In re Molycorp, Inc. Shareholder Derivative Litigation

EFiled: May 27 2015 01:44PM EDT
Transaction ID 57297166
Case No. 7282-VCN
COURT OF CHANCERY
OF THE
STATE OF DELAWARE
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May 27, 2015
Jessica Zeldin, Esquire Robert D. Goldberg, Esquire
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919 Market Street, Suite 1401 921 North Orange Street
Wilmington, DE 19801 Wilmington, DE 19801
Stephen C. Norman, Esquire Raymond J. DiCamillo, Esquire
Ryan T. Costa, Esquire Kevin M. Gallagher, Esquire
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Potter Anderson & Corroon LLP 920 North King Street
1313 North Market Street Wilmington, DE 19801
Wilmington, DE 19801
P. Clarkson Collins, Jr., Esquire Elizabeth M. McGeever, Esquire
Patricia A. Winston, Esquire Prickett, Jones & Elliott, P.A.
Morris James LLP 1310 King Street
500 Delaware Avenue, Suite 1500 Wilmington, DE 19801
Wilmington, DE 19801
Michael DeBaecke, Esquire M. Duncan Grant, Esquire
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Wilmington, DE 19801 Wilmington, DE 19801
In re Molycorp, Inc. Shareholder Derivative Litigation
Consolidated C.A. No. 7282-VCN
May 27, 2015
Page 2
Re: In re Molycorp, Inc. Shareholder Derivative Litigation
Consolidated C.A. No. 7282-VCN
Date Submitted: January 16, 2015
Dear Counsel:
This is a dispute about whether a secondary stock offering at an unusually
high price, demanded by private equity investors that together owned 44.1% of a
corporation’s stock and facilitated by directors they appointed, impermissibly
allowed select shareholders to benefit to the detriment of the corporation.
Complaints related to the sale of stock in June 2011 (albeit presenting different
legal theories) were filed from as early as 2012, and Plaintiffs in this derivative
action assert demand futility based on the composition of the board at the time of
earlier-filed complaints. Although not without some questions regarding demand
futility, the Court dismisses Plaintiffs’ claims (for breach of fiduciary duties, aiding
and abetting, and unjust enrichment) for failure to state a claim, in light of the
investors’ contractual right to sell and the absence of a demonstrable basis for
recovery.
In re Molycorp, Inc. Shareholder Derivative Litigation
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May 27, 2015
Page 3
*****
Plaintiffs Resource Equities, G.P. (“Resource Equities”) and Ira Gaines
(individually and as trustee of the Paradise Wire & Cable Defined Benefit Plan
Dated 11/1/84, “Gaines”) are shareholders of Nominal Defendant Molycorp, Inc.
(“Molycorp”).1 Molycorp is a publicly traded Delaware corporation “engaged in
the production and sale of rare earth oxides in the western hemisphere.”2
Defendants fall into three categories: (1) TNA Moly Group LLC (“TNA”), Traxys
North America, LLC (“Traxys”),3 RCF Management LLC (“RCF”), and Pegasus
1
Unless otherwise indicated, the facts have been drawn from the Second Amended
Verified Consolidated Stockholders’ Derivative Complaint (“SAC”) and essential
incorporated documents, namely the Registration Rights Agreement, Opening Br.
in Supp. of Director Defs.’ Mot. to Dismiss Second Am. Compl. (“DD OB”) Ex. 2
(“RRA”), and the Stockholders Agreement. Aff. of Lynda J. Grant (“Grant Aff.”)
Ex. D (“SA”). On a motion to dismiss, the Court may consider, for “limited”
purposes, documents that are “integral to a plaintiff’s claim and incorporated in the
complaint.” In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del.
1995). The Court “may also take judicial notice of matters that are not subject to
reasonable dispute.” In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162,
169 (Del. 2006) (citing D.R.E. 201(b)). The analysis here considers Molycorp’s
stock prices, which both Plaintiffs and Defendants have asked the Court to
observe, and earlier filings which assist the demand futility discussion.
2
SAC ¶ 29.
3
TNA was formed to hold Traxys’s Molycorp stock. A Certificate of Cancellation
for TNA was filed in February 2012. See Transmittal Aff. of Patricia A. Winston,
Esq. (“Winston Opening Aff.”) Ex. 3, July 14, 2014.
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Capital Advisors, L.P. (“Pegasus,” collectively, the Private Equity Investors
(“PEIs”)4); (2) Ross R. Bhappu (“Bhappu”), Mark A. Smith (“Smith”) and his
entity KMSMITH, LLC (“KMSMITH”), Charles R. Henry (“Henry”), Mark S.
Kristoff (“Kristoff”), Jack E. Thompson (“Thompson”), Alec Machiels
(“Machiels”), Brian T. Dolan (“Dolan”), and Russell D. Ball (“Ball,” collectively,
the “Director Defendants”); and (3) groups (1) and (2) above with the exception of
Ball (the “Selling Defendants”).
Defendants are linked in a number of ways.5 At the time the SAC was filed,
Pegasus indirectly controlled Traxys and TNA, and was a “shareholder partner[]”6
The Court does not reach the question of whether TNA has been properly
dissolved. The Court sometimes refers to TNA and Traxys as “TNA” for
convenience.
4
The Court recognizes that the PEIs protest being characterized as a group. TNA
and Traxys, RCF, and Pegasus have retained separate counsel and have filed
separate briefs. The defined term is used for convenience rather than to
acknowledge a control group.
Furthermore, except where the differences are material, the Court does not
distinguish among the arguments in Defendants’ eight briefs (or the Plaintiffs’
two). Molycorp has joined in the Director Defendants’ motion to dismiss and
related briefs.
5
The details are complicated, and not all facts relied on in the briefing were raised
in the SAC. A high-level summary is provided for context. In light of the Court’s
decision infra, a fuller description of the complex relationship among the
Defendants would not be material.
6
SAC ¶ 38.
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of the Traxys Group with RCF. Bhappu formed Molycorp’s predecessor in 2008,
in which the PEIs (among others) joined to acquire a rare earth element mine. In
2010, in preparation for Molycorp’s initial public offering (“IPO”), “investors and
insiders rolled up their assets into Molycorp.”7 The PEIs and KMSMITH also
executed a Stockholders Agreement and a Registration Rights Agreement, both
dated April 15, 2010.8 Effective until the IPO, the Stockholders Agreement gave
the PEIs the right to nominate members to the board (among other rights).9 This
power resulted in Bhappu, Dolan, Machiels, and Kristoff serving as partners and
directors of multiple parties at the time of the June Offering. The Registration
Rights Agreement secured the PEIs’ rights to have Molycorp register their shares
for a secondary offering. As of spring 2011, RCF held 23.4% of Molycorp’s
shares, Pegasus (and affiliates) held 13.4%, and TNA held 7.3%—collectively
44.1%.
In its IPO prospectus, Molycorp announced a vision including “build[ing]
the largest, most advanced and efficient fully integrated [rare earth oxide]
7
SAC ¶ 53.
8
RRA 23-25; SA 34-36.
9
The agreement generally provided that “[e]ach Director . . . shall serve solely in
the discretion of the Stockholder that nominated such Director.” SA § 9(d).
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processing facility in the world.”10 Molycorp’s July 2010 IPO, however, generated
a “disappointing” $360.4 million.11 Yet, rare earth element prices shot up after
China, which controls the market, limited its exports in September 2010. The
Defendants benefited from this price spike early on through a secondary offering
of Molycorp stock in February 2011. Plaintiffs do not contest the February
offering, although Molycorp did not share in the over $675 million ($50 per share)
gross proceeds.12 In March 2011, Molycorp had $492.5 million in cash, as
compared to a capital budget of approximately $781 million through 2013.
By May, Molycorp knew that a $280 million loan guarantee from the
Department of Energy (“DOE”) would not come through as planned13 and that
financing and joint venture opportunities with Sumitomo Banking Corp.
10
SAC ¶ 61 (first alteration in original) (internal quotation marks omitted). At the
time, this project was expected to cost over $500 million dollars.
11
SAC ¶ 63. Molycorp had wanted to raise $478 million.
12
Defendants argue that Plaintiffs could not maintain such a claim because
Molycorp’s stock price rose after February. They also note that if the board had
exercised its delay rights in February, it would not have been able to delay the June
Offering without breaching the Registration Rights Agreement. Opening Br. of
Defs. TNA Moly Group LLC and Traxys North America, LLC in Supp. of Their
Mot. to Dismiss (“TNA OB”) 3-4, 41. Plaintiffs clarify that they do not complain
about the February offering because Molycorp’s financial needs had not become
dire at that point. Oral Arg. Defs.’ Mot. to Dismiss (“Oral Arg. Tr.”) 116.
13
An October 18, 2010, article in Forbes suggested that the loan guarantee could
help to make up for funds not generated by the IPO. SAC ¶ 65.
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(“Sumitomo”) and Hitachi Metals, Ltd. (“Hitachi”) were in danger. Rare earth
element prices follow a “classic boom-bust cycle”14 typical of (but more extreme
than other) commodities prices, and the prices were not showing the same rate of
growth. Some analysts had predicted “that market adjustment of [rare earth
element] prices was inevitable.”15
It was at this time when Defendants exercised the demand registration rights
at the heart of this dispute. Section 2 of the Registration Rights Agreement
provided the authority for the PEIs to demand priority registration of their shares:
[T]he Corporation shall be required to include in such Registration
Statement only such number of securities as is equal to the
Underwriter’s Maximum Number and the Corporation and the
Requesting Holders shall participate in such offering in the following
order of priority:
(i) First, the Corporation shall be obligated and required to include in
the Registration Statement the number of Registrable Securities that
the Requesting Holders have requested to be included in the
Registration Statement and that does not exceed the Underwriter’s
Maximum Number . . . .
(ii) Second, the Corporation shall be entitled to include in such
Registration Statement and underwriting that number of shares of
Common Stock and/or other securities of the Corporation that it
proposes to offer and sell for its own account or the account of any
14
SAC ¶ 49.
15
SAC ¶ 73.
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other Person to the full extent of the remaining portion of the
Underwriter’s Maximum Number.16
This “Demand Registration” right was subject to certain conditions, such as
Molycorp’s ability to delay action for up to ninety days based on a good faith
judgment of the board and its counsel that “it would be materially detrimental to
the Corporation or its stockholders for such Registration Statement either to
become effective or to remain effective.”17 The PEIs could not demand
registration “for one hundred twenty (120) days immediately following the
effective date of a Registration Statement filed pursuant to the prior exercise of any
Holder’s [S-1] registration rights” and six months of a primary offering.18
Furthermore, they were limited in the number of S-1 registration requests they
could make.19 Of course, the Registration Rights Agreement did not permit any
fiduciary to breach its fiduciary duties.
16
RRA § 2(i). The Underwriter’s Maximum Number refers to “the number of
securities that can be sold without adversely affecting the price, timing, distribution
or sale of securities in the offering.” RRA § 2(i).
17
RRA § 2(d). Defendants also point out that the Registration Rights Agreement
required Molycorp to use “reasonable best efforts to file (within ninety (90) days
after such request has been given) with the SEC a Registration Statement.”
RRA § 2(a).
18
RRA § 2(e).
19
RRA § 2(b).
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The Registration Rights Agreement contemplates other types of registrations
as well. Notably, there is the provision whereby Molycorp can elect to register and
sell shares for its own account but, to the extent that the Underwriter’s Maximum
Number has not been reached, must include additional shares requested by covered
shareholders (a “Company Registration”).20 A Company Registration does not
trigger explicit frequency restrictions or delay provisions beyond certain notice
periods.21
The PEIs invoked their right to a Demand Registration, and Molycorp filed a
registration statement on May 24, 2011.22 In the offering that followed (the “June
Offering”), Smith and KMSMITH, Kristoff, Henry, Thompson,23 Pegasus, TNA,
20
RRA § 3(c)(ii).
21
TNA argues that the prospectus for the IPO contradicts Plaintiffs’ explanation of
priority in Company Registrations. See Reply Br. of Defs. TNA Moly Group LLC
and Traxys North America, LLC in Supp. of Their Mot. to Dismiss (“TNA RB”)
22 n.16. At this stage, the Court examines the language appearing in the
Registration Rights Agreement and notes that even accepting a reading friendly to
Plaintiffs does not change its conclusion.
22
Plaintiffs observe that the Director Defendants agreed that they and Molycorp
would not raise funds through stock (or securities convertible into stock) for ninety
days after the June Offering. Pls.’ Br. in Opp’n to Private Equity Investors’ Mots.
to Dismiss Second Am. Compl. (“Pls.’ PEI Opp’n Br.”) 4. The SAC does not
incorporate an underwriting agreement (or a demand letter), but these are not
material to the Court’s assumptions about control.
23
The SAC does not focus on how the individual sellers participated.
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and RCF sold at $51 per share.24 Altogether, the Selling Defendants received
approximately $575 million (gross) in the June Offering. The sale allegedly
saturated the market for Molycorp stock and caused media concern that insiders
were “abandon[ing]” the company.25 Molycorp, on the other hand, conducted a
private offering of convertible notes on June 15, 2011. The offering raised
$223 million, but Molycorp’s cash on hand was still more than $100 million short
of its core operating budget through 2013. Molycorp was unable to implement its
strategy to increase production beginning in late 2010, missing additional profits
from the spike in rare earth element prices.26
Within a few months of the June Offering, prices for rare earth elements
(and Molycorp stock) fell significantly.27 By September, Molycorp had a capital
and operating budget of around $950 million and $562 million cash on hand. In
February 2012, Molycorp arranged a private sale of 12.5 million shares for
24
Additionally, Bhappu, Dolan, and Machiels participated “indirectly” through the
PEIs. SAC ¶¶ 84-85. The SAC does not discuss the Underwriter’s Maximum
Number in great detail. Plaintiffs suggest that the maximum numbers were
“apparently” the amounts sold in February and June. See Pls.’ PEI Opp’n Br. 22.
25
SAC ¶ 87 (internal quotation marks omitted).
26
Compare SAC ¶ 64 (quoting from the IPO prospectus), with SAC ¶ 100 (quoting
an October 2011 press release).
27
Defendants emphasize that Molycorp’s price “remained strong” until mid-
September. TNA OB 18; see also SAC ¶ 20.
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$390 million. At $51 per share, Molycorp would have earned approximately
$248 million more. Molycorp raised another $532 million in August 2012 by
selling stock (at $10 per share) and convertible senior notes.28
Gaines filed a complaint in February 2012,29 and the first amended
complaint in the consolidated action was filed on August 21, 2012.30 The
consolidated complaint “implicate[d] whether there were material misstatements
and improper trading in Molycorp stock by certain Defendants.”31 Due to a
pending federal securities class action, the Court stayed the consolidated action on
May 15, 2013.32 Resource Equities filed its first complaint on July 23, 2013,
28
Plaintiffs ask the Court to take judicial notice of Molycorp’s trading price of less
than $2.00 per share (as of September 2014). Grant Aff. Ex. A, at 1.
29
Interestingly, Gaines’s initial complaint alleged that Molycorp had raised too
much money: “Given this price run up, the Company has raised hundreds of
millions of dollars through the IPO, two Secondary Offerings, and a convertible
preferred offering, among other things, providing it with money to engage in a
shopping spree . . . .” Verified Deriv. S’holder Compl. ¶ 62, Feb. 24, 2012.
30
The Court focuses on the milestones important for demand purposes. For more
background on the procedural history, see In re Molycorp, Inc. Shareholder
Derivative Litigation, 2014 WL 1891384 (Del. Ch. May 12, 2014).
Defendants have raised concerns that one of Plaintiffs’ attorneys engaged in this
litigation as both plaintiff and counsel. The involvement was not simultaneous.
31
Id. at *2.
32
Federal securities fraud complaints have been dismissed in the Southern District
of New York (with prejudice) and the District of Colorado (with leave to amend).
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alleging three counts: breach of fiduciary duties by the Director Defendants, breach
of fiduciary duties and aiding and abetting by the PEIs, and unjust enrichment by
the Selling Defendants.33 That complaint was consolidated into the original action;
it was never an operative complaint.
Plaintiffs focused on the current dispute when they filed a motion to lift the
stay and to file the SAC on October 9, 2013. In their motion papers, Plaintiffs
noted that “the United States Securities and Exchange Commission (the ‘SEC’)
staff determined that it would not recommend any formal action against the
Company” and that the instant allegations “do not substantially overlap with the
securities case.”34 Finding that the “Delaware corporate law claim is not raised in
the Federal Securities Action, . . . . [n]or does this theory appear to have been
raised in any of the derivative actions currently stayed,”35 the Court granted the
motion. The SAC became operative on May 15, 2014.
Letter from Raymond J. DiCamillo, Esq., Apr. 1, 2015. The Court’s decision in
May 2014 took notice of the Colorado proceedings.
33
S’holders’ Verified Deriv. Compl. ¶¶ 78-92, Res. Equities, G.P. v. Smith, C.A.
No. 8744 (Del. Ch. July 23, 2013).
34
Pls.’ Mot. to Lift Stay and for Leave to File an Am. Compl. 2.
35
In re Molycorp, 2014 WL 1891384, at *6.
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Five directors remained on the board at all relevant times: Kristoff,
Machiels, Dolan, Henry, and Ball. Again, in June 2011, there were eight members
on the board, with four individually selling in the June Offering (Smith, Kristoff,
Henry, and Thompson) and three others holding significant positions within at
least one of the PEIs (Bhappu, Machiels, and Dolan). By October 9, 2013 (filing
of the motion for leave to amend), Smith and Thompson were no longer on the
board. Instead, Michael Schwarzkopf, John Graell, and Constantine E.
Karayannopoulos had been appointed. Karayannopoulos was Molycorp’s Interim
CEO and President until December 2013. Finally, by May 15, 2014 (filing of the
SAC), Bhappu had left the board and Geoffrey R. Bedford and James J. Jackson
assumed positions.36
*****
The SAC asserts three counts: (1) that the Director Defendants breached
fiduciary duties by favoring the PEIs’ and their own interests over Molycorp’s;
(2) that the PEIs breached their fiduciary duties as a control group and aided and
abetted the Director Defendants’ breaches of fiduciary duties; and (3) that the
36
DD OB 17-18. Plaintiffs focused on earlier filings and did not contest the
independence of Graell, Schwarzkopf, Bedford, and Jackson in the SAC or
answering briefs.
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Selling Defendants were unjustly enriched through reaping profits knowing that
Molycorp could not stop the sale. More specifically, Plaintiffs complain about the
board’s “failing to delay the June Offering and allowing Molycorp to hold an
offering first, or at least allocating a substantial portion of the June 2011 Offering
to Molycorp, as doing so would have diminished the Selling Defendants’ profits or
even prevented them from making a second offering.”37 The PEIs are alleged to
have “closed Molycorp out of the equity markets at a time when Molycorp was in
dire need of an equity infusion.”38 The Selling Defendants are faulted for selling
for profit, knowing that “Molycorp could not prevent this unfair and inequitable
conduct.”39
Defendants have moved to dismiss the SAC for failure to make demand
pursuant to Court of Chancery Rule 23.1 and for failure to state a claim pursuant to
Court of Chancery Rule 12(b)(6). The Court resolves this dispute on the
Rule 12(b)(6) arguments without deciding whether demand would have been futile,
the PEIs were a control group, or the Director Defendants were interested in the
June Offering. As relevant, Defendants contend that the Registration Rights
37
SAC ¶ 89.
38
SAC ¶ 81.
39
SAC ¶ 131.
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Agreement secured the PEIs’ right to sell (not to mention protection against
Plaintiffs’ desired intervention), the common law allows shareholders to deal with
their shares in good faith, and the PEIs cannot be charged with “clairvoyance.”40
Thus, the PEIs did not usurp a corporate opportunity or engage in wrongful
conduct. Defendants add that, in light of the above rights, Plaintiffs have not
shown how the board acted unreasonably. They point out that Molycorp’s
(unpredictable) stock price remained strong for months after June 2011. Claims
for aiding and abetting against the PEIs allegedly fail because fiduciaries cannot
aid and abet another fiduciary, Plaintiffs did not plead knowing participation in
wrongful conduct, and there is no underlying breach. Finally, Defendants attack
the unjust enrichment claims as covered by the Registration Rights Agreement and
duplicative of deficient fiduciary duty claims.
In response, Plaintiffs emphasize entire fairness, claiming that they meet the
threshold because of a conflicted board, the PEIs’ control and actions, and
Defendants’ exclusive profits. Given the above, Plaintiffs continue, the Court
cannot dismiss their claims under a Rule 12(b)(6) standard. Particularly, their
40
Opening Br. in Supp. of Def. RCF Management’s Mot. to Dismiss Second Am.
Compl. 18.
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interpretation of the Registration Rights Agreement permits Molycorp to interfere
with the PEIs’ registration demand and, fundamentally, never allowed the Director
Defendants or the PEIs to breach fiduciary duties. Plaintiffs clarify that their
aiding and abetting claims are in the alternative and that the ties between the
directors and the PEIs allow the Court to infer knowing participation. Finally, they
argue that their unjust enrichment claims should not be dismissed because their
“claims are rooted in equity . . . and are not based upon a violation of the
[Registration Rights Agreement].”41 They submit that the contract does not
completely govern the parties’ relationship and that their unjust enrichment and
fiduciary duty claims survive in parallel.
Defendants, in reply, criticize Plaintiffs for relying on speculation,
misreading the Registration Rights Agreement, and asking the Court to draw
unreasonable conclusions. They argue that to survive the motions to dismiss the
fiduciary duty claims (and to trigger the entire fairness standard), Plaintiffs’
pleadings must support some unfair or conflicted action.42 In fact, they contend
41
Pls.’ Br. in Opp’n to Director Defs.’ Mot. to Dismiss Second Am. Compl. (“Pls.’
DD Opp’n Br.”) 46.
42
Reply Br. in Further Supp. of Director Defs.’ Mot. to Dismiss Second Am.
Compl. 22-24 & nn.28, 30.
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that Molycorp’s board did not have the right to interfere with the PEIs’ priority—if
not under the explicit language of the detrimental condition provision then under
an implied covenant of good faith. They add that exercise of valid contract rights
does not establish knowing participation in the breach of a fiduciary duty and that
Defendants’ actions fell squarely within the parameters of the Registration Rights
Agreement, leaving no room for unjust enrichment claims.
*****
A. A Word on Demand Futility
To promote judicial economy, the Court focuses on the merits of the
fiduciary duty, aiding and abetting, and unjust enrichment claims. Both sides have
presented thoughtful arguments on the issue of demand, but the Court grants the
motions to dismiss without resolving the thorny issues of legal standard and the
relevant board. For one, regardless of whether the test articulated in Aronson v.
Lewis43 or Rales v. Blasband44 is applied, Plaintiffs have an argument that demand
43
473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner,
746 A.2d 244 (Del. 2000).
44
634 A.2d 927, 934 (Del. 1993). The SAC reads more like a charge of inaction,
but Plaintiffs discuss “affirmative decision[s]” and the Aronson test in their
briefing. Pls.’ DD Opp’n Br. 29.
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is excused based on the composition of the board at all relevant filings until the
May 2014 filing. Before the SAC took effect, a majority of the board members
had either sold stock in the June Offering or held high level positions with selling
shareholders.45 It would seem unfair to allow boards to frustrate demand excusal
while this Court takes time to decide a motion,46 and earlier complaints more than
alluded to the same underlying events.47 Ultimately, however, the Court need not
Plaintiffs elaborated during oral argument that “there has to have been a decision
not to try to sell . . . . [because] when [Molycorp] went public, it didn’t raise as
much money as it wanted to.” Oral Arg. Tr. 84; see also id. at 90 (“The decision
was to raise $400 million the worst possible way . . . at the whim of the third
part[ies].”).
A breach of fiduciary duties can be found for an act, as well as a failure to act.
See Hubbard v. Hollywood Park Realty Enters., Inc., 1991 WL 3151, at *10 (Del.
Ch. Jan. 14, 1991) (“From a semantic and even legal viewpoint, ‘inaction’ and
‘action’ may be substantive equivalents, different only in form.”). As discussed
infra, the Court need not resolve this dispute.
45
Kristoff and Henry had sold stock personally in June 2011; Bhappu, Machiels,
and Dolan served concurrently as partners of a PEI.
46
Given that exactly half of the directors serving in May 2014 had served since the
first Gaines complaint, the parties debate whether the analysis in Braddock v.
Zimmerman, 906 A.2d 776 (Del. 2006), applies. If it did apply, it would likely
track the merits analysis that the Court performs infra. Again, it is not necessary
for the Court to resolve this question.
47
For example, the first amended complaint contained allegations that “the
Director Defendants could have delayed the June 2011 Offering” and “could have
attempted an equity offering . . . in advance of the June 2011 Offering,” Verified
Consolidated Am. S’holder Deriv. Compl. (“FAC”) ¶ 100, Aug. 21, 2012, as well
as that the Director Defendants “cho[se] to side with the Controlling Shareholders
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resolve these issues because the SAC fails to state a claim upon which Plaintiffs
can recover. Thus, the Court simply assumes that a majority of the directors
serving in October 2013 had disqualifying interests by reason of personal gains or
fiduciary relationships with PEIs and that demand would be excused.48
B. The Relevant Standards
On a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6), the
Court takes as true the well-pleaded facts in the complaint and draws reasonable
to ensure that Defendants . . . had primary access to the equity market.”
FAC ¶ 101. Count I identified breaches of duties by “participating in and profiting
from the February and June 2011 Offerings,” FAC ¶ 215, but the harms were
couched in terms of securities fraud. See FAC ¶ 216. Resource Equities’ first
complaint, though never operative, leveled allegations similar to those in the SAC.
48
The Court’s assumption that demand would have been futile does not mean that
the SAC necessarily “contains sufficient facts to state a cognizable claim.” See
McPadden v. Sidhu, 964 A.2d 1262, 1270 (Del. Ch. 2008). Similarly, an
assumption that the Director Defendants had competing interests relating to the
June Offering does not suffice to state a claim for breach of fiduciary duties, as
explained infra. Plaintiffs suggest that claims survived in Carsanaro v.
Bloodhound Technologies, Inc., 65 A.3d 618 (Del. Ch. 2013), “where at least half
of the board was alleged to have not been independent and disinterested in setting
the terms of several rounds of preferred stock financing because it was reasonably
conceivable that most of the purportedly conflicted directors were also fiduciaries
for affiliated funds that participated . . . .” Pls.’ DD Opp’n Br. 43. The key is the
combination of the interests and the reasonably conceivable allegations of
wrongful conduct. See Carsanaro, 65 A.3d at 639, 640 (noting allegations of acts
that permit “a reasonable inference of unfairness”).
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inferences in the light most favorable to the non-moving party.49 The Court
dismisses the complaint only where “the plaintiff would not be entitled to recover
under any reasonably conceivable set of circumstances.”50 Nonetheless, the Court
need not accept “conclusory assertions unsupported by specific factual
allegations,”51 and “a claim may be dismissed if allegations in the complaint or in
the exhibits incorporated into the complaint effectively negate the claim as a matter
of law.”52
One heated dispute that occupies a substantial portion of the parties’ papers
is the proper standard of review for the fiduciary duty claims. Plaintiffs argue that
the conduct of both the Director Defendants and the PEIs should be subject to
entire fairness review. Defendants submit that the Director Defendants are entitled
to the protection of the business judgment rule and that, to the extent there is a
loyalty claim against the PEIs, it should be evaluated under the corporate
opportunity doctrine. Distinguishing among standards of review is an important
49
E.g., Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1030 (Del.
Ch. 2006).
50
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531,
535 (Del. 2011).
51
Allied Capital Corp., 910 A.2d at 1030.
52
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001).
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(and frequently a dispositive) exercise. Regardless of the level of scrutiny,
however, a plaintiff must make allegations that support the basic elements of a
claim. The “classic” duty of loyalty claim involves “preferring the adverse self-
interest of the fiduciary or of a related person to the interest of the corporation.”53
It is because its decision turns on the failure to state a claim that the Court does not
reach the issue of whether a more exacting standard of review applies.
C. The Fiduciary Duty Claims
Plaintiffs’ basic argument is 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.
Defendants assert that Plaintiffs have not alleged any wrongful conduct.54 They
draw support from the Registration Rights Agreement, pleadings about funding in
the SAC, and unpredictable stock prices.
53
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 66 (Del. 2006). The SAC hints
at a breach of the duty of good faith, but those claims were not developed in
subsequent briefing and oral argument. To establish a breach of the duty of good
faith, a plaintiff must at least show that defendants engaged in conduct
“qualitatively more culpable than gross negligence.” Id.54
Defendants make other arguments, particularly those challenging control and
conflicts, but the Court focuses on the sufficiency of the SAC. The Court assumes,
but does not decide, that the PEIs owed fiduciary duties.
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To survive a motion to dismiss, a complaint must show that there is a
reasonably conceivable set of facts under which the plaintiff can recover. A
fiduciary is not strictly liable for all injuries; a breach of fiduciary duty claim
requires some cognizable wrong.55 A number of cases have explored the
distinction between permissible and wrongful actions by fiduciaries. To begin, this
55
In other words, a fiduciary is not presumed to be liable for every grievance
asserted against her. See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701, 703 (Del.
1983) (stating general agreement with the principle that “even though the ultimate
burden of proof is on the majority shareholder to show by a preponderance of the
evidence that the transaction is fair, it is first the burden of the plaintiff attacking
the merger to demonstrate some basis for invoking the fairness obligation”);
Abraham v. Emerson Radio Corp., 901 A.2d 751, 762 (Del. Ch. 2006) (dismissing
a complaint against a controlling shareholder (and its controller) for sale of the
company to a competitor because, “[a]t the very least, a plaintiff seeking to state a
claim must plead facts that indicate that the controller knew there was a risk that
the buyer was a looter or otherwise intended to extract illegal rents from the
subsidiary”).
Although the Court does not decide whether a majority of Molycorp’s directors
were conflicted, it notes that Plaintiffs have not rebutted the presumptions of the
business judgment rule as to Ball. Being appointed by a powerful or controlling
shareholder does not make one conflicted. Aronson, 473 A.2d at 816. The
Delaware Supreme Court recently clarified that “applying the entire fairness
standard against interested parties does not relieve plaintiffs seeking damages of
the obligation to plead non-exculpated claims against each of the defendant
directors.” In re Cornerstone Therapeutics Inc., S’holder Litig., -- A.3d --, 2015
WL 2394045, at *6 (Del. May 14, 2015). Molycorp’s charter includes a
Section 102(b)(7) provision. DD OB Ex. 1 art. VIII. Therefore, even if claims
were to remain against interested parties, claims against Ball would need to be
tested for sufficient pleadings of non-exculpated conduct.
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Court has held that it is 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.56 Of course, the law
does not require a controller to sacrifice every benefit of her investment because
she is interested in the result.57 In Goodman v. Futrovsky,58 for example, the
Delaware Supreme Court rejected an argument that the lower court should have
considered all of the plaintiff’s claims before approving a settlement. The
defendants owned two businesses, established a contractual relationship between
the two, and, over a decade later, publicly sold stock for one. The conflict had
56
See, e.g., Monroe Cnty. Empls.’ Ret. Sys. v. Carlson, 2010 WL 2376890, at *2
(Del. Ch. June 7, 2010) (“Transactions between a controlling shareholder and the
company are not per se invalid under Delaware law. Such transactions are
perfectly acceptable if they are entirely fair, and so plaintiff must allege facts that
demonstrate a lack of fairness.” (footnote omitted)).
57
See, e.g., In re Sirius XM S’holder Litig., 2013 WL 5411268, at *9 (Del. Ch.
Sept. 27, 2013) (“[E]ven a controlling shareholder is not required to give up legal
rights that it clearly possesses . . . .” (alteration and internal quotation marks
omitted)); cf. Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL
2521426, at *5 (Del. Ch. Aug. 25, 2006) (“[The defendant] is alleged to have taken
advantage of its contractual rights for its own purposes. Without more, that is not
sufficient to allege that [the defendant] is a ‘controlling shareholder’ bound by
fiduciary obligations.”).
58
213 A.2d 899 (Del. 1965).
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been disclosed in the offering prospectus and later public filings.59 The plaintiff’s
first claim alleged that one of the companies was “solely a device to divert profits”
from the other company to its controllers, and that claim of fraud on the company
was voluntarily abandoned as “without merit.”60 Settlement negotiations
proceeded on the second claim—that the arrangement served a “business function”
but that the “profits had become excessive.”61 In agreeing that the first theory
lacked merit, the Court reasoned that the controllers’ conduct “was [their]
privilege, and the buying public may not complain of that decision as long as it
was not misled.”62
Case law on wrongful conduct by directors is also well-developed.
Appointment by a powerful shareholder does not automatically render a director’s
decisions suspect.63 Nor is it wrong for a director to buy or sell company shares,
without more.64 If such conduct were actionable, “directors of every Delaware
corporation would be faced with the ever-present specter of suit for breach of their
59
Id. at 901.
60
Id. at 900.
61
Id.62
Id. at 902.
63
Frank v. Elgamal, 2014 WL 957550, at *22 (Del. Ch. Mar. 10, 2014).
64
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 833 A.2d 961,
974 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004).
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duty of loyalty if they sold stock in the company on whose Board they sit.”65 Even
when a form of heightened scrutiny applies, a plaintiff cannot prevail by advancing
unreasonable inferences or by making conclusory statements and suggesting that it
is the defendant’s burden to prove them wrong. In particular, the Court has
declined to find liability based on allegations that, judging from hindsight,
directors could have done more to protect shareholders.66 It also cannot be the law
that a director breaches her fiduciary duties by merely failing to predict stock price
movements accurately.67
Plaintiffs allege, as culpable conduct, that the that the PEIs (1) appointed
representatives to the board,68 (2) “functioned as a de facto group of controlling
65
Id.66
See, e.g., Dias v. Purches, 2012 WL 4503174, at *8 (Del. Ch. Oct. 1, 2012)
(making a fee award based on a meritorious disclosure claim but not on a
“fruitless” claim that directors violated duties under Revlon because they failed to
secure a price collar—and the price of the merger consideration later fell).
67
Cf. Noerr v. Greenwood, 1997 WL 419633, at *4-5 (Del. Ch. July 16, 1997)
(discussing federal and state authority and rejecting “‘fraud by hindsight’”
allegations). The Noerr court, for example, declined to adopt “a more flexible
standard, under which it may infer from a rapid increase (or decrease) in stock
price that follows a contrary representation as to the stock’s value, that the
fiduciary knew or should have known that their disclosures were false.” Id. at *5.
68
SAC ¶ 67.
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stockholders” through ownership and “common goals,”69 (3) invoked their
registration rights, and (4) “closed Molycorp out of the equity markets,”70 or
(5) knowingly “assisted in [the Director Defendants’ breach of fiduciary duties],
encouraged them, and benefitted.”71 The Director Defendants are alleged to have
(1) “resolved the issue [of selling priority] by putting the interests of the
Controlling and Selling Stockholders ahead of those of the Company,”72
(2) “authorized a second massive capital raise,”73 (3) elected “to complete a private
offering of Convertible Notes” for Molycorp,74 and (4) knowingly exposed
Molycorp to financial risks.75 The SAC provides varying degrees of fact-based
support for these allegations.
Taking the well-pleaded facts in the light most favorable to Plaintiffs, there
is no question that the Selling Defendants, and not Molycorp, benefited from the
June Offering. The PEIs believed that they would profit by demanding registration
in May 2011. All Defendants knew that each share the Selling Defendants sold
69
SAC ¶ 70.
70
SAC ¶ 81.
71
SAC ¶ 127.
72
SAC ¶ 17; see also SAC ¶ 89.
73
SAC ¶ 17.
74
See SAC ¶ 92.
75
E.g., SAC ¶¶ 9, 76, 92.
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meant one less share for Molycorp to sell and that Molycorp’s stock price would
eventually fall. Defendants also knew that arrangements with the DOE,
Sumitomo, and Hitachi had not come through (and possibly would never).
Molycorp did not have cash on hand in 2011 to satisfy its projections through
2013.76 It had ambitious plans and desired additional funds. Unable to ramp up its
mining efforts by late 2010, it missed out on sales of rare earth elements at the
temporarily high prices. Molycorp needed “at least $100 million more” to achieve
its mining goals from as early as late 201077 and was unable to do so until late
2011.78
A closer observation of the pleadings, however, does not support the main
conclusions the Court is asked to draw. Critically, the SAC does not allege that the
Registration Rights Agreement was invalid.79 This fact, combined with a lack of
76
In March 2011, Molycorp had $492.5 million, and in June 2011, presumably,
Molycorp had $680 million, as compared to its nearly $800 million operating
budget through 2013. SAC ¶¶ 12, 92. The other budget numbers postdate the
decision-making window for the June Offering. See, e.g., SAC ¶¶ 21, 99, 101. As
such, they do not help the Court to infer that Defendants acted culpably.
77
See SAC ¶ 79; see also SAC ¶ 64.
78
SAC ¶ 100.
79
This is not an instance where problematic contract rights have been superseded
by fiduciary duty concerns. See, e.g., In re Del Monte Foods Co. S’holders Litig.,
25 A.3d 813, 840-43 (Del. Ch. 2011). Plaintiffs do not question the Registration
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reason to believe that the PEIs knew when the rare earth element bubble would
burst, defeats the fiduciary duty claims against the PEIs. The PEIs were major
investors in Molycorp and bargained for certain rights before the IPO. Contending
that the PEIs exercised rights that benefited themselves but were fairly extracted
and disclosed in public filings, as in Goodman, does not itself state a claim that the
PEIs took advantage of Molycorp and its minority shareholders.80 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 PEIs controlled their board appointees,
Plaintiffs would need to plead that the PEIs had done something wrong to state a
breach of fiduciary duties.
Plaintiffs suggest that the PEIs “exclud[ed] Molycorp from the equity
markets at a crucial point.”81 The Court infers that the relevant timeframe
extended from May 2011 through September 2011. The pleadings, in contrast, do
Rights Agreement. They do question whether various Defendants should have
intervened to delay or defeat a contractually-conferred right to sell.
80
In Goodman, there was an additional viable claim that profits from the
negotiated agreement had become excessive. The well-pleaded complaint does not
allege that the Defendants here had control over Molycorp’s stock price or knew
when the boom phase would end.
81
SAC ¶ 126.
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not provide support for allegations that Molycorp had a pressing need to fund its
business during those few months and that other financing avenues (for example, a
convertible note offering) were closed going forward.82 Maybe discovery would
yield a factual basis for Plaintiffs’ suppositions about the Defendants’ assessment
of the path of the price of Molycorp’s stock as a function of time. Emails might
prove informative, but speculation of that sort should not accompany a decision on
a motion to dismiss. The Court must base its decision on the facts as set forth by
the Plaintiffs in the SAC, not conclusory statements. It simply is not a wrong to
sell stock knowing that “‘a pin lies in wait for every bubble,’”83 before a company
with other opportunities decides to sell its own stock.
Similar reasoning explains why Plaintiffs have not stated a claim against the
Director Defendants. Again, the Registration Rights Agreement informs the
context in which Defendants were acting and cannot be ignored. In their
opposition, Plaintiffs raise the argument that the express language of the contract
supports the Director Defendants’ duty to have sold stock for Molycorp. Under
82
For further discussion, see infra text accompanying notes 87-88.
83
See Pls.’ PEI Opp’n Br. 3 n.5 (quoting Warren Buffett). To the extent that there
are fiduciary duty claims against the Selling Defendants as such, the same
reasoning about speculation would seem to apply. See also DD OB 51 (citing
cases).
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Plaintiffs’ reading, the Director Defendants could have secured the benefits of the
June Offering for Molycorp by conducting a Company Registration “at any time it
needed to raise cash”84 or by delaying the Demand Registration (and conducting a
Company Registration in the meantime). True, the Director Defendants could have
conducted a Company Registration as soon as they learned that the BOE loan
guarantee was in jeopardy. Defendants argue, however, that once the PEIs
requested a Demand Registration, a Company Registration designed to preclude
that offering would not have been in good faith (whether as an express or implied
obligation).85 With respect to delaying a Demand Registration (assuming that the
detrimental condition provision extends beyond mere filing), the board would have
needed to certify that a detrimental condition existed “in the good faith judgment
of [itself] and its counsel.”86
Perhaps the Court is to infer that Molycorp’s directors had a duty to conduct
a Company Registration or to interfere with the PEIs’ contractual rights.87 This
84
Pls.’ PEI Opp’n Br. 41.
85
See TNA RB 25-26.
86
RRA § 2(d). The Court does not resolve the parties’ debate over the meaning of
the detrimental condition provision as it is not material to its conclusion.
87
Alternatively, perhaps the board needed to adjust the allocation of the June
Offering. See Pls.’ PEI Opp’n Br. 42 n.32 (offering one possibility).
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argument conceivably could succeed if the factual allegations (and reasonable
inferences) establish a reason to take such action. Plaintiffs seem to suggest that a
cash crunch provided that reason. They allege that the amount of cash Molycorp
had in 2011 was less than the amount Molycorp projected it needed through 2013.
They note expert forecasts, slowing price growth, frustrated financing
opportunities, and two public statements suggesting that production plans were
delayed from 2010 to 2011. Yet they also state that Molycorp raised $233 million
in a June 2011 note offering, and the latter of the two statements announced that
Molycorp would meet its production goal “three months earlier than previously
planned.”88 Moreover, the SAC gives no reason to infer that, as of May 2011,
Defendants knew that Molycorp could not make another successful offering
(perhaps ninety days after the June Offering). A developing company almost
certainly will have budget issues—it is not reasonable to infer fault for every
decision that does not raise money. Simply put, the well-pleaded facts that
Molycorp’s IPO did not raise as much money as expected and that the DOE,
Sumitomo, and Hitachi arrangements were in jeopardy do not state a reasonably
conceivable claim that the Director Defendants needed to violate the PEIs’
88
SAC ¶ 100 (internal quotation marks omitted).
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expectations (or conduct a Company Registration whenever Molycorp desired
more funding).
There is also an argument that the Director Defendants rightfully could have
(and needed to have) delayed the Demand Registration because of a detrimental
condition. The parties debate whether a cash shortfall triggers the materially
detrimental condition provision; it is not suggested that any other materially
detrimental condition existed at the time. Regardless of how the provision is
interpreted, the SAC does not provide any allegations about a good faith decision
made by the board and its counsel (or even the lack thereof). The Court, on its
own, does not find a reasonably conceivable case for invoking the provision,
particularly when the SAC does not explain why Molycorp promptly needed funds
through an equity offering and what decisions were (or were not) made by the
board and its counsel. The factual allegations, as elaborated supra, actually
contradict a finding of a need for a delay.
The strongest argument against finding a reasonably conceivable wrong,
though, is that there are no allegations that the Director Defendants knew that the
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market would rise and fall as dramatically as it did, when it did.89 A director is not
liable for failing to predict the movement of stock prices, and a stockholder is
generally allowed to sell her shares. The PEIs exercised contractual rights that
they had secured on April 15, 2010. Molycorp’s stock price rose with the price of
rare earth elements, largely tracking a boom-bust cycle and political events. The
stock price did not fall substantially until September 2011—months after two large
secondary sales.90 The Court declines to charge a director with knowing (or at
least having sufficient reason to know), based on pleadings of a cyclical market
and an unusual political event, that prices will decrease, within a narrow time
frame, below the level needed to raise funds that her company needs.
In conclusion, Plaintiffs’ theories of liability fail because the Court cannot
accept conclusory statements, engage in speculation, or rely on hindsight.
Plaintiffs do not identify particular board meetings, resolutions, or authorizations
89
The discussion about the limits of speculation, supra text accompanying
notes 81-83, applies here as well.
90
While hindsight does not demand any legal conclusion, it shows that the
secondary offerings did not significantly affect the price of Molycorp’s stock—the
price remained strong for almost ninety days after the June Offering. See Winston
Opening Aff. Ex. 5. Also, had Molycorp delayed the Demand Registration for a
period just short of ninety days, it is possible that the Selling Defendants still
would have earned high profits that could have accrued to Molycorp. See TNA
OB 4.
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about participating in or delaying an offering. The Court does not mean to suggest
that a plaintiff must plead particular facts to survive a motion to dismiss, but it
does not know when decisions were made, who made those decisions, and how
such decisions were made—assuming that there were board acts. The SAC even
indicates that Molycorp raised over $200 million in June 2011 through a
convertible note offering. The Registration Rights Agreement, facts contradicting
a cash crunch, and the human inability to predict the future preclude a conceivable
finding that Defendants violated their fiduciary duties. Accordingly, because the
primary fiduciary duty claims fail, any secondary aiding and abetting claims would
also fail.91
D. The Unjust Enrichment Claims
Plaintiffs’ final count is for unjust enrichment against the Selling
Defendants. A claim for unjust enrichment requires Plaintiffs to show “(1) an
enrichment, (2) an impoverishment, (3) a relation between the enrichment and
91
The elements of an aiding and abetting claim are: “(1) the existence of a
fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3) knowing
participation in that breach by the defendants, and (4) damages proximately caused
by the breach.” Malpiede, 780 A.2d at 1096 (omission in original) (internal
quotation marks omitted). Thus, regardless of whether the PEIs were fiduciaries,
there is no viable claim.
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impoverishment, (4) the absence of justification, and (5) the absence of a remedy
provided by law.”92 Unjust enrichment claims fail where a validly negotiated
contract governs the contested matter, although the Court can be wary of granting a
motion to dismiss when it is not clear that the contract covers the entire dispute.93
Furthermore, where a breach of fiduciary duty claim based on the same facts and
circumstances fails, the Court often dismisses the corresponding unjust enrichment
claim.94
The analysis here is simple because the Registration Rights Agreement has
not been challenged as an unfair or invalid contract. Plaintiffs argue that they are
not grounding their claims in a breach of contract, but the validly negotiated
contract rights and the failure to allege culpable conduct (by the directors or the
PEIs) defeat claims that the Selling Defendants lacked justification for their gains
in the June Offering.95 Unable to establish this critical element, Plaintiffs cannot
succeed on their unjust enrichment claims.
92
Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *16-17 (Del.
Ch. Dec. 22, 2010).
93
See, e.g., id. at *16.
94
Frank v. Elgamal, 2014 WL 957550, at *31.
95
Cf. Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010) (“Just as the plaintiffs
have failed on the merits of their breach of contract claim, they have failed to
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*****
For the reasons above, Defendants’ motions to dismiss are granted.96
IT IS SO ORDERED.
Very truly yours,
/s/ John W. Noble
JWN/cap
cc: Register in Chancery-K
prove that the Directors[] unjustly benefited from the pre-transaction redemption,
in contravention of . . . the fundamental principles of justice or equity and good
conscience.” (internal quotation marks omitted)). Those not parties to the
Registration Rights Agreement would not seem to have the benefit of its
justification to sell, even if there was a close relationship with a signatory.
Nonetheless, the SAC fails to charge the Selling Defendants with knowledge of (or
reason to know) how Molycorp’s price would move. They are not guarantors and,
as discussed in the fiduciary duty analysis, Plaintiffs have not provided a basis to
infer wrongful conduct from the fact of a sale.
96
The motions to dismiss are granted with prejudice as to the named Plaintiffs. To
be clear, this decision does not affect the rights of shareholder Paul Temkin, who
pursued an action under 8 Del. C. § 220, Temkin v. Molycorp, Inc., C.A. No. 8240,
and whose Rule 23.1 demand on the Molycorp board remains unresolved. See
Letter from Brian D. Long, Esq., Jan. 15, 2015.