Nicholas Olenik v. Frank A. Lodzinski

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NICHOLAS OLENIK, Individually and :
on Behalf of All Others Similarly :
Situated and Derivatively on Behalf of :
Nominal Defendant EARTHSTONE :
ENERGY, :
:
Plaintiff, :
:
v. : C.A. No. 2017-0414-JRS
:
FRANK A. LODZINSKI, RAY :
SINGLETON, DOUGLAS E. :
SWANSON, BRAD THIELEMANN, :
ROBERT L. ZORICH, JAY F. :
JOLIAT, ZACHARY G. URBAN, :
ENCAP INVESTMENTS L.P., BOLD :
ENERGY III LLC, BOLD ENERGY :
HOLDINGS, LLC and OAK VALLEY :
RESOURCES, LLC, :
:
Defendants, :
:
and :
:
EARTHSTONE ENERGY, INC., a :
Delaware corporation, :
:
Nominal Defendant. :

MEMORANDUM OPINION

Date Submitted: April 20, 2018
Date Decided: July 20, 2018
Ned Weinberger, Esquire and Thomas Curry, Esquire of Labaton Sucharow LLP,
Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. Springer, Esquire and
David Sborz, Esquire of Andrews & Springer LLC; and Jeremy S. Friedman,
Esquire, Spencer Oster, Esquire and David F.E. Tejtel, Esquire of Friedman Oster &
Tejtel PLLC, New York, New York, Attorneys for Plaintiff.

Kenneth J. Nachbar, Esquire, D. McKinley Measley, Esquire and Lauren Neal
Bennett, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware;
Gerard G. Pecht, Esquire of Norton Rose Fulbright US LLP, Houston, Texas; and
Peter A. Stokes, Esquire and William Patrick Courtney, Esquire of Norton Rose
Fulbright US LLP, Austin, Texas, Attorneys for Defendants Frank A. Lodzinski,
Ray Singleton and Bold Energy III LLC, and Nominal Defendant Earthstone
Energy, Inc.

Rolin P. Bissell, Esquire and James M. Yoch, Jr., Esquire of Young, Conaway,
Stargatt & Taylor, LLP, Wilmington, Delaware and Michael C. Holmes, Esquire,
Craig E. Zieminski, Esquire, Amy T. Perry, Esquire, Kent Piacenti, Esquire,
Meredith S. Jeanes, Esquire of Vinson & Elkins LLP, Dallas, Texas, Attorneys for
Defendants Douglas E. Swanson, Brad Thielemann, Robert L. Zorich, EnCap
Investments L.P., Bold Energy Holdings, LLC, and Oak Valley Resources, LLC.

Raymond J. DiCamillo, Esquire, Robert L. Burns, Esquire and Daniel E. Kaprow,
Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for
Defendants Jay Joliat and Zachary Urban.

SLIGHTS, Vice Chancellor
 This litigation arises out of an all-stock “Up-C” business combination

between Earthstone Energy, Inc. (“Earthstone” or the “Company”) and Bold

Energy III LLC (“Bold”) whereby Earthstone’s legacy stockholders ended up

owning approximately 38.9% of the combined company (the “Transaction”).

The Transaction was negotiated and approved on Earthstone’s behalf by a special

committee of independent and disinterested directors (the “Special Committee”).

From the outset of the negotiations of the Transaction, Earthstone’s proposal to Bold

was explicitly conditioned on Special Committee approval and majority-of-the-

minority stockholder support. Earthstone stockholders voiced their support of the

Transaction in a “yes” vote where 83.6% of the issued and outstanding shares

participated, and 99.7% of the non-affiliated shares (shares not held by Earthstone’s

executive officers or by Earthstone’s largest stockholder, Oak Valley Resources,

LLC (“Oak Valley”)) approved the Transaction. The Transaction closed on May 9,

2017.

Plaintiff, Nicholas Olenik, is an Earthstone stockholder. With the benefit of

documents obtained under 8 Del. C. § 220 (“Section 220 Documents”), Olenik has

brought a Verified Amended Stockholder Class Action and Derivative Complaint

(the “Complaint”),1 in which he alleges that Earthstone’s board of directors, certain

1
Citations to the Complaint are to “Compl. ¶ __.”

1
Earthstone officers and it supposed controlling stockholder, Oak Valley, breached

their fiduciary duties to Earthstone’s minority stockholders by approving the unfair

Transaction for the benefit of Oak Valley and EnCap Investments, L.P. (“EnCap”).

EnCap is a private equity firm with majority stakes in both Bold and Oak Valley.

Olenik also alleges that Bold, Bold Holdings LLC (an acquisition vehicle), EnCap

and Oak Valley aided and abetted those breaches.

In this Memorandum Opinion, I conclude that Earthstone structured the

Transaction in the manner prescribed by Kahn v. M & F Worldwide Corp. in order

to trigger the presumptions of the business judgment rule.2 Under the business

judgment rule standard of review, the Court will not second-guess the decisions of

corporate fiduciaries unless the Transaction is so inexplicable as to constitute waste.

Olenik has not expressly pled waste and the Complaint does not plead facts from

which the Court can reasonably conceive that waste occurred here. Accordingly, the

Complaint must be dismissed.

2
Kahn v. M & F Worldwide Corp., 88 A.3d 635, 645–46 (Del. 2014) (setting forth a
framework by which a transaction with a controlling stockholder can be structured so that
it replicates arms-length negotiations and invokes the business judgment rule standard of
review).

2
 I. FACTUAL BACKGROUND

I draw the facts from the allegations in the Complaint, documents

incorporated by reference or integral to the Complaint and judicially noticeable facts

available in public Securities and Exchange Commission filings.3 For purposes of

this motion to dismiss, I accept as true the Complaint’s well-pled factual allegations

and draw all reasonable inferences in Plaintiff’s favor.4

A. The Parties and Relevant Non-Parties

Plaintiff, Olenik, is and has been a record owner of shares of Earthstone

common stock at all times relevant to this litigation. 5 His Complaint pleads both

direct and derivative claims.

Nominal defendant, Earthstone, is a Delaware corporation that operates in the

“upstream” oil and natural gas sector.6 Its primary assets are located in the Midland

3
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on
a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint); In re Gen. Motors (Hughes) S’holder Litig., 897
A.2d 162, 170 (Del. 2006) (noting that trial courts may take judicial notice of facts in SEC
filings that are “not subject to reasonable dispute”) (emphasis in original).
4
Gen. Motors (Hughes) S’holder Litig., 897 A.2d at 169.
5
Compl. ¶ 20.
6
Compl. ¶¶ 21, 38. The oil and gas industry is generally divided into “upstream,”
“downstream” and “midstream” operations. Upstream operations are those focused on the
identification of oil and gas deposits, well drilling and the recovery of raw materials from
underground. Compl. ¶ 38 n.3. Downstream operations are those focused on turning raw
materials into usable products (such as gasoline) and marketing those products. Id.
Midstream operations are those focused on linking upstream and downstream operations
3
Basin of west Texas, the Eagle Ford Shale of south Texas and the Williston Basin

of North Dakota.7 At the time of the Transaction, Earthstone was a mature company

with increasing revenue each year between 2012 and 2016, but with limited

undeveloped resources.8 As announced to its stockholders prior to the Transaction,

given the state of its asset portfolio, Earthstone’s “business model” contemplated

“active [participation] in corporate mergers and the acquisition of oil and natural gas

properties that have production and future development opportunities.”9

Earthstone’s board of directors (the “Board”) at the time of the Transaction

comprised Frank Lodzinski, Ray Singleton, Douglas Swanson, Brad Thielemann,

Robert Zorich, Jay Joliat, Zachary Urban and Phillip Kramer.10 Wynne Snoots Jr.

joined in May 2017, expanding the Board to nine directors.11

through resource transportation and storage, including the operation of pipelines and
gathering systems. Id.
7
Compl. ¶ 38.
8
Compl. ¶ 3; see Proxy Statement at 18, 22.
9
Compl. ¶ 38; Earthstone Energy, Inc., Annual Report (Form 10-K) (Mar. 15, 2017)
(“Earthstone 2016 Annual Report”) at 8.
10
Compl. 1, ¶ 35. Kramer joined the Earthstone Board in October 2016, after negotiations
had already commenced but before Earthstone announced the Transaction on November 8,
2016. Compl. ¶¶ 22, 35. Plaintiff initially brought claims against Kramer but has since
voluntarily dismissed those claims. Dkt. 34.
11
Compl. ¶ 36.

4
 Defendant, EnCap, is a Delaware limited partnership that operates as a private

equity and venture capital firm.12 EnCap bills itself as “the leading provider of

venture capital to the independent sector of the U.S. oil and gas industry.”13

Defendant, Oak Valley, is a Delaware limited liability company that functions

as a holding company for the stated purpose of pursuing investment opportunities in

upstream oil and gas companies.14 Lodzinski founded Oak Valley in December

2012, and served as Oak Valley’s President and Chief Executive Officer until

December 2014.15 EnCap and its affiliates own approximately 57.3% of the

membership interests in Oak Valley.16 Since its initial investment one week after

Oak Valley’s founding, EnCap has been Oak Valley’s largest investor.17 Oak

Valley, in turn, owns 41.1% of Earthstone’s outstanding common stock.18 Thus,

12
Compl. ¶¶ 2, 22.
13
Compl. ¶ 22.
14
Compl. ¶¶ 25, 42.
15
Compl. ¶¶ 26, 39, 42.
16
Compl. ¶ 44; Earthstone Energy, Inc., Definitive Proxy Statement (Schedule 14A)
(Apr. 7, 2017) (“Proxy Statement”) at 69.
17
Compl. ¶ 44.
18
Compl. ¶ 22; Earthstone 2016 Annual Report at 28; Proxy Statement at 117.

5
while EnCap indirectly owns 23.6% of Earthstone, it “may be deemed to own

beneficially 41.1%.”19

Defendant, Bold, is a Texas limited liability company.20 Bold was formed in

March 2013, and is 95.9% owned by EnCap.21 It is an early-stage oil and gas

company engaged in the acquisition, exploration and development of oil and gas

properties in west Texas and southeastern New Mexico.22 Bold’s assets “consist

principally of undeveloped acreage in the Midland Basin” located within the greater

Permian Basin.23 As compared to Earthstone, Bold generated far less revenues but

owned approximately three-times more undeveloped resources.24

19
Proxy Statement at 2. See also Compl. ¶¶ 22, 150. “[B]eneficial ownership
contemplates a separation of legal and equitable ownership. Under this concept, the
equitable or beneficial owner possesses an economic interest in the subject property distinct
from legal ownership or control.” Anadarko Petroleum Corp. v. Panhandle E. Corp.,
545 A.2d 1171, 1176 (Del. 1988).
20
Compl. ¶¶ 23, 64.
21
Compl. ¶¶ 4, 64.
22
Compl. ¶¶ 4, 23, 64.
23
Compl. ¶¶ 4, 67 (citing ESTE000517); Transmittal Aff. of James M. Yoch, Jr. in Supp.
of the EnCap and Oak Valley Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss the
Verified Am. S’holder Class Action and Deriv. Compl. (“Yoch Aff.”), Ex. 4 (“Stephens
Presentation (Nov. 7, 2016)”) at ESTE000517. See also Proxy Statement at 30.
24
Proxy Statement at 18–19, 22.

6
 Defendant, Bold Holdings, is a Texas limited liability company that was

established as a vehicle to facilitate the Transaction.25 Specifically, Bold Holdings

was the vehicle through which Bold contributed its assets to the combined company,

and was also the entity through which Bold’s members would hold their equity in

the combined company following the closing of the Transaction.26

Defendant, Lodzinski, has served as Earthstone’s Chairman, President and

CEO since December 2014.27 Lodzinski founded Oak Valley, owns a non-

controlling interest in that entity, serves on its board of managers and served as its

President and CEO until December 2014.28 He has over forty-three years of

experience in the oil and gas industry.29 During those forty-three years, Lodzinski

has founded four entities and served on the board of directors or in management at

approximately ten entities.30 According to a news article cited in the Complaint,

Lodzinski produced impressive returns for at least four companies in which he was

involved in a leadership capacity: (1) Hampton Resources – 30% return to preferred

25
Compl. ¶ 24.
26
Proxy Statement at i, 20.
27
Compl. ¶¶ 7, 26.
28
Compl. ¶¶ 7, 26, 39, 42, 47.
29
Proxy Statement at 102.
30
Id.

7
investors and 700% to initial investors; (2) Texoil – 250% return to preferred

investors, 300% to follow-on investors and 1,000% to initial investors; (3) Aroc –

17% return to preferred investors and 400% to initial investors; and (4) Southern

Bay – 40% return to initial investors.31

Defendant, Singleton, has been an Earthstone director since July 1989.32 He

served as Earthstone’s President and CEO from March 1993 until December 2014,

when he transitioned into the role of Executive Vice President of Earthstone’s

Northern Region.33

Defendants, Swanson, Thielemann, Zorich, Joliat and Urban, each have

served on the Board since December 2014.34 Joliat and Urban served as the only

two members of the Earthstone Special Committee formed to consider and negotiate

the Transaction.35 Both own a membership interest in Oak Valley. 36 Urban also

currently serves as CEO at Vlasic Group, a private investment company with

31
Nissa Darbonne, Look Who’s Doing It Again: Frank Lodzinski, Oil and Gas Investor
(June 23, 2014, 3:58 PM), https://www.oilandgasinvestor.com/blog/look-whos-doing-it-
again-frank-lodzinski-564526#p=full (cited by Compl. ¶ 183 n.26).
32
Compl. ¶ 27.
33
Id.
34
Compl. ¶¶ 28–32.
35
Compl. ¶¶ 31–32.
36
Compl. ¶¶ 31–32.

8
“a history over nearly thirty years of making investments in companies led by

Lodzinski.”37 According to the Complaint, Vlasic Group holds a 7.5% voting

interest in Oak Valley and has backed five different Lodzinski companies dating

back to 1988.38

Swanson, Thielemann and Zorich have affiliations with EnCap: Swanson has

been an EnCap managing partner since 199939; Thielemann has served as an EnCap

managing director since 200640; and Zorich co-founded EnCap in 1988 and serves

as a managing partner.41 Swanson and Zorich both serve on Oak Valley’s board of

managers.42

Non-party, Kramer, has been an Earthstone director since October 2016.43

Non-party, Snoots, has been an Earthstone director since May 2017.44

37
Compl. ¶ 32.
38
Compl. ¶¶ 97, 183. Lodzinski, Singleton, Swanson, Thielemann, Zorich, Joliat and
Urban are collectively referred to as the “Director Defendants.”
39
Compl. ¶ 28.
40
Compl. ¶ 29.
41
Compl. ¶ 30.
42
Compl. ¶¶ 28, 30.
43
Compl. ¶ 35.
44
Compl. ¶ 36.

9
 B. The Earthstone-Oak Valley Reverse Merger in December 2014

In December 2014, Earthstone issued to Oak Valley a controlling share of its

common stock—approximately 9.1 million shares—in exchange for Oak Valley

contributing its membership interests in three subsidiaries to Earthstone

(the “Reverse Merger”).45 After the Reverse Merger closed in December 2014, Oak

Valley owned 84% of Earthstone’s common stock.46 With control of the company

in hand, Oak Valley installed six new members on Earthstone’s then-seven member

board of directors, and each of these six directors—Lodzinski, Swanson,

Thielemann, Zorich, Urban and Joliat—remained on the Board throughout the time

relevant to this litigation.47 Oak Valley also installed new management, placing

Lodzinski at the helm as Earthstone’s President, CEO and Chairman of the Board,

positions he continued to hold throughout the negotiations and consummation of the

Transaction.48 To make room for Lodzinski as CEO, Singleton stepped down from

that post and became Executive Vice President of Earthstone’s Northern Region.49

45
Compl. ¶ 39–40.
46
Compl. ¶ 40.
47
Compl. ¶ 49.
48
Compl. ¶¶ 26, 50.
49
Compl. ¶ 50.

10
 “[F]ollowing the Reverse Merger, Lodzinski and Earthstone pursued a year-

long acquisition spree that created significant value for the Company and positioned

it for success.”50 One such acquisition was of Lynden Energy Corp.

(“Lynden Corp.”), which provided Earthstone with a non-operated working

presence in a section of the Permian Basin in Texas, the Midland Basin, where Bold

also operates.51 As a result of these acquisitions, Earthstone grew from a micro-cap

company into a small-cap company.52

C. Bold’s Market Check in June 2015

“Oil and gas exploration companies like Bold require large amounts of cash

to fund drilling operations” and “are constantly looking for ways to raise capital to

meet their heightened cash needs.”53 By the summer of 2015, EnCap was reaching

the end of its capital commitments to entities, including Bold, that were sponsored

through one of its funds.54 “As a result, EnCap was looking to take Bold public

without having to invest additional capital of its own.”55 In or around June 2015,

50
Compl. ¶ 55.
51
Compl. ¶¶ 23, 64; Proxy Statement at 46. The Earthstone-Lynden Corp. transaction
closed in May 2016. Proxy Statement at 29, 46.
52
Compl. ¶ 60.
53
Compl. ¶ 66.
54
Compl. ¶¶ 64–65.
55
Compl. ¶ 65.

11
Bold retained Tudor, Pickering, Holt & Co. (“TPH”) to “determine whether there

was a market for Bold’s assets.”56 After an “extensive” three-month market check,

no buyer for Bold emerged.57 Around this same time, oil prices tumbled, which

caused “exponentially more stress on smaller companies like Bold.”58

By the time the Special Committee was considering the Transaction, it was

well aware of Bold’s condition. Indeed, minutes of a July 22, 2016 Special

Committee meeting state:

Bold does not have enough cash and drilling capacity to continue to run
the company even with its final capital call to EnCap (which it intends
to make in the next week). [It was] noted that [] even though EnCap
will have finished making its capital commitment to Bold, it will
continue funding Bold.

Mr. Lodzinski then advised that he believes EnCap is looking to sell
Bold because it is in EnCap’s Fund 9 and EnCap has started its Fund 10,
EnCap has reached its total capital commitment and EnCap does not
think that the current management of Bold could take the [c]ompany
public.59

56
Compl. ¶ 68 (quoting Proxy Statement at 46).
57
Compl. ¶ 68.
58
Compl. ¶ 67.
59
Id.; Transmittal Aff. of Lauren Neal Bennett in Supp. of the Opening Br. in Supp. of the
Earthstone Defs.’ Mot. to Dismiss Am. Compl. (“Bennett Aff.”), Ex. L (“Special
Committee Meeting Minutes (July 22, 2016)”) at ESTE000075.

12
 D. Earthstone Searches for Acquisition Targets in June 2015

On June 25, 2015, Earthstone met with Wells Fargo Securities LLC

(“Wells Fargo”) to discuss potential acquisition targets for Earthstone.60 Wells

Fargo’s list of potential targets included Bold.61 At the Board’s direction, Wells

Fargo contacted one of the potential targets on Earthstone’s behalf, but those

discussions did not mature.62 The Board ultimately determined that it would not

pursue the other identified targets for a variety of reasons, including that several of

the companies had valued their assets above market while others indicated they

would only be amenable to all cash offers which was not the deal structure preferred

by Earthstone’s management.63

As for Bold, Earthstone was informed of Bold’s market check and that bids

were due in August 2015.64 Earthstone believed that Bold’s assets were

economically attractive. Nevertheless, the Board chose not to pursue the opportunity

due to the size of Bold’s acreage position, Bold’s limited production and uncertainty

surrounding Earthstone’s ability to obtain adequate cash financing, “particularly

60
Proxy Statement at 46.
61
Id.
62
Id.
63
Id.
64
Id.

13
considering the anticipated volatility in commodity prices and Earthstone’s likely

acquisition of Lynden Corp. with Earthstone common stock.”65

E. Lodzinski Explores an Earthstone-Bold Transaction in November 2015

In the late fall, Earthstone learned that Bold’s efforts had not yielded a bidder.

Upon hearing this news, Lodzinski initiated discussions with EnCap regarding Bold

and other EnCap portfolio companies that might fit as potential Earthstone

acquisition targets.66

On November 12, 2015, EnCap provided Lodzinski and Earthstone

management with a presentation that TPH had used earlier in the year to market Bold

to potential buyers.67 Five days later, on November 17, 2015, Lodzinski and

Earthstone management held a conference call with EnCap to discuss a possible

combination of Earthstone and Bold.68 Plaintiff alleges, “Lodzinski’s team

expressed their view that a combination could be beneficial to both parties, and

committed to immediately begin a comprehensive review of Bold’s assets.”69

65
Id. Earthstone ultimately announced the Earthstone-Lynden Corp. transaction in
December 2015, and the transaction closed in May 2016. Id.
66
Compl. ¶ 69; Proxy Statement at 46.
67
Compl. ¶ 72; Proxy Statement at 46.
68
Compl. ¶ 72; Proxy Statement at 46.
69
Compl. ¶ 72. See also Proxy Statement at 46.

14
Two days later, Earthstone entered into a confidentiality agreement with EnCap to

govern the exchange of financial information concerning Bold.70 Throughout late

November and early December 2015, EnCap provided Earthstone management with

access to the data room that TPH had created for Bold’s market check earlier that

year.71

Discussions between EnCap and Earthstone concerning Bold continued into

December 2015. On December 8, 2015, Earthstone entered into a separate

confidentiality agreement with Bold to govern Earthstone’s review of technical,

operational, financial and analytical information prepared by Bold and TPH.72 Two

days later, on December 10, 2015, TPH presented a technical overview of Bold’s

assets to Earthstone and EnCap.73 Then, on December 18, 2015, TPH, Earthstone

and EnCap held a follow-up meeting to discuss Bold’s land, infrastructure issues and

a development model for the properties.74

From mid-December 2015 through mid-January 2016, Lodzinski and his team

met with three investment banking firms to solicit their views on valuation

70
Compl. ¶ 73; Proxy Statement at 46.
71
Compl. ¶ 73; Proxy Statement at 46–47.
72
Compl. ¶ 74; Proxy Statement at 47.
73
Compl. ¶ 74; Proxy Statement at 47.
74
Compl. ¶ 74; Proxy Statement at 47.

15
parameters related to Bold’s assets, methods to fund their development, and equity

market receptivity to the potential acquisition of Bold’s assets.75 Discussions halted

in mid-January 2016, however, when the price of oil fell to a 12-year low.76

F. Lodzinski Re-engages with EnCap

By April 2016, conditions in the oil and gas industry were showing signs of

improvement.77 On April 27, 2016, Lodzinski provided the Board with a letter he

described as “a comprehensive status update” in which he discussed Earthstone’s

operations in advance of the Board’s regularly scheduled May 3, 2016 meeting. 78

The letter mentioned Bold once, under a heading “Current Deals Working,” where

Lodzinski stated, “b. Bold – updating analysis and intend to make offer.”79

The letter said nothing of conditioning a proposal to Bold on approval of an

independent special committee or a majority-of-the-minority stockholder vote.80

75
Compl. ¶ 75; Proxy Statement at 47.
76
Compl. ¶ 76; Proxy Statement at 47.
77
Compl. ¶ 79.
78
Id. (quoting ESTE000001); Bennett Aff., Ex. E (“Lodzinski Board Status Update Letter
(Apr. 27, 2016)”) at ESTE000001.
79
Compl. ¶ 80 (citing ESTE000007); Lodzinski Board Status Update Letter (Apr. 27,
2016) at ESTE000007 (emphasis added). The reference to “updating” suggests that
Lodzinski had discussed Bold with the Board previously.
80
Compl. ¶ 80.

16
 On April 29, 2016, Lodzinski and the Earthstone management team restarted

discussions with EnCap regarding a potential Earthstone-Bold combination.81

At that time, EnCap, through Oak Valley, indirectly held greater than a 50% voting

interest in Earthstone.82

G. The May 3, 2016 Earthstone Board of Directors Meeting

The Board met on May 3, 2016, as scheduled, and all members were in

attendance as well as two members of management, including Robert Anderson,

Executive Vice President for Engineering.83 Minutes for this meeting state that the

Board received a 48-page presentation, which included a slide titled “Acquisition

Opportunities – Summary” that identified an “Active” potential transaction

involving Bold as “Seller” and EnCap as “Financial Partner.”84 The meeting

minutes, however, do not reflect any discussion concerning Bold specifically.85

Rather, the minutes merely indicate that the Board discussed, as its third topic of

discussion, “[c]orporate and asset acquisition opportunities.”86

81
Compl. ¶ 81; Proxy Statement at 47.
82
Compl. ¶ 10.
83
Compl. ¶ 82.
84
Compl. ¶ 83 (citing ESTE000048).
85
Compl. ¶ 84.
86
Id. (citing ESTE000010).

17
 H. Earthstone-Bold Discussions Continue in May, June and July 2016

Following the May 3, 2016 Board meeting, and throughout May, June and

July, Earthstone’s management, led by Lodzinski, continued discussions with

EnCap and Bold. First, on May 11, 2016, Earthstone management delivered a non-

binding presentation to EnCap concerning a possible Earthstone-Bold combination

based on an equity valuation for Bold of approximately $305 million in shares of

Earthstone common stock.87 The presentation was silent with respect to the

formation of an Earthstone special committee or the need for a majority of

Earthstone’s minority stockholders to approve the combination.88

On May 18, 2016, Earthstone management made a second presentation to

EnCap.89 This time, Earthstone revised its equity valuation for Bold to

approximately $335 million in shares of Earthstone common stock to account for

acreage that Bold recently acquired that had not been included in Earthstone’s prior

valuation of $305 million.90 Here again, the presentation did not include any

87
Compl. ¶ 86; Proxy Statement at 47.
88
Compl. ¶ 87.
89
Compl. ¶ 88; Proxy Statement at 47.
90
Compl. ¶ 88; Proxy Statement at 47.

18
mention of an independent special committee or a majority of the minority

stockholder vote.91

A flurry of activity followed in June and July 2016. On June 2, 2016,

Anderson discussed Bold’s assets with Bold’s president, Joseph Castillo, and the

two executives agreed to set up an in-person meeting.92 The following day,

Earthstone met with TPH to discuss the current asset and divestiture market for

transactions in markets relevant to a possible Earthstone – Bold transaction.93 Also

on June 3, Thielemann sent an email to Lodzinski and Anderson providing

“a suggested action plan to be carried out [over] the ensuing weeks and months,

relating to a possible transaction between [Earthstone and Bold].”94 On June 7,

2016, EnCap held a teleconference concerning the plan of action outlined in

Thielemann’s email.95

91
Compl. ¶ 88.
92
Compl. ¶ 90; Proxy Statement at 48.
93
Compl. ¶ 90; Proxy Statement at 48.
94
Compl. ¶ 90 (citing Proxy Statement at 48) (alteration in Compl.).
95
Compl. ¶ 90; Proxy Statement at 48.

19
 On June 10, 2016, Lodzinski and Anderson met with Castillo twice.96 First,

they met at Earthstone’s office to discuss the possible combination.97 Later that day,

they met at EnCap’s offices for a meeting with EnCap and TPH, during which TPH

provided its views on the equity market’s likely receptivity to a combination of

Earthstone and Bold.98 Subsequently, Anderson and Castillo corresponded by email

on June 21, 2016, about arranging a meeting to begin a due diligence review that

would include an overview of the assets of both companies and a tour of Bold’s field

facilities.99 On June 28, 2016, Earthstone provided Bold with access to its corporate

data room.100 On July 6, 2016, Earthstone management, EnCap and EnCap’s

counsel met at EnCap’s offices “to develop a preliminary timeline to complete a

possible transaction, identify the participants and their counsel, and assign

responsibilities to complete the proposed transaction.”101

96
Compl. ¶ 91; Proxy Statement at 48.
97
Compl. ¶ 91.
98
Id.
99
Compl. ¶ 92.
100
Id. In mid-June 2016, while discussions between Earthstone and EnCap concerning a
potential Earthstone-Bold combination were ongoing, Earthstone conducted an unrelated
stock offering following which Oak Valley’s ownership stake in Earthstone was reduced
from over 50% to 41.1%. Compl. ¶ 53; Stephens Presentation (Nov. 7, 2016) at
ESTE000520. The Board and Earthstone’s management team remained unchanged.
Compl. ¶ 54.
101
Compl. ¶ 93; Proxy Statement at 48 (emphasis supplied).

20
 I. Earthstone Forms a Special Committee

By July 8, 2016, Earthstone’s independent directors, Urban and Joliat, had

begun to take steps to form a special committee of the Board (of which they would

be the only members).102 Specifically, during the week following July 8, 2016, Joliat

and Urban interviewed three law firms to serve as counsel to the Special Committee,

and ultimately retained Richards, Layton, & Finger, P.A. (“RLF”).103 They also

interviewed six investment banking firms before settling on Stephens, Inc. as the

Special Committee’s financial advisor.104 The Board adopted the resolution to create

the Special Committee on July 29, 2016.105 Thereafter, between July and November

2016, the Special Committee formally met sixteen times.106

During a meeting of the Special Committee on July 22, 2016, Lodzinski and

Anderson gave a presentation on the possible structure of a potential Earthstone-

Bold combination and updated the Special Committee on the status of negotiations

102
Compl. ¶¶ 99, 101; Proxy Statement at 48.
103
Compl. ¶ 99; Proxy Statement at 48. In the midst of these interviews, Lodzinski met
with Bold’s Chief Financial Officer and Executive Vice President for Business
Development to discuss, among other things, employment matters and the future
composition of Earthstone’s board of directors should Earthstone make a formal proposal.
Compl. ¶ 100; Proxy Statement at 48. No specific plans were agreed upon, however.
Proxy Statement at 48.
104
Compl. ¶ 110; Proxy Statement at 49.
105
Compl. ¶ 101; Proxy Statement at 49.
106
Proxy Statement at 49–53.

21
that had occurred thus far.107 Anderson discussed an updated valuation of Bold

prepared by management reflecting a value of between $300 and $350 million.108

Anderson also reported to the Special Committee that Bold did not have enough cash

and drilling capacity to continue to run the company, even with its final capital call

to EnCap.109 Nevertheless, Anderson stated that he had been “advised” that EnCap

“will continue funding Bold.”110 Lodzinski added that “he believes EnCap is looking

to sell Bold because it is in EnCap’s Fund 9 and EnCap has started its Fund 10,

EnCap has reached its total capital commitment and EnCap does not think that the

current management of Bold could take the Company public.”111

According to the meeting minutes, “[i]t was agreed that the Special

Committee will understand, oversee and direct the negotiations with respect to the

Potential Transaction” and that “any major decisions to be made with respect to the

negotiations should be made by the Special Committee.”112 The minutes also reflect

107
Compl. ¶ 106 (citing ESTE000074–76).
108
Id. (citing ESTE000074–76).
109
Compl. ¶ 102 (citing ESTE000075); Special Committee Meeting Minutes (July 22,
2016) at ESTE000075.
110
Compl. ¶ 102 (citing ESTE000075); Special Committee Meeting Minutes (July 22,
2016) at ESTE000075.
111
Compl. ¶ 103 (quoting ESTE000075).
112
Compl. ¶ 104 (quoting ESTE000075).

22
that the Special Committee emphasized “that any directors affiliated with EnCap

would be kept out of the flow of information and any information regarding pricing

or valuations should only be communicated to members of the Special

Committee.”113

As noted, the Board formally established the Special Committee on July 29,

2016, notwithstanding that it had already met on several occasions before then.114

The Special Committee’s charter authorized the Special Committee, among other

things, to:

(i) Determine whether or not to make a formal offer of combination
with Bold and if so, the terms and conditions of such offer;
(ii) Negotiate and oversee the documentation of any such offer;
(iii) Retain its own financial advisor and legal counsel;
(iv) Solicit the views of, and obtain information from, Earthstone’s
executive, financial and other officers; and
(v) Reject the potential transaction, cease further negotiations and
“walk-away.”115

113
Id. (quoting ESTE000076).
114
Compl. ¶ 101; Proxy Statement at 49.
115
Proxy Statement at 49.

23
The Special Committee’s charter also provided that the Board would not approve a

transaction with Bold without a favorable recommendation from the Special

Committee.116

J. Stephens’ Initial Financial Analysis and Recommendations

On August 16, 2016, Stephens offered its preliminary financial analysis to the

Special Committee.117 Stephens noted that its analysis was subject to “further due

diligence on certain items including the Bold projections which were prepared by

[Earthstone management],”118 that it was unsure of the source of the information

Earthstone management had used to prepare its Bold projections,119 “that the

Company’s projections assume the number of shares to be issued in the deal will be

calculated based on a 10% discount to the stock price,” and that it was “not sure why

such a discount would be used in this case.”120 The minutes of that meeting reflect

“that the deal currently being contemplated by the Company includes an equity split

of 60% for Bold and 40% for the Company.”121 The minutes also reflect that the

116
Id.
117
Compl. ¶ 112.
118
Id. (quoting ESTE000227) (alteration in Compl.).
119
Id. (citing ESTE000227).
120
Compl. ¶ 114 (quoting ESTE000229).
121
Compl. ¶ 113 (quoting ESTE000228–29).

24
“contribution analysis show[ed] that the average contribution is 37.2% for Bold and

62.4% for the Company,” and did not, therefore, “support the currently proposed

split between the Company and Bold.”122

After discussing the details of its preliminary analysis, Stephens stepped back

to offer its initial macro impressions of the Transaction from Earthstone’s

perspective. On this point, Stephens was clear; the Transaction was likely to be

highly accretive to Earthstone. Specifically, Stephens advised the Special

Committee that “[t]he Company’s stock price is currently around $10.89 per share

and assuming that the transaction is completed and based on public comparable

transactions for the purchase of approximately 21,000 acres, Stephens estimate[d]

that the stock price [would] increase to $26.46 per share.”123

According to Stephens, “the biggest difference in the Company’s valuation as

compared to the Bold valuation relates to the fact that the Company is at a more

mature stage in its development than Bold.”124 Therefore, according to Stephens,

“the valuation of the Company shows that the Company may be slightly

undervalued.”125

122
Id. (quoting ESTE000228–29).
123
Compl. ¶ 144 (quoting ESTE000228).
124
Id. (quoting ESTE000228).
125
Id. (quoting ESTE000228).

25
 Stephens’ long-term view of the Transaction revealed greater value for Bold.

Specifically, Stephens reported that if it “went out further than 2018 in the analysis,

the contributions from Bold are expected to be significant and would change the

analysis.”126 Stephens cautioned, however, that “sometimes using estimates that are

further out could provide less meaningful results” and, therefore, it was not inclined

to use the 2019 projections in its analysis.127

As of the August 16, 2016 meeting, the Special Committee had concluded

that, because Earthstone was “at a more mature stage of development than Bold, and

Bold currently does not have much by way of current cash flow, the contribution

analysis based on 2017 and 2018 EBITDA did not support the proposed ownership

split of 60% for Bold and 40% for the Company.”128 But this assessment was by no

means dispositive of value given Stephens’ view that “results of the contribution

analysis [were] not as relevant when a mature company [was] buying acreage from

a less mature company.”129

126
Compl. ¶ 139 (quoting ESTE000229).
127
Id. (quoting ESTE000229).
128
Compl. ¶ 140 (quoting ESTE000230).
129
Compl. ¶ 141 (quoting ESTE000229) (alteration in Compl.).

26
 On August 19, 2016, Stephens presented an updated preliminary valuation to

the Special Committee that included two recent comparable transactions.130

Stephens reported that, based on the updated analysis, “the ownership interest of the

Company in the resulting entity [should be] around 38%–39%.”131 The Special

Committee and Stephens then discussed “the best way to ensure that the Company

is getting a good price.”132 Stephens noted that “the key is the number of shares that

the Company issues in the transaction.”133 Stephens presented a revised valuation

of Earthstone that “took out the 10% discount and used a 30 day volume weighted

average price of $10.35,” “result[ing] in 57% for Bold and 43% for the Company.”134

Following a discussion of Stephens’ updated analyses, the Special Committee

determined that the price of the Company’s stock in the transaction
should not be calculated at a discount, the volume weighted average
trading price for the 30 days prior to signing should be used to
determine the Company’s stock price, the transaction should result in
the Company owning more than 40% of the resulting entity and the
$325 million purchase price should be based on the enterprise value of
Bold, which includes liabilities.135

130
Yoch Aff., Ex. 10 (“Special Committee Meeting Minutes (Aug. 19, 2016)”) at
ESTE000234.
131
Special Committee Meeting Minutes (Aug. 19, 2016) at ESTE000234.
132
Id.
133
Id.
134
Id.
135
Compl. ¶ 115 (quoting ESTE000234–35); Special Committee Meeting Minutes
(Aug. 19, 2016) at ESTE000234–35.

27
Having settled on these specifics, the Special Committee authorized Lodzinski to

send a corresponding proposal to Bold.136

K. The Special Committee Makes an Offer to Bold

On August 19, 2016, Lodzinski communicated Earthstone’s first formal

proposal to Bold in the form of an offer letter (the “Offer Letter”) in which

Earthstone proposed a transaction whereby Earthstone would combine with Bold in

an all-stock transaction valuing Bold at $325 million, including the assumption of

net financial obligations not to exceed $25 million.137 According to the Offer Letter,

the number of Earthstone shares to be issued would be calculated by dividing

$325 million, less net financial obligations, by the greater of (i) Earthstone’s

volume-weighted average per share price for the twenty trading days preceding the

date a definitive agreement is signed, or (ii) $10.50 per share.138 “Assuming

approximately $25 million in net financial obligations and a $10.50 share price, the

offer letter contemplated Earthstone owning approximately 45% of the resulting

136
Special Committee Meeting Minutes (Aug. 19, 2016) at ESTE000235.
137
Bennett Aff., Ex. H (“Offer Letter”) at 1; Compl. ¶ 118. The parties stipulated to the
universe of Section 220 Documents, which did not include the Offer Letter. The Proxy
Statement describes the Offer Letter, but it does not include a copy of the document.
138
Offer Letter at 1 n.1; Compl. ¶ 118.

28
entity.”139 The Offer Letter expressly conditioned consummation of the Transaction

on “final approval by Earthstone’s Special Committee” and “formal approval of

Earthstone’s stockholders, including the holders of a majority of the common stock

held by persons other than EnCap Investments LP and its affiliates and associates,

and [sic] well as the Board of Managers of Bold and the LLC interest owners of Bold

(if required).”140

Lodzinski continued to serve as Earthstone’s lead negotiator following

delivery of the Offer Letter.141 On August 31, 2016, Castillo sent Bold’s

counterproposal to Lodzinski wherein Bold proposed that it would own 62.5% of

the combined entity.142

On September 1 and 6, 2016, the Special Committee met with RLF, Stephens

and members of management to consider Bold’s counterproposal.143 Meeting

minutes from September 6, 2016 reflect that Stephens advised, “based on the

139
Compl. ¶ 118. See also Proxy Statement at 50.
140
Offer Letter at 1.
141
Compl. ¶ 120.
142
Proxy Statement at 50. The Complaint erroneously identifies Bold’s counterproposal
as calling for Bold to own 65.5% of the combined entity. Compl. ¶ 120.
143
Compl. ¶ 121.

29
updated valuation, the Company should try to end up at approximately 40%.”144

“The members of the Committee then advised that they would like the ownership

split to be 40% or more for the Company,”145 “authorized Lodzinski to prepare a

draft response to Bold’s counteroffer and noted that such response should provide

for an ownership percentage of approximately 40% for the Company.”146

On September 8, 2016, Lodzinski submitted a counteroffer in writing to Castillo that

provided for Bold to receive 60% ownership (in the form of 34.593 million shares

of Earthstone common stock) in the combined company.147

In response, on September 9, 2016, Castillo reiterated his position that Bold

should have 62.5% ownership of the combined company.148 During a phone

conversation on September 12, 2016, Lodzinski advised Castillo that Earthstone

might be able to increase its offer from 34.593 million shares to 35.5 million shares

of Earthstone common stock, which would increase Bold’s projected ownership

interest in the combined entity to more than 61.5%.149 Castillo agreed to consider

Id.; Bennett Aff., Ex. F (“Special Committee Meeting Minutes (Sept. 6, 2016)”) at
144

ESTE000240.
145
Compl. ¶ 121; Special Committee Meeting Minutes (Sept. 6, 2016) at ESTE000240.
146
Special Committee Meeting Minutes (Sept. 6, 2016) at ESTE000241.
147
Compl. ¶ 121.
148
Compl. ¶ 123; Proxy Statement at 51.
149
Compl. ¶ 123.

30
that allocation and Lodzinski stated he would seek further direction from the Special

Committee.150

The Special Committee met again with RLF and Stephens on September 13,

2016.151 Joliat reported on his conversation with Lodzinski, noting that: “Company

management believed that, because the valuation is premised on a $10.50 stock price

and the Company’s stock is currently trading around $9, the Company could accept

a transaction that provides for slightly less than a 40% ownership interest for the

Company.”152 Notwithstanding management’s views, Stephens reiterated its advice

that “the Company should attempt to negotiate for a transaction that results in an

ownership percentage of at least 40% for the Company.” 153 Having said that,

Stephens emphasized that the ownership split

was not the only metric of fairness and that the appropriate ownership
split could change over time and will be a moving target until closing.
Because of that, [Mr. North (the Stephens advisor)] cannot advise on
Stephens’ ability to provide a fairness opinion because it will be based
on an analysis at the time the transaction closes and will be subject to
the decision of Stephens’ opinion committee. However, he noted that,

150
Id.
151
Compl. ¶ 124; Bennett Aff., Ex. G (“Special Committee Meeting Minutes (Sept. 13,
2016)”) at ESTE000246.
152
Compl. ¶ 124 (quoting ESTE000247); Special Committee Meeting Minutes (Sept. 13,
2016) at ESTE000247.
153
Compl. ¶ 125 (quoting ESTE000246); Special Committee Meeting Minutes (Sept. 13,
2016) at ESTE000246.

31
 at this time, he is comfortable with a fairness analysis with respect to
an ownership percentage for the Company at approximately 40%.154

Stephens refined that statement later in the meeting when it “noted that, while there

is [an] argument that the Company’s stock price is currently undervalued

(and therefore worth more than $9 per share), [Stephens] believes that [it] would be

able to provide a fairness opinion if the Company’s ownership percentage is slightly

below 40%.”155 Following further discussion, “the members of the Committee

agreed that Mr. Joliat should inform Mr. Lodzinski that the Committee would like

to keep the Company’s ownership percentage at approximately 40%.”156

On September 19, 2016, following an email exchange, Lodzinski and Castillo

agreed that each would present to the Special Committee and EnCap, respectively,

a transaction whereby Bold would receive 36.0 million shares of Earthstone common

stock, or 61% of the combined company.157 Lodzinski also agreed to seek authority

from the Special Committee to increase the offer to 36.5 million shares of Earthstone

154
Compl. ¶ 125; Special Committee Meeting Minutes (Sept. 13, 2016) at ESTE000246.
To be sure, Stephens remained consistent in its view that a contribution analysis was not
the best indicator of fairness and that “the key analysis with respect to this transaction is
the relative equity analysis,” which supported the Transaction as brokered. Compl. ¶ 158
(quoting ESTE000229); Stephens Presentation (Nov. 7, 2016) at ESTE000557.
155
Compl. ¶ 160; Special Committee Meeting Minutes (Sept. 13, 2016) at ESTE000247.
156
Compl. ¶ 125; Special Committee Meeting Minutes (Sept. 13, 2016) at ESTE000247.
157
Compl. ¶ 127; Proxy Statement at 51.

32
common stock, or 61.3% of the combined company, if necessary to reach a final

agreement.158

Lodzinski informed the Special Committee of his September 19 exchange

with Castillo on September 23, 2016.159 According to Plaintiff, Lodzinski “advised

that the negotiations are continuing but it appears that the parties have agreed on a

transaction involving the purchase of Bold for 36 million shares, which represents a

61% interest in the surviving entity for Bold.”160 Lodzinski “further advised that he

would like authority from the Committee to increase the purchase price to

36.5 million shares which represents a 61.3% interest in the surviving entity for Bold

to allow him to obtain some more favorable terms for the Company in the merger

agreement and in other related negotiations with Bold.”161 It is alleged that after a

discussion lasting only twenty-six minutes, the Special Committee authorized

Lodzinski to finalize negotiations with Bold for up to 36.5 million shares.162

158
Compl. ¶ 127; Proxy Statement at 51.
159
Compl. ¶ 128; Proxy Statement at 52.
160
Compl. ¶ 128 (quoting ESTE000262).
161
Id. (quoting ESTE000262).
162
Compl. ¶ 128.

33
 L. The Special Committee Recommends the Transaction

By November 7, 2016, Earthstone and Bold had reached an agreement

regarding the Transaction structure and, later that day, the Special Committee met

and voted to recommend the proposed Transaction, including the contribution

analysis and ancillary agreements.163 Lodzinski, Anderson and Singleton

participated in the first part of the meeting but then departed, leaving Joliat, Urban,

Stephens and RLF to consider whether to recommend the Transaction to the

Board.164 Stephens delivered its fairness opinion, which rested, in part, upon the

2019 projections even though it had earlier opined that a contribution analysis that

incorporated these projections “could provide less meaningful results.”165

The Transaction contemplated that Earthstone would conduct its business

through a newly-formed Delaware limited liability company and wholly-owned

subsidiary of Earthstone, Earthstone Energy Holdings, LLC (“EEH”), and that

Earthstone would be EEH’s sole managing member.166 The deal was structured as

an “Up-C” combination in which Earthstone and Bold (through Bold Holdings),

163
Compl. ¶¶ 131–32, 134; Proxy Statement at 53.
164
Compl. ¶ 132; Proxy Statement at 53.
165
Compl. ¶ 142 (citing ESTE000229).
166
Compl. ¶ 131.

34
each contributed their assets to EEH.167 Existing Earthstone stockholders and Bold

Holdings ultimately would own approximately 39% and 61% of the combined

company’s (Earthstone) Class A common stock, respectively.168

M. The Earthstone Board Approves and Announces the Transaction

The Board met and approved the Transaction on November 7, 2016, soon after

the Special Committee meeting adjourned.169 Earthstone and Bold announced the

Transaction the next day.170 The market’s reaction to the announcement was highly

favorable. Earthstone’s stock price rose 27% on the day of the announcement.171

Between November 7, 2016 and April 7, 2017, the stock price increased from $8.98

to $14.98 per share.172

167
Id.; Proxy Statement at 2, 53.
168
Compl. ¶ 131; Proxy Statement at 45.
169
Compl. ¶ 135.
170
Compl. ¶ 22.
171
Bennett Aff., Ex. I (Stock Price Chart) at 2. The Court may take judicial notice of
Earthstone’s stock price. Gen. Motors (Hughes) S’holder Litig., 897 A.2d at 169
(“The trial court may also take judicial notice of matters that are not subject to reasonable
dispute.”).
172
Compl. ¶ 143.

35
 N. Earthstone’s Disinterested Stockholders Approve the Transaction

On May 9, 2017, Earthstone’s disinterested stockholders voted to approve the

Transaction.173 Of Earthstone’s outstanding shares of common stock as of the record

date, 83.6% of those shares participated in the vote.174 Of the voted shares not held

by Oak Valley or the Company’s executive officers, 99.7% voted in favor of the

Transaction.175

In its explanation of the Board’s reasons for recommending the Transaction,

the Proxy Statement disclosed “Bold has a valuable and highly prospective asset

base,” including acreage in an area currently “of intense industry interest.”176 The

Board also opined that the Transaction “will result in significantly enhancing

[Earthstone’s] financial position, production, Midland Basin acreage position and

drilling locations” and will “provide long-term strategic benefit to [Earthstone]

stockholders by creating an oil and natural gas company with more diversified

reserves and increased scope and scale of economies.”177

173
Earthstone Energy, Inc., Current Report (Form 8-K) (May 15, 2017) at Item 5.07.
174
Id.
175
Id. The Court may take judicial notice of a stockholder vote approving a transaction
where there exists no reasonable dispute as to whether stockholder approval occurred.
General Motors (Hughes) S’holder Litig., 897 A.2d at 170–71.
176
Proxy Statement at 54.
177
Proxy Statement at 54–55.

36
 O. Procedural Posture

Plaintiff filed his first complaint on June 2, 2017. In response to motions to

dismiss, Plaintiff amended his complaint on August 13, 2017, with the now-

operative Complaint.178 Defendants renewed their motions to dismiss on

November 8, 2017.179

The Complaint sets forth five direct and derivative claims: Counts I through

III assert breach of fiduciary duty claims against the Director Defendants, Lodzinski

and Singleton as officers of Earthstone, and EnCap and Oak Valley as Earthstone’s

controlling stockholders.180 Count IV alleges Bold aided and abetted EnCap, Oak

Valley and the Director Defendants’ breaches of fiduciary duty.181 And Count V

alleges EnCap and Oak Valley aided and abetted the Director Defendants’ breaches

of fiduciary duty.182

Plaintiff’s core contention is that Lodzinski caused the Special Committee and

the Board to approve the Transaction for the benefit of himself, EnCap and Oak

Valley (to save their failing investment in Bold) and to the detriment of Earthstone

178
Dkts. 1, 17–21, 37.
179
Dkts. 40–47.
180
Compl. ¶¶ 189–203.
181
Compl. ¶¶ 204–08.
182
Compl. ¶¶ 209–13.

37
stockholders. In doing so, Lodzinski, Singleton and the Director Defendants

breached their fiduciary duties as officers and directors of Earthstone, and EnCap

and Oak Valley breached their fiduciary duties as Earthstone’s controlling

stockholder. Bold, EnCap and Oak Valley (if not Earthstone’s controlling

stockholders) are alleged to have aided and abetted the fiduciary breaches.

The motions to dismiss invoke both Court of Chancery Rules 12(b)(6) and

23.1. For reasons explained below, I am satisfied that the standard of review

applicable to Plaintiff’s fiduciary duty claims is the business judgment rule and that

Plaintiff has not pled facts that overcome the presumptions of reasonable and

informed decision-making that are features of that standard. Because I have

concluded that the Complaint fails to state viable claims, I need not reach

Defendants’ argument that Plaintiff has failed adequately to plead demand futility.

II. LEGAL ANALYSIS

Under Court of Chancery Rule 12(b)(6), a complaint must be dismissed if the

Plaintiff would be unable to recover under “any reasonably conceivable set of

circumstances susceptible of proof” based on the facts pled in the complaint.183 In

considering a motion to dismiss, the Court must accept as true all well-pled

allegations in the complaint and draw all reasonable inferences from those facts in

183
Gen. Motors (Hughes) S’holder Litig., 897 A.2d at 168 (citing Savor, Inc. v. FMR
Corp., 812 A.2d 894, 896–97 (Del. 2002)).

38
Plaintiff’s favor.184 The Court need not accept, however, conclusory allegations that

lack factual support or “accept every strained interpretation of the allegations

proposed by the plaintiff.”185

A. The Standard of Review

The battle lines drawn by the parties mark familiar territory. According to

Plaintiff, the Transaction involves a controlling stockholder (Oak Valley and, by

extension, EnCap) who stood on both sides of the deal. Thus, the Individual

Defendants’ fiduciary breaches cannot be “cleansed” by an informed, uncoerced

vote of the Earthstone stockholders approving the Transaction.186 In other words, as

Plaintiff sees the case, because the Transaction involved a conflicted controlling

stockholder, Corwin does not apply.187 As a fall back, Plaintiff maintains that, even

if implicated, Corwin does not apply because the Earthstone stockholder vote was

uninformed as a consequence of material omissions in the Proxy Statement.

184
Id.
185
Id.
186
See Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 309 (Del. 2015) (holding that the
business judgment rule applies to “cleanse” alleged breaches of fiduciary duty when
disinterested stockholders have approved the challenged transaction by an informed,
uncoerced vote).
187
See Pl.’s Omnibus Answering Br. in Opp’n to Defs.’ Mot. to Dismiss (“Answering Br.”)
4–5. See also In re Solera Hldgs., Inc. S’holder Litig., 2017 WL 57839, at *6 n.28 (Del. Ch.
Jan. 5, 2017) (holding that “the only transactions that are subject to entire fairness that
cannot be cleansed by proper stockholder approval are those involving a controlling
stockholder”) (citing Larkin v. Shah, 2016 WL 4485447, at *10 (Del. Ch. Aug. 25, 2016)).

39
 Defendants forcefully dispute the fundamental premise of Plaintiff’s

argument. According to Defendants, with only a 41.1% ownership stake, Oak

Valley is far from Earthstone’s controlling stockholder. Corwin, therefore, provides

the relevant analytical paradigm and sets the standard of review as the business

judgment rule. For their fall back, Defendants argue that even if the Court deems

Oak Valley to be a controlling stockholder, the business judgment rule still applies

because the Transaction was structured so that it would comply with the six

conditions set forth in Kahn v. M & F Worldwide Corp. (“MFW”).188 Plaintiff, of

course, counters that MFW has no application here because the Special Committee

was neither well-functioning nor independent, the vote of the minority stockholders

was not informed and none of the protective deal conditions was imposed ab initio

as required.189 Accordingly, Plaintiff asserts that regardless of whether one views

the Transaction through a Corwin or MFW lens, the image is the same—entire

fairness review.190

188
MFW, 88 A.3d at 639 (setting forth six factors that would justify business judgment
review of a controlling stockholder transaction, including ab initio conditions that the
transaction be negotiated and approved by a well-functioning special committee of
independent directors and then approved again by an informed, uncoerced vote of a
majority of the minority stockholders).
189
Answering Br. 4.
190
Id. 3.

40
 The parties to the Transaction evidently anticipated that a dissatisfied

stockholder might challenge the Transaction post-closing and, thus, structured the

Transaction with the MFW framework in mind.191 “[T]he MFW standard was born

with the goal of establishing a technique, a practice, a structure, where, at the

pleading stage, defendants could show that they were not subject to a breach of

fiduciary duty challenge.”192 Because I am satisfied that Earthstone’s decision to

employ the MFW framework was well-executed by all concerned, I need not decide

whether vel non Oak Valley was Earthstone’s controlling stockholder because, even

if it was, business judgment deference is the appropriate standard by which to

evaluate the Transaction, even at the pleadings stage.193

191
This, of course, is the cynical explanation. The other quite plausible explanation is that
the Board, with the guidance of competent counsel, elected to practice good corporate
governance.
192
Swomley v. Schlecht, C.A. No. 9355–VCL, at 67 (Del. Ch. Aug. 27, 2014)
(TRANSCRIPT), aff’d, 128 A.3d 992 (Del. 2015) (TABLE). See also IRA Tr. FBO Bobbie
Ahmed v. Crane, 2017 WL 7053964, at *21 (Del. Ch. Dec. 11, 2017) (applying business
judgment review at the pleadings stage to grant a motion to dismiss where plaintiff “failed
to plead facts sufficient to call into question satisfaction of any of the six elements set forth
in the MFW framework”); In re Synutra Int’l, Inc., 2018 WL 705702 (Del. Ch. Feb. 2,
2018) (ORDER) (same); In re Books-A-Million, 2016 WL 5874974 (Del. Ch. Oct. 10,
2016) (same), aff’d, 164 A.3d 56 (Del. 2017); Swomley, C.A. No. 9355–VCL (same).
193
IRA Tr. FBO Bobbie Ahmed, 2017 WL 7053964, at *10 (observing that the
MFW framework applies beyond the controller squeeze-out transactional context to any
form of conflicted controller transaction) (citation omitted).

41
 The six elements set forth in MFW that must be satisfied to earn business

judgment review are:

(i) the controller must condition the procession of the transaction ab
initio on the approval of both a special committee and a majority of
the minority stockholders;

(ii) the special committee must be independent;

(iii) the special committee must be empowered to freely select its own
advisors and to say no definitively;

(iv) the special committee must meet its duty of care in negotiating a fair
price;

(v) the vote of the minority must be informed; and

(vi) there can be no coercion of the minority.194

As best I can discern, Plaintiff offers four reasons why the Transaction failed to meet

the MFW elements: (1) the ab initio requirement was not satisfied because deal

negotiations had commenced prior to the announcement of the Special Committee

and majority of the minority vote conditions; (2) the Special Committee was not

independent because its members had ties to Oak Valley, EnCap and Lodzinski;

(3) the Special Committee did not act with due care because it allowed Lodzinski to

control all aspects of the negotiation and review process without supervision prior

to bringing the deal to the Board for approval; and (4) the minority stockholder vote

194
MFW, 88 A.3d at 645.

42
was not fully informed because there were material deficiencies in the Proxy

Statement. I address each argument in turn.

B. The Ab Initio Condition Was Satisfied

When a proposed transaction is conditioned on approval of both a special

committee of independent directors and an informed majority of the disinterested

stockholders, this deal structure “replicates the arm’s-length merger steps of the

DGCL by ‘requir[ing] two independent approvals, which it is fair to say serve

independent integrity-enforcing functions.’”195 In order truly to mimic arms-length

dealing, and to neutralize the controller’s influence, these two conditions must be in

place “ab initio,”196 meaning the conditions must be announced “before any

negotiations [take] place.”197 And, for purposes of the MFW analysis, in most

instances, “negotiations” begin when a proposal is made by one party which, if

accepted by the counter-party, would constitute an agreement between the parties

regarding the contemplated transaction.198 “Using this point in time fulfills the goals

195
Id. at 643 (citing In re MFW S’holders Litig., 67 A.3d 496, 528 (Del. Ch. 2013), aff’d
sub nom. MFW, 88 A.3d 635).
196
MFW S’holders Litig., 67 A.3d at 528.
197
Synutra Int’l, 2018 WL 705702, at *2 (citing Swomley, 2014 WL 4470947, at *21).
198
See Synutra Int’l, 2018 WL 705702, at *2–3 (analyzing the initial offer letter and follow
up offer letter for purposes of the ab initio inquiry); Books-A-Million, 2016 WL 5874974,
at *8 (finding the offer letter conditioning the transaction on special committee approval
and informed vote of the majority of the minority satisfied the ab initio requirement).
43
of disabling the controller for purposes of the negotiations and ensuring that the

controller ‘cannot dangle a majority-of-the-minority vote before the special

committee late in the process as a deal-closer rather than having to make a price

move.’”199

Here, the Offer Letter, sent on August 19, 2016, was the very first proposal

that Earthstone directed to Bold.200 The Offer Letter announced and made clear from

See also id. (observing that the offer letter was a distinct proposal and that “it generated a
separate process”).
199
Synutra Int’l, 2018 WL 705702, at *2 (citing MFW, 88 A.3d at 644). Plaintiff’s concern
that a controller could negotiate the material terms of a transaction before submitting a
formal offer, and then claim ab initio status by sweeping those terms, along with the MFW
conditions, into its first (and final) formal proposal, might well be justified on a different
record. But that is not what happened here. As explained below, the Special Committee
met several times to formulate its proposal before the Offer Letter was submitted. After
the Offer Letter was delivered, in which the Special Committee clearly announced the
MFW conditions, the Special Committee and Bold engaged in substantial negotiations
before reaching a final agreement. Proxy Statement at 50–54.
200
Plaintiff’s argument that the Court cannot rely on the Offer Letter without converting
this motion to dismiss into a motion for summary judgment is without merit. Answering
Br. 4 n.2. It is unfortunate that the Offer Letter was not included with the Section 220
Documents. Nevertheless, there is no doubt the Offer Letter is integral to the Complaint;
indeed, the pleading expressly relies upon the Offer Letter (albeit selectively) at paragraph
118. Compl. ¶ 118. In this regard, Plaintiff asserts paragraph 118 “is a reference to the
Proxy, which merely states that a letter was sent on August 19.” Answering Br. 20. This
argument falls short, however, because paragraph 118 does not reference the Proxy
Statement directly (or quote it) nor does it allege only that a letter was sent on August 19.
Because I am satisfied that the Offer Letter is integral to the Complaint and paragraph 118
only selectively describes the Offer Letter, the Court may consider it to decide this motion
to dismiss. See Wal-Mart Stores, Inc., 860 A.2d at 320 (noting that on a motion to dismiss,
the Court may consider documents that are “integral” to the complaint); Reiter v. Fairbank,
2016 WL 6081823, at *5 (Del. Ch. Oct. 18, 2016) (“[W]here a complaint quotes or
characterizes some parts of a document but omits other parts of the same document, the
44
the outset—at the start of negotiations on the proposal—that any transaction between

Earthstone and Bold would be conditioned on “final approval by Earthstone’s

Special Committee” and “formal approval of Earthstone’s stockholders, including

the holders of a majority of the common stock held by persons other than EnCap

Investments LP and its affiliates and associates, and [sic] well as the Board of

Managers of Bold and the LLC interest owners of Bold (if required).”201 By

conditioning the first offer in this manner, the Special Committee made clear to Bold

and EnCap that the “procession of the transaction” would be subject to these

terms.202 That is precisely what MFW requires.203

Plaintiff argues that this construction of the time at which “negotiations” begin

for MFW purposes ignores the substantial preliminary discussions that Lodzinski

had with EnCap and Bold prior to the Offer Letter, and the opportunities afforded to

the controller during those discussions to influence the outcome. 204 This argument,

however, ignores the important distinction between “discussions” about the

Court may apply the incorporation-by-reference doctrine to guard against the cherry-
picking of words in the document out of context.”).
201
Offer Letter at 1.
202
MFW, 88 A.3d at 645.
203
Id.
204
Answering Br. 43–46.

45
possibility of a deal and “negotiations” of a proposed transaction after the

“discussions” lead to a definitive proposal. As our Supreme Court has recognized:

No dictionary references are needed to know that to “negotiate” means
to bargain toward a desired contractual end, whereas to “discuss” means
merely to exchange thoughts and points of views on matters of mutual
interest, with no bargaining overtones necessarily involved.205

Lodzinski’s discussions with EnCap and Bold, while extensive, never rose to the

level of bargaining; they were entirely exploratory in nature. The Offer Letter

marked the first real move in the negotiating bout.206 It was followed by more than

two months of negotiations between the Special Committee and Bold that included

several attacks, parries and remises before a final deal was struck. 207 Given this

history, the Offer Letter marked the appropriate time at which to announce the MFW

ab initio conditions.

205
Colonial Sch. Bd. v. Colonial Affiliate, NCCEA/DSEA/NEA, 449 A.2d 243, 247
(Del. 1982).
206
Plaintiff’s concern that a controller could negotiate the material terms of a transaction
before submitting a formal offer, and then claim ab initio status by sweeping those terms,
along with the MFW conditions, into its first (and final) formal proposal, might well be
justified on a different record. But that is not what happened here. The Special Committee
met several times to formulate its proposal before the Offer Letter was submitted. After
the Offer Letter was delivered, in which the Special Committee clearly announced the
MFW conditions, the Special Committee and Bold engaged in substantial negotiations
before reaching a final agreement. Proxy Statement at 50–54.
207
Compl. ¶¶ 120–21.

46
 C. The Special Committee Was Well-Functioning

The second, third and fourth MFW conditions, in essence, require that a

special committee function well in order to justify business judgment deference.208

Stated differently, “the special committee must function in a manner which indicates

that the controlling stockholder did not dictate the terms of the transaction and that

the committee exercised real bargaining power at an arms-length.”209 The telltale

signs of a well-functioning special committee—independence, full and unfettered

negotiating authority and careful deliberation—are all present here.

1. The Special Committee Was Independent

“To establish lack of independence, [Plaintiff] must show that the directors

are beholden to [EnCap or Oak Valley] or so under their influence that their

discretion would be sterilized.”210 Moreover, “[a] plaintiff seeking to show that a

director was not independent must satisfy a materiality standard. The court must

conclude that the director in question had ties to the person whose proposal or actions

he or she is evaluating that are sufficiently substantial that he or she could not

objectively discharge his or her fiduciary duties.”211 “In other words, [plaintiff must

208
MFW, 88 A.3d at 645.
209
Id. at 646 (internal quotations omitted).
210
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993) (internal quotations omitted).
211
MFW, 88 A.3d at 649.

47
abide by] a key teaching of our Supreme Court, requiring a showing that a specific

director’s independence is compromised by factors material to her.”212

Plaintiff’s showcase arguments regarding Urban and Joliat’s compromised

independence are: (1) EnCap appointed Urban and Joliat to their Earthstone board

seats213; (2) both directors “own interests in Oak Valley,” “which pre-date their

Earthstone directorships”214; and (3) Urban is CEO of Vlasic Group, which has

invested in Lodzinski-led companies.215 None of these facts disabled either Urban

or Joliat from proper service on (or to) the Special Committee.

First, “a director’s nomination or election [to the board] by an interested

party,” standing alone, does not support a reasonable inference that the director lacks

independence.216 In Ezcorp, this court observed:

[I]t is not enough to charge that a director was nominated by or elected
at the behest of those controlling the outcome of a corporate election.
That is the usual way a person becomes a corporate director. It is the
care, attention and sense of individual responsibility to the performance

212
Id. at 650.
213
Compl. ¶ 96; Answering Br. 48.
214
Compl. ¶¶ 96, 98; Answering Br. 48.
215
Compl. ¶ 97; Answering Br. 49.
216
In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *40 (Del.
Ch. Jan. 25, 2016) (decided in the demand futility context).

48
 of one’s duties, not the method of election, that generally touches on
independence.217

Here, Plaintiff’s allegation that EnCap appointed Urban and Joliat to the Earthstone

board is insufficient to impeach their independence.

Second, Plaintiff’s allegations regarding Urban and Joliat’s “interests in Oak

Valley” are likewise insufficient to allow a reasonable inference that both directors

cannot act independently of Oak Valley as fiduciaries of Earthstone. Allegations of

financial ties between the interested party and the director, without more, are not

disqualifying.218 Rather, Plaintiff must “compare the actual economic circumstances

of the directors they challenge to the ties the plaintiff contends affect their

impartiality.”219 The Complaint, however, does nothing more than baldly allege that

Urban and Joliat’s non-controlling membership interests in Oak Valley “fostered a

long-running relationship with Lodzinski [] and EnCap,” and therefore, Urban and

Joliat’s economic interests in Oak Valley depend on the leadership and financial

backing of Lodzinski and EnCap.220 Of course, the Complaint does not even attempt

to allege the materiality to Urban and Joliat of their Oak Valley membership interests

217
Ezcorp, 2016 WL 301245, at *40 (citing Aronson v. Lewis, 473 A.2d 805, 816
(Del. 1984)), overruled on other grounds, Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
218
MFW, 88 A.3d at 650.
219
Id.
220
Compl. ¶ 96.

49
(or their Earthstone board seats).221 That missing link separates the “financial ties”

allegations from well-pled bases to infer compromised independence.

Third, Plaintiff’s contention that Urban lacks independence “due to his role as

CEO of Vlasic Group, which has invested in five different Lodzinski-led companies

since 1988” misses the mark for the same reason that his other attacks on Urban’s

independence fail—the allegation, even if true, is not compromising.222 According

to Plaintiff, Urban’s ties to Vlasic Group, which has ties (however attenuated) to

Lodzinski, makes it “reasonably conceivable that Urban wishes to maintain a good

relationship with Lodzinski and therefore lacks independence.”223 Allegations that

directors “moved in the same social circles,” “developed business relationships

before joining the board” or described each other as “friends,” are insufficient,

without more, to rebut the presumption of independence.224 Indeed,

[a] lack of independence does not turn on whether the interested party
can directly fire a director from his day job. It turns on, at the pleadings
stage, whether the plaintiff[] [has] pled facts from which the director’s

221
Even if the Complaint alleged Urban and Joliat were motivated to preserve their
compensation as Earthstone directors (which it does not), ordinary director compensation,
“standing alone, cannot be the basis for asserting a lack of independence.” Synutra Int’l,
2018 WL 705702, at *4 (citing Robotti & Co., LLC v. Liddtell, 2010 WL 157474, at *14
(Del. Ch. Jan. 14, 2010)).
222
Compl. ¶ 97; Answering Br. 49.
223
Compl. ¶ 97; Answering Br. 49.
224
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051
(Del. 2004); MFW, 88 A.3d at 649.

50
 ability to act impartially on a matter important to the interested party
can be doubted because that director may feel either subject to the
interested party’s dominion or beholden to that interested party.225

Here, there are no well-pled facts that allow an inference that Urban might feel

subject to Lodzinski’s domination (if any) because Vlasic Group made investments

(of unspecified size), spanning nearly three decades, in five Lodzinski-led entities.

Plaintiff has not well-pled that the Special Committee members lacked

independence.

2. The Special Committee Was Empowered

MFW instructs that a special committee is empowered if it can “freely select

its own advisors and [can] say no definitively.”226 Plaintiff does not meaningfully

argue that the Special Committee’s mandate did not meet this test, and for good

reason. The Board resolution creating the Special Committee expressly empowered

the committee to hire its own legal and financial advisors, which is precisely what

the Special Committee did after interviewing numerous potential candidates for the

positions. The mandate also expressly empowered the Special Committee to

“[r]eject the potential transaction, cease further negotiations and ‘walk-away.’”227

225
Ezcorp, 2016 WL 301245, at *36 (citing Delaware Cnty. Emp. Ret. Fund v. Sanchez,
124 A.3d 1017, 1023 n.25 (Del. 2015)).
226
MFW, 88 A.3d at 645.
227
Proxy Statement at 49.

51
Plaintiff has not well-pled that the Special Committee lacked the authority to

negotiate the Transaction.

3. The Special Committee Acted with Due Care

MFW requires that “[t]he Special Committee meet[] its duty of care in

negotiating a fair price.”228 “Due care in the decision making context is process due

care only.”229 “For purposes of applying the [MFW] framework on a motion to

dismiss, the standard of review for measuring compliance with the duty of care is

whether the complaint has alleged facts supporting a reasonably conceivable

inference that the directors were grossly negligent.”230 “In the civil context, the

Delaware Supreme Court has defined gross negligence as ‘a higher level of

negligence representing an extreme departure from the ordinary standard of

care.’”231 “It refers to a decision ‘so grossly off-the-mark as to amount to reckless

indifference or a gross abuse of discretion.’”232

228
MFW, 88 A.3d at 645.
229
Synutra Int’l, 2018 WL 705702, at *4 (emphasis in original) (citing Brehm, 746 A.2d at
264). “Process due care” means that directors must “inform themselves, prior to making a
business decision, of all material information reasonably available to them.” Aronson, 473
A.2d at 812. See also Synutra Int’l, 2018 WL 705702, at *4.
230
Books-A-Million, 2016 WL 5874974, at *17.
231
Synutra Int’l, 2018 WL 705702, at *5 (citing Browne v. Robb, 583 A.2d 949, 953
(Del. 1999)).
232
Synutra Int’l, 2018 WL 705702, at *5 (citing Solash v. Telex Corp., 1988 WL 3587,
at *9 (Del. Ch. Jan. 19, 1988)).

52
 “[G]ross negligence is a very tough standard to satisfy.” 233 For example,

“[r]aising questions such as ‘whether the special committee could have extracted

another higher bid’ or ‘whether the special committee was too conservative in

valuing [the company’s] future prospects’ does not plead a violation of the duty of

care.”234 Likewise, allegations that the Special Committee could have approached

the negotiations differently implicate matters of strategy and tactics, not a duty of

care violation.235 Simply stated, “[a] committee [will] satisfy its duty of care by

negotiating diligently with the assistance of advisors.”236 That is the only reasonable

inference of what happened here.

Plaintiff maintains that the Special Committee failed to act with due care in

three respects: “the Special Committee failed to exercise real bargaining power,

permitted the Transaction process to be dominated by conflicted Earthstone

management and EnCap, and capitulated to the terms of the Transaction that

Lodzinski and EnCap favored and had been negotiating for months.”237 These

233
Swomley, C.A. No. 9355–VCL, at 73.
234
Synutra Int’l, 2018 WL 705702, at *5 (citing MFW, 67 A.3d at 516).
235
Swomley, C.A. No. 9355–VCL, at 73–74 (“Somebody could have negotiated that
differently, but that seems to me to be a matter of strategy and tactics that’s debatable and
isn’t a duty of care violation.”).
236
Books-A-Million, 2016 WL 5874974, at *18 (citing MFW S’holders Litig., 67 A.3d
at 514–16).
237
Compl. ¶ 13.

53
allegations, when measured against the backdrop of the properly considered record

and the high legal threshold Plaintiff must clear, fail to state a viable gross negligence

claim.

The MFW special committee met eight times.238 The Swomley special

committee met twenty times over eight months.239 During a period of four months

between its formation in July and the inking of the Transaction in November, the

Earthstone Special Committee met sixteen times. At these meetings, the Special

Committee actively engaged with its indisputably independent legal and financial

advisors and considered their advice. Stephens prepared a preliminary financial

analysis in August 2016, which the Special Committee evaluated.240 That

preliminary financial analysis advised the Special Committee that (1) “the

contribution analysis does not support the currently proposed split between the

Company and Bold”241; “the biggest difference in the Company’s valuation as

compared to the Bold valuation relates to the fact that the Company is at a more

238
MFW, 88 A.3d at 651.
239
Swomley, C.A. No. 9355–VCL, at 19.
240
Compl. ¶ 112.
241
Compl. ¶ 139 (quoting ESTE000228–29).

54
mature stage in its development than Bold”242; and that “the valuation of the

Company shows that the Company may be slightly undervalued.” 243

Stephens advised that if it “went out further than 2018 in the analysis, the

contributions from Bold are expected to be significant and would change the

analysis.”244 This view made sense given that Earthstone was mature and fully

functioning while Bold had not yet exploited its vast oil and gas properties in the

Greater Permian Basin, including sought-after acreage in the Midland Basin.245

Indeed, the real benefit of the Transaction to Earthstone—the deal thesis from the

outset of the process—was that Bold had untapped resources to which Earthstone

could deploy its upstream development capabilities.246

A few days after presenting its preliminary analysis to the Special Committee,

Stephens updated the analysis to include recent transactions in the industry that were

discussed at a previous Special Committee meeting. Stephens then advised the

Special Committee that the key to “ensur[ing] that the Company is getting a good

242
Compl. ¶ 144 (quoting ESTE000228).
243
Id. (quoting ESTE000228).
244
Compl. ¶ 139 (quoting ESTE000229).
245
Proxy Statement at 22 (comparing estimates of developed and undeveloped reserves for
each of Earthstone and Bold’s oil, natural gas and natural gas liquids reserves).

Id.; Compl. ¶ 18 (“Bold, meanwhile, will receive the capital it needs to fund ongoing
246

operations and use Earthstone’s established cash flows to grow its undeveloped
assets . . .”).

55
price . . . is the number of shares that the Company issues in the transaction.” 247

With that insight, the Special Committee instructed Stephens to conduct its analysis

without a 10% discount to Earthstone’s stock price that was embedded in the

management projections upon which Stephens’ preliminary analysis relied.248 The

Special Committee also specified that Stephens should use “a 30 day volume

weighted average price of $10.35” in its analysis.249 The Offer Letter ultimately

reflected these elements and other aspects of the Special Committee’s work with

Stephens to reach an appropriate valuation.

As noted, following the Offer Letter, the Special Committee, with the

guidance of its advisors, engaged in several rounds of negotiations with Bold.250

When a potential final agreement was in sight, Lodzinski was dispatched to broker

final terms with Castillo, and then to bring those terms back to the Special

Committee for approval. That is precisely what he did.251

247
Special Committee Meeting Minutes (Aug. 19, 2016) at ESTE000234.
248
Id.
249
Compl. ¶ 114 (quoting ESTE000229); Special Committee Meeting Minutes (Aug. 19,
2016) at ESTE000234.
250
Compl. ¶¶ 120–21.
251
Compl. ¶ 127; Proxy Statement at 51.

56
 Contrary to Plaintiff’s assertions, the Special Committee did not rubber-stamp

a fully-baked deal that Lodzinski had negotiated.252 While Lodzinski did engage

directly with Bold and EnCap, it can hardly be viewed as remarkable that a chairman

and CEO with Lodzinski’s proven track record and expertise in the oil and gas

industry would have exploratory discussions with a potential merger partner before

the formation of the Special Committee and then spearhead negotiations of the

merger on behalf of the Special Committee after it was formed.253 Indeed, in contrast

to Plaintiff’s fully-baked theory, Earthstone management’s preliminary presentation

to Bold “indicated an equity valuation for Bold (after factoring in all of Bold’s

252
Compl. ¶ 102.
253
See In re NYMEX S’holder Litig., 2009 WL 3206051, at *7 (Del. Ch. Sept. 30, 2009)
(“It is well within the business judgment of the Board to determine how merger
negotiations will be conducted, and to delegate the task of negotiating to the Chairman and
the Chief Executive Officer.”); In re OPENLANE, Inc. S’holders Litig., 2011 WL 4599662,
at *5 (Del. Ch. Sept. 30, 2011) (“Even if [the CEO] were conflicted, his efforts in
negotiating the Merger Agreement and dealing with other potential acquirers do not taint
the process. The Board was aware of [the CEO’s alleged conflict and involvement] and
was fully committed to the process.”); In re Plains Expl. & Prod. Co. S’holder Litig., 2013
WL 1909124, at *5 (Del. Ch. May 9, 2013) (rejecting claim that purportedly conflicted
CEO’s involvement as the point person for negotiations tainted the process because “the
Board properly managed the conflict by overseeing the negotiations.”); In re Netsmart, 924
A.2d 171, 189 (Del. Ch. Mar. 14, 2007) (declining to find a tainted sales process where
company management and its financial advisor conducted due diligence and signed a
confidentiality agreement with a potential target “without the Special Committee’s
involvement” and before the special committee was formed).

57
assets) of approximately $335 million”254 while the Offer Letter, authorized by the

Special Committee, bid only $325 million.255

With all of that said, the Special Committee’s effectiveness is perhaps best

illustrated by the fact that, on August 19, 2016, Stephens’ updated analysis showed

“the ownership interest of the Company in the resulting entity came out to around

38%–39%,” yet the Offer Letter sent out that same day pinned Earthstone’s

ownership interest in the combined entity at 45%.256 That Plaintiff believes the

Special Committee “could have extracted [a] higher [ownership interest in the

combined entity],” or “the special committee was too conservative in valuing [the

company’s] future prospects, does not plead a violation of the duty of care.”257 This

point is made especially poignant by the undisputed fact that Earthstone’s ownership

interest in the combined entity was only 1% shy of the 40% target set by Stephens

in its analysis.258 This likely explains why Stephens did not hesitate to provide a

254
Compl. ¶¶ 86–88.
255
Compl. ¶¶ 112–13, 118.
256
Compl. ¶ 118; Proxy Statement at 50.
257
Synutra Int’l, 2018 WL 705702, at *5 (third alteration in original) (internal quotations
omitted) (citing MFW, 67 A.3d at 516). See also In re MFW S’holders Litig., 67 A.3d
at 516 (noting that criticisms of the special committee’s negotiating tactics and results
packaged as due care claims were “the sorts of questions that can be asked about any
business negotiation, and that are, of course, the core of an appraisal proceeding”).
258
See Compl. ¶¶ 14, 133. See also Books-A-Million, 2016 WL 5874974, at *16 (finding
that the “difference [between two offers] is not so facially large as to suggest that the
58
fairness opinion when the Special Committee had negotiated the final terms of the

deal.259

Plaintiff has not well-pled that the Special Committee failed to meet its duty

of care in negotiating a fair price.260

Committee was attempting to facilitate a sweetheart deal for [the controlling
stockholder]”).
259
See Compl. ¶ 133. When viewing the bona fides of Stephens’ fairness opinion, one
cannot help but be struck by what is missing in the Complaint – there are no allegations of
banker conflicts, no allegations of misaligned incentives, either in Stephens’ fee structure
or otherwise, and no allegations of a lack of diligence or commitment to the engagement.
Rather, it appears that Plaintiff simply does not like, or agree with, what Stephens had to
say about the Transaction. That is not firm ground upon which to attack the opinion or the
Special Committee’s reliance upon it. See Selectica, Inc. v. Versata Enters., Inc., 2010
WL 703062, at *17 (Del. Ch. Feb. 26, 2010), aff’d, 5 A.3d 586 (Del. 2010) (“[U]nder
[8 Del. C.] § 141(e), where a board has relied on an expert’s advice in making a decision,
a due care claim challenging that decision must establish such facts as would make reliance
on the expert opinion unreasonable.”).
260
Plaintiff’s reliance on In re Jefferies Gp., Inc. S’holders Litig., C.A. 8059-CS (Del. Ch.
Nov. 4, 2013) (TRANSCRIPT) for the proposition that the Special Committee failed to
exercise supervision over conflicted directors and price negotiations is misplaced.
Answering Br. 53. In Jefferies, then-Chancellor Strine observed that the special committee
delayed meeting and hiring its financial advisor for a month after its formation. Jefferies,
C.A. 8059-CS, at 66. Moreover, the Jefferies special committee allowed conflicted
directors to conduct price negotiations, failed to monitor the negotiations and determined
the transaction exchange ratio in one meeting. Id. at 67–68, 71. Here, as stated, the Special
Committee acted swiftly, diligently monitored the negotiations and actively deliberated the
terms of the Transaction with the guidance of its independent advisors early on and
throughout the process.

59
 D. The Stockholder Vote Was Informed and Not Coerced

MFW requires that “the vote of the minority is informed” and that “there is no

coercion of the minority.”261 The Complaint does not allege coercion. It does allege,

however, that the minority stockholders cast uninformed votes.262

Our law requires full and fair disclosure of “all material information within

the board’s control when it seeks shareholder action.”263 Information is material if

“there [is] a substantial likelihood that the disclosure of the omitted fact would have

been viewed by the reasonable investor as having significantly altered the total mix

261
MFW, 88 A.3d at 645.
262
I note that Defendants urge the Court to hold that Plaintiff’s disclosure criticisms come
too late. Specifically, they point out, correctly, that Plaintiff received the Section 220
Documents before the stockholder vote, sat on that information and allowed the
Transaction to close without saying a word, and now raises the disclosure claims post-
closing in an attempt to undermine the Board’s proper adoption and implementation of the
MFW framework. I note as well that Defendants contend Plaintiff waived two of his four
disclosure claims, as pled in the Complaint, because he failed to address those two claims
in his Answering Brief. Joint Reply Br. in Supp. of Defs.’ Mots. to Dismiss the Am.
Compl. 25. Because I am satisfied that Plaintiff’s disclosure allegations fail on the merits,
I decline to reach Defendants’ estoppel, laches and waiver arguments knowing full well
that the arguments likely will surface again on similar facts, following a similar timeline,
in connection with a similar challenge of a different transaction.
263
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).

60
of information made available.”264 An omitted fact is not material, however, simply

because it “might be helpful.”265

Plaintiff alleges the Proxy Statement misled stockholders and undermined the

stockholders’ approval of the Transaction in four respects: (1) it failed to disclose

that the Special Committee directed Stephens to manipulate its contribution analysis;

(2) it failed to disclose that Stephens would not commit to provide a fairness opinion;

(3) it failed to disclose Lodzinski’s role in the negotiations; and (4) it failed to

disclose Bold’s poor cash position prior to the Transaction. For reasons I explain

below, none of these alleged disclosure violations state a claim or undermine

confidence in the bona fides of the stockholder vote.

1. Changes in Stephens’ Analysis

Plaintiff alleges the Proxy Statement failed to disclose that “Stephens’ initial

contribution analysis did not support a 60/40 Bold-Earthstone split [for the

outstanding equity] in the combined company, and that, consequently, the Special

Committee, with management’s assistance, had to manipulate Bold and Earthstone’s

264
Malpiede v. Townson, 780 A.2d 1075, 1086 (Del. 2001) (internal quotations and
alteration omitted). See also Morrision v. Berry, 2018 WL 3339992, at *9 (Del. July 9,
2018) (“An omitted fact is material if there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote.”) (citing Rosenblatt v.
Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)).
265
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000).

61
financial projections to make the consideration appear fair.”266 Specifically, Plaintiff

observes that the further out management took the projections, the more the

contribution percentage of the combined-entity favored Bold. This unremarkable

observation reflects the previously discussed growth dynamic at the heart of the deal

thesis; Bold is an early-stage company with much growth potential while Earthstone

is a mature company with most of its organic growth already behind it.

According to Plaintiff, although Stephens’ initial contribution analysis

utilized 2017 and 2018 data, the Special Committee directed Stephens to add the

Bold projections out to 2019 in order to lower the Earthstone stockholders’ justified

stake in the combined company. Plaintiff correctly characterizes the growth

dynamic but mischaracterizes the Proxy Statement’s treatment of that issue. Indeed,

far from “manipulation,” the change in Stephens’ analysis to which Plaintiff refers

(the addition of 2019 projections to Stephens’ preliminary analysis) can be clearly

discerned from Stephens’ final analysis as disclosed in the Proxy Statement.267 That

analysis does include 2019 projections, but the projections out to 2017 and 2018 are

also clearly stated as is Stephens’ contribution analysis methodology.268 From this,

Earthstone stockholders could see for themselves how the contribution analysis

266
Compl. ¶ 154.
267
Proxy Statement at 66.
268
Id.

62
changes based on the extent to which Bold’s expected future growth (and cash flows)

are considered in the calculation.

The Proxy Statement also made clear that, in Stephens’ opinion, the growth

dynamic between the two companies diminished the relevance of the contribution

analysis as an indicator of value.269 And it made clear that the value of the

Transaction from Earthstone’s perspective, among other synergies, was to add

Bold’s “valuable and highly prospective asset base” to Earthstone’s more mature,

already developed assets.270 The Board was not obliged to characterize the

progression of Stephens’ analysis in a particular manner, or to disclose all iterations

of Stephens’ work for the Special Committee.271 The Earthstone stockholders were

269
Id. (“Stephens noted that given the difference in the development stages of Earthstone
(mature) and Bold (early development), it did not regard the relative contribution metrics
as meaningful for purposes of its valuation analysis.”).
270
Proxy Statement at 54. The Proxy Statement provided other bases for the slight
difference between Stephens’ initial analysis and the final offer—Bold had acquired
additional acreage beyond what was initially valued, and that acreage was located in a
section of the Permian Basin that was “rapidly increasing in value[].” Proxy Statement
at 50–51.
271
See In re Gen. Motors (Hughes) S’holder Litig., 2005 WL 1089021, at *16 (Del. Ch.
May 4, 2005), aff’d, 897 A.2d 162 (Del. 2006) (“A disclosure that does not include all
financial data needed to make an independent determination of fair value is not, however,
per se misleading or omitting a material fact. The fact that the financial advisors may have
considered certain non-disclosed information does not alter this analysis.”); In re Pure Res.,
Inc. S’holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002) (holding that stockholders are
entitled to receive in the proxy statement “a fair summary of the substantive work
performed by the investment bankers upon whose advice the recommendations of their
board as to how to vote on a merger or tender rely”); Seibert v. Harper & Row, Publishers,
Inc., 1984 WL 21874, at *6 (Del. Ch. Dec. 5, 1984) (“Proxy materials are only required to
63
given all that was needed to follow Stephens’ analyses and ultimate opinions on

value and fairness.

2. Stephens’ “Refusal” to Commit to Provide a Fairness Opinion

Plaintiff next alleges that the Proxy Statement “omitted that Stephens told the

Special Committee [at a September 13, 2016 meeting] that it ‘cannot advise on

Stephens’ ability to provide a fairness opinion because it will be based on an analysis

at the time the transaction closes.’”272 Plaintiff argues that Stephens’ reluctance to

provide a fairness opinion was an acknowledgement that it was not comfortable with

the Special Committee’s push to get Stephens to separate from its initial contribution

analysis (where it did not support a 60/40 Bold-Earthstone ownership allocation).273

Plaintiff reads too much into Stephens’ unwillingness in September to commit to

provide a fairness opinion regarding a transaction that was months away from

fruition. Indeed, if Stephens had committed to provide a fairness opinion in

September before knowing the final terms of the Transaction, that actually would

have been a problematic development worthy of disclosure to stockholders. But that

is not what happened. Simply put, it is not reasonably conceivable that Earthstone

disclose all germane facts. They need not include opinions or possibilities, legal theories
or plaintiff’s characterization of the facts.”) (emphasis in original).
272
Compl. ¶ 157; Special Committee Meeting Minutes (Sept. 13, 2016) at ESTE0000246.
273
Compl. ¶ 158.

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stockholders would find it material that Stephens told the Special Committee that it

could not commit to provide a fairness opinion in the midst of negotiations, two

months before the Transaction terms were fixed.

3. Lodzinski’s Role in the Negotiations

The Complaint takes aim at the Proxy Statement’s “fail[ure] to disclose that

on September 13, 2016, the Special Committee ‘agreed that Mr. Lodzinski can speak

directly to the representatives of Stephens regarding the valuation.’”274 Even if true,

it is unclear how Plaintiff sees this undisclosed fact as altering the total mix of

information available to stockholders. The Complaint does not allege that Lodzinski

steered Stephens’ valuation. Nor does it plead facts from which one might

reasonably infer that the Special Committee’s authorization of Earthstone’s

chairman and CEO to speak directly to the Special Committee’s independent

financial advisor was somehow problematic, especially considering that both

Lodzinski and Stephens were in regular contact with, and reported directly to, the

Special Committee.

And this Special Committee was no door mat. It was actively engaged in the

process, called its own shots and interfaced directly with management and its legal

and financial advisors throughout the negotiations. That Lodzinski, Earthstone’s

274
Compl. ¶ 162 (quoting ESTE000247).

65
Chairman, President and CEO, who also happened to have extensive experience and

expertise in the oil and gas industry, was authorized to work directly with Stephens

is not surprising and certainly not a material fact.

4. Bold’s Liquidity Constraints

Last, but not least, Plaintiff alleges the Proxy Statement “omitted any

disclosure regarding the fact that ‘Bold [did] not have enough cash and drilling

capacity to continue to run’ and that, as of July 22, 2016, ‘EnCap ha[d] reached its

total capital commitment’ and was not looking to invest any more of its own capital

into Bold.”275 These allegations are flawed for two reasons.

First, the same Special Committee meeting minutes that Plaintiff cites to

support its allegations of a material omission state clearly, in the sentence directly

following the one Plaintiff quotes, that EnCap “will continue funding Bold.”276

From the Special Committee’s vantage point, EnCap was willing to continue funding

Bold even though it had “reached its total capital commitment.” To have disclosed

otherwise would have been misleading.

Second, the Proxy Statement includes pages of Bold’s financial disclosures

from which stockholders readily could assess for themselves Bold’s liquidity.277

275
Compl. ¶ 165 (alterations in Compl.) (quoting ESTE000075).
276
Special Committee Meeting Minutes (July 22, 2016) at ESTE000075.
277
See, e.g., Proxy Statement 19, 94–101, F-7–F-64.

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Here again, the Board was not obliged to characterize Bold’s cash position,

particularly when the facts were disclosed and neither the Special Committee nor the

Board actually concluded that Bold was distressed and needed to sell.278

*****

Plaintiff has not pled “a reasonably conceivable set of facts showing that any

or all of [the] enumerated [MFW] conditions did not exist [such] that [the] complaint

would state a claim for relief that would entitle the plaintiff to proceed and conduct

discovery.”279 The MFW protective conditions were imposed at the right time, the

Special Committee was properly authorized to negotiate from its inception and then

exercised due care in doing so to arrive at a fair price. The Proxy Statement

adequately apprised Earthstone stockholders of the material facts they needed to

know about the Transaction so they could cast informed votes. The business

judgment rule is, therefore, the operative standard of review.280

278
See Special Committee Meeting Minutes (July 22, 2016) at ESTE000075 (stating
Earthstone’s management advised the Special Committee “that, even though EnCap will
have finished making its capital commitment to Bold, it will continue funding Bold”).
279
MFW, 88 A.3d at 645.
280
Id. at 644 (stating that where, as here, “the controller irrevocably and publicly disables
itself from using its control to dictate the outcome of the negotiations and the shareholder
vote, the controlled merger then acquires the shareholder-protective characteristics of third-
party, arm’s-length mergers, which are reviewed under the business judgment standard”).

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 E. The Operation of the Business Judgment Rule

When the business judgment rule standard of review applies, “the claims

against the Defendants must be dismissed unless no rational person could have

believed that the merger was favorable to [the] minority stockholders.”281 Stated

differently, under the business judgment rule, “the court will defer to the judgments

made by the corporation’s fiduciaries unless the [Transaction] is so extreme as to

suggest waste.”282 This court has observed that “it [is] logically difficult to

conceptualize how a plaintiff can ultimately prove a waste or gift claim in the face

of a decision by fully informed, uncoerced, independent stockholders to ratify the

transaction.”283

Here, a financial advisor opined that the Transaction was fair and 99.7% of

disinterested stockholders who participated in the vote voiced their approval of the

Transaction.284 Moreover, the stockholder vote occurred against the backdrop of the

Board having fully explained the rationale for the Transaction in the Proxy

Statement. The rationale reflected the reality of the key driver of the Transaction as

viewed by Earthstone’s management and Special Committee: it made good sense to

281
Id. at 654.
282
Books-A-Million, Inc., 2016 WL 5874974, at *1.
283
Harbor Fin. P’rs v. Huizenga, 751 A.2d 879, 901 (Del. Ch. 1999).
284
Earthstone Energy, Inc., Current Report (Form 8-K) (May 15, 2017) at Item 5.07.

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combine Bold’s rich but undeveloped resources with Earthstone’s more mature asset

portfolio. This was particularly so given that Earthstone had publically disclosed

that its business model for growth was to be “active in corporate mergers and the

acquisition of oil and natural gas properties that have production and future

development opportunities.”285 That Bold’s assets consisted principally of acreage

where there was “intense industry interest,” and overlapped substantially with

Earthstone’s existing assets, bolstered the rationale for the Transaction.286 There

was no waste here.

F. The Remaining Claims

Under the business judgment rule, “the court will defer to the judgments made

by the corporation’s fiduciaries,” including its officers.287 Accordingly, the claims

against Lodzinski and Singleton as officers must be dismissed for the same reasons

the claims against the Director Defendants fail. And, “[h]aving failed to plead a

285
Compl. ¶ 38; Earthstone 2016 Annual Report at 8.
286
Proxy Statement at 54. See also Compl. ¶ 38; Proxy Statement at 30.
287
See Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (“[T]he business
judgment rule attaches to protect corporate officers and directors and the decisions they
make, and our courts will not second-guess these business judgments.”).

69
claim for breach of fiduciary duty, the plaintiff likewise has failed to plead a claim

for aiding and abetting.”288

III. CONCLUSION

For the foregoing reasons, Defendants’ motions to dismiss must be

GRANTED. The Complaint is dismissed with prejudice.

IT IS SO ORDERED.

288
Synutra Int’l, 2018 WL 705702, at *6 (citing Malone v. Brincat, 722 A.2d 5, 14–15
(Del. 1998)).

70