(Del. Ch., Apr. 14, 2009) (Letter Opinion)
This decision involved a class plaintiff’s motion for expedited proceedings.
In the fall of 2008, Exelon Corporation (“Exelon”) engaged NRG Energy, Inc. (“NRG”) in discussions regarding a potential acquisition of NRG by Exelon. When those discussions failed, Exelon proceeded to publicly announce a proposal to acquire NRG in a stock-for-stock exchange. Exelon’s offer was rejected as inadequate by the NRG board. Exelon responded by making its offer directly to NRG’s shareholders and brought suit against the NRG board, claiming that it had breached its fiduciary duties in responding to Exelon’s offer.
Thereafter, Exelon notified NRG of its intent to nominate nine directors to NRG’s board and propose a bylaw amendment increasing the size of the board from twelve to nineteen directors. Significantly, Exelon only sought to nominate nine directors because NRG’s debt instrument contained a continuing director provision that would accelerate NRG’s $4B debt unless a majority of its board were “continuing directors,” defined as either incumbent directors or directors nominated or approved by incumbent directors. Exelon proposed having four of its nominees run against NRG incumbents and its five other nominees fill the new seats to be created by the proposed bylaw amendment. Exelon also made it publicly known that it would permit NRG to nominate directors to fill the other two new seats. Consistent with Exelon’s expectations, the NRG board of directors took action to expand the board to thirteen and appointed a director to one of the seats left open by Exelon and stated its intent to appoint another director before NRG’s next annual meeting. This step taken by the NRG board assured that a vote in favor of Exelon’s board expansion proposal and all nine of its nominees would not immediately trigger the continuing director provision in NRG’s debt instrument. Plaintiffs, who are stockholders of NRG, then filed a motion with the Court for expedited proceedings and injunctive relief to require the defendant NRG board members to retract their appointment of the thirteenth director, and enjoin the NRG board from interfering with the upcoming election of directors. Plaintiffs argued that the NRG board’s actions improperly manipulated the vote of shareholders and implicated the compelling justification standard of Blasius.
In order for their motion to be granted, the plaintiffs were required to show “a sufficiently colorable claim and . . . a sufficient possibility of a threatened irreparable injury.” Plaintiffs did not meet the second prong of the test, so the Court found that the cost of expedited proceedings were not warranted. Plaintiffs also opposed defendants’ defensive measures, asserting that such measures would affect the vote of the stockholders at the annual meeting. In rejecting this contention, the Court explained that by increasing the size of the board and filling the newly-created directorship the NRG board effectively increased the number of continuing directors, thereby making the triggering of the continuing director provision less likely, and thus freeing the shareholders to vote for Exelon’s directors if they wished. The Court found that plaintiffs’ request was fundamentally flawed because, whether or not the bylaw amendment expanding the board passed, Exelonnominated directors would not constitute a majority of the board or trigger the continuing director provision. Thus, there was no present threat which required expedition.
The full opinion is available here.