On May 15, 2017, Vice Chancellor Sam Glasscock III of the Delaware Chancery Court dismissed a shareholder derivative action asserting that the directors of The Williams Companies, Inc. (“Williams”) breached their duty of loyalty in connection with its entry into, and subsequent cancellation of, an agreement to acquire the remaining interest in its affiliate, Williams Partners L.P. (“WPZ”). Ryan v. Armstrong, C.A. No. 12717-VCG (Del. Ch. May 15, 2017). Plaintiff, a Williams shareholder, alleged that Williams’ directors were “motivated . . . by a desire . . . to entrench themselves” when they approved the WPZ acquisition in the context of “acquisition overtures” made toward Williams by another company, Energy Transfer Equity, L.P. (“ETE”). The Court held that allegations of “defensive measures”—even if sufficient to trigger enhanced scrutiny under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)—do not result in “automatic demand excusal.” Therefore, because demand futility was not otherwise adequately pleaded, the Court granted dismissal under Court of Chancery Rule 23.1 for plaintiff’s failure to make a pre-suit demand on the Williams board to pursue the litigation.
In 2015, Williams entered into an agreement to merge with ETE. Prior to its eventual entry into that agreement, however, Williams’ board approved, and Williams entered into, an agreement to acquire WPZ. Plaintiff alleged that “Williams’ CEO, motivated by a dislike of ETE and its management, or by a desire to entrench himself, engineered the WPZ Acquisition as a defensive measure, designed to make Williams harder for ETE to swallow; and that the other directors voted in favor to entrench themselves.” When Williams did agree to merge with ETE, it was allegedly required to end its agreement to acquire WPZ and incur a $410 million break-up fee and other expenses. Ultimately, the ETE transaction failed, according to the Court, “for reasons not pertinent” to the present suit. Plaintiff thereafter asserted a shareholder derivative claim for damages against the directors who approved the WPZ acquisition for allegedly having breached their fiduciary duty of loyalty by entering into the WPZ agreement, which plaintiff contended was an unreasonable anti-takeover defense subject to enhanced scrutiny under Unocal.
As the Court explained, “a plaintiff may not maintain litigation derivatively on behalf of a corporation, absent demand, unless she demonstrates via specific pleading that there is a reasonable doubt whether a majority of the directors are capable of bringing business judgment to bear on such a demand.” Here, according to the Court, “[p]laintiff ha[d] not attempted to plead via particularized facts, on a director-by-director basis, that a majority of the board is interested in the transaction, or lacks independence;” instead, “he relie[d] on the inference of entrenchment that arises under Unocal.”
The Court, however, held that even “a well-pled Unocal claim” is not, “standing alone, sufficient to excuse demand.” Moreover, the Court found that “demand under Rule 23.1 is not excused” because plaintiff “failed . . . to plead sufficient particularized facts to imply a substantial likelihood of liability for damages arising out of those actions on the part of a majority of the directors.” The Court, therefore, dismissed the complaint.
Notably, because the Court dismissed the complaint under Rule 23.1, it left unresolved the question of whether Unocal even applies in a damages action, as opposed to an action for injunctive relief in a pending merger, a point disputed by the parties. But the Court did highlight that “[i]t is clear . . . that Unocal enhanced scrutiny is primarily a tool for this Court to provide equitable relief where defensive measures by directors threaten the stockholders’ right to approve a value-enhancing transaction.”
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