In re Paramount Gold & Silver Corp. Stockholders Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE PARAMOUNT GOLD AND SILVER CONSOLIDATED
CORP. STOCKHOLDERS LITIGATION C.A. No. 10499-CB
MEMORANDUM OPINION
Date Submitted: February 10, 2017
Date Decided: April 13, 2017
Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley,
RIGRODSKY & LONG, P.A., Wilmington, Delaware; Derrick B. Farrell, DLA
PIPER US LLP, Wilmington, Delaware; Michael Van Gorder, FARUQI &
FARUQI, LLP, Wilmington, Delaware; Peter Andrews, ANDREWS & SPRINGER
LLC, Wilmington, Delaware; Shannon L. Hopkins and Sebastiano Tornatore, LEVI
& KORSINSKY LLP, Stamford, Connecticut; Michael Palestina, KAHN SWICK
& FOTI LLP, Madisonville, Louisiana; Juan E. Monteverde and James M. Wilson,
Jr., FARUQI & FARUQI, LLP, New York, New York; Joshua Lifshitz, LIFSHITZ
& MILLER, Garden City, New York, Attorneys for Plaintiffs.
Albert H. Manwaring, IV and Albert J. Carroll, MORRIS JAMES LLP, Wilmington,
Delaware, Attorneys for Defendants Christopher Crupi, John Carden, Michel
Stinglhamber, Robert Dinning, Eliseo Gonzalez-Urien, Christopher Reynolds, and
Shawn Kennedy.
BOUCHARD, C.
In this action, former stockholders of Paramount Gold and Silver Corporation
(“Paramount”) sued the members of its board of directors challenging a transaction
Paramount entered with Coeur Mining, Inc. (“Coeur”) that closed in April 2015.
Defendants have moved to dismiss the complaint for failure to state a claim for relief.
Before the transaction, Paramount had two mining projects, one in Mexico
and the other in Nevada. The transaction involved (1) the spin-off of the Nevada
mining assets into a separate entity, approximately 95% of the shares of which were
distributed to Paramount’s stockholders, and (2) a stock-for-stock merger of a
subsidiary of Coeur into Paramount (the “Merger”), which then held the Mexican
mining assets but not the Nevada mining assets. On the same day it entered into the
merger agreement, Paramount entered into a royalty agreement pursuant to which a
wholly-owned subsidiary of Coeur acquired a 0.7% royalty interest in the Mexican
mining project in exchange for a payment of $5.25 million.
The complaint asserts a single claim for breach of fiduciary duty against the
seven members of Paramount’s board. Plaintiffs do not challenge the independence
or disinterestedness of the majority of the board, nor do they contend that the
transaction should be subject to Revlon or entire fairness review.
Plaintiffs’ primary contention is that Unocal enhanced scrutiny should apply
on the theory that the royalty agreement, when combined with the termination fee
provision in the merger agreement, constituted an unreasonable deal protection
1
device. For the reasons explained below, I conclude that this contention is without
merit because the terms of the royalty agreement did not prevent any interested party
from making a competing bid for Paramount and because the termination fee in the
merger agreement by itself concededly was reasonable.
I also conclude that the stockholder vote approving the transaction was fully-
informed. Therefore, under Corwin v. KKR Financial Holdings LLC and its
progeny, the Paramount board’s decision to enter into the merger agreement with
Coeur is subject to business judgment rule, and the complaint must be dismissed.
Finally, I conclude as a separate ground for dismissal that, even if Corwin did not
apply, the complaint must be dismissed because plaintiffs have failed to state a non-
exculpated claim for breach of fiduciary duty against the defendants.
I. BACKGROUND
Unless noted otherwise, the facts recited in this opinion come from the
allegations of the Verified Third Amended Class Action Complaint (the
“Complaint”) and the documents incorporated therein.1
1
The parties stipulated that if “Plaintiffs file an Amended Complaint and use any of the
documents produced in limited discovery to Plaintiffs on March 30, 2015 in their Amended
Complaint, Plaintiffs agree that any or all of the documents produced in limited discovery
to Plaintiffs on March 30, 2015 are deemed to be incorporated by reference in that
Amended Complaint.” Am. Stipulation and Order Governing Briefing on Defs.’ Mots. to
Dismiss ¶ 1 (Trans. ID. 59385071, Aug. 8, 2016).
2
A. Paramount and the Parties
Before the Merger, Paramount Gold and Silver Corporation was a precious
metals exploration company headquartered in Winnemucca, Nevada that had two
advanced stage mining projects: the Sleeper Gold Project and the San Miguel
Project. The Sleeper Gold Project was located off a main highway about 25 miles
from the town of Winnemucca, Nevada. The San Miguel Project consisted of over
142,000 hectares (over 353,000 acres) in the Palmarejo District of northwest
Mexico.
Paramount had not generated any revenue of its own and was heavily
dependent on its largest stockholder, FCMI Financial Corp., to fund its operations
and expansion. As of the date of the Merger, FCMI Financial Corp. owned
approximately 15.7% of Paramount’s outstanding common stock, which was listed
on the New York Stock Exchange under the ticker symbol “PZG.”
Plaintiffs Fernando Gamboa, Justin Beaston, Rob Byers, Jerry Panning, James
Alston, and Jonah Weiss, IRA allege they were stockholders of Paramount at all
times relevant to this action.
Defendants Christopher Crupi, Robert G. Dinning, Michel Stinglhamber,
Shawn V. Kennedy, Christopher Reynolds, John Carden, and Eliseo Gonzalez-Urien
each served as a member of Paramount’s board of directors since at least 2009, and
were the seven members of Paramount’s board of directors when it approved the
3
Merger. Crupi, the then-President and Chief Executive Officer of Paramount, was
the only management director on the board. Reynolds and Gonzalez-Urien were
designated to the board by FCMI Financial Corp.
B. Early Expressions of Interest in Paramount
At various times from 2007 to 2014, Coeur Mining, Inc. had expressed an
interest in acquiring Paramount’s San Miguel Project, and had entered into several
confidentiality agreements with Paramount to obtain confidential information in
pursuit of its interest in the San Miguel Project. During this period, Paramount also
explored the possibility of a business combination with other exploration and mining
companies, and entered into confidentiality agreements with those companies to
facilitate due diligence. None of these discussions resulted in a proposal that
Paramount’s board could recommend to its stockholders.
In October 2012, Coeur inquired whether Paramount would be interested in
selling a portion of its San Miguel Project for cash and shares. Paramount rejected
this proposal. In February 2013, Coeur again expressed its interest in the San Miguel
Project, which led the Paramount board to invite five investment banks to make
proposals to serve as its financial advisor in connection with a possible sale of all or
a portion of the company. The Paramount board ultimately deferred the decision to
hire a financial advisor.
4
C. Negotiations Leading to the Merger
In September 2014, Coeur sent Paramount a letter of intent describing a
proposed transaction that would result in Coeur acquiring Paramount, with
Paramount spinning off its Nevada business into a standalone public company
(“SpinCo”). The letter of intent contemplated mixed consideration of 20.6 million
shares of Coeur common stock and $19.7 million in cash. Coeur also would receive
9.9% of the fully diluted equity of SpinCo.
Later in September, the Paramount board made a counter-proposal to the
Coeur offer, which contemplated mixed consideration of 20.7 million shares of
Coeur common stock and $85.2 million in cash and required Coeur to purchase a
9.9% equity interest in SpinCo for an additional $6.2 million. The counter-proposal
also included the sale to Coeur of a 0.5% royalty interest in the Sleeper Gold Project
for $12 million in cash, and the sale of certain mining claims in the Spring Valley
District of Nevada for $6 million in cash. Coeur’s board rejected this counter-
proposal.
On October 14, 2014, the Paramount board engaged Scotia Capital (USA) Inc.
(“Scotia”) as its financial advisor.
On November 7, 2014, Coeur sent Paramount another draft letter of intent
setting forth the general terms under which Coeur would acquire Paramount in a
stock-for-stock transaction. The letter of intent provided for the issuance of
5
approximately 32.7 million shares of Coeur common stock, equating to
approximately 0.20 share of Coeur common stock for each outstanding share of
Paramount common stock. The letter of intent again contemplated that Paramount
would spin off its Nevada operations into SpinCo. It also contemplated that Coeur
would invest $10 million in cash in SpinCo and that SpinCo would combine with
another public company, with Coeur receiving a 4.9% interest in the combined
company. Coeur also proposed to enter into a royalty agreement with respect to the
San Miguel Project for $5.25 million.
On November 10, 2014, Paramount’s board met to consider Coeur’s most
recent proposal and created a special committee comprised of “all of the independent
members of the board excluding one independent member who had disclosed to the
board his potential conflict of interest due to his relationship with the third party
proposed to combine with SpinCo.”2 The board created the special committee
“solely to consider the proposed transaction between SpinCo and the third party.” 3
On November 14, 2014, the special committee decided to abandon the
proposed business combination between SpinCo and the third party and instructed
management to seek an alternative structure for the spin-off. Over the next several
2
Compl. ¶ 75.
3
Id.
6
weeks, Paramount and Coeur continued to engage in discussions and their counsel
exchanged drafts of documents for a proposed transaction.
D. The Merger Agreement and the Royalty Agreement
On December 15, 2014, Paramount’s board met to consider the terms of a
proposed merger transaction with Coeur, which it unanimously approved after
receiving a fairness presentation from Scotia. The next day, on December 16,
Paramount and Coeur entered into a merger agreement (the “Merger Agreement”).
The Merger Agreement provided for Coeur to acquire all of the outstanding
shares of Paramount common stock after Paramount spun off its Nevada assets into
SpinCo. Upon completion of the Merger, Paramount would become a wholly owned
subsidiary of Coeur. Paramount stockholders would receive 0.2016 of a share of
Coeur common stock in exchange for each share of Paramount common stock. They
also would receive a pro rata share of a 95.1% interest in SpinCo. Coeur would
provide SpinCo with $10 million in cash and hold the remaining 4.9% interest in
SpinCo.
The 0.2016 share of Coeur common stock represented an implied value of
$0.90 per share of Paramount common stock based on Coeur’s 20-day volume
weighted average price and a 19.8% implied premium over Paramount’s trading
price as of its last trading day. The implied value of the transaction was
7
approximately $146 million, without attributing any value to SpinCo. The estimated
aggregate value of SpinCo was approximately $37.5 million.
Section 7.3 of the Merger Agreement provides, in general terms, that if
Paramount’s stockholders voted against the Merger, Paramount would be obligated
to pay Coeur a $5 million termination fee if (1) an alternative acquisition proposal
was made to Paramount’s stockholders or to Paramount, and (2) within twelve
months after the termination of the Merger Agreement, Paramount consummated an
alternative transaction.
On the same day Paramount and Coeur entered into the Merger Agreement,
Paramount and certain of its subsidiaries entered into a royalty agreement
concerning the San Miguel Project with Coeur Mexicana S.A. de C.V. (“Coeur
Mexicana”), a wholly-owned subsidiary of Coeur (the “Royalty Agreement”).
Under the Royalty Agreement, Coeur Mexicana would receive a perpetual royalty
“privileged and preferential in payment” of 0.7% of the net smelter returns from the
sale or other disposition of productions produced from the San Miguel properties in
exchange for a payment of $5.25 million.4
4
Id. ¶ 105.
8
E. The Merger Closes
On January 7, 2015, Paramount and Coeur filed a joint preliminary
registration statement with the Securities and Exchange Commission, which was
amended three times, on February 9, 2015, March 4, 2015, and March 16, 2015 (the
“Registration Statement”).
On April 17, 2015, stockholders of Paramount holding over 54% of
Paramount’s outstanding common stock voted to approve the Merger, with
approximately 97% of those voting expressing their approval.5 The Merger closed
on the same day.
F. Procedural History
Shortly after the Merger’s announcement on December 17, 2014, six actions
were filed in this Court challenging the transaction. On February 18, 2015, the Court
consolidated the various actions into this action and appointed lead counsel.
By the end of March 2015, Paramount voluntarily produced limited discovery,
including board minutes and Scotia’s fairness presentation. Plaintiffs took no action
5
Carroll Aff. Ex. A, at 33 (162,027,422 shares outstanding as of record date); Ex. C, at 2
(87,855,333 shares approved out of (i) 162,027,422 shares outstanding, and (ii) 90,665,033
shares that voted or abstained). See In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d
162, 170-71 (Del. 2006) (holding that the Court of Chancery may take judicial notice of
the result of a stockholder vote approving a transaction where there is no reasonable dispute
about the vote).
9
after receiving this discovery to enjoin the proposed transaction, which closed on
April 17, 2015.
On February 1, 2016, after this action had been dormant for ten months, the
Court requested a status report from plaintiffs’ counsel. On April 8, 2016, plaintiffs
filed a Second Amended Complaint in which they deleted disclosure claims that they
previously had asserted.
On August 18, 2016, plaintiffs filed their Third Amended Complaint (as
defined above, the “Complaint”), asserting a single claim for breach of fiduciary
duty against the seven members of Paramount’s board in connection with their
approval of the transaction. The Third Amended Complaint added back allegations
challenging certain disclosures in the Registration Statement, including allegations
that plaintiffs had deleted just four months earlier.
On September 28, 2016, defendants moved to dismiss the Complaint for
failure to state a claim for relief. Argument was held on February 2, 2017, during
which the Court requested supplemental submissions, which were provided on
February 10, 2017.
II. ANALYSIS
The standards governing a motion to dismiss for failure to state a claim for
relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
10
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”6
The Court is not required, however, to accept mere conclusory allegations as true or
make inferences unsupported by well-pleaded factual allegations.7 The Court also
“is not required to accept every strained interpretation of the allegations proposed
by the plaintiff.”8
Defendants’ primary argument in favor of dismissal is that plaintiffs have
failed to state a claim for breach of fiduciary duty because of the effect of the
Paramount stockholders’ approval of the Merger. In Corwin v. KKR Financial
Holdings LLC, the Delaware Supreme Court explained that “[f]or sound policy
reasons, Delaware corporate law has long been reluctant to second-guess the
judgment of a disinterested stockholder majority that determines that a transaction
with a party other than a controlling stockholder is in their best interests.”9 Thus,
“when a transaction not subject to the entire fairness standard is approved by a fully
6
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted).
7
In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999), aff’d sub nom.
Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000) (TABLE).
8
Gen. Motors (Hughes), 897 A.2d at 168.
9
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 306 (Del. 2015).
11
informed, uncoerced vote of the disinterested stockholders, the business judgment
rule applies.”10
In Singh v. Attenborough, the Supreme Court further explained that: “When
the business judgment rule standard of review is invoked because of a vote, dismissal
is typically the result. That is because the vestigial waste exception has long had
little real-world relevance.”11 Recently, the Supreme Court twice affirmed the Court
of Chancery’s dismissal of post-closing challenges to merger transactions based on
the Corwin doctrine.12
Plaintiffs do not challenge the disinterestedness of the stockholder vote. Nor
do plaintiffs allege that the Merger, which involved a stock-for-stock exchange and
was approved by a majority independent and disinterested board, should be subject
to either a Revlon or an entire fairness standard of review.13 Plaintiffs instead
contend that Corwin does not apply here for two reasons: (1) because the combined
effect of the termination fee in the Merger Agreement and of certain provisions in
10
Id. at 308-09.
11
Singh v. Attenborough, 137 A.3d 151, 151-52 (Del. 2016).
12
See In re Volcano Corp. S’holder Litig., 143 A.3d 727 (Del. Ch. 2016), aff’d 2017 WL
563187 (Del. Feb. 9, 2017) (TABLE); City of Miami Gen. Empls.’ and Sanitation Empls.’
Ret. Tr. v. Comstock, 2016 WL 4464156 (Del. Ch. Aug. 24, 2016), aff’d 2017 WL 1093185
(Del. Mar. 23, 2017) (TABLE).
13
Tr. Oral Arg. 51 (Feb. 2, 2017) (acknowledging that Revlon does not apply). Although
the Complaint alleged that FCMI Financial Corp., which held 15.7% of Paramount’s
outstanding stock at the time of the Merger, was a controller, plaintiffs did not address this
theory in their brief and abandoned the issue. Tr. Oral Arg. 12-13.
12
the Royalty Agreement constituted a “preclusive and per se unreasonable” deal
protection device “rendering the vote coerced,” and (2) because the stockholder vote
was uninformed.14 As discussed below, neither argument has merit in my opinion.
A. The Complaint Fails to Allege Facts Supporting a Reasonable
Inference that Defendants Implemented Unreasonable Deal
Protections
Our Supreme Court has held that a “board’s decision to protect its decision to
enter a merger agreement with defensive devices against uninvited competing
transactions that may emerge is analogous to a board’s decision to protect against
dangers to corporate policy and effectiveness when it adopts defensive measures in
a hostile takeover contest,” and thus should be reviewed under the Unocal enhanced
judicial scrutiny standard.15 In this context, “defensive devices,” or “deal protection
devices” describe “any measure or combination of measures that are intended to
protect the consummation of a merger transaction. Defensive devices can be
economic, structural, or both.”16
14
Pls.’ Answering Br. 16.
15
Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 932 (Del. 2003). Under Unocal,
a board must first demonstrate that it had “reasonable grounds for believing that a danger
to corporate policy and effectiveness existed.” Unocal Corp. v. Mesa Petroleum Co., 493
A.2d 946, 955 (Del. 1985). It then must demonstrate that the defensive response adopted
was “reasonable in relation to the threat posed” by demonstrating that (1) the defensive
response was neither preclusive nor coercive, and that (2) the board’s actions fell “within
a range of reasonable responses to the threat” posed. Unitrin, Inc. v. Am. Gen. Corp., 651
A.2d 1361, 1367, 1373 (Del. 1995).
16
Omnicare, 818 A.2d at 933-34.
13
Invoking Corwin, defendants contend that the Unocal intermediate standard
of review does not apply here because the Merger was approved by a fully informed
and uncoerced vote of a majority of Paramount’s disinterested stockholders.
Plaintiffs counter that this position cannot be squared with the Delaware Supreme
Court’s earlier decision in In re Santa Fe Pacific Corporation Shareholder
Litigation,17 where the Court held in the context of a post-closing challenge that a
fully informed stockholder vote approving a merger did not preclude review of
certain deal protection devices under Unocal.18 The Supreme Court in Corwin did
17
669 A.2d 59 (Del. 1995).
18
More specifically, the Supreme Court held that a fully informed stockholder vote
approving the merger of Santa Fe Pacific Corporation and Burlington Northern, Inc. did
not remove from enhanced judicial scrutiny certain defensive measures (i.e., adoption of a
rights plan, approval of a joint tender offer and stock repurchase plan, and inclusion of a
termination fee in the merger agreement) that the board of Santa Fe implemented in the
face of a hostile bid by Union Pacific Corporation. After commenting that “enhanced
judicial scrutiny of Board action is designed to ensure that stockholders vote or decide to
tender in an atmosphere free from undue coercion,” the Court reasoned as follows:
In voting to approve the Santa Fe-Burlington merger, the Santa Fe
stockholders were not asked to ratify the Board’s unilateral decision to erect
defensive measures against the Union Pacific offer. The stockholders were
merely offered a choice between the Burlington Merger and doing nothing.
The Santa Fe stockholders did not vote in favor of the precise measures under
challenge in the complaint. Here, the defensive measures had allegedly
already worked their effect before the stockholders had a chance to vote. In
voting on the merger, the Santa Fe stockholders did not specifically vote in
favor of the Rights Plan, the Joint Tender or the Termination Fee.
Since the stockholders of Santa Fe merely voted in favor of the merger and
not the defensive measures, we decline to find ratification in this instance.
Id. at 68.
14
not discuss or expressly overrule this aspect of Santa Fe.19 I need not address the
apparent tension between Corwin and Santa Fe that plaintiffs focus on because it is
apparent from the face of the Complaint and documents incorporated therein that the
provisions challenged here do not constitute an unreasonable deal protection device.
As noted above, plaintiffs assert that the combination of the Royalty
Agreement and the termination fee in the Merger Agreement constituted an
unreasonable deal protection device under Unocal. In making this argument,
plaintiffs concede that the $5 million termination fee in the Merger Agreement—
representing 3.42% of the estimated value of the Merger excluding SpinCo, and
about 2.72% of the estimated value of the overall transaction including SpinCo—is
not unreasonable by itself.20 This concession is sensible given that this Court
routinely has upheld termination fees of this magnitude.21
19
The Supreme Court only commented in a footnote that the parties had “engaged in an
interesting debate” on appeal “about whether this Court’s decision” in Santa Fe “supports
their respective positions” about the proper interpretation of Gantler, but that it was not
necessary “to engage in that debate, when the overwhelming weight of our state’s case
law” supported the decision below. Corwin, 125 A.3d at 311 n.20.
20
Tr. Oral Arg. 53.
21
See, e.g., In re Toys “R” Us, Inc. S’holder Litig., 877 A.2d 975, 1015-21 (Del. Ch. 2005)
(Strine, V.C.) (holding that a termination fee amounting to 3.75% of the total equity value
and 3.25% of the total transaction value, combined with matching rights, are not
unreasonable deal protection measures); In re MONY Grp. Inc. S’holder Litig., 852 A.2d
9, 24 (Del. Ch. 2004) (holding that a termination fee representing 3.3% of the total equity
value and 2.4% of the total transaction value was “well within the range of
reasonableness”); McMillan v. Intercargo Corp., 768 A.2d 492, 505-06 (Del. Ch. 2000)
(Strine, V.C.) (upholding a 3.5% termination fee).
15
As a threshold matter, plaintiffs’ Unocal argument hinges on whether the
Royalty Agreement constitutes a deal protection device in the first place. Plaintiffs
assert that the Royalty Agreement “effectively served as a second termination fee
because the Royalty Agreement would have required the payment of at least an
additional $5.25 million (or approximately 3.6% of the Transaction’s value) by any
superior bidder to unshackle the San Miguel Project from Coeur and its
subsidiaries.”22 Thus, according to plaintiffs, “the combined Royalty
Agreement/termination fee reached $10.25, or 7.02% of the Transaction value.”23
This amount would be problematic if plaintiffs’ assertion were true, but I conclude
for the reasons explained below that the contention is plainly incorrect.
The Royalty Agreement became effective when it was signed and was not
contingent on consummation of the Merger.24 More importantly, plaintiffs have not
pled any facts suggesting that a superior bidder had any obligation to buy out Coeur’s
royalty interest in the San Miguel Project (for $5.25 million or any other price) in
order to propose or consummate a transaction with Paramount. Instead, absent some
impediment built into the Royalty Agreement, which I address below, a potential
bidder could simply acquire Paramount subject to the Royalty Agreement, thereby
22
Pls.’ Answering Br. 21.
23
Id. at 22 (emphasis omitted).
24
See Carroll Aff. Ex. E, at 5 (defining “Effective Date” as “the date hereof,” i.e.,
December 16, 2014), 17-18 (consummation of the Merger not a condition of closing).
16
assuming the obligations under the Royalty Agreement and reaping the benefit of
the $5.25 million cash infusion. In that regard, it is significant that plaintiffs do not
allege that Paramount received inadequate consideration in exchange for the 0.7%
royalty provided in the Royalty Agreement.
In their Complaint and in briefing, plaintiffs relied on Section 17.2(3) of the
Royalty Agreement to argue that Coeur could use the Royalty Agreement to block
Paramount from entering into an alternative transaction.25 Section 17.2(3) of the
Royalty Agreement provides that: “The Owners and Parent shall not allow a Change
of Control of the Owners without the prior written consent of [Coeur Mexicana and
its successors-in-interest], such consent not to be unreasonably withheld.”26
Under the Royalty Agreement, “Owners” refers to the two Paramount
subsidiaries (Paramount Mexico and Minera Gama) that owned the San Miguel
Project, “Parent” means “Paramount Gold and Silver Corp. and includes all of
Parent’s successors-in-interest,” and “Change of Control” means “Parent” ceasing
to own all of the issued and outstanding voting securities and participating securities
of either Owner.”27 Thus, Section 17.2(3) applies only if there is a change of control
of the two specified subsidiaries of Paramount. Critically, Section 17.2(3) does not
25
Compl. ¶ 106; Pls.’ Answering Br. 22.
26
Carroll Aff. Ex. E, at 29 § 17.2(3).
27
Id. at 4-6.
17
apply to a change of control of Paramount itself. If Paramount itself were acquired,
Paramount (or its successor-in-interest in a merger where it is not the surviving
entity) still would own all of the securities of the two Paramount subsidiaries and
there would be no “Change of Control of the Owners” that could trigger Section
17.2(3).
Recognizing the flaw in their reliance on Section 17.2(3), plaintiffs abandoned
the theory at oral argument, where they argued for the first time that a different
provision of the Royalty Agreement—Section 17.2(1)—could be used to block an
alternative transaction.28 As an initial matter, plaintiffs waived this argument by not
raising it in their brief.29 In any event, Section 17.2(1) also is of no help to plaintiffs.
Section 17.2(1) of the Royalty Agreement provides, in relevant part, that:
The Owners and Parent shall not, directly or indirectly, Encumber, sell,
option, assign, lease, license, transfer or otherwise dispose of, the
Mineral Property or any material portion thereof (other than pursuant
to an internal reorganization or to or with an affiliate or subsidiary of
the Owners or Parent provided such affiliate or subsidiary first enters
into an agreement, in form satisfactory to Holder, under which such
party assumes the Owners’s [sic] obligations to Holder under the
Agreement) without the prior written consent of Holder, such consent
not to be unreasonably withheld.30
28
Tr. Oral Arg. 54-55.
29
Emerald P’rs v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003), aff’d, 840
A.2d 641 (Del. 2003) (“It is settled Delaware law that a party waives an argument by not
including it in its brief.”).
30
Carroll Aff. Ex. E, at 29 § 17.2(1).
18
“Mineral Property” means “the properties collectively and commonly known as San
Miguel,” and “Holder” refers to Coeur Mexicana and its successors-in-interest.31
Plaintiffs contend that, if a third party wished to top Coeur’s bid to acquire
Paramount, then Paramount would “directly or indirectly . . . sell, assign, . . ., transfer
or otherwise dispose of, the Mineral Property,”32 thus triggering Coeur Mexicana’s
qualified consent right.33 But the San Miguel Project was owned by two Paramount
subsidiaries: Paramount Mexico and Minera Gama. Paramount, as the parent
company, only owns all of the outstanding securities of the two subsidiaries.34 Thus,
a sale of Paramount as a whole would not disturb the property ownership structure
at the subsidiary level, and there would be no sale, assignment, transfer, or other
form of disposition of the San Miguel Project in that circumstance.
Furthermore, as discussed above, Section 17.2(3) directly addresses Coeur
Mexicana’s consent right in a change of control situation, and confers a consent right
on Coeur Mexicana only when there is a Change of Control of the Owners—the two
Paramount subsidiaries—and not in the event of a change of control of Paramount
itself. To now read Section 17.2(1) to confer a consent right on Coeur Mexicana
31
Id. at 3, 6.
32
See Tr. Oral Arg. 56; Pls.’ Suppl. Submission 5.
33
The consent right in both Sections 17.2(1) and 17.2(3) was qualified because consent
could not “be unreasonably withheld.”
34
Carroll Aff. Ex. E, at 4.
19
over the sale of Paramount as a whole would read into this section a right that the
parties carefully carved out from Section 17.2(3) in my view, contrary to the basic
tenet of contract construction that a contract is to be read as a whole and all
provisions of the contract should be harmonized to the extent possible.35
For the above reasons, I find that Coeur Mexicana did not have a “block right”
under the Royalty Agreement to veto an alternative transaction to the Merger, and
thus the Royalty Agreement was not a deal protection device. Accordingly, and
because plaintiffs prudently conceded that the $5 million termination fee in Merger
Agreement alone was not an unreasonable deal protection device, plaintiffs’
assertion that defendants adopted unreasonable deal protection devices in connection
with the Merger fails to state a claim for relief.
B. The Stockholder Vote Was Fully Informed
Under Delaware law, when directors solicit stockholder action, they must
“disclose fully and fairly all material information within the board’s control.”36 A
fact is material only “if there is a substantial likelihood that a reasonable shareholder
35
Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine P’rs 2006, L.P., 93 A.3d 1203,
1205-06 (Del. 2014) (“Under New York law, when interpreting a contract the task of a
court is to read the contract as a whole.”). The Royalty Agreement is governed by New
York law. Carroll Aff. Ex. E, at 30 § 17.6.
36
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
20
would consider it important in deciding how to vote.”37 In other words, information
is material if, from the perspective of a reasonable stockholder, there is a substantial
likelihood that it “significantly alter[s] the ‘total mix’ of information made
available.”38 The determination of materiality is case specific,39 and our courts have
recognized that a board’s disclosure obligation is “not boundless,”40 and that the
board need not disclose information simply because it “might be helpful.”41
To overcome a Corwin defense, the “plaintiff challenging the decision to
approve a transaction must first identify a deficiency in the operative disclosure
document, at which point the burden would fall to defendants to establish that the
alleged deficiency fails as a matter of law to secure the cleansing effect of that
vote.”42 Here, plaintiffs have identified three disclosure issues,43 which I address in
turn below.
37
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (adopting materiality standard
of TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
38
Arnold v. Soc’y for Sav. Bancorp, 650 A.2d 1270, 1277 (Del. 1994).
39
Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997).
40
In re CheckFree Corp. S’holders Litig., 2007 WL 3262188, at *2 (Del. Ch. Nov. 1,
2007).
41
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000).
42
In re Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *7-8 (Del. Ch. Jan. 5, 2017).
43
The Complaint identified five disclosure issues (Compl. ¶¶ 110-16), and plaintiffs’ brief
discussed four disclosure issues, three of which came from the Complaint. Ultimately,
plaintiffs chose to press three disclosure issues (two from their brief and a new one raised
for the first time at oral argument) and abandoned the others. See Tr. Oral Arg. 60-61.
21
1. The Analyst Price Targets Disclosure
Plaintiffs’ first disclosure challenge concerns certain analyst price targets
disclosed in a summary of Scotia’s fairness opinion in the Registration Statement.
In a section entitled “Other Approaches,” the Registration Statement states, in
relevant part, that:
Scotia Capital also considered but gave less weight to various other
approaches, including a review of premiums paid in comparable
transactions involving precious metal development projects, a review
of the perspectives of the equity research analyst community on
Paramount and a review of the relative contributions to the post-merger
entity. The results of these analyses are reflected in Scotia Capital’s
Opinion.
...
A review of available equity analyst research generated illustrative
values in the range of $52 to $81 million or $0.32 to $0.50 per share of
Paramount common stock.44
Plaintiffs argue that the disclosed price targets of “$0.32 to $0.50 per share of
Paramount common stock” directly contradict Scotia’s fairness presentation to the
Paramount board, which cited “analyst illustrative values ranging from $122 million
to $556 million and price targets from $0.80 per share to $2.25 per share.” 45 To be
clear, plaintiffs’ contention is not that the disclosure quoted above contradicts
44
Carroll Aff. Ex. A, at 64.
45
Pls.’ Answering Br. 30 (citing Long Aff. Ex. B, at PGS000168). The slide in the fairness
presentation at issue is entitled “Perspectives on PZG—Research Overview.”
22
another disclosure in the Registration Statement, but that it contradicts another
statement in Scotia’s board presentation that was not included in the summary of its
work in the Registration Statement.
As an initial matter, given that this section of the Registration Statement
explicitly stated that Scotia Capital “gave less weight to . . . a review of the
perspectives of the equity research analyst community,” the materiality of this
information is highly questionable.46 But even if one assumes the information was
material, plaintiffs’ argument is based on an evident misreading of the Registration
Statement. As discussed below, when the “Other Approaches” section of the
Registration Statement that plaintiffs rely on is read in context, it becomes apparent
that the “$0.32 to $0.50 per share of Paramount stock” price targets concerned the
value of the San Miguel Project alone, which naturally would be different from the
“$0.80 per share to $2.25 per share” price targets in Scotia’s board presentation that
plaintiffs assert were for Paramount as a whole.47
The summary of Scotia’s fairness opinion, spanning from page 59 to page 66
of the Registration Statement, consisted of six major sections. The first section
46
See Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *12 (Del. Ch. Jan. 25, 1999)
(Strine, V.C.) (holding that the financial advisor’s giving little weight to the valuation
method at issue was a factor supporting non-materiality).
47
See generally Pls.’ Answering Br. 29-31.
23
provided an overview of Scotia’s fairness approach.48 The second section, entitled
“Net Asset Value Analysis,” calculated a net asset value for the San Miguel Project
on a stand-alone and an adjusted basis.49 The third section, entitled “Comparable
Precedent Transactions Analysis,” similarly valued the San Miguel Project on a
stand-alone and an adjusted basis using a comparison to selected precious metal
developer transactions.50 The fourth section, the one at issue here, is entitled “Other
Approaches.”51 The fifth section, entitled “Value of the Coeur Consideration,”
estimated the value of the Coeur stock to be received in the transaction based on a
market trading approach.52 Finally, the sixth section, entitled “Value of the SpinCo
Consideration,” estimated the value of SpinCo stock to be received in the transaction
using certain analyses.53
The structure of the summary of Scotia’s fairness analysis in the Registration
Statement shows that the “Other Approaches” section concerned a valuation of the
San Miguel Project alone, rather than Paramount as a whole. In particular, the
48
Carroll Aff. Ex. A, at 59.
49
Id. at 60-62.
50
Id. at 63-64.
51
Id. at 64.
52
Id. at 64-65. “Coeur consideration” was defined as the right to receive 0.2016 share of
Coeur common stock. Id. at 59.
53
Id. at 65-66. “SpinCo consideration” was defined as 95.1% of the aggregate shares of
SpinCo common stock. Id. at 59.
24
“Other Approaches” section immediately followed two sections estimating the value
of the San Miguel Project alone, one using net asset value analyses and the other
comparing the San Miguel Project to comparable precedent transactions. In this
context, the title “Other Approaches” logically implies that this section still
concerned the valuation of the San Miguel Project, although using different—or
“other”—valuation methods. Indeed, because the summary of Scotia’s work in the
Registration Statement did not otherwise discuss the valuation of Paramount as a
whole, to read the “Other Approaches” section as a section discussing the valuation
of Paramount as a whole would be unreasonable.
Scotia’s approach to valuing the San Miguel Project and SpinCo separately,
rather than valuing the pre-spinoff Paramount as a whole makes logical sense given
the structure of the transaction. After spinning off the Nevada business, Paramount’s
value effectively consisted of the San Miguel Project.54 Thus, as a result of the
Merger, Paramount stockholders (1) retained 95.1% of the common stock of SpinCo
(consisting of Paramount’s Nevada business and $10 million of additional cash) and
(2) exchanged their interests in the San Miguel Project for shares of Coeur common
stock. In other words, the values of the “gives” and the “gets” in the overall
54
See Compl. ¶ 33; Carroll Aff. Ex. A, at 27.
25
transaction depend on the values of the San Miguel Project, SpinCo, and Coeur
separately, and not the pre-spinoff value of Paramount as a whole.
Plaintiffs argue that the language in the “Other Approaches” section referring
to “$0.32 to $0.50 per share of Paramount common stock” is misleading. Viewed
in isolation, this sentence could be read to suggest that the value of Paramount as a
whole was $0.32 to $0.50 per share. But the structure of the fairness opinion
summary, as discussed above, eliminates that ambiguity when the statement is read
in context. Furthermore, throughout the summary, the phrase “per share of
Paramount common stock” was used as a measurement unit—a way to express the
values of the San Miguel Project or SpinCo as opposed to stating the value of
Paramount in the aggregate. For example, in summarizing the net asset value
analysis for the San Miguel Project, the Registration Statement stated: “The NAV
approach . . . generated illustrative values in the range $59 to $193 million for
Paramount’s interest in the San Miguel Project, or $0.36 to $1.19 per share of
Paramount common stock.”55 Similarly, in summarizing the comparable precedent
transactions analysis for the San Miguel Project, the Registration Statement stated:
“A P/NAV range of 0.5x-0.7x . . . generated illustrative values in the range of $65
55
Carroll Aff. Ex. A, at 61.
26
to $91 million or $0.40 to $0.56 per share of Paramount common stock.”56 Thus,
reading the “$0.32 to $0.50 per share of Paramount common stock” statement in
context, a stockholder would understand that the disclosure referred to analyst price
targets for the San Miguel Project alone, not Paramount as a whole.
During oral argument, plaintiffs argued for the first time that even assuming
the disclosed analyst price targets concerned the San Miguel Project only, the
disclosure still was inaccurate.57 Specifically, plaintiffs pointed to certain pages
from Scotia’s board presentation suggesting that, when arriving at the $0.32 to $0.50
per share price targets for the San Miguel Project, Scotia applied a 0.50x-0.70x
trading multiple to the analyst estimates of the net asset value of the San Miguel
Project.58 Thus, according to plaintiffs, “even if you assume . . . that a stockholder
would understand the disclosure is talking just about the San Miguel mine, they
certainly have no understanding that the bankers essentially cut the numbers in half
based on a trading multiple.”59
56
Id. at 63. See also id. at 66 (“The NAV approach . . . generated illustrative values in the
rage [sic] of $82 to $240 million for Paramount’s interest in the Sleeper Project, or $0.51
to $1.48 per share of Paramount common stock.”).
57
Tr. Oral Arg. 61. See Pls.’ Answering Br. 29-31.
58
Tr. Oral Arg. 62-65 (referring to Compl. Ex. 1, at PGS000168, PGS000170,
PGS000182).
59
Tr. Oral Arg. 65.
27
In addition to not being raised in their brief and thus waived, plaintiffs’
argument is deficient for two other reasons. First, the disclosure at issue states that
“A review of available equity analyst research generated illustrative values in the
range of $52 to $81 million or $0.32 to $0.50 per share of Paramount common
stock,”60 which is different from saying that all of the equity analyst price targets
were “in the range of $52 to $81 million or $0.32 to $0.50 per share of Paramount
common stock.” Thus there was no misrepresentation. Second, contrary to
plaintiffs’ contention, the Registration Statement disclosed that “A P/NAV range of
0.5x-0.7x was selected based on several factors, including, the average/median
values of the selected transactions, market conditions at the time and Scotia Capital’s
professional judgment as to typical transaction multiples.”61
For the above reasons, plaintiffs’ challenge to the analyst price targets
disclosed in the “Other Approaches” section of the summary of Scotia’s work in the
Registration Statement is without merit in my opinion.
60
Carroll Aff. Ex. A, at 64.
61
Id. at 63. To the extent that plaintiffs challenge Scotia’s choice of the P/NAV multiple,
this does not state a disclosure claim. See In re 3Com S’holders Litig., 2009 WL 5173804,
at *6 (Del. Ch. Dec. 18, 2009) (“[Q]uibbles with a financial advisor’s work simply cannot
be the basis of a disclosure claim.”).
28
2. The Cantor Fitzgerald Disclosure
Plaintiffs’ second disclosure challenge concerns the role of Cantor Fitzgerald
& Co. in the Merger.62 Specifically, plaintiffs argue that the Registration Statement
misrepresented that Cantor Fitzgerald, which attended a Paramount board meeting
to offer advice on a potential transaction on September 5, 2014, had no further
involvement in the transaction after that date.
The relevant part of the Registration Statement that plaintiffs challenge states:
On September 5, 2014, the Paramount board reconvened to further
consider the letter of intent. . . . A representative of Cantor Fitzgerald
& Co., an investment bank, was in attendance to offer advice on the
potential transaction. Cantor Fitzgerald & Co. had no further
involvement in the transaction.63
Plaintiffs contrast this disclosure with the following information from the minutes
of a Paramount board meeting held on December 2, 2014:
The Board held an in camera session and invited Graham Moylan from
Cantor Fitzgerald to attend the session. The purpose of the session was
to discuss whether it would be prudent for the Board of Directors to
retain its own independent advisor to provide, at a fixed price, a fairness
opinion to the Board of Directors with respect to whether the proposed
transaction is fair to the shareholders of the Corporation. Cantor
Fitzgerald quoted $250,000 USD as the fee for such an opinion.
...
BE IT RESOLVED THAT management instruct Cantor Fitzgerald to
review the facts of our transaction and the market generally in order to
62
Tr. Oral Arg. 65-71.
63
Carroll Aff. Ex. A, at 41.
29
put itself in a position to deliver an independent fairness opinion if so
instructed and required by the Board of Directors.64
Putting the two documents together, plaintiffs argue that the Registration Statement
misrepresented that Cantor Fitzgerald had no further involvement in the transaction
after September 5, 2014, because a representative of Cantor Fitzgerald attended a
Paramount board meeting on December 2, 2014, during which the board invited
Cantor Fitzgerald to review the facts of the transaction in case it later was instructed
to deliver an independent fairness opinion.
But plaintiffs, who received copies of Paramount’s board minutes during
discovery, do not allege that the Paramount board later “instructed” or “required”
Cantor Fitzgerald to deliver an independent fairness opinion.65 The Paramount
board’s mere consideration of having Cantor Fitzgerald issue a second fairness
opinion, without more, does not mean to my mind that Cantor Fitzgerald was
involved in the transaction. Thus, the Registration Statement did not contain any
64
Long Aff. Ex. E, at PGS000252-53 (emphasis added).
65
Because plaintiffs make no allegation on this issue, there is no basis for me to draw
reasonable inferences in favor of plaintiffs either. See Lukens, 757 A.2d at 727 (internal
quotation omitted) (“Although all facts of the pleadings and reasonable inferences to be
drawn therefrom are accepted as true . . . neither inferences nor conclusions of fact
unsupported by allegations of specific facts . . . are accepted as true.”). Cf. In re Asbestos
Litig., 2017 WL 510463, at *1 n.2 (Del. 2017) (TABLE) (“The Court must decline to draw
an inference for the non-moving party if the record is devoid of facts upon which the
inference reasonably can be based. Where there is no precedent fact, there can be no
inference; an inference cannot flow from the nonexistence of a fact, or from a complete
absence of evidence as to the particular fact. Nor can an inference be based on surmise,
speculation, conjecture, or guess, or on imagination or supposition.”).
30
misrepresentation when it stated that “Cantor Fitzgerald & Co. had no further
involvement in the transaction” after September 5, 2014.66
3. The Scotia Fee Arrangement Disclosure
Plaintiffs’ final disclosure challenge is that the Registration Statement omitted
certain material facts relating to Scotia’s fee arrangement. The Registration
Statement disclosed that Paramount engaged Scotia as its financial advisor on
October 14, 2014, and that Paramount and Scotia executed a new engagement letter
on November 12, 2014.67 It also disclosed the key terms of the new engagement
letter as follows:
Pursuant to a letter agreement dated November 12, 2014, Paramount
engaged Scotia Capital to act as its financial advisor in connection with
the transaction and certain other transactions. Pursuant to the terms of
this engagement letter, Paramount has agreed to pay Scotia Capital a
success fee equal to 1.05% of the transaction value of the transaction,
excluding the value of any consideration paid for any assets of
Paramount other than San Miguel, subject to a minimum of $1.25
million, all of which is contingent upon consummation of the
transaction. If the transaction is consummated, the success fee payable
to Scotia Capital will be approximately $1.5 million. In addition,
Paramount has agreed to reimburse certain of Scotia Capital’s expenses
66
To the extent that plaintiffs argue the Registration Statement should have disclosed that
the Paramount board considered having Cantor Fitzgerald issue a second fairness opinion
as evidence that Scotia had a conflict, see Tr. Oral Arg. 70, I find that this information was
immaterial because (1) it is not alleged nor reasonably inferable that the board ever
instructed Cantor Fitzgerald to deliver such an opinion, and (2) it is not reasonably
conceivable that this additional information would have significantly altered the total mix
of information, because the Registration Statement’s disclosures concerning the amount
and contingent nature of Scotia’s advisory fee (discussed below) were sufficient to put the
stockholders on notice of Scotia’s potential conflict of interest in this transaction.
67
Carroll Aff. Ex. A, at 41-42.
31
arising, and indemnify Scotia Capital against certain liabilities that may
arise, out of its engagement.68
Plaintiffs do not contend that any of the information quoted above was
erroneous or misleading. They instead argue that the Registration Statement also
should have disclosed the reason for the amendment to Scotia’s engagement letter
on November 12, 2014. Plaintiffs cite to minutes of a meeting of the Paramount
board held on November 11, 2014, which stated the following:
The CFO advised that Scotia Capital had requested compensation with
respect to its services rendered to enable [Paramount] to obtain the
proposed $10M loan from [Coeur] and the proposed $5.25M royalty
(as neither were contemplated nor addressed in the original Scotia
engagement letter). The CFO and CEO advised that Scotia Capital had
been instrumental with respect to both the proposed loan and the
proposed royalty.
The CFO indicated that the typical rates for an investment banker with
regard to such services is 6-7% of the amount raised.
The CFO advised that [Paramount] management and Scotia had
determined that a fair compromise, subject to Board approval, would
be an amendment to the commission rate set forth in the engagement
letter to increase same from 0.75% to 1.05% subject to a minimum fee
of $1.25M. The CFO noted that such a commission rate would be at
the lower end of the standard range.
...
BE IT RESOLVED THAT the CEO or CFO is instructed to execute
such documents as are necessary to amend the terms of the Scotia
68
Id. at 67.
32
Capital engagement letter to increase the fee from 0.75% to 1.05%
subject to a minimum fee of $1.25M.69
Plaintiffs argue that the reason for amending Scotia’s engagement letter
should have been disclosed because this information was relevant to assessing
Scotia’s potential conflicts of interest.70 I disagree. Because the Registration
Statement disclosed the total amount and the contingent nature of Scotia’s
compensation in connection with the merger, Paramount’s stockholders were made
aware of the full magnitude and nature of Scotia’s financial interest in the
transaction. How the Paramount board and Scotia negotiated to arrive at the fully
disclosed final fee arrangement is immaterial in my view.71
*****
69
Long Aff. Ex. A, at PGS000245-46.
70
Plaintiffs insinuate that Paramount overpaid Scotia for its services in connection with the
$10 million loan and the $5.25 million Royalty Agreement. Pls.’ Answering Br. 42-43.
Putting aside that plaintiffs’ math appears to be incorrect, their criticism of the amount paid
to Scotia is not a valid disclosure claim. See Comstock, 2016 WL 4464156, at *15
(“Plaintiff’s substantive disagreement with that decision cannot be recast as a disclosure
claim.”).
71
See In re Om Gp., Inc. S’holders Litig., 2016 WL 5929951, at *17 (Del. Ch. Oct. 12,
2016) (finding that the board’s change of the compensation arrangement with its financial
advisor from fixed fee to contingency fee was not material information so long as the
amount and the contingent nature of the fee arrangement were disclosed, so that the
stockholders “were not misled as to [the financial advisor’s] incentives.”); see also In re
Sauer–Danfoss Inc. S’holders Litig., 65 A.3d 1116, 1130 (Del. Ch. 2011) (holding that the
board’s “underlying reasons for acting” generally are not deemed material); Globis P’rs,
L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *14 (Del. Ch. Nov. 30, 2007)
(internal quotation omitted) (“a full and fair characterization [of background to a
transaction] does not require . . . a play-by-play description of merger negotiations.”).
33
For the reasons explained above, plaintiffs’ disclosure challenges are without
merit and thus the stockholder vote approving the Merger was fully informed.
C. The Business Judgment Rule Applies to the Board’s Approval of
the Merger
Because the Merger was approved by a majority of Paramount’s disinterested
stockholders in a fully informed, uncoerced vote, the business judgment rule applies
to the Paramount board’s decision to approve the Merger, and the transaction may
only be attacked on the ground of waste.72 Since plaintiffs do not assert that the
board’s decision to approve the Merger amounted to waste, the Complaint must be
dismissed for failure to state a claim for relief under the Corwin doctrine.
D. Even If Corwin Did Not Apply, Plaintiffs Have Not Pled a
Non-Exculpated Claim for Breach of Fiduciary Duty
As a separate ground for dismissal, I find that even if Corwin did not apply in
this case, plaintiffs’ fiduciary duty claim still fails to state a claim for relief. As
explained above, plaintiffs do not contend that the transaction at issue implicates
either a Revlon or entire fairness standard of review, and plaintiffs’ invocation of
Unocal fails because the Royalty Agreement was not a deal protection device. Thus,
the decision to enter the Merger, a stock-for-stock transaction, presumptively would
be governed by the business judgment rule.73
72
Attenborough, 137 A.3d at 151-52.
73
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011) (“Delaware has
three tiers of review for evaluating director decision-making: the business judgment rule,
34
Paramount’s certificate of incorporation contains a § 102(b)(7) provision
exculpating its directors from monetary liability for breach of fiduciary duty “to the
fullest extent permitted by the Delaware General Corporation Law.”74 Plaintiffs do
not challenge the independence or disinterestedness of a majority of the Paramount
board, and have not articulated any conceivable basis for a loyalty claim other than
to assert “bad faith.” As addressed below, however, plaintiffs’ allegations of bad
faith are wholly conclusory and insufficient to support a non-exculpated claim for
breach of fiduciary duty.
To state a bad faith claim, “a plaintiff must show either an extreme set of facts
to establish that disinterested directors were intentionally disregarding their duties,
or that the decision under attack is so far beyond the bounds of reasonable judgment
that it seems essentially inexplicable on any ground other than bad faith.”75 “Bad
faith is not a light pleading standard. Even gross negligence, without more, does not
constitute bad faith.”76
enhanced scrutiny, and entire fairness. The business judgment rule is the default standard
of review.”).
74
Carroll Aff. Ex. F. See Intercargo, 768 A.2d at 501 n.40 (Del. Ch. 2000) (“The court
may take judicial notice of an exculpatory charter provision in resolving a motion
addressed to the pleadings.”).
In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *7 (Del. Ch.
75
May 20, 2016) (internal quotations omitted).
76
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *23 (Del. Ch. Oct. 24,
2014).
35
Plaintiffs argue that the Paramount board acted in bad faith by approving
certain preclusive deal protections in the form of the termination fee and the Royalty
Agreement, and by failing to disclose certain material information. Both of these
grounds are without merit for reasons already discussed, namely that the Royalty
Agreement plainly did not operate as a deal protection device and the termination
fee by itself was reasonable,77 and that the Registration Statement accurately
disclosed all material information.78 Even if reasonable minds could disagree on the
latter point, the Complaint is devoid of any facts from which one reasonably could
infer that Paramount’s directors intentionally disregarded their duties or otherwise
acted in bad faith with respect to the disclosures in the Registration Statement.
Plaintiffs next argue that the defendants acted in bad faith by failing to inform
themselves of Paramount’s value by running “a rushed process” with Coeur and
failing to conduct an auction or to negotiate a go-shop.79 These allegations fall short
of supporting a reasonable inference of bad faith. “[T]here is a vast difference
between an inadequate or flawed effort to carry out fiduciary duties and a conscious
disregard for those duties.”80 Even in the Revlon context, which is not the case here,
77
See supra Section II.A.
78
See supra Section II.B.
79
Pls.’ Answering Br. 58.
80
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009).
36
“the directors’ failure to take any specific steps during the sale process could not
have demonstrated a conscious disregard of their duties.”81
Mainly relying on analyst commentary and target prices, plaintiffs assert that
the merger consideration “significantly undervalued” Paramount.82 “Delaware law
requires that for an allegation of price inadequacy to support a bad faith claim, the
Court would need to conclude that the price was so far beyond the bounds of
reasonable judgment that it seems inexplicable on any ground other than bad faith.”83
Plaintiffs have failed to allege facts from which I reasonably could infer that the
Merger consideration, representing a “19.8% premium over the last day of
trading,”84 satisfies this “demanding standard.”85
Finally, plaintiffs assert that Scotia’s fairness opinion “was utterly lacking and
far from complete.”86 This contention, even if true, would not support a showing of
bad faith on the part of Paramount’s board. To support a bad faith claim based on a
board’s reliance on its advisors’ financial analyses, “the plaintiffs must plead non-
conclusory facts creating the reasonable inference that the board purposely relied on
81
Id.
82
Compl. ¶ 17.
83
Crimson, 2014 WL 5449419, at *23.
84
Compl. ¶ 17.
85
Crimson, 2014 WL 5449419, at *23 (rejecting a bad faith claim based on price
inadequacy where the exchange ratio represented a 7.7% premium).
86
Pls.’ Answering Br. 58.
37
analyses that were inaccurate for some improper reason. The plaintiffs cannot
simply quibble with the inputs used in the fairness opinions.”87 No such showing
has been made here.
III. CONCLUSION
For all the foregoing reasons, plaintiffs have failed to state a claim for breach
of fiduciary duty, and defendants’ motion to dismiss the Complaint with prejudice
is GRANTED.
IT IS SO ORDERED.
87
In re Morton’s Rest. Gp. Inc. S’holders Litig., 74 A.3d 656, 673-74 (Del. Ch. 2013).
38