In this opinion Vice Chancellor Strine declined to enjoin a merger between Massey Energy Co. (“Massey”) and Alpha Natural Resources, Inc. (“Alpha”), pursuant to which Massey shareholders will receive Alpha stock and $10 cash per share. Plaintiffs only pursued their claim that the Massey directors breached their fiduciary duties in negotiating and approving the Alpha merger, by failing to identify and secure the full value of derivative claims against Massey’s officers and directors for failure to monitor mine safety (“Derivative Claims”). The Derivative Claims were triggered by a massive explosion in April 2010 that killed 29 workers at Massey’s Upper Big Branch mine and predated the sale process. As a result of the merger, standing to prosecute the Derivative Claims will likely pass from Massey’s shareholders to Alpha. The Court agreed that the Massey directors did not consider the Derivative Claims “in an ideal manner,” but concluded that they exercised “reasonable, good faith efforts to get as favorable a deal as they could,” and were not improperly motivated by a desire to escape liability for the Derivative Claims. Accordingly, the Court refused to scrutinize the Massey directors’ conduct under the entire fairness standard, but noted they could likely show the merger was economically fair because the value of the Derivative Claims was not material. In addition, the Court considered the potential harm to plaintiffs from an injunction if Alpha withdrew its offer leaving Massey directors in control, as well as the monetary relief potentially available post-closing, and concluded that the shareholders should decide for themselves whether to accept a premium offer negotiated at arms’ length or preserve the right to pursue the Derivative Claims.
The day after the opinion, Massey shareholders voted to approve the Alpha merger.
Vice Chancellor Strine began his analysis by explaining that, as a matter of “black letter law” pre-merger derivative claims will pass to the acquirer except in two circumstances: (1) where the merger is a fraudulent attempt to deprive shareholders of standing or (2) the merger is merely a reorganization that does not affect shareholders’ relative ownership in the resulting entity. The preliminary record suggested that neither exception would apply, and the Court expressly rejected plaintiffs’ argument that the Delaware Supreme Court’s recent opinion in Arkansas Teacher Ret. Sys. v. Caiafa, 996 A.2d 321,323 (Del. 2010), added a third exception, i.e., when a board’s pre-merger breaches of fiduciary duty reflected misconduct “so injurious to the company that it led to the subsequent merger.” Accordingly, the Court found that Alpha would likely control the Derivative Claims and noted that it was “surprising” and “regrettable” that the Massey directors did not analyze their value, reiterating “any board negotiating the sale of a corporation should attempt to value and get full consideration for all of the corporation’s material assets.”
Although the board’s consideration of the Derivative Claims was “less than ideal,” and the better practice would have been for independent counsel to advise on their value (not the directors’ counsel in the derivative actions), the Court concluded that plaintiffs were unlikely to succeed on the merits. In so holding, the Court reasoned that the directors acted in good faith reliance on the advice of their counsel and the Derivative Claims were not likely to be material assets. Vice Chancellor Strine believed that the director oversight claims were well pled and likely to survive a motion to dismiss, but not material in the context of an $8.5 billion merger. Because of the numerous difficulties they faced, the Court rejected plaintiffs’ argument that the Derivative Claims were equivalent in value to the aggregate negative financial effect of the Upper Big Branch explosion on Massey. First, the business judgment rule and Massey’s §102 (b)(7) exculpatory charter provision require that plaintiffs prove that independent Massey directors acted with scienter in failing to adequately oversee Massey’s operations. As the Court has often stated, such a claim is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Second, the value of the Derivative Claims must be further discounted because of the offsetting harm, in the form of judgments, fines, penalties and settlements, that proving conscious disregard of safety failures would bring to Massey (or its acquirer). Third, the value of any judgment on the Derivative Claims would be limited to the amount that could be collected from the defendants. In this case, the individual defendants’ insurance coverage was capped at $95 million and likely excludes coverage for willful acts. Finally, plaintiffs’ allegation that the Derivative Claims were grossly undervalued is disproved by the fact that no other bidder made a topping bid.
In finding that plaintiffs failed to demonstrate irreparable harm, the Court held that monetary relief, though difficult to obtain, was potentially available via appraisal, a direct action against the directors for a sale approved in bad faith, continued pursuit of the Derivative Claims (if the merger was intended to deprive shareholders of standing), or double derivative litigation. Finally, in concluding that an injunction was likely to cause more harm than benefit to Massey stockholders, the Court considered the likelihood that Alpha would abandon the merger if the Court enjoined the transaction and the additional damage to Massey that existing management (who plaintiffs have deemed unsound) could cause during any delay of the merger.
The full opinion is available here.