Molycorp, Inc. is a publically traded Delaware corporation engaged in a the production and sale of rare earth oxides. Private equity investors held 44% of Molycorp’s stock, appointed certain directors and had demand registration rights. As an earlier stage company, Molycorp had a need for substantial cash to fund its development budget.
In 2010, prices for rare earth elements shot up, and Molycorp’s stock price reacted accordingly. Around this same time, Molycorp learned that a loan guarantee from the Department of Energy would not come through and other joint venture opportunities were in danger. In May 2011, the private equity investors exercised their demand registration rights and an offering was conducted in June 2011. The sale allegedly saturated the market with Molycorp stock and caused media concern that insiders were abandoning the company. In June 2011, Molycorp also conducted a private offering of convertible notes but was still short more than $100 million in cash to meet its operating budget.
Within a few months of the June offering, prices for rare earth elements, and Molycorp stock, fell significantly. A derivative action followed. The plaintiffs complained about the board’s failure to delay the June offering by the private equity investors and that the private equity investors closed Molycorp out of the equity markets at a time when Molycorp was in dire need of an equity infusion.
The Delaware Court of Chancery dismissed the derivative action for failure to state a claim. According to the court, the plaintiffs’ basic argument was that, at a time when Molycorp needed funding, other sources were risky at best, and everyone knew that prices would fall eventually, defendants sold their own stock and shut Molycorp out of a sale. The court noted it was not enough to observe that a controller had interests that conflicted with the minority shareholders’ interests—to state a claim, one must allege that the controller used her power in an unfair manner. The law does not require a controller to sacrifice every benefit of her investment because she is interested in the result.
The court found the pleadings did not support the main conclusions the court was asked to draw. The plaintiffs did not allege the registration rights agreement was invalid. That fact, combined with a lack of reason to believe that the private equity investors knew when the rare earth element bubble would burst, defeats the fiduciary duty claims against the private equity investors. The private equity investors were major investors in Molycorp and bargained for certain rights before its IPO. Contending that the private equity investors exercised rights that benefited themselves but were fairly extracted and disclosed in public filings does not itself state a claim that the private equity investors took advantage of Molycorp and its minority shareholders. According to the court, a finding otherwise could discourage would-be investors from funding start-ups for fear that their investment value will not be preserved despite disclosed, carefully negotiated agreements. Even assuming that the private equity investors controlled their board appointees, the plaintiffs would need to plead that the private equity investors had done something wrong to state a breach of fiduciary duties.
As to the director defendants, the court found no reason to infer the directors had a duty to conduct an offering on behalf of Molycorp or interfere with the private equity investors’ registration rights. There was no reason to infer that as of May 2011 Molycorp could not make another successful offering. All developing companies have budget issues, according to the court, and it is not reasonable to infer fault for every decision not to raise money. The court said the strongest argument for not finding fault by the directors was that there were no allegations that the director defendants knew that the market would rise and fall as dramatically as it did, when it did. According to the court, a director is not liable for failing to predict the movement of stock prices, and a stockholder is generally allowed to sell her shares.