Two prominent shareholder firms, Grant & Eisenhofer and Bernstein Litowitz Berger & Grossmann, filed a provocative motion for re-argument Monday at the Delaware Supreme Court, accusing the Delaware justices of tacitly abandoning decades-old precedent on whether boards must tell investors about credible bids received after a company announces an M&A deal. The plaintiffs’ firms said that if the state Supreme Court really wants to adopt a tough new standard for the materiality of competing bids – one so stringent, they said, that seminal Delaware cases wouldn’t have met it – the justices should do so explicitly.
G&E and Bernstein Litowitz threw down that gauntlet in City of Miami General Employees’ and Sanitation Employees’ Retirement Trust v. Comstock, in which the Miami pension fund sued former board members of the oilfield services company C&J Energy for breaching their duties to shareholders when they agreed to a $2.9 billion merger with Nabors Industries in 2015. The case has a tortured history, but I’ll boil it down to the essentials.
Nabors and C&J announced their agreement in the summer of 2014. Shareholders moved for a preliminary injunction to block the deal in Delaware Chancery Court. In November, Vice-Chancellor John Noble granted the injunction and ordered C&J to test the market for competing offers.
C&J’s board appointed a Special Committee, which hired lawyers and bankers who reached out to dozens of prospective bidders. Cerberus was interested enough to offer a 12 percent premium on C&J’s trading price, which already reflected the Nabors bid. C&J’s bankers from Morgan Stanley said it would take a 30 percent premium to beat the Nabors offer. The bank told Cerberus its proposal wasn’t rich enough for C&J shareholders.
At the same time as Morgan Stanley was negotiating with Cerberus, C&J appealed the Chancery Court injunction to the Delaware Supreme Court. In December 2014, the state justices lifted the injunction that required C&J to test the market.
A few months later, C&J put out proxy materials in advance of a shareholder vote on the Nabors deal. The proxy disclosed that the board had solicited competing bids, that one potential bidder had submitted “an acquisition proposal,” and that the board’s Special Committee, on advice from its bankers and lawyers, had determined the proposal “was not reasonably likely” to beat Nabors’ offer. The proxy did not reveal the name of the bidder or details of its offer.
Those details would not have surfaced, according to Grant & Eisenhofer and Bernstein Litowitz, had C&J not sought hundreds of thousands of dollars from them. Vice-Chancellor Noble had required the plaintiffs' firms to post a bond to cover C&J’s costs if it ended up winning its appeal of the injunction. After the Delaware Supreme Court sided with C&J, the company moved to recover more than $500,000 of the bond. To support its account of the cost of soliciting competing bids, the company disclosed board material that revealed the Cerberus proposal.
The plaintiffs' firms argued that shareholders – nearly 98 percent of whom voted for the Nabors deal – should have been told that a well-financed private equity fund had come to the board with an initial offer that was at least competitive. The Delaware Supreme Court, as you’re probably aware, ruled in 2015’s Corwin v. KKR that fully informed shareholder votes provide thick insulation for corporate directors. But in the C&J case, plaintiffs’ lawyers contended, shareholders were not fully informed. They sued for post-closing damages, claiming that C&J’s directors should be subject not to the ultra-forgiving business judgment standard but to the more exacting entire fairness inquiry.
Last summer, Chancellor Andre Bouchard of Delaware Chancery Court dismissed their case. The chancellor said none of the supposed omissions plaintiffs’ lawyers had cited, including the Cerberus proposal, amounted to a disclosure failure. The board, he said, concluded that the inchoate Cerberus proposal was not going to beat the Nabors offer. Delaware law, the chancellor wrote, “does not require disclosure of a play-by-play of negotiations leading to a transaction or of potential offers that a board has determined were not worth pursuing.”
On Thursday, in an opinion totaling a mere one paragraph, the Delaware Supreme Court affirmed Chancellor Bouchard’s dismissal, holding that shareholders hadn’t shown C&J’s proxy was “materially misleading,” even though the filing did not provide any specifics about Cerberus’s offer. Chief Justice Strine had pressed C&J’s lawyers at Vinson & Elkins about the Cerberus offer at oral arguments on March 1, noting at one point that none of the Delaware justices had fallen off of a vegetable truck.
But the Supreme Court ended up agreeing with C&J that details of the Cerberus proposal didn’t need to be disclosed to shareholders. Without delving at all into the law on materiality, the Supreme Court simply concluded that G&E and Bernstein Litowitz hadn’t made out an adequate case. “Plaintiff has failed to plead facts supporting a rational inference that the bid (Cerberus) made would have been regarded as material,” the court said in its two-page order. “The plaintiff has pled no fact supporting the inference that the (Cerberus) bid was financially superior, much less that the bidder was willing to raise its bid to a level that was in fact superior to the Nabors deal.”
The new re-argument motion by the two plaintiffs' firms said the Supreme Court’s ruling implicitly abandons Delaware precedent that aligns the state’s materiality standard with the standard the U.S. Supreme Court set for federal securities cases in 1976’s TSC v. Northway. And if that’s what the court meant to do, the plaintiffs' firms said, the justices ought to say so.
“To the extent the court intended to cause Delaware law to abandon the TSC standard and now adopt a materiality standard that requires a greater showing by aggrieved investors than the standard they would need to show if they filed the exact same claims in federal courts, plaintiff respectfully submits that such a significant ruling should be made expressly, and not sub silentio,” the motion said.
It’s extremely unlikely the Delaware justices want to engage again with this sticky case. Bernstein Litowitz’s Mark Lebovitch gave the materiality issue a thorough airing at oral arguments, and both sides analyzed Delaware precedent on disclosing competing bids in their appellate briefs. The new motion for re-argument, in other words, doesn’t really tell the justices anything they haven’t already heard.
But it’s important that Grant & Eisenhofer and Bernstein Litowitz decided to call out the Delaware justices for, in their view, raising the bar on shareholder claims to an almost unreachable height. I wrote last fall that plaintiffs' firms are not at all happy about the direction of the Delaware Supreme Court’s recent rulings in M&A cases, which is one of the reasons why those suits are moving to federal court. The C&J opinion seems to be adding to the discontent.
I emailed C&J lawyer Craig Zieminski of Vinson & Elkins, who argued for the company’s former directors at the Delaware Supreme Court, but didn’t hear back.