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Caspian Select Credit Master Fund Ltd. v. Gohl, C.A. No. 10244-VCN (Del. Ch. Sept. 28, 2015) (Noble, V.C.)

September 28, 2015

In this memorandum opinion, the Court of Chancery granted in part and denied in part a motion to dismiss direct and derivative claims against the company’s board and controlling stockholders for breaches of fiduciary duty based on amendments to the terms of a loan between the controlling stockholders and the company.  Specifically, the Court dismissed the plaintiffs’ direct claims for breach of fiduciary duty, holding that the claims were exclusively derivative in nature.  The Court upheld, however, the derivative claims against the controlling stockholders, most of the directors, and the Company’s CEO.  The Court also upheld various claims for breach of a stockholders agreement and unjust enrichment.

In 2009, Key Plastics Corporation (“Key Plastics” or the “Company”) entered into a term loan (the “Term Loan”) with Wayzata Opportunities Fund II, L.P. (“Wayzata Opportunities”) pursuant to a pre-packaged bankruptcy plan.  Wayzata Opportunities, along with Wayzata Opportunities Fund Offshore II, L.P. (“Wayzata Offshore,” and collectively with Wayzata Opportunities, the “Wayzata Funds”), owned over 90% of the Company’s stock, and Wayzata Investment Partners LLC (“Wayzata Partners”), along with director Christopher Keenan (collectively with the Wayzata Funds and Wayzata Partners, the “Wayzata Defendants”) managed the Wayzata Funds.  Over several years, Wayzata Partners directed Wayzata Opportunities to amend the Term Loan to extend its maturity date, extend its term, increase the loan commitment, and permit the Company to pay interest in-kind. 

The plaintiffs, minority stockholders of the Company, filed suit to challenge these amendments.  Specifically, the plaintiffs’ first three counts asserted direct claims for breach of fiduciary duty and aiding and abetting based on wrongful dilution of the value of the plaintiffs’ stock.  The plaintiffs also brought one derivative claim for breach of fiduciary duty against the Wayzata Defendants for participating in the transaction and another derivative breach of fiduciary duty claim against the Company’s board, CEO, and CFO (collectively, the “Individual Defendants”) for approving the Term Loan amendments.  Finally, the plaintiffs asserted claims for aiding and abetting against Wayzata Partners and the Company’s CFO, breach of two provisions of a stockholders agreement against the Wayzata Defendants and the Company, and unjust enrichment against the Wayzata Defendants.

First, the Court dismissed the plaintiffs’ direct claims for breach of fiduciary duty and aiding and abetting, applying the general rule that claims for wrongful equity dilution are exclusively derivative in nature.  The Court evaluated an exception to this rule, wherein the controlling stockholder transacts with the corporation in a manner that increases the percentage ownership of the controlling stockholder while decreasing the percentage ownership of the minority stockholders.  The claim did not fall within this exception, however, because the payments of interest in-kind did not affect the proportional ownership between the stockholders.

Second, the Court upheld the derivative claims for breach of fiduciary duty against most of the defendants.  The Court first evaluated whether demand was excused.  Applying Aronson v. Lewis, the Court found that demand was excused because three of the five directors on the board were not independent or disinterested.  One of the directors was a principal at Wayzata Partners and stood to benefit from the transaction, and two other directors had past business relationships with Wayzata Partners. 

The Court then upheld the plaintiffs’ derivative claim against the Wayzata Defendants for entering into the Term Loan amendments.  The Court evaluated the transaction under entire fairness review because the Wayzata Defendants stood on both sides of the transaction.  The Court found that the plaintiffs adequately alleged that the price was unfair because the interest rate was exorbitantly above-market and alternative financing was available at significantly lower rates.  The Court also found the process to be unfair because the board failed to obtain a fairness opinion and did not explore alternative sources of financing.

In so ruling, the Court held that each of the Wayzata Defendants potentially owed fiduciary duties to the Company as controlling stockholders.  The Court upheld the claim against Wayzata Opportunities because it owned approximately 82% of the Company’s stock.  The Court also upheld the claim against Wayzata Partners, despite owning none of the Company’s stock directly, because Wayzata Partners exerted actual control over the Company’s board.  Finally, the Court upheld the claim against Wayzata Offshore, despite owning only approximately 9% of the Company’s stock, because the Court could not “disentangle” Wayzata Offshore from the influence that the other Wayzata Defendants exerted over the Company.

Next, the Court upheld the plaintiffs’ derivative claim for approving the Term Loan amendments against all but three of the Individual Defendants.  The Court upheld the plaintiffs’ duty of loyalty claims against each of the three directors whom the Court found to be interested in connection with its demand futility analysis, finding that the complaint sufficiently demonstrated that they placed their own interests above the Company’s in approving the Term Loan amendments.  The Court also upheld the claim against the Company’s CEO, who, according to the complaint, was appointed by and therefore beholden to the Wayzata Defendants, thereby implying that he approved the Term Loan amendments for improper reasons.

The Court dismissed, however, the claim against the one director who was not nominated to the board by the Wayzata Defendants because the sole allegation against him, that he approved the transaction in “lock-step” with the interested directors, did not reasonably imply that he approved the loan for improper reasons.  The Court also dismissed the claim against the Company’s CFO who, given his subservience to and limited ability to influence the board, did not commit any gross misconduct.  Finally, the Court dismissed the claim against Keenan because it was duplicative with the count against him pertaining to the Wayzata Defendants.

Finally, the Court dismissed the claims for aiding and abetting, breach of contract, and unjust enrichment against certain of the defendants but upheld the claims against the remaining defendants.  Specifically, the Court dismissed the plaintiffs’ aiding and abetting claim against the Company’s CFO because he owed fiduciary duties to the Company but upheld the claim against Wayzata Partners in case discovery showed that Wayzata Partners did not owe fiduciary duties.  Next, the Court dismissed the contract claims against the Wayzata Defendants, noting that neither of the provisions at issue imposed obligations against them.  The Court then upheld the claim against the Company for failure to provide periodic financial information as required.  The Court dismissed, however, the claim that the Company dishonored the plaintiffs’ preemptive rights that trigger when the Company issues or sells “any equity interests” because the payments of interest in-kind were not an equity interest per the stockholders agreement.  The Court then upheld the claim for unjust enrichment against Wayzata Partners and Wayzata Opportunities, but it dismissed the unjust enrichment claim against Wayzata Offshore because the complaint failed to explain how Wayzata Offshore had been directly enriched by the Term Loan Amendments.

As a final note, the Court exercised jurisdiction over Wayzata Offshore, a Cayman Islands entity, holding that the conspiracy theory of personal jurisdiction applied due to Wayzata Offshore’s participation in the alleged conspiracy to profit from Key Plastics, a Delaware corporation.

The full opinion is available here