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DELAWARE CORPORATEWestlaw Journal

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VOLUME 29, ISSUE 24 / JUNE 8, 2015

PRE-SUIT DEMAND

9 It’s Wal-Mart shareholder plaintiffs’ last stand in Delaware, 8th Circuit

In re Wal-Mart Stores Del. Derivative Litig. (Del. Ch.)

BREACH OF DUTY

10 CEO siphons Sears’ assets to save self at investors’ expense, suit says

Solak v. Lampert (Del. Ch.)

MERGER CHALLENGE

11 AOL should hang up on Verizon’s $4.4 billion merger offer, shareholder says

Williams v. AOL Inc. (Del. Ch.)

BOOKS & RECORDS

12 AbbVie investor appeals dismissal of records suit over aborted Shire merger

Se. Pa. Transp. Auth. v. AbbVie Inc. (Del.)

ADVANCEMENT

13 Judge orders Alpha to pay legal defense for Massey’s ex-CEO

Blankenship v. Alpha Appalachia Holdings (Del. Ch.)

MISREPRESENTATION

14 MoneyGram stock offering belied looming Wal-Mart competition, suit says

Iron Workers Dist. Council of New England Pension Fund v. MoneyGram Int’l (D. Del.)

ALISON FRANKEL’S ON THE CASE

15 Financial advisers in Rural Metro appeal: We’re not M&A gatekeepers

CONTINUED ON PAGE 16

SEE PAGE 5

COMMENTARY

El Paso Corp. hit with $171 million in damages for defective related-party transactionTransactional specialists Gardner Davis and Danielle Whitley of Foley & Lardner examine a recent Delaware Chancery Court opinion and explain how the failures of El Paso Corp.’s special committee and investment banker cost it $171 million in a cautionary tale for those considering related-party transactions.

SEE PAGE 3

COMMENTARY

Recent applications of Daimler v. Bauman shrink jurisdiction over foreign corporationsAmiad Kushner and Richard Bodnar of Lowenstein Sandler LLP provide a comprehensive update on the impact of the landmark 2014 U.S. Supreme Court decision in Daimler AG v. Bauman on cases involving the personal jurisdiction of corporations around the nation.

PRE-SUIT DEMAND

JPMorgan director duty in ‘London Whale’ debacle already decided, Delaware judge saysShareholders cannot sue JPMorgan Chase & Co.’s directors in Delaware over the “London Whale” rogue trading fiasco because New York judges have already found in parallel cases that the directors were not negligent, a Chancery Court judge has ruled.

Asbestos Workers Local 42 Pension Fund v. Bammann et al., No. 9772, 2015 WL 2455469 (Del. Ch. May 22, 2015).

In a May 22 revised opinion, Vice Chancellor Sam Glasscock III dismissed a pension fund’s derivative suit on the ground that the business-judgment rule protected the directors’ decision to bar shareholder suits on behalf of JPMorgan over high-risk trading in complex securities called credit derivatives.

He said the issue has already been decided by New York state and federal judges who dismissed two parallel cases after finding that the directors validly exercised their independent business judgment when they decided those shareholder actions were not in the company’s best interests. In re JPMorgan Chase & Co. Derivative

REUTERS/Mike Theiler

The lawsuits said JPMorgan CEO Jamie Dimon, shown here, caused the company to hire a team of speculative traders headed by London-based Bruno Iksil — the “London Whale” — and pushed them to make huge, high-risk bets on credit derivatives.

© 2015 Thomson Reuters2 | WESTLAW JOURNAL n DELAWARE CORPORATE

TABLE OF CONTENTSWestlaw Journal Delaware CorporatePublished since November 1986

Publisher: Mary Ellen Fox

Executive Editor: Donna M. Higgins

Managing Editor: Phyllis Lipka Skupien, Esq.

Senior Editor: Frank [email protected]

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Pre-suit Demand: Asbestos Workers Local 42 Pension Fund v. BammannJPMorgan director duty in ‘London Whale’ debacle already decided, Delaware judge says (Del. Ch.) ..........1

Commentary: By Amiad Kushner, Esq., and Richard Bodnar, Esq., Lowenstein Sandler LLPRecent applications of Daimler v. Bauman shrink jurisdiction over foreign corporations ............................... 3

Commentary: By Gardner Davis, Esq., and Danielle Whitley, Esq., Foley & LardnerEl Paso Corp. hit with $171 million in damages for defective related-party transaction .................................5

Pre-suit Demand: In re Wal-Mart Stores Del. Derivative Litig.It’s Wal-Mart shareholder plaintiffs’ last stand in Delaware, 8th Circuit (Del. Ch.) ........................................9

Breach of Duty: Solak v. LampertCEO siphons Sears’ assets to save self at investors’ expense, suit says (Del. Ch.) ........................................ 10

Merger Challenge: Williams v. AOL Inc.AOL should hang up on Verizon’s $4.4 billion merger offer, shareholder says (Del. Ch.) ..............................11

Books & Records: Se. Pa. Transp. Auth. v. AbbVie Inc.AbbVie investor appeals dismissal of records suit over aborted Shire merger (Del.) ....................................12

Advancement: Blankenship v. Alpha Appalachia HoldingsJudge orders Alpha to pay legal defense for Massey’s ex-CEO (Del. Ch.) ......................................................13

Misrepresentation: Iron Workers Dist. Council of New England Pension Fund v. MoneyGram Int’lMoneyGram stock offering belied looming Wal-Mart competition, suit says (D. Del.) ..................................14

Alison Frankel’s On the CaseFinancial advisers in Rural Metro appeal: We’re not M&A gatekeepers .........................................................15

Chancery Court Cases Filed............................................................................................................................. 17

News in Brief ..................................................................................................................................................... 17

Case and Document Index ...............................................................................................................................18

JUNE 8, 2015 n VOLUME 29 n ISSUE 24 | 3© 2015 Thomson Reuters

Amiad Kushner (L) is a litigation partner with Lowenstein Sandler LLP in New York, and Richard Bodnar (R) is a litigation associate in the firm’s Roseland, N.J., office.

COMMENTARY

Recent applications of Daimler v. Bauman shrink jurisdiction over foreign corporationsBy Amiad Kushner, Esq., and Richard Bodnar, Esq. Lowenstein Sandler LLP

In an era of increasing globalization, it is not surprising that foreign corporations are routinely sued in U.S. courts, even if they have few if any operations in the forum state.

Counsel for plaintiffs seeking redress from foreign corporations (as well as counsel for the foreign corporations) would be well-advised to familiarize themselves with the U.S. Supreme Court’s January 2014 decision in Daimler AG v. Bauman, which limited the circumstances in which foreign corporations could be subject to general jurisdiction in U.S. courts.1 This article reviews a number of recent decisions in the (now significant) body of case law applying Daimler.

In Daimler, the plaintiffs (all residents of Argentina) asserted tort claims against DaimlerChrysler AG in California federal court, alleging that Mercedes-Benz Argentina, a subsidiary of Daimler, assisted Argentine security forces in torturing and killing MB Argentina workers during the country’s “Dirty War.”

The plaintiffs contended the California court had general jurisdiction over Daimler because its indirect subsidiary Mercedes-Benz USA LLC distributed Mercedes vehicles in California and that MB USA’s contacts with California could be imputed to Daimler for jurisdictional purposes. The U.S. District Court for the Northern District of California granted Daimler’s motion to dismiss for lack of personal jurisdiction. On appeal, an

en banc panel of the 9th U.S. Circuit Court of Appeals reversed.

The Supreme Court reversed the appeals court. The high court stated that in determining general jurisdiction over a corporation, the proper inquiry was whether the corporation’s “affiliations with the state are so continuous and systematic as to render it essentially at home in the forum state.”

The court identified two “paradigm” bases for general jurisdiction over a corporation: its place of incorporation and principal place of business. Applying those principles, the court found that the California court lacked general jurisdiction over Daimler because (even assuming that MB USA were Daimler’s agent), Daimler and MB USA were not incorporated in California and did not have their principal place of business there.

v. Dollywood Co., the U.S. District Court for the Southern District of New York found that it lacked general jurisdiction over three corporations that were not incorporated in New York and that did not have their principal place of business in New York.2

Significantly, the court reached this conclusion notwithstanding that one of the defendants was registered to do business in New York and paid taxes in New York.

The court acknowledged that “[p]rior to Daimler, some courts concluded that registering to do business in the state of New York automatically confers general jurisdiction on that person or entity.”

The court concluded, however, that after Daimler, “the mere fact of [the foreign corporation] being registered to do business is insufficient to confer general jurisdiction in

a state that is neither its state of incorporation or its principal place of business.”3

Similarly, in In re M/V MSC Flaminia, the court considered whether a European chemical company and its U.S. affiliate were subject to general jurisdiction in New York.4 Neither of these corporations was incorporated in New York or had its principal place of business in New York.

Further, on an aggregate basis, New York accounted for less than 1 percent of the corporations’ worldwide sales, less than the threshold that the Supreme Court had rejected in Daimler (where the Daimler subsidiary at issue derived over 2 percent of its sales from the forum state). Applying the principles articulated in Daimler, the court found that it lacked general jurisdiction over the defendants.

The high court identified two “paradigm” bases for general jurisdiction over a corporation: its place

of incorporation and principal place of business.

Further, Daimler’s contacts with California were not distinguishable from “every other state in which MB USA’s sales are sizable.”

A number of recent decisions applying Daimler have found that there was no general jurisdiction over a foreign corporation. For example, in Chatwal Hotels & Resorts LLC

4 | WESTLAW JOURNAL n DELAWARE CORPORATE © 2015 Thomson Reuters

CONTINUING IMPACT

The continuing impact of Daimler has also been highlighted in a number of recent cases in which foreign corporations were held to have waived jurisdictional defenses that became viable after Daimler. It is important to note that personal jurisdiction (whether based on general or specific jurisdiction) can be waived by a party, unlike subject matter jurisdiction.

For example, in Peters v. Peters, the trial court entered an order in December 2013 (pre-Daimler) requiring nonparty UBS (a Swiss entity) to comply with a subpoena served by the plaintiff.5 UBS objected to the subpoena on bank secrecy grounds, while conceding that the court had general jurisdiction.

This concession was not surprising because, prior to Daimler, courts routinely found that a party was subject to general jurisdiction in a state if it maintained a branch there (and thus had a continuous presence).6 One month after the trial court ordered UBS to comply with the subpoena, Daimler came down.

On appeal, UBS argued for the first time that under Daimler the court lacked personal jurisdiction over the bank and therefore could not compel compliance with the subpoena. The Appellate Division rejected this argument. The court held that since UBS did not contest that it is “essentially at home” in New York, UBS waived its objection based on personal jurisdiction.

Similarly, in Laydon v. Mizuho Bank Ltd. the plaintiff sued a number of domestic and foreign banks in New York federal court.7 The banks moved to dismiss in 2013 (pre-Daimler); four of the defendants entered into a stipulation reserving their right to bring a motion for lack of personal jurisdiction, while 10 defendants did not enter into the stipulation.

Seven months after Daimler was decided, the non-stipulating defendants brought a motion to dismiss for lack of personal jurisdiction, citing Daimler. The court held

that the non-stipulating defendants had waived their personal jurisdiction defense. This was a particularly harsh result, since the stipulating defendants were dismissed.

REGISTERING = JURISDICTION?

A critical issue brewing as a result of Daimler is whether registering to do business in a state constitutes consent to personal jurisdiction. Courts have reached different conclusions on this issue. For example, in Novartis Pharmaceuticals Corp. v. Mylan Inc., the court held that defendant Mylan Pharmaceuticals was subject to general jurisdiction in Delaware because it registered to do business in Delaware, whereas Mylan Inc. did not register and thus did not consent.8

In Vera v. Republic of Cuba (currently on appeal), the plaintiff judgment creditors sought the assistance of a number of domestic and foreign banks.9 Several banks including Banco Bilbao Vizcaya Argentina, moved to dismiss for lack of personal jurisdiction.

As the court stated, “any foreign corporation transacting business in the state of Missouri is required to register with the secretary of state,” and “[t]herefore, to extend the plaintiff’s reasoning to its natural conclusion, every foreign corporation transacting business in the state of Missouri would be subject to general jurisdiction here.” The court concluded that “Daimler clearly rejects this proposition.”

CONCLUSION

Daimler and its progeny continue to significantly affect the law of general jurisdiction. Counsel in cases involving foreign corporations sued in U.S. courts should carefully consider whether any jurisdictional defenses exist based on Daimler and its progeny. Further, foreign corporations that may have such defenses should assert them in a timely manner, because otherwise the defenses may be waived. WJ

NOTES1 Daimler AG v. Bauman, 134 S. Ct. 746 (2014).

2 Chatwal Hotels & Resorts LLC v. Dollywood Co., No. 14-CV-8679 CM, 2015 WL 539460, at *5 (S.D.N.Y. Feb. 6, 2015).

3 Though defendants were found not to be subject to general jurisdiction, the court found that it had specific jurisdiction relating to the transactions at issue. Thus, even if under Daimler general jurisdiction is lacking based on a corporation’s contacts with a forum, the corporation is not immune from jurisdiction if the cause of action relates to those contacts.

4 In re M/V MSC Flaminia, No. 12-CV-8892 SAS, 2015 WL 1849714, at *3-4 (S.D.N.Y. Apr. 22, 2015).

5 Peters v. Peters, 127 A.D.3d 656 (N.Y. App. Div., 1st Dep’t 2015).

6 Daimler, 134 S. Ct. at 735 n. 18; Sonera Holding B.V. v. Cukurova Holding A.S., 750 F.3d 221, 224–25 (2d Cir. 2014).

7 Laydon v. Mizuho Bank Ltd., No. 12 CIV. 3419 GBD, 2015 WL 1499185, at *2 (S.D.N.Y. Mar. 31, 2015).

8 Novartis Pharms. Corp. v. Mylan Inc., No. CV 14-777-RGA, 2015 WL 1246285, at *3 (D. Del. Mar. 16, 2015); see also Otsuka Pharm. Co. v. Mylan Inc., No. CIV.A. 14-4508 JBS, 2015 WL 1305764, at *10 (D.N.J. Mar. 23, 2015) (applying same logic and finding that Daimler did not alter the standard for finding jurisdiction by consent, including by registration).

9 Vera v. Republic of Cuba, No. 12 Civ. 1596 (AKH), 2015 WL 1244050, at *2 (S.D.N.Y. Mar. 17, 2015).

10 Neeley v. Wyeth LLC, No. 4:11-CV-00325-JAR, 2015 WL 1456984, at *2-3 (E.D. Mo. Mar. 30, 2015).

Counsel in cases involving foreign corporations sued in U.S. courts should carefully consider whether any jurisdictional

defenses exist based on Daimler and its progeny.

In holding that BBVA consented to general jurisdiction in New York, the court said Daimler and its progeny “should not be read so broadly as to eliminate the necessary regulatory oversight into foreign entities that operate within the boundaries of the United States,” and that “[w]hen corporations receive the benefits of operating in this forum, it is critical that regulators and courts continue to have the power to compel information concerning their activities.”

The court concluded that “BBVA consented to the necessary regulatory oversight in return for permission to operate in New York, and is therefore subject to jurisdiction requiring it to comply with the appropriate information subpoenas.”

However, in another recent decision, Neeley v. Wyeth LLC, the U.S. District Court for the Eastern District of Missouri declined to find general jurisdiction over a foreign corporation that was registered to do business in Missouri and designated a registered agent in the state.10


Gardner Davis (L) is a partner in the transactional and securities practice of Foley & Lardner in Jacksonville, Fla. He frequently represents buyers and sellers in M&A transactions and advises boards of directors and special committees in regard to fiduciary-duty issues. He can be reached at 904-359-8726 or [email protected]. Danielle Whitley (R) is a partner in the firm’s finance and financial institutions and transactional and securities practices. She focuses her practice in the areas of mergers and acquisitions, finance, and general corporate law. She can be reached at 904-359-8789 or [email protected].

COMMENTARY

El Paso Corp. hit with $171 million in damages for defective related-party transactionBy Gardner Davis, Esq., and Danielle Whitley, Esq. Foley & Lardner

The Delaware Chancery Court recently held El Paso Corp. liable for $171 million because of a defective related-party “dropdown” transaction with El Paso’s publicly held master limited partnership financing vehicle. El Paso didn’t really do anything wrong — other than drive too good a deal. The fault lies with the special transaction committee and the investment banker representing the MLP. But when the process breaks down, the controller ultimately pays the price.

INTRODUCTION

In In re El Paso Pipeline Partners LP, No. 7141, 2015 WL 1815846 (Del. Ch. Apr. 20, 2015), Vice Chancellor J. Travis Laster issued a stinging rebuke of the independent directors, whom he found to have acted in “subjective bad faith” by going against their better judgment and approving a transaction that they did not believe was in the MLP’s best interests. According to Vice Chancellor Laster, the independent directors chose to do what the parent wanted rather than what they believed would be best for the MLP.

The Chancery Court’s willingness to hold that the independent directors acted in bad faith — a drastic and unusual finding — probably results in part from the unusual procedural context of the case. Most cases involving directors’ alleged bad faith arise in the corporate context, in which directors

Pickering, Holt & Co., the committee’s financial adviser. Vice Chancellor Laster believed Tudor manipulated its valuation analysis to present the transaction in a light that would get the deal approved and enable it to collect its fee. This case, following in the wake of the Chancery Court’s Rural/Metro, El Paso, Atheros and Del Monte decisions, demonstrates heightened concern regarding investment bankers’ loyalty and objectivity.1 Frankly, it’s almost too much to expect that independent directors will diligently and

owe a fiduciary duty directly to the plaintiff shareholders. Under Delaware law, a finding of bad faith may expose the defendant directors to personal liability for monetary damages.

This case is different because the plaintiffs are limited partners in the publicly traded MLP. El Paso’s subsidiary is the corporate general partner of the MLP, and the independent directors approving the conflict transaction are directors of the corporate general partner.

Technically, the directors owe a direct fiduciary duty under corporate law only to El Paso, as the

sole shareholder of the corporate general partner.

Technically, the directors owe a direct fiduciary duty under corporate law only to El Paso, as the sole shareholder of the corporate general partner. Therefore, Vice Chancellor Laster could find that the directors acted in bad faith without exposing them to personal liability for monetary damages. El Paso’s subsidiary, the general partner of the partnership, will pay the damages in this case under a contract-based claim based on the partnership agreement.

Vice Chancellor Laster rightly placed much of the blame for the failed process on Tudor,

aggressively meet their responsibilities to get the best deal possible and simply say no when their banker works against them and distorts the facts to please the controlling parent and maintain an ongoing source of lucrative work.

BACKGROUND

El Paso Corp., an energy company focused on the exploration, production and transmission of natural gas, sponsored El Paso Pipeline Partners, LP, a publicly traded master limited partnership, to maximize the market value of its midstream assets and the amount of capital it could raise based on that valuation. El Paso’s midstream assets were governed by long-term capacity agreements that generated stable cash flows. Because the MLP is a pass-through entity for tax purposes, it could distribute the cash to investors in a tax-efficient manner.

This built-in tax advantage meant that investors valued the same cash flows more highly at the MLP level than at the El Paso corporate level. This enabled the MLP to issue equity at a lower cost of capital than El Paso could achieve.


El Paso owned the MLP’s general partner interest, representing a 2 percent economic interest, as well as approximately 52 percent of the publicly traded common units and all of the incentive distribution rights. El Paso exercised control over the MLP through the general partner. As a practical matter, the partnership had no employees of its own, and El Paso employees managed and operated the MLP’s business.

The corporate general partner’s board was loaded with present and former El Paso executives and Arthur Reichstetter, who retired after a long and distinguished investment banking career focused primarily in the energy industry.

From time to time, income-producing assets were sold by El Paso to the MLP. Similar related-party transactions proliferate in the oil and gas industry, where professionals call them dropdowns.

financial adviser. Tudor is a Houston-based investment banking boutique that specializes in the oil and gas industry. Its standard engagement letter called for a $500,000 fee plus expenses, with the entire fee contingent upon the issuance of a fairness opinion.

COMMITTEE FAULTED

Vice Chancellor Laster faulted the committee for repeatedly hiring the same advisers without considering other firms. He expressed a concern that the advisers became compromised by a desire to capture the continuing deal flow and resulting fees. He also implicitly criticized the contingent nature of Tudor’s fee. Reading between the lines, Vice Chancellor Laster would have preferred that Tudor receive a significant portion of its fee in the event that it advised against the transaction.

At the committee’s first meeting to consider the economics of the proposed deal, Tudor distributed a presentation to the committee that looked like the books from the prior dropdowns. There were subtle differences that seemingly were intended to improve the appearance of the current proposal. Tudor modified its presentation of precedent transactions to combine all transactions rather than separately break out minority acquisitions and control acquisitions, as it had done in the past. This approach enabled Tudor to raise the transaction multiple ranges for the proposed acquisition of a minority interest in Elba so that El Paso’s asking price fell within the range.

Tudor also played with its discounted cash flow methodology. For the prior dropdown of 51 percent of Elba, Tudor used a single DCF projection. For the proposed 49 percent dropdown, Tudor prepared three different DCF valuations. One had a five-year projection period, one had a 10-year projection period and one had a 15-year projection period.

Tudor calculated the terminal value using four exit multiples rather than three as it had done in the past. It also added a 6x multiple to the mix. Most significantly, Tudor reduced the upper bound of its discount from 14.5 percent to 12 percent. These changes widened the DCF range and moved El Paso’s price toward the center.

Finally, Tudor modified its valuation summary. On the page addressing the Southern asset, where El Paso was asking for the lowest multiple, Tudor provided bars for all three of its methodologies. Tudor did the same on the page addressing Elba and Southern together, where the lower multiple for Southern drove down the multiple El Paso was asking for the transaction as a whole. But on the page that addressed Elba by itself, Tudor only presented bars for its various DCF analyses and did not show its precedent transaction or comparable company analysis.

UNIFYING THEME FOUND

Vice Chancellor Laster found the unifying theme of these changes was to make El Paso’s asking price look better. Tudor did not identify any of these changes for the committee, and the committee members did not notice them. They did not learn of the changes until the lawsuit challenging the transaction approval process.

Vice Chancellor Travis Laster rightly placed much of the blame for the failed process on Tudor, Pickering,

Holt & Co., the committee’s financial adviser.

The limited partnership agreement governing the MLP permitted El Paso to engage in a transaction involving a conflict of interest, like a dropdown, if the transaction received “Special Approval.” The MLP’s limited partnership agreement defined special approval as approval from a conflicts committee comprised of qualified members of the board of directors of the MLP’s corporate general partner. The only contractual requirement for special approval was that the committee members believed in good faith that the transaction was in the best interest of the MLP.

Each time El Paso proposed a dropdown transaction to the MLP, the board of the MLP’s general partner would appoint an ad hoc committee to consider the specific transaction. The committee consisted of two retired El Paso executives and Reichstetter.

Reichstetter always served as chair and did all of the bargaining with the parent.

Each time, the committee obtained a marginal improvement in the El Paso’s opening offer and then granted special approval.

The committee always hired Akin Gump as its legal counsel and Tudor as its

In October of 2010, El Paso proposed that the MLP acquire El Paso’s 49 percent minority ownership interest in a liquefied natural gas terminal in Elba Island, Georgia, and a 190-mile pipeline connecting the terminal to four major interstate pipelines for $948 million in cash and debt. Earlier in 2010, the MLP purchased the controlling 51 percent ownership interest in Elba from El Paso. The proposal also included an option for the MLP to purchase an additional 13 percent of El Paso’s Southern Natural Gas subsidiary, in which the MLP already owned a 16 percent stake.

Upon receiving the proposal, Reichstetter asked Tudor to consider whether the weakening LNG market had undermined Elba’s attractiveness and to examine recent LNG transactions. He also followed up with an email asking Tudor to analyze each of the assets individually as well as on a combined basis. Reichstetter also asked Tudor to consider a new comparable acquisition category presenting just the three recent LNG asset deals and to look at the MLP’s public market performance since the March acquisition of the 51 percent controlling stake in Elba.


The following day, Ronald Kuehn, retired Chairman of El Paso and a member of the special committee, shared his thoughts about the proposal with his fellow committee members by email. The upshot was that he did not like having the MLP acquire the balance of Elba; he thought the price was too high and would result in an over-concentration of assets in a single class of assets. Kuehn provided several reasons for these conclusions.

At its next meeting, Tudor provided a presentation to the committee substantially identical in format to the prior presentation but with some additional modification. Most notably, Tudor changed the exit multiples it used in its DCF analysis to bring the proposed transaction price closer to the center of the DCF sensitivity. Tudor again did not identify the change to the committee, and the committee members did not notice the change.

When Reichstetter met with the chief financial officer of El Paso to discuss price, Reichstetter asked for a 3 percent reduction in the price. The El Paso CFO quickly agreed. There is no indication in the record that Reichstetter made the types of arguments that one would expect a motivated bargainer to make. He did not compare the asking price to the prior Elba dropdown or point out that Tudor had previously justified a higher price based on the acquisition of control. He did not cite the deterioration of the LNG market, and he did not mention Kuehn’s objections to the transaction.

After agreeing on price, the CFO of El Paso came back to Reichstetter to propose changing the deal to provide that the MLP acquire 15 percent of Southern.

The committee quickly met twice in three days to consider and approve the revised deal. Tudor’s presentation valued Elba and Southern as a package, while El Paso valued the assets separately. Tudor had previously valued the assets separately, and Reichstetter told Tudor to do so.

At the final meeting, Tudor opined that the combined transaction, but not its component parts, was fair from a financial point of view. The committee never learned what the breakdown in price was between Elba and Southern.

Members of the committee had no idea what the MLP paid for the additional 15 percent of Southern or how it compared to the prior purchase of Southern.

Though it did not present a separate analysis for the Southern and Elba assets to the committee, Tudor did the work internally. Tudor’s analysis indicated that at best, the MLP paid the same price on a percentage basis for 49 percent of Elba that it previously paid for control.

The plaintiff sought to prove at trial that the general partner breached the provision in the partnership agreement requiring that the committee members believe that the transaction is in the best interest of the MLP. The contractual standard did not require that the committee make a determination about the best interests of the common unit holders as a class or prioritize their interests over other constituencies. Nor did the contractual standard contemplate that a court would review the committee’s decision using an objective test, such as reasonableness.2

Unfortunately, Vice Chancellor Laster found that the members of the special committee, the investment bankers and the other defense witnesses had little to offer to support their decision. They had few specific recollections of the transaction, and they testified instead to what they typically did or generally would have done when responding to a proposed dropdown.6

THE TIPPING POINT

Vice Chancellor Laster found that the number of problems reached a tipping point. The composite picture that emerged, according to Vice Chancellor Laster, was one in which the committee members went through the motions.7 They did not subjectively believe that approving the dropdown was in the best interest of the MLP. They thought the dropdown would

“Tudor failed to perform the real work of an advisor to a committee,” the judge said.

For the purpose of trial, the contractual standard meant that the plaintiff bore the burden of proving by a preponderance of the evidence that the committee members did not hold the necessary subjective belief. Plaintiffs could prove this by showing either “subjective bad faith” or conduct “motivated by an actual intent to do harm,” which is the classic concept of “bad faith” addressed in In re Walt Disney World Co.3 Alternatively, the plaintiff could establish a lack of the necessary actual belief by evidence that the committee members intentionally failed to act in the face of a known duty to act, demonstrating a conscious disregard for their duties. This required the court to focus on the subjective beliefs of the specific directors accused of wrongful conduct.4

Vice Chancellor Laster found that the trial record revealed numerous problems with the transaction. None of these problems, standing alone, would have supported a finding that the committee members acted in subjective bad faith. Even a combination of the problems would not have been sufficient to overcome the presumption of good faith and the testimony of the committee members that they acted in good faith. Indeed, the transaction could have suffered from many flaws as long as the committee members reached a rational decision for comprehensible reasons.5

allow the MLP to increase distributions on its common units while achieving El Paso’s goal of raising inexpensive capital. However, neither factor meant that the transaction was in the best interest of the MLP. In this case, the vice chancellor found, notwithstanding the formal transaction documentation to the contrary, the committee did not decide that acquiring the balance of Elba at the price paid in the transaction was in the best interest of the MLP. In fact, the committee never learned enough about the price to make that determination.

Vice Chancellor Laster placed great emphasis on the committee members’ private emails. These emails included the opinion that the MLP already had an over-concentration of assets in the LNG trade and that the MLP should not acquire more of Elba, as well as substantial doubt regarding the value of the assets.8

Vice Chancellor Laster also placed weight on the fact that the special committee consciously disregarded what it had learned from the prior dropdown, involving 51 percent of Elba, after which the members of the committee acknowledged that the market thought the MLP had paid too much and decided they would do a better job the next time.9


Vice Chancellor Laster concluded, however, that rather than returning to their independent assessments of value, the committee allowed the price from the spring 51 percent control dropdown to anchor their counteroffer. Similarly, the committee members consciously ignored their own commitment to examine the transactions component separately and signed off on El Paso’s aggregate price.10

Moreover, when El Paso proposed to include 15 percent of Southern without providing a separate price for the two assets, it was impossible to determine how the deal priced either individually. Despite Reichstetter’s earlier instructions and the obvious reasons for valuing the components separately, Tudor did not analyze the two assets separately for the committee.

Internally, however, Tudor did analyze the components separately, and the plaintiffs’ expert used Tudor’s internal analysis to unpack the price.

Because of the experience with the prior 51 percent Elba dropdown, the committee knew better. They consciously disregarded their own independent and well-considered views about value when confronted by the El Paso CFO, even after the market had confirmed their views. They consciously disregarded their desire for separate analysis of the components of the proposed dropdown, even though it was obvious that separate pricing information was needed. “Their actions evidence[d] conscious indifference to their responsibilities to El Paso MLP.”11

SUBORDINATED WISHES

Vice Chancellor Laster found that the committee “subordinated their independently held views to the parent’s wishes.”12 Vice Chancellor Laster found that the committee members “did not want to acquire the balance of Elba in 2010 and believed subjectively that doing so was not in the best interest of MLP.”13

Vice Chancellor Laster found that Tudor’s work product further undermined any possible confidence in the committee. Vice Chancellor Laster found that “Tudor’s actions demonstrated that the firm sought to justify Parent’s asking price and collect its fee. Tudor’s approach made it all the more likely that the Committee practice appeasement as well.”14

Vice Chancellor Laster also found “Tudor manipulated the deal process through malfeasance. It is often said that valuation is more art than science, but this aphorism reflects the need for professionals to make case-specific judgments. For the dropdowns, Tudor practiced a different kind of art: the crafting of a visually pleasing presentation designed to make the dropdowns of the moment look as attractive as possible. This was a case in which ‘the financial adviser, eager for future business … compromises its professional valuation standards to achieve the controller’s unfair objective.’”15 “Tudor manipulated its presentations in unprincipled ways to justify the deal.”16

TUDOR SLAMMED

Vice Chancellor Laster slammed Tudor.

“Tudor failed to perform the real work of an adviser to a committee,” he said. “Instead of helping the committee develop alternatives, identify arguments, and negotiate with the controller, Tudor sought to make the price that the parent proposed look fair. Tudor’s real client was the deal, and the firm did what it could to justify the fall dropdown, get to closing, and collect its contingent fee. Rather than helping the committee bolster its claim to have acted in good faith, Tudor undercut it.”17

Under the terms of the partnership agreement, each committee member had an affirmative duty to conclude that the transaction was “in the best interest of the partnership.” Vice Chancellor Laster found that committee members did not do so.18

“They viewed El Paso MLP as a controlled company that existed to benefit Parent by providing a tax-advantaged source of inexpensive capital,” he said. “They knew that the fall dropdown was something the parent wanted, and they deemed it sufficient that the transaction was accretive for the holders of common units … everyone understood the routine and expected the transaction to go through with a tweak to the asking price. No one thought the committee might bargain vigorously or actually say ‘no.’”19

Vice Chancellor Laster found “the committee members and Tudor went through the motions, but the substance was lacking.”20 Because the committee members disregarded their known duty to determine that the proposed dropdown was in the best interest of El Paso MLP, they did not

act in good faith. Consequently, the general partner breached the LP agreement by engaging in the dropdown and was assessed $171 million in damages plus interest and costs.

CONCLUSION

The El Paso Pipeline decision represents another shot across the bow by the Delaware Chancery Court for special committees in the context of controlling shareholder transactions. The opinion highlights the risk that independent directors face where controlling shareholder management and the special committee’s professional advisers essentially lull the independent directors into complacency and acceptance. The case shows the need for both vigilance in the process and the dangers of just going through the motions and trying to get along with the controlling parent. WJ

NOTES1 In re Rural Metro Corp. S’holders Litig., 2014 WL 971718 (Del. Ch. Mar 7, 2014); In re El Paso Corp. S’holders Litig., 41 A.3d 432, 439 (Del. Ch. 2012); In re Atheros Commc’ns S’holder Litig., 25 A.3d 813, 830-31 (Del. Ch. 2011); In re Del Monte Foods Co. S’holder Litig., 25 A.3d 813, 830-31 (Del. Ch. 2011).

2 El Paso Pipeline Partners, 2015 WL 1815846 at *15 (Del. Ch. Apr. 20, 2015).

3 In re Walt Disney World Co. Derivative Litig., 906 A.2d 27, 64 (Del. 2006).

4 El Paso Pipeline Partners, 2015 WL 1815846 at *15.

5 Id. at *16.

6 Id.

7 Id. at *17.

8 Id.

9 Id. at *19.

10 Id. at *19.

11 Id. at *21.

12 Id. at *17.

13 Id.

14 Id. at *21.

15 Id. at *22 (quoting Gerber v. Enter. Prods. Holdings LLC, 67 A.3d 400, 420-21 (Del. 2013)).

16 Id.

17 Id. at *24.

18 Id. at *25.

19 Id.

20 Id.


PRE-SUIT DEMAND

It’s Wal-Mart shareholder plaintiffs’ last stand in Delaware, 8th CircuitDissident Wal-Mart shareholders in Delaware and Arkansas have one last chance to get a green light to press their charges that the discount retailer’s directors disloyally ignored red-flag reports of a Mexican subsidiary’s systemic bribery of government officials.

In re Wal-Mart Stores Inc. Delaware Derivative Litigation, No. 7455, 2015 WL 2441451 (Del. Ch. May 20, 2015).

Cottrell et al. v. Duke et al., No. 15-1869, appellant’s statement of issues filed (8th Cir. May 12, 2015).

The two sets of investor plaintiffs must convince their respective courts that Wal-Mart’s directors lacked the independence and objectivity to fairly decide whether shareholder litigation over an alleged executive whitewash of the so-called Wal-Mex scandal was in the parent company’s best interests.

One set of plaintiffs will try to persuade the chief judge of Delaware’s Chancery Court that they have now gathered enough documents to prove that the directors were unfit to make that decision and that the derivative suit should therefore be allowed to go forward.

Another set will argue to the 8th U.S. Circuit Court of Appeals that a federal judge in Arkansas wrongly tossed their parallel action on behalf of the company for lack of evidence.

PASSING THE TEST

If both sets of plaintiffs are unsuccessful, their suits will die because of their failure to pass a preliminary hurdle for all shareholders who sue on behalf of their company.

The “pre-suit demand” test requires derivative plaintiffs to first ask the directors — as managers of the company — to review their charges and take action to remedy alleged wrongs.

But all the Wal-Mart shareholder plaintiffs skipped that step and cannot survive a motion to dismiss unless they can prove the directors did not properly investigate the charges or were too involved in the alleged wrongdoing to be objective.

The shareholders who filed their derivative suit in Arkansas ,where Wal-Mart is based, said they had enough proof that the directors were too biased to fairly review the charges, but the judge disagreed and dismissed their suit in March. In re Wal-Mart Stores S’holder Derivative Litig., No. 12-4041, 2015 WL 1470184 (W.D. Ark. Mar. 31, 2015).

They have asked the 8th Circuit to revive their charges. Cottrell et al. v. Duke et al., No. 15-1869 notice of appeal filed (8th Cir. Apr. 28, 2015).

In a statement of issues filed May 12, plaintiff John Cottrell, on behalf of several groups of Arkansas shareholders, said the trial court judge misapplied the law that requires plaintiffs to make a pre-suit demand, setting the standard of proof too high. The plaintiffs’ opening brief is due June 17.

ON HOLD

The Delaware shareholders agreed to put their derivative suit on hold while they took

REUTERS/Edgard Garrido

Following a May 20 Chancery Court hearing, Chancellor Andre Bouchard ordered the two sides

to brief and then argue that collateral estoppel issue, and the requirements of pre-suit demand.

the time to gather ammunition to increase the chances that it would not suffer the fate of the Arkansas suit, but their 2012 records suit took far longer than they expected.

They chose one of the pension funds whose suits had been combined in their consolidated litigation to file a related books-and-records action, employing the right of shareholders in Delaware-chartered companies such as Wal-Mart to demand to inspect company records to confirm suspicions of wrongdoing.

Records inspection actions are usually comparatively short, simple suits used to force companies to comply with requests for documents.

However, as both plaintiff shareholders and high-profile corporate defendants have recognized the value of the ammunition a records suit could garner, those actions have involved substantially more time, lawyers, complex issues, appeals and cost.

That was the case in the pension fund’s records suit, which ran for more than three years, bounced between the Chancery Court and Delaware Supreme Court, and prompted the plaintiffs to seek sanctions against Wal-Mart for allegedly dragging its feet to favor the Arkansas action.

By the time Chancellor Andre G. Bouchard ruled in May that the plaintiffs had all the documents that the state high court had ordered Wal-Mart to produce, the faster-paced Arkansas action had already gone to court and had been dismissed. Ind. Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc., No. 7779, 2015 WL 2150668 (Del. Ch. May 7, 2015).

Since the Arkansas derivative plaintiffs had been the first to champion the cause of the shareholders over Wal-Mart’s alleged mishandling of the Wal-Mex debacle, the Delaware judge could say those Arkansas plaintiffs failed on behalf of all shareholders and bar the Chancery Court suit.


NO SLAM DUNK

Following a May 20 hearing, Chancellor Bouchard ordered the two sides to brief and then argue that collateral estoppel issue, and the requirements of pre-suit demand, at an upcoming hearing on the effect of the Arkansas ruling.

He denied Wal-Mart’s request for what amounted to a slam-dunk ruling that would end the Delaware suit.

Wal-Mart had asked him to find that the dismissal of the Arkansas suit barred any other shareholder from suing on behalf of the company over the Wal-Mart directors’ handling of the Wal-Mex debacle.

The pension fund’s lead attorney, Stuart Grant of Grant & Eisenhofer, told Reuters columnist Alison Frankel that the negligence of the Arkansas plaintiffs — who rushed to the courthouse without enough evidence to survive a dismissal motion — and the

gamesmanship of the defense made it difficult to get justice for the shareholders. WJ

Attorneys:Plaintiffs: Stuart M. Grant, Michael J. Barry, Nathan A. Cook and Bernard C. Devieux, Grant & Eisenhofer, Wilmington, Del.

Defendants: Stephen C. Norman, Potter, Anderson & Corroon, Wilmington

Related Court Document: May 20 order: 2015 WL 2441451

BREACH OF DUTY

CEO siphons Sears’ assets to save self at investors’ expense, suit saysA Sears Holding Corp. investor is asking Delaware’s Chancery Court to stop the struggling retailer’s controlling shareholder/CEO from “siphoning off” one of its few remaining valuable assets — its real estate — in an unfair sale to a company he controls.

REUTERS/Peter Morgan

The suit says that when Edward S. Lampert, shown here in 2004, acquired control of Sears the following year, he combined the company with the troubled Kmart Holding Corp. — which he also controlled — and presided over “a disaster for the company.”

Solak v. Lampert et al., No. 11081, complaint filed (Del. Ch. May 29, 2015).

Shareholder John Solak’s suit, filed on behalf of Sears, Roebuck & Co.’s’ parent company, says CEO Edward S. Lampert, “faced with dwindling options to keep the failing retailer afloat,” plans to protect his investment at shareholders’ expense.

Lampert — who is also Sears’ board chairman and majority stockholder — has proposed a self-dealing transaction that will transfer the bulk of the company’s most valuable real estate to Seritage Growth Properties, which he controls, “while leaving Sears saddled with debt, few valuable assets and renting the space it formerly owned,” the complaint says.

Unless the Chancery Court enjoins the sale, Solak says, Sears’ minority shareholders will be left with a stark choice: Participate in an “opaque” offering of rights to the property assets they already own or pass on the transaction and lose ownership to Sears’ last monetized asset.

Solak’s suit claims the deal will result in the sale of 235 of the company’s best properties in exchange for a “paltry” cash payment of $2.5 billion and also put the company on the hook for $150 million a year in rent.

According to the complaint, when Lampert acquired control of Sears in 2005, he combined the company with the troubled Kmart Holding Corp. — which he also controlled — and presided over “a disaster for the company.”

“With defendant Lampert as chairman, the company has gone through four CEOs, severely underinvested in its stores, experienced same-store sales declines for six straight years and, by 2012, saw annual losses near $1 billion,” the suit says.

Lampert was appointed CEO in 2013, but his asset sales, store closures and cost-cutting have not arrested Sears’ “monumental fall,”

with annual losses increasing to nearly $1.7 billion by 2014, and the financial outlook continues to worsen, Solak says.

Worse still, Solak complains, Sears’ board of directors has not received a fairness opinion or other vital information on the proposed real estate deal, which effectively forces those shareholders with sufficient means “to buy into a transaction blindfolded” or be “short-changed for Sears’ best properties.”

A call to Sears Holdings’ media relations department seeking comment on the litigation was not returned.

The Illinois-based Sears is chartered in Delaware, giving Solak standing to sue in the Chancery Court.

The suit accuses Lampert and seven directors of breaching their duty to put the shareholders’ interests first in any change-of-control situation. Instead, they “presided over one of the greatest destructions of stockholder value in recent corporate history,” the complaint says.

Under Delaware law, the real estate transaction should be examined under the harsh light of the “entire fairness” standard because the CEO stands on both sides of the deal and failed to take any steps to ensure fairness to shareholders, the suit says.

Solak asks the court to enjoin the transaction and hold the defendants accountable for any economic damages resulting from their actions. WJ

Attorneys:Plaintiff: Peter B. Andrews and Craig J. Springer, Andrews & Springer, Wilmington, Del.

Related Court Document: Complaint: 2015 WL 3491785


MERGER CHALLENGE

AOL should hang up on Verizon’s $4.4 billion merger offer, shareholder saysAOL Inc.’s directors disloyally accepted an “inadequate” $4.4 billion merger offer with “onerous” restrictions from Verizon Communications that opportunistically takes advantage of a temporary dip in AOL’s stock price, according to a shareholder suit in the Delaware Chancery Court.

REUTERS/Brendan McDermid

The suit claims CEO and Chairman Tim Armstrong, shown here, and eight AOL directors disloyally accepted Verizon’s terms and timing to the detriment of the shareholders.

Williams v. AOL Inc. et al., No. 11049, complaint filed (Del. Ch. May 20, 2015).

Plaintiff Richard Williams’ breach-of-duty class action asks the court to put Verizon’s $50-a-share offer — and the terms that go with it — on hold while the AOL directors search for a better bid.

He says the AOL board has a duty to shop for a better offer with fewer restrictions than the ones Verizon has demanded in its merger, announced May 12.

Both AOL, a global media technology company spun off from Time Warner Inc. in 2009, and Verizon, a broadband and wireless communications company formed after the breakup of AT&T Corp., are based in New York but incorporated in Delaware, giving shareholders standing to sue there.

No one at AOL was immediately available to comment on the lawsuit.

Company CEO and Chairman Tim Armstrong issued a statement about the merger on the AOL website May 12.

“The visions of Verizon and AOL are shared; the companies have existing successful partnerships, and we are excited to work with the team at Verizon to create the next generation of media through mobile and video,” he said.

Williams’ suit claims the AOL board “failed to secure a fair price for the company, either for the intrinsic value of its assets or the value of the company’s assets to Verizon,” and that the directors disloyally accepted Verizon’s terms and timing to the detriment of the shareholders.

AOL has been reporting strong growth in recent quarters and, despite a temporary price dip, would have provided shareholders with robust returns on their investment if the company remained independent, the suit says.

The suit claims Armstrong and eight AOL directors violated their fiduciary duties by

putting their personal interests ahead of the shareholders’, who will suffer irreparable injury unless the court enjoins the merger. WJ

Attorneys:Plaintiff: Seth D. Rigrodsky, Brian D. Long,Gina M. Serra and Jeremy J. Riley, Rigrodsky & Long, Wilmington, Del.

Related Court Document: Complaint: 2015 WL 2450635

See Document Section B (P. 41) for the complaint.

AOL merger provisions

• A$150.2millionterminationfeethat AOL or its buyer would owe Verizon if the merger was canceled.

• Astrict“nosolicitation”clausethat prohibits AOL from contacting other prospective buyers.

• Amatching-rightsclausethatnotifies Verizon of any competing bid and gives it access to the other bidder’s offer information so that it could easily meet or top it.

“These deal-protection provisions unreason-ably restrain the company’s ability to solicit or engage in negotiations with any third party regarding a proposal to acquire all or a significant interest in the company,” the complaint says.


BOOKS & RECORDS

AbbVie investor appeals dismissal of records suit over aborted Shire mergerA dissident AbbVie Inc. shareholder has asked Delaware’s high court to reinstate its demand to investigate the decision-making process behind the drugmaker’s ill-fated and costly attempt to get a corporate tax break via a $55 billion “inversion merger” with Ireland-based Shire Plc.

Shareholder James Rizzolo, whose records action was combined with SEPTA’s, did not join in the appeal.

Their suits alleged that AbbVie wrongly rebuffed their rights as shareholders to examine the Delaware-chartered company’s correspondence and documents for evidence of mismanagement by directors who pushed the Shire merger.

AbbVie’s tax rate for 2016 reportedly would have dropped from about

22 percent to roughly 13 percent if the merger

had been consummated.

Southeastern Pennsylvania Transportation Authority v. AbbVie Inc., No. 239, 2015, notice of appeal filed (Del. May 13, 2015).

The appeal was filed by the Southeastern Pennsylvania Transportation Authority, one of two shareholder plaintiffs that sought access to AbbVie’s records to confirm their suspicions that the directors cost the company more than $1.6 billion by rushing into a deal with a slim chance of success.

A Delaware Chancery Court judge dismissed the books-and-records suit in April. Vice Chancellor Sam Glasscock III found that although AbbVie had to pay Shire a $1.6 billion breakup fee when the U.S. Department of the Treasury effectively closed the so-called tax-inversion loophole AbbVie hoped to use, “evaluating risk is the raison d’etre of a corporate director.” Se. Pa. Transp. Auth. v. AbbVie Inc., No. 10374; Rizzolo v. AbbVie Inc., No. 10408, 2015 WL 1753033 (Del. Ch. Apr. 15, 2015) (see Westlaw Journal Delaware Corporate, Vol. 29, Iss. 21, 29 No. 21 WJDEC 4).

But the Southeastern Pennsylvania Trans-portation Authority, an institutional investor, argues that AbbVie would not have had to pay the billion-dollar bill if the directors had properly evaluated the risks as required by their fiduciary duty.

deter American companies from acquiring foreign competitors to avoid domestic taxes, according to the suits.

By May 20, 2014, proposed federal legislation that could have blocked the corporate benefit of inversion mergers loomed on the horizon, and plans for such deals quickly withered even though it was never enacted.

SEPTA’s suit said AbbVie’s directors should have seen those dark clouds before July 2014 when the Shire deal was signed and thought twice about binding the company to a transaction that would require a $1.6 billion payment if the deal fell through.

The AbbVie directors canceled the merger Oct. 20.

One of the likely focal points of the appeal is the standard of proof required for a books-and-records action.

Vice Chancellor Glasscock’s opinion noted that even though the standard of proof for a books-and-records action is lower than what is required for a breach-of-duty derivative suit, the plaintiffs here failed to meet even that lower standard. WJ

Attorneys:Plaintiff-appellant: Pamela S. Tikellis, Robert J. Kriner Jr., Matthew T. Arvizu and Scott M. Tucker, Chimicles & Tikellis, Wilmington, Del.

Defendant-appellee: Lisa A. Schmidt and J. Scott Pritchard, Richards, Layton & Finger, Wilmington

In a so-called inversion merger, a larger U.S.-chartered company is poured into a smaller foreign-based company, thereby changing its official address to a country with a significantly lower corporate tax rate.

AbbVie’s tax rate for 2016 reportedly would have dropped from about 22 percent to roughly 13 percent if the merger had been consummated.

However, U.S. Treasury Department officials, alarmed over the possible drop in tax revenues, vowed to take action to


ADVANCEMENT

Judge orders Alpha to pay legal defense for Massey’s ex-CEO(Reuters) – Alpha Natural Resources Inc. must pay for the legal defense of Donald Blankenship, who is facing a criminal trial over a coal mining disaster in 2010, when he headed Alpha’s Massey Energy Co. business, a Delaware judge ruled May 28.

U.S. judge rejects bid by Massey ex-CEO to drop mine blast charges(Reuters) – A federal judge has denied nine motions to dismiss charges against former Massey Energy Chief Executive Officer Don Blankenship related to a 2010 mine explosion in West Virginia that killed 29 people.

United States v. Blankenship, No. 5:14-cr-00244, 2015 WL 3506054 (S.D. W. Va. June 3, 2015).

Blankenship faces three felony counts for allegedly ignoring hundreds of safety violations at the Upper Big Branch mine and conspiring to cover up violations. The blast was the worst U.S. mine disaster in four decades.

Blankenship’s attorneys had sought to have charges dismissed. They said a conspiracy charge was so broadly argued that it could cover the correction of safety violations.

U.S. District Judge Irene Berger of West Virginia’s Southern District rejected the motions June 3.

Of the bid to toss the conspiracy charge, she wrote that Blankenship’s “argument that he only corrected violations, and thus, his alleged acts were not criminal, borders on the absurd.”

Blankenship, who led Massey from 2000 to 2010, pleaded not guilty in 2014 and is free on a $5 million cash bond.

U.S. Magistrate Judge R. Clarke VanDervort granted an order June 3 allowing Blankenship to attend a race car event in Ohio on June 5 and June 6 in which his son is a contestant.

Blankenship faces a maximum 31 years in prison if convicted on all charges. Massey Energy was purchased in 2011 by Alpha Natural Resources Inc. for about $7 billion.

Blankenship’s trial is scheduled to start July 13. His lawyers have requested a delay until January, saying they needed more time to prepare. WJ

(Reporting by Elizabeth Daley in Pittsburgh; editing by Ian Simpson and Mohammad Zargham)

Blankenship v. Alpha Appalachia Holdings Inc. et al., No. 10610, 2015 WL 3408255 (Del. Ch. May 28, 2015).

Blankenship was indicted in November for his role in the explosion at Massey’s Upper Big Branch mine in West Virginia in 2010,

which killed 29 people. It was the worst U.S. mine disaster in four decades.

In February, Massey refused to continue paying Blankenship’s defense costs, arguing he was no longer entitled to the benefit after he was indicted, according to court records.

Blankenship, who was chief executive officer from 2000 to 2010, has pleaded not guilty to violating federal safety laws. If convicted, he could face a total of 31 years in prison.

Blankenship is accused of conspiring to tip off workers about inspections so they could cover up violations. The indictment also said that after the explosion, he misled the U.S. Securities and Exchange Commission about Massey’s safety practices.

Andre Bouchard, a judge on Delaware’s Court of Chancery, ruled in favor of Blankenship and rejected the company’s reading of its charter and other agreements. Blankenship said his unpaid fees totaled $5.8 million as of April, according to the ruling.

Alpha said in a statement it is reviewing the ruling.

Blankenship retired in December 2010 as CEO and chairman. A month later Massey agreed to be acquired by Alpha Natural Resources Inc. of Bristol, Va., for about $7 billion. Alpha has not been accused of wrongdoing.

Massey and Alpha are both incorporated in Delaware. WJ

(Reporting by Tom Hals)

Related Court Document: Opinion: 2015 WL 3408255


MISREPRESENTATION

MoneyGram stock offering belied looming Wal-Mart competition, suit saysBy Michael Nordskog, Senior Content Writer, Westlaw Daily Briefing

MoneyGram International Inc. and its underwriters issued false statements prior to a 2014 public stock offering by failing to disclose Wal-Mart’s pending launch of its own money-transfer service, according to a shareholder suit filed in Delaware federal court.

Iron Workers District Council of New England Pension Fund v. MoneyGram International Inc., No. 15-cv-402, notice of removal filed (D. Del. May 19, 2015).

On May 19, MoneyGram removed the suit, originally filed in Delaware state court in April by plaintiff Iron Workers District Council of New England Pension Fund, to the U.S. District Court for the District of Delaware.

In addition to MoneyGram, top company officials and controlling shareholder Thomas H. Lee Partners LP, the suit names as defendants six financial services companies involved in underwriting the public offering.

MONEY TRANSFER SERVICES

Dallas-based MoneyGram, a Delaware-chartered corporation, serves “unbanked” or “underbanked” customers by providing money transfer, bill payment and money order services, according to the complaint.

The suit says the company earns most of its revenues by providing money transfer services through a network of retail agents, of which Wal-Mart is the largest.

MoneyGram renewed its partnership agreement with the retail giant in October 2012, subject to a new provision allowing Wal-Mart to eventually launch a competing service, the suit says.

In February 2014, MoneyGram told investors it knew of no definitive plans for the Wal-Mart launch while also reporting strong quarterly earnings and a global restructuring initiative, the suit says.

SECONDARY STOCK OFFERING

MoneyGram issued 9.2 million shares of common stock in a March 2014 secondary public offering of securities held by THL and affiliates of Goldman, Sachs & Co., one of the underwriter defendants, according

to the complaint. The suit says the offering raised more than $147 million for the selling shareholders.

Offering documents preceding the sale disclosed MoneyGram’s intention to reduce costs and enhance efficiencies through the previously announced restructuring, but did not say the imminent launch of Wal-Mart’s competing service was the reason behind the initiative, the suit says.

Instead, the documents characterized the Wal-Mart product as “merely a possibility,” the suit says.

Two weeks after the secondary offering closed, Wal-Mart announced that its money-transfer service would launch in late April 2014, according to the complaint.

On this news, MoneyGram’s share price fell 30 percent in the next two days’ trading to $12.80 per share, “well below the $16.50 offering price,” the suit says.

The plaintiff alleges violations of the registration statement requirements Sections 11, 12(a)(2) and 15 of the Securities Act, 15 U.S.C.A. §§ 77k, 771 and 77o.

The suit seeks compensatory damages on behalf of parties who acquired MoneyGram stock pursuant or traceable to the 2014 offering. WJ

Related Court Document: Notice of removal: 2015 WL 2437309

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ALISON FRANKEL’S ON THE CASE

Financial advisers in Rural Metro appeal: We’re not M&A gatekeepersBy Alison Frankel

(Reuters) – According to the trade group for the securities industry, Vice Chancellor Travis Laster of Delaware Chancery Court tagged financial advisers with responsibilities that aren’t rightfully theirs in his 2014 decision holding Royal Bank of Canada liable for aiding and abetting a breach of duty by the board of the ambulance company Rural Metro.

Vice Chancellor Laster said RBC and other financial advisers should act as “gatekeepers” in M&A transactions, helping to keep board members from tainting the deal. In re Rural Metro Corp. Stockholders Litig., 88 A.3d 54 (Del. Ch. 2014).

But the Securities Industry and Financial Markets Association, in an amicus brief in RBC’s Delaware Supreme Court appeal of Vice Chancellor Laster’s $76 million ruling, argues financial advisers “are not qualified or even legally permitted to play that role.” RBC Capital Mkts. v. Jervis, No. 140, 2015, amicus brief filed (Del. May 26, 2015).

SIFMA’s lawyers at Sidley Austin expressly distinguished between a board’s bankers and its lawyers. “Financial advisers are not in a position to monitor, let alone direct or control, the actions of the board, nor to make demands of it for information or access,” the brief said.

“It is the board’s counsel (internal or external) — not their financial advisers — who advise it on how to discharge its fiduciary duties although even they cannot ultimately control the board’s actions. One cannot aid and abet that which is out of one’s control or outside the scope of one’s knowledge and the proper discharge of directors’ fiduciary

duties is outside the specialized knowledge of financial advisers. Put simply: The board’s lawyers provide legal advice as to how to fulfill a fiduciary duty, and its financial advisers provide financial advice.”

And unless the Delaware Supreme Court restricts the risk Vice Chancellor Laster’s Rural Metro decision imposes on financial advisers, SIFMA contends, the judge’s “fundamental misreading” of bankers’ M&A role is going to be a big problem.

SIFMA’s brief was filed May 26, a week after RBC’s lawyers at Potter Anderson & Corroon and Milbank Tweed Hadley & McCloy filed the bank’s opening brief.

RBC’s arguments are tied closely to the facts of Rural Metro’s 2011 private equity buyout and the ensuing shareholder litigation over the deal. The bank said, for instance, that Vice Chancellor Laster applied the wrong standard of review to the Rural Metro board’s actions, which he subjected to enhanced scrutiny instead of deferring to directors’ business judgment. (RBC got support on this point from the National Association of Corporate Directors, whose counsel at Gibson Dunn & Crutcher argued that Vice Chancellor Laster committed a cascade of legal errors in his evaluation of the board’s sale process.)

RBC also said the theory underlying the ruling — that it didn’t disclose its conflicting interest in financing the Rural Metro buyout or a buyout of the company’s biggest rival — didn’t make sense: RBC said the board was aware of its financing interests and hired a second financial adviser to be sure the sale process wasn’t tainted.

It also said the sale price was sound because no topping bid emerged. “The trial court had quibbles (albeit expressed with heated rhetoric) with the timing and manner of the sale process. But that does not render the process deficient,” the bank brief said.

Both RBC and SIFMA — but, tellingly, not the corporate directors’ group — claimed Vice Chancellor Laster made yet another mistake in allocating liability.

Rural Metro’s charter includes an exculpatory provision that bars shareholders from collecting money damages from directors who breach their duty of care. Because of that provision, the judge found, board members were not jointly liable for the breach.

SIFMA and the bank argue that his holding unfairly shifts risk onto financial advisers, which, as a result, will be reluctant to advise “any board that even appears to be at risk of breaching its duty,” the RBC brief said.

That outcome would undermine the whole policy justification for provisions insulating directors from damages, the bank and SIFMA said.

Rural Metro shareholders will, of course, have plenty to say about all of this when their lawyers at Robbins Geller Rudman & Dowd file a response, due in July. The case will go before the Delaware justices in September. WJ

Alison Frankel updates her blog, “On the Case,” multiple times throughout each day on WestlawNext Practitioner Insights. A founding editor of Litigation Daily, she has covered big-ticket litigation for more than 20 years. Frankel’s work has appeared in The New York Times, Newsday, The American Lawyer and several other national publications. She is also the author of “Double Eagle: The Epic Story of the World’s Most Valuable Coin.”


Litig., No. 12 Civ. 03878, 2014 WL 1297824 (S.D.N.Y. Mar. 31, 2014); Wandel v. Dimon, No. 651830/12, order issued (N.Y. Sup. Ct., N.Y. Cnty. Feb. 3, 2014).

The vice chancellor said those two judges found insufficient proof that the JPMorgan directors lacked the independence or objectivity to decide what legal actions to take in response to $6.3 billion in trading losses and more than $1 billion in fines by federal regulators.

Since both the New York and Delaware actions were brought derivatively, the plaintiffs were required to first ask the board of directors — as the company’s managers — to review their proposed suits and decide whether they should proceed.

Since the New York and Delaware plaintiffs skipped that step, they were required to show that the directors were unfit to judge the shareholder suit, but the New York judges found that those plaintiffs failed to do that, and they dismissed the suits.

Those rulings apply to parallel actions in other states, and there is no reason to delve into a comparison of those with the Delaware suit, Vice Chancellor Glasscock said in his opinion.

The Delaware and New York suits were part of a tsunami of litigation triggered by JPMorgan’s announcements in May and July 2012 that trading of exotic credit derivatives caused losses that could top $7 billion and would force the company to restate its 2012 financials.

Like the other suits, the New York and Delaware shareholder derivative actions claimed that JPMorgan CEO Jamie Dimon caused the company to hire a team of speculative traders headed by London- based Bruno Iksil and pushed them to make huge, high-risk bets on credit derivatives.

A credit derivative is an exotic security that essentially bets on the future fortunes of other stocks.

Iksil was later dubbed the “London Whale” for the size of his ill-fated bets.

According to the vice chancellor’s opinion, JPMorgan in 2013 entered into consent orders with various federal regulators that resulted more than $1 billion in fines.

The issue in the derivative actions, however, concerned only whether JPMorgan’s directors and officers negligently failed in their fiduciary duty to manage the company

‘London Whale’CONTINUED FROM PAGE 1

Since the New York judges found no reason to question the directors’ decisions, and no new

issues have been presented in the Delaware case, the vice chancellor said he must defer to them.

and steer it away from illegal activity, Vice Chancellor Glasscock said.

He noted that, in response to shareholder demands for litigation against the rogue trading unit and those who supervised it, the board had created a review committee of three independent directors who retained separate counsel and conducted an eight-month review.

The committee report recommended reforms but not litigation and did not find negligence on the part of the officers and directors, the vice chancellor said.

Since the New York judges found no reason to question the directors’ decisions, and no new issues have been presented in the Delaware case, the vice chancellor said he must defer to the New York rulings and dismiss the pension fund’s action. WJ

Attorneys:Plaintiff: Carmella P. Keener and P. Bradford deLeeuw, Rosenthal, Monhait & Goddess, Wilmington, Del.; Stewart L. Cohen, Robert L. Pratter, Jacob A. Goldberg and Alessandra C. Phillips, Cohn, Placitella & Roth, Philadelphia

Defendants: Gregory P. Williams, Catherine G. Dearlove and Christopher H. Lyons, Richards, Layton & Finger, Wilmington; Richard C. Pepperman II and George R. Painter IV, Sullivan & Cromwell, New York

Related Court Document: Opinion: 2015 WL 2455469

See Document Section A (P. 21) for the opinion.

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NEWS IN BRIEF

HELICOPTER SERVICES FIRM LIED ABOUT CONTRACT SITUATION BEFORE IPO, SUIT SAYS

A Canada-based helicopter services provider and its top executives failed to disclose that one of its largest customers stopped payments on its contracts months before the company’s initial public offering, a federal lawsuit says. The proposed class-action complaint filed against CHC Group by shareholder Errol Rudman in the U.S. District Court for the Southern District of New York says the company violated federal securities laws by misrepresenting the contract situation to its investors. CHC — one of the world’s largest commercial helicopter operators — mainly runs flights to offshore oil rigs and flies search-and-rescue and emergency medical missions. Prior to its IPO on July 9, 2014, CHC said its contract with Brazilian state-run oil company Petrobras accounted for 14 percent of its revenues, the suit says. The company announced the next day, however, that Petrobras had not made payments on its contract since April 2013. CHC’s share price subsequently fell 12 percent on the news to $7.63 per share.

Rudman et al. v. CHC Group Ltd. et al., No. 15-CV-3773, complaint filed (S.D.N.Y. May 15, 2015).

Related Court Document:Complaint: 2015 WL 2275276

FOR-PROFIT EDUCATION COMPANY URGES DISMISSAL OF SHAREHOLDER SUIT

Education Management Corp. and its officers and directors say a lawsuit accusing the company of inflating its stock price in violation of federal securities laws by misrepresenting its financial outlook should be thrown out. In a memorandum in support of their motion

to dismiss Brian Robb’s lawsuit, filed in the U.S. District Court for the Western District of Pennsylvania, EMC and its executives argue the suit fails to allege facts showing their statements were materially false or misleading. The for-profit company operates post-secondary education providers under the names The Art Institutes, Argosy University, Brown Mackie Colleges and South University. According to Robb’s complaint, EMC misrepresented to investors its revenue, job placement numbers, admission statistics, and loan and grant programs. The company says the suit should be dismissed because the allegedly false statements are too vague to be actionable.

Robb v. Education Management Corp. et al., No. 14-CV-01287, memorandum in support of motion to dismiss filed (W.D. Pa. May 18, 2015).

Related Court Document:Memorandum in support of motion to dismiss: 2015 WL 2373433

SEC HIRES NEW DEPUTY DIRECTOR OF MUNICIPAL SECURITIES OFFICE

The Securities and Exchange Commission announced May 20 that it has hired Rebecca J. Olsen as deputy director for the agency’s Office of Municipal Securities. Olsen had been serving as chief counsel for the office since April 2014. The Office of Municipal Securities is tasked with administering SEC rules involving broker-dealers, investors, municipal advisers and municipal securities issuers. It also advises the SEC on municipal securities policy matters, enforcement issues, rulemaking and the agency’s municipal adviser registration program. Olsen joined the SEC in 2013. She spent the previous 10 years as a private attorney practicing municipal securities law at Ballard Spahr LLP.

CHANCERY COURT CASES FILED

CAPTION CASE # WESTLAW # NATURE OF ACTION DATE ATTORNEY

1. Van Wie v. DVW Capital 11083 N/A Breach of duty June 2, 2015 Rudolph Koch

2. Borchardt v. SFX Entertainment 11082 2015 WL 3454355 Breach of duty May 29, 2015 Seth Rigrodsky

3. Solak v. Lampert 11081 2015 WL 3491785 Breach of duty May 29, 2015 Peter Andrews

4. Rein v. Natale 11073 2015 WL 3491750 Breach of duty May 28, 2015 Theodore Kittila

5. Taylor v. Taylor 11071 2015 WL 3491746 Close corporation issues May 28, 2015 Andrew Cordo

6. Kassis v. Cyan 11069 2015 WL 3491742 Breach of duty May 27, 2015 Brian Long

7. TVGLT v. Ann 11067 2015 WL 3417991 Breach of duty May 27, 2015 Seth Rigrodsky

8. Bronfeld v. Borderfree 11063 2015 WL 3417988 Breach of duty May 26, 2015 Seth Rigrodsky

9. CDBPFPF v. Dentsply International 11056 2015 WL 3382133 Books & records May 21, 2015 Michael Hanrahan

10. CCERF v. New Residential 11058 2015 WL 3382142 Breach of duty May 22, 2015 Paul Fioravanti Jr.

11. Williams v. AOL 11049 2015 WL 2450635 Breach of duty May 20, 2015 Seth Rigrodsky

12. Bonfe v. Kinner 11048 2015 WL 2450630 Breach of duty May 20, 2015 Theodore Kittila

13. Wiggins v. FedEx 11041 2015 WL 2450631 Books & records May 19, 2015 Neal Belgam


CASE AND DOCUMENT INDEX

Asbestos Workers Local 42 Pension Fund v. Bammann et al., No. 9772, 2015 WL 2455469 (Del. Ch. May 22, 2015) ......................................................1 Document Section A..................................................................................................................................................................................................... 21

Blankenship v. Alpha Appalachia Holdings Inc. et al., No. 10610, 2015 WL 3408255 (Del. Ch. May 28, 2015) ..............................................................13

Cottrell et al. v. Duke et al., No. 15-1869, appellant’s statement of issues filed (8th Cir. May 12, 2015) ...............................................................................9

In re Wal-Mart Stores Inc. Delaware Derivative Litigation, No. 7455, 2015 WL 2441451 (Del. Ch. May 20, 2015) ............................................................9

Iron Workers District Council of New England Pension Fund v. MoneyGram International Inc., No. 15-cv-402, notice of removal filed (D. Del. May 19, 2015) ..................................................................................................................................................................... 14

Robb v. Education Management Corp. et al., No. 14-CV-01287, memorandum in support of motion to dismiss filed (W.D. Pa. May 18, 2015) .......................................................................................................................................................................................................17

Rudman et al. v. CHC Group Ltd. et al., No. 15-CV-3773, complaint filed (S.D.N.Y. May 15, 2015) ....................................................................................17

Solak v. Lampert et al., No. 11081, complaint filed (Del. Ch. May 29, 2015) ...................................................................................................................... 10

Southeastern Pennsylvania Transportation Authority v. AbbVie Inc., No. 239, 2015, notice of appeal filed (Del. May 13, 2015) .............................................................................................................................................................................................................. 12

United States v. Blankenship, No. 5:14-cr-00244, 2015 WL 3506054 (S.D. W. Va. June 3, 2015) ...................................................................................13

Williams v. AOL Inc. et al., No. 11049, complaint filed (Del. Ch. May 20, 2015) ................................................................................................................. 11 Document Section B ..................................................................................................................................................................................................... 41

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