City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., C.A. No. 9980-CB (Del. Ch. Jan. 23, 2018) (Bouchard, C.)
In this opinion, the Court of Chancery denied a Plaintiff-stockholder’s application for attorneys’ fees on the basis that changing market conditions, and not Plaintiff’s lawsuit, caused the reduction of the purchase price in a merger agreement that created a cost savings benefit to all of the company’s stockholders. The Court also denied the fee application for the independent reasons that Plaintiff had failed to preserve its fee claim in the company’s bankruptcy proceeding and because it would be inequitable, unprecedented, and inconsistent with the corporate benefit and common fund doctrines to permit Plaintiff to single out a large stockholder as the source of the fee payment when the alleged benefit warranting a fee award flowed to the benefit of all stockholders.
On June 25, 2014, C&J Energy Services, Inc. (“C&J Inc.”) and Nabors Industries Ltd. (“Nabors”) executed a merger agreement by which C&J Inc. would merge with a wholly owned subsidiary of Nabors Red Lion Limited, which was wholly owned by Nabors. Nabors Red Lion Limited was renamed C&J Energy Services, Ltd. (“C&J Ltd.”) after the merger. Under the merger agreement, Nabors would receive $938 million in cash from C&J Inc. and approximately 53% of the shares of C&J Ltd., with the remaining 47% of C&J Ltd.’s shares going to the public stockholders of C&J Inc. in the proposed transaction.
On July 30, 2014, Plaintiff, a stockholder of C&J Inc., filed its original complaint, alleging that C&J Inc.’s directors breached their fiduciary duties in connection with the proposed transaction with Nabors and seeking to enjoin the transaction. On November 25, the Court of Chancery preliminarily enjoined the proposed transaction from closing until C&J Inc. solicited alternative proposals during a thirty-day “go-shop” period. That solicitation process produced one potential alternative proposal, but on December 19, the Delaware Supreme Court reversed the Court of Chancery’s decision and lifted the preliminary injunction, reinstating the no-shop provision in the merger agreement.
On February 6, 2015, C&J Inc. and Nabors agreed to reduce the cash portion of the consideration that C&J Inc. would pay to Nabors in the proposed transaction by $250 million (the “Price Reduction”). The proxy statement issued in connection with the proposed transaction stated that the Price Reduction was precipitated by concerns that C&J Inc.’s stockholders would not support the transaction on its original terms based on “significant dislocation in oil and natural gas prices that began in late 2014 and continued into 2015.” After the Price Reduction, C&J Inc.’s stockholders overwhelmingly approved the transaction, which closed in March 2015.
On October 29, 2015, approximately seven months after the transaction closed, Plaintiff amended its complaint. However, the Court of Chancery granted Defendants’ motions to dismiss the amended complaint.
On July 20, 2016, C&J Inc., C&J Ltd., and other affiliated entities (the “Debtors”) filed for bankruptcy protection. Plaintiff did not file a proof of claim for its fee application relating to the Price Reduction in the bankruptcy action. On December 16, 2016, the bankruptcy court approved the reorganization plan, discharging the Debtors of any responsibility for Plaintiff’s fee application.
On April 7, 2017, after the Delaware Supreme Court affirmed the dismissal of Plaintiff’s amended complaint, Plaintiff filed a motion for a $5 million attorney fee award. In support of its fee application, Plaintiff asserted that the original complaint created pressure that ultimately led to the Price Reduction, which, according to Plaintiff, was akin to a common fund that entitled Plaintiff to be compensated for its litigation efforts. Plaintiff sought the fee award from the estate of Joshua Comstock, who was a large stockholder of C&J Inc. prior to the transaction and C&J Inc.’s former CEO and Chairman of the Board.
The Court of Chancery assumed, without deciding, that the causation presumption of the common fund and corporate benefit doctrines applied to Plaintiff’s fee application, placing the burden on Defendants to show that the Price Reduction was not caused by the initiation of Plaintiff’s suit. The Court determined that Defendants successfully rebutted the presumption of causation by submitting an affidavit from a C&J Inc. director which categorically denied that Plaintiff’s lawsuit caused the Price Reduction and stated that the Price Reduction was effected solely to assuage stockholders’ concerns about the economic merit of the proposed transaction in response to changing industry market conditions. Plaintiff attempted to undermine the affidavit by arguing that negotiations for the Price Reduction did not start in September 2014 when energy markets first crashed. The Court rejected this argument, stating that the fact that negotiations did not begin until late December 2014 was reflective of the fact that the stockholder vote was approaching and the need to secure sufficient stockholder support was imminent. The Court also noted that Plaintiff did not seek to depose the affiant or to take any discovery to respond directly to the affidavit.
The Court also denied Plaintiffs’ fee application on two separate, independent bases. Specifically, the Court analogized the Price Reduction to a benefit that accrued to all of C&J Inc.’s stockholders and stated that, even if a fee award was appropriate, it should come from the corporate treasury of C&J Inc. However, because of the bankruptcy discharge, a fee award could not come from that source. Facing that reality, Plaintiff took a “novel” approach, arguing that Comstock’s estate should pay the fee award because Comstock was one of C&J Inc.’s “top shareholders” who owned approximately 11% of C&J Inc.’s outstanding shares as of the date of the merger and who “benefited the most from this litigation.” The Court also rejected that argument, holding that imposing a fee reimbursement obligation on a single large stockholder would be inequitable, unsupported by any case law, and inconsistent with the rationale of the corporate benefit doctrine which requires that benefits that redound to all stockholders should be taxed pro rata against all stockholders and not against a single stockholder cherry-picked by a plaintiff.