IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
IN RE MEADWESTVACO ) Consolidated
STOCKHOLDERS LITIGATION ) C.A. No. 10617-CB
)
MEMORANDUM OPINION
Date Submitted: May 15, 2017
Date Decided: August 17, 2017
Peter B. Andrews, Craig J. Springer, and David M. Sborz of ANDREWS &
SPRINGER LLC, Wilmington, Delaware; Gregory M. Nespole, Mark C. Rifkin,
Anita B. Kartalopoulos, and Kevin G. Cooper of WOLF HALDENSTEIN ADLER
FREEMAN & HERZ LLP, New York, New York; Lead Attorneys for Plaintiff.
Gregory P. Williams and Sarah A. Clark of RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Rachelle Silverberg and A.J. Martinez of
WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for
Defendants MeadWestvaco Corporation, John A. Luke, Jr., Michael E. Campbell,
James G. Kaiser, Richard B. Kelson, Susan J. Kropf, Gracia C. Martore, James E.
Nevels, Timothy H. Powers, and Alan D. Wilson.
William M. Lafferty and Ryan D. Stottmann of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; Gary A. Bornstein of CRAVATH,
SWAINE & MOORE LLP, New York, New York; Attorneys for Defendant Rock-
Tenn Company.
BOUCHARD, C.
In this action, stockholders of MeadWestvaco Corporation seek damages
relating to a strategic stock-for-stock merger of equals between MeadWestvaco and
Rock-Tenn Company that closed in July 2015. The transaction was the product of
on-again, off-again negotiations that occurred over a period of about nine months,
and yielded a 9.1% premium for MeadWestvaco’s stockholders. Eight of the nine
MeadWestvaco directors who approved the merger were outside directors whose
independence and disinterestedness are unquestioned. Five months elapsed between
the signing of the merger agreement and the stockholder vote, but no other suitor
emerged with a superior proposal even though the deal protections in the merger
agreement concededly were reasonable. The merger received favorable
recommendations from two leading proxy advisory firms, and was approved
overwhelmingly by 98% of the MeadWestvaco stockholders who voted—after
plaintiffs took some discovery and waived their disclosure claims.
The complaint asserts a claim for breach of fiduciary duty against the
members of the MeadWestvaco board, and a second claim for aiding and abetting
against Rock-Tenn. The thesis of the complaint is that the directors entered into the
merger in bad faith in reaction to a threatened proxy contest by an activist investor.
According to plaintiffs, the directors “flew blind” and left behind $3 billion of value
in a transaction that impliedly valued MeadWestvaco at $9 billion. Defendants have
moved to dismiss both claims for failure to state a claim for relief.
1
The core issue before the Court is whether the complaint contains factual
allegations sufficient to state a reasonably conceivable claim against
MeadWestvaco’s directors for bad faith in connection with their approval of the
merger. For the reasons explained below, I conclude that the complaint does not and
thus must be dismissed.
I. BACKGROUND
Unless otherwise noted, the facts recited in this opinion come from the
allegations in the Amended Verified Consolidated Class Action Complaint filed on
June 21, 2016 (the “Complaint”), documents incorporated therein,1 and additional
documents the parties agreed could be considered on a motion to dismiss.2 Any
additional facts are either undisputed or subject to judicial notice.
A. The Parties
Before the merger, defendant MeadWestvaco Corporation (“MeadWestvaco”
or the “Company”) was a publicly-traded Delaware corporation headquartered in
1
See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citations omitted) (“a
plaintiff may not reference certain documents outside the complaint and at the same time
prevent the court from considering those documents’ actual terms” in connection with a
motion to dismiss).
2
Specifically, as a condition to defendants producing to plaintiffs certain “Starboard-
related documents” after the transaction closed, the parties agreed defendants could use
those documents in connection with motion to dismiss briefing “to the extent that plaintiffs
use any of the newly-produced Starboard documents in an amended complaint or in
connection with any motion to dismiss briefing.” Transmittal Affidavit of Sarah A. Clark,
Esq. (“Clark Aff.”) Ex. 2 (Dkt. # 45).
2
Richmond, Virginia. MeadWestvaco was a global packaging company that also
produced specialty chemicals for automotive, energy, and infrastructure businesses
in a separate operating segment. Defendant Rock-Tenn Company (“RockTenn”)
was a Georgia corporation with headquarters in Norcross, Georgia. RockTenn was
a packaging company that also manufactured containerboard and paperboard.
The Complaint names as defendants the nine members of the MeadWestvaco
board of directors during the period leading up to and including its approval of the
merger: Michael E. Campbell, James G. Kaiser, Richard B. Kelson, Susan J. Kropf,
John A. Luke, Jr., Gracia C. Martore, James E. Nevels, Timothy H. Powers, and
Alan D. Wilson. Luke was Chief Executive Officer and Chairman of the Board.
The other eight members of the board were outside directors whose independence is
not challenged.
Plaintiffs CWA Local 1180 Administrative Fund and CWA Local 1180
Members Annuity Fund allege they held shares of MeadWestvaco at all relevant
times.
B. MeadWestvaco Begins to Consider a Transaction with RockTenn
In March 2014, Vertical Research Partners published an analyst note
proposing a merger between RockTenn and MeadWestvaco. The note stated that
RockTenn, which faced a billion-dollar pension deficit, could benefit from
MeadWestvaco’s pension surplus, which exceeded $1 billion. That same month,
3
Starboard Value LP, a well-known activist investment firm, began purchasing
MeadWestvaco stock.
In April 2014, MeadWestvaco’s Chairman and CEO, John Luke, Jr., engaged
in preliminary discussions with RockTenn’s CEO, Stephen Voorhees, regarding a
potential merger. On April 28, Luke presented the idea of a merger to the rest of
MeadWestvaco’s board, which asked a number of questions, including:
who were the alternative candidates to RockTenn?
why would MeadWestvaco bring RockTenn’s valuation up as
opposed to RockTenn dragging MeadWestvaco’s valuation down?
what RockTenn assets did MeadWestvaco want and which would
MeadWestvaco want to dispose of?
why was MeadWestvaco unable to create the same added value from
divesting its Specialty Chemicals Segment and its remaining land
development interests by acting alone?3
The next day, Luke told a fellow director that “[t]he questions were right on target,
and we have or will have all answers shortly.”4
C. Starboard Acquires a 5.6% Stake and Sends a Letter to the Board
On June 2, 2014, the MeadWestvaco board received a letter from Starboard
stating that it had acquired approximately 5.6% of MeadWestvaco’s outstanding
common stock, making it one of the Company’s largest stockholders. Starboard
3
Compl. ¶ 35.
4
Clark Aff. Ex. 6 MWV359.
4
asserted in the letter that the Company was not operating at its full potential and
demanded an overhaul of the Company through cost cutting and the sale of its
specialty chemicals business. Starboard also suggested a stock repurchase or an
outright sale or merger of the Company. The letter was publicly filed on the day it
was sent, putting the market on notice of Starboard’s agenda.5
Later on June 2, after receiving Starboard’s letter, the MeadWestvaco board
convened a telephonic meeting with management. During the meeting, senior
management reviewed and discussed with the board relative valuation, potential deal
terms, negotiating strategy, and the culture and governance of a combined entity.6
At the end of the meeting, the board directed Luke to explore a potential merger with
RockTenn and to engage in negotiations with Voorhees.7
D. Merger Negotiations Proceed Over the Next Six Months but are
Terminated Twice by MeadWestvaco
In the two months following the June 2 meeting, Luke and Voorhees met in
person at least five times to discuss the terms of a potential transaction.8 On August
20, members of senior management for MeadWestvaco and RockTenn met face-to-
face to conduct merger discussions along with the companies’ respective financial
5
Clark Aff. Ex. 10.
6
Compl. ¶¶ 39-40; Clark Aff. Ex. 12.
7
Compl. ¶ 39.
8
Compl. ¶ 41.
5
advisors.9 Bank of America Merrill Lynch and Goldman, Sachs & Co. participated
as MeadWestvaco’s financial advisors. MeadWestvaco terminated the negotiations
and the meeting ended without an agreement because MeadWestvaco refused to
accept an exchange ratio below the then-market price of its stock.
On September 29, 2014, Voorhees called Luke to re-engage in merger
negotiations. Given the gap that existed between the parties in August,
MeadWestvaco would agree to engage in merger discussions only if MeadWestvaco
were valued at least at its market price.10 Because RockTenn’s overture was
sufficiently constructive to meet this minimum condition, the parties re-engaged in
merger discussions.
Negotiations with RockTenn continued throughout October 2014, but stalled
again in November. On November 16, Luke informed the MeadWestvaco board that
RockTenn was unwilling to proceed on terms acceptable to MeadWestvaco. This
was the second time over the past several months that MeadWestvaco terminated
merger negotiations with RockTenn.
9
Compl. ¶ 46.
10
Compl. ¶ 47.
6
E. MeadWestvaco Decides to Spin-Off its Specialty Chemicals
Business as Starboard Signals a Potential Proxy Fight
On October 2, 2014, in the midst of its on-again, off-again merger discussions
with RockTenn, the MeadWestvaco board considered a potential spin-off of its
specialty chemicals business.
On November 10, 2014, shortly before MeadWestvaco broke off negotiations
with RockTenn for a second time, its board met with Starboard, which made a
presentation about enhancing the Company’s value. One of Starboard’s suggestions
was to spin-off the Company’s specialty chemicals business. During the same
meeting, the board and its outside legal and financial advisors discussed the
possibility of a spin-off, allegedly as part of a response to the threat that Starboard
would run a proxy contest against the MeadWestvaco board,11 and reviewed again
the rationale for a combination with RockTenn and the value to stockholders it could
create.12
In December 2014, Starboard increased its ownership stake in MeadWestvaco
to 6.1%. Also in December, signaling a potential proxy fight, Starboard announced
it had entered into advisory agreements with the previous Chief Operating Officer
11
Compl. ¶ 48.
12
Clark Aff. Ex. 11 at MWV248-49.
7
of Smurfit-Stone Container Corp. before it was acquired by RockTenn in 2012, and
the Chairman of Soundview Paper Company.
On January 8, 2015, MeadWestvaco issued a press release announcing that
the board had approved a plan to spin off the specialty chemicals division into a
separate, publicly-traded company. The Company also announced that it was selling
off its Europe-based tobacco folding carton business for an undisclosed amount. On
the day of the January 8 press release, the Company’s stock price rose approximately
5.8% higher on the news to close at $45.59 per share, but fell the next day to close
at $44.50.
F. RockTenn Seeks to Resume Merger Discussions, and the Parties
Reach an Agreement in Principle on an Exchange Ratio
On January 9, 2015, Luke and Voorhees met for the first time since
discussions fell apart in November to resume discussions about a potential merger.
During the meeting, Voorhees proposed an “at market” stock-for-stock merger based
on the ratio of the market value of MeadWestvaco stock to RockTenn stock at the
time, meaning that each share of MeadWestvaco stock would be converted into 0.71
shares of the combined entity.13 Voorhees also proposed that the combined entity
13
During briefing and initially at oral argument, plaintiffs inexplicably disputed that a
transaction involving a 0.71 exchange ratio was ever discussed and contended that the “one
and only” proposal RockTenn made involved a 0.78 exchange offer. The depositions
plaintiffs took plainly show otherwise. See Rakowski Dep. at 172 (Dkt. #51) (testifying
that RockTenn “came in at .71 at market”); Clark Supp. Aff. Ex. 34 (Luke Dep.) at 141-3
(Dkt. # 55) (testifying that Voorhees proposed an exchange ratio of “.71 to 1” based on the
8
would have a twelve-person board, with RockTenn appointing seven directors and
MeadWestvaco appointing five directors; that Voorhees would remain as CEO; and
that Luke would become Chairman of the combined company.14
On January 13, Luke sent an email to Michael Campbell, MeadWestvaco’s
lead director, stating: “We have also had outreach from [RockTenn]. We are
working with our advisors to assess the seriousness of their intent. If there is
substance worth discussing, I will let you know.”15
The next day, on January 14, after Luke informed Voorhees that an at-market
transaction would not be acceptable to MeadWestvaco, Luke and Voorhees agreed
to proceed on the basis of a 0.78 exchange ratio.16 Two days later, on January 16,
Luke and Voorhees further agreed to amend the prior proposal to increase the size
of the board for the combined company to fourteen directors, with RockTenn
appointing eight directors and MeadWestvaco appointing six directors.
On January 19, the MeadWestvaco board met to discuss the proposed merger
terms with their financial and legal advisors. In addition to Bank of America Merrill
ratio of the value of MeadWestvaco stock to Rock-Tenn stock in the market at the time).
When confronted with this evidence at oral argument, plaintiffs’ counsel apologetically
conceded the point. Tr. Oral Arg. at 94-5 (Dkt. #63).
14
Compl. ¶ 65.
15
Compl. ¶ 66; Clark Aff. Ex. 27 MWV1180.
16
Compl. ¶ 69.
9
Lynch and Goldman Sachs, Greenhill & Co., LLC had been added as a third financial
advisor. Wachtell, Lipton, Rosen & Katz provided outside legal counsel.
On January 23, in the midst of its deliberations over the proposed merger, the
board agreed to extend the deadline for Starboard to nominate a dissident slate to
February 27, 2015.
On January 25, the MeadWestvaco board met and unanimously approved an
Agreement and Plan of Merger (the “Merger Agreement”) under which
MeadWestvaco stockholders would receive 0.78 shares of stock in the combined
entity for each MeadWestvaco share. The “indicated price” derived from this
exchange ratio was $49.13 per share, representing a 9.1% premium over the
Company’s stock price on the last trading day before the transaction was
announced.17 According to the definitive proxy statement (the “Proxy”),
MeadWestvaco’s stockholders would receive approximately 50.1% of the shares of
the combined entity and RockTenn’s stockholders would receive the balance. Both
parties estimate that the transaction implied a value for the Company of
approximately $9 billion.18 All three of MeadWestvaco’s financial advisors opined
that the transaction was fair to the Company’s stockholders.19
17
Compl. ¶ 74.
18
See Tr. Oral Arg. at 7, 52.
19
Proxy at 56.
10
The Merger Agreement contained a non-solicitation clause, matching and
information rights, a fiduciary-out in case of a superior offer, and a $230 million
termination fee20 equating to less than 3% of the value attributed to the Company in
the transaction. The Merger Agreement also provided that the spin-off of the
specialty chemicals division would occur after the merger closed.21
On May 20, 2015, the Proxy was issued in advance of a MeadWestvaco
stockholder meeting scheduled for June 24 to consider the proposed merger. In June
2015, ISS Proxy Advisory Services and Glass Lewis & Co., LLC both issued
advisory reports recommending that stockholders vote in favor of the proposed
merger.22 On June 24, 2015, MeadWestvaco’s stockholders approved the merger,
with 83% of the outstanding shares voting, of which 98% were voted in favor of the
transaction.23 The transaction closed on July 1, 2015.
II. PROCEDURAL POSTURE
After the transaction was announced, three class action lawsuits were filed,
which were consolidated on March 9, 2015. On June 3, 2015, the parties stipulated
to entry of an order providing for certain discovery in advance of a preliminary
injunction hearing, which was scheduled for June 16. Within a matter of days,
20
Compl. ¶¶ 78-81.
21
Compl. ¶ 75.
22
Clark Supp. Aff. Ex. 32 at 2; Clark Supp. Aff. Ex. 33 at 6.
23
Clark Aff. Ex. 20.
11
plaintiffs abandoned their preliminary injunction motion and agreed to “waive any
disclosure claims based on any information available to them” as of that date in
exchange for certain additional discovery from defendants, in particular their
agreement to make three witnesses available for depositions after the closing.24
In the first half of 2016, plaintiffs deposed MeadWestvaco’s CEO and CFO
at the time of the merger (John Luke and Mark Rajkowksi) and a representative of
one of its financial advisors (Colin Covey of Goldman Sachs). On July 21, 2016,
plaintiffs filed the operative Complaint, which contains two claims. Count I asserts
a claim for breach of fiduciary duty against the nine members of the MeadWestvaco
board who approved the merger. Count II asserts a claim for aiding and abetting
against RockTenn.
On September 6, 2016, defendants moved to dismiss the Complaint under
Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief can
be granted.
III. ANALYSIS
The standards governing a motion to dismiss for failure to state a claim for
relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
24
See Clark Aff. Ex. 21 ¶ 6.
12
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”25
Although this standard is minimal, the Court “will not credit conclusory allegations
or draw unreasonable inferences in favor of the Plaintiffs,”26 nor will it “accept every
strained interpretation of the allegations proposed by the plaintiff.”27
A. The Parties’ Contentions
Given that the merger was a strategic combination of two publicly-traded,
widely-held companies without any controllers, and that the consideration
MeadWestvaco stockholders received consisted entirely of stock of the combined
entity, the merger is not subject to entire fairness review ab initio28 or enhanced
scrutiny under Revlon.29 Plaintiffs do not contend otherwise. As a result, the
25
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted).
26
In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *5 (Del. Ch. 2013).
27
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (internal
quotations omitted).
28
See Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002) (“Usually, the entire fairness
standard only applies at the outset (‘ab initio’) in certain special circumstances, viz, a
squeeze out merger or a merger between two companies under the control of a controlling
shareholder.”).
29
See, e.g., In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71 (Del. 1995) (internal
quotations omitted) (noting that a corporation does not undergo a change of control where
control of the postmerger entity remains in “a large, fluid, changeable and changing
market”); Arnold v. Soc'y for Sav. Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (same);
Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1150 (Del. 1989) (same).
13
MeadWestvaco board’s decision to approve the merger presumptively is governed
by the business judgment rule.30
Furthermore, given that MeadWestvaco’s certificate of incorporation contains
a Section 102(b)(7) provision exculpating its directors from personal liability for any
breach of the fiduciary duty of care,31 plaintiffs’ claim for post-closing damages
against the directors for breach of fiduciary duty can survive only if the Complaint
alleges facts from which it reasonably can be inferred “that (1) a majority of the
Board was not both disinterested and independent or (2) that the [Board] did not act
in good faith.”32
Although plaintiffs contend that Starboard’s presence was the “impetus” for
the board’s decision to engage in negotiations with RockTenn that led to the merger,
they “do not argue that Starboard created a disabling conflict [or] that the looming
proxy fight with Starboard prevented the Board from appropriately conducting their
duties.”33 The Complaint, moreover, is otherwise devoid of any allegations calling
30
See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993) (internal quotations
omitted) (business judgment rule is a “presumption that in making a business decision, the
directors of a corporation acted on an informed basis, in good faith and in the honest belief
that the action taken was in the best interest of the company”).
31
Clark Aff. Ex. 26 Art VIII.
32
BJ’s Wholesale Club, 2013 WL 396202, at *6.
33
Pl.s’ Br. at 40 (Dkt. #50). Plaintiffs’ position is not surprising. “Delaware law routinely
rejects the notion that a director’s interest in maintaining his office, by itself, is a
debilitating factor.” Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 175 (Del.
Ch. 2005); see also In re TriQuint Semiconductor, Inc. Stockholders Litig., 2014 WL
2700964, at *3 (Del. Ch. June 13, 2014) (rejecting as not colorable plaintiffs’ assertion that
14
into question the disinterestedness or independence of any of the eight non-
management directors on MeadWestvaco’s nine-member board. Even as to Luke,
MeadWestvaco’s CEO, who did not obtain a management position in the combined
entity, plaintiffs do not contend that he suffered from a disabling conflict of interest.
The plaintiffs’ case thus rests entirely on the board’s alleged failure to discharge its
duties in good faith.
Defendants make essentially two arguments in response—that the allegations
of the Complaint do not plead a viable claim for bad faith and, even if they did, that
the board’s decision to approve the merger was cleansed under Corwin v. KKR Fin.
Holdings, LLC34 and its progeny by virtue of the stockholders’ overwhelming
approval of the merger. Because the first issue is dispositive for the reasons
discussed below, I do not address the second issue.
C. Count I Fails to State a Claim for Bad Faith
This Court has held on numerous occasions that “to state a bad-faith claim, a
plaintiff must show either [1] an extreme set of facts to establish that disinterested
Tri-Quint’s directors could not consider the merits of a merger impartially where Starboard
had launched a proxy contest to replace six of the eight members of the board); In re Lukens
Inc. Shareholders Litig., 757 A.2d 720, 729 (Del. Ch. 1999) (“there is no logical force to
the suggestion that otherwise independent, disinterested directors of a corporation would
act disloyally or in bad faith and agree to a sale of their company ‘on the cheap’” merely
“because of the possibility that [some of the directors] might face opposition for reelection
at the next annual stockholders meeting.”), aff'd sub nom. Walker v. Lukens, Inc., 757 A.2d
1278 (Del. 2000).
34
125 A.3d 304 (Del. 2015).
15
directors were intentionally disregarding their duties or [2] that the decision under
attack is so far beyond the bounds of reasonable judgment that it seems essentially
inexplicable on any ground other than bad faith.”35 This is a difficult standard to
meet. As our Supreme Court explained in Lyondell Chem. Co. v. Ryan, “Directors'
decisions must be reasonable, not perfect. In the transactional context, [an] extreme
set of facts [is] required to sustain a disloyalty claim premised on the notion that
disinterested directors were intentionally disregarding their duties,”36 and even one
“plausible and legitimate explanation for the board’s decision” would negate a
reasonable inference that the decision was “so far beyond the bounds of reasonable
judgment that it seems essentially inexplicable on any ground other than bad faith.”37
Here, plaintiffs focus on what they refer to as MeadWestvaco’s “Four Non-
Core Assets:” its specialty chemicals business, its pension surplus, its Brazilian
subsidiary (Rigesa), and certain real estate investments in South Carolina.
According to plaintiffs, the directors—who approved the merger at an implied
35
In re Chelsea Therapeutics International Ltd. Stockholders Litigation, 2016 WL
3044721, at *7 (Del. Ch. May 20, 2016) (internal quotations omitted); Dent v. Ramtron
Int'l Corp., 2014 WL 2931180, at *6 (Del. Ch. June 30, 2014) (dismissing a plaintiff’s
Revlon claim for failure to plead a non-exculpated breach of fiduciary duties); BJ’s
Wholesale Club, 2013 WL 396202, at *7 (same); In re Alloy, Inc., 2011 WL 4863716, at
*7 (Del. Ch. Oct. 13, 2011) (same).
36
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) (alterations in original)
(internal quotations omitted).
37
Alloy, 2011 WL 4863716, at *12.
16
valuation for MeadWestvaco of approximately $9 billion—knew these assets were
undervalued by the market and “deprived MeadWestvaco’s shareholders of at least
$3 billion of additional value”38 by “flying blind” and doing “virtually nothing” to
meet their fiduciary duties.39
In my opinion, the Complaint’s allegations fall far short of pleading the
“extreme set of facts” necessary to establish a reasonably conceivable bad-faith
claim on the theory that the concededly overwhelming majority of disinterested and
independent MeadWestvaco directors (8 of 9) intentionally disregarded their
fiduciary duties with respect to the process that led to the merger.
Plaintiffs’ own pleading suggests that, far from “flying blind,” the board was
actively engaged in the process. The board first considered merging with RockTenn
in April 2014, about nine months before the transaction ultimately was approved.40
After the April 28 board meeting where Luke first raised the possibility of a
combination, the directors asked a series of probing questions regarding a potential
transaction with RockTenn—hardly evidence of an intentional disregard of one’s
duties.41 In total, the board held at least six meetings to consider a potential
38
Compl. ¶ 3.
39
Pl.s’ Br. at 27, 40.
40
Compl. ¶ 34.
41
Compl. ¶¶ 34-35. The parties vigorously dispute whether the directors received
satisfactory answers to these questions. Plaintiffs assert in conclusory fashion they did not.
Referring to board presentations and other documents, defendants assert they did. Given
17
transaction42 and received numerous valuations of the Company.43 The directors
were aided by prominent legal counsel (Wachtell Lipton) and three nationally
recognized financial advisors—Bank of America Merrill Lynch, Goldman Sachs,
and Greenhill.
The negotiation history between the parties also negates the notion that the
directors sanctioned a flawed process in deliberate disregard of their fiduciary
obligations. As alleged in the Complaint, it was MeadWestvaco that twice
terminated negotiations with RockTenn, first in August 2014 when “MeadWestvaco
refused an exchange ratio at anything below the current market price of its stock,”44
and then a few months later in November when “Luke informed the Board that
RockTenn was unwilling to proceed on terms acceptable to MeadWestvaco.”45
MeadWestvaco also did not accept RockTenn’s “one and only offer,” as plaintiffs
that the directors posed these questions in the first place, which indicates a genuine effort
to fulfill rather than to ignore their fiduciary obligations, a failure to obtain satisfactory
answers—a conclusory allegation for which plaintiffs offer no support—would seem, at
most, to implicate their duty of care. See Lyondell, 970 A.2d at 243 (“there is a vast
difference between an inadequate or flawed effort to carry out fiduciary duties and a
conscious disregard for those duties”). As noted previously, the directors are exculpated
from liability for any breach of their duty of care.
42
Compl. ¶¶ 34, 39, 48, 51, 53-55, 73, 74.
43
See Clark Aff. Exs. 11, 12, 28-31.
44
Compl. ¶ 46.
45
Compl. ¶ 50.
18
initially charged.46 To the contrary, as plaintiffs later conceded,47 MeadWestvaco
agreed to the merger only after rejecting RockTenn’s proposal for an “at market”
transaction, when RockTenn agreed to increase the exchange ratio from 0.71 to 0.78,
yielding a 9.1% premium for MeadWestvaco’s stockholders. The Merger
Agreement, furthermore, included a fiduciary-out and a concededly reasonable
break-up fee of less than 3% to afford stockholders the opportunity to receive a
superior proposal.48
Plaintiffs further criticize the term of the Merger Agreement that provided for
the specialty chemicals division spin-off to occur after the merger closed. Even if
one assumes, arguendo, that the individual defendants failed “to take any specific
steps during the sale process,” that would not be enough to demonstrate “a conscious
disregard of their duties,” even “in the Revlon context, which is not the case here.”49
More to the point, changing the deal to time the spin-off of the specialty chemicals
division to occur before the merger logically would have changed the relative
valuations and therefore the exchange ratio obtained in the transaction.
46
Pl.s’ Br. at 27.
47
See supra. n.13.
48
Tr. Oral Arg. at 54.
49
In re Paramount Gold & Silver Corp. Stockholders Litig., 2017 WL 1372659, at *15
(Del. Ch. Apr. 13, 2017) (internal quotations omitted).
19
In sum, the facts pled in the Complaint do not support a reasonable inference
that the eight concededly independent and disinterested directors on the board, who
met numerous times with the aid of legal and financial advisors over a nine-month
span, intentionally disregarded their fiduciary duties in connection with their
oversight of what plaintiffs describe as “near a year of on-again off-again
discussions.”50 As this Court recently held: “As long as a board attempts to meet
its duties, no matter how incompetently, the directors did not consciously disregard
their obligations.”51
The allegations in the Complaint also do not support a reasonable inference
that the ultimate decision to approve a strategic merger that impliedly valued the
Company at approximately $9 billion was itself an act of bad faith. “Delaware law
requires that for an allegation of price inadequacy to support a bad faith claim, the
Court would need to conclude that the price was so far beyond the bounds of
reasonable judgment that it seems inexplicable on any ground other than bad faith.”52
Our Supreme Court has equated showing that the substance of a board’s decision is
an act of bad faith to meeting the onerous burden of proving a waste claim: “To
prevail on a waste claim or a bad faith claim, the plaintiff must overcome the general
50
Pls.’ Br. at 24.
51
Chen v. Howard-Anderson, 87 A.3d 648, 683 (Del. Ch. 2014).
52
In re Crimson Expl. Inc. Stockholder Litig., 2014 WL 5449419, at *23 (Del. Ch. Oct. 24,
2014).
20
presumption of good faith by showing that the board’s decision was so egregious or
irrational that it could not have been based on a valid assessment of the corporation’s
best interests.”53
“Delaware corporate fiduciary law does not require directors to value or
preserve piecemeal assets in a merger setting.”54 What is relevant is the value of the
enterprise as a whole. Even under the deferential motion to dismiss standard, the
merger consideration here is nowhere near so “egregious,”55 so “irrational,”56 or “so
far beyond the bounds of reasonable judgment” as to be “inexplicable on any ground
other than bad faith.”57
First, the MeadWestvaco board negotiated an exchange ratio representing a
9.1% premium to its stockholders in a strategic merger between two widely-held
companies where MeadWestvaco stockholders obtained 50.1% of the combined
entity even though, according to information provided to the board, MeadWestvaco
contributed less than 50% of the combined company’s revenue, net income, and
EBITDA.58 The transaction at issue here did not involve a sale of control. It was a
53
White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001).
54
Arkansas Teacher Ret. Sys. v. Caiafa, 996 A.2d 321, 322 (Del. 2010).
55
Panic, 783 A.2d at 554 n.36.
56
Panic, 783 A.2d at 554 n.36.
57
Ramtron, 2014 WL 2931180, at *6.
58
Proxy at 102-3; Clark Supp. Aff. Ex. 28 MWV72-74. I take judicial notice of these
financial metrics not for their truth, but to show that this information was provided to the
board, a fact which is not reasonably subject to dispute. See Santa Fe, 669 A.2d at 70
21
strategic merger, ostensibly of equals. Even if it were true that the premium was
low, “[t]here is no rule that a low premium represents a bad deal, much less bad
faith.”59
Second, three separate, nationally recognized financial advisors, none of
which are alleged to be conflicted, opined that the merger was fair to
MeadWestvaco’s stockholders.60 A “board’s receipt of a fairness opinion typically
supports a factual inference that the board acted properly when deciding to proceed
with a transaction.”61
(“Despite the fact that a SEC filing may constitute hearsay with respect to the truth of the
matters asserted therein, courts may consult these documents to ascertain facts appropriate
for judicial notice under D.R.E. 201.”).
59
Crimson, 2014 WL 5449419, at *23 (rejecting bad-faith challenge to stock-for-stock
merger where target stockholders who obtained approximately 20% of the combined entity
received a premium of only 7.7% in the transaction); see also, e.g., BJ’s Wholesale Club,
2013 WL 396202 (dismissing bad-faith claims in leveraged-buyout providing only a 6.6%
premium).
60
Proxy at 56. The Complaint alleges that Greenhill’s analysis was “flawed’ because it
overstated MeadWestvaco’s liabilities by “over $1 billion in debt.” Compl. ¶ 91. Even if
this is true, two other financial advisors rendered fairness opinions that are not alleged to
be flawed.
61
Alloy, 2011 WL 4863716, at *10; see also, e.g., McMillan v. Intercargo Corp., 768 A.2d
492, 505 n. 55 (Del. Ch.2000) (“The board’s reliance upon an investment banker (whose
independence and qualifications are not challenged in the complaint) is another factor
weighing against the plaintiffs' ability to state an actionable claim.”); In re Dairy Mart
Convenience Stores, Inc., 1999 WL 350473, at *13 (Del. Ch. May 24, 1999) (“[A]n outside
financial advisor's opinion on the terms of a transaction generally gives the Court comfort
with respect to the reasonableness of the board's action.”); Goodwin v. Live Entm’t, Inc.,
1999 WL 64265, at *23 (Del. Ch. Jan. 25, 1999) (board decision to accept bidder’s offer
without market check reasonable in part because of fairness opinion); Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1134, 1143 (Del. Ch. 1994) (fairness opinion of outside
financial advisor among factors supporting a finding that transaction was entirely fair).
22
Third, the deal protections in the Merger Agreement, which included a
fiduciary-out and a $230 million break-up fee, concededly were reasonable.62 The
$3 billion in value that plaintiffs assert was left on the table is approximately thirteen
times the size of the break-up fee. Starboard’s initial letter to the board stated that
“[m]any of MeadWestvaco’s U.S. competitors have large underfunded pension
plans” and specifically identified a second company other than RockTenn as a
potential merger partner with “pension liabilities that exceed $1 billion.”63 If the
exchange ratio really was so irrational, “one might think some other buyer would
emerge to capture this surplus.”64 Despite the fact that the transaction did not close
for more than five months after the Merger Agreement was signed, none did.
Finally, two major independent proxy advisory firms—ISS and Glass
Lewis—recommended that stockholders vote to approve the merger.65 The
62
Tr. Oral Arg. at 54. See e.g., Ramtron, 2014 WL 2931180, at *8-9 (no-solicitation
provisions have been “repeatedly” approved by the court, matching rights are
“unremarkable and customary procedural restraints,” and a 4.5% termination fee is “highly
unlikely” to have been “unreasonably high”).
63
Clark Aff. Ex. 9 MWV1015.
64
Crimson, 2014 WL 5449419, at *24.
65
See In re Zale Corp. Stockholders Litig., 2015 WL 5853693, at *16 (Del. Ch. Oct. 1,
2016) (internal citations omitted) (“First, to the extent that TIG’s, GAMCO’s, and Glass
Lewis’s oppositions to the Merger are evidence that the Merger Price was inadequate,
Golden Gate's and ISS’s support for the Merger are evidence of the Merger's fairness.
Although I must draw all inferences in favor of Plaintiffs on Defendants' motion to dismiss,
those inferences still must be reasonable. Because a large stockholder and an independent
proxy advisory firm supported the Merger Price, I do not consider it reasonably
23
Company’s stockholders did so overwhelmingly—to the tune of 98% of the votes
cast at a meeting held after plaintiffs obtained preliminary discovery and elected to
waive their disclosure claims. Notably, the Complaint nowhere suggests that
Starboard expressed any opposition to the merger price or believed that the
MeadWestvaco directors left any additional value behind.
At bottom, plaintiffs’ theory that the concededly disinterested and
independent directors on MeadWestvaco’s board intentionally disregarded their
fiduciary obligations to leave $3 billion of additional value on the negotiating
table—equating to one-third of the $9 billion implied value of the Company in the
merger, or about one-quarter of what plaintiffs apparently believe the Company
should have been valued at for purposes of the merger ($12 billion)—is simply not
credible. Based on the facts pled in the Complaint and that otherwise may be
considered on the present motion, it is not reasonably conceivable that the directors’
decision to agree to a strategic merger of equals yielding a 9% premium for
MeadWestvaco’s stockholders is essentially inexplicable on any ground other than
bad faith.
conceivable that the opposition of the firms on which Plaintiffs rely would make that price
‘essentially inexplicable on any ground other than bad faith.’”).
24
D. Count II Fails to State a Claim for Aiding and Abetting
To adequately plead an aiding and abetting claim, plaintiffs must allege facts
demonstrating “(1) the existence of a fiduciary relationship, (2) a breach of the
fiduciary’s duty, . . . (3) knowing participation in that breach by the defendants, and
(4) damages proximately caused by the breach.”66 Because plaintiffs have failed to
state a claim for breach of a fiduciary duty, their aiding and abetting claim fails for
lack of a predicate breach.
Count II fails to state a claim for a second reason. The “knowing
participation” element of an aiding and abetting claim is a “stringent standard that
turn[s] on proof of scienter.”67 But the Complaint contains no non-conclusory facts
suggesting that RockTenn knew that MeadWestvaco’s directors, who oversaw a
process in which MeadWestvaco terminated negotiations on at least two occasions
and obtained a premium for its stockholders after rejecting an “at market” proposal,
had failed to discharge their fiduciary duties.68 To the contrary, the Complaint’s
66
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
67
Lee v. Pincus, 2014 WL 6066108, at *13 (Del. Ch. Nov. 14, 2014).
68
In a one-paragraph argument that fails to cite any allegation of the Complaint, plaintiffs
list several facts that RockTenn allegedly “knew.” Pl.s’ Br. at 49-50. These assertions are
all either conclusory—“RockTenn certainly knew that Luke failed to negotiate”—or have
no bearing on whether RockTenn participated in a breach of fiduciary duty—“RockTenn
knew that Starboard was ramping up its pressure on the Board.” Id. In any event,
“[a]rguments in briefs do not serve to amend the pleadings.” California Public Employees’
Ret. System v. Coulter, 2002 WL 31888343, at *12 (Del. Ch. Dec. 18, 2002).
25
allegations paint a picture of genuine arm’s-length bargaining that is the antithesis
of an aiding and abetting claim. 69
IV. CONCLUSION
For the reasons stated above, both claims in the Complaint fail to state a claim
for relief. Accordingly, defendants’ motions to dismiss are GRANTED.
IT IS SO ORDERED.
69
Morgan v. Cash, 2010 WL 2803746, at *1 (Del. Ch. July 16, 2010) (Strine, V.C.)
(recognizing “the long-standing rule that arm’s-length bargaining is privileged and does
not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and
abetting”).
26