On March 13, 2017, the United States District Court for the District of Delaware rejected LRR Energy L.P. (“LRR”) and Vanguard Natural Resources, LLC’s (“Vanguard”) motion to dismiss, allowing the putative shareholder class action suit against them and various current and former directors to proceed.  Robert Hurwitz v. LRR Energy, L.P., et al., Civ. No. 15-711-SLR (D. Del. March 13, 2017).  Plaintiff asserted claims under Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”) and Sections 14(a) and 20(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”), alleging that Vanguard and LRR Energy failed to disclose material information related to Vanguard’s debt agreements in the proxy statement and registration statement issued by LRR and Vanguard, respectively, in connection with Vanguard’s acquisition of LRR in 2015.  In denying the motion to dismiss, the Court held that plaintiffs had sufficiently pled that the proxy and registration statement failed to disclose material information as to Vanguard’s ability to service its debt, and the consequences of such debt servicing issues.

In 2015, LRR, a partnership involved in North American oil and gas development and production, entered into merger talks with Vanguard, a company specializing in the acquisition and development of oil and gas properties in the United States.  In order to facilitate the transaction, Vanguard issued a registration statement and LRR issued a proxy statement (which was incorporated into the registration statement by reference).  A few weeks after announcing the merger, Vanguard released its 10-Q for the first quarter of 2015, stating that while the company was currently in compliance with all debt covenants, the company expected that it “will not be in compliance with our total leverage ratio covenant in certain future periods.”  In March 2016, in order to reduce its debt, Vanguard’s board of directors voted to suspend all cash distributions.  This announcement allegedly caused Vanguard’s stock to fall precipitously.

Plaintiffs alleged that both the registration and proxy statements “failed to disclose that Vanguard’s then-current financial projections showed that it would violate existing debt covenants in certain future periods,” and also did not disclose the consequences that debt servicing issues would have on Vanguard’s ability to make cash distributions to shareholders.  The Court rejected defendants’ argument that the allegedly omitted fact could be determined by a “simple calculation” of the total leverage ratio based on disclosed information.  The Court held that neither the proxy nor registration statement “provided, in any obvious manner, the numbers required” to perform what the Court stated was not a “simple calculation.”  The Court similarly rejected defendants’ argument that the omissions were immaterial, finding that plaintiff sufficiently alleged that the likelihood of receiving distributions is “a key investment criterion.”  Finally, the Court rejected defendants’ arguments that the challenged statements and omissions were mere puffery or were inactionable under the “bespeaks caution” doctrine.  After holding that plaintiffs sufficiently pleaded claims under Sections 11 and 14(a), and that the individual defendants’ sole argument against control liability was plaintiffs’ failure to establish a primary violation, the Court also allowed the claims under Sections 15 and 20(a) to proceed.  The Court also found unpersuasive a decision from a Texas court granting defendants’ motion to dismiss a putative class action brought on behalf of shareholders of another company acquired by Vanguard in parallel with LRR.