City of Miami Gen. Emps.’ and Sanitation Ret. Tr. v. Comstock, C.A. No. 9980-CB (Del. Ch. Aug. 24, 2016) (C. Bouchard)
In this Memorandum Opinion, the Court of Chancery decided two motions: (1) defendants’ motion to dismiss the complaint for failure to state a claim for relief; and (2) C&J Energy Services, Inc.’s (“C&J”) motion to recover approximately $542,000 in damages against the plaintiff’s injunction bond posted earlier to secure the entry of a preliminary injunction order (“PI Order”). The Court , applying Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015) (“Corwin”), held that the approval of the merger between C&J and a subsidiary of Nabors Industries Ltd. (“Nabors”) by a majority of fully informed and uncoerced stockholders entitled defendants to the business judgment rule standard of review, and dismissed the amended complaint. The Court also held that C&J was entitled to a rebuttable presumption that it was entitled to recover damages against the injunction bond, that plaintiffs failed to rebut the presumption, and thus that C&J was entitled to recover its requested damages from plaintiff’s injunction bond.
The Motion to Dismiss
The issues addressed by the Court of Chancery in this Memorandum Opinion arose out of what began as a pre-closing challenge to the merger between C&J and a Nabors subsidiary. Plaintiffs originally sought, and were granted, a mandatory injunction enjoining the proposed transaction and ordering a 30-day “go-shop” period. Defendants appealed the injunction while, in parallel, forming a Special Committee and commencing the “go-shop.” On appeal, the Supreme Court reversed and vacated the injunction. C&J Energy Servs. Inc. v. City of Miami Gen. Emps.’ Ret. Tr., 107 A.3d 1049 (Del. 2014).
After the Supreme Court vacated the injunction, C&J issued a final proxy statement (the “Proxy”) and, on March 20, 2015 C&J’s stockholders approved the transaction. Months after the transaction closed, plaintiff filed an amended complaint (the “Complaint”), which dropped C&J as a defendant and added Morgan Stanley, the Special Committee’s financial advisor.
The seven count Complaint contained claims for breach of fiduciary duties, aiding and abetting, and disclosure claims arising from the Proxy. Defendants, relying upon Corwin, , argued that a fully informed and uncoereced majority of stockholders voted to approve the merger and therefore defendants were entitled to business judgment review..
Analyzing the alleged disclosure violations, the Court of Chancery held that none had merit. Two of those claims related to the Court-ordered solicitation process. In both cases, the Court found, in part, that the alleged omissions were not material because that process was a nullity after the Supreme Court reversed the PI Order. Thus, any omissions or misdisclosures related to a potential topping bid were not material because the merger agreement contained a “no-shop” provision. Furthermore, the Court held that any of the Special Committee’s financial advisor’s conflicts of interest were immaterial because the court-ordered “go-shop” process was a nullity.
The Court of Chancery then analyzed plaintiff’s arguments for invoking the entire fairness standard of review: (1) that a majority of the C&J board of directors (the “Board”) was interested in the Nabors transaction because of their desire to obtain seats on the board of directors of the surviving entity (“New C&J”), and (2) that Comstock tainted the process by which the Board considered the transaction.
The Court of Chancery held that plaintiff’s allegation that a majority of the Board suffered a disabling interest in evaluating the transaction because of a desire to be directors of the New C&J failed as a matter of law. The Court noted that, as an initial matter, not all of the Board members stood to receive seats on the New C&J board of directors (the “New C&J Board”), and in fact, only four of the seven would be appointed to the New C&J Board if the transaction was approved. Additionally, the Court held that the Complaint was devoid of any factual allegations that any director’s service on the New C&J Board would actually create a disabling conflict of interest. The Court had previously commented that enticement of a future seat on the board of a company surviving a merger is not sufficient to disqualify that director from making a disinterested decision on the on the merits of the transaction.. Furthermore, plaintiff also failed to allege that the receipt of any director fees would be material to any individual director. The Court also found that plaintiff’s argument that Comstock deceived the Board, thereby tainting the Board’s process of considering the transaction, was unsupported by any well-pled facts.
Because plaintiff failed to invoke entire fairness review, the Court of Chancery held that the business judgment presumption under Corwin applied to the claims and dismissed the fiduciary duty claims against the C&J officers and directors. Since the underlying fiduciary duty claims did not survive the motion to dismiss, the Court accordingly dismissed the aiding and abetting claims.
Motion for the Recovery of Damages Against the Injunction Bond
C&J sought $542,087.89 in damages against the cash bond that plaintiff posted to secure the preliminary injunction. The damages represented costs in complying with the preliminary injunction that Court of Chancery had entered in November 2014 and consisted of costs to the Special Committee’s financial and legal advisors, legal fees paid for help in complying with the PI Order, and fees paid to officers for attending board meetings in connection with the PI Order.
The Court analyzed the request under Court of Chancery Rule 65(c), which requires an applicant for a preliminary injunction to post a bond “in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.” The Court found that the preliminary injunction was “wrongful” because the Supreme Court reversed the PI Order on appeal and the damages were “proximately caused” by the injunction because they represented costs in complying with the PI Order. Furthermore, the Court was unpersuaded by any of plaintiff’s arguments made in an effort to overcome the presumption in favor of C&J recovering damages.