IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CITY OF MIAMI GENERAL )
EMPLOYEES’ AND SANITATION )
EMPLOYEES’ RETIREMENT )
TRUST, )
)
on behalf of itself and on behalf of all
others similarly situated, )
)
Plaintiff, )
)
v. ) C.A. No. 9980-CB
)
JERRY M. COMSTOCK, JR., as )
Independent Executor of the Estate of )
Joshua E. Comstock, RANDALL C. )
MCMULLEN, DARREN M. )
FRIEDMAN, ADRIANNA MA, )
MICHAEL ROEMER, C. JAMES )
STEWART, III, H.H. “TRIPP” )
WOMMACK, III, THEODORE “TED” )
MOORE, NABORS INDUSTRIES )
LTD., NABORS RED LION LIMITED, )
and MORGAN STANLEY & CO. LLC, )
)
)
)
Defendants.
MEMORANDUM OPINION
Date Submitted: May 24, 2016
Date Decided: August 24, 2016
Stuart M. Grant, Mary S. Thomas and Jonathan M. Kass, GRANT &
EISENHOFER P.A., Wilmington, Delaware; Mark Lebovitch, Jeroen van
Kwawegen and Christopher J. Orrico, BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, New York, New York; Attorneys for Plaintiff City of Miami
General Employees’ and Sanitation Employees’ Retirement Trust.
Stephen C. Norman, Michael A. Pittenger and Jaclyn C. Levy, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Michael C. Holmes,
Manuel G. Berrelez, Elizabeth C. Brandon, Craig E. Zieminski, Olivia D. Howe,
Meriwether T. Evans and Meredith S. Jeanes, VINSON & ELKINS LLP, Dallas,
Texas; Attorneys for Defendants Jerry M. Comstock, Jr. Randall C. McMullen,
Darren M. Friedman, Adrianna Ma, Michael Roemer, C. James Stewart, III, H.H.
“Tripp” Wommack, III, and Theodore “Ted” Moore; William M. Lafferty and
Lindsay M. Kwoka, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Wilmington, Delaware; Alan J. Stone and Hailey DeKraker, MILBANK, TWEED,
HADLEY & MCLOY, LLP, New York, New York; Attorneys for Defendants
Nabors Industries, Ltd. and Nabors Red Lion Limited; Ashley R. Altschuler and
John L. Reed, DLA PIPER LLP (US), Wilmington, Delaware; John J. Clarke, Jr.,
DLA PIPER LLP (US), New York, New York; Attorneys for Defendant Morgan
Stanley & Co. LLC.
BOUCHARD, C.
This case involves a stockholder challenge to the merger of C&J Energy
Services, Inc. and a subsidiary of Nabors Industries Ltd. that held its completion
and production services business. On November 25, 2014, this Court issued a
preliminary injunction enjoining the transaction from closing until after C&J
solicited alternative proposals to purchase C&J during a 30-day period. On
December 19, the Supreme Court reversed that order. In March 2015, after
receiving the approval of approximately 97.6% of the shares of C&J stock that
voted, the transaction closed.
Seven months after the closing, plaintiff amended its complaint to assert
claims seeking damages for breaches of fiduciary duty against the members of the
C&J board and certain of its officers challenging their conduct in deciding to enter
the Nabors transaction in the first place and in carrying out the Court-ordered
solicitation process, and challenging for the first time various disclosures in the
proxy that was disseminated to C&J’s stockholders before they voted to approve
the transaction. Plaintiff also sued Nabors and the financial advisor to the special
committee that ran the solicitation process, Morgan Stanley & Co., for aiding and
abetting the alleged breaches of fiduciary duty.
Pending before the Court are two motions: (1) defendants’ motion to
dismiss the amended complaint for failure to state a claim for relief, and (2) C&J’s
motion to recover approximately $542,000 in damages against the bond that the
1
plaintiff posted to secure entry of the preliminary injunction order. For the reasons
explained below, both motions are granted.
With respect to the first motion, I conclude that plaintiff’s claims for post-
closing damages against C&J’s directors and officers are subject to the business
judgment presumption under the Delaware Supreme Court’s decision in Corwin v.
KKR Financial Holdings LLC because of the legal effect of the stockholder vote,
and that judicial review of plaintiff’s fiduciary duty claims (and related aiding and
abetting claims) thus ends there. This conclusion follows from two subsidiary
determinations: that plaintiff has failed to plead facts sufficient to demonstrate that
the C&J stockholder vote was not fully informed, and that plaintiff has not alleged
facts showing that the challenged transaction, which was approved by a majority of
disinterested and independent directors, should be subject to entire fairness review.
With respect to the second motion, I conclude that C&J is entitled to a
rebuttable presumption that it may recover its damages against the injunction bond,
which consist primarily of the costs of legal and financial advisors that provided
assistance during the Court-ordered solicitation process, and that plaintiff has
failed to demonstrate circumstances warranting a deviation from this presumption.
Thus, C&J is entitled to its requested damages.
2
I. BACKGROUND
Unless noted otherwise, the facts recited in this opinion are based on the
allegations of the Amended Verified Class Action Complaint (the “Complaint”).
A. The Parties and Relevant Entities
Before the transaction at issue in this action, C&J Energy Services, Inc.
(“C&J”), a Delaware corporation, provided fracturing, pressure pumping, and
oilfield services. Defendant Nabors Industries, Inc. (“Nabors”), a Bermuda
company, is an owner and operator of drilling rigs and provides related services.
On March 20, 2015, C&J merged with a subsidiary of Nabors that held Nabors’
completion and production services business. This transaction is referred to herein
as the “Nabors transaction.” The surviving entity of the Nabors transaction was
C&J Energy Services, Ltd. (“New C&J”), a Bermuda company that was formerly
known as Nabors Red Lion Limited. 1
Plaintiff City of Miami General Employees’ and Sanitation Employees’
Retirement Trust is a single-employer defined benefit retirement plan for certain
employees and retirees of the City of Miami. It alleges it held shares of C&J
common stock at all relevant times.
1
On July 20, 2016, New C&J filed for bankruptcy. Dkt. 302. On August 5, 2016,
counsel for the individual defendants informed the Court that they do not contend at this
time that they are affected by the bankruptcy stay. Dkt. 307.
3
Defendant Joshua E. Comstock was the CEO and Chairman of C&J Energy
Services, Inc. (“C&J”). 2 After the Nabors transaction, Comstock became CEO and
Chairman of New C&J. Defendant Randall C. McMullen was the President and
Chief Financial Officer of C&J and a member of C&J’s board. McMullen became
the CFO and a director of New C&J after the Nabors transaction.
Defendants Darren M. Friedman, Adrianna Ma, Michael Roemer, C. James
Stewart, and H.H. “Tripp” Wommack, III, were non-management directors of C&J
during the negotiation, signing, and closing of the Nabors transaction. I refer to
these five individuals as the “Outside Directors.” Friedman, Ma, and Stewart were
members of a special committee that C&J formed to conduct the Court-ordered
solicitation process (the “Special Committee”).
Defendant Theodore “Ted” Moore served as C&J’s Executive Vice
President and General Counsel. Moore became New C&J’s Executive Vice
President, General Counsel and Chief Risk Officer after the Nabors transaction.
Defendant Morgan Stanley & Co. LLC (“Morgan Stanley”) is a Delaware
LLC based principally in New York.
2
Comstock passed away on March 11, 2016. Dkt. 290 (Rule 25(a) Notice Regarding
Joshua E. Comstock). On June 2, 2016, the Court entered an order substituting Jerry M.
Comstock, Jr., Independent Executor of the Estate of Joshua E. Comstock, as a party
defendant in Joshua E. Comstock’s place. Dkt. 301.
4
B. The C&J-NCPS Transaction
Comstock founded C&J in 1997 and took it public in 2011. In October
2013, C&J became interested in pursuing possible acquisitions and retained
Goldman Sachs to advise on a potential deal with Chesapeake Oil Services.
In January 2014, Citigroup Global Markets Inc. (“Citi”) approached
Comstock with a proposal to combine C&J and Nabors’ completion and
production services business (“NCPS”) by having C&J merge into a subsidiary of
Nabors, with C&J’s stockholders retaining 45% of the combined entity’s stock and
Nabors retaining 55%. On January 16, Comstock and McMullen met with a
representative of Citi and Tony Petrello, the Chairman of Nabors, to discuss the
potential deal. Everyone understood that Comstock’s support for any such
transaction was conditional on his remaining Chairman of the combined entity.
Comstock did not tell the C&J board about his discussions at this time.
On March 5, 2014, Comstock and McMullen met Nabors executives to
continue analyzing the potential transaction. In this meeting, Nabors informed
Comstock that NCPS’s EBITDA for 2014 and 2015 would be significantly worse
than previously projected. Later in March, Nabors reduced NCPS’s 2014 EBITDA
projection by an additional $51 million.
On April 3, 2014, Comstock informed the C&J board about the potential
Nabors deal. He presented the transaction as an acquisition of NCPS by C&J and
5
did not disclose that the deal would result in the sale of a majority stake of C&J.
Comstock told the board that its current board members would comprise a majority
of the New C&J board and that Nabors would re-elect the current C&J directors
for at least five additional years. The C&J board authorized Comstock and Citi to
send a non-binding letter for the acquisition of NCPS for an initial maximum
aggregate value of up to $2.6 billion.
On April 4, Comstock made an offer at the enterprise value cap of $2.6
billion, which implied an EBITDA multiple for NCPS of 6.5. Under this offer,
Nabors would receive a majority stake in the combined company and $916 million
in cash, and C&J’s stockholders would receive a minority stake in the combined
company. The offer letter indicated that any definitive transaction agreements,
employment agreements, and organizational documents would need to include
protections to ensure continuity with C&J’s management team and board of
directors.
On April 10, Petrello urged Comstock to increase the premium C&J would
pay for Nabors based on tax benefits resulting from inverting C&J into a Bermuda
company. These benefits would be captured by way of a $1 billion intra-company
note. Comstock included this note in his transaction proposal and valued the
resulting tax benefits at $250 million.
6
On April 14, Comstock asked the C&J board to approve an increase of
C&J’s offer from an aggregate enterprise value of $2.6 billion to $2.75 billion,
which implied a 6.9 multiple of NCPS’s 2014 EBITDA. The C&J board agreed,
and Comstock sent this higher offer to Petrello on April 16.
On April 22, Nabors released its first-quarter results, reporting negative $3
million in operating income and $53 million in EBITDA. Comstock was
disappointed with these results and realized that NCPS would be unlikely to reach
the already-reduced $400 million 2014 EBITDA forecast. The next day, Petrello
rejected C&J’s $2.75 billion proposal, complaining that the offer failed to account
for synergies and demanding a cash payment upon closing rather than a debt
instrument.
On April 25, without obtaining permission from the C&J board to further
increase its offer, Comstock submitted a new proposal, this time valuing the
combined enterprise at up to $2.9 billion and contemplating a cash payment to
Nabors. Comstock based his new valuation on an annualized EBITDA multiple
derived from NCPS’s second quarter returns rather than on its full-year 2014
EBITDA. Comstock and Petrello eventually agreed to work toward a valuation of
$2.925 billion. At that point, Comstock approached Citi through McMullen with
an offer to lead the debt financing for the transaction in order to pay the $940
million cash component of Nabors’ consideration.
7
On May 2, 2014, Comstock asked Petrello to add 2015 EBITDA to NCPS’s
financial information. Petrello then provided updated financials that included a
2015 EBITDA projection of $490 million, a 6x multiple to the previously
discussed $2.925 billion valuation. Petrello provided this projection two days after
KPMG sent Nabors a report that listed Nabors’ management’s projection of
NCPS’s 2015 EBITDA as being only $387.4 million.
C&J retained Deloitte Tax LLP to perform due diligence on NCPS in
anticipation of a transaction. In mid-June, Deloitte noted that NCPS’s April results
were worse than expected. The May numbers, in contrast, were not credible to
Comstock because they contained “creative accounting” that Comstock
commented was used to show improved results.3 Comstock and McMullen asked
Deloitte to stop its due diligence, which it did from June 16 until June 19.
On June 18, 2014, Citi gathered its due diligence results, which also
suggested lower April results, and which contained a “Management Case” 2015
EBITDA projection of $408 million. Comstock and Citi were comfortable with
this projection, but at a 6x multiple, the enterprise value did not reach the $2.925
billion to which they had agreed. Comstock thus indicated that he was willing to
increase the EBITDA multiple from 6.0 to 6.5. After recalculating NCPS’s
projected 2015 EBITDA, the “upside case” for NCPS’s 2015 EBITDA came to
3
Compl. ¶ 81.
8
$445 million according to McMullen, which was less aggressive than the $505
million Nabors estimated. 4 Citi and Tudor Pickering Holt & Co. (“Tudor”), which
had been retained to provide a second fairness opinion, used this $445 million
projection for their 2015 EBITDA estimate in their fairness opinions. They were
not informed that McMullen allegedly viewed it as an upside case.
Shortly before a board meeting held on June 24, Comstock sent Petrello
proposed employment contracts for himself and other C&J executives.
Comstock’s proposed agreement included a $19.1 million success bonus and
severance payments of $173 million in the ordinary course and $220 million in
connection with an unapproved change of control transaction. The board was not
involved in negotiating these employment agreements, and Comstock noted that
they would be subject to a vote of New C&J’s stockholders.
On June 24, C&J’s board approved a transaction to merge C&J with NCPS,
with Nabors receiving $940 million in cash and a majority stake in the combined
entity. The transaction called for four of C&J’s seven board members to have
guaranteed seats on the new entity’s board for five years. The minutes of the board
4
Compl. ¶¶ 89-90. As discussed below, plaintiff’s description of this communication is
contrary to the Supreme Court’s review of the preliminary injunction record.
Specifically, based on affidavits submitted by McMullen and Comstock and documentary
exhibits of the e-mails in question, the Supreme Court found that the $445 million
estimated EBITDA figure represented “management’s expected or base case” and that
Comstock inserted the reference to an “upside case” as “a negotiating tactic.” C&J
Energy Servs., Inc. v. City of Miami Gen. Emps.’ Ret. Tr., 107 A.3d 1049, 1061 n.54
(Del. 2014).
9
meeting indicate that the approval was for C&J’s “acquisition of [NCPS]” rather
than the sale of C&J.5 Accordingly, the minutes do not contain a discussion of a
sale process or market check for C&J, or whether the deal offered the best value
reasonably available for C&J’s stockholders. Citi and Tudor calculated that the
transaction was worth $30.76 per share for C&J’s stockholders, compared to
C&J’s share price of $32.50 at the time and Citi’s determination that C&J was
worth $37.38 per share on a standalone basis.
On June 25, Nabors informed Comstock that it was not willing to sign the
employment agreements Comstock had proposed or a related side letter.
Comstock replied that he would not sign the transaction without guaranteed terms
for himself and C&J’s management. Petrello then agreed to sign a side letter
regarding Comstock’s success bonus and severance payments, at which point
Comstock and Petrello announced the proposed transaction.
C. The Preliminary Injunction6
On July 30, 2014, plaintiff filed its initial complaint alleging breaches of
fiduciary duty in connection with the Nabors transaction and requesting, among
5
Compl. ¶ 93.
6
This Section I.C contains certain facts from the record associated with C&J’s motion to
recover damages against the injunction bond. Unless otherwise noted, the additional
facts drawn from outside the Complaint are not used in analyzing the motion to dismiss,
but are included to provide a coherent narrative and to analyze C&J’s motion to recover
damages against the injunction bond.
10
other things, that the transaction be enjoined until C&J adopted a process to obtain
the highest possible value for stockholders. 7 On November 10, 2014, plaintiff
moved for a preliminary injunction.
On November 24, 2014, the Court of Chancery issued a preliminary
injunction against C&J regarding the Nabors transaction. On November 25, the
parties drafted competing forms of orders to implement the injunction for a 30-day
period. Plaintiff’s proposed order stated:
During the period that this Preliminary Injunction is in effect, the
members of the C&J Board of Directors who have not been
designated to be directors of C&J Energy Services, Ltd. shall take all
steps reasonably necessary to explore whether there are other persons
or entities interested in purchasing a controlling stake in C&J,
including without limitation retaining an independent financial
consultant (the “Advisor”). If after the 30 day period either a
potential buyer or additional facts warrant further injunctive relief, the
injunction will remain in effect until the Advisor submits to this Court
an affidavit (“Affidavit”) certifying that the Board has made all
reasonable efforts to obtain the best price reasonably available for
C&J.8
C&J’s proposed order stated:
[C&J] is hereby ordered to solicit alternative proposals to purchase the
Company that are superior to the Proposed Transaction, as such term
is defined by the Merger Agreement, for a period of 30 days from
November 24, 2014. . . . The Company is enjoined from holding its
7
Verified Class Action Compl. 33-34.
8
Levy Aff. Ex. 2 ¶¶ 1-3.
11
stockholder meeting until the Company has complied with paragraph
1 above. 9
On November 25, after receiving these proposed orders, the Court entered the
following preliminary injunction order (the “PI Order”):
1. C&J Energy Services, Inc. (the “Company”), through its directors
who have not been designated to be directors of C&J Energy services,
Ltd., is hereby ordered to solicit alternative proposals to purchase
the Company (or a controlling stake in the Company) that are superior
to the Proposed Transaction, as such term is defined by the Merger
Agreement, for a period of 30 days from November 24, 2014.
2. The solicitation of proposals consistent with this Order and any
subsequent negotiations of any alternative proposal that emerges will
not constitute a breach of the Merger Agreement in any respect.
3. The Company is enjoined from holding its stockholder meeting
until the Company has complied with paragraph 1 above.
4. This order may be extended on application made within 30 days of
November 24, 2014, showing a potential buyer, additional facts that
warrant further injunctive relief, or that it would be appropriate
because of the stay authorized in paragraph 7 hereof.
5. Plaintiff shall post a bond in the amount of $650,000 within three
business days.
6. This Court’s order and bench ruling of November 24, 2014, are
certified to the Supreme Court of the State of Delaware for disposition
in accordance with Rule 42 of that Court.
7. The Injunction is stayed pending the outcome of Defendants’
appeal to the Supreme Court of the State of Delaware, or further order
of that Court. 10
9
Levy Aff. Ex. 4 ¶¶ 1, 3.
10
Levy Aff. Ex. 5 (emphasis added).
12
In sum, the Court ordered C&J to solicit alternative proposals but stayed that order
pending appeal. The Court also provided an opportunity to request an extension of
the injunction under certain circumstances, including if it was “appropriate because
of the stay.” The Court further required plaintiff to post a $650,000 bond despite
the stay of the injunction.
The evening the PI Order was entered, plaintiff inquired why it was
necessary to post a bond given that the injunction had been stayed pending the
appeal. 11 The next morning, on November 26, the Court explained in a letter that
the bond must be posted for two reasons: “First, the Defendants may decide to
comply with the order and, if they do, they are entitled to the protection of the
bond. Second, if the stay is lifted or otherwise lapses, the bond should be in effect
as of that moment.”12
At 2:29 p.m. that afternoon, C&J filed a letter with the Court stating that it
intended “to pursue its appellate remedy and undertake the required solicitation in
parallel. For this reason, C&J respectfully requests that the Court lift the stay
immediately.” 13 C&J pointed out that “the initial end date in the Merger
Agreement is December 31, 2014,” and expressed concern that it would not have
11
Levy Aff. Ex. 6.
12
Levy Aff. Ex. 7.
13
Levy Aff. Ex. 8.
13
time to appeal the ruling and still comply with the 30-day solicitation requirement
if it lost the appeal.14 At 3:00 p.m., the Court granted C&J’s request and lifted the
stay, thus making the Court-ordered solicitation process operative in parallel with
C&J’s appeal.15 At 3:31 p.m., the Register in Chancery stamped as “FILED” a
payment of $650,000 for the preliminary injunction bond. Plaintiff’s counsel filed
a letter to the Register in Chancery attaching the receipt for that bond at 5:15 p.m. 16
D. Post-Injunction Conduct
On November 25, Comstock, in his capacity as C&J’s CEO, issued a press
release disagreeing with the Court’s decision and its conclusion that C&J’s board
had been obligated to solicit alternate proposals before signing the merger
agreement. He noted that C&J planned to appeal the decision and remained
“committed to the transaction.”17 According to Friedman, C&J’s board had not
seen or approved the press release.
On November 26, the board formed a Special Committee consisting of
Friedman, Ma, and Stewart, the three directors who had not been offered seats on
the New C&J board. The Special Committee was tasked with overseeing the
14
Id.
15
Levy Aff. Ex. 9.
16
Levy Aff. Ex. 28.
17
Compl. ¶ 108.
14
required 30-day solicitation process, assessing alternative proposals, and
presenting to the board any competing offers that the Special Committee
determined were potentially superior to the Nabors transaction.
On November 26, Comstock asked his friend John Bishop, a banker at
Morgan Stanley & Co., to serve as the financial advisor for the Special
Committee’s solicitation process. Bishop was aware that Comstock opposed the
Court-ordered solicitation process. When Comstock was negotiating Morgan
Stanley’s fees, Bishop informed Comstock that he would not lose the engagement
“on price.”18 Comstock replied that if Morgan Stanley would take the engagement,
it would be “a solid in with the company.” 19
The Special Committee allowed Ted Moore, C&J’s General Counsel, to
attend all of the committee’s meetings and receive all of its materials. Moore
served as Morgan Stanley’s primary contact during the solicitation process. The
Special Committee also retained Paul, Weiss, Rifkind, Wharton & Garrison LLP as
its legal advisor. At its first meeting, the Special Committee discussed the likely
timing of the appeal of the preliminary injunction to the Supreme Court using a
timeline prepared by Vinson & Elkins LLP, whom Comstock retained in
connection with the Nabors transaction. Morgan Stanley proposed that the Special
18
Compl. ¶ 113.
19
Compl. ¶ 114.
15
Committee assess alternative bids on December 17, around the same day that
Vinson & Elkins expected a decision from the Supreme Court.20
Through McMullen, Comstock instructed Moore that Morgan Stanley and
potential bidders for C&J would not receive confidential information, including
forecasts. Morgan Stanley and the bidders thus did not receive such information.
By December 10, 2014, three potential bidders for C&J had emerged:
Cerberus Capital Management, SCF Partners, and Apollo Global Management. On
December 11, Cerberus made a proposal to combine C&J with Keane Energy, one
of Cerberus’s portfolio companies, and to provide C&J stockholders with $5.25 per
share in cash and a 49% interest in the combined company. The proposal valued
C&J at $14.55 per share, excluding synergies. On December 12, 2014, Cerberus
signed a non-disclosure and standstill agreement and met with Comstock,
McMullen, Moore, and Bishop.
After the meeting, Comstock expressed frustration with Bishop for
considering the proposed transaction with Keane, noting that Keane was a much
smaller company compared to what Comstock had built at C&J. Bishop told
20
Compl. ¶ 119. The timelines pictured in the Complaint do not match precisely.
According to the Complaint, Morgan Stanley’s solicitation process timeline envisioned
that the Special Committee would review bids on December 16 and the entire board
would review them on December 17, while Vinson & Elkins’ appeal timeline anticipated
that the Supreme Court’s decision was expected between December 17 and 19. Compl.
¶ 119. But the Complaint also indicates that Morgan Stanley suggested that the Special
Committee wait until December 17 to assess an alternate bid. Id.
16
Comstock he understood that the go-shop process was frustrating for Comstock
after so much work had gone into the Nabors deal, and reassured him that he
remained supportive of Comstock. Bishop also stated that they were “going to run
a tight objective go-shop process” to avoid giving the Court of Chancery any
reason to doubt their assessment of what other bidders may be willing to offer. 21
On December 12, Morgan Stanley sent Cerberus a letter in response to its
December 11 proposal, inviting Cerberus to bid for a majority stake in C&J and
requesting certain detailed offer terms, which allegedly already were included in
Cerberus’s initial offer. 22 On December 17, Morgan Stanley presented its
assessment of the Cerberus bid to the Special Committee. Morgan Stanley’s
assessment did not include any expected synergies, in contrast to its valuation of
the Nabors deal, which included synergies of $67 million but not the cost of
implementing those synergies.
Bishop informed the Special Committee that, in order to constitute a
superior proposal, Cerberus’s offer should be at least 30% above C&J’s current
stock price but that its offer was only a 12% premium. This guideline was not
specifically based on the language of the PI Order or the merger agreement, which
defines a “Superior Proposal” as a bona fide written proposal that the board
21
Compl. ¶ 125.
22
Compl. ¶¶ 126-27.
17
determines in good faith is more favorable to C&J’s stockholders from a financial
point of view than the Nabors deal. Morgan Stanley did not directly compare the
value of the offers because it considered the Nabors deal to be an acquisition of
assets rather than a sale of C&J. Plaintiff alleges that Morgan Stanley also made
numerous errors in its analysis of the Nabors transaction that overvalued it relative
to the Cerberus transaction.
At the December 17 meeting, the Special Committee discussed the potential
value of the Cerberus bid and the Nabors transaction. On December 18, Morgan
Stanley informed Cerberus that its proposal did not offer enough value to C&J’s
stockholders. The next day, on December 19, the Delaware Supreme Court
reversed the Court of Chancery and lifted the preliminary injunction, thus
reinstating the no-shop provision in the merger agreement.
E. The Proxy and Transaction Closing
After the PI Order was lifted, C&J improved the deal terms by reducing the
cash payment it would make to Nabors at closing by $250 million. On February
13, 2015, C&J issued a final proxy statement regarding the Nabors transaction (the
“Proxy”). As described later, plaintiff alleges that the Proxy omitted material
information and was false in various respects.
18
On March 20, 2015, 97.66% of C&J’s stockholders who voted (constituting
81.73% of the outstanding shares) approved the transaction.23
F. Procedural Posture
On February 27, 2015, C&J filed a motion to recover damages in the amount
of $542,087.89 against the $650,000 injunction bond plaintiff had posted in
connection with obtaining the preliminary injunction. On March 25, 2015, C&J
moved to dismiss plaintiff’s original complaint. On May 7, 2015, this action was
reassigned to me from Vice Chancellor Noble.
On July 24, 2015, plaintiff moved to release the portion of the injunction
bond ($107,912.11) that C&J was not claiming. On July 31, I granted that motion
and ordered those funds to be released.
On October 29, 2015, plaintiff filed an amended complaint (as defined
above, the “Complaint”), which dropped C&J as a defendant and added Morgan
Stanley. In November and December, the individual defendants, Nabors, and
Morgan Stanley moved to dismiss the Complaint.
23
Zieminski Aff. Ex. A (C&J Energy Services, Inc., Current Report (Form 8-K) (March
20, 2015)) at 1. The Complaint acknowledges that C&J’s stockholders approved the
Nabors transaction. Compl. ¶ 22. I take judicial notice of the publicly filed result of the
stockholder vote, which is not subject to reasonable dispute. See In re Gen. Motors
(Hughes) S’holder Litig., 897 A.2d 162, 170-71 (Del. 2006).
19
On April 26, 2016, oral argument was heard on defendants’ motion to
dismiss and their motion to recover the balance of the injunction bond. Plaintiff
thereafter filed a supplemental submission on May 24, 2016.
II. ANALYSIS OF DEFENDANTS’ MOTION TO DISMISS
This Court will grant a motion to dismiss under Court of Chancery Rule
12(b)(6) only if the “plaintiff could not recover under any reasonably conceivable
set of circumstances susceptible of proof.” 24 In making this determination, the
Court will “accept all well-pleaded allegations as true and draw all reasonable
inferences in the plaintiff’s favor.”25 The Court is not required, however, to accept
mere conclusory allegations as true or make inferences that are not supported by
well-pleaded factual allegations. 26 The Court also “is not required to accept every
strained interpretation of the allegations proposed by the plaintiff.” 27
The Complaint contains seven claims:
Count I: Breach of fiduciary duty against Comstock.
Count II: Breach of fiduciary duty against the Outside Directors
concerning the Nabors transaction.
24
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536
(Del. 2011).
25
Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013).
26
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).
27
In re Gen. Motors, 897 A.2d at 168.
20
Count III: Breach of fiduciary duty and aiding and abetting against
McMullen and Moore.
Count IV: Aiding and abetting against Nabors and New C&J.
Count V: Breach of fiduciary duty against the Special Committee
members concerning the solicitation process.
Count VI: Aiding and abetting against Morgan Stanley.
Count VII: Breach of fiduciary duty against Comstock, McMullen, Moore
and the Outside Directors concerning disclosures in the Proxy.
I begin by assessing plaintiff’s disclosure claim and then turn to the claims for
breach of fiduciary duty and for aiding and abetting.
A. Disclosure Allegations
In Count VII, plaintiff asserts that Comstock, McMullen, Moore, and the
Outside Directors breached their fiduciary duties by including false information in,
and omitting material information from, the Proxy. 28 Plaintiff further argues that
these disclosure violations prevented C&J’s stockholders from voting on the
Nabors transaction in an informed manner.
Plaintiff did not include a disclosure claim in its original complaint and did
not press this claim during its motion for preliminary injunction.29 Plaintiff added
28
Compl. ¶¶ 184-86; Zieminski Aff. Ex. F (C&J Energy Services, Inc., Definitive Proxy
Statement (Schedule 14A) (February 13, 2015)) (the “Proxy”).
29
Verified Class Action Compl., July 30, 2014.
21
the disclosure claim when it amended its complaint in October 2015, months after
the Nabors transaction closed. In doing so, plaintiff did not heed the preference
under Delaware law for disclosure claims to be litigated before a stockholder vote
so that if a disclosure violation exists, it can be remedied by curing the
informational deficiencies, thus providing stockholders with the opportunity to
make a fully informed decision. 30 For this reason, defendants argue that plaintiff’s
disclosure claim should be barred under the doctrine of laches. 31 There is some
persuasive force to this argument, considering that plaintiff did not bring its
disclosure claim until long after the transaction closed, thus waiting until it was
“too late to remedy the harm” with supplemental disclosures. 32
There is a wrinkle here, however, that leads me to decide the disclosure
claim on the merits despite what appears to have been a calculated delay in
asserting this claim. As discussed below, defendants argue that, under the
Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC, the C&J
directors’ approval of the Nabors transaction is subject to the business judgment
30
See In re Transkaryotic Therapies, Inc., 954 A.2d 346, 360-62 (Del. Ch. 2008).
31
See Ryan v. Lyondell Chem. Co., 2008 WL 2923427, at *21 n.128 (Del. Ch. July 29,
2008) (noting that defendants “could make a compelling argument that all of [the]
disclosure claims ought to be barred by the doctrine of laches” because plaintiff could
have moved for a pre-vote preliminary injunction but failed to do so), rev’d on other
grounds, 970 A.2d 235 (Del. 2009).
32
In re Transkaryotic Therapies, 954 A.2d at 361.
22
presumption because it was approved by a fully-informed, uncoerced stockholder
vote.33 Thus, the question whether the stockholder base was fully informed is
relevant not only to determine whether Count VII states a claim for relief, but also
to address defendants’ arguments concerning the applicable standard of review for
its other fiduciary duty claims. For this reason, I choose to address plaintiff’s
disclosure claims on the merits.
Under Delaware law, when directors solicit stockholder action, they must
“disclose fully and fairly all material information within the board’s control.” 34
Delaware has adopted the standard of materiality used under the federal securities
laws. Information is material “if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.”35 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.”36
33
See Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 312 (Del. 2015) (“[T]he doctrine
applies only to fully informed, uncoerced stockholder votes, and if troubling facts
regarding director behavior were not disclosed that would have been material to a voting
stockholder, then the business judgment rule is not invoked.”) (Strine, C.J.).
34
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
35
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)).
36
Arnold v. Soc’y for Sav. Bancorp, 650 A.2d 1270, 1277 (Del. 1994).
23
Using this standard, I address plaintiff’s disclosure allegations, which can be
grouped into seven categories.
1. C&J’s Estimate of NCPS’s EBITDA
In what it characterizes as its strongest disclosure claim, plaintiff argues that
the Proxy contained “false” information regarding C&J’s estimate of NCPS’s
EBITDA. 37 To put these allegations in context, it is useful to see what the Proxy
said about these estimates in the first place:
In addition, C&J’s management prepared unaudited prospective
financial information regarding the C&P Business’s anticipated future
operations for fiscal years 2015 to 2018, which was derived from the
information provided by Nabors to C&J for fiscal years 2015 to 2018
in connection with C&J’s due diligence review of the C&P Business.
The unaudited prospective financial information provided below
includes certain adjustments by C&J management to the prospective
financial information provided to C&J by Nabors. . . . These
adjustments were based on C&J management’s interpretation of
financial results for the C&P Business for April through June 2014
and ongoing conversations with Nabors management in connection
with C&J’s due diligence review of the C&P business, as well as C&J
management’s view of the outlook for the stimulation and production
businesses. C&J has included below a summary of this information to
give its stockholders access to certain non-public information that was
considered by the C&J board of directors and also provided to C&J’s
financial advisors in connection with the Merger.
37
See Tr. Oral Arg. Mot. Dismiss 95-98.
24
* Earnings before interest, taxes, depreciation and amortization,
excluding non-recurring integration, severance and retention
expenses. EBITDA is a non-GAAP financial measure and should not
be considered as an alternative to net income (loss) or cash flow data
prepared in accordance with GAAP. 38
Plaintiff alleges that the Proxy did not disclose that C&J’s estimate of $445
million in 2015 EBITDA for NCPS in the above table was “(a) the result of
Comstock agreeing with Petrello that he would use a 6.5 multiple to get a deal
done, thereby providing both C&J and Nabors with a $450 million target; or (b)
C&J’s management’s ‘upside case.’” 39 There are a number of problems with these
allegations that undermine plaintiff’s assertion that the disclosed EBITDA
projection was false or that any further disclosure was required.
To start, although plaintiff asserts that the projection was the “result” of
“stretching the multiple” on the deal to 6.5, 40 that contention does not follow from
specific allegations in the Complaint concerning what it meant to “stretch the
38
Proxy at 96.
39
Compl. ¶ 146.
40
Pl.’s Br. in Opp’n 57.
25
multiple.” In particular, the Complaint quotes Comstock as telling Petrello the
following on June 19, 2014:
My current thinking is original valuation of $2.925 was based on 6x
2015 ebitda of $490. To the extent the forecasts come down, I’m
willing to stretch to a 6.5x to get it done. 6.5 is a number I can
substantiate as it is a blended multiple of the peer group plus one
turn.41
In other words, Comstock told Petrello he had hoped to pay 6 times NCPS’s
EBITDA assuming the 2015 EBITDA number was $490 million and, if the 2015
EBITDA forecast declined from that level, was willing to pay up to 6.5 times a
lower EBITDA figure in order to close the deal based on the previously agreed
valuation of $2.925 billion. Comstock’s offer to pay a higher multiple to make up
for a lower EBITDA represents a negotiating concession on C&J’s part, not an act
of concealment or a misstatement of earnings.
Plaintiff’s assertion that this concession provided a $450 million “target”
merely reflects the mathematical fact that achieving a $2.925 billion valuation at a
multiple of 6.5 would require a $450 million earnings figure, which Nabors
necessarily would have known. Of course, if Comstock had refused to stretch the
multiple from 6.0 to 6.5, the same arithmetic would have led C&J and Nabors to a
different “target” of $490 million to reach the same valuation with a multiple of
6.0. What is critically missing from the Complaint is any well-pled allegation that
41
Compl. ¶ 87.
26
Nabors deliberately manipulated or misstated NCPS’s financial data in response to
Comstock’s concession, and that C&J knew it. Nor is there a well-pled allegation
that C&J’s own $445 million projection resulted from this “target.” Put
differently, the Complaint does not plead facts from which it would be reasonable
to infer the causal relationship plaintiff suggests, i.e., that the $445 million 2015
EBITDA estimate resulted from Comstock’s willingness as a negotiator to
“stretch” the EBITDA multiple to reach a particular valuation.
Plaintiff’s next argument, that the Proxy should have disclosed that the $445
million EBITDA estimate was management’s “upside case,” also is unavailing.
First, the contention that this figure was an upside case cannot be squared with the
Supreme Court’s analysis of this issue from the preliminary injunction record. It
examined affidavits and the documents in question and found that McMullen did
not refer to $445 million as an upside case in his e-mail to Comstock, but rather
that Comstock added the “upside case” language when forwarding the message to
Nabors as a negotiation tactic.42 Given this finding, which plaintiff has not
42
The Supreme Court stated as follows:
Although the plaintiffs discovered an email purportedly from C&J’s CFO,
McMullen, to Comstock calling the $445 million an “upside case,”
McMullen asserted in an affidavit that $445 represented “management’s
expected or base case,” not an “upside case.” McMullen’s email did not
originally contain the phrase “upside case,” but in a version forwarded to
Petrello, Comstock added a sentence suggesting that $445 was “an upside
case.” Comstock submitted an affidavit recalling that he had added the
sentence as “a negotiating tactic.” Comstock also explained to the Citi
27
addressed, far from being corrective, it would be misleading to characterize the
$445 million EBITDA projection as an “upside case.”
The Complaint, moreover, alleges that “Comstock never informed the
Board, Citi or Tudor that the revised 2015 EBTIDA [sic] estimate of $445 million
was an ‘upside case’ . . . .” 43 As the block quote set forth above demonstrates, the
Proxy disclosed the $445 million figure and noted that it and other confidential
financial information “was considered by the C&J board of directors and also
provided to C&J’s financial advisors in connection with the Merger.” 44 Thus, even
if it were true that management viewed $445 million as an upside case, the board
was not made aware of that view according to the Complaint, and thus it would
have been misleading to characterize it as such in the Proxy when describing the
information the board was provided.45 For all these reasons, plaintiff has failed to
team that his team was comfortable with forecasting EBITDA of $450
million based on their diligence.
C&J, 107 A.3d at 1061 n.54 (citations omitted).
43
Compl. ¶ 91.
44
Proxy at 96.
45
Plaintiff also argues that the board would have learned that management’s forecasts
were an upside case during the injunction process. Pl.’s Br. in Opp’n 57. Considering
the Supreme Court’s assessment of the record, see supra note 42, it would not be
reasonable to infer that the board learned this seemingly erroneous fact during the
injunction litigation.
28
state a claim that the disclosure in the Proxy concerning C&J’s estimate of NCPS’s
EBITDA was false.
2. Nabors’ Estimate of NCPS’s EBITDA
The previous section addressed plaintiff’s contentions about the Proxy’s
disclosures concerning C&J’s estimate of NCPS’s EBITDA. Plaintiff also
challenges the Proxy’s disclosure concerning Nabors’ estimate of NCPS’s
EBITDA that it provided to C&J. With regard to the latter issue, the Complaint
alleges as follows:
[T]he Proxy represented that Nabors estimated NCPS’s 2014
EBITDA at $376 million when Nabors knew that NCPS’s EBITDA
was approximately $300 million. Furthermore, the Proxy represented
that Nabors estimated NCPS’s 2015 EBITDA at $516 million, when
Nabors’ management had informed KPMG that its best estimate was
$387.4 million. 46
There are two primary problems with this claim.
First, the section of the Proxy disclosing these estimates explains that
“Nabors presented certain prospective, unaudited financial information,” including
the EBITDA figures, to C&J and its financial advisors, which “was not prepared
with a view toward public disclosure . . . .” 47 In other words, the Proxy is listing
the information that Nabors provided to C&J and its financial advisors. Amending
46
Compl. ¶ 146.
47
Proxy at 98.
29
or supplementing those figures with other estimates that were not presented to C&J
would misstate the information that C&J actually received from Nabors.
Second, and relatedly, the Complaint alleges that Nabors knew that its own
estimates were incorrect, but not that C&J’s board knew that the estimates were
inaccurate or otherwise relied on an alternate set of projections from Nabors.48
Disclosure in a Proxy to be disseminated to C&J’s stockholders of financial
estimates outside of the board’s knowledge is immaterial. 49
3. Synergies and the Intra-Company Loan
Plaintiff complains that the Proxy did not disclose that “absent purported
synergies—including tax synergies resulting from a fictitious $1 billion intra-
company loan—the deal represented a negative premium to the standalone implied
equity value of C&J.” 50 Although plaintiff labels the loan as “fictitious,” it does
not allege that the loan and its tax benefits were invalid or otherwise would fail to
achieve the expected tax synergies. Equally problematic, plaintiff provides no
48
Plaintiff also argues that “Comstock and McMullen invited Nabors to provide
unreliable EBITDA projections to further the sales process and purposefully passed that
flawed data along to the Board without disclosure of its origin.” Pl.’s Br. in Opp’n 55.
This allegation is a reprise of plaintiff’s “stretch the multiple” theory, which fails to state
a claim for the reasons discussed previously.
49
See Wayne Cty. Emps.’ Ret. Sys. v. Corti, 954 A.2d 319, 332 (Del. Ch. 2008) (rejecting
argument that more recent internal projections must be disclosed because, among other
reasons, “there is no evidence in the record that the Activision board relied on these
Vivendi projections”).
50
Compl. ¶ 146.
30
explanation for why a statement of the obvious (i.e., that the failure to attain
expected synergies would make the deal less attractive) would significantly alter
the total mix of available information. This disclosure claim is thus without merit.
4. Comstock’s Alleged Threat to Block the Deal
Plaintiff argues that the Proxy should have disclosed Comstock’s threat on
June 25 that he would not sign the Nabors deal unless Nabors guaranteed
employment terms for himself and C&J’s management team. 51 According to
plaintiff, a reasonable stockholder “would find it material that the Chairman and
CEO—who also owned 10% of the Company—refused to support the deal unless
his lucrative success bonus was promised in writing.”52
The Proxy, however, did contain the relevant information surrounding these
discussions. Specifically, immediately after describing the board’s approval of the
transaction on June 24, 2014, the Proxy stated as follows:
Following the conclusion of the C&J board of directors meeting, C&J,
Nabors and their respective counsel finalized the transaction
documentation. C&J management indicated that they required greater
assurance regarding the arrangements for the Management Team
before entering into the transaction, and accordingly Members of the
51
Compl. ¶¶ 99-100, 146. Plaintiff’s disclosure claim states that “Comstock threatened
to block the deal,” Compl. ¶ 146, but the specific language plaintiff alleges Comstock
used was: “I’m not prepared to sign for this transaction without guaranteed terms for
myself and management team. A side letter was circulated and it, at a minimum, will be
necessary for us to gain comfort. It’s highly unfortunate this stance was taken at the last
minute. We will not be prepared to close as it currently stands.” Compl. ¶ 99.
52
Pl.’s Br. in Opp’n 58.
31
Management Team and Nabors agreed that the terms of their proposed
employment arrangements with [New C&J] would be finalized on
substantially the terms previously discussed prior to the mailing of
this proxy statement/prospectus. Thereafter, C&J and NIL executed
the Original Merger Agreement in the form approved by their
respective boards, the Original Separation Agreement and the Support
Agreement. 53
On the previous page, the Proxy defined the term “Management Team” to mean
“specifically, Messrs. Comstock, McMullen, Gawick, Prestidge and Moore.”54
Thus, the Proxy did disclose that C&J management told Nabors that the proposed
employment arrangements for Comstock (and other managers) needed to be
finalized “before entering into the transaction.”55
The Proxy, furthermore, disclosed the employment terms for Comstock that
were agreed to after this alleged “threat” was made. 56 Thus, C&J’s stockholders
were made aware that Comstock’s incentives differed from other stockholders
53
Proxy at 73. I incorporate this text by reference in considering plaintiff’s allegations of
text missing from the Proxy statement. In doing so, I do not rely on the truth of the
content, only that such statements were made in the Proxy.
54
Proxy at 72.
55
To insist that this communication be described as a “threat” would amount to self-
flagellation that is not required under Delaware law. See Loudon v. Archer-Daniels-
Midland Co., 700 A.2d 135, 143 (Del. 1997) (“The directors’ duty of disclosure does not
oblige them to characterize their conduct in such a way as to admit wrongdoing.”). It
also is open to question whether the so-called threat was even credible, rather than
immaterial puffery, given that Comstock’s June 25 statement was made after the C&J
board had approved the transaction, placing it beyond Comstock’s authority to block.
56
See Proxy at 108-11.
32
because, although he held a large equity stake in the company, he also would
receive financial benefits not accruing to the stockholders at large.
5. Citi’s Alleged Conflict
Plaintiff asserts that the Proxy failed to disclose that “Citi violated its own
conflicts policy” by providing deal financing while acting as a financial advisor on
the deal.57 Plaintiff misstates its own allegations in this regard. The Complaint
alleges that Citi’s conflicts policy restricts its ability to earn “significant buy-side
financing fees” when giving “sell-side advice.”58 But plaintiff does not allege that
Citi provided buy-side financing (i.e., financing for Nabors to make a payment to
C&J), because the reverse was true: Nabors was to receive $940 million in cash in
the transaction, not pay it.59 Consequently, plaintiff’s own allegations do not
support the conclusion that Citi violated its conflicts policy.
Contrary to plaintiff’s assertion, the Proxy provided adequate disclosures
concerning Citi’s role in providing financing. It specifically disclosed:
57
Compl. ¶ 146.
58
Compl. ¶ 74.
59
Compl. ¶¶ 73-74, 139. One could argue that the financing issue is not quite that simple
because New C&J, the combined entity, would retain the debt obligation. Compl. ¶ 73.
This does not alter my analysis because Nabors, the “buyer” in the transaction under
plaintiff’s own theory, is undisputedly the entity being paid the cash. At most, it can be
argued that Nabors exercised control over the entity undertaking the financing obligation
after the transaction closed. That, in my view, does not convert Citi’s role into providing
buy-side financing, when the alleged buyer is the entity receiving cash.
33
Citi and its affiliates are also participating in the financing for the
Transactions, including acting as lead arranger for such financing, for
which services Citi and its affiliates will receive an aggregate fee
currently estimated to be up to approximately $19.6 million.60
For these reasons, plaintiff’s allegations regarding Citi’s conflict policy and
disclosures of its role in financing the transaction fail to state a disclosure claim.
6. Disclosures Related to the Court-Ordered Solicitation Process
The Proxy contained the following disclosure concerning the solicitation
process that this Court ordered:
On November 24, 2014, the Court of Chancery entered a bench
ruling, followed by a written order (the “Order”) on November 25,
2014, that (i) ordered certain members of the C&J board of directors
to solicit for a period of 30 days alternative proposals to purchase C&J
(or a controlling stake in C&J) that are superior to the Transactions,
and (ii) preliminary enjoined C&J from holding its stockholder
meeting until it complied with the Order. . . .
On November 26, 2014, in response to and in compliance with
the Order, the C&J board of directors authorized a special committee
of independent directors who have not been designated to serve on the
combined company’s board of directors following consummation of
the Merger (the “Special Committee”) to conduct the solicitation of
acquisition proposals consistent with the Order and evaluate any
alternative proposal received. The Special Committee engaged
Morgan Stanley & Co. . . . as its financial advisor in connection with
the solicitation and Paul, Weiss, Rifkin, Wharton & Garrison LLP . . .
as its legal advisor in connection with the solicitation.
At the request of the Special Committee, Morgan Stanley
contacted 46 strategic parties and 36 financial parties that might
potentially be interested in making an acquisition proposal that could
60
Proxy at 95.
34
be superior to the Merger. In response to the solicitation, C&J entered
into confidentiality and non-disclosure agreements with two of the
parties and, at the request of such parties, held high level discussions
with C&J’s management team. One of such third parties submitted an
acquisition proposal to C&J on December 11, 2014. After evaluating
the acquisition proposal with Morgan Stanley and Paul Weiss, the
Special Committee determined that such acquisition proposal was not
reasonably likely to lead to a superior proposal in accordance with the
terms of the Merger Agreement. 61
Plaintiff identifies a laundry list of issues concerning this disclosure.
Specifically, it alleges that the Proxy failed to disclose “that the Cerberus bid
included a $5.25 per share cash dividend for C&J stockholders,” “that Morgan
Stanley never received C&J forecasts or other confidential information concerning
C&J’s performance while it purportedly assessed the value of the Cerberus bid,”
“that Morgan Stanley did not include any synergies in its assessment of the value
of the Cerberus bid,” “that Morgan Stanley continued to analyze the Nabors Deal
as an acquisition of assets and never provided the Special Committee with a
comparison of the value of the Cerberus bid with the value of the Nabors Deal for
C&J stockholders,” and “that Morgan Stanley and C&J management refused to
provide any confidential information to Cerberus and other potential bidders, even
after they signed an NDA with a standstill provision.”62
61
Id. at 73-74.
62
Compl. ¶ 146.
35
In essence, plaintiff argues that C&J should have given stockholders more
information regarding the potential alternate bidders who materialized during the
Court-ordered solicitation process, in particular Cerberus, more information about
Morgan Stanley’s and the Special Committee’s interactions with those bidders, and
more details about Morgan Stanley’s financial analysis. Some of these allegations
restate as disclosure claims plaintiff’s substantive arguments regarding Morgan
Stanley’s and C&J’s assessment of the Cerberus bid, such as Morgan Stanley’s
decision to treat the Nabors transaction as an asset acquisition or not to include
synergies in valuing the Cerberus bid. “[Q]uibbles with a financial advisor’s work
simply cannot be the basis of a disclosure claim.” 63 Regarding plaintiff’s argument
that details of the Cerberus bid should have been disclosed to stockholders,
moreover, Delaware law does not require disclosure of a play-by-play of
negotiations leading to a transaction or of potential offers that a board has
determined were not worth pursuing.64
As alleged in the Complaint, the Special Committee proposed to the C&J
board that Morgan Stanley be permitted to tell Cerberus that its proposal “did not
63
In re 3Com S’holders Litig., 2009 WL 5173804, at *6 (Del. Ch. Dec. 18, 2009).
64
David P. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *12 (Del. Ch. June
27, 2008); Skeen v. Jo-Ann Stores, Inc., 1999 WL 803974, at *8 (Del. Ch. Sept. 27, 1999)
(“Because no firm offer was made, the board had no duty to disclose any of the specifics
of HF’s negotiations with that entity.”), aff’d, 750 A.2d 1170 (Del. 2000).
36
offer enough value to C&J stockholders” to be superior to the Nabors transaction.65
Consistent with this allegation, the Proxy disclosed that the Special Committee had
determined that the Cerberus bid was not reasonably likely to lead to a proposal
superior to the Nabors transaction. Plaintiff’s substantive disagreement with that
decision cannot be recast as a disclosure claim. Plaintiff essentially argues that the
stockholders should have been informed about the offer in case they, too, disagreed
with the Special Committee. 66 The board was not obliged to do so under Delaware
law, which does not require disclosing details about offers that directors conclude
are not worth pursuing. 67
Finally, the unique posture of this case provides another reason why the
details of the Cerberus transaction did not need to be disclosed. In addition to the
fact that the Special Committee determined that the offer was not reasonably likely
to lead to a proposal superior to the Nabors transaction, as was disclosed in the
Proxy, the reversal of the preliminary injunction reinstated the no-shop provision
65
Compl. ¶ 142.
66
Mot. Dismiss Tr. 100 (“[T]his would have been the last chance for the stockholders to
say, You know what? I disagree. I will vote down this proposal and take my chances that
Cerberus is still interested. So just saying that somebody had submitted a proposal
without giving more detail, not full and fair disclosure, deprived the stockholders from a
full and fair vote.”).
67
David P. Simonetti Rollover IRA, 2008 WL 5048692, at *12 (“In the usual case, where
a board has not received a firm offer or has declined to continue negotiations with a
potential acquirer because it has not received an offer worth pursuing, disclosure is not
required.”).
37
and thus prevented the board from pursuing the Cerberus transaction further in any
case. For these reasons, plaintiff cannot establish a substantial likelihood that a
reasonable stockholder would consider the various details surrounding the
Cerberus transaction and the analysis of it to be important in deciding how to vote.
7. Claims Relating to Morgan Stanley’s Alleged Conflicts
Plaintiff asserts that the Proxy should have disclosed certain information
calling into question Morgan Stanley’s independence as the Special Committee’s
financial advisor. Specifically, the Complaint challenges the omission from the
Proxy that Comstock was friends with Bishop, Morgan Stanley’s representative to
the Special Committee, and that Comstock had told Bishop it would be a “solid in
with the company” if he accepted the financial advisor role.68
As an initial matter, because the solicitation process became a nullity when
the Supreme Court reversed the preliminary injunction, questions concerning the
integrity of that process logically would have ceased to be meaningful to
stockholders. Thus, in my view, Morgan Stanley’s potential conflicts were not
material to stockholders at the time they were asked to vote on the Nabors
transaction.
But even if the solicitation process did continue to be meaningful to C&J’s
stockholders, plaintiff’s allegations do not rise to the level of materiality for other
68
Compl. ¶ 146.
38
reasons as well. Friendship alone has been rejected by this Court as a basis to
impugn the independence of a financial advisor.69 The inquiry instead must be
more textured to take into account the overall circumstances of the engagement.
Here, the circumstances were that the Court had entered an injunction mandating a
highly expedited solicitation process just two days before Thanksgiving and that
Comstock’s statement that the work would “be a solid in with the company” 70 was
made in the context of negotiating fees, after Bishop opined that the fees Comstock
was offering were low. 71 Potential fees or other business with the company does
69
In re Inergy L.P., 2010 WL 4273197, at *14 (Del. Ch. Oct. 29, 2010) (finding that the
decision of a one-person special committee to hire a “longstanding” friend of the CEO
was not unreasonable under the circumstances).
70
Compl. ¶ 13.
71
See Thomas Aff. Ex. 13 (full text of the e-mail discussion). Plaintiff relied on the
quoted e-mail chain in its Complaint by selectively quoting the “solid in” portion of the
message multiple times. See Compl. ¶¶ 13, 114, 146. I consider the remaining text of the
e-mail chain to be incorporated by reference into the Complaint to put the quotations in
their proper context. In my view, “there is no concern that [plaintiff] would not have
notice that the defendants would want to put those selective quotations in context . . . .”
In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 659 n.3 (Del. Ch. 2013)
(Strine, C.). This is particularly true in light of the fact that, in addition to quoting the
e-mails multiple times in its Complaint, plaintiff submitted the full e-mail thread in an
affidavit regarding the injunction bond motion. Thomas Aff. Ex. 13. Finally, although
considering the quoted e-mails in their full context is useful, my analysis would not
change because, absent any explanatory context, the one-line quotation (quoted three
times in the Complaint) is too vague to lead to a reasonable inference one way or another.
39
not in itself constitute a material conflict of interest.72 This is particularly apt here,
where the suggestion of future business with the company was made to entice a
well-qualified advisor to accept an unusually low fee for an assignment that had to
be performed under far less than ideal conditions. Taking into account the context
of Morgan Stanley’s retention, the alleged omissions concerning Morgan Stanley
would not have been important to a reasonable stockholder in deciding how to vote
on the Nabors transaction.
*****
For the reasons detailed above, plaintiff’s disclosure-related allegations fail
to state a claim, and Count VII is thus dismissed.
B. Fiduciary Duty Claims
The Complaint asserts four claims for breach of fiduciary duty seeking post-
closing damages. Counts I and III are asserted against three insiders (Comstock,
McMullen, and Moore) for their respective roles in the Nabors transaction and the
solicitation process. Counts II and V are asserted against outside directors.
Specifically, Count II is asserted against all five of the Outside Directors for their
72
See Solomon v. Armstrong, 747 A.2d 1098, 1119 (Del. Ch. 1999) (“The payment
structure and relationship histories do not form a sufficient basis for the inference that
these investment banks were willing to opine, or lean toward, better terms for GM during
the negotiation of the transaction.”), aff’d, 746 A.2d 277 (Del. 2000) (TABLE).
40
role in the Nabors transaction, and Count V is asserted against the three members
of the Special Committee for their role in the solicitation process.
In selling control of a corporation, the actions of a board of directors are
subject to enhanced scrutiny under Revlon and its progeny, which involves an
assessment of the board’s decision-making process and the reasonableness of their
actions under the circumstances.73 As the Supreme Court explained last year in
Corwin v. KKR, the enhanced scrutiny of Revlon (and Unocal) was “primarily
designed to give stockholders and the Court of Chancery the tool of injunctive
relief to address important M&A decisions in real time, before closing,” and was
not a tool “designed with post-closing money damages claims in mind.” 74
Focusing on the post-closing context, the Supreme Court held in Corwin that
if a transaction that is not subject to entire fairness is approved by a fully informed,
uncoerced vote of stockholders, Revlon review does not apply and the appropriate
standard for a post-closing damages action is the business judgment rule.75 The
Supreme Court further explained earlier this year that, in such cases, dismissal is
typically the result because the transaction then can be attacked only on grounds of
waste, a concept that has “little real-world relevance” in an M&A transaction
73
See Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994).
74
Corwin, 125 A.3d at 312.
75
Id.
41
because “stockholders would be unlikely to approve a transaction that is
wasteful.”76
Plaintiff does not allege that the Nabors transaction amounted to waste or
that the stockholder vote on the Nabors transaction was coerced and, as I
concluded above, plaintiff has failed to allege that C&J’s stockholders were not
fully informed when they voted to approve that transaction. Consequently, unless
plaintiff can establish a basis for applying entire fairness to the Nabors transaction,
each of its fiduciary duty claims must be dismissed under a straightforward
application of Corwin and Attenborough.77
Plaintiff advances essentially two arguments for invoking entire fairness:
(1) that a majority of the C&J board was interested in the Nabors transaction
because of their desire to obtain board seats in the surviving entity, and (2) that
Comstock tainted the process by which the board considered the transaction.
Neither argument has merit.
76
Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016) (ORDER).
77
Because I conclude that Corwin applies, I do not opine on defendants’ separate
argument that Revlon does not apply because of certain control-limiting provisions in the
transaction. See C&J Defs.’ Op. Br. 21-24.
42
1. The Complaint Fails to Allege that a Majority of the C&J
Board Was Interested in the Nabors Transaction
To rebut the business judgment presumption that a board acted loyally, a
plaintiff must allege that “the board was either interested in the outcome of the
transaction or lacked the independence to consider objectively whether the
transaction was in the best interest of its company and all of its shareholders.”78
“If a plaintiff alleging a duty of loyalty breach is unable to plead facts
demonstrating that a majority of a board that approved the transaction in dispute
was interested and/or lacked independence, the entire fairness standard of review is
not applied and the Court respects the business judgment of the board.” 79
C&J’s board consisted of seven directors: Comstock, McMullen, Friedman,
Ma, Roemer, Stewart, and Wommack. The five directors other than Comstock and
McMullen were outside directors. Although the argument was not prominently
featured in plaintiff’s brief, the Complaint alleges and plaintiff’s counsel reiterated
at oral argument that a majority of the C&J board was interested in the Nabors
transaction because of “the prospect of five years of unassailable board seats.”80
78
Orman v. Cullman, 794 A.2d 5, 22 (Del. Ch. 2002).
79
Id. at 23.
80
Compl. ¶ 110; Compl. ¶ 7 (“A majority of C&J’s Board would receive guaranteed seats
on the board of New C&J for at least five years.”); see also Tr. Oral Arg. Mot. Dismiss
71-73, 76. The Complaint at one point alleges that the seats were for six years. Compl. ¶
163 (“Motivated in part by their own selfish interest in guaranteed six-year board seats on
the New C&J board, the Director Defendants allowed Comstock to negotiate the Nabors
43
This allegation is wholly insufficient to establish that a majority of the board
members were interested in the Nabors transaction.
As an initial matter, not all of C&J’s directors stood to receive seats on the
New C&J board. To the contrary, as the Complaint alleges, only four of the seven
directors would be nominated to New C&J’s board if the Nabors transaction was
approved. 81 Consequently, even if a director may have thought he or she had some
chance—perhaps even a high likelihood—of joining the board of New C&J,
approving the transaction entailed giving up his or her current position in exchange
for an uncertain future position.82
More importantly, the Complaint is devoid of any allegations that securing a
board seat with New C&J for two staggered terms created a disabling conflict of
interest for any of the Outside Directors. This Court has previously commented
that the enticement of a future seat on the board of the company surviving a merger
is not sufficient to disqualify that director from making a disinterested decision on
the basis of financial interest. 83 Even if the prospect of obtaining a board seat in a
Deal on terms that were highly favorable to Comstock at the expense and to the
significant detriment of C&J’s stockholders.”). This does not change the analysis.
81
Compl. ¶ 54.
82
Which board members would join New C&J was not formally determined until the day
the Nabors transaction was approved. Compl. ¶ 54.
83
Orman v. Cullman, 794 A.2d at 28-29 (“No case has been cited to me, and I have
found none, in which a director was found to have a financial interest solely because he
44
surviving entity theoretically could create a disabling conflict of interest, “when a
party challenges a director’s action based on a claim of the director’s debilitating
pecuniary self-interest, that party must allege that the director’s interest is material
to that director.”84
Here, plaintiff, who had the opportunity to take discovery in aid of its
preliminary injunction motion before amending its complaint, fails to make any
factual allegations to support a reasonable inference that a seat on the board of
New C&J would be material to any of the five Outside Directors. 85 Even assuming
for the sake of argument that Comstock and McMullen had a meaningful interest in
obtaining board seats to protect their future managerial interests, the outsiders
formed a disinterested majority of directors on the C&J board. Thus, plaintiff’s
will be a director in the surviving corporation. To the contrary, our case law has held that
such an interest is not a disqualifying interest. . . . Because Orman alleges no facts in
addition to the assertion of continued board membership on the part of Barnett, his
assertion of interest fails as a matter of law.”).
84
Solomon v. Armstrong, 747 A.2d at 1118; see also In re Gen. Motors, 2005 WL
1089021, at *8 (“First, it is well settled that plaintiffs’ allegations of pecuniary self-
interest must allow the Court to infer that the interest was of a sufficiently material
importance, in the context of the director’s economic circumstances, as to have made it
improbable that the director could perform her fiduciary duties without being influenced
by her overriding personal interest.”) (internal quotation marks omitted).
85
The only allegations that remotely bear on their individual financial circumstances
concern the amounts two of these individuals received for their past C&J board service.
See Compl. ¶¶ 31 (Roemer receiving $500,000 in total compensation between 2011 and
2013), 33 (Wommack receiving $490,000 in total compensation between 2011 and 2013).
Plaintiff alleged nothing related to the compensation of Ma, Friedman, or Stewart.
45
attempt to invoke entire fairness review based on an alleged interest in serving on
the New C&J board is without merit.
2. The Complaint Fails to Allege Facts Demonstrating that
Comstock Deceived the C&J Board
Plaintiff also argues that, even if a majority of the C&J board was
disinterested in the Nabors transaction, entire fairness must apply because
Comstock, acting in his own interest, tainted the board’s process of considering the
transaction. In Mills Acquisition Co. v. Macmillan, Inc., the Supreme Court held
that the business judgment rule will not apply “in the face of illicit manipulation of
a board’s deliberative processes by self-interested corporate fiduciaries.” 86 In
order to rebut the business judgment rule on this basis, plaintiff must allege that
Comstock was acting out of self-interest and that he deceived the rest of the board
into approving the transaction.
Comstock’s interest in the transaction is subtler than plaintiff suggests.
Although Comstock presumably expected to receive a lucrative employment
package in his role at New C&J, plaintiff does not allege that his new
compensation terms would constitute a material increase from his existing ones.
Nor does plaintiff allege that Comstock’s position heading C&J was in jeopardy or
that Comstock pushed for the Nabors transaction to avoid a different deal that
86
Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del. 1989).
46
would have had a worse outcome for him. The lack of such allegations undercuts
plaintiff’s argument that Comstock simply was acting out of self-interest.87
Indeed, Comstock’s ownership of a 10% stake in C&J created a strong
countervailing incentive for him to maximize the value of C&J’s stock. In
addition, unlike in Macmillan, which involved management’s self-interested
actions in favoring a management buyout over a third-party offer, 88 there was no
such prospect of a transfer of control to Comstock here.
The allegations concerning Comstock closely resemble those that Chancellor
Chandler found insufficient to state a claim under Macmillan in Wayne County
Employees’ Retirement System v. Corti. In Corti, Activision’s Chairman and CEO
(Kotick) and another board member (Kelly), who engineered the disputed sale of
Activision to Vivendi, were alleged to receive “substantial benefits under [their]
new employment agreements.”89 The Court nonetheless declined to apply the
Macmillan analysis, concluding instead that the complaint was “not sufficient to
support a claim that Kotick and Kelly were interested in the transaction or
otherwise violated their fiduciary duty of loyalty . . . .” 90 In making this
87
See Corti, 2009 WL 2219260, at *11.
88
Macmillan, 559 A.2d at 1272.
89
Corti, 2009 WL 2219260, at *12.
90
Id. at *13.
47
determination, the Court found the security of their existing employment situation
particularly important:
Significantly, the factual allegations in the Complaint do not suggest
that Kotick and Kelly’s jobs were ever in danger. There is no
allegation that there was a bidder threatening to take over Activision
and replace management. There is no allegation that Kotick and Kelly
would be removed as managers if Activision did not pursue a
transaction with Vivendi. Moreover, plaintiff alleges that from the
start of negotiations Vivendi assumed Kotick and Kelly’s roles in the
combined company. That Kotick and Kelly did not have to pursue the
transaction with Vivendi in order to retain their positions as managers
significantly alleviates the concern that Kotick and Kelly were acting
out of an impermissible “entrenchment” motive. When Vivendi’s
assumption regarding Kotick and Kelly’s roles is added to the
analysis, plaintiff’s “entrenchment” theory fails completely. 91
Similarly here, there is no allegation that Comstock’s position was in danger
or that his new employment terms were materially different than his existing
terms. 92 In addition, just as the directors in Corti owned a meaningful portion
(7.5% in total) of the company’s common stock, “which gave Kotick and Kelly an
incentive to obtain a higher price for Activision shares,”93 Comstock’s 10% stake
in C&J provided an equally strong incentive to maximize stockholder returns, and
91
Id. at *11.
92
Plaintiff alleges the compensation was “so material to Comstock that he almost blew
up the transaction when his compensation proposal was not agreed to prior to execution
of the Nabors Deal.” Pl.’s Br. in Opp’n 32. Considering those negotiations occurred
after C&J’s board had approved the transaction, the reasonable inference is that
Comstock was using a negotiation tactic.
93
Corti, 2009 WL 2219260, at *12.
48
therefore his own. Finally, the Court in Corti pointed out another important
distinction from Macmillan that is also present here:
There is much less cause for concern where managers will continue
their employment with the combined post-transaction entity, than
when the conflicted managers are bidders in an auction for control of
the company, and are thereby seeking to transfer control of the
company to themselves personally. 94
Comstock’s large equity position helped to align his interests with stockholders,
his employment offer is not alleged to be materially different than his existing
terms, and there was no temptation for Comstock to tip the scales in favor of a
transaction that would give him control of the combined entity as a stockholder.
Consequently, plaintiff has failed to allege facts showing the type of material self-
interest that was present in Macmillan. That reason alone would seem sufficient to
undermine plaintiff’s argument for entire fairness under Macmillan.
Even if plaintiff could demonstrate a material self-interest, moreover, the
Complaint lacks allegations of deception that also are required to trigger entire
fairness under Macmillan. In Macmillan, management skewed a transaction in
favor of the buyout they desired by misleading the board about the auction process.
In particular, management’s financial advisor, in the presence of a complicit CEO
and COO, misled the board about the fairness of the bidding process:
94
Id. at *13.
49
Wasserstein falsely claimed that the advisors had conducted “a level-
playing field auction where both parties had equal opportunity to
participate.” Additionally, in answer to questioning, Wasserstein
mistakenly assured the board that he had been the “only conduit of
information” during the process and, falsely, that both parties had
received identical information during the auction. Despite the obvious
untruth of these assertions, Evans and Reilly remained silent, knowing
also that Evans had clandestinely, and wrongfully, tipped Maxwell’s
bid to KKR. 95
Here, plaintiff’s allegations do not come close to the type of duplicitous
conduct that was condemned in Macmillan. For instance, although plaintiff
criticizes Comstock and McMullen for “keeping the other directors in the dark”
about Comstock’s skepticism regarding Nabors’ financials,96 the Complaint does
not allege that Nabors’ financials were presented to the board. Rather, it can be
inferred from the Complaint that C&J management constructed its own projection
for NCPS’s 2015 EBITDA of $445 million based on its analysis of information
received from Nabors. 97 This $445 million 2015 EBITDA projection was provided
to Citi and Tudor and used in their fairness presentations to the board.98 In other
words, plaintiff’s allegations do not demonstrate that Comstock or anyone else
95
Macmillan, 559 A.2d at 1277.
96
Pl.’s Br. in Opp’n 32.
97
See Compl. ¶¶ 79-82, 89-92; see also Proxy at 96 (explaining that EBITDA projections
included C&J management’s adjustments and interpretations of NCPS’s results and
Nabors’ projections for NCPS).
98
Compl. ¶ 91.
50
misled C&J’s board with respect to management’s views of Nabors’ or NCPS’s
financials.
Turning to management’s $445 million EBITDA projection itself, plaintiff’s
primary critique is that management did not inform Citi or the board that it was an
“upside case” and not their baseline projection. But, as discussed above, the
preliminary injunction’s appellate record reflects that this estimate was
“management’s expected base case” and not an “upside case,” and that Comstock
added the words “upside case” as a negotiation tactic.99 Given this evidence,
which the Supreme Court considered in reversing the preliminary injunction and
which plaintiff has failed to address, the Complaint’s assertion that the $445
million EBITDA figure was an “upside case” is not supported by well-pled factual
allegations in my view to warrant making the very serious charge that Comstock
intended to deceive the C&J board.
Plaintiff also alleges that Comstock deceived the board by failing to inform
it of various steps he took while negotiating the transaction. For instance, plaintiff
alleges that Comstock did not disclose an early discussion with Petrello regarding
C&J management’s potential future contracts with New C&J, or Comstock’s
motives for negotiating the transaction, as plaintiff interprets them. Significantly,
however, plaintiff does not allege that management’s eventual future roles were
99
See C&J, 107 A.3d at 1061 n.54; see also supra notes 4, 42.
51
never disclosed to the board, 100 or that the critical deal terms Comstock negotiated,
such as the EBITDA multiple, were hidden from the board.
Plaintiff’s allegation that Comstock “usurped the Special Committee process
to protect the Nabors Deal” fares no better under a Macmillan theory. The
Complaint alleges that the Special Committee allowed Moore to attend its
meetings and to serve as Morgan Stanley’s point of contact despite “knowing that
his personal allegiance was to Comstock and the Nabors Deal,” 101 and that
Comstock, McMullen, and Moore prevented Morgan Stanley and any potential
bidders from receiving any confidential C&J information, including forecasts.102
But the Complaint alleges no deception in connection with these allegations. The
Complaint does not allege that the Special Committee was unaware of Moore’s
role—just the opposite, he attended the Special Committee’s meetings—or that
Morgan Stanley failed to inform the Special Committee about its decision to
withhold information from prospective bidders. Nor does the Complaint allege
100
The absence of such allegations is not surprising given that the Proxy shows the
opposite. See Proxy at 20-21 (“[T]he members of the C&J board of directors were aware
of the fact that the C&J management team had proposed new arrangements to [Nabors]
and of the terms of such proposal and the C&J board of directors also considered this,
among other matters, in evaluating the Merger Agreement and the Merger, and in
recommending to C&J stockholders that the Merger Agreement be adopted.”).
101
Compl. ¶¶ 117-18.
102
Compl. ¶ 120.
52
that management or Morgan Stanley deceived the Special Committee about
Morgan Stanley’s valuation techniques.
To sum up, plaintiff’s theory that Comstock, to advance his own
self-interest, intentionally deceived the board in connection with its consideration
of the Nabors transaction and the Special Committee’s work on the solicitation
process is unsupported by any well-pled allegations or reasonable inferences drawn
from the Complaint. Thus, plaintiff has failed to demonstrate the type of deceitful
conduct necessary to trigger entire fairness under a Macmillan theory.
*****
Plaintiff’s remaining fiduciary duty allegations amount to quarrels
concerning the level of care and the reasonableness of the process the board used
to evaluate and approve the Nabors transaction, and that the Special Committee
and Morgan Stanley undertook in connection with the solicitation process.103
These allegations lack the type of self-interested deceptive conduct required for
103
For instance, plaintiff alleges that the Outside Directors “(i) ignored Comstock and
Management’s potential conflicts of interest; (ii) let Comstock commandeer the sales
process; (iii) did not conduct the type of assessment of the value of NCPS warranted by
its non-public nature; (iv) did not run the process like it was a sale of C&J; (v) never
considered why the deal provided no control premium for stockholders; and (vi)
approved the deal based on incomplete and misleading information,” and that the Special
Committee “(i) permitted the Insiders [to] influence every aspect of the solicitation
process; (ii) ignored potential Morgan Stanley conflicts; (iii) did not compare the current
value of the Nabors Deal or the Cerberus Bid; (iv) timed the solicitation process to be
shut down with the appeal; and (v) analyzed the Cerberus Bid and Nabors Deal based on
incomplete and misleading information.” Pl.’s Br. in Opp’n 50-51.
53
plaintiff to show that the board was defrauded.104 Such allegations presumably
would be sufficient to sustain a claim under the enhanced scrutiny standard of
Revlon but, as explained above, that standard is not applicable to a post-closing
action for damages where the transaction has been approved by an uncoerced,
fully-informed vote of the stockholders.
Because the Nabors transaction is not subject to entire fairness review and
the business judgment presumption applies under Corwin, plaintiff’s fiduciary duty
claims against the C&J directors must be dismissed.105 Under Delaware law,
officers owe the same fiduciary duties as directors. 106 Thus, for the same reasons
that plaintiff’s fiduciary duty claims against the C&J directors fail to state a claim
for relief, plaintiff’s claims challenging actions taken by Comstock, McMullen,
and Moore in connection with the Nabors transaction or the solicitation process in
104
See Macmillan, 559 A.2d at 1279 (applying entire fairness because “[h]ere, not only
was there such deception, but the board’s own lack of oversight in structuring and
directing the auction afforded management the opportunity to indulge in the misconduct
which occurred.”); see also In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 836
(Del. Ch. 2011) (quoting Macmillan and describing deceptive conduct amounting to a
“fraud upon the board”).
105
See Singh v. Attenborough, 137 A.3d at 152 (noting that in such cases “dismissal is
typically the result”); Corwin, 125 A.3d at 312-13 (“Finally, when a transaction is not
subject to the entire fairness standard, the long-standing policy of our law has been to
avoid the uncertainties and costs of judicial second-guessing when the disinterested
stockholders have had the free and informed chance to decide on the economic merits of
a transaction for themselves.”).
106
See Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009).
54
their capacity as officers also must be dismissed. For these reasons, Counts I, II,
III, 107 and V are dismissed. 108
3. Aiding and Abetting Claims
Count III of the Complaint asserts, in the alternative, that McMullen and
Moore aided and abetted the breaches of fiduciary duty of Comstock, the C&J
board, and the Special Committee. 109 Count IV asserts that Nabors and New C&J
aided and abetted the breaches of fiduciary duty of Comstock, McMullen, and the
C&J board. 110 Count VI asserts that Morgan Stanley aided and abetted breaches of
fiduciary duty of the Special Committee, Comstock, McMullen, and Moore. 111
A claim for aiding and abetting a breach of fiduciary duty cannot survive if
the underlying fiduciary duty claims do not.112 Thus, because each of plaintiff’s
107
Count III is dismissed in part for these reasons. The part of the Count relating to
aiding and abetting is dismissed for reasons explained in the next section.
108
Even if I had concluded that Comstock had tainted the transaction such that entire
fairness would apply, the Outside Directors (for their service on the board as well as on
the Special Committee) would be subject to dismissal due to the presence of a 102(b)(7)
provision and the absence of claims amounting to bad faith or disloyalty. See In re
Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1187 (Del. 2015) (Strine,
C.J.); Zieminski Aff. Ex. C at art. 9.
109
Compl. ¶ 167.
110
Compl. ¶ 171.
111
Compl. ¶ 181.
112
See Gerber v. EPE Hldgs., LLC, 2013 WL 209658, at *11 (Del. Ch. Jan. 18, 2013)
(“Gerber has not stated a claim for breach of fiduciary duty. Accordingly, his claim for
aiding and abetting a breach of fiduciary duty must also fail.”); In re Alloy, Inc., 2011
55
fiduciary duty claims fails to state a claim for relief, plaintiff’s claims for aiding
and abetting a breach of fiduciary duty also must be dismissed. Accordingly,
Counts III, IV, and VI are dismissed.113
III. ANALYSIS OF C&J’S MOTION TO RECOVER DAMAGES
AGAINST THE INJUNCTION BOND
C&J seeks to recover $542,087.89 in damages against the cash bond that
plaintiff posted to secure the preliminary injunction. These damages represent
costs incurred in complying with the preliminary injunction the Court issued on
November 24, 2014, which the Delaware Supreme Court reversed on December
19, 2014. Specifically, the damages consist of $366,932.90 paid to Morgan
Stanley as the Special Committee’s financial advisor; 114 $109,958.99 paid to Paul,
Weiss, Rifkind, Wharton & Garrison LLP as the Special Committee’s legal
WL 4863716, at *14 (Del. Ch. Oct. 13, 2011) (“As a matter of law and logic, there
cannot be secondary liability for aiding and abetting an alleged harm in the absence of
primary liability.”); Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *28 (Del. Ch. Jan.
25, 1999) (“Since I find that there was no breach of fiduciary duty by Live’s directors,
Goodwin’s aiding and abetting claims also fail.”), aff’d, 741 A.2d 16 (Del. 1999).
113
Plaintiff’s claim against McMullen and Moore for aiding and abetting a breach of
fiduciary duty also fails because, as directors and/or officers of C&J, they are themselves
fiduciaries. To state a claim for aiding and abetting a breach of fiduciary duty, a plaintiff
must demonstrate, among other things, “knowing participation in the breach by a
defendant who is not a fiduciary . . . .” In re Transkaryotic, 954 A.2d at 370 (emphasis
added).
114
Levy Aff. Ex. 18.
56
advisor;115 $32,196 paid to Vinson & Elkins for assisting C&J in complying with
the PI Order; 116 and $33,000 paid to C&J’s directors for attending two board
meetings and four Special Committee meetings in connection with the PI Order.117
A. Legal Standard
Court of Chancery Rule 65(c) requires that the applicant for a preliminary
injunction post a bond “in such sum as the Court deems proper, for the payment of
such costs and damages as may be incurred or suffered by any party who is found
to have been wrongfully enjoined or restrained.”118 “Rule 65(c) does not focus on
the conduct of the applicant, but on the potential for harm to the enjoined or
restrained party.” 119 There is an implicit, although rebuttable, presumption in favor
of awarding damages for a wrongful injunction.120 “An injunction is ‘wrongful’ if
reversed on appeal or if the enjoined party at all times had the right to do the
115
Levy Aff. Ex. 19.
116
Levy Aff. ¶ 23, Exs. 20-21.
117
See Friedman Aff. ¶¶ 4-11.
118
Ct. Ch. R. 65(c).
119
Emerald P’rs v. Berlin, 726 A.2d 1215, 1226 (Del. 1999).
120
Id.; see also Emerald P’rs v. Berlin, 712 A.2d 1006, 1010 (Del. Ch. 1997) (comparing
“automatic damages” standard and the preferable “judicial discretion” standard that
establishes a rebuttable presumption of entitlement to provable damages), aff’d, 726 A.2d
1215.
57
enjoined act.” 121 A wrongfully enjoined party is entitled to damages proven by a
preponderance of the evidence as being proximately caused by the wrongful
injunction. 122
B. The Injunction Was Wrongful and Proximately Caused C&J’s
Damages
The preliminary injunction was “wrongful” because the Supreme Court
reversed the PI Order on appeal.123 The original grant of the injunction need not
have been an abuse of the Court’s discretion to be considered wrongful.124 The
presumption in favor of awarding damages to the enjoined party is supported by
the purpose of an injunction bond to “protect a party that is wrongfully
enjoined”125 by compensating that party for injuries or costs incurred in complying
with the injunction. An enjoined party typically is entitled to receive the damages
121
Emerald P’rs, 726 A.2d at 1226.
122
Id. at 1227. Therefore, in contrast to analyzing defendants’ motion to dismiss, I may
consider evidence the parties have submitted in deciding this motion. See Emerald P’rs,
712 A.2d at 1010-11 (allowing the parties to schedule an evidentiary hearing to present
the issue of damages).
123
See id. at 1011 (“Defendants were ‘wrongfully enjoined or restrained,’ for the
purposes of Rule 65(c), because the Supreme Court dissolved this Court’s injunction.”).
124
Id. at 1009.
125
Guzzetta v. Serv. Corp. of Westover Hills, 7 A.3d 467, 471 (Del. 2010).
58
it can prove were proximately caused by the wrongful injunction. 126 “Proximate
cause exists if a natural and continuous sequence, unbroken by any efficient
intervening cause, produces the injury and without which the result would not have
occurred.”127
C&J’s requested damages consist of expenses it incurred as a result of the
injunction, namely fees paid to the Special Committee’s financial advisor and legal
advisor, to C&J’s legal advisor for work relating to the solicitation process, and to
board members for additional meetings relating to the injunction and the
solicitation process. It is undisputed that these expenses stemmed from the
preliminary injunction. The injunction was the impetus of forming the Special
Committee, hiring its advisors, and holding the associated director meetings.
Similar transaction-related expenses have been subject to a damages claim
against an injunction bond. In Emerald Partners, the Court of Chancery awarded
damages against an injunction bond based on the amount of time that the
company’s Chief Executive Officer and Chief Operating Officer spent complying
with a wrongfully issued injunction, estimating the cost of the time spent based on
126
See Emerald P’rs, 726 A.2d at 1227; Ct. Ch. R. 65(c) (noting that injunction bond is
to pay for “costs and damages as may be incurred or suffered by any party who is found
to have been wrongfully enjoined”).
127
Wilm. Country Club v. Cowee, 747 A.2d 1087, 1097 (Del. 2000).
59
their annual compensation. 128 In this case, the damages are even simpler to prove
because they consist of actual cash expenses C&J incurred in retaining advisors
and compensating its directors on a per-meeting basis. The damages also were
foreseeable and are eminently reasonable—amounting to the expenditure of about
half a million dollars in the face of an injunction threatening to halt a nearly $3
billion transaction. As such, C&J presumptively is entitled to recover these
expenses against the injunction bond.
Plaintiff makes three arguments in an effort to overcome the presumption in
favor of C&J recovering damages resulting from the wrongful injunction. Each is
without merit.
Plaintiff first argues that C&J failed to mitigate its damages by choosing to
lift the stay of the injunction and to conduct the solicitation process during the
appeal, rather than to await the outcome of the appeal before beginning the
solicitation process. That argument is unavailing. As detailed above, the PI Order
provided room to extend the injunction period as needed, including as a result of
the stay pending the appeal. Consequently, C&J faced the risk that if it lost the
appeal, the injunction would be extended to require it to undertake a full 30-day
128
Emerald P’rs v. Berlin, 1998 WL 474195, at *4 (Del. Ch. Aug. 3, 1998), aff’d, 726
A.2d 1215, 1227 (“The record supports the Court of Chancery’s determination that the
defendants had proved entitlement to $99,200 in damages attributable to the force of the
injunction.”).
60
solicitation process that would begin when the appeal process ended. Such a delay
would not only result in the potential postponement of a nearly $3 billion
transaction by a month, it also would put C&J at risk of losing the Nabors
transaction entirely if the injunction were still in place at the end of December.
The merger agreement contained a condition precedent for each party
(waivable by the other) requiring that no preliminary injunction prohibiting the
merger be in effect when the transaction closed.129 The agreement further provided
that either party could unilaterally extend the December 31 end date in the merger
agreement until up to March 31, 2014, but only if the conditions precedent in the
merger agreement—including that no preliminary injunction be in place—were
satisfied as of December 31.130 Consequently, if C&J were still laboring under the
preliminary injunction at the end of 2014 because the injunction period had been
extended or because the solicitation process did not start until the end of the
appeal, Nabors would be able to walk away from the transaction.
Plaintiff downplays this risk, asserting that “the record is unambiguous that
C&J was aware that there was never any risk that Nabors would terminate the
Merger Agreement if the closing occurred after December 31, 2014,” 131 and citing
129
Levy Aff. Ex. 17 § 7.1(e).
130
Id. § 8.1(c).
131
Pl.’s Br. in Opp’n Mot. Recover Damages Against Inj. Bond 31.
61
a November 25 public filing of a communication from Petrello to NCPS
employees, in which Petrello stated that “Nabors remains fully committed to the
proposed transaction.” 132 Yet around the same time, Nabors refused Comstock’s
request to extend the deadline.133 Although Comstock expressed confidence that
Nabors would “extend if/when absolutely needed,” 134 such an informal assurance
is a far cry from a binding commitment from Nabors to extend the deadline.
Plaintiff’s contention that Nabors was committed to the deal thus provides cold
comfort in the face of a looming deadline that C&J would be unable to extend
without Nabors’ consent.
Plaintiff also ignores the fact that the presence of the injunction and the
December 31 deadline provided valuable optionality to Nabors at C&J’s expense.
However committed Nabors may have been to the transaction when the injunction
issued, C&J assumed the entire risk of unforeseen circumstances that could cause
Nabors to choose to walk away from the deal. “The duty to mitigate is assessed in
reference to the exposure of the mitigating party to risk and uncertainty which is,
itself, another form of risk.” 135 If Nabors refused to preemptively extend the
132
Thomas Aff. Ex. 30.
133
Id. Ex. 7.
134
Id.
135
Henkel Corp. v. Innovative Brands Hldgs., LLC, 2013 WL 396245, at *5 (Del. Ch.
Jan. 31, 2013).
62
deadline (which they did refuse to do)136 and C&J delayed the solicitation process
to appeal the injunction, an unexpected change in the attractiveness of the
transaction or of C&J’s value to Nabors would allow Nabors to scuttle the deal.
Paying $542,000 in expenses to undertake the solicitation process in parallel with
the appeal to mitigate these real-world risks is a far more reasonable course of
action than plaintiff’s proposed tactic of mitigating $542,000 in expenses by
placing stockholders at even a slight risk of losing the $3 billion Nabors
transaction. For these reasons, plaintiff’s argument that these relatively modest
expenses were unnecessary or easily could have been mitigated lacks merit. 137
As detailed in the timeline above,138 the Court put plaintiff on notice that
C&J could pursue the solicitation process in tandem with its appeal, that the bond
existed to reimburse C&J for such expenses if the injunction turned out to be
wrongful, and that C&J could seek to lift the stay in order to begin the solicitation
process. Plaintiff thus knew or certainly should have known of the risk that these
expenses would be incurred when it elected to post the injunction bond. Having
136
Thomas Aff. Ex. 7 (e-mails from November 26, 2014).
137
Plaintiff makes a number of claims regarding C&J’s knowledge that the transaction
would not close by the end of December in any event. These arguments fail because the
existence of the preliminary injunction, unlike other obstacles, would prevent C&J from
extending the deadline unilaterally.
138
See supra Part I.C.
63
been granted its request for a preliminary injunction, plaintiff must accept
responsibility for the costs that come with it.
Plaintiff’s second argument for why it should not bear the costs of the
injunction is that C&J did not comply with the PI Order. In particular, plaintiff
argues that, because Morgan Stanley and the Special Committee failed to directly
compare the value of the Nabors transaction and the Cerberus proposal and
committed other analytical mistakes, they did not comply with the PI Order’s
requirement that the board seek a Superior Proposal as defined in the merger
agreement, i.e. a proposal that “the [C&J] Board determines in good faith, after
consultation with its financial advisors and outside legal counsel, . . . is more
favorable to the stockholders of [C&J], from a financial point of view, than the
transactions contemplated by this Agreement . . . .” 139 Selectively quoting certain
Special Committee meeting minutes, plaintiff argues that the Special Committee
did not properly perform this task because it looked only at the “potential value” of
the Cerberus bid and the Nabors transaction.
This line of attack is one of semantics that cannot be squared with the full
content of these Special Committee minutes, which state:
The Special Committee asked Morgan Stanley to compare the
financial value of the Cerberus proposal to the financial value of the
Nabors transaction. Morgan Stanley provided this advice . . . . Page
139
Levy Aff. Ex. 17 § 6.4(e).
64
15 shows Morgan Stanley’s estimation of potential value of (i)
Keane Group as a standalone entity, (ii) the Company as a standalone
entity, (iii) Keane Group and the Company as a combined entity, and
(iv) the Company and Nabors as a combined entity. The materials
reflect that the transaction between the Company and Nabors creates
more potential value to the Company’s stockholders from a financial
point of view than would the Cerberus proposal. 140
In other words, contrary to plaintiff’s assertions, the minutes strongly suggest that
Morgan Stanley and the Special Committee closely examined the financial benefits
of both potential transactions—each of which has, by definition, a potential value.
More generally, plaintiff’s attempt to escape its financial responsibilities
under the injunction bond by criticizing the methods C&J employed in attempting
to comply with the PI Order amounts to impermissible after-the-fact second-
guessing. C&J incurred the expenses of hiring financial and legal advisors to assist
the Special Committee in soliciting alternative proposals to the Nabors transaction,
as plaintiff requested and as the PI Order required. That these costs were incurred
in a fashion different from what plaintiff now says it hoped for is of no moment:
the bond exists to compensate C&J for its damages, and C&J is therefore entitled
to recoup the costs it reasonably incurred as a result of the PI Order.
Finally, plaintiff argues that it would be inequitable to compensate C&J for
its damages from the wrongful injunction because C&J acted in bad faith during
the solicitation process by engaging in unfair and inequitable conduct. This
140
Thomas Aff. Ex. 26 at 2 (emphasis added).
65
argument seeks to resurrect plaintiff’s legally deficient fiduciary duty claim that
the solicitation process was a sham designed to protect the Nabors transaction,
mislead the board, and prevent alternative bids, thus failing to maximize value for
stockholders.141 As discussed above, these allegations fail to state fiduciary duty
claims upon which relief can be granted. The same allegations are insufficient to
support a finding of bad faith.
*****
For all of these reasons, I find that C&J suffered $542,087.89 in damages as
a result of the wrongful injunction that plaintiff requested, and that C&J is entitled
to recover these damages against the injunction bond.
IV. CONCLUSION
For the reasons explained in Section II above, defendants’ motion to dismiss
the Complaint is GRANTED. The Complaint is hereby dismissed with prejudice.
For the reasons explained in Section III above, C&J’s motion to recover
$542,087.89 in damages against the injunction bond is GRANTED.
IT IS SO ORDERED.
141
Pl.’s Br. in Opp’n 36-39.
66
City of Miami General Employees' and Sanitation Employees' Retirement Trust v. Jerry M. Comstock, Jr.
Combined Opinion