On December 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a putative stockholder suit asserting breach of fiduciary duty claims against NRG Energy, Inc. (“NRG”), the controlling stockholder of NRG Yield, Inc. (“Yield”), and the Yield directors in connection with a reclassification of Yield’s shares. IRA Trust FBO Bobbie Ahmed v. David Crane, et al., Consol. C.A. No. 12742-CB (Dec. 11, 2017). Plaintiff claimed that the reclassification enabled NRG to maintain its control over Yield and that this qualified as a “non-ratable” benefit that was not shared with Yield’s minority stockholders. The Court agreed that plaintiff adequately pleaded that the reclassification was a conflicted transaction such that the entire fairness standard would apply but ultimately dismissed the case after finding that the transaction met the requirements for application of the business judgment rule under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”).
Yield is a dividend-growth company that serves as the primary mechanism through which NRG owns and operates energy and infrastructure assets. In connection with an IPO, in July 2013 Yield split its stock into two classes: Class A shares, which were sold through the IPO, and Class B shares, which were held by NRG and constituted approximately 65% of the total voting power. After the IPO, NRG’s controlling interest in Yield was diluted to 55%, as Yield issued new shares to finance additional acquisitions, leading NRG to propose to the Yield board several alternative transactions designed to guard against further dilution, including a proposal to issue new Class C stock that would carry no voting rights. From the outset of negotiations, the stock issuance proposal was conditioned upon (i) approval of the Yield board’s Conflicts Committee and (ii) approval by a “majority of the minority” of Yield stockholders. After negotiations between NRG and the Yield Conflicts Committee, which engaged both legal counsel and a financial advisor, Yield issued two new classes of stock (Class C and D), each entitling its holder to 1/100 of a vote per share, which were distributed to holders of outstanding Class A and B shares, respectively, through a stock split. A majority of the minority stockholders voted in favor the reclassification, which was effected on May 14, 2015.
In opposing defendants’ motion to dismiss, plaintiff argued that the reclassification was subject to an entire fairness review because NRG, as controlling stockholder, received a non-ratable benefit that was unavailable to minority stockholders. The Court agreed, concluding that the complaint adequately alleged that the ability to perpetuate NRG’s majority control over yield was, at the pleadings stage, sufficient to invoke the entire fairness standard. Nevertheless, the Court found that the transaction’s procedural protections—including the independent committee and majority-of-the-minority approval—warranted application of the business judgment rule under MFW. Citing various other recent Court of Chancery decisions in which the MFW protections were applied to transactions other than a squeeze-out merger (e.g., EZCORP (where the court observed that MFW should apply to any conflicted controller transaction) and Martha Stewart (which applied MFW to challenged side deals with the controlling stockholder)), the Court found no principled reason not to apply MFW to the reclassification. The Court also rejected plaintiff’s argument that the stockholder vote was not adequately informed, concluding that proxy adequately disclosed all material information, including that NRG was close to losing majority control of yield.
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