Arkansas Teacher Retirement System v. Alon USA Energy, Inc. et al., C.A. No. 2017-0453-KSJM (Del. Ch. June 28, 2019) (McCormick, V.C.)
In this memorandum opinion, the Delaware Court of Chancery found it reasonably conceivable that a plaintiff stockholder of Alon USA Energy, Inc. (“Alon”) had standing as a third-party beneficiary to bring, and adequately pled, claims for breach of contract and violation of Section 203 of the General Corporation Law of the State of Delaware (“Section 203”) arising from a stockholder agreement entered into between Alon and Delek US Holdings, Inc. (“Delek”) prior to a merger involving the two companies. The Court further held that the plaintiff adequately pled claims for breaches of fiduciary duty against Delek as a controlling stockholder and Alon’s directors (“Director Defendants”) in connection with the merger. In declining to apply the business judgment standard of review for controller buyouts under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the Court found it reasonably conceivable at the pleadings stage that the merger was not conditioned ab initio upon the approval of both a special committee of Alon directors and a majority of the minority stockholders of Alon.
In 2015, Delek acquired 48% of Alon’s common stock for $16.99 per share. At the time of this stock purchase, Delek was interested in acquiring all of Alon’s outstanding stock. Section 203 prohibits a stockholder from engaging in a business combination with a company within three years from the date it acquires at least 15% of the company’s outstanding voting equity. The statute’s prohibitions do not apply under certain circumstances, including when the company’s board pre-approves the initial stock purchase of at least 15% of the company’s voting stock.
To avoid the three-year standstill period imposed by Section 203, Delek requested that Alon’s board pre-approve the initial stock purchase. Alon’s board granted Section 203 approval on the condition that Delek enter into a stockholder agreement (“Stockholder Agreement”) that established anti-takeover protections similar to those imposed by Section 203, but for a period of only one year. Delek agreed.
During the one-year standstill period imposed by the Stockholder Agreement, substantive deal negotiations allegedly took place between Delek and a special committee of Alon directors (“Special Committee”). When the one-year standstill period ended, the Special Committee allegedly bid against itself by issuing increasingly lower proposals before receiving a counteroffer from Delek. In 2017, Alon’s board and stockholders approved a deal for $12.13 per share, significantly less than the $16.99 per share paid by Delek in 2015.
The plaintiff brought a class action stockholder suit alleging breach of the Stockholder Agreement, violation of Section 203, and breaches of fiduciary duty against Delek and the Director Defendants. As a threshold matter, the Court rejected the defendants’ argument that the plaintiff lacked standing to sue for breach of contract because it was not a party to the Stockholder Agreement. The Court found that the plaintiff adequately pled facts demonstrating that the Stockholder Agreement was intended to directly benefit stockholders as third parties insofar as it replicated the anti-takeover protections afforded to stockholders under Section 203. The Court therefore held that the plaintiff had standing as a third-party beneficiary to pursue claims for breach of the Stockholder Agreement.
Addressing the merits of the breach of contract claim, the Court held that the Complaint adequately alleged Delek breached the Stockholder Agreement by engaging in substantive negotiations during the one-year standstill period. The Court found it reasonably conceivable that Delek took several affirmative steps in contravention of the Stockholder Agreement during the standstill period, including: (1) publicly announcing its intent to acquire Alon; (2) entering into confidentiality agreements with Alon related to the merger; (3) meeting with Alon directors six times to negotiate terms of the merger; and (4) proposing favorable deal terms.
Next, the Court held that the plaintiff adequately alleged violations of Section 203. Noting the plaintiff’s novel Section 203 argument, the Court found it reasonably conceivable that Delek’s breaches of the Stockholder Agreement vitiated the Alon board’s pre-approval of Delek’s initial stockholder purchase in 2015 and thus restored the statutory protections of Section 203. The Court then rejected the defendants’ argument that the merger complied with Section 203 because Alon’s board and at least two-thirds of disinterested stockholders approved the deal. Finding that the plaintiff adequately alleged several disclosure deficiencies related to Delek’s initial stock purchase and the merger, the Court found it reasonably conceivable that the stockholder vote was not fully informed and thus not compliant with Section 203.
Turning to the breach of fiduciary duty claims, the Court rejected the defendants’ argument that the merger was subject to the protections of the business judgment rule under MFW. First, the Court found that the plaintiff adequately pled that Delek was a controlling stockholder on account of its 48% equity interest and influence upon six of eleven Alon board members, five of whom were Delek employees. Next, the Court found it reasonably conceivable that the MFW conditions were not imposed until six months after the two sides began substantive negotiations, by which time Delek and Alon had already begun negotiating deal structure, exchange ratio, and price terms. For these reasons, the Court found it reasonably conceivable that the MFW conditions were not imposed at the germination stage of the Special Committee process, and therefore declined to apply the business judgment standard of review under MFW.
Finding it reasonably conceivable that the merger would be subject to the entire fairness standard of review, the Court next held that the Complaint adequately alleged unfair process and unfair price. With respect to process, the Court found it reasonably conceivable that the Special Committee’s negotiations with Delek were conducted by a director whose independence and disinterestedness were questionable. With respect to price, the Court held that the Complaint adequately alleged that the deal price was unfair because it fell at the low end of projections prepared by J.P. Morgan that employed an unreasonably low growth rate for Alon.
Finally, the Court rejected the Director Defendants’ argument that Alon’s exculpatory charter provision adopted pursuant to Section 102(b)(7) of the General Corporation Law of the State of Delaware shielded them from liability for breach of fiduciary duty claims. The Court found it reasonably conceivable that the Special Committee acted in bad faith because of an allegedly suboptimal negotiation process coupled with a series of alleged disclosure deficiencies, including with respect to: (1) the Stockholder Agreement; (2) J.P. Morgan’s conflict of interest; (3) the Alon board’s formation of the Special Committee; (4) Delek’s nomination of two directors to Alon’s board; (5) compensation promised to Alon directors for post-merger board service; and (6) Delek’s planned post-merger acquisition of Alon’s interests in an entity through which Alon operates much of its business.