The Huff Energy Fund, L.P. v. Gershen, C.A. No. 11116-VCS (Sept. 29, 2016) (Slights, V.C.)
In this memorandum opinion, the Court of Chancery dismissed a stockholder complaint alleging that a corporation’s directors, in approving a plan of dissolution, breached their obligations under a shareholders agreement and violated Revlon and Unocal duties.
The dispute arose out of a decision by the board of directors (the “Board”) of Longview Energy Company (the “Company”) to sell nearly all Company assets and then, following the sale, dissolve the Company. The plaintiff, which owned 40% of the Company's stock and was a party to a shareholders agreement with the Company (the "Shareholders Agreement"), claimed that the approval of the plan of dissolution constituted a breach of the Shareholders Agreement and the Board’s fiduciary duties. After the defendants moved to dismiss the complaint for failure to state a claim, the Court granted the motion in its entirety.
In evaluating the plaintiff's claims that the directors were bound by the Shareholders Agreement because they signed it on the Company’s behalf, the Court held that directors and officers cannot be personally liable for a contract signed in a representative capacity. The Court also rejected the plaintiff's alternative argument that the director defendants were liable for tortious interference with the Shareholders Agreement. The Court found that the plaintiff failed to plead the claim in the complaint and had instead improperly raised the argument in its opposition to the motion to dismiss. The Court held that, even if the plaintiff had timely raised the tortious interference claim, the complaint lacked facts suggesting that the director defendants exceeded the scope of their employment in approving the dissolution.
The Court likewise rejected the plaintiff's remaining arguments that the director defendants breached the Shareholders Agreement by approving the dissolution with less-than-unanimous Board support. The Court found inapplicable a provision in the Shareholders Agreement requiring unanimous Board approval of "any action or omission that would have a material adverse effect on the rights of any Shareholder, as set forth in" the Shareholders Agreement because the right that was allegedly affected, the right of transferability, was not conferred by the Shareholders Agreement. The Court also rejected the plaintiff’s contention that unanimity was required to terminate the Company’s existence. The Court reasoned that the Shareholders Agreement’s requirement that the Company "continue to exist and remain in good standing” was simply a recognition that the Company would take actions necessary to remain in good standing and that unanimity was not required for other transactions, such as mergers, contemplated by the Shareholders Agreement.
The Court also rejected the plaintiff's fiduciary duty claims. The Court found that the plaintiff's allegations that certain directors would receive severance payments of up to two years' worth of compensation did not create a reasonable doubt about the disinterestedness and independence of any Board members with respect to the plan of dissolution. The Court noted that the change-in-control payments resulted from the asset sale, which the plaintiff did not challenge, and not from the plan of dissolution. The Court also rejected an argument that one of the director defendants controlled the Board and only sought to liquidate the Company so that the plaintiff could never obtain control. The Court found that there was no logic behind the plaintiff's argument that the allegedly controlling defendant would personally benefit from a decision to dissolve the Company. Furthermore, the relationships alleged in the complaint did not raise a reasonable doubt about the other Board members’ ability to exercise independent business judgment.
The Court next concluded that neither Revlon nor Unocal applied to the Board’s approval of the plan of dissolution. The Court reasoned that the dissolution did not constitute a "final stage" transaction under Revlon because the corporation's existence would continue for another three years for purposes of prosecuting and defending suits and winding up affairs. The Court also held that the dissolution did not constitute a "change of control" under Revlon because the sale, not the dissolution, triggered change-of-control payments to certain directors. The Court similarly concluded that Unocal did not apply because the plan of dissolution did not constitute an "unreasonable poison pill,” as no threat to corporate control existed when the plan was approved. In addition, the plan did not implicate entrenchment concerns because the dissolution involved the winding up of the Company.
Lastly, the Court held that, even if enhanced scrutiny under Revlon or Unocal was warranted, the stockholder vote had a cleansing effect on the board's approval of the plan of dissolution, citing the Delaware Supreme Court's decision in Corwin v. KKR Financial Holdings LLC.