In re Columbia Pipeline Group, Inc. Merger Litigation, C.A. No. 2018-0484-JTL (Del. Ch. Mar. 1, 2021) (Laster, V.C.)
In a stockholder class action claiming breaches of fiduciary duty and aiding and abetting in the sale of Columbia Pipeline Group, Inc. (the “Company” or “Columbia”), the Delaware Court of Chancery denied defendants’ motion to dismiss. The Court held that the plaintiff stockholders of Columbia adequately alleged Columbia Chairman and CEO Robert Skaggs, Jr. and Executive Vice President and Chief Financial Officer Steven Smith breached their duty of loyalty by favoring bidder TransCanada Corporation in a sale of the Company and that TransCanada aided and abetted breaches of fiduciary duty by Skaggs and Smith by knowingly exploiting them.
This action arose from a sale of Columbia by its board of directors (the “Board”). According to the allegations of the complaint, prior to the sale, Skaggs and Smith transferred from CEO and CFO of Columbia’s parent to those same positions at Columbia during a spinoff of Columbia, thereby receiving compensation plans providing for much greater payouts in the event of a sale of Columbia. According to the plaintiffs, the two expressed urgent desires to retire and were planning to that end. Anticipating Columbia would become an acquisition target, the two allegedly contacted a financial advisor which identified potential bidders, including Dominion Energy Inc., Berkshire Hathaway Energy, Spectra Energy Corp., and NextEra Energy Inc.
According to the complaint, Spectra contacted Skaggs to negotiate but Skaggs rebuffed, believing that Spectra would use its stock as an acquisition currency while Skaggs wanted cash. Columbia allegedly entered into NDAs with TransCanada Dominion, NextEra, and Berkshire, each containing a standstill and a “don’t ask, don’t waive” provision. According to the complaint, TransCanada contacted Smith in violation of the standstill and, without telling the Board, Smith told Skaggs and the Company’s financial advisor and scheduled a meeting with TransCanada. Smith allegedly sent 190 pages of confidential Company information to only TransCanada without Board approval. At the January 7 meeting with TransCanada, Smith supposedly gave TransCanada talking points intended for Smith’s use only, prepared by a financial advisor, detailing how TransCanada could convince the Board to agree to a deal without putting the Company “in play,” avoiding an auction. According to Plaintiffs, Smith also told TransCanada they were unlikely to face competition, all without Board approval. TransCanada then offered $25-$28 per share, supposedly breaching the standstill again. Skaggs allegedly presented misinformation and material omissions to the Board while it considered TransCanada’s bid. Plaintiffs alleged that Skaggs and Smith repeatedly ignored and delayed following Board instructions to inform other bidders that the Board was waiving the standstills.
Skaggs allegedly downplayed Spectra’s expression of interest to the Board. Plaintiffs claimed that Skaggs offered to renew TransCanada’s exclusivity agreement, knowing it had lapsed, and granted TransCanada’s demand for a “moral commitment” to insist on a serious fully-financed offer prior to confirmatory diligence in writing from any other bidders, even though TransCanada was the only bidder that had conducted significant diligence. Skaggs and Smith purportedly told their investment banker to screen calls from Spectra so it could not talk directly to management. TransCanada then allegedly lowered its offer from $26 to $25.50, which terminated the exclusivity agreement and freed the Company to negotiate with other bidders. According to the complaint, TransCanada put a three-day time limit on its offer and threatened to publicly announce termination of negotiations if it was not accepted by then, which would damage the Board’s bargaining power with other bidders.
The parties signed the merger agreement, which allegedly contained deal protection measures including a no-shop provision, a three percent termination fee, an expense reimbursement fee, and unlimited matching rights with four-days’ notice. The merger closed, prompting litigation. First, four shareholders sued the entire Board claiming breach of duty of loyalty by conducting the spin-off and breach of duty of disclosure from material omissions in the proxy. The Court dismissed the complaint. Then two groups of hedge funds filed an appraisal action wherein the court held that the fair price was equal to the deal price. Then plaintiffs filed this class action and the appraisal petitioners moved to consolidate their action with this action. The Court denied this request, causing this action to remain dormant. While this action was dormant, former stockholders filed a class action alleging violations of federal securities law in connection with the proxy disclosure, which the court largely dismissed. Then, this action became active again when plaintiffs filed the current complaint alleging that Skaggs and Smith breached their duty of candor via the false and misleading proxy, and breaches of fiduciary duty by steering the sale toward TransCanada and failing to engage with Spectra for personal reasons. Plaintiffs also alleged that TransCanada was unjustly enriched by the merger and that TransCanada aided and abetted Skaggs’ and Smith’s breaches by violating the standstill, obtaining the moral commitment from the two, and by lowering its offer. Skaggs, Smith, and TransCanada moved to dismiss the Complaint for failing to state a claim, which this decision addressed.
The Court held the suit was not precluded by the factual findings and legal rulings in the previous appraisal decision or the federal securities decision. The Court rejected Defendants’ argument that a special preclusion rule from M.G. Bancorporation, Inc. v. Le Beau, 737 A.2d 513 (Del. 1999) should apply, holding instead that the case was distinguishable and did not create a new preclusion rule. Alternatively, Defendants argued for the application of a more modern Delaware preclusion doctrine, citing Aveta, Inc. v. Cavallieri, 23 A.3d 157 (Del. Ch. 2010) and Brevan Howard Credit Catalyst Master Fund Ltd. V. Spanish Broadcasting System, Inc., 2015 WL 2400712 (Del. Ch. May 19, 2015). The Court distinguished these two cases noting that neither of the two cases created any new preclusion rules different from the blackletter law. The Court agreed with Plaintiffs applying the longstanding law for issue preclusion articulated in the Restatement (Second) of Judgments and Kohls v. Kenetech Corp., 791 A.2d 763 (Del. Ch. 2000). In applying this test, the Court noted the Plaintiffs were not parties to the prior appraisal decision or the federal securities action and found that none of the three exceptions to the general rule that non-parties are not bound by the prior adjudication via issue preclusion was present. The first exception was not present as neither the appraisal action nor the federal securities action was properly certified as a class action. The second exception did not apply because merely “being fellow stockholders” is not a sufficient pre-existing legal relationship. Finally, the third exception did not apply as Defendants had not shown any affirmative conduct by Plaintiffs inducing Defendants to refrain from taking action to bind Plaintiffs in either action.
In evaluating the correct standard of review for a fiduciary breach claim in the sale process context, the Court noted that enhanced scrutiny applied, and more specifically, Revlon review was implicated no later than the alleged January 7 meeting. The Court rejected Defendants’ arguments that the standard of review was subject to stockholder ratification under Corwin, holding that Plaintiffs alleged at least three disclosure violations on the proxy which prevented Corwin cleansing.
The Court held, at the pleading stage, the alleged course of conduct supported a reasonable inference that the sale process failed enhanced Revlon scrutiny as Skaggs and Smith unduly favored TransCanada for improper personal reasons. The Court cited the January 7 meeting where TransCanada supposedly violated the standstill and Smith allegedly provided confidential information, handed over private talking points, and told TransCanada it was unlikely to face competition. The Court also pointed to Skaggs’s presentation to the Board that supposedly contained material omissions and misrepresentations as to Company’s value. The Court also pointed to Skaggs’ and Smith’s purported lack of transparency with the Board, their repeated delays in carrying out Board directives to inform other bidders that their standstills were waived, and their downplaying of Spectra’s interest. The Court also cited Skaggs’ alleged treatment of TransCanada with exclusivity even when not required and his “serious moral commitment” to TransCanada to only respond to other bidders if they present a “serious written proposal” meaning a “financed bid subject only to confirmatory diligence.”
The Court rejected Defendants’ argument that the previous appraisal decision established the transaction price and that it was a reliable indicator of fair value for the purposes of this fiduciary duty action. The Court reasoned that in an appraisal action, the Court determines the standalone value of the company “as a going concern” without determining whether the Board breached its fiduciary duties. On the other hand, in a fiduciary duty action, the Court determines whether the sale process led to the highest value reasonably available to the stockholders by analyzing the company’s value to a third party as an acquisition rather than individually as a going concern. Thus, the Court held that the previous appraisal decision did not preclude finding that the Board breached its fiduciary duties by failing to attain the highest price reasonably achievable.
The Court held that, at the pleading stage, it is reasonably conceivable that Skaggs and Smith steered the sale process toward TransCanada for personal reasons breaching their duty of loyalty and rendering them liable for damages. The Court rejected Defendants’ arguments relying on the findings of the prior appraisal decision with similar reasoning as in the Revlon analysis, stating that the appraisal decision merely determined the standalone value of the Company and not whether fiduciary breaches impeded the sale price reaching its potential value to a third party.
In denying the motion to dismiss, the Court held that the Complaint adequately pled a claim for damages against TransCanada for aiding and abetting Skaggs’ and Smith’s alleged breaches of fiduciary duty. The Court cited Plaintiffs’ allegations of TransCanada’s multiple breaches of the standstill agreement, Smith’s actions during the January 7 meeting, Skaggs’ choice to treat TransCanada with exclusivity after the agreement had ended, Skaggs’ “moral commitment” to only consider fully-financed offers, and TransCanada lowering its bid. Taking these allegations together and assuming them to be true for purposes of the motion to dismiss, the Court held these actions could establish knowledge on the part of TransCanada.
The Court held Plaintiffs’ claims for money damages for lack of disclosure were sufficiently plead. The Court echoed its earlier finding of at least three supposed violations in the proxy statement for the merger. It held that, due to Skaggs’ and Smith’s alleged interest in retiring and the incentives present in the merger, Plaintiffs adequately pled the non-exculpated gross negligence necessary when seeking an injunction. The Court further held that Plaintiffs also pled the additional element of knowing participation necessary to support their claims that TransCanada allegedly aided and abetted Skaggs’ and Smith’s lack of disclosure. Accordingly, the Court denied Defendants’ motion to dismiss.