IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE OM GROUP, INC. : CONSOLIDATED
STOCKHOLDERS LITIGATION : C.A. No. 11216-VCS
MEMORANDUM OPINION
Date Submitted: July 14, 2016
Date Decided: October 12, 2016
Michael J. Barry, Esquire and David M. Haendler, Esquire of GRANT &
EISENHOFER P.A., Wilmington, Delaware; Joel Friedlander, Esquire, Jeffrey M.
Gorris, Esquire, and Benjamin P. Chapple, Esquire of FRIEDLANDER &
GORRIS, P.A., Wilmington, Delaware; Mark Lebovitch, Esquire, Jeroen van
Kwawegen, Esquire, and Alla Zayenchik, Esquire of BERNSTEIN LITOWITZ
BERGER & GROSSMANN LLP, New York, New York; and Randall J. Baron,
Esquire, David T. Wissbroecker, Esquire, Edward M. Gergosian, Esquire of
ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California, Attorneys
for Plaintiffs.
S. Mark Hurd, Esquire and Thomas P. Will, Esquire of MORRIS, NICHOLS,
ARSHT & TUNNELL LLP, Wilmington, Delaware, and Robert S. Faxon, Esquire
and Adrienne Ferraro Mueller, Esquire of JONES DAY LLP, Cleveland, Ohio,
Attorneys for Defendants Joseph Scaminace, Richard W. Blackburn, Steven J.
Demetriou, Katharine L. Plourde, Patrick S. Mullin, Hans-Georg Betz, Carl R.
Christenson, and John A. McFarland.
SLIGHTS, Vice Chancellor
With the benefit of discovery taken in support of an ultimately-abandoned
motion to enjoin an arms-length merger, Plaintiffs, former stockholders of non-
party, OM Group, Inc. (“OM” or “the Company”), filed their Consolidated
Amended Verified Class Action Complaint (“the Complaint”) against the former
members of the OM board of directors (the “OM Board”) seeking declarations that
the individual defendants breached their fiduciary duties by entering into the
merger and an award of post-closing “recissionary damages.” Claims of aiding
and abetting a breach of fiduciary duty against the other party to the merger,
Apollo Global Management, LLC (“Apollo”), and its affiliates have been
voluntarily dismissed.
The Complaint sets forth a disquieting narrative. In the face of a threat of
shareholder activism, it is alleged that the OM Board rushed to sell OM on the
cheap in order to avoid the embarrassment and aggravation of a prolonged proxy
fight. According to Plaintiffs, OM’s financial advisors had opined that separate
sales of OM’s many diverse business units would yield maximum value for OM
shareholders. Ignoring this guidance, the OM Board decided to wrap the units for
sale in one package to ensure there was nothing left for them to manage, and then
hurried the pre-signing sale process and post-signing market check in a manner
that ensured strategic buyers would have no time or desire to pursue piecemeal
transactions. The OM Board’s rush to the closing table, according to Plaintiffs,
1
was unreasonable and in violation of the OM Board’s fiduciary duties when
reviewed under enhanced Revlon scrutiny.
The Complaint alleges that the process undertaken by the OM Board leading
up to the transaction with Apollo fell beneath any measure of reasonableness in
three particular respects. First, the OM Board deliberately shut out strategic
acquirors from the process in favor of a quick deal with a financial sponsor
because it knew that strategic acquirors would be more interested in acquiring
individual OM business units rather than the entire company. This tunnel vision
was fueled by a desire to avoid a public confrontation with a vocal dissident
shareholder by selling OM before the dissident could mount a proxy fight. Second,
the OM Board failed to manage conflicts among its contingently compensated
investment bankers, especially with respect to Deutsche Bank which had received
significant fees from Apollo over the three years leading up to the merger. Finally,
the OM Board relied upon, and allowed the bankers to rely upon, manipulated
projections that understated OM’s prospects in order to drive the bankers to
conclude that a less-than-reasonable merger price was fair.
OM’s stockholders voted overwhelmingly to approve the merger.
Nevertheless, Plaintiffs allege that the vote should be disregarded because it was
the product of OM’s incomplete and misleading public disclosures to stockholders
regarding a director conflict, the extent to which the OM Board appreciated and
2
managed the banker conflicts and material details of an indication of interest
received by the OM Board during the post-signing go-shop.
Defendants have moved to dismiss the Complaint under Court of Chancery
Rule 12(b)(6) on three grounds. First, they contend the Complaint fails to plead
facts that would allow a reasonable inference that the OM Board acted
unreasonably under Revlon. Second, they contend that the fully informed,
uncoerced vote of a majority of disinterested stockholders in favor of the merger
triggers the irrebuttable business judgment rule. In this regard, they argue that
Plaintiffs have failed to identify any material omissions or misleading disclosures
in any of the public filings related to the merger. Finally, Defendants argue that
even if the stockholder vote did not effectively cleanse any breaches of fiduciary of
duty, Plaintiffs have failed to plead either a breach of the duty of loyalty or bad
faith such that they can overcome the exculpation clause within OM’s certificate of
incorporation.
For reasons explained more fully below, even accepting all of its allegations
as true, I conclude that the Complaint must be dismissed because a majority of the
fully informed, uncoerced, disinterested stockholders voted to approve the merger
and Plaintiffs have not alleged that the transaction amounted to waste. Having
reached this conclusion, I need not and have not considered whether Plaintiffs have
3
pled a viable breach of fiduciary duty claim under Revlon or whether any such
claim would be subject to dismissal under 8 Del. C. § 102(b)(7).
I. BACKGROUND
The facts are drawn from allegations in the Complaint, documents integral to
the Complaint and matters of which the Court may take judicial notice.1
A. The Parties
Lead Plaintiffs City of Plantation Police Officers’ Retirement System, City
of Sarasota Firefighters’ Pension Fund, Cruiser Capital Advisors, LLC, Laborers’
Local #231 Pension Fund and Northern California Pipe Trades Pension Plan were
stockholders of OM at the time of the merger. OM was a Delaware corporation
operating as a global chemical and technology conglomerate comprised of five
distinct business units: electronic chemicals, photomasks, magnetic technologies,
battery technologies and advanced organics.
1
In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *8 (Del. Ch.
Oct. 24, 2014) (“‘A judge may consider documents outside of the pleadings only when:
(1) the document is integral to a plaintiff’s claim and incorporated in the complaint or
(2) the document is not being relied upon to prove the truth of its contents.’ Under at
least the first exception, [the court finds] that consideration of the Proxy Statement is
appropriate in resolving this dispute.”) (citation omitted); In re Gardner Denver, Inc.,
2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014) (on a motion to dismiss, the Court may
rely on documents extraneous to a complaint “when the document, or a portion thereof, is
an adjudicative fact subject to judicial notice.”) (footnotes and internal quotation marks
omitted); Narrowstep, Inc. v. Onstream Media Corp., 2010 WL 5422405, at *5 (Del. Ch.
Dec. 22, 2010) (same).
4
Defendants Joseph Scaminace, Steven J. Demetriou, Hans-Georg Betz,
Richard W. Blackburn, Carl R. Christenson, John A. McFarland, Patrick S. Mullin
and Katharine L. Plourde comprised the OM Board. Scaminace served as OM’s
CEO starting in June 2005 and as Chairman of the OM Board starting in August
2005. Demetriou served as CEO and Chairman of the board of directors of Aleris
Corp. (“Aleris”), a company majority-owned by an investment group that includes
affiliates of Apollo. The Complaint named several additional defendants that
Plaintiffs have now voluntarily dismissed without prejudice: Joseph M. Gingo,
Allen A. Spizzo, Apollo, Platform Specialty Products Corporation (“Platform”)
and certain Apollo and Platform affiliates.2
Apollo, a Delaware limited liability company, along with its subsidiaries,
owns and manages the funds and entities that own OM’s merger partners, Duke
Acquisition Holdings, LLC and Duke Acquisition, Inc. Platform, a Delaware
corporation headquartered in Florida, is a diversified producer of high technology
specialty chemical products. Platform joined with Apollo to acquire OM.
2
Spizzo and Gingo were to be included in OM’s 2015 slate of OM Board nominees
pursuant to a Settlement Agreement (defined below) between OM and activist investor,
FrontFour Capital Group LLC (“FrontFour”). On March 9, 2016, the Court entered a
stipulated dismissal without prejudice as to all claims against Spizzo and Gingo.
Plaintiffs initially alleged aiding and abetting claims against Apollo, Platform and their
respective affiliates, but filed a notice of voluntary dismissal without prejudice as to those
parties and claims on April 27, 2016.
5
B. OM’s Financial Struggles Prior to the Merger
From 2005 to 2015, OM engaged in a growth strategy favoring acquisitions.
OM spent over $1.5 billion in pursuit of this strategy but, by January 2015, the
Company’s enterprise value was only $750 million. As a result, OM’s return on
investment severely lagged behind its self-identified peer group. OM’s stock
traded at $36.76 per share in January 2014; by June 2015, it had fallen to $26.54.
Analyst reports indicated that OM’s underperformance was due in large part
to operational mishandling attributable to management, including failure to
optimize costs and manage working capital. For example, KeyBank Capital
Markets reported that OM’s Selling, General & Administrative Expense ratio to
sales was 21%, as compared to the average peer group ratio of 14%, and that OM’s
“working capital as a percentage of sales far exceeded that of the Company’s peer
group.”3
C. FrontFour Seeks Operational and Managerial Improvements
In 2013, FrontFour, an activist investor holding approximately 5.8% of
OM’s outstanding stock, began to communicate with OM’s management regarding
the Company’s lackluster performance. On January 9, 2015, FrontFour issued a
public letter to the OM Board and Scaminace “expressing serious concerns with
the Company’s performance and destruction of stockholder value,” and proposing
3
Consolidated Am. Verified Class Action Compl. (“Compl.”) ¶ 35.
6
an operational overhaul that would double OM’s stock price by the end of 2016.4
A feature of FrontFour’s campaign to provide a “fresh perspective”5 for OM was to
highlight the disconnect between executive compensation and company
performance.6 According to FrontFour, even in the midst of OM’s value-
destructive acquisition strategy and failure to meet compensation targets, the OM
Board continued to pay OM’s executives at twice the levels of OM’s peers.7
In its January 9, 2015 letter, FrontFour identified a specific “path to value
creation . . . through (i) . . . cost-cutting opportunities of at least $50 million,
(ii) the release of $30 million in working capital and (iii) a $250 million stock
buyback.”8 On January 28, 2015, following the OM Board’s refusal to entertain
FrontFour’s proposals, FrontFour announced its delivery of formal nominations of
three director candidates for election to the OM Board at OM’s June 1, 2015
4
Compl. ¶ 36.
5
Id.
6
Though FrontFour directed its criticisms at management, they also implicated
Demetriou’s interests by targeting him for replacement on the OM Board as part of their
proxy campaign.
7
Indeed, the OM Board’s willingness to pay relatively excessive compensation to OM’s
executives led to “corporate governance monitor Glass Lewis . . . consistently assign[ing]
OM’s compensation practices[] a grade of ‘D’ . . . or worse.” Compl. ¶ 37.
8
Compl. ¶ 38. By FrontFour’s calculations, “successful implementation of these
initiatives should result in OM Group’s shares trading at approximately $60 per share,
which represents upside of nearly 120%.” Compl. ¶ 39 (emphasis removed) (quoting a
statement made by David A. Lorber, managing member and principal owner of
FrontFour).
7
annual stockholder meeting.9 Analysts reacted favorably to FrontFour’s proposals,
raising price estimates for OM’s stock to $35–$40 per share.
In response to FrontFour’s January 9 letter, OM issued a press release on
January 30, 2015, announcing that it was in the process of implementing most of
FrontFour’s proposals. Soon after, OM announced a series of additional
improvements to its operations and cost structure that would result in substantial
cost savings by year end 2017. On March 4, 2015, FrontFour filed a presentation
with the SEC expressing concerns regarding certain aspects of OM’s performance
similar to those expressed in its January 9 letter including, inter alia, OM’s value-
destructive acquisition strategy, excessive executive compensation and low
margins. The March 4 presentation contained a financial analysis that assumed
effective implementation of FrontFour’s recommendations and calculated a
resulting implied share price of $55.51—more than double the company’s
January 8, 2015 share price.
D. The OM Board Engages BNP Paribas to Asses Strategic Options
As early as 2005, OM’s various business lines began attracting interest from
potential strategic purchasers. On August 12, 2014, a financial advisor acting on
behalf of Platform contacted OM to express Platform’s interest in purchasing
OM’s electronic chemicals business. OM refused Platform’s overture and
9
Due to the OM Board’s classified structure, only three of the eight OM Board members
stood for reelection in 2015.
8
indicated that it was not interested in pursuing a sale of only one segment of its
business. In September and October 2014, three financial sponsors expressed to
OM an interest in acquiring or investing in the company, including a written
indication of interest submitted by Advent International Corporation (“Advent”) to
purchase all of OM’s outstanding common stock at $27.00 to $32.00 per share.10
On October 31, 2014, the OM Board held a special meeting at which management
detailed its concern that “activists could derail the execution of [OM’s] strategy”
by calling for “change[s] in capital priorities” and an “externally driven change of
board members.”11 According to Plaintiffs, these concerns prompted the OM
Board to engage BNP Paribas to assess potential value creation options.12
During the October 31, 2014 meeting, BNP Paribas presented to the OM
Board preliminary financial analyses of OM and its strategic alternatives. Included
in the presentation was BNP Paribas’s opinion that OM’s “‘[a]bility to maximize
value [through a sale] may be limited due to few, if any strategic buyers for the
whole company,’ since OM’s ‘[d]iverse portfolio of assets limits merger
candidates,’ and that a lack of operational synergies could limit the premium in any
10
Plaintiffs allege that at this point in time, while FrontFour had not yet initiated a proxy
contest, OM management and the OM Board were acutely aware of pressure from activist
investors. Compl. ¶ 48.
11
Compl. ¶ 48. During this September–October 2014 timeframe, FrontFour attempted to
meet with OM management “and OM management cancelled at least twice.” Id.
12
Id.
9
transaction with a financial buyer.”13 The OM Board authorized management to
engage BNP Paribas to conduct a confidential market test and negotiated a fee
structure under which BNP Paribas would be paid approximately $10 million,
$7 million of which was contingent on OM consummating a merger.
E. The OM Board Focuses on Financial Sponsors
On November 10, 2014, Apollo and Platform submitted a joint indication of
interest to acquire all of OM’s common stock at a range of $27.00 to $32.00 per
share (Apollo and Platform joint bids are hereafter referred to as Apollo bids). The
following day, the OM Board met and authorized management to engage with both
Advent and Apollo regarding their respective proposals, and to request that BNP
Paribas contact additional potential suitors. The OM Board indicated that the
outreach efforts should remain limited to financial buyers reasonably likely to
consider a transaction involving a sale of the entire company. This outreach
13
Compl. ¶ 49 (quoting BNP Paribas Oct. 31 Presentation at OMG00013, Suppl.
Transmittal Aff. of Thomas P. Will in Supp. of the Director Defs. Reply Br. in Supp. of
Their Mot. to Dismiss Pls. Consolidated Am. Verified Class Action Compl. Ex. A (“BNP
Paribas Oct. 31 Presentation”). Defendants point out that in that same presentation BNP
Paribas discussed other strategic options including doing nothing and remaining
standalone, engaging in a LBO, pursuing acquisitions or realigning the Company’s
portfolio through divestitures which would involve the “sale of certain assets that may be
more synergistic for another party.” The presentation of the divestiture approach
included a discussion of sales of OM divisions to “strategic acquirors” in “multiple
transactions” and noted that such a strategy carried certain identified “risks and
complexities.” Id. at OMG00013, OMG00031. See Amalgamated Bank v. Yahoo! Inc.,
132 A.3d 752, 797 (Del. Ch. 2016) (the “incorporation-by-reference doctrine permits a
court to review the actual document to ensure that the plaintiff has not misrepresented its
contents and that any inference the plaintiff seeks to have drawn is a reasonable one.”).
10
strategy was in apparent conflict with BNP Paribas’s presentation suggesting that a
transaction with a financial sponsor would forfeit synergistic value that might be
obtained by selling OM’s specific business units to strategic buyers.
Beginning in mid-November, BNP Paribas contacted five additional
financial sponsors, none of which expressed interest in acquiring OM at a price
competitive with Advent’s or Apollo’s proposals. Also in mid-November, Advent
and Apollo executed confidentiality agreements after which OM released
additional due diligence materials.14 “On December 1, 2014, shortly after Apollo
began its due diligence, Demetriou had a lunch meeting with Matthew Michelini, a
key employee in Apollo’s metals group.”15
F. The OM Board Engages a Second Financial Advisor
Plaintiffs allege that the OM Board desired an opinion from a second
financial advisor because it recognized that BNP Paribas was conflicted.16 To that
end, the OM Board (with assistance from OM management) hired Deutsche Bank
to act as the OM Board’s third-party advisor independent of management. The
14
Plaintiffs allege on information and belief that the confidentiality agreements
“contained standstill provisions prohibiting Advent and Apollo/Platform from acquiring
OM for one year or more unless OM released them from the standstill.” Compl. ¶ 55.
15
Compl. ¶ 109. The Complaint says nothing of what occurred at this meeting.
16
Plaintiffs’ only allegations regarding BNP Paribas’s purported conflict are that BNP
Paribas had experience working with management and therefore may favor a transaction
with a private equity buyer content with retaining management, and that $7 million of
BNP’s $10 million compensation became payable only upon consummation of a deal.
Compl. ¶¶ 57–60.
11
OM Board initially discussed a two-stage engagement of Deutsche Bank,
consisting of a flat fee for independent advice and, if the sale process progressed,
the possibility that the engagement would continue through consummation.
Contrary to its initial plan, however, the OM Board ultimately engaged Deutsche
Bank on a fully contingent basis, conditioning a payment of $5.32 million on the
delivery of a fairness opinion and the closing of a transaction. Prior to its
engagement, Deutsche Bank disclosed to OM that it had received “significant” fees
from Apollo since January 1, 2013, but omitted the precise amount of those fees.17
By the end of December 2014, Apollo had proposed to acquire OM for
between $33.00 and $35.00 per share, and Advent had submitted a non-binding
proposal to acquire OM for $34.00 per share. During a meeting of the OM Board
on January 15, 2015, Deutsche Bank reported that no strategic buyer had expressed
interest in acquiring the entire company. It also provided its opinion that OM’s
implied share price for the Company as a whole was $36.80.
On January 21, 2015, OM rejected Advent’s request for exclusivity causing
Advent, on March 15, 2015, formally to withdraw its indication of interest. In the
17
The Proxy (defined below), after disclosing that OM knew that Apollo had paid
“significant fees” to Deutsche Bank at the inception of Deutsche Bank’s engagement,
also disclosed that the actual amount of the fees paid by Apollo to Deutsche Bank
amounted to over €140 million since 2013. Deutsche Bank had also received more than
€2 million from Platform over the same time period. Transmittal Aff. Of Thomas P. Will
in Supp. of the Director Defs. Br. in Supp. of Their Mot. to Dismiss Pls. Consolidated
Am. Verified Class Action Compl. Ex. A (OM Group, Inc. DEFM14A Proxy
Statement(“Proxy”)) at 25, 47–48.
12
meantime, the OM Board’s negotiations with Apollo, which had begun in 2014,
continued into 2015. OM provided Apollo access to its electronic data room and
additional due diligence.18 On April 26, 2015, Apollo submitted a bid of $34.00
per share. Three days later, during a telephonic OM Board meeting, Deutsche
Bank presented the OM Board with a DCF analysis valuing OM’s stock at $35.27
per share.
G. The OM Board Settles with FrontFour
As the OM Board continued to negotiate with Apollo, it also was negotiating
with FrontFour in an effort to head off a proxy fight. According to the Complaint,
the OM Board never revealed to FrontFour during the course of these negotiations
that it was actively pursuing a sale of the Company.
On March 23, 2015, OM announced that it reached an agreement with
FrontFour regarding OM Board composition (the “Settlement Agreement”). The
Settlement Agreement contemplated that OM would submit two FrontFour
nominees, David A. Lorber and Joseph M. Gingo, in its 2015 proxy statement for
approval at the annual stockholder meeting. In addition, OM would expand the
OM Board by one seat to be filled by Allen A. Spizzo, one of FrontFour’s original
nominees.19
18
Compl. ¶ 55; Proxy at 26.
19
Plaintiffs allege that OM was motivated to enter the Settlement Agreement as a means
to silence FrontFour’s criticism of OM’s executive compensation. They also allege that
13
In return for OM’s agreement to seat FrontFour’s designees on the OM
Board, FrontFour agreed to vote its shares in favor of the OM Board’s nominees
and to abide by standstill provisions in the Settlement Agreement that prohibited
FrontFour from taking any public action regarding OM for nearly a year. The
prohibited public actions included, inter alia, proxy solicitation activity,
participation in group voting or voting trusts with respect to OM securities,
encouragement of contests to the OM Board’s nominations, participation in merger
proposals or communications in opposition to any merger, pursuit of additional
OM Board representation and any requests to amend the terms of the Settlement
Agreement.20
H. The OM Board Approves a Transaction with Apollo
The OM Board terminated negotiations with Apollo on two separate
occasions in May 2015 when negotiations over deal terms stalled. On both
occasions, Apollo capitulated and negotiations resumed.
silencing FrontFour contributed to Scaminace’s interest in closing the Apollo transaction.
Specifically, the Apollo transaction would allow Scaminace (and other executives) to
continue with OM without the “oversight by new Board members who were profoundly
critical of their performance and sought to . . . sharply reduce their compensation,” or
would at least ensure that if Apollo ultimately dismissed Scaminace following a change
of control event, he “would be eligible for [a] generous golden parachute package[] . . .
valued at approximately $15 million.” Compl. ¶¶ 105, 107.
20
Plaintiffs argue that the standstill provisions, in combination with OM’s announcement
of the transaction the same day the stockholders were to seat FrontFour’s directors
Compl. ¶ 81, “indicates that OM negotiated the Settlement Agreement specifically with
an eye towards ensuring that the Transaction (with Apollo) could be completed without
interference.” Compl. ¶ 119.
14
On May 31, 2015, the OM Board approved Apollo’s offer to acquire all
outstanding OM shares for $34.00 per share cash, resulting in a total transaction
value of approximately $1 billion.21 Following the transaction, it was understood
that Apollo would retain OM’s magnetic technologies, battery technologies and
advanced organics businesses, and would sell OM’s electronic chemicals and
photomasks businesses to Platform for total cash consideration of $365 million.22
While BNP Paribas and Deutsche Bank both provided fairness opinions
endorsing the transaction, the Complaint contains several allegations that question
the bona fides of the bankers’ views. According to Plaintiffs, alone or together
these concerns raise a reasonable inference that the OM Board acted unreasonably
in approving the transaction.23
First, the $34.00 deal price fell within the lower half of BNP Paribas’s
suggested fair value range of $29.42 to $41.59 per share and Deutsche Bank’s
suggested fair value range of $31.25 to $41.75 per share.24 In this regard, Plaintiffs
21
Plaintiffs’ question, in addition to the price, the timing of the transaction, citing the fact
that OM’s June 1, 2015 announcement of the transaction caused its stock to jump from
$26.54 on May 29 to $34.04 on June 1, allowing Scaminace to exercise options with a
strike price of $34.03 at a profit of approximately $480,000.
22
Following Apollo’s post-transaction spin-off, “Platform announced that the OM
businesses it acquired would provide a synergy opportunity to it in excess of $20 million
over two years.” Compl. ¶ 81.
23
Compl. ¶¶ 72-79.
24
When presenting its analysis to the OM Board, one of Deutsche Bank’s DCF analyses
stated that the implied share price was $36.27. Compl. ¶ 72.
15
allege that the May 31, 2015 meeting was the first time the OM Board considered a
“sum-of-the-parts” valuation, which was conducted by Deutsche Bank and resulted
in a fair value range of $32.75 to $39.50 per share.25
Second, Plaintiffs allege that the fair value ranges provided by BNP Paribas
and Deutsche Bank undervalued OM because management and the OM Board
“instructed the . . . financial advisors to use revised projections that were less
favorable to [OM] and contradicted statements that OM management had made to
investors.”26 Specifically, in a March 6, 2015 presentation to the OM Board,
management provided revised projections that reduced share price estimates by
approximately $4.00 per share by lowering OM’s projected EBITDA and
increasing its projected working capital requirements.27 The increase in working
capital—responsible for a $3.21 per share reduction in the revised projections—
was “inappropriate, given that OM management had been stressing to investors
that they expected [OM’s] working capital to decline.”28
25
Id.
26
Compl. ¶ 73.
27
The revised projections reduced the cumulative EBITDA projections for 2015–2019
from $796 million to $767 million, reducing OM’s valuation by $2.12 per share. At the
same time, the revised projections increased the cumulative working capital over the
same period to $74 million from $53 million, reducing OM’s valuation by $3.21 per
share. The total reduction of $5.33 per share was partially offset by a decrease in capital
expenditures from $238 million to $216 million, increasing the fair value per share by
$1.34. Compl. ¶¶ 73–77.
28
Compl. ¶ 78 (emphasis removed) (citing March 2 and April 30, 2015 analyst calls with
OM’s CFO discussing expectations regarding working capital requirements).
16
Third and finally, although the $34.00 per share deal price represents an
approximate 28% premium to OM’s unaffected stock price, it also reflects “only an
18.3% premium over the average closing price for the 30 trading days prior to the
transaction . . ., [and is] an approximate 10% discount to OM’s 2014 high, an
approximate 17% discount to OM’s five-year high, and a greater than 50%
discount to OM’s all-time high.”29 According to Plaintiffs, OM’s Management
could have increased OM’s market capitalization merely by signaling an end to its
acquisition binge. Instead, by plowing forward into the transaction, OM prompted
certain sophisticated investors, including a Seeking Alpha analyst, Cove Street
Capital and an APB Financial Group analyst, to criticize the transaction and to
perform their own sum-of-the-parts analyses which revealed a fair value per OM
share ranging from “the low $40s” to $49 per share.30
In addition to the value left on the table by the OM Board, Plaintiffs point to
several non-monetary flaws in the transaction they allege reflect the OM Board’s
rush to lock up and close the first deal that would allow them to avoid the
embarrassment of a battle with FrontFour. Sections 1.6 and 7.5 of the Merger
Agreement provided for the OM Board’s mandatory resignation immediately
before the closing date, forcing out the FrontFour nominees almost immediately
29
Compl. ¶ 84.
30
Compl. ¶ 90.
17
after they were elected and ensuring that any improvements implemented during
their short tenure would inure to the exclusive benefit of Apollo and Platform.31
The Settlement Agreement assured that any opposition to the transaction FrontFour
might have expressed was silenced.
Section 6.2 of the Merger Agreement provided for a “go-shop” period of just
over one month, but allowed Apollo and Platform to scrutinize the entire process.
The go-shop lasted from May 31, 2015 through July 5, 2015 (the “Go-Shop
Period”). During this time, upon providing non-public information requested by
any potential acquirer, OM was required to “substantially concurrently” provide to
Apollo and Platform that same information unless it was previously disclosed.
Section 6.2 also required OM to keep Apollo and Platform “informed on a
reasonably current basis (and in any event within forty-eight hours) of the status
and terms and conditions of any [competing proposal], including the price and
form of consideration and all material terms and conditions (other than the identity
of the party thereto) . . . and any material developments, discussions or
negotiations in connection therewith.”32 If informed of a superior proposal,
Section 6.2 granted Apollo and Platform corresponding “matching rights.”
31
Sections 1.6 and 7.5 of the Merger Agreement further provide that the directors of the
merger subsidiary are to replace the OM Board upon its mandatory resignation.
32
Proxy at Annex A (Agreement and Plan of Merger (“Merger Agmt.”)) § 6.2(a).
18
While the Merger Agreement countenanced post-go-shop negotiations with
Excluded Parties,33 it prohibited OM from soliciting third parties after 12:00 a.m.
eastern time on July 5, 2015. After that time, the OM Board could negotiate with
third parties only if the third party submitted an unsolicited proposal the OM Board
could reasonably expect to lead to a Company Superior Proposal.34 Notably,
Section 6.2(f) of the Merger Agreement prohibited OM from altering its
recommendation to the stockholders in favor of the Apollo transaction unless the
OM Board determined in good faith that the third-party proposal could reasonably
qualify as a Company Superior Proposal. This prohibition effectively barred the
OM Board from recommending any transaction for less than 90% of OM’s assets.
Finally, Sections 9.1(c) and 9.2(b) of the Merger Agreement contemplated a
termination fee of $18.3 million (approximately 1.83% of the transaction price) if
the agreement terminated prior to expiration of the Go-Shop Period or at any time
in favor of an agreement with an Excluded Party. If terminated in any other
circumstance, the Merger Agreement’s termination fee would jump to $36,575,000
(approximately 3.66% of the transaction price).
33
The Merger Agreement defines “Excluded Party” as any party from whom OM Group
has received, prior to termination of the Go-Shop Period, a Company Superior Proposal
or an offer that “could reasonably be expected to lead to a Company Superior Proposal.”
Id. § 11.2.
34
The Merger Agreement defines “Company Superior Proposal” as a “written, [bona fide
inquiry, proposal or offer] . . . that if consummated would result in a third party . . .
acquiring, directly or indirectly, (1) more than 50% of [OM’s] Common Stock or
(2) [more than 90 % of OM’s] assets or businesses.” Id.
19
I. The Post-Signing Go-Shop
During the Go-Shop Period, BNP Paribas and Deutsche Bank contacted
forty-nine parties, including twenty-one strategic buyers, marking the first
solicitation to potential strategic acquirers during the sale process. Only five
parties responded, three of which entered into confidentiality agreements with OM
and received due diligence materials. On July 5, 2015, the first day following the
expiration of the Go-Shop Period, OM received a letter dated July 4, 2015 from
Advanced Technology & Materials Co., Ltd. (“Advanced”) indicating its interest
to acquire OM, jointly with one or more co-investors, for between $35.00 and
$36.00 per share.
The OM Board determined that Advanced was an Excluded Party.
Accordingly, the OM Board could continue to negotiate with Advanced beyond the
Go-Shop Period. But Advanced had a problem. It was a foreign company that was
banned by federal law from acquiring certain OM assets that sold high-tech
equipment to the U.S. military. Advanced asked OM to postpone the stockholder
vote on the Apollo merger to allow it more time to work around the problem. The
OM Board declined. According to Plaintiffs, this effectively took Advanced out
the running. On August 4, 2015, OM reported that Advanced would not submit a
Company Superior Proposal and reaffirmed its recommendation that OM’s
stockholders approve the Merger Agreement.
20
J. The Closing
On July 10, 2015, OM filed its Form DEFM14A Proxy Statement (the
“Proxy”) noticing an August 10, 2015 special stockholder meeting to approve the
Merger Agreement and recommending that stockholders vote their shares in favor
of the transaction. At the August 10 special meeting, the stockholders approved,
by a margin of 10:1, the Merger Agreement and a precatory executive
compensation scheme in line with the merger. The Merger Agreement closed on
October 28, 2015. Also on October 28, Scaminace announced his decision to step
down as CEO thereby triggering $15 million in golden parachute payments.
K. The Procedural History
Six complaints challenging the transaction were filed in this Court within
weeks of OM’s announcement of the deal. The Court consolidated the complaints
and granted a motion to expedite in aid of a motion to enjoin the transaction. After
conducting expedited discovery, Plaintiffs withdrew their motion for a preliminary
injunction and amended their complaint to seek post-closing remedies. Defendants
then moved to dismiss the amended Complaint.
21
II. ANALYSIS
A. Motion to Dismiss Standard
“[T]he governing pleading standard in Delaware to survive a motion to
dismiss is reasonable ‘conceivability.’”35 Under this standard, the Court will deny
the motion if the plaintiff has pled a reasonably conceivable cause of action. 36 All
well-pled allegations in the complaint will be regarded as true, but the Court need
not accept conclusory allegations that lack any factual basis.37
B. Standard of Review
When faced with a stockholder challenge to a board of directors’ exercise of
fiduciary duties in the course of negotiating and approving a corporate transaction,
the prime determination for the Court is the applicable standard of review.
“Delaware has three tiers of review for evaluating director decision-making: the
business judgment rule, enhanced scrutiny, and entire fairness.”38 This Court
generally applies the entire fairness standard “when the board labors under actual
conflicts of interest.”39 While Plaintiffs allege that each member of the OM Board
35
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011).
36
Id.
37
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011); Criden v.
Steinberg, 2000 WL 354390, at *1 (Del. Ch. Mar. 23, 2000).
38
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011).
39
In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013); In re Walt Disney
Co. Deriv. Litig., 907 A.2d 693, 747 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006).
22
acted out of an overpowering sense of self-interest (indeed, reputational self-
preservation), they do not advocate for entire fairness review.40 This likely reflects
their appreciation that the Complaint alleges no facts from which one could infer
that a majority of the OM Board was interested in the transaction or that the OM
Board labored under the influence of a controller.
Accordingly, the question here is whether the transaction is subject to the
business judgment rule or enhanced scrutiny under Revlon. The OM stockholders
were cashed-out in the merger. At first glance, therefore, it would appear that
Revlon governs and that the Court should review the sales process to determine
whether the OM Directors acted reasonably to pursue the transaction that offered
the best value reasonably available to the OM stockholders.41
Before the Court launches into its Revlon analysis, however, it must first
account for the fact that another “qualified decision maker,” the disinterested OM
40
Tr. of Oral Arg. on Defs. Mot. to Dismiss (“Oral Arg. Tr.”) 74 (“Your Honor, you’re
correct in that I am not arguing entire fairness.”).
41
TW Servs., Inc. v. SWT Acq. Corp., 1989 WL 20290, at *7 (Del. Ch. March 2, 1989)
(Allen, C.) (“In the settling of a sale of a company for cash, the board’s duty to
shareholders is inconsistent with acts not designed to maximize present share value, acts
which in other circumstances might be accounted for or justified by reference to the long
run interests of shareholders.”); In re Rural Metro Corp., 88 A.3d 54, 82–83 (Del. Ch.
2014) (“Enhanced scrutiny applies in [the context of a sale of a corporation for cash]
because of the potential conflicts of interest that fiduciaries face when considering
whether to sell the corporation, to whom, and on what terms.”).
23
stockholders, overwhelmingly approved the transaction.42 If their approval was the
product of a fully informed, uncoerced vote, then, under Corwin v. KKR Financial
Holdings, LLC,43 the irrebuttable business judgment rule would apply and the OM
Board’s decision to approve the Merger would be “insulate[d] … from all attacks
other than on grounds of waste.”44 Since the effect of the stockholder vote will
dictate the standard of review by which the OM Board’s conduct will be measured,
it is appropriate to address this potentially case dispositive issue first.45
C. The OM Stockholders’ Vote Was Fully Informed
In the wake of disinterested stockholder approval of a merger not subject to
the entire fairness standard, a plaintiff seeking to hold directors individually liable
42
See J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40
Wm. Mitchell L. Rev. 1443, 1444 (2014) (“To the extent the board is compromised by
the situational pressures that trigger enhanced scrutiny, the collective body of
disinterested and informed stockholders should be able to act as a qualified decision
maker to which the court should defer.”).
43
125 A.3d 304 (Del. 2015).
44
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 1001 (Del. Ch. 2014), aff’d,
Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 312-14 (Del. 2015). See also Volcano
Corp. S’holder Litig., 2016 WL 3626521, at *9 (Del. Ch. June 30, 2016) (“[R]ecent
Supreme Court decisions confirm that the approval of a merger by a majority of a
corporation’s outstanding shares pursuant to a statutorily required vote of the
corporation’s fully informed, uncoerced, disinterested stockholders renders the business
judgment rule irrebuttable.”).
45
Corwin, 125 A.3d at 308 (“[W]e need not delve into whether the Court of Chancery’s
determination that Revlon did not apply to the merger is correct for a single reason: it
does not matter. Because the Chancellor was correct in determining that the entire
fairness standard did not apply to the merger, the Chancellor's analysis of the effect of the
uncoerced, informed stockholder vote is outcome-determinative, even if Revlon applied
to the merger.”).
24
for approving the merger must take either or both of two paths to overcome a
motion to dismiss: (1) demonstrate that the transaction amounted to corporate
waste; or (2) demonstrate that the stockholder vote was uninformed or coerced.46
The path of least resistance is to challenge the soundness of the stockholder vote.47
Indeed, “the [Corwin] doctrine applies only to fully informed, uncoerced
stockholder votes, and if troubling facts regarding director behavior were not
disclosed that would have been material to a voting stockholder, then the business
judgment rule is not invoked.”48
Plaintiffs have not attempted to plead a claim for waste but instead seek to
avoid Corwin burden-reduction by arguing that the OM Board either failed to
disclose material information or made materially misleading partial disclosures to
the OM stockholders regarding the merger thereby rendering the vote uninformed.
It is well-settled that directors of Delaware corporations owe to the stockholders “a
fiduciary duty to disclose fully and fairly all material information within the
46
Id. at 312–14.
47
Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016) (ORDER) (noting that dismissal
“is typically the result” in cases where a plaintiff has challenged a transaction on grounds
of waste, a concept that has “little ‘real-world relevance’” in M&A transactions “because
stockholders would be unlikely to approve a transaction that is wasteful.”). See also In re
Zale Corp. S’holders Litig., 2015 WL 6551418, at *2 (Del. Ch. Oct. 29, 2015); City of
Miami General Employers’ and Sanitation Employees’ Retirement Trust v. Comstock, et
al., 2016 WL 4464156, at *17 (Del. Ch. August 24, 2016) (“[I]n such cases, dismissal is
typically the result because the transaction then can be attacked only on grounds of
waste. . .”).
48
Corwin, 125 A.3d at 312.
25
board’s control when it seeks shareholder action.”49 “The duty of directors to
observe proper disclosure requirements derives from the combination of the
fiduciary duties of care, loyalty and good faith.”50 A fact is material if “there is a
substantial likelihood that a reasonable shareholder would consider it important in
deciding how to vote.”51 Stated differently, material facts are those that, if
disclosed, would “significantly alter the ‘total mix’ of information.”52
To establish the materiality of an omitted fact, a plaintiff “must show a
substantial likelihood that the omitted facts would have assumed actual
significance in the deliberations of a reasonable stockholder. . . .”53 While the
determination of materiality is a case specific endeavor,54 our courts have
recognized that a board’s disclosure obligation is “not boundless”55 and that the
board need not disclose information simply because it “might be helpful.”56 Thus,
a board need not disclose “[c]onsistent and redundant facts” or “insignificant
49
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
50
Malone v. Brincat, 722 A.2d 5, 11 (Del. 1998).
51
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)).
52
Abrons v. Maree, 911 A.2d 805, 813 (Del. Ch. 2006).
53
McMillan v. Intercargo Corp., 1999 WL 288128, at *5 (Del. Ch. May 3, 1999).
54
Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997).
55
In re CheckFree Corp. S’holders Litig., 2007 WL 3262188, at *2 (Del. Ch. Nov. 1,
2007).
56
Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000).
26
details and reasonable assumptions” and must remain mindful of “the fallacy that
increasingly detailed disclosure is always material and beneficial disclosure.”57
Here, 89.6% of the shares voted at the stockholder meeting approved the
transaction, representing 75.7% of OM’s total outstanding common shares.
Nevertheless, Plaintiffs urge the Court to ignore the stockholder vote because the
Proxy was misleading in three material respects: (1) it omitted information
regarding Advanced’s competing bid through misleading partial disclosures; (2) it
omitted information about Demetriou’s alleged conflicts of interest; and (3) it
omitted information about the evolution of Deutsche Bank’s engagement and the
timing of the OM Board’s discovery of the extent of Deutsche Bank’s conflicts.58
57
Zirn v. VLI Corp., 1995 WL 362616, at *4 (Del. Ch. June 12, 1995), aff’d, 681 A.2d
1050 (Del. 1996)). See also In re Answers Corp. S’holders Litig., 2011 WL 1366780, at
*5 (Del. Ch. Apr. 11, 2011) (noting that public disclosures need not “inundate”
stockholders “with an overload of information”).
58
Curiously, the Complaint does not allege that the OM Board failed to disclose facts that
would allow stockholders to appreciate the factual bases of the gravamen of Plaintiffs’
breach of fiduciary duty claim, including the financial advisors’ views that separate sales
of OM’s divisions would yield more value for stockholders than a sale of OM in the
aggregate, the rushed timing of the transaction to a avoid confrontation with a
shareholder activist, or the flaws in the management projections used by the OM Board to
value OM. The Corwin doctrine does not apply if “troubling facts regarding director
behavior were not disclosed that would have been material to a voting stockholder. . . .”
Corwin, 125 A.3d at 312. And while a board need not engage in “self-flagellation,”
Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997), it is telling that
Plaintiffs have not suggested that the OM stockholders were not told of material facts
relating to FrontFour, including the FrontFour settlement, the advice received by the OM
Board from financial advisors regarding the value of sum-of-the-parts transactions,
management projections or the details of the alleged banker conflicts (as opposed to the
timing of the OM Board’s discovery of the conflicts).
27
Whether the Company’s disclosures are adequate is a mixed question of law
and fact.59 In this case, I am satisfied that no further development of the factual
record would be useful in determining the materiality of the alleged disclosure
deficiencies. Whatever discovery that might be useful in evaluating the disclosures
has been taken by Plaintiffs in aid of their later-abandoned motion for preliminary
injunction and the fruits of that effort have been incorporated within the
Complaint. Moreover, Plaintiffs have not identified any areas of factual dispute
with respect to their disclosure claims and I can discern none. The identified
omissions or misleading partial disclosures are either legally material or they are
not. I will address them in turn.60
1. Advanced’s Competing Bid
Plaintiffs argue that the Proxy’s failure to disclose (i) that Advanced “made
a written proposal in the $35.00 to $36.00 per share range during the Go-Shop
[Period] . . .; and (ii) that Advanced . . . requested additional time to work out
certain issues in order to submit a [Company] Superior Proposal but the Board
59
Zirn v. VLI Corp., 681 A.2d 1050, 1055 (Del. 1996).
60
Even though Plaintiffs elected not to press their “disclosure claims” pre-closing in
connection with their ultimately-abandoned motion for preliminary injunction, see In re
Transkaryotic Ther., Inc.954 A.2d 346, 360-62 (Del. Ch. 2008) (expressing a preference
to address disclosure claims prior to the stockholder vote), it is appropriate to address
them on the merits in this procedural context since Defendants have invoked the Corwin
doctrine and thereby have called the question of whether the stockholder vote approving
the merger was uncoerced and fully informed. See City of Miami Gen. Empls. & San.
Empls. Ret. Trust v. Comstock, 2016 WL 4464156, at *9 (Del. Ch. Aug. 24, 2016).
28
refused to consider the request” are both material omissions that render the Proxy
materially misleading.61 According to Plaintiffs, the omissions are particularly
misleading in light of the Proxy’s partial disclosures that (i) an Excluded Party
emerged during the Go-Shop Period; (ii) the OM Board negotiated with the
Excluded Party; and (iii) the Excluded Party ultimately did not submit a Company
Superior Proposal. In Plaintiffs’ view, these “partial and incomplete disclosures”
misleadingly suggested to OM’s stockholders that Advanced’s bid was below
Apollo’s and that Advanced walked away from negotiations when, in fact, the OM
Board refused to consider Advanced’s request for a time extension.62
Plaintiffs point to Arnold v. Soc’y for Sav. Bancorp, Inc.,63 where our
Supreme Court recognized that a partial and incomplete disclosure of arguably
immaterial information regarding the history of negotiations leading to a merger
might result in a materially misleading disclosure if not supplemented with
information that would allow the stockholders to draw the complete picture. 64
Against the Arnold backdrop, although not conceding the point, Plaintiffs are
willing to spot the Defendants their argument that the negotiations with Advanced
61
Pls. Opp’n to the Director Defs. Mot. to Dismiss (“Pls. Answering Br.”) 46.
62
Id. at 47–48. Oral Arg. Tr. 80 (“The disclosures that we just read give the distinct
impression . . . that Advance[d] just walked away, that they weren’t interested. And
that’s demonstrably not true. They were interested. They wanted to continue working,
and the board said no.”).
63
650 A.2d 1270 (Del. 1994).
64
Id. at 1281.
29
were so tentative and the likelihood of a deal with Advanced was so speculative
that any facts relating to an Advanced proposal would be deemed immaterial as a
matter of Delaware law.65 Even so, Plaintiffs argue that once the Proxy “traveled
down the road of partial disclosure of the history” of discussions with Advanced,
the OM Board was obliged to “provide the stockholders with an accurate, full, and
fair characterization of those historic events.”66
While Plaintiffs’ statement on Delaware law regarding partial disclosures is
correct as a general matter, it does not quite complete the circle. “The partial
disclosure rule is implicated only where the omission of a related fact renders the
partially disclosed information materially misleading.”67 Even in the partial
disclosure context, our Supreme Court’s guidance on materiality is still the
benchmark. And given the Proxy’s discussion of the Advanced overture, with
references to defined terms within the Merger Agreement that place the potential
proposal in context, I cannot reasonably infer that the absence of the information
65
This Court generally will deem as immaterial for disclosure purposes a board’s
decision to shut down negotiations with a potential acquirer that have not produced an
offer worth pursuing. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *12
(Del. Ch. June 27, 2008) (“In the usual case, where a board has not received a firm offer
or has declined to continue negotiations with a potential acquirer because it has not
received an offer worth pursuing, disclosure is not required.”). Indeed, “requiring
disclosure of every material event that occurred and every decision not to pursue another
option would make proxy statements so voluminous that they would be practically
useless.” In re Lukens Inc. S’holders Litig., 757 A.2d 720, 736 (Del. Ch. 1999), aff’d sub
nom., Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000).
66
Arnold, 650 A.2d at 1280.
67
Zirn, 681 A.2d at 1057 (emphasis in original).
30
Plaintiffs have identified as omitted facts from the Proxy rendered the Proxy
materially misleading.
In a section titled “Subsequent Events”, which appears after the history of
the merger negotiations, the Proxy discloses that “[p]rior to the expiration of the
Go-Shop Period, the Board received a written company takeover proposal.”68
Based on this information, the stockholders were aware that a party had come
forward during the Go-Shop Period with a proposal that potentially competed with
the Apollo offer. The Proxy continues: “[a]fter consulting with its financial
advisors and legal counsel, the Board determined that the party submitting the
proposal is an excluded party under the Merger Agreement with which the
Company may continue to negotiate following the end of the Go-Shop Period until
such party ceases to be an excluded party as defined under the Merger
Agreement.”69 The term “Excluded Party” is defined in the Merger Agreement as:
any Person, or group of Persons from whom the Company or any of
its Representatives has received, prior to the No-Shop Period Start
Date, a Company Takeover Proposal that the Company Board or duly
constituted or authorized committee thereof determines, in good faith,
prior to or as of the No-Shop Period Start Date and after consultation
with its financial advisors and legal counsel, constitutes or could
reasonably be expected to lead to a Company Superior Proposal.70
68
Proxy at 32.
69
Id.
70
Merger Agmt. §11.2. The Proxy entreats stockholders more than once to “read the
entire Merger Agreement carefully.” See, e.g., Proxy at 5, 23, 75.
31
With this information, stockholders knew that, with the help of financial and
legal experts, the Board had determined that Advanced was an Excluded Party,
meaning that the Board had, in good faith, determined that Advanced’s proposal
either constituted or could reasonably be expected to lead to a Company Superior
Proposal. The term “Company Superior Proposal” is defined in the Merger
Agreement as:
a bona fide, written Company Takeover Proposal . . . (i) that if
consummated would result in a third party . . . acquiring, directly or
indirectly, (1) more than 50% of the Company Common Stock or
(2) assets or businesses of the Company and its Subsidiaries
representing more than 90% of the consolidated assets, revenues or
net income of the Company and its Subsidiaries . . . that is reasonably
capable of being completed as proposed on a timely basis, after taking
into account (A) all financial, legal, regulatory and other aspects of
such Company Takeover Proposal . . . and (B) the identity of the
Person making such Company Takeover Proposal, and (ii) that the
Company Board determines in good faith, after consultation with legal
counsel and its financial advisor . . . is more favorable to the
stockholders of the Company than the Merger.71
Based on this information, the stockholders knew that the Excluded Party had
submitted a proposal that either was or could lead to a bona fide offer for at least
50% of the common stock or 90% of the Company’s assets and that the Board, in
good faith, thought the proposal could be more favorable to stockholders than the
Apollo offer. The Proxy made clear, however, that
[t]here can be no assurance that the proposal or any other alternative
proposal will ultimately lead to a superior proposal, as negotiations
71
Merger Agmt. § 11.2
32
with the excluded party may not result in a superior proposal and
could terminate at any time. The Company does not intend to make
any public announcement regarding the negotiations with the
excluded party unless such party ceases to be an excluded party or the
Board makes a change of recommendation.72
The company later announced that the bidder would not be making a
superior proposal. This, in turn, allowed stockholders to conclude that for either
“financial, legal, or regulatory” reasons, the Board, in good faith, had determined
that the offer would not be more favorable to stockholders than the current merger
proposal or that it was not “reasonably capable of being completed on a timely
basis.” Indeed, given that Advanced, a Chinese company, faced unresolved and
potentially unresolvable regulatory obstacles to an acquisition of certain of OM’s
assets that were connected to the United States military, the disclosure that
Advanced could not make a “Company Superior Proposal” reflected accurately the
OM Board’s assessment that Advanced was not able to make a proposal on a
“timely basis” that was “reasonably capable of being completed” from a
“regulatory” perspective. There was no material omission and no materially
misleading partial disclosure.73
72
Proxy at 32.
73
Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *12 (Del. Ch.
Nov. 30, 2007) (“[A] reasonable line has to be drawn or else disclosures in proxy
solicitations will become so detailed and voluminous that they will no longer serve their
purpose.” (alteration in original) (internal quotation marks omitted)); Dent v. Ramtron
Int’l Corp., 2014 WL 2931180, at *15 (Del. Ch. June 30, 2014) (“Delaware law does not
require management ‘to discuss the panoply of possible alternatives to the course of
33
Plaintiffs also suggest that the OM Board made the wrong call when it
determined that the Advanced overture was not worth pursuing after designating
Advanced an “Excluded Party” during the Go-Shop Period.74 A similar argument
was raised and rejected in City of Miami General Employers’ and Sanitation
Employees’ Retirement Trust v. Comstock.75 There, Chancellor Bouchard
concluded that the plaintiff’s disclosure claim boiled down to an argument that
plaintiff disagreed with a Special Committee’s decision not to pursue another
acquisition proposal and that other “stockholders should have been informed about
the offer in case they, too, disagreed with the Special Committee.”76 The
Chancellor noted that the Board was “not obliged to [make such a disclosure]
under Delaware law, which does not require disclosing details about other offers
action it is proposing,’ in part because ‘stockholders have a veto power over fundamental
corporate changes (such as a merger) but entrust management with evaluating the
alternatives and deciding which fundamental changes to propose.’”) (internal quotation
marks omitted).
74
Oral Arg. Tr. 82–83 (“[T]he mere fact of telling stockholders that this other potential
superior bid is out there, ‘I said no to extend the time because I thought I wasn't allowed
to,’ might cause them to vote down the deal and allow that extra time. That's within the
discretion of the shareholders. For them to say, ‘Well, I'm not going to tell you because
you might get confused and vote against this transaction,’ that's precisely why they
should have explained it to them and let the shareholders make an informed vote.”).
75
2016 WL 4464156 (Del. Ch. Aug. 24, 2016).
76
Id. at *15.
34
that directors conclude are not worth pursuing.”77 The same is true for the OM
Board.78
2. Demetriou’s Conflicts of Interest
Plaintiffs next allege that the Proxy’s failure to inform OM stockholders that
“(i) Demetriou was Chairman and CEO of a company partially owned by Apollo;
and (ii) . . . Demetriou met with Apollo during the sales process” constitute
material omissions. To be sure, stockholders of Delaware corporations are
“entitled to know that certain of their fiduciaries [have] a self-interest that [is]
arguably in conflict with their own, and the omission of [that] fact [is] material.”79
As in all matters of public disclosure, materiality is the touchstone of the
board’s disclosure duty. This is true with respect to the disclosure of director
conflicts.80 And not every fact tending remotely to suggest that a board member’s
interest might differ in some respect from that of the stockholders amounts to a
material omission.81 Plaintiffs must allege facts from which the Court may
77
Id.
78
Simonetti Rollover IRA, 2008 WL 5048692, at *12.
79
Eisenberg v. Chicago Milwaukee Corp., 537 A.2d 1051, 1061 (Del. Ch. 1987).
80
See Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116, 122-23 (Del. Ch. 1986)
(dismissing disclosure claims regarding director conflicts on summary judgment because
alleged omissions not material as a matter of law).
81
Id.
35
reasonably infer that “there is a substantial likelihood that a reasonable shareholder
would consider [the omission] important in deciding how to vote.”82
The Complaint alleges no facts from which I can reasonably infer that the
omitted facts relating to Demetrious’ connection to Apollo reflect an actual conflict
or are otherwise material. The Complaint alleges: (1) Demetriou was the CEO of
Aleris; (2) Apollo (through its affiliates) owns 18.99% of Aleris as part of an
investment group; and (3) on December 1, 2014, Demetriou had lunch with
“Matthew Michelini, a key employee in Apollo’s metals group.”83 Other than
conclusory assertions of conflict, however, the Complaint pleads no facts that
would allow a reasonable inference that a single lunch meeting between an Apollo
employee and an executive of a company in which Apollo and its affiliates have an
ownership stake would somehow compromise Demetriou’s independence or
otherwise be material to a reasonable investor.84
82
Rosenblatt, 493 A.2d at 944 (quoting TSC Indus., Inc., 426 U.S. at 449).
83
Compl. ¶ 109.
84
See In re CompuCom Sys., Inc. S’holders Litig., 2005 WL 2481325, at *9 (Del. Ch.
Sept. 29, 2005) (conclusory allegations of director conflict not sufficient). Plaintiffs do
not cite a single case, and I am aware of none, in which a remote potential conflict of a
single fiduciary was deemed per se material. In all of the cases cited by the Plaintiffs for
the proposition that stockholders have the right to full disclosure of potential conflicts,
the undisclosed potential conflict occurred in factual scenarios in which the directors had
either an undisclosed financial interest directly adverse to stockholders or in which there
were reasons to believe that a director with an undisclosed conflict had actual or potential
influence over other members of the Board. Pls. Answering Br. 49–50. See, Eisenberg v.
Chicago Milwaukee Corp., 537 A.2d 1051 (Del. Ch. 1987) (holding that an Offer to
Purchase used for a self-tender offer contained material omissions because, among other
36
Notably, Plaintiffs do not allege that Apollo controlled or even influenced
Demetriou or that Demetriou controlled or had undue influence over any other
members of the OM Board. Plaintiffs’ conclusory allegation that “Demetriou was
influenced to support the Transaction” due to his “pre-existing relationship with
OM’s counterparty Apollo”85 does not make it reasonably conceivable that this
information should have been inserted in the Proxy or, if it was included, that it
would have changed the total mix of information available to investors or would be
important to a reasonable investor in deciding how to vote her shares. Thus, even
if Plaintiffs’ conclusory allegations regarding Demetriou’s conflict were deemed
factual and true, without even the slightest indication much less allegation that
Demetriou could exercise undue influence over the other indisputably independent
deficiencies, it failed to disclose that half of the directors, as holders of significant
amounts of common stock, had a direct financial conflict of interest with preferred
stockholders); In re Lear Corp. S’holder Litig., 926 A.2d 94 (Del. Ch. 2007) (holding that
a proxy statement contained material omissions because it failed to disclose a CEO, the
negotiator singularly employed by the board to obtain the best price for the stockholders,
had an acute liquidity need which could rationally lead him to favor a deal at a less than
optimal price); Millenco L.P. v. meVC Draper Fisher Jurvetson Fund I, Inc., 824 A.2d 11
(Del. Ch. 2002) (holding that it is material for stockholders to know the interconnected
relationships of independent and insider directors when the insider director has de jure
and de facto control over the independent directors at another entity); In re Orchard
Enterprises, Inc. S’holder Litig., 88 A.3d 1 (Del. Ch. 2014) (holding that genuine issue of
material fact as to whether proxy statement's disclosures about negotiating committee
chairman's relationship with controlling stockholder were inaccurate or misleading
precluded summary judgment).
85
Compl. ¶ 109.
37
members of the OM Board, I cannot accept Plaintiffs’ contention that the omission
of facts relating to the Demetriou “conflict” was material.86
3. Deutsche Bank Conflicts
Plaintiffs’ final argument to challenge the cleansing effect of the stockholder
vote is that the stockholders were uninformed regarding material aspects of the
OM Board’s engagement of Deutsche Bank. Specifically, they allege that the
Proxy misled OM stockholders in two material respects: (1) the Proxy failed to
disclose that the OM Board did not discover the precise amount fees paid by
Apollo to Deutsche Bank until the day the OM Board approved the merger; and (2)
the Proxy failed to disclose that the OM Board initially contemplated hiring
Deutsche Bank on a flat fee basis but then inexplicably converted the engagement
to a contingency fee arrangement.
“Because of the central role played by investment banks in the evaluation,
exploration, selection, and implementation of strategic alternatives, this Court has
required full disclosure of investment banker compensation and potential
conflicts.”87 It is important that stockholders “understand what factors might
86
I note that Plaintiffs deposed Demetriou in aid of their motion for preliminary
injunction and cited frequently to his deposition transcript throughout their Complaint. If
there was a factual basis to allege that Demetriou controlled other members of the OM
Board, Plaintiffs certainly would have pled those facts.
87
Del Monte, 25 A.3d at 832.
38
influence the financial advisor’s analytical efforts.”88 Here, the Proxy thoroughly
and accurately disclosed the terms under which Deutsche Bank was engaged by the
Board to provide investment banking advice and the extent to which Deutsche
Bank had previously provided services to Apollo and Platform.
With respect to the terms and circumstances of Deutsche Bank’s
engagement, the Proxy disclosed that Deutsche Bank would be paid $1.5 million
upon delivery of a fairness opinion and that payment of the balance of the fee was
contingent upon consummation of the merger.89 The Proxy also disclosed that
“more than €140 million in fees [had been paid to Deutsche Bank] from Apollo”
since January 1, 2013.90 In this regard, stockholders were advised that the OM
Board knew upon Deutsche Bank’s engagement that it “had an ongoing
relationship with Apollo and its affiliated funds and had received significant fees
88
David P. Simonetti Rollover IRA, 2008 WL 5048692, at *8.
89
Specifically, the Proxy states that
[p]ursuant to an engagement letter between OM Group and Deutsche Bank,
dated February 4, 2015, OM Group has agreed to pay Deutsche Bank a fee
estimated to be approximately $5.32 million for its services as financial
advisor to the non-executive members of the Board in connection with the
merger, of which $1,500,000 became payable upon delivery of its opinion
(or would have become payable if Deutsche Bank had advised the Board
that it was unable to render its opinion) and the remainder of which is
contingent upon consummation of the merger.
Proxy at 47.
90
Id. at 47–48.
39
from Apollo and its affiliates for a variety of investment and commercial banking
services over the prior three years.”91
With these disclosures in hand, OM stockholders knew precisely the amount
and circumstances under which Deutsche Bank would be paid for its services. And
they knew that the OM Board was aware that Deutsche Bank had received
“significant fees” from Apollo at the time the OM Board agreed to the
engagement. It is not reasonably conceivable that stockholders would have found
the timing of the OM Board’s discovery that “significant fees” means “€140
million” to be important in deciding whether to vote to approve the merger.92
Plaintiffs’ argument that the Proxy materially omitted that the OM Board
altered the compensation arrangement with Deutsche Bank from fixed fee to
contingency fee fares no better. While Plaintiffs have correctly recited that our law
“require[s] full disclosure of investment banker compensation and potential
conflicts”93 so that “stockholders [can] understand what factors might influence the
91
Id. at 25 (emphasis added).
92
Such a disclosure would add little, if anything, to the total mix of information available
to stockholders and, at best, might tend to expose the OM Board to a potential claim for
breach of the duty of care. Yet it is well settled that “a board is not required to engage in
‘self-flagellation’ and draw legal conclusions implicating itself in a breach of fiduciary
duty from surrounding facts and circumstances prior to a formal adjudication of the
matter.” Stroud, 606 A.2d 75, 84 n.1 (Del. 1992).
93
Del Monte, 25 A.3d at 832.
40
financial advisor’s analytical efforts,”94 they have failed to articulate in what
manner the Proxy materially missed this mark. The OM stockholders were fully
apprised of Deutsche Bank’s past work with Apollo and of the contingent nature of
its engagement by the OM Board. They were not misled as to Deutsche Bank’s
incentives. To the extent Plaintiffs are arguing that the evolution of the OM
Board’s thinking regarding the terms by which Deutsche Bank would be engaged
should have been disclosed, this is precisely the sort of “‘play-by-play’ information
that this Court repeatedly has eschewed requiring companies to disclose.”95
Plaintiffs have not well-pled facts that allow me to conclude it is reasonably
conceivable that any of the omissions regarding Deutsche Bank would have
significantly altered the total mix of information available to OM’s stockholders or
that a reasonable investor would have considered this information important in
deciding how to vote on the proposed merger.96 Consequently, Plaintiffs’
allegations regarding Deutsche Bank fail to state a disclosure claim and fail to
undermine the cleansing effect of stockholder approval.
94
David P. Simonetti Rollover IRA, 2008 WL 5048692, at *8.
95
Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *15 (Del. Ch. June 30, 2014). See
also In re Sauer-Danfoss Inc. S’holders Litig., 65 A.3d 1116, 1130 (Del. Ch. 2011)
(holding that the board’s “underlying reasons for acting” generally not deemed material);
Newman v. Warren, 684 A.2d 1239, 1246 (Del. Ch. 1996) (“asking why a fiduciary took
a certain action does not state a meritorious disclosure claim.”).
96
Abrons, 911 A.2d at 813.
41
D. The Business Judgment Rule Applies
Having determined that a majority of the disinterested, uncoerced and fully
informed OM stockholders approved the merger, it follows that the standard of
review will shift from enhanced scrutiny to the business judgment rule.97 And,
‘[w]hen the business judgment rule standard of review is invoked because of a
vote, dismissal typically is the result.”98 As Plaintiffs have not alleged or argued
that the merger amounted to waste, they cannot overcome the presumption of the
business judgment rule.99
III. CONCLUSION
The OM stockholders’ fully informed, disinterested and uncoerced approval
of the Merger Agreement cleansed any failure of the OM Board to act reasonably
to seek the transaction offering the best value reasonably available. Consequently,
the motion to dismiss the Complaint must be GRANTED.
IT IS SO ORDERED.
97
Corwin, 125 A.3d at 308–312; Volcano, 2016 WL 3626521, at *11 (a transaction
approved by a fully informed vote of the majority of a company’s disinterested,
uncoerced stockholders irrebuttably invokes the business judgment rule and “can [only]
be challenged on the basis that it constituted waste.”).
98
Singh v. Attenborough, 137 A.3d 151, 152 (Del. 2016) (ORDER).
99
Id.
42