In re GGP, Inc. Stockholder Litigation., C.A. No. 2018-0267-JRS (Del. Ch. May 25, 2021) (Slights, V.C.)
In this memorandum opinion, the Delaware Court of Chancery found that a 35.3% stockholder was not a controlling stockholder for purposes of determining whether Corwin was the appropriate paradigm under which to apply the standard of review. The Court also found that the payment of a pre-closing dividend did not violate 8 Del. C. § 262 because courts may account for amounts paid prior to closing in their assessment of fair value.
GGP, Inc. (“GGP” or the “Company”) was a publicly traded, tax-advantaged real estate investment trust, or REIT. In 2009, GGP filed for bankruptcy protection and developed a reorganization plan, which contemplated the sale of the Company. Emerging as a friendly bidder, Brookfield Property Partners, L.P. (“Brookfield”) acquired a 35.3% stake in GGP, subject to a standstill agreement and an investment agreement. The standstill agreement (1) prevented Brookfield from voting more than 10% of GGP’s outstanding stock for or against any non-Brookfield designated board nominee, (2) required approval of a majority of unaffiliated stockholders for any transaction between Brookfield and GGP, and (3) prohibited Brookfield from acquiring more than 45% of GGP’s outstanding stock without approval of a majority of unaffiliated, disinterested directors and stockholders. The investment agreement permitted Brookfield to nominate up to three directors for election to GGP’s nine-member board of directors (the “Board”).
In early 2016, GGP’s CEO expressed the belief that the private real estate markets valued the Company’s assets more highly than the public stock markets, prompting the Board to explore strategic alternatives. In late 2017, Brookfield sent an unsolicited letter that included an offer to purchase the remainder of GGP’s shares not owned by Brookfield. The letter requested that the Board appoint a special committee consisting of independent directors to evaluate the offer, and that any transaction be conditioned on a majority-of-the-minority stockholder vote. The Company heeded both requests. Brookfield and the special committee later agreed on a deal pursuant to which Brookfield would acquire the outstanding shares of GGP that it did not already own for $23.50 per share in cash or one unit of Brookfield per share of GGP stock, subject to certain limitations. Approximately 98.5% of the consideration was to be paid as a pre-closing dividend to all stockholders regardless of whether they sought appraisal, and the balance was to be paid at closing to only those stockholders who did not exercise their appraisal rights.
After obtaining books and records pursuant to 8 Del. C. § 220, the Plaintiffs brought suit alleging breach of fiduciary duty against Brookfield in its capacity as a controlling stockholder and breaches of the fiduciary duty of loyalty against various Board members. The Plaintiffs also alleged Brookfield aided and abetted the directors’ breaches of fiduciary duty. The Defendants moved to dismiss, asserting the transaction was subject to a cleansing stockholder vote under Corwin. The Plaintiffs countered by arguing Brookfield was a controlling stockholder that stood on both sides of the transaction, and in the alternative, Corwin did not apply because of various disclosure violations in the proxy. The Court granted the Defendants’ motion to dismiss.
The Court held Brookfield was not a controlling stockholder. Owning only 35.3% of GGP’s outstanding stock, Brookfield did not meet the 50% threshold for actual control. Accordingly, the Plaintiffs alleged that Brookfield controlled the transaction specifically and that Brookfield controlled GGP generally.
Regarding transaction-specific control, the Plaintiffs pled that five of GGP’s nine directors were interested or lacked independence. Because the special committee exclusively controlled the negotiation and approval of the deal, the Court narrowed its inquiry by analyzing whether the allegedly conflicted directors controlled the special committee. Only two of the allegedly conflicted directors served on the special committee, and the Plaintiffs argued they needed to plead only one special committee member is interested or lacks independence to establish transaction specific control. The Court disagreed and reasoned that the Plaintiffs must plead “some factual predicate from which the court can infer the compromised director(s) somehow infected the special committee’s process,” which they failed to do.
The Court likewise found Brookfield did not exercise general control over the Company. The Court reasoned that Brookfield’s contractual right to acquire up to 45% of GGP’s stock was immaterial, because the mere potential for a stockholder to increase its influence through stock purchases is of no consequence—courts should instead look to the stockholder’s actual holdings at the time of the transaction. Additionally, the fact a Brookfield-affiliated director was the CEO of GGP, without more, did not “move the needle.”
After finding Brookfield was not a controller, the Court determined there were no disclosure violations in the proxy. The Court rejected as immaterial an argument that the proxy should have disclosed that the Audit Committee’s meeting to approve the transaction lasted only five minutes, because the three Audit Committee members all served on the special committee and were therefore “intimately familiar with the [t]ransaction and its history.” The Court likewise rejected the argument that the proxy should have disclosed the potential for a “minority discount” for those accepting stock in lieu of cash was material because the proxy noted those stockholders would have less voting power—and therefore less influence—relative to their voting power over GGP. The Court found this disclosure sufficient and declined to require that Brookfield use the words “minority discount.”
The Plaintiffs also alleged that the proxy did not “adequately disclose to stockholders the true nature of their appraisal rights” in that the payment of a pre-closing dividend violated 8 Del. C. § 262. The Plaintiffs asserted that the pre-closing dividend, which all stockholders received regardless of whether they sought appraisal, “removed almost all value underlying the GGP shares available for appraisal.” The Court rejected this argument. After noting that the General Corporation Law of the State of Delaware is an enabling statute, the Court pointed out that the Plaintiffs had failed to identify any statutory text restricting merger parties from authorizing a pre-closing dividend prior to the closing of a merger transaction. The Court elevated substance over form and viewed the pre-closing dividend as a relevant factor in assessing whether the stockholders received fair value. That is, in assessing whether stockholders received fair value, the Court could disregard the timing of the payment and add together the pre-closing dividend and closing merger consideration to determine whether the stockholder received fair value for its proportionate share of the corporation upon the closing. Therefore, the Court found no disclosure violation because there was effectively no difference between utilizing a pre-closing dividend and paying all consideration upon closing for purposes of appraisal.
The Court then held the stockholder vote was not coerced by the payment of a pre-closing dividend. Using the “structural coercion framework,” the Court rejected this claim by referencing its discussion of the appraisal disclosure claim and relying on the same reasoning. Because the Plaintiffs declined to plead waste, the Court dismissed the breach of fiduciary duty claim. The Court likewise dismissed the Plaintiffs’ aiding and abetting claim for lack of a predicate breach of fiduciary duty.