In re Columbia Pipeline Group, Inc. S’holder Litig., C.A. No. 12152-VCL (Del. Ch. Mar. 7, 2017) (Laster, V.C.)
In this Order, the Court of Chancery dismissed post-closing fiduciary duty claims brought on behalf of a putative class of former stockholders of Columbia Pipeline Group, Inc. (the “Company”), which arose from TransCanada Corporation’s acquisition of the Company via merger. The merger was approved by the holders of 95% of the voting power of the outstanding shares entitled to vote thereon. The Court held that the business judgment rule applied to the decision to approve the merger because the plaintiffs had failed to allege any viable disclosure claims, and therefore dismissed the action with prejudice.
Plaintiffs’ claims for breach of fiduciary duty were based on the fact that the merger had occurred following the spin-off of the Company from its former parent company NiSource, Inc. (“NiSource”). Plaintiffs alleged that, prior to the spin-off, NiSource received expressions of interest regarding an acquisition of the Company. Certain NiSource officers and directors joined the Company following the spin-off, and their “change-of-control benefits transferred over to [Columbia] on a dollar-for-dollar basis, even though the Company was much smaller than NiSource.” Accordingly, Plaintiffs alleged that the spin-off, coupled with the later merger, permitted the defendants to divert merger consideration from the public stockholders to themselves.
The Court agreed that the complaint was “sufficiently detailed to state a pleadings-stage claim for breach of the duty of loyalty against the defendants.” However, that holding was not enough to allow the complaint to survive the motion to dismiss. Under the Delaware Supreme Court’s opinion in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), the business judgment rule applies and insulates a transaction from all claims (other than waste) if a transaction is approved by a fully informed and uncoerced vote of a majority of the disinterested stockholders. The Court noted that the merger had been approved by a majority of the disinterested stockholders.
Plaintiffs argued that the proxy statement describing the Merger was flawed because it failed to disclose that the defendants acted out of self interest. The Court rejected this argument, holding that the duty of disclosure “does not demand that fiduciaries engage in self-flagellation and draw legal conclusions” adverse to themselves. It was enough that the proxy statement disclosed the material facts of the merger and thereby afforded the stockholders the opportunity to consider “whether the defendants had incentives that caused them to favor a quick sale or which enabled them to divert consideration from the public stockholders that the defendants would not have received if NiSource had sold the Company without a spinoff.” To demand the directors affirmatively disclose self-interested motivation would create a legal regime that would require self-flagellation. “The material facts were disclosed. That is all Delaware law requires.”
Plaintiffs next argued that the disclosures were flawed because the financial advisor to the Company had an undisclosed interest in the buyer. The Court noted that the financial advisor’s stock holdings were publicly available, and that the financial advisor had a larger stake in the Company than in the buyer. The Court suggested a disclosure regime that would lay out the sell-side investment advisors relevant equity holdings in a table in the proxy, “rather than expecting stockholders to uncover the information by mining other lengthy filings.” But the Court applied existing law and therefore dismissed this disclosure claim.
Plaintiffs also argued that the proxy statement provided partial and misleading disclosures about the interests of a potential competing bidder. The proxy statement disclosed that a financial advisor preliminarily advised the Company’s board that a transaction with the competing bidder could result in payment of consideration ranging from $25.50 to $28 per share. The Court rejected Plaintiffs’ argument that further information regarding the financial advisor’s analysis would need to be disclosed, holding as follows: “Delaware decisions have held that fiduciaries need not summarize a financial adviser’s analyses if the analyses do not relate to the fairness of the transaction that the stockholders are being asked to consider.” The Court also emphasized that this potential bidder never made an offer.