The Delaware Court of Chancery in In re Columbia Pipeline Group, Inc. Merger Litigation denied a motion to dismiss claims for fiduciary duty breach in the sale of Columbia Pipeline Group, Inc. (“Columbia”). The Court found that the plaintiff stockholders’ allegations supported the inference that Columbia’s CEO and Chairman Robert Skaggs, Jr. and CFO Steven Smith breached their fiduciary duty of loyalty by favoring TransCanada Corporation in the sale of Columbia.
Background of the Transaction
The litigation arose from the sale of Columbia by its board of directors (the “Board”). Columbia, with its primary asset being a gas pipeline, sought to exploit a production boom. Skaggs and Smith planned to retire in 2016, and they enjoyed as part of their compensation packages lucrative change-in-control arrangements, which would provide greater benefits if the company was sold before their retirement. A decline in commodity prices pushed Columbia’s stock down, making it a target for an acquisition.
In July of 2015, the CEO of Spectra Energy Corp. contacted Skaggs and expressed interest in a deal, which Skaggs allegedly rebuffed because he believed Spectra would use its stock as currency for the deal. Skaggs wanted a cash deal. Over the next few months, Columbia entered non-disclosure agreements with four companies, including TransCanada, all containing standstill and “don’t ask don’t waive” provisions that prohibited the counterparties from asking Columbia to amend or waive the standstill. Around this time, Columbia needed to raise capital and planned an equity offering. Skaggs and Smith set a deadline of November 19, 2015, for potential acquires to make a bid, or it would move forward with the offering. After the deadline passed, Skaggs and Smith told the Board that they did not receive an offer, but they failed to tell the Board that they only told TransCanada and one other bidder of the deadline. With the deadline passed, the Board terminated merger talks and proceeded with the equity offering. Nevertheless, Smith told TransCanada that Columbia would most likely pick up merger talks again soon without the Board’s knowledge or authorization.
Beginning in December 2015, Skaggs and Smith began showing a preference for a TransCanada deal. TransCanada called Smith to express interested in a deal, in violation of the standstill, and Smith requested that Columbia’s financial advisor schedule a meeting with TransCanada without the Board’s knowledge or permission. Prior to the meeting, Smith sent 190 pages of confidential information, including financial projections, on Columbia to TransCanada, again without the Board’s knowledge or permission. The financial advisor prepared talking points for Smith to use at the January 7 meeting with TransCanada, which explained how TransCanada could convince the Board to agree to a deal with TransCanada without putting Columbia “in play,” avoiding an auction. At the January 7 meeting, Smith literally gave the talking points to TransCanada and stressed that TransCanada was unlikely to face competition from other players, all of which undermined Columbia’s leverage with TransCanada. A few weeks later, TransCanada offered $25-$28 per share, again breaching the standstill agreement without approval of the Board. During a board meeting to consider the offer, Skaggs tried to convince the Board of the TransCanada offer by allegedly presenting misinformation and omitting material facts. The Board instructed Skaggs and Smith to demand a formal proposal from TransCanada, and to waive the standstill provisions with the other potential bidders, the former of which Skaggs and Smith ignored.
The same day the news broke of TransCanada’s formal offer in March 2016, Spectra Energy Corp. emailed Skaggs to start merger talks, but Skaggs downplayed the seriousness of Spectra’s interest to the Board. Skaggs also offered to renew TransCanada’s exclusivity agreement, even though he knew it had lapsed, and granted TransCanada’s demand for a “moral commitment” to insist on a written proposal with a financed bid subject only to confirmatory diligence. Skaggs and Smith understood that no competing bidder would provide such an offer given no other bidder had conducted significant diligence. Shortly thereafter, TransCanada lowered its offer from $26 to $25.50, which terminated TransCanada’s exclusivity agreement and allowed Columbia to field offers from other bidders. TransCanada placed a three-day deadline on its offer and threatened that, if Columbia did not accept the offer in that timeframe, it would announce the termination of the negotiations. Such an announcement would suggest TransCanada uncovered problems that caused them to back away, thereby turning Columbia into damaged goods and potentially hurting its ability to find an alternative deal partner. Columbia and TransCanada signed the merger agreement the following day and months later the merger closed.
The merger prompted four lawsuits. First, four Columbia shareholders sued the entire Board for breach of the duty of loyalty and failure to disclosure material facts. Considering the Board’s motion to dismiss, the Court found that the proxy disclosed sufficient information and dismissed the claim. Second, two hedge funds filed petitions seeking appraisal, and the court found the fair value to be equal to the deal price. Third, another former shareholder filed a federal securities lawsuit, alleging the proxy contained material misstatements, which the court also dismissed. In the lawsuit at issue here, plaintiffs alleged that Skaggs, Smith, and the Board breached their duty of loyalty by disclosing misleading facts in the proxy, steering the deal toward TransCanada, and failing to engage with Spectra for self-interested reasons. Skaggs, Smith, and TransCanada moved to dismiss, relying heavily on the courts’ holdings in the previous deal-related litigations.
The Court held that the correct standard of review for the breach of fiduciary duty claim was the Revlon enhanced scrutiny, and that the Revlon enhanced scrutiny was implicated no later than Skaggs and Smith’s January 7 meeting with TransCanada. The Court also rejected the Defendants’ argument that holdings from other deal-related litigations on the sufficiency of the disclosures in the proxy supports the application of Corwin, holding that three disclosure violations prevented a Corwin cleansing defense.
Reviewing the sales process under enhanced scrutiny, the Court found that at the pleading stage, it was reasonably conceivable that the sales process fell outside the range of reasonableness and generated a price below what TransCanada or another bidder otherwise would have paid. The allegations supported a reasonable inference that Skaggs and Smith tilted the sales process in favor of TransCanada and against the other bidders so they could obtain a cash deal that would enable them to retire with their change-in-control benefits before their target retirement date, and such favoritism was persistent and substantial. The Court also found it reasonable to infer that this favoritism contributed to TransCanada lowering its bid and improved TransCanada’s negotiating position. The Court also rejected Defendants’ argument that the courts holding in the appraisal action that the sale process resulting in the best value reasonably available for shareholder was dispositive, citing the different standard for fair value in an appraisal setting versus whether the Board’s conduct undermined its ability to obtain a higher price. Finally, the Court found it reasonable to infer that Skaggs and Smith impaired the sales process for self-interested reasons and committed fraud on the Board by withholding material information from the Board, thereby allowing the claim for damages against Skaggs and Smith in their capacities as officers to continue.
This decision shows the court’s focus on the fraud on the board theory of liability. The Court rejected the Defendant’s argument that a plaintiff could not state a claim for breach of fiduciary duty unless it could plead a loyalty claim against a majority of the board. The Court noted that a “plaintiff can plead a claim against an officer by showing that the officer committed a fraud on the board by withholding material information from the directors that would have affected their decision-making or by taking action that materially and adversely affected the sales process without informing the board.”