Vrajeshkumar Patel v. Timothy S. Duncan ( 2021 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
MORGAN T. ZURN LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR 500 N. KING STREET, SUITE 11400
WILMINGTON, DELAWARE 19801-3734
May 17, 2020
Stephen E. Jenkins, Esquire Kevin R. Shannon, Esquire
Ashby & Geddes, P.A. Potter Anderson & Corroon LLP
500 Delaware Avenue, 8th Floor 1313 North Market Street, 6th Floor
Wilmington, DE 19801 Wilmington, DE 19801
William B. Chandler, III, Esquire David E. Ross, Esquire
Wilson Sonsini Goodrich & Rosati Ross Aronstam & Moritz LLP
222 Delaware Avenue, Suite 800 100 South West Street, Suite 400
Wilmington, DE 19801 Wilmington, DE 19801
Rudolf Koch, Esquire
Richards Layton & Finger, P.A.
920 North King Street
Wilmington, DE 19801
RE: Vrajeshkumar Patel v. Timothy S. Duncan, et al.,
Civil Action No. 2020-0418-MTZ
Dear Counsel:
I have reviewed the complaint and briefs on the pending motions to dismiss
(the “Motions”) in the above-captioned matter.1 I conclude that complete relief
cannot be afforded among the parties currently before the Court and order that
certain necessary parties be joined. Until they are, I will hold the Motions in
abeyance.
1
Docket Item (“D.I.”) 24; D.I. 25; D.I. 27; D.I. 28.
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I. BACKGROUND
Nominal Defendant Talos Energy, Inc. (“Talos”) is an oil and gas company
focused on offshore exploration and production in the Gulf of Mexico.2 Plaintiff
Vrajeshkumar Patel is a Talos stockholder.3 His verified complaint (the
“Complaint”) challenges a February 2020 transaction (the “Transaction”) under
which Talos acquired a portfolio of Gulf of Mexico producing assets, prospects, and
acreage from affiliates of nonparties Castex Energy 2014, LLC and ILX Holdings,
LLC (together, “Sellers”).4 Under the Transaction’s final terms, Sellers received
$385 million in cash and 110,000 shares of Talos preferred stock, to automatically
convert into 11 million shares of common stock twenty days after Talos distributed
its definitive information statement to its public stockholders.5 Defendant
Guggenheim Securities, LLC (“Guggenheim”) advised Talos on the Transaction.6
Plaintiff’s challenge to the Transaction centers on Talos’ two private equity
sponsors, Riverstone Holdings, LLC (“Riverstone Parent”) and Apollo Global
Management, Inc. (“Apollo Parent,” together with Riverstone Parent, the “Parents”).
2
D.I. 1 ¶ 11 [hereinafter “Compl.”].
3
Id. ¶ 10.
4
Id. ¶¶ 1, 59, 74.
5
Id. ¶ 74.
6
Id. ¶ 34.
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Neither Parent owns any Talos stock. Instead, several affiliated funds own the
relevant shares. Those funds are parties to a stockholder voting agreement (the
“Stockholders’ Agreement”) and some are identified in the Complaint.7 Funds
affiliated with Riverstone Parent (the “Riverstone Funds”) own approximately
27.5% of Talos’ stock;8 funds affiliated with Apollo Parent (the “Apollo Funds,” and
together with the Riverstone Funds, the “Funds”) own approximately 35.4% of
Talos’ stock.9 Plaintiff did not name the Funds as defendants in this action.
7
See D.I. 27, Ex. 6 [hereinafter “Stockholders’ Agr.”]; Compl. ¶¶ 20–21.
8
Compl. ¶¶ 14–15, 62. It is unclear how many Riverstone Funds own Talos stock. The
Complaint only mentions one by name, while the Stockholders’ Agreement mentions three.
Compare id. ¶ 21 (“[Riverstone Parent] controls numerous affiliates, including Riverstone
Energy Partners V, L.P., a controller of Old Talos. As used in this Complaint, the term
‘Riverstone’ refers to Riverstone Holdings, LLC and its affiliates.”), with Stockholders’
Agr. at 1 (referencing “Riverstone Talos Energy Equityco LLC, a Delaware limited
liability company, Riverstone Talos Energy Debtco LLC, a Delaware limited liability
company (together, the ‘Riverstone Feeders’), Riverstone V FT Corp Holdings, L.P., a
Delaware limited partnership (the ‘Riverstone Blocker Holding Company’ and, together
with the Riverstone Feeders and any other member of the Riverstone Group executing a
joinder, the ‘Riverstone Parties’)”). Riverstone’s brief represents that two Riverstone
Funds own the relevant stock. See D.I. 28 at 5 n.4 (describing the Riverstone Funds’
organizational structure). In any case, it is undisputed that Riverstone’s affiliated funds,
rather than Riverstone Parent itself, own the relevant stock. As used in this letter, the term
“Riverstone Funds” refers to the Riverstone entities that own the relevant Talos stock.
9
Compl. ¶¶ 14–15, 62. It is similarly unclear how many Apollo Funds own Talos stock.
Compare id. ¶ 20 (“Apollo controls numerous affiliates, including Apollo Management
VII, L.P. and Apollo Commodities Management, L.P., two controllers of Old Talos. As
used in this Complaint, the term ‘Apollo’ refers to Apollo Global Management, Inc. and
its affiliates.”), with Stockholders’ Agr. at 1 (referencing “AP Talos Energy LLC, a
Delaware limited liability company, AP Talos Energy Debtco LLC, a Delaware limited
liability company (together, the ‘Apollo Feeders’), AP Overseas Talos Holdings
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Plaintiff filed his seven-count Complaint on May 29, 2020.10 Counts II and
V allege that the “Controllers,” defined as Apollo Parent, Riverstone Parent, the
Apollo Funds, and the Riverstone Funds, breached their fiduciary duties. 11 Counts
III and VI allege that Guggenheim aided and abetted the Controllers’ breaches.12
Central to the Complaint is Plaintiff’s theory that the Parents and the Funds
combined their substantial Talos holdings and formed a control group.13 Plaintiff
alleges that “[a]t all relevant times, Talos has been controlled collectively by
Riverstone and Apollo.”14 The Complaint defines “Riverstone” as including both
Riverstone Parent and the Riverstone Funds.15 Similarly, the Complaint defines
Partnership, LLC, a Delaware limited liability company, AIF VII (AIV), L.P., a Delaware
limited partnership, ANRP DE Holdings, L.P., a Delaware limited partnership
(collectively, the ‘Apollo Blocker Holding Companies’ and, together with the Apollo
Feeders and any other member of the Apollo Group executing a joinder, the ‘Apollo
Parties’)”). Again, it appears undisputed that Apollo’s affiliated funds, rather than Apollo
Parent itself, own the relevant stock. As used in this letter, the term “Apollo Funds” refers
to the Apollo entities that own the relevant Talos stock. The term “Funds” refers to the
relevant Riverstone Funds and Apollo Funds.
10
See generally Compl.
11
Id. ¶¶ 20–22; 169–73; 188–92. Plaintiff also seeks relief related to these counts, in the
form of a finding that the Controllers, as defined, breached their fiduciary duties to Talos
and its minority stockholders. Id. ¶ F.
12
Id. ¶¶ 174–82, 193–201.
13
Id. ¶¶ 2, 22.
14
Id. ¶ 22.
15
Id. ¶ 20 (“[Apollo Parent] controls numerous affiliates, including Apollo Management
VII, L.P. and Apollo Commodities Management, L.P., two controllers of Old Talos. As
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“Apollo” as including both Apollo Parent and the Apollo Funds.16 Based on these
defined terms, I understand Plaintiff to argue that the Parents and the Funds formed
a control group and therefore owe fiduciary duties to Talos’ minority stockholders.17
Plaintiff argues the control group is empowered in part by the Funds’ stock holdings,
and that the Parents are connected in a legally significant way.18
Because Sellers are affiliated with Riverstone Parent,19 a member of the
alleged control group, Plaintiff alleges that the control group stood on both sides of
the Transaction, subjecting it to entire fairness review.20 Plaintiff devotes substantial
space in his Complaint to the theory that the Transaction was not entirely fair.21
Defendants filed the pending Motions on August 4.22 The Motions assert that
Plaintiff failed to adequately plead the existence of a control group. Defendants
used in this Complaint, the term ‘Apollo’ refers to Apollo Global Management, Inc. and
its affiliates.”).
16
Id. ¶ 21 (“[Riverstone Parent] controls numerous affiliates, including Riverstone Energy
Partners V, L.P., a controller of Old Talos. As used in this Complaint, the term
‘Riverstone’ refers to Riverstone Holdings, LLC and its affiliates.”).
17
See id. ¶¶ 170, 189.
18
See D.I. 48 at 20 (citing Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del.
Ch. May 22, 2009)). This letter does not address whether those ties are sufficiently pled.
19
Compl. ¶ 59.
20
Id. ¶ 80.
21
See id. ¶¶ 81–148.
22
See D.I. 24; D.I. 25; D.I. 27; D.I. 28.
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argue, among other things, that because Plaintiff named the nonstockholder Parents
instead of the stockholder Funds as defendants in the Complaint, he sued the wrong
entities, and his Complaint must be dismissed.23
The parties briefed the Motions and presented oral argument on February 19,
2021.24 As explained in more detail below, I conclude that the Parents may properly
be before the Court, but Plaintiff’s control group is missing the Funds as necessary
parties. Before the Court can consider the Motions’ merits, all the alleged control
group’s members must be present to defend their interests.
II. ANALYSIS
The joinder of all necessary parties is an important gatekeeping mechanism in
any litigation. As Vice Chancellor Slights described:
As master of his complaint, a plaintiff decides, among other things, who
to sue, who not to sue, where to sue and what claims to bring. When a
plaintiff elects not to sue a party who, “in equity and good conscience,”
is deemed “indispensable” to the resolution of the pled claims, courts
of equity have long understood that the plaintiff’s election not to sue
that party cannot be countenanced and must be remedied.25
Rule 19(a) provides:
23
See D.I. 28 at 14–16; D.I. 26 at 20–22.
24
See D.I. 73; see also D.I. 76.
25
Germaninvestments AG v. Allomet Corp., 2020 WL 6870459, at *1 (Del. Ch.
Nov. 20, 2020) (footnotes omitted) (citing Ct. Ch. R. 19).
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Persons to Be Joined if Feasible. A person who is subject to service
of process and whose joinder will not deprive the Court of jurisdiction
over the subject matter of the action shall be joined as a party in the
action if (1) in the person’s absence complete relief cannot be accorded
among those already parties, or (2) the person claims an interest relating
to the subject of the action and is so situated that the disposition of the
action in the person’s absence may (i) as a practical matter impair or
impede the person’s ability to protect that interest or (ii) leave any of
the persons already parties subject to a substantial risk of incurring
double, multiple, or otherwise inconsistent obligations by reason of the
claimed interest.26
If such a necessary person has not been joined, “the Court shall order that the person
be made a party.”27 The Court may do so upon a motion28 or sua sponte.29 If joinder
is not feasible, the Court must determine whether the person is indispensable such
that the case cannot go on without her.30
The Complaint and the Motions pose the question of whether the nonparty
Funds are members of a control group. Any decision favoring Plaintiff on Counts II
and V would include a determination that the Funds were in a control group and
owed fiduciary duties to Talos’ minority stockholders. The Funds therefore have
26
Ct. Ch. R. 19(a).
27
Id. (emphasis added).
28
See Ct. Ch. R. 12(b)(7).
29
E.g., Tikiob v. Tikiob-Carlson, 2020 WL 4036789, at *4 (Del. Ch. July 16, 2020), report
adopted by 2020 WL 4474951 (Del. Ch. Aug. 3, 2020); E.I. Dupont De Nemours & Co v.
Shell Oil Co., 1983 WL 8942, at *1 (Del. Ch. Dec. 13, 1983).
30
See Ct. Ch. R. 19(b).
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“an interest relating to the subject of the action,”31 namely, preserving their status as
nonfiduciaries. Allowing the litigation to commence in their absence would “impair
or impede [the Funds’] ability to protect that interest.”32 Complete relief also could
not be afforded without the Funds’ presence, as a judgment against “Riverstone” or
“Apollo,” as defined in the Complaint, would also be against the relevant Funds.33
Defendants argue this deficiency means the Complaint must be dismissed.
According to Defendants, the Parents are the wrong parties and should be dismissed
altogether.34 Defendants’ position mischaracterizes Plaintiff’s theory. Plaintiff does
not argue that the Parents alone formed a control group. Rather, the alleged control
group includes both the Parents, which do not own Talos stock, and the relevant
31
Id. 19(a)(2).
32
Id. 19(a)(2)(i).
33
See id. 19(a)(1); Compl. ¶ 20–21. The Funds are legally distinct entities from their
corporate parents and Plaintiff has not advanced any argument to pierce the corporate veil
or otherwise ignore corporate separateness.
34
See D.I. 28 at 14 (“Plaintiff has incorrectly named Riverstone as a defendant in this
action. . . . [T]he Riverstone Funds—and not Riverstone [Parent]—owned Talos stock at
the time of the challenged transaction.”); D.I. 26 at 20 (“[T]his Complaint should also be
dismissed as to Apollo because Plaintiff sued the incorrect Apollo entity, namely [Apollo
Parent]. In short, Plaintiff cannot make claims against [Apollo Parent]. [Apollo Parent]
has affiliates that manage the Apollo-related funds that invested in Talos. Given the
relationship of [Apollo Parent] and the relevant funds there is simply no legitimate basis
for the Plaintiff to include [Apollo Parent] as a party here.”).
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Funds, which do.35 Delaware law may countenance including the Parents in a
control group, even though they do not own stock.36 In In re EZCORP Inc.
Consulting Agreement Derivative Litigation, the Court extended fiduciary duties to
an individual defendant that was the company’s “ultimate controller,” even though
he exercised control indirectly and did not himself own stock.37 EZCORP also held
that downstream entities through which the “ultimate human controller” owned the
relevant stock “likewise are appropriate defendants for a breach of fiduciary duty
claim” under a controlling stockholder theory.38
Here, Plaintiff appears to advance a parallel theory, albeit through murky
defined terms, that Riverstone Parent, Apollo Parent, the Riverstone Funds, and the
Apollo Funds formed a control group. All these entities may be proper defendants
to such a claim; whether Plaintiff can plead and prevail on his theory remains to be
seen. I note that the Parents have an incentive to argue—and have argued—that the
35
See Compl. ¶¶ 20–22.
See In re Pattern Energy Gp. Inc. S’holders. Litig., 2021 WL 1812674, at *39 (Del. Ch.
36
May 6, 2021).
37
2016 WL 301245, at *8–10 (Del. Ch. Jan. 25, 2016) (citing S. Pac. Co. v. Bogert, 250
U.S. 483, 491–92 (1919), also citing Eshleman v. Keenan, 187 A. 25 (Del. Ch. 1936)
(Wolcott, C.), aff’d, 2 A.2d 904 (Del. 1938), also citing Sterling v. Mayflower Hotel Corp.,
93 A.2d 107, 109–10 (Del. 1952)); see also Pattern Energy, 2021 WL 1812674, at *38–
41.
38
EZCORP, 2016 WL 301245, at *10.
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entities did not form a control group. “While the named Defendants are incented to
raise defenses, that does not mean the absent parties, whose rights would be directly
affected, do not have a right to be heard.”39 In view of the Funds’ obvious interest
in adjudicating whether they owe fiduciary duties to Talos’ minority stockholders,
they are plainly necessary parties and ought to be joined as defendants.
Rule 19 requires joinder of a necessary party if such joinder is feasible.40 No
party has argued that joining the Funds is not feasible for jurisdictional or other
reasons. To the contrary, Plaintiff offered to amend the Complaint to add the Funds
as defendants.41 I take this as a representation that joining the necessary Funds
would be feasible under Rule 19(a). Moreover, it appears that the Funds listed in
the shareholders’ agreement are Delaware entities.42 Because they are subject to
service of process, I conclude that joining the Funds that own the relevant Talos
stock is feasible and thus, they must be joined under Rule 19(a).43 To the extent
39
Germaninvestments, 2020 WL 6870459, at *9.
40
See Ct. Ch. R. 19(a); Germaninvestments, 2020 WL 6870459, at *6 (“If a party should
be joined under Rule 19(a), the Court’s next inquiry is whether joinder is feasible. If it is,
then the Court will direct that joinder occur.”).
41
See D.I. 48 at 51–52. Defendants did not respond to Plaintiff’s proposed amendment in
their reply briefs. See generally D.I. 55; D.I. 53.
42
See Stockholders’ Agr. at 1.
43
See Ct. Ch. R. 19(a).
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joining the necessary Funds is not feasible, the parties should advise the Court within
five business days of this letter.
III. CONCLUSION
The Riverstone Funds and Apollo Funds that hold the relevant Talos stock are
necessary parties to this action. Until they are joined, the Motions are held in
abeyance. The parties shall confer on a stipulated order identifying and joining the
necessary Funds and updating the case caption. If the Funds wish to join the Motions
and present additional argument, the parties shall confer on a schedule by which
those positions, and any response by Plaintiff, may be concisely presented to the
Court. Once the Funds are joined and their positions, if any, are presented, the Court
will take the Motions under advisement.
Sincerely,
/s/ Morgan T. Zurn
Vice Chancellor
MTZ/ms
cc: All Counsel of Record, via File & ServeXpress