In re USG Corporation Stockholder Litigation, C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020) (Glasscock, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted a motion to dismiss a claim for breach of fiduciary duty, holding that plaintiffs adequately pled that a stockholder vote was not fully informed under Corwin, but nevertheless finding that plaintiffs failed to adequately allege a non-exculpated breach of fiduciary duty.
This action arises out of a transaction pursuant to which Gebr. Knauf KG (“Knauf”), a stockholder of USG Corporation, a Delaware corporation (“USG” or the “Company”), acquired USG (the “Acquisition”). In 2017, Knauf, which owned approximately 10.6% of USG’s outstanding common stock, began exploring a potential transaction with USG. Recognizing that another large stockholder of USG, Berkshire Hathaway, which owned approximately 30.4% of USG’s outstanding common stock, was receptive to a potential Knauf/USG transaction, Knauf began direct negotiations with both USG and Berkshire Hathaway. In 2018, Knauf submitted a proposal to acquire USG for $42.00 per share, while also indicating that Knauf and Berkshire Hathaway may engage in hostile takeover tactics if USG did not negotiate in good faith regarding the proposal. USG rejected the proposal as inadequate. Knauf then engaged in a successful proxy withhold campaign, convincing stockholders (including Berkshire Hathaway) to withhold their votes for four of USG’s director nominees at the upcoming annual meeting. USG and Knauf then engaged in further negotiations, ultimately agreeing to a transaction price of $44.00 per share, which was approved by a majority of USG’s disinterested stockholders. The transaction disclosures mentioned that the Board of Directors of USG (the “Board”) held a view of the Company’s intrinsic value but did not disclose the specific number of that value, which was $50.00 per share.
First, the Court found that plaintiffs failed to plead facts from which the Court could infer that Knauf was a controlling stockholder of USG. In reaching that conclusion, the Court rejected an argument that Knauf and Berkshire Hathaway constituted a control group, finding that the complaint did not explicitly allege a control group and that, at most, what had been alleged is that Knauf and Berkshire Hathaway had a shared goal of a USG sale. The Court also found that Knauf, standing alone, was not a controlling stockholder, rejecting an argument that the withhold campaign constituted a “retributive action” evidencing Knauf’s control over the Board. In light of the conclusion that Knauf was a not a controlling stockholder of USG, the Acquisition was eligible for Corwin cleansing.
Second, the Court held the stockholder vote did not cleanse the transaction under Corwin because the disclosures to the stockholders were materially incomplete or misleading. The Court noted that the concept of intrinsic value was mentioned fifteen times in the disclosures, including a disclosure that the Board had reached a conclusion regarding the intrinsic value. Nevertheless, the Board did not disclose the specific number of that value, despite ultimately recommending the Acquisition. The Court found there was “a substantial likelihood that a reasonable stockholder would have considered the Board’s oft-mentioned view of intrinsic [value] important in deciding how to vote.” Accordingly, the disclosures were incomplete and/or misleading such that Corwin’s cleansing effect did not apply.
Despite finding that the failure to include the intrinsic value number in the disclosures precluded application of Corwin, the Court held that, under the “entirely distinct” breach of fiduciary duty analysis, the misleading disclosure did not arise from self-interest or bad faith conduct. Importantly, the Court emphasized that “the concept of bad faith, and the determination of adequate disclosure for Corwin purposes, are fundamentally separate. They involve different inquiries, the outcomes of which are not necessarily mutually supportive.” For example, a Corwin analysis focuses on the reader of disclosures, while a bad faith analysis focuses on the drafter. In conducting the distinct breach of fiduciary analysis, the Court found that the disclosures belied any bad faith attempt to conceal the intrinsic value. In particular, the disclosures stated that the Board reached a position regarding intrinsic value but considered the $44.00 per share price to be more favorable to USG stockholders than the value of potential alternatives, including the continued operation of USG on a standalone basis. In light of the threat of a hostile takeover should the standalone option be pursued, and read as a whole, the Court held it was “not reasonably conceivable” that non-disclosure of the intrinsic value number “rises to the level of conscious disregard of duty.”
Likewise, the Court rejected plaintiffs’ Revlon argument, finding that plaintiffs failed to adequately allege bad faith sufficient to plead a non-exculpated breach of the duty of loyalty. Importantly, the Court noted that “Revlon duties” are not distinct duties, but rather the application of the duties of loyalty and care in change of control transactions, and that “Revlon duties” should not be confused with the “Revlon standard of view.” Because plaintiffs failed to adequately allege bad faith during the sale process, the Court dismissed the complaint for failure to state a claim.