In re Riverstone National, Inc. S’holder Litig., Consol. C.A. No. 9796-VCG (Del. Ch. July 28, 2016) (Glasscock, V.C.)
In this memorandum opinion, the Court of Chancery largely denied defense motions to dismiss claims for breach of fiduciary duty relating to Riverstone National, Inc.’s acquisition by Greystar Real Estate Partners, LLC. The Court held that the plaintiffs’ complaint contained sufficient facts suggesting that the merger was not entirely fair to Riverstone’s stockholders because a majority of the Company’s board of directors received a material benefit not shared with the Company’s stockholders by obtaining a release of their potential personal liability on alleged derivative claims for usurpation of corporate opportunities.
According to the complaint, after the housing crisis in 2008, Riverstone, then a fee-based apartment property management company, allegedly pursued a new business plan that involved buying, rehabilitating, and leasing single-family homes, and thereafter managing the leases for those properties. Riverstone purportedly hired advisors in connection with the implementation of this new business strategy and partnered with Treehouse Group and Blackstone Group LP to create Invitation Homes. Riverstone similarly was alleged to have assisted Blackstone in the development of B2R, an entity that provided residential buy-to-rent mortgages for property investors. Despite allegedly expending significant funds and resources to develop the Invitation Homes and B2R opportunities, Riverstone purportedly was not given the chance to acquire ownership interests in either business. Instead, many of Riverstone’s directors and officers were alleged to have been given the opportunity to, and did, invest in these businesses. In total, certain of Riverstone’s officers and directors allegedly received 70% of Invitation Homes’ “promote” or “carried interest” units in exchange for approximately $5 million (largely in the form of deferred capital contributions), and purportedly received ownership interests in B2R as well.
Thereafter, the plaintiffs, who were stockholders of Riverstone prior to the merger, informed the Company’s board of directors of their putative derivative claims that the Company’s directors and officers breached their fiduciary duties by improperly usurping Riverstone’s opportunities to invest in Invitation Homes and B2R. The plaintiffs demanded to inspect the Company’s books and records in order to investigate those claims, and ultimately filed a suit in the Court of Chancery under 8 Del. C. § 220. The same day the plaintiffs filed their Section 220 action, Riverstone signed an agreement to merge with Greystar, which by operation of law extinguished their standing to bring the alleged derivative claims for usurpation of corporate opportunities relating to Invitation Homes and B2R. In addition, in connection with the merger, Greystar agreed to release any claims the Company may have had against the Riverstone directors and officers.
Following the merger, the plaintiffs filed an appraisal action in the Court of Chancery. Later, the plaintiffs filed a separate action for breach of fiduciary duty against, among others, Riverstone’s board of directors alleging, among other things, that the merger was not entirely fair to the Company’s stockholders because the merger consideration did not include any value for the potential, pre-merger derivative claims for usurpation of corporate opportunities. The defendants moved to dismiss the complaint pursuant to Rule 12(b)(6).
The Court largely denied the defense motions, concluding that the plaintiffs adequately pled that a majority of Riverstone’s board of directors was interested in the merger because Greystar agreed to release any claims the Company may have had against the Riverstone directors, including the alleged derivative claims for usurpation of corporate opportunities, and, consequently, that the entire fairness standard of review applied to the merger and that the transaction was not entirely fair to the Company’s stockholders.
The Court found that the complaint plausibly pled that a claim against a majority of Riverstone’s directors existed for usurpation of corporate opportunities prior to the merger and that such a claim brought derivatively would have withstood a motion to dismiss. The Court analyzed the usurpation claims based on the factors set forth by the Delaware Supreme Court in Broz v. Cellular Information Systems, Inc., 673 A.2d 148 (Del. 1996). The Court first determined that the Company was adequately alleged to have been financially able to exploit the Invitation Homes and B2R opportunities, reasoning that the issue involved a fact-intensive inquiry that generally required a developed record and that, while the Company may have been facing financial challenges, it was reasonably conceivable that it was financially able to make the approximate $5 million investment given the allegations that it had $72 million in assets and $18 million in current assets at the time. The Court next found that it was reasonably conceivable that the Invitation Homes and B2R opportunities were in the Company’s line of business and that the Company had an interest or expectancy in these opportunities, finding that the complaint alleged sufficient facts suggesting that Riverstone expended significant resources in developing the opportunities with an expectation that it would expand its business to include ownership of the properties it managed. The Court also found it reasonable to assume based on the allegations in the complaint that the Riverstone directors were placed in a position inimical to their duties to the Company by directing these opportunities away from the Company and taking them for themselves.
The Court then found that the director defendants were aware of their potential personal liability for the usurpation claims at the time of the merger, that the claims were likely to have been pursued derivatively, and that such potential personal liability was material to the directors. The Court observed that the plaintiffs allegedly notified the Riverstone board of the claims just days before the merger agreement was executed and also sought to investigate those claims pursuant to Section 220. The Court also noted that the alleged value of the potential usurpation claims exceeded the amount of the monetary investments the defendant directors were required to make to acquire their ownership interests in Invitation Homes and B2R.
Lastly, the Court concluded that a majority of the Riverstone board of directors was interested in the merger because “the merger agreement the directors obtained and recommended both eliminated the threatened derivative suit by operation of law, and eliminated any pursuit of the matter as a corporate asset purchased by the acquirer, as a matter of contract.”
Accordingly, the Court found the entire fairness standard was applicable and that it was reasonably conceivable that the merger was unfair because it did not include the value of the derivative claims for usurpation of corporate opportunities, which represented approximately 10% of the net merger consideration. As such, the Court largely denied the defense motions to dismiss.