In re Massey Energy Co. Derivative and Class Action Litig., Consol. C.A. No. 5430-CB (Del. Ch. May 4, 2017) (Bouchard, C)
In this opinion, the Delaware Court of Chancery resolved the long-running stockholder litigation resulting from the sale of Massey Energy Company (“Massey” or the “Company”) to Alpha Natural Resources, Inc. (“Alpha”) after the 2010 Upper Big Branch coal mine explosion in West Virginia. Chancellor Bouchard dismissed plaintiffs’ derivative claims in their entirety, finding that the plaintiffs lost standing to pursue a derivative action when the sale of Massey closed. The Court also dismissed plaintiffs’ class claims, finding that under Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), such claims were properly derivative rather than direct. The Court ultimately reasoned that this outcome was equitable, notwithstanding that plaintiffs had pled an otherwise viable derivative claim, because Alpha “paid a substantial sum . . . to acquire all of the assets of Massey . . . [including] the derivative claim at issue in this case,” giving it the right to exercise control over the claims.
Massey was the largest producer of Central Appalachian coal, and the fourth largest producer of bituminous coal in the United States. Massey subsidiary Performance Coal Company owned the Upper Big Branch (“UBB”) mine in West Virginia. On April 5, 2010, an explosion at the UBB mine killed 29 miners.
On April 26, 2010, Alpha’s board chairman, Michael Quillen, approached the then-CEO of Massey, Don L. Blankenship, about a business combination with Massey. Massey’s stock price was down to $43.61 from $53.05 as a result of the UBB disaster, and Massey’s board decided that a business combination was not in the best interest of Massey’s stockholders given the depressed stock price. In August, 2010, Alpha made a non-binding proposal to acquire all of Massey’s stock in an all-stock transaction valued at $37.19 per share, which represented a 20% premium over Massey’s then-stock price of $30.99. Alpha later increased its offer to $41.07 per share. Massey then established a board committee to review strategic alternatives and solicited bids from potential acquirers in fall 2010. After receiving bids from Alpha and another bidder, Massey entered into a merger agreement with Alpha for 1.025 Alpha shares plus $10 in cash for each Massey share, which represented a 27% premium over Massey’s stock price immediately preceding the UBB mine explosion.
The plaintiff stockholders filed a derivative action in April 2010, which was consolidated with several other actions. The plaintiffs alleged that Massey had a long history of non-compliance with federal and state safety regulations, resulting in lawsuits, citations, fines, and criminal convictions. Plaintiffs asserted that the defendant directors and officers, led by Blankenship, ignored numerous health and mine safety regulations, running the Company in such a way that “the priority of profits over safety was one not to be questioned.” Plaintiffs claimed that failures to comply with “basic safety requirements” led to the explosion at the UBB mine.
Once the Alpha merger was announced, plaintiffs moved to enjoin the transaction because the Massey board had not negotiated to have the pending derivative claims transferred into a litigation trust for the benefit of Massey stockholders. The Court denied that motion in May 2011 and the merger closed on June 1, 2011. After the merger, the action was stayed for 5 years pending federal criminal investigation and an Alpha bankruptcy. After Alpha was reorganized, the stay was lifted and the parties proceeded with motions to dismiss.
Plaintiffs’ complaint asserted two claims, both for breach of fiduciary duty based on the same underlying facts—one was styled as a derivative claim and the second was styled as a direct claim. First, on the defendants’ motion to dismiss, the Court ruled that plaintiffs lacked standing to assert a derivative claim. The Court noted that plaintiffs’ complaint would have “state[d] a viable claim for relief that could be pursued in this action if the merger had not happened.” However, “it has been a matter of well-settled Delaware law for over three decades that stockholders of Delaware corporations must hold shares not only at the time of the alleged wrong, but continuously thereafter throughout the litigation in order to have standing to maintain derivatives claims and will lose standing when their status as stockholders of the company is terminated as a result of a merger.”
Second, the Court dismissed plaintiffs’ direct claims as properly derivative because plaintiffs failed to state a claim for inseparable fraud, wherein “directors cover massive wrongdoing with an otherwise permissible merger.” A proper claim for inseparable fraud must “plead facts from which it would be reasonably conceivable that (1) a defendant engaged in serious misconduct before a merger that constitutes a direct claim and (2) the merger must have been ‘necessitated’ or made ‘inevitable’ by that misconduct.” The first factor depends on the application of the Tooley test to determine if the allegations are direct or derivative. In applying the Tooley test, the Court found that plaintiffs’ claims were derivative because, on their face, they constituted a Caremark claim for mismanagement of the Company, which is “owed to the corporation and not separately or independently to the stockholders.” The Court also found that the harms identified in the complaint “are prototypical examples of corporate harm that can be pursued only derivatively.” Ultimately, the Court reasoned that “the thesis of the complaint does not involve conduct . . . that caused injury to any stockholder individually or separately from causing harm to the corporation.” Specifically, the Court noted that “the complaint is devoid of any allegations that any of the defendants—including Blankenship, the protagonist behind Massey's abysmal safety record—engaged in misconduct to secure personal benefits for themselves to the detriment of any Massey stockholder separately or individually. The complaint does not allege, for instance, that any of the defendants sold stock at inflated values or engaged in any other form of self-enrichment through the pursuit of the alleged ‘business plan of willfully disregarding both internal and external safety regulations.’” This adverse finding on the first part of the test for pleading a claim for inseparable fraud was deemed dispositive by the Court, and thus the Court did not reach a finding on the causation requirement in the second prong of the inseparable fraud claim.
The Court concluded its opinion by addressing the defendants’ argument that the Massey stockholders’ approval of the Alpha merger compels dismissal of the plaintiffs’ claim under Corwin v. KKR Financial Holdings and its progeny. Chancellor Bouchard explained that “[t]he fundamental policy underlying Corwin . . . is to avoid ‘judicial second-guessing’ when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction themselves.” Because plaintiffs’ complaint did not challenge the economic merits of the merger itself, but rather the defendants’ negligent conduct in managing the Company, Corwin is not implicated. The Court further noted that Corwin “was never intended to serve as a massive eraser, exonerating corporate fiduciaries for any and all of their actions or inactions preceding their decision to undertake a transaction for which stockholder approval is obtained.” Specifically, a vote by Massey’s stockholders “[did] not . . . approve releasing defendants from any liability they may have to the Company for the years of alleged mismanagement that preceded the sale process.” “In short, in order to invoke the cleansing effect of a stockholder vote under Corwin, there logically must be a far more proximate relationship than exists here between the transaction or issue for which stockholder approval is sought and the nature of the claims to be ‘cleansed’ as a result of a fully-informed vote.”