Olenik v. Lodzinski

IN THE SUPREME COURT OF THE STATE OF DELAWARE

NICHOLAS OLENIK, Individually §
and on Behalf of All Others §
Similarly Situated, §
§ No. 392, 2018
Plaintiff Below, §
Appellant, § Court Below—Court of Chancery
§ of the State of Delaware
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 Below, §
Appellees, §
§
and §
§
EARTHSTONE ENERGY, INC., §
a Delaware Corporation, §
§
Nominal Defendant Below, §
Appellee. §

Submitted: February 6, 2019
Decided: April 5, 2019
Before STRINE, Chief Justice; VALIHURA, and SEITZ, Justices.

Upon appeal from the Court of Chancery of the State of Delaware: AFFIRMED IN
PART, REVERSED IN PART, and REMANDED.

Jeremy S. Friedman, Esquire, Spencer Oster, Esquire, and David F.E. Tejtel,
Esquire, Friedman Oster & Tejtel, PLLC, New York, New York; Ned Weinburger,
Esquire (argued), and Thomas Curry, Esquire, Labaton Sucharow LLP,
Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. Springer, Esquire, and
David Sborz, Esquire, Andrews & Springer LCC, Wilmington, Delaware, for
Appellant, Nicholas Olenik.

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

Rolin P. Bissell, Esquire, and James M. Yoch, Jr., Esquire, Young Conaway Stargatt
& Taylor, LLP, Wilmington, Delaware; Michael C. Holmes, Esquire, Craig E.
Zieminski, Esquire, Stephen S. Gilstrap, R. Kent Piacenti, Esquire, and Jeffrey
Crough, Esquire, Vinson & Elkins LLP, Dallas, Texas for Appellees Douglas E.
Swanson, Brad Thielemann, Robert L. Zorich, EnCap Investments L.P., Bold
Energy Holdings, LLC, and Oak Valley Resources, LLC.

2
SEITZ, Justice:

Nicholas Olenik, a stockholder of nominal defendant Earthstone Energy, Inc.,

brought class and derivative claims against the defendants challenging a business

combination between Earthstone and Bold Energy III LLC. As alleged in the

complaint, EnCap Investments L.P. controlled Earthstone and Bold and caused

Earthstone stockholders to approve an unfair transaction based on a misleading

proxy statement. The defendants moved to dismiss the complaint on several

grounds. They claimed that the proxy statement disclosed fully and fairly all

material facts about the transaction, and Earthstone conditioned its offer on the

approval of a special committee and the vote of a majority of the minority

stockholders. Thus, under Kahn v. M&F Worldwide Corp.,1 instead of the exacting

entire fairness standard of review, business judgment review should apply leading

to dismissal.

The Court of Chancery agreed with the defendants and dismissed the case.

Two grounds were central to the court’s ruling. First, the proxy statement informed

the stockholders of all material facts about the transaction. And second, although

the court recognized that EnCap, Earthstone, and Bold worked on the transaction for

months before the Earthstone special committee extended an offer with the so-called

MFW conditions, it found those lengthy interactions “never rose to the level of

1
88 A.3d 635 (Del. 2014).
3
bargaining: they were entirely exploratory in nature.”2 Thus, in the court’s view, the

MFW protections applied, and the transaction was subject to business judgment

review resulting in dismissal.

While the parties briefed this appeal, we decided Flood v. Synutra

International, Inc.3 Under Synutra, to invoke the MFW protections in a controller-

led transaction, the controller must “self-disable before the start of substantive

economic negotiations.”4 The controller and the board’s special committee must

also “bargain under the pressures exerted on both of them by these protections.”5

We cautioned that the MFW protections will not result in dismissal when the

“plaintiff has pled facts that support a reasonable inference that the two procedural

protections were not put in place early and before substantive economic negotiations

took place.”6

The Court of Chancery held correctly that the plaintiff failed to state a

disclosure claim. But, the complaint should not have been dismissed in its entirety.

Applying Synutra and its guidance on the MFW timing issue—which the Court of

Chancery did not have the benefit of at the time of its decision—the plaintiff has

pled facts supporting a reasonable inference that EnCap, Earthstone, and Bold

2
Olenik v. Lodzinski, 2018 WL 3493092, at *16 (Del. Ch. July 20, 2018).
3
195 A.3d 754 (Del. 2018).
4
Id. at 763.
5
Id.
6
Id. at 764.
4
engaged in substantive economic negotiations before the Earthstone special

committee put in place the MFW conditions. We also find no merit to the

defendants’ alternative ground for affirmance based on EnCap’s supposed lack of

control of Earthstone. The Court of Chancery’s decision is affirmed in part and

reversed in part, and the case remanded for further proceedings consistent with this

opinion.

I.

A.

According to the allegations of the complaint, which we accept as true at this

stage of the proceedings, nominal defendant Earthstone is an upstream oil and gas

company developing domestic oil and gas reserves. EnCap is a Delaware limited

partnership operating as a private equity and venture capital firm focusing on

domestic oil and gas ventures. EnCap had two holdings relevant to this appeal—

Oak Valley Resources, LLC, a Delaware limited liability company, which in turn

owned a controlling stake in Earthstone; and Bold, a Texas limited liability company

controlled by EnCap with substantial undeveloped oil and gas resources in Texas

and New Mexico.

Frank Lodzinski founded Oak Valley in 2012, and served as its president and

chief executive officer. Lodzinski and EnCap have a history of successful

investments in the oil and gas industry. EnCap came to control Oak Valley through

5
a reverse merger when EnCap contributed membership interests in three subsidiaries

in exchange for a controlling interest in Earthstone. Lodzinski and three other

members affiliated with EnCap made up four of the five Oak Valley board of

managers. Affiliates of EnCap had the contractual right to nominate a majority of

the Oak Valley board of managers.

From December 2014 through June 2016, EnCap owned more than 50% of

Earthstone through its majority membership interest in Oak Valley. After a 2016

reverse merger involving Earthstone and Oak Valley, Oak Valley’s ownership

interest in Earthstone dropped to 41%. The following chart shows Earthstone’s

corporate structure post-2016 reverse merger:

6
 After investing in December 2014, EnCap installed new Earthstone

management, with Lodzinski as president and chief executive officer. Earthstone

also employed several individuals who work for an Oak Valley affiliate. At this

point, EnCap and certain of its affiliates “through their direct and indirect ownership

may be deemed to share the right to direct the disposition of the Common Stock held

by Oak Valley through the EnCap Oak Valley Funds’ interest in Oak Valley and

7
EnCap Fund IX’s ownership of Bold.”7 In its 10-K report following the 2016 reverse

merger, Earthstone stated that it remained a controlled company:

So long as OVR [Oak Valley] continues to control a significant amount
of our common stock, OVR will continue to be able to strongly
influence all matters requiring stockholder approval, regardless of
whether or not other stockholders believe that a potential transaction is
in their own best interests. In any of these matters, the interests of OVR
may differ or conflict with the interests of our other stockholders.
Moreover, this concentration of stock ownership may also adversely
affect the trading price of our common stock to the extent investors
perceive a disadvantage in owning stock of a company with a
controlling stockholder. As of March 1, 2017, OVR controls 9,162,452
shares of our common stock, or 41.1% of the outstanding shares.8

B.

Turning to the transaction at issue in this appeal, the Earthstone-Bold business

combination has its roots in mid-2015 when EnCap began looking for ways to sell

Bold or take it public. The plaintiff’s theory is that Bold required large capital

commitments from EnCap’s investment funds to sustain its oil and gas operations.

In the summer of 2015, EnCap reached the end of its capital commitments, was

hesitant to invest more capital into Bold, and saw problems taking Bold public.9

EnCap retained an investment banker “to determine whether there was a market for

Bold’s assets.”10 The banker came up dry due to falling oil and gas prices.

7
App. to Opening Br. at A254, 274, 314, 354 (Proxy Statement, at 10, 30, 69, 106).
8
Id. at A642 (Annual 10-K at 27-28, filed March 15, 2017) (emphasis added).
9
Id. at A68 (Am. Compl. ¶ 67).
10
Id. at A290 (Proxy Statement, at 45).
8
According to the plaintiff, EnCap had run out of options to meet Bold’s heavy capital

requirements and keep Bold afloat. Even with the final capital call from EnCap,

“Bold d[id] not have enough cash and drilling capacity to continue to run the

company . . . .”11

Meanwhile, Earthstone in 2014-15 was pursuing a number of acquisitions,

which led to its interest in an Earthstone/Bold transaction. In the fall of 2015

Lodzinski saw an opportunity to combine Earthstone’s cash-generating assets with

Bold’s undeveloped resources. He initiated discussions with EnCap about a possible

Earthstone-Bold transaction which, according to the plaintiff, was done without

informing the Earthstone board. Those early interactions included:

 11/2015 – EnCap provided Lodzinski and Earthstone management
with Bold’s marketing pitchbook followed by a conference call with
EnCap to discuss a business combination. Earthstone and EnCap
entered into a confidentiality agreement covering Bold’s internal
information. Bold shared financial information with Earthstone,
which included access to Bold’s data room set up from the earlier
unsuccessful market survey.

 11-12/2015 – Earthstone contacted Bold’s investment banker and
Earthstone’s and Bold’s technical employees met with a consultant
to discuss Bold’s assets. Earthstone and Bold entered into another
confidentiality agreement covering Bold technical, operational,
financial, and analytical information prepared by Bold and its
investment banker, followed by a banker presentation presenting a
technical overview of Bold’s assets to EnCap and Earthstone, and a
follow up meeting among the same parties.

11
Id. at A743 (Minutes of a Meeting of the Special Committee, July 22, 2016).
9
  12/15-1/16 – Lodzinski and Earthstone management met with
investment banking firms “to solicit their views on valuation
parameters related to Bold’s assets, methods to fund their
development, and equity market receptivity to potential acquisition
of Bold’s assets.”12

C.

Earthstone and EnCap put their discussions on hold in early 2016 when oil

prices reached a twelve-year low. But, in April 2016, Lodzinski rekindled his

interest in Bold and provided Earthstone’s board with a letter discussing

Earthstone’s operations. In that April 27 letter, Lodzinski described a transaction

with Bold as a “Current Deal[],” noted he was “updating analysis,” and also wrote

“intend to make offer.”13 For the next few months Lodzinski led substantive

financial discussions among EnCap, Earthstone, and Bold about a transaction:

 05/02/2016 – EnCap provided Earthstone more information on
Bold’s projects and “indicated it would begin to build an
independent evaluation model of Earthstone and Bold” to use “in
evaluating any potential business combination.”14

 05/11/2016 – Without assistance from an independent financial
advisor, Earthstone delivered a presentation to EnCap proposing an
equity valuation for Bold of approximately $305 million in
Earthstone common stock.15

12
Id. at A71 (Am. Compl. ¶ 75).
13
Id. at A740 (Apr. 27, 2016 Letter from Lodzinski to Earthstone Board of Directors, at 7).
14
Id. at A292 (Proxy Statement, at 47).
15
Id. at A76 (Am. Compl., ¶ 86).
10
  05/18/2016 – Earthstone revised their proposed valuation to $335
million after EnCap apparently made no response.16

 05/23/2016 – Earthstone granted EnCap access to its corporate data
room which included a combined corporate model of Earthstone and
Bold and an Earthstone net asset value model.17 Bold got access a
month later.

 06/03/2016 – Earthstone and Bold officers discussed “a suggested
action plan to be carried out during the ensuing weeks and months,
relating to a possible transaction.”18

 06/27/2016 – Earthstone and Bold management met to go over
Bold’s assets and visited some Bold operations.19

 07/06/2016 – Earthstone, EnCap, and EnCap counsel met “to
develop a preliminary timeline to complete a possible transaction,
identify the participants and their counsel, and assign
responsibilities to complete the proposed transaction.”20

D.

On July 8, 2016—over two months after Earthstone and EnCap restarted

discussions about a potential deal and almost eight months after the initial

discussions between Lodzinski and EnCap—Earthstone’s two independent

directors, Joliat and Urban, held a conference call with Earthstone management and

Earthstone’s legal counsel. Joliat and Urban said they would form a special

committee to oversee the potential transaction.

16
Id. at A77 (Am. Compl., ¶ 88). This increase was allegedly due to some recently acquired assets
of Bold not included in the first evaluation. Id. at A292 (Proxy Statement, at 48).
17
Id. at A292 (Proxy Statement, at 47).
18
Id. at A293 (Proxy Statement, at 49).
19
Id. at A79 (Am. Compl. ¶ 92).
20
Id. at A293 (Proxy Statement, at 48).
11
 While the board was in the process of forming the special committee,

substantive discussions continued over the transaction. On July 12, 2016, Lodzinski

met with Bold’s chief financial officer and executive vice president for business

development to discuss, among other things, employee matters and the future

composition of the combined board.21 On July 19, 2016, Earthstone employees met

with Bold representatives and toured some Bold facilities.22 And, on July 22, 2016,

Lodzinski and Anderson made a presentation to the unofficial special committee

members about the status and plan for the transaction, including information about

what Earthstone would do with Bold’s assets, an updated valuation of Bold

reflecting a value between $300 and $350 million, possibly structuring the deal using

an initially tax-free “Up-C” structure, and a possible tax receivable agreement that

would benefit EnCap that Earthstone was working on with EnCap’s outside

counsel.23 Operational and technical employees of the two companies also

continued to meet and visit Bold’s drilling locations in West Texas.24

On July 29, 2016, the Earthstone board formally established the special

committee consisting of Joliat and Urban. According to the proxy statement, the

special committee’s charter gave the committee the power to:

21
Id.
22
Id. at A294 (Proxy Statement, at 49).
23
Id. at A742-44 (July 22, 2016 Minutes of a Meeting of the Special Committee).
24
Id. at A294 (Proxy Statement, at 49).
12
 (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.’”25

The charter also provided that the Earthstone board would not approve a transaction

without the special committee’s favorable recommendation.26 There was not,

however, a condition that any transaction be approved by a majority-of-the-minority

stockholder vote. About the same time, the special committee selected Stephens Inc.

as its financial advisor.

On August 10, 2016, the full board held a regularly scheduled meeting to

discuss the transaction. According to management-prepared discussion materials,

the plan was to “Announce Project Boldstone” in the third or fourth quarter.27

During the meeting, “the directors discussed the potential Bold transaction and its

pro forma financial and operational impact on Earthstone.”28 Like the board’s

previous meeting in May, the board held the meeting at EnCap’s offices and was

25
Id.
26
Id.
27
Id. at A88 (Am. Compl. ¶ 111).
28
Id. at A295 (Proxy Statement, at 50).
13
attended by the same two EnCap employees who attended the previous meeting.

“All directors were supportive of a transaction between Earthstone and Bold and

directed the proper officers to continue to pursue such a transaction.”29

On August 16, 2016, the special committee met with its counsel and Stephens

to receive Stephens’s preliminary financial analysis and discuss the terms of an offer

to Bold. Although the minutes of the meeting state that “the deal currently being

contemplated by [Earthstone] includes an equity split of 60% for Bold and 40% for

[Earthstone],” Stephens’s “contribution analysis show[ed] that the average

contribution is 37.2% for Bold and 62.8% for [Earthstone].”30 The Stephens

representative stated that “the Committee should be aware that the contribution

analysis does not support the currently proposed split between [Earthstone] and

Bold.”31 He also noted that Earthstone’s projections were based on a 10% discount

to the stock price and that he was “not sure why such a discount would be used in

this case.”32

Later that same day, the special committee met with Earthstone management

to continue discussions about the transaction. The committee discussed, “among

other matters, the proposed transaction, recent transactions in the Midland Basin,

29
Id.
30
Id. at A89 (Am. Compl. ¶ 113).
31
Id.
32
Id. at A90 (Am. Compl. ¶ 114).
14
competition, management’s current views on valuation and contribution analysis,

the sources of the information provided to Stephens, anticipated market impacts on

Earthstone and submission of a proposal to Bold.”33

On August 19, 2016, the special committee met again about the transaction.

According to the minutes, the committee “determined that the price of the

Company’s stock in the transaction should not be calculated at a discount, the

weighted average trading price for the 30 days prior to signing should be used to

determine the Company’s stock price,” and “the transaction should result in the

Company [Earthstone] owning more than 40% of the resulting entity,” with a $325

million purchase price based on Bold’s enterprise value.34 The minutes further

suggest that the special committee reduced the amount Earthstone would own in the

resulting entity from Stephens’s earlier analysis because that earlier analysis did not

estimate Bold’s cash flows far enough into the future. In other words, Bold was an

early-stage company with long-term potential but uncertain short-term prospects.

The committee then authorized Lodzinski to send an offer letter to Bold.

E.

Lodzinski sent a formal written proposal to Bold’s President, Castillo (the

“August 19 Letter”). Consistent with the special committee’s instructions, the

33
Id. at A295 (Proxy Statement, at 50).
34
Id. at A90 (Am. Compl. ¶ 115) (emphasis omitted).
15
August 19 Letter proposed to acquire all of Bold’s assets and liabilities through “a

private stock transaction with a face value of $325 million funded through the

issuance of shares of Earthstone’s common stock,” less net financial obligations not

to exceed $25 million.35 According to the proxy statement, assuming an equity

valuation of $300 million for Bold and $10.50 per share for Earthstone stock, “the

offer would have resulted in Bold owning about 55% of the combined entity on a

fully diluted basis.”36 The August 19 Letter also conditioned the transaction on

approval by the special committee and, apparently for the first time, “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.”37

Five days after the special committee sent the August 19 Letter, Lodzinski

met with Castillo to discuss Earthstone’s offer and “begin more detailed negotiations

on the broader terms of the proposed transaction.”38 A week later, Castillo formally

responded to Earthstone’s proposal. Bold’s counteroffer called for Bold to own

65.5% of the combined company.

35
App. to Opening Br. at A748 (Letter from Frank Lodzinski to Joseph L. Castillo).
36
Id. at A295 (Proxy Statement, at 50).
37
Id. at A748 (Letter from Frank Lodzinski to Joseph L. Castillo). The plaintiff claims that
Earthstone did not produce the August 19 Letter as part of the § 220 demand response, is not
incorporated by reference in the complaint, and therefore, should not be considered by this Court
on a motion to dismiss. Earthstone responds that the letter was produced before the plaintiff filed
his complaint. We do not have to resolve this dispute because it does not affect our analysis.
38
Id. at A92-93 (Am. Compl ¶ 120).
16
 The special committee considered Bold’s counteroffer at two meetings with

its advisors on September 1 and September 6, 2016. At the second meeting,

Stephens advised the special committee that “the Company should try to end up at

approximately 40%” of the combined entity (i.e., 60% for Bold).39 The special

committee agreed, and on September 8, 2016, authorized Lodzinski to offer Bold

60% of the combined entity.

Castillo responded the next day to Earthstone’s counteroffer. His position was

that Bold should end up with 62.5% of the combined entity. Before the special

committee had a chance to digest this new offer, Lodzinski spoke to Castillo about

the offer. During this discussion, Lodzinski hinted “that Earthstone might be able

to increase its proposal,” and thereby increase Bold’s ownership of the combined

entity to 61.5%.40 Castillo was receptive to an offer in that range.

Based on his conversation with Castillo, Lodzinski spoke with Joliat and

encouraged him to consider accepting a deal at less than 40% ownership of the

combined entity. Joliat reported this conversation to his special committee colleague

at a September 13, 2016 meeting, but Stephens advised that “the Company should

attempt to negotiate for a transaction that results in an ownership percentage of at

least 40% for the Company.”41 The special committee agreed, and instructed

39
Id. at A93 (Am. Compl. ¶ 121).
40
Id. at A94 (Am. Compl. ¶ 123).
41
Id. at A95 (Am. Compl. ¶ 125).
17
Lodzinski “that the Committee would like to keep the Company’s ownership

percentage at approximately 40%.”42

Six days later, on September 19, 2016, Lodzinski and Castillo discussed the

transaction, and Lodzinski agreed to propose to the special committee a transaction

that would result in Earthstone owning 39% of the combined entity. Lodzinski also

told Castillo that he would request authority from the special committee to accept a

transaction that left Earthstone with 38.7% of the combined entity. A few days later,

Lodzinski took this proposal to the special committee. After “[a] very brief

discussion (the entire meeting lasted only 26 minutes), . . . the Special Committee

authorized Lodzinski to finalize the negotiations with Bold for” 38.7% of the

combined entity.43

After this point, negotiations moved quite rapidly. On October 7, 2016, the

special committee sent a draft Contribution Agreement to Bold.44 Bold responded

almost two weeks later.45 During this time, Lodzinski met with Castillo and other

members of Bold’s management team to iron out “employee matters” and other

transaction details. Negotiations were finalized during the last week of October and

42
Id.
43
Id. at A97 (Am. Compl. ¶ 128).
44
App. to Opening Br. at A297 (Proxy Statement, at 52).
45
Id.
18
the first week of November, when Earthstone and Bold negotiated the final

Contribution Agreement.

On November 7, 2016, Earthstone and Bold reached an agreement on the

structure and final economic terms of the transaction. Earthstone stockholders

would end up owning approximately 39% of the combined company. The special

committee met that day, received a fairness opinion from Stephens, and approved

the transaction. Later that same day, Earthstone’s full board met. After hearing the

special committee’s recommendation, the board approved the transaction. The

board announced the transaction the next day. On May 9, 2017, Earthstone’s

disinterested stockholders approved the deal. “Of the voted shares not held by Oak

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

Transaction.”46

II.

The plaintiff filed his complaint for breach of fiduciary duties against the

Earthstone directors, EnCap/Oak Valley as Earthstone’s controlling stockholders,

Lodzinski and Singleton as officers of Earthstone, and the Bold entities for aiding

and abetting breaches of fiduciary duty. The Court of Chancery dismissed the

complaint because (1) EnCap/Earthstone preconditioned the deal on MFW’s dual

requirements up front in its August 19 Letter, (2) the special committee was well

46
Olenik, 2018 WL 3493092, at *12.
19
functioning, and (3) the stockholder vote was informed and not coercive. According

to the court, the plaintiff had not pled facts sufficient to overcome the business

judgment standard of review requiring dismissal.

A.

Our standard of review of a decision granting a motion to dismiss is de novo.47

At the motion to dismiss stage, we must “accept as true all of the plaintiff’s well-

pleaded facts,” and “draw all reasonable inferences” in plaintiff’s favor.48 Further,

a motion to dismiss should be denied unless the facts pled support a reasonable

inference that the plaintiff can succeed on his claims.49

We address first the plaintiff’s argument that the Court of Chancery erred

when it found that MFW’s dual protections had been agreed to from the deal’s

inception. According to the plaintiff, although MFW requires that the dual

protections be put in place “up front,” the Court of Chancery failed to credit

reasonable inferences from well-pled facts that the MFW procedural protections

were not put in place until after almost eight months of substantive economic

dealings among the parties. More specifically, the plaintiff claims that, based on the

well-pled facts of the complaint, Lodzinski and EnCap substantially negotiated the

47
Brinckerhoff v. Enbridge Energy Co., 159 A.3d 242, 252 (Del. 2017).
48
Allen v. Encore Energy Partners, L.P., 72 A.3d 93, 100 (Del. 2013).
49
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536–37 (Del.
2011).
20
financial state of play between the companies before special committee involvement

and the MFW conditions.

The defendants respond by pointing to the August 19 Letter from the special

committee with the MFW conditions. According to the defendants, the interactions

among Lodzinski, Earthstone, EnCap, and Bold that preceded the letter did not

equate to substantive financial negotiations or “horse-trading” because “neither side

changed its position on any issue” before the letter. Thus, under MFW, the

complaint’s allegations were insufficient to avoid a pleading-stage dismissal of the

complaint.

B.

In Kahn v. M&F Worldwide Corp. we held that the business judgment

standard of review governs mergers proposed by a controlling stockholder and its

corporate subsidiary when conditioned from the beginning “upon the approval of an

independent, adequately-empowered Special Committee that fulfills its duty of care;

and the uncoerced, informed vote of a majority-of-the-minority of stockholders.”50

The most rigorous standard of review—entire fairness—was not needed to protect

minority stockholders from overreaching because the controller “irrevocably and

publicly disables itself from using its control to dictate the outcome of the

50
88 A.3d 635, 644 (Del. 2014). Although the Earthstone/Bold transaction is not a transaction
between the controlling stockholder and a controlled company, the same principles apply whether
the controller is directly or indirectly exerting its influence over the transaction.
21
negotiations and the shareholder vote.”51 With the controller’s influence neutralized

by the MFW conditions, the transaction takes on the “characteristics of third-party,

arm’s-length mergers, which are reviewed under the business judgment standard.”52

Relying on the Court of Chancery’s reasoning in MFW, we also explained that

the MFW protections must be established “up front” if they are to serve as a “potent

tool to extract good value for the minority.”53 In other words, “from inception, the

controlling stockholder knows that it cannot bypass the special committee’s ability

to say no,” and “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.”54 But, “if a plaintiff that can plead a reasonably conceivable set of facts

showing that any or all of those enumerated conditions did not exist, that complaint

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

discovery.”55

More recently, in Flood v. Synutra,56 we considered in greater detail the “up

front” requirement. In Synutra, the controlling stockholder’s first expression of

interest was quickly followed by the MFW dual requirements before any substantive

51
Id.
52
Id.
53
Id.
54
Id.
55
Id. at 645.
56
195 A.3d 754 (2018); see also in re Books-A-Million, Inc. Stockholders Litig., 2016 WL
5874974, at *9 (Del. Ch. Oct. 10, 2016), aff'd, 164 A.3d 56 (Del. 2017) (finding a rejected offer
made in 2012 without MFW conditions did not preclude MFW applying to a new 2015 offer).
22
negotiations took place between the controller and the special committee. Taking a

pragmatic approach, we held in Synutra that the defendants satisfied the MFW

requirements because the controller “condition[ed] its offer on the key protections

at the germination stage of the Special Committee process, when it [was] selecting

its advisors, establish[ed] its method of proceeding, beg[an] its due diligence, and

ha[d] not commenced substantive economic negotiations with the controller.”57 We

recognized, however, that “when a plaintiff has pled facts that support a reasonable

inference that the two procedural protections were not put in place early and before

substantive economic negotiation took place,” the court should “refuse to dismiss

the case.”58 That is, MFW is not satisfied if a controller has not “accept[ed] that no

transaction goes forward without special committee and disinterested stockholder

approval early in the process and before there has been any economic horse

trading.”59

The Court of Chancery held correctly that preliminary discussions between a

controller’s representatives and representatives of the controlled company do not

pass the point of no return for invoking MFW’s protections. But, based on our

57
Synutra, 195 A.3d at 765.
58
Id. at 765. Here, the plaintiff also raised a technical argument—the offer with the MFW
conditions did not come directly from the controller but instead from the special committee. Under
the facts of this case, the distinction does not make a difference in our analysis. EnCap indirectly
controlled Earthstone and appeared to agree with the special committee’s insistence on the MFW
conditions.
59
Id. at 756.
23
review of the plaintiff’s complaint, as informed by our Synutra decision, the well-

pled facts “support a reasonable inference” that the MFW requirements “were not

put in place early and before substantive economic negotiation took place.”60

First, in April 2016 Lodzinski told the Earthstone board that he was “updating

analysis” of Bold and intended to make “an offer.”61 And, in his August 1, 2016

letter to the Earthstone board, Lodzinski said he was “negotiating”62 with Bold while

the special committee and its advisors were still “getting up to speed.”63

Second, viewed along the negotiating continuum, the well pled facts show that

substantial economic negotiations took place well before the August 19 Letter with

the MFW conditions:

 During early discussions in November 2015, the controller, EnCap, provided
Earthstone with a presentation that EnCap’s investment bank, TPH, had used
the previous summer to market the target company, Bold; Earthstone
management and EnCap held a conference call to discuss a potential deal;
and Earthstone and EnCap executed a confidentiality agreement governing
the exchange of information about Bold.

 The next month, EnCap provided Earthstone with information about Bold,
including access to a data room and confidential technical, operational,
financial, and analytic information about Bold; Earthstone entered a
confidentiality agreement with Bold; Earthstone management spoke with
TPH; TPH provided a technical overview of Bold’s assets to Earthstone and
EnCap; and Earthstone, EnCap, and TPH met again to discuss Bold’s assets.

60
Id. at 764.
61
App. to Opening Br. at A740 (Apr. 27, 2016 Letter from Lodzinski to Earthstone Board of
Directors, at 7).
62
Id. at A1050 (August 1, 2016 Letter from Lodzinski to the Earthstone Board, at 3).
63
Id. at A88 (Am. Compl. ¶ 110) (quoting Minutes of a Meeting of the Special Committee, Aug.
3, 2016).
24
  During that same month, Earthstone management met with three separate
investment banks to get their views on valuation parameters related to
Bold’s assets, methods to fund their development, and equity market
receptivity to a possible deal with Bold.

 In April 2016, when Lodzinski decided to restart negotiations as the oil and
gas market began recovering, Earthstone management met with EnCap to
discuss moving forward on the Bold deal.

 Presentation materials from the Earthstone board’s May 3, 2016 meeting
indicated an “Active” potential deal where Bold was listed as the “Seller”
and EnCap as a “Financial Partner.”64

 In May 2016, there were multiple substantive economic communications
between Earthstone and EnCap. Earthstone management delivered a
presentation to EnCap about the proposed deal indicating an equity valuation
for Bold of approximately $305 million, which EnCap said it would review
with TPH. Then, about a week later, Earthstone management made another
presentation to EnCap about the transaction, this time raising its valuation of
Bold to about $335 million. Several days after that second presentation,
Earthstone communicated with EnCap and TPH again about the transaction
and gave TPH access to Earthstone’s data room, which included
Earthstone’s combined corporate model of the two companies as well as a
model of Earthstone’s net asset valuation.

 In June and July 2016, there were numerous meetings between various
representatives of Earthstone, EnCap, Bold, and TPH, including meaningful
on-site due diligence regarding Bold’s assets in West Texas.

While some of the early interactions between Earthstone and EnCap could be

fairly described as preliminary discussions outside of MFW’s “from the beginning”

requirement, the well-pled facts in the complaint support a pleading stage inference

that the preliminary discussions transitioned to substantive economic negotiations

64
App. to Opening Br. at AA74 (Am. Compl. ¶ 83).
25
when the parties engaged in a joint exercise to value Earthstone and Bold. In the

presentations made by Earthstone to EnCap, Earthstone management valued Bold at

$305 million in the first presentation and $335 million in the second presentation.

Based on these facts, it is reasonable to infer that these valuations set the field of

play for the economic negotiations to come by fixing the range in which offers and

counteroffers might be made.65 According to the complaint, that generally turned

out to be the case. Earthstone’s first formal offer—the one in which the MFW

conditions were finally mentioned—reflected an equity valuation for Bold of about

$300 million, and the final deal reflected an equity valuation for Bold of around $333

million.66 Additionally, at the August 10 board meeting management presented a

transaction with an already presumed timeline (to be announced in “Q3/Q4” of that

year) and an “assumed” price of $333 million.67

In Synutra we described the ordinary meaning of “from the beginning” as the

first stage of an ongoing process.68 According to the complaint’s well-pled

allegations, EnCap, Earthstone, and Bold were engaged in substantive economic

discussions during some of the eight months before the MFW protections were put

65
See generally Amos Tversky & Daniel Kahneman, Judgment Under Uncertainty: Heuristics
and Biases, 185 SCIENCE 1124, 1128–30 (1974) (coining the term “anchoring” to describe the
phenomenon in which a starting value biases future adjustments toward that initial value).
66
If a 55/45 split in Bold’s favor implies a $300 million equity valuation for Bold, then the final
61/49 split implies a $333 million equity valuation for Bold.
67
Id. at A1059, 1077 (August 10, 2016 Earthstone Board Meeting, at 6, 24).
68
Synutra, 195 A.3d at 761–62.
26
place. Where, as here, the plaintiff “has pled facts that support a reasonable

inference that the two procedural protections were not put in place early and before

substantive economic negotiation took place,” the plaintiff has met his pleading-

stage burden and the complaint should not have been dismissed on MFW grounds.69

C.

The defendants ask us to affirm the Court of Chancery’s decision on an

alternative ground not considered by the court—that EnCap shed its controller status

before the Earthstone special committee’s August 19 Letter containing the MFW

conditions. Until mid-June 2016, EnCap owned a majority of Oak Valley’s units,

which in turn owned a majority of Earthstone stock. After the 2016 reverse merger

involving Earthstone and Oak Valley, Oak Valley’s ownership interest in Earthstone

dropped to about forty percent. The defendants rely on the drop below majority

ownership before the August 19 Letter as dispositive of the control issue.

We agree with the defendants that a controlling stockholder must own a

majority of a corporation’s voting power or have “effective control of the board” and

exercise control over the corporation’s conduct.70 And, we agree that around mid-

June, 2016, EnCap through Oak Valley no longer held a majority of Earthstone’s

69
Id. at 764.
70
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 307 (Del. 2015); see also Weinstein
Enterprises, Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005) (“[T]he plaintiff must establish the actual
exercise of control over the corporation’s conduct by that otherwise minority stockholder.”).
27
stock. But, the plaintiff has pled facts that support a claim that EnCap controlled

Earthstone after the 2016 reverse merger and also held a majority of Earthstone’s

stock while substantive economic negotiations took place that fixed the field of play

for the eventual transaction price.

First, in Earthstone’s March 2017 10-K—issued after the August 19 Letter

with the MFW conditions—Earthstone described itself as a “company with a

controlling shareholder.”71 Further, the plaintiff has pled that EnCap, through

Lodzinski, led the negotiations for the transaction.72 According to the complaint,

Lodzinski was a conflicted negotiator because of his long-term relationship with

EnCap. And, according to the complaint, Lodzinski negotiated his continued

employment with Earthstone before Earthstone formally created the special

committee.73

Further, as pled in the complaint, key substantive economic negotiations

occurred before the August 19 Letter when it is undisputed that EnCap controlled

Oak Valley and Earthstone. The two valuations of Bold proposed by Lodzinski

occurred in May, 2016. And there were multiple other meetings, confidentiality

71
App. to Opening Br. at A642 (March 17, 2017 Earthstone Annual Report (Form 10-k), at 28).
Additionally, the inclusion of the MFW conditions in August continue to suggest that Earthstone
viewed EnCap as its controlling shareholder.
72
See In re Crimson Expl. Inc. Stockholder Litig., 2014 WL 5449419, at *16 (Del. Ch. Oct. 24,
2014) (requiring a plaintiff to show that the stockholder “actually controlled the board’s decision
about the transaction at issue”) (emphasis added).
73
App. to Opening Br. at A44 (Am. Compl. ¶ 12).
28
agreements, due diligence, and logistical discussions while EnCap was a majority

stockholder. Thus, the defendants are not entitled to a pleading stage dismissal based

on lack of control because the facts pled support the reasonable inference that EnCap

acted as Earthstone’s controlling stockholder while key economic negotiations took

place between Earthstone and Bold which set the financial playing field for later

negotiations.74

D.

Finally, we turn to the plaintiff’s disclosure claims. On appeal, the plaintiff

claims the Court of Chancery erred in dismissing the disclosure claims because the

proxy statement failed to disclose that (1) Stephens’s initial contribution analysis did

not support a 40/60 Earthstone/Bold split for the transaction; (2) Stephens was

74
The defendants also raise two other arguments. First, they claim that the plaintiff failed to plead
facts that the transaction was not entirely fair. To survive a motion to dismiss in an entire fairness
case, the plaintiff must plead facts that, with all reasonable inferences drawn in their favor, show
the transaction was unfair. Soloman v. Pathe Commc’ns Corp., 672 A.2d 35, at 38 (Del. 1996);
See also Calma v. Templeton, 114 A.3d 563, 589 (Del. Ch. 2015) (quoting Solomon v. Pathe
Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995)) (requiring “some facts that
tend to show that the transaction was not fair.”). Here, the plaintiff has met his burden. The
plaintiff has pled that Bold’s cash position required EnCap to sell Bold; Earthstone’s financial
advisor at one time proposed a ratio with Earthstone acquiring 60% of the combined entity; and
Lodzinski, as a conflicted negotiator due to his ties with EnCap, assumed what should have been
the special committee’s lead role in the financial negotiations. App. to Opening Br. at A41, 44-
45, 89 (Am. Compl. ¶¶ 5, 12, 113). Defendants Lodzinski and Singleton also claim that the
plaintiff has not pled non-exculpated claims against them. See 8 Del. C. § 102(b)(7). We agree
with the plaintiff, however, that the complaint has pled non-exculpated claims. The plaintiff pled
both breach of loyalty claims and claims against them as corporate officers, neither of which are
subject to exculpation under 8 Del. C. § 102.
29
pressured to revise its analysis, which helped support the final split; and (3) EnCap

was motivated to sell Bold due to its cash position.

Directors “have a fiduciary duty to disclose fully and fairly all material

information within the board’s control that would have a significant effect upon a

stockholder vote when it seeks or recommends a shareholder action.”75 Omitted

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’ of information made available.”76 To be material

the missing information does not have to cause a reasonable shareholder to change

her vote.77

We agree with the Court of Chancery that the plaintiff failed to state a

disclosure claim. Although the proxy does not discuss the changes in Stephens’s

analysis, it does include projections for each of the years 2017-19. Stephens

emphasized that it “did not regard the relative contribution metrics as meaningful”

given the “difference in development stages” of the two companies.78 From those

yearly projections it is apparent that the contribution analysis favors Earthstone in

75
Appel v. Berkman, 180 A.3d 1055, 1060 (Del. 2018).
76
Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018) (quoting Rosenblatt v. Getty Oil Co., 493
A.2d 929, 944 (Del. 1985)).
77
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 859 (Del. 2015) (quoting Rosenblatt, 493
A.2d at 944).
78
App. to Opening Br. at A31. See Olenik, 2018 WL 3493092, at *22 (the proxy “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.”).
30
the early years and Bold in the later years. Investors were free to place the emphasis

where warranted. Although the plaintiff alleges that Stephens should have disclosed

that it was allegedly pressured to change its analysis, the defendants do not have to

adopt “plaintiff’s characterization of the facts.”79 And finally, as for EnCap’s reason

for selling Bold—that “Bold [was] in dire need of cash and EnCap [was] on the hook

for further capital infusions”80—the reason was apparent on the face of the proxy.81

The proxy disclosed Bold’s financials. They showed that Bold was in a poor cash

position. As the Court of Chancery held, “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.”82

79
Shaev v. Adkerson, 2015 WL 5882942, at *10 (Del. Ch. Oct. 5, 2015) (quoting Seibert v. Harper
& Ros, Publishers, Inc., 1984 WL 21874, at *6 (Del. Ch. Dec. 5, 1984); see also Frank v. Arnelle,
725 A.2d 441, 1999 WL 89284, at *2 (Del. Jan. 22, 1999) (no requirement to disclose “soft
information” of a financial advisor’s opinion on value); Brody v. Zaucha, 697 A.2d 749, 754 (Del.
1997) (not requiring a director to adopt “his opponents’ current explanation of why he was
removed”).
80
Opening Br. at 46.
81
App. to Opening Br. at A263, A341-49 (Proxy Statement, at 19, 94-101) (disclosing Bold’s
financial position and noting that its “primary sources of liquidity . . . has been equity investments
from EnCap and Bold’s management and employees”).
82
Olenik, 2018 WL 3493092, at *23.
31
 III.

The Court of Chancery’s decision dismissing the complaint is affirmed in part

and reversed in part. The case is remanded for proceedings consistent with this

opinion. Jurisdiction is not retained.

32