In re Columbia Pipeline Group, Merger Litigation, 2018-0484-JTL (Del. Ch. June 30, 2023) (Laster, V.C.)

In this 196-page post-trial opinion, the Court of Chancery found a third-party buyer liable for aiding and abetting breaches of fiduciary duty after the buyer persistently and opportunistically violated a standstill provision, exploited management’s conflicts of interest, and failed to correct misleading disclosures in the proxy statement.

Columbia Pipeline Group, Inc. (“Columbia”) was a wholly owned subsidiary of NiSource Inc. until it was spun off in July of 2015.  Two executives, Robert Skaggs, Jr. and Stephen Smith, who were seeking to retire in the near term, requested to join Columbia with the understanding that a sale of Columbia to a third party would trigger certain change-in-control benefits and allow them to retire on their desired timeline.  Shortly after the spinoff, Columbia began receiving inquiries from potential bidders, but the Board of Directors of Columbia (the “Board”) embarked on a dual-track strategy of pursuing an equity offering while simultaneously pursuing a potential sale of Columbia with select bidders.  Columbia executed non-disclosure agreements with don’t-ask-don’t-waive standstill provisions with each bidder, including TC Energy Corp. (“TransCanada”), which had expressed an interest in Columbia.  The standstill prevented TransCanada from, among other things, acquiring, or offering to acquire, Columbia without permission from the Board and requesting a waiver of the standstill.  After receiving indications of interest from two bidders, the Board ultimately determined to terminate the sales process.

Following the termination of the sales process, the standstill became operative.  Notwithstanding the standstill, a TransCanada executive leveraged his prior professional relationship with the Columbia executive to engage in a multi-month dialogue with Columbia executives about TransCanada’s proposed acquisition of Columbia.  One of the Columbia executives revealed key insider information about competing bidders and Columbia’s management’s eagerness to close the deal.  Despite the persistent and opportunistic violations of the standstill, the Columbia officers never attempted to enforce the standstill and did not disclose the violations of the standstill to the Board.  After TransCanada expressed an interest in acquiring Columbia for a price per share in the range of $25 to $28, the Board approved engaging in exclusive negotiations with TransCanada. 

Through the TransCanada’s executive’s conversations with the Columbia officers, TransCanada became so confident that Columbia management was desperate for the deal that it initially offered just $24 per share, a dollar below its previous indicative range.  Following negotiation, the parties reached an agreement-in-principle for TransCanada to buy Columbia at $26 per share (90% in cash and 10% in TransCanada stock).

After the Wall Street Journal reported on the negotiations, a second bidder expressed interest.  Instead of pursing a competitive bid, however, the Columbia officers persuaded the Board to renew exclusivity with TransCanada, downplaying the interest of the second bidder.  One wrote a script for other incoming bidders that stated Columbia would only respond to serious written offers, and he shared this script with TransCanada.  TransCanada interpreted this behavior, among other things, as evidence that Columbia’s management was wedded to the sale, and lowered TransCanada’s bid to $25.50 per share in cash.  TransCanada also threatened to publicly announce that it was terminating negotiations—an action prohibited by TransCanada’s non-disclosure agreement—if Columbia did not accept within three days.  The Board ultimately approved the sale at the lower price offered by TransCanada.

Plaintiffs pursued a class action and sued certain officers and Columbia’s former directors for breaching their fiduciary duties during the sales process and for failing to adequately disclose management’s discussions with TransCanada.  Plaintiffs also sued TransCanada for aiding and abetting these fiduciary breaches.  Prior to trial, Plaintiffs withdrew claims against Columbia’s outside directors and settled its claims against the officers, such that the only defendant remaining at trial was TransCanada.

The Court first concluded that Columbia’s officers and directors had breached their fiduciary duties, a prerequisite for holding TransCanada liable for aiding and abetting those breaches.  Applying enhanced scrutiny, the Court held the officers breached their duty of loyalty in the sales process because “they pursued a transaction that would enable them to retire in 2016 with their full change-in-control benefits,” rather than seek the best transaction reasonably available for Columbia’s stockholders, and “took actions that fell outside the range of reasonableness” because of those conflicts.  The Board, on the other hand, breached its duty of care by failing to “provide sufficiently active and direct oversight of the sales process.”

Next the Court turned to whether TransCanada had knowingly and culpably participated in the fiduciary breaches such that it may be held liable for aiding and abetting.  To be liable, the Court reasoned, a third-party acquirer in an arms-length sale must have actual or constructive knowledge of the underlying fiduciary breach and some level of volitional conduct, such as creating, exacerbating, or exploiting its counterparty’s fiduciary breach. 

The Court found that TransCanada had at least constructive knowledge Columbia’s officers were acting disloyally.  TransCanada and its advisors observed and discussed a series of signals from the officers and concluded that they were interested in any defensible price—not the best price—so that they could retire with their change-in-control benefits.  At a minimum, TransCanada should have been aware that the officers had breached their duties by “acting like a bunch of noobs who didn’t know how to play the game.”  TransCanada was also aware the officers had powerful financial motivations to sell and should have recognized that Columbia’s executives were “trying to lock in their change-in-control benefits and retire.”  Similarly, TransCanada had constructive knowledge that the Board was breaching its duty of care by not taking control of the negotiations away from “a conflicted management team that lacked M&A experience.”

The Court also found culpable participation by TransCanada.  Specifically, TransCanada exploited its counterparty’s fiduciary breaches by reneging on the $26 agreement-in-principle and making a $25.50 offer, tied to a three-day deadline to accept and backed by a threat to publicly announce that the negotiations had terminated if the offer was not accepted.  The Court noted that TransCanada had the confidence to reduce its offer with a coercive threat due only to TransCanada’s experience in repeatedly violating the standstill.

The Court was quick to distinguish this case from other cases in which buyers have used their available leverage to obtain favorable terms.  Here, TransCanada’s “persistent and opportunistic violations” of the seller’s procedural boundaries undermined its defense against aiding and abetting claims.  Had TransCanada simply stood by the $26 agreement-in-principle and abided by its contractual commitments and the rules established for the sale process, the Court suggested that TransCanada would not have been secondarily liable for the sell-side breaches of duty.

With respect to the duty of disclosure, the Court concluded the officers and directors breached their duty in connection with the proxy statement by, among other things, (i) failing to disclose that TransCanada’s contacts with Columbia repeatedly breached the standstill and that Columbia management choose not to enforce the standstill, (ii) mischaracterizing certain interactions between TransCanada and Columbia management, and (iii) including materially misleading statements regarding the reason TransCanada lowered its offer price to $25.50 per share.  The Court determined that TransCanada aided and abetted the disclosure violations because TransCanada chose not to correct certain material misstatements regarding TransCanada’s contacts with Columbia’s management and because TransCanada had constructive knowledge that the proxy statement contained material omissions but did not raise any concerns with Columbia regarding such omissions.  These failures, the Court concluded, constituted culpable participation in the underlying violation of the duty to disclosure such that TransCanada could be held liable for Columbia’s materially misleading proxy statement.  The Court noted that TransCanada could have eliminated risk of liability for aiding and abetting the breach of the duty of disclosure if it had provided specific disclosures regarding its meetings with Columbia management and asked Columbia to consider whether further disclosures were needed based on its constructive knowledge.

In calculating damages for the sale-process claim, the Court compared the expected value of the $26 (90% cash, 10% stock) agreement-in-principle to the $25.50 all-cash deal.  Due to a rise in TransCanada’s stock price in the lead-up to closing, Columbia’s stockholders would have received $26.50 in value for each share, had the deal closed as originally agreed.  Consequently, the Court awarded $1 per share for TransCanada’s aiding and abetting fiduciary breaches in the sale process.

In assessing damages for the disclosure claim, the Court first declined to award rescissory damages because the case was litigated with the understanding that plaintiffs would be required to show the stockholder class’s reliance on the misleading proxy statement, and they failed to do so.  However, the Court took the opportunity to clarify that, for future cases, there is a rebuttable presumption that, when asked to vote, stockholders rely on proxy statements distributed by corporate fiduciaries “such that individualized proof of reliance is not required.”

While rescissory damages were unavailable, the Court reasoned that it was still permitted to assess damages for TransCanada’s aiding and abetting the misleading proxy statement because “equity will not suffer a wrong without a remedy.”  While precedent could justify an award up to $2.50 per share, the Court concluded that $0.50 per share or 1.97% the stock price was the most “persuasive” award.  However, the Court reasoned that the disclosure damages were not additive and only established a remedial floor in cases with lower economic damages.  Thus, Plaintiffs were entitled to the higher of the two damage awards (here, $1 per share)—but not both.

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