price of $10 per share. The warrants did not require CHR to give Corporate Property Associates advance notice of cash dividends and did not protect the value of the warrants from being diluted through the payment of cash dividends. Therefore, CHR and Platinum both had the ability and the incentive to reduce the value of Corporate Property Associates’ warrants by issuing large cash dividends from CHR to Platinum. On October 9, 2006, CHR paid a $45 million cash dividend (the “First Dividend”) to Platinum, its sole stockholder, without giving prior notice to Corporate Property Associates. Corporate Property Associates demanded a right to participate in that dividend, and it sent a questionnaire to CHR seeking information for the purpose of valuing the Warrants. One question asked CHR to “[d]iscuss any significant changes/developments related to the business over the course of the past six months.” CHR responded to that question, but it did not discuss any planned future dividends. Less than three weeks following its response to the questionnaire, CHR issued another dividend to Platinum for $143 million (the “Second Dividend”). According to Corporate Property Associates, if it had known about the Second Dividend before the May 17 record date for that dividend, it would have exercised the Warrants and earned $3,225,564. Less than two months after the Second Dividend, CHR notified Corporate Property Associates that it had entered into a Plan of Merger pursuant to which CHR would be sold for $606,600,000 in cash. It also informed Corporate Property Associates that CHR was exercising certain “drag along” rights contained in the warrants to require Corporate Property Associates to exercise the Warrants and participate in the merger. Corporate Property Associates claimed that had the First and Second Dividends not been issued, it would have received materially greater consideration in the merger. Corporate Property Associates brought suit alleging fraud, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty. Defendants moved to dismiss all of the claims. The Court dismissed the breach of fiduciary duty claim, noting that directors do not owe fiduciary duties to warrant holders. The Court also dismissed the claim for breach of the implied covenant of good faith and fair dealing. Regarding the fraud claim, the Court held that while the contract did not require the advance disclosure of the dividends, the viability of the claim depended on whether CHR had a duty to disclose the information about the Second Dividend due to the requirement to make full and fair disclosure as to matters about which one undertakes to speak. CHR’s response the Corporate Property Associates’ questionnaire was misleadingly incomplete because it did not discuss the refinancing that was being finalized and the Second Dividend. Having chosen to speak, CHR was required to make a full and fair disclosure. CHR argued that Second Dividend was not finalized and that the questionnaire was purely backward-looking. The Court noted that discovery might reveal, e.g., evidence to show that CHR reasonably believed the questionnaire was entirely backward-looking. The Court held, however, that at this stage of the proceedings, there is a reasonable inference that CHR was in the final steps of implementing a large dividend, knew that Corporate Property Associates would exercise its Warrants promptly if told of that development, and consciously decided to omit that development from its response to the questionnaire.