BOUCHARD, C.
In this action, former stockholders of Paramount Gold and Silver Corporation ("Paramount") sued the members of its board of directors challenging a transaction Paramount entered with Coeur Mining, Inc. ("Coeur") that closed in April 2015. Defendants have moved to dismiss the complaint for failure to state a claim for relief.
Before the transaction, Paramount had two mining projects, one in Mexico and the other in Nevada. The transaction involved (1) the spin-off of the Nevada mining assets into a separate entity, approximately 95% of the shares of which were distributed to Paramount's stockholders, and (2) a stock-for-stock merger of a subsidiary of Coeur into Paramount (the "Merger"), which then held the Mexican mining assets but not the Nevada mining assets. On the same day it entered into the merger agreement, Paramount entered into a royalty agreement pursuant to which a wholly-owned subsidiary of Coeur acquired a 0.7% royalty interest in the Mexican mining project in exchange for a payment of $5.25 million.
The complaint asserts a single claim for breach of fiduciary duty against the seven members of Paramount's board. Plaintiffs do not challenge the independence or disinterestedness of the majority of the board, nor do they contend that the transaction should be subject to Revlon or entire fairness review.
Plaintiffs' primary contention is that Unocal enhanced scrutiny should apply on the theory that the royalty agreement, when combined with the termination fee provision in the merger agreement, constituted an unreasonable deal protection device. For the reasons explained below, I conclude that this contention is without merit because the terms of the royalty agreement did not prevent any interested party from making a competing bid for Paramount and because the termination fee in the merger agreement by itself concededly was reasonable.
I also conclude that the stockholder vote approving the transaction was fully-informed. Therefore, under Corwin v. KKR Financial Holdings LLC and its progeny, the Paramount board's decision to enter into the merger agreement with Coeur is subject to business judgment rule, and the complaint must be dismissed. Finally, I conclude as a separate ground for dismissal that, even if Corwin did not apply, the complaint must be dismissed because plaintiffs have failed to state a non-exculpated claim for breach of fiduciary duty against the defendants.
Unless noted otherwise, the facts recited in this opinion come from the allegations of the Verified Third Amended Class Action Complaint (the "Complaint") and the documents incorporated therein.
Before the Merger, Paramount Gold and Silver Corporation was a precious metals exploration company headquartered in Winnemucca, Nevada that had two advanced stage mining projects: the Sleeper Gold Project and the San Miguel Project. The Sleeper Gold Project was located off a main highway about 25 miles from the town of Winnemucca, Nevada. The San Miguel Project consisted of over 142,000 hectares (over 353,000 acres) in the Palmarejo District of northwest Mexico.
Paramount had not generated any revenue of its own and was heavily dependent on its largest stockholder, FCMI Financial Corp., to fund its operations and expansion. As of the date of the Merger, FCMI Financial Corp. owned approximately 15.7% of Paramount's outstanding common stock, which was listed on the New York Stock Exchange under the ticker symbol "PZG."
Plaintiffs Fernando Gamboa, Justin Beaston, Rob Byers, Jerry Panning, James Alston, and Jonah Weiss, IRA allege they were stockholders of Paramount at all times relevant to this action.
Defendants Christopher Crupi, Robert G. Dinning, Michel Stinglhamber, Shawn V. Kennedy, Christopher Reynolds, John Carden, and Eliseo Gonzalez-Urien each served as a member of Paramount's board of directors since at least 2009, and were the seven members of Paramount's board of directors when it approved the Merger. Crupi, the then-President and Chief Executive Officer of Paramount, was the only management director on the board. Reynolds and Gonzalez-Urien were designated to the board by FCMI Financial Corp.
At various times from 2007 to 2014, Coeur Mining, Inc. had expressed an interest in acquiring Paramount's San Miguel Project, and had entered into several confidentiality agreements with Paramount to obtain confidential information in pursuit of its interest in the San Miguel Project. During this period, Paramount also explored the possibility of a business combination with other exploration and mining companies, and entered into confidentiality agreements with those companies to facilitate due diligence. None of these discussions resulted in a proposal that Paramount's board could recommend to its stockholders.
In October 2012, Coeur inquired whether Paramount would be interested in selling a portion of its San Miguel Project for cash and shares. Paramount rejected this proposal. In February 2013, Coeur again expressed its interest in the San Miguel Project, which led the Paramount board to invite five investment banks to make proposals to serve as its financial advisor in connection with a possible sale of all or a portion of the company. The Paramount board ultimately deferred the decision to hire a financial advisor.
In September 2014, Coeur sent Paramount a letter of intent describing a proposed transaction that would result in Coeur acquiring Paramount, with Paramount spinning off its Nevada business into a standalone public company ("SpinCo"). The letter of intent contemplated mixed consideration of 20.6 million shares of Coeur common stock and $19.7 million in cash. Coeur also would receive 9.9% of the fully diluted equity of SpinCo.
Later in September, the Paramount board made a counter-proposal to the Coeur offer, which contemplated mixed consideration of 20.7 million shares of Coeur common stock and $85.2 million in cash and required Coeur to purchase a 9.9% equity interest in SpinCo for an additional $6.2 million. The counter-proposal also included the sale to Coeur of a 0.5% royalty interest in the Sleeper Gold Project for $12 million in cash, and the sale of certain mining claims in the Spring Valley District of Nevada for $6 million in cash. Coeur's board rejected this counter-proposal.
On October 14, 2014, the Paramount board engaged Scotia Capital (USA) Inc. ("Scotia") as its financial advisor.
On November 7, 2014, Coeur sent Paramount another draft letter of intent setting forth the general terms under which Coeur would acquire Paramount in a stock-for-stock transaction. The letter of intent provided for the issuance of approximately 32.7 million shares of Coeur common stock, equating to approximately 0.20 share of Coeur common stock for each outstanding share of Paramount common stock. The letter of intent again contemplated that Paramount would spin off its Nevada operations into SpinCo. It also contemplated that Coeur would invest $10 million in cash in SpinCo and that SpinCo would combine with another public company, with Coeur receiving a 4.9% interest in the combined company. Coeur also proposed to enter into a royalty agreement with respect to the San Miguel Project for $5.25 million.
On November 10, 2014, Paramount's board met to consider Coeur's most recent proposal and created a special committee comprised of "all of the independent members of the board excluding one independent member who had disclosed to the board his potential conflict of interest due to his relationship with the third party proposed to combine with SpinCo."
On November 14, 2014, the special committee decided to abandon the proposed business combination between SpinCo and the third party and instructed management to seek an alternative structure for the spin-off. Over the next several weeks, Paramount and Coeur continued to engage in discussions and their counsel exchanged drafts of documents for a proposed transaction.
On December 15, 2014, Paramount's board met to consider the terms of a proposed merger transaction with Coeur, which it unanimously approved after receiving a fairness presentation from Scotia. The next day, on December 16, Paramount and Coeur entered into a merger agreement (the "Merger Agreement").
The Merger Agreement provided for Coeur to acquire all of the outstanding shares of Paramount common stock after Paramount spun off its Nevada assets into SpinCo. Upon completion of the Merger, Paramount would become a wholly owned subsidiary of Coeur. Paramount stockholders would receive 0.2016 of a share of Coeur common stock in exchange for each share of Paramount common stock. They also would receive a pro rata share of a 95.1% interest in SpinCo. Coeur would provide SpinCo with $10 million in cash and hold the remaining 4.9% interest in SpinCo.
The 0.2016 share of Coeur common stock represented an implied value of $0.90 per share of Paramount common stock based on Coeur's 20-day volume weighted average price and a 19.8% implied premium over Paramount's trading price as of its last trading day. The implied value of the transaction was approximately $146 million, without attributing any value to SpinCo. The estimated aggregate value of SpinCo was approximately $37.5 million.
Section 7.3 of the Merger Agreement provides, in general terms, that if Paramount's stockholders voted against the Merger, Paramount would be obligated to pay Coeur a $5 million termination fee if (1) an alternative acquisition proposal was made to Paramount's stockholders or to Paramount, and (2) within twelve months after the termination of the Merger Agreement, Paramount consummated an alternative transaction.
On the same day Paramount and Coeur entered into the Merger Agreement, Paramount and certain of its subsidiaries entered into a royalty agreement concerning the San Miguel Project with Coeur Mexicana S.A. de C.V. ("Coeur Mexicana"), a wholly-owned subsidiary of Coeur (the "Royalty Agreement"). Under the Royalty Agreement, Coeur Mexicana would receive a perpetual royalty "privileged and preferential in payment" of 0.7% of the net smelter returns from the sale or other disposition of productions produced from the San Miguel properties in exchange for a payment of $5.25 million.
On January 7, 2015, Paramount and Coeur filed a joint preliminary registration statement with the Securities and Exchange Commission, which was amended three times, on February 9, 2015, March 4, 2015, and March 16, 2015 (the "Registration Statement").
On April 17, 2015, stockholders of Paramount holding over 54% of Paramount's outstanding common stock voted to approve the Merger, with approximately 97% of those voting expressing their approval.
Shortly after the Merger's announcement on December 17, 2014, six actions were filed in this Court challenging the transaction. On February 18, 2015, the Court consolidated the various actions into this action and appointed lead counsel.
By the end of March 2015, Paramount voluntarily produced limited discovery, including board minutes and Scotia's fairness presentation. Plaintiffs took no action after receiving this discovery to enjoin the proposed transaction, which closed on April 17, 2015.
On February 1, 2016, after this action had been dormant for ten months, the Court requested a status report from plaintiffs' counsel. On April 8, 2016, plaintiffs filed a Second Amended Complaint in which they deleted disclosure claims that they previously had asserted.
On August 18, 2016, plaintiffs filed their Third Amended Complaint (as defined above, the "Complaint"), asserting a single claim for breach of fiduciary duty against the seven members of Paramount's board in connection with their approval of the transaction. The Third Amended Complaint added back allegations challenging certain disclosures in the Registration Statement, including allegations that plaintiffs had deleted just four months earlier.
On September 28, 2016, defendants moved to dismiss the Complaint for failure to state a claim for relief. Argument was held on February 2, 2017, during which the Court requested supplemental submissions, which were provided on February 10, 2017.
The standards governing a motion to dismiss for failure to state a claim for relief are well settled:
The Court is not required, however, to accept mere conclusory allegations as true or make inferences unsupported by well-pleaded factual allegations.
Defendants' primary argument in favor of dismissal is that plaintiffs have failed to state a claim for breach of fiduciary duty because of the effect of the Paramount stockholders' approval of the Merger. In Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court explained that "[f]or sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests."
In Singh v. Attenborough, the Supreme Court further explained that: "When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result. That is because the vestigial waste exception has long had little real-world relevance."
Plaintiffs do not challenge the disinterestedness of the stockholder vote. Nor do plaintiffs allege that the Merger, which involved a stock-for-stock exchange and was approved by a majority independent and disinterested board, should be subject to either a Revlon or an entire fairness standard of review.
Our Supreme Court has held that a "board's decision to protect its decision to enter a merger agreement with defensive devices against uninvited competing transactions that may emerge is analogous to a board's decision to protect against dangers to corporate policy and effectiveness when it adopts defensive measures in a hostile takeover contest," and thus should be reviewed under the Unocal enhanced judicial scrutiny standard.
Invoking Corwin, defendants contend that the Unocal intermediate standard of review does not apply here because the Merger was approved by a fully informed and uncoerced vote of a majority of Paramount's disinterested stockholders. Plaintiffs counter that this position cannot be squared with the Delaware Supreme Court's earlier decision in In re Santa Fe Pacific Corporation Shareholder Litigation,
As noted above, plaintiffs assert that the combination of the Royalty Agreement and the termination fee in the Merger Agreement constituted an unreasonable deal protection device under Unocal. In making this argument, plaintiffs concede that the $5 million termination fee in the Merger Agreement— representing 3.42% of the estimated value of the Merger excluding SpinCo, and about 2.72% of the estimated value of the overall transaction including SpinCo—is not unreasonable by itself.
As a threshold matter, plaintiffs' Unocal argument hinges on whether the Royalty Agreement constitutes a deal protection device in the first place. Plaintiffs assert that the Royalty Agreement "effectively served as a second termination fee because the Royalty Agreement would have required the payment of at least an additional $5.25 million (or approximately 3.6% of the Transaction's value) by any superior bidder to unshackle the San Miguel Project from Coeur and its subsidiaries."
The Royalty Agreement became effective when it was signed and was not contingent on consummation of the Merger.
In their Complaint and in briefing, plaintiffs relied on Section 17.2(3) of the Royalty Agreement to argue that Coeur could use the Royalty Agreement to block Paramount from entering into an alternative transaction.
Under the Royalty Agreement, "Owners" refers to the two Paramount subsidiaries (Paramount Mexico and Minera Gama) that owned the San Miguel Project, "Parent" means "Paramount Gold and Silver Corp. and includes all of Parent's successors-in-interest," and "Change of Control" means "Parent" ceasing to own all of the issued and outstanding voting securities and participating securities of either Owner."
Recognizing the flaw in their reliance on Section 17.2(3), plaintiffs abandoned the theory at oral argument, where they argued for the first time that a different provision of the Royalty Agreement—Section 17.2(1)—could be used to block an alternative transaction.
Section 17.2(1) of the Royalty Agreement provides, in relevant part, that:
"Mineral Property" means "the properties collectively and commonly known as San Miguel," and "Holder" refers to Coeur Mexicana and its successors-in-interest.
Plaintiffs contend that, if a third party wished to top Coeur's bid to acquire Paramount, then Paramount would "directly or indirectly . . . sell, assign, . . ., transfer or otherwise dispose of, the Mineral Property,"
Furthermore, as discussed above, Section 17.2(3) directly addresses Coeur Mexicana's consent right in a change of control situation, and confers a consent right on Coeur Mexicana only when there is a Change of Control of the Owners—the two Paramount subsidiaries—and not in the event of a change of control of Paramount itself. To now read Section 17.2(1) to confer a consent right on Coeur Mexicana over the sale of Paramount as a whole would read into this section a right that the parties carefully carved out from Section 17.2(3) in my view, contrary to the basic tenet of contract construction that a contract is to be read as a whole and all provisions of the contract should be harmonized to the extent possible.
For the above reasons, I find that Coeur Mexicana did not have a "block right" under the Royalty Agreement to veto an alternative transaction to the Merger, and thus the Royalty Agreement was not a deal protection device. Accordingly, and because plaintiffs prudently conceded that the $5 million termination fee in Merger Agreement alone was not an unreasonable deal protection device, plaintiffs' assertion that defendants adopted unreasonable deal protection devices in connection with the Merger fails to state a claim for relief.
Under Delaware law, when directors solicit stockholder action, they must "disclose fully and fairly all material information within the board's control."
To overcome a Corwin defense, the "plaintiff challenging the decision to approve a transaction must first identify a deficiency in the operative disclosure document, at which point the burden would fall to defendants to establish that the alleged deficiency fails as a matter of law to secure the cleansing effect of that vote."
Plaintiffs' first disclosure challenge concerns certain analyst price targets disclosed in a summary of Scotia's fairness opinion in the Registration Statement. In a section entitled "Other Approaches," the Registration Statement states, in relevant part, that:
Plaintiffs argue that the disclosed price targets of "$0.32 to $0.50 per share of Paramount common stock" directly contradict Scotia's fairness presentation to the Paramount board, which cited "analyst illustrative values ranging from $122 million to $556 million and price targets from $0.80 per share to $2.25 per share."
As an initial matter, given that this section of the Registration Statement explicitly stated that Scotia Capital "
The summary of Scotia's fairness opinion, spanning from page 59 to page 66 of the Registration Statement, consisted of six major sections. The first section provided an overview of Scotia's fairness approach.
The structure of the summary of Scotia's fairness analysis in the Registration Statement shows that the "Other Approaches" section concerned a valuation of the San Miguel Project alone, rather than Paramount as a whole. In particular, the "Other Approaches" section immediately followed two sections estimating the value of the San Miguel Project alone, one using net asset value analyses and the other comparing the San Miguel Project to comparable precedent transactions. In this context, the title "
Scotia's approach to valuing the San Miguel Project and SpinCo separately, rather than valuing the pre-spinoff Paramount as a whole makes logical sense given the structure of the transaction. After spinning off the Nevada business, Paramount's value effectively consisted of the San Miguel Project.
Plaintiffs argue that the language in the "Other Approaches" section referring to "$0.32 to $0.50 per share of Paramount common stock" is misleading. Viewed in isolation, this sentence could be read to suggest that the value of Paramount as a whole was $0.32 to $0.50 per share. But the structure of the fairness opinion summary, as discussed above, eliminates that ambiguity when the statement is read in context. Furthermore, throughout the summary, the phrase "per share of Paramount common stock" was used as a measurement unit—a way to express the values of the San Miguel Project or SpinCo as opposed to stating the value of Paramount in the aggregate. For example, in summarizing the net asset value analysis for the San Miguel Project, the Registration Statement stated: "The NAV approach . . . generated illustrative values in the range $59 to $193 million for Paramount's interest in the San Miguel Project, or $0.36 to $1.19 per share of Paramount common stock."
During oral argument, plaintiffs argued for the first time that even assuming the disclosed analyst price targets concerned the San Miguel Project only, the disclosure still was inaccurate.
In addition to not being raised in their brief and thus waived, plaintiffs' argument is deficient for two other reasons. First, the disclosure at issue states that "A review of available equity analyst research
For the above reasons, plaintiffs' challenge to the analyst price targets disclosed in the "Other Approaches" section of the summary of Scotia's work in the Registration Statement is without merit in my opinion.
Plaintiffs' second disclosure challenge concerns the role of Cantor Fitzgerald & Co. in the Merger.
The relevant part of the Registration Statement that plaintiffs challenge states:
Plaintiffs contrast this disclosure with the following information from the minutes of a Paramount board meeting held on December 2, 2014:
Putting the two documents together, plaintiffs argue that the Registration Statement misrepresented that Cantor Fitzgerald had no further involvement in the transaction after September 5, 2014, because a representative of Cantor Fitzgerald attended a Paramount board meeting on December 2, 2014, during which the board invited Cantor Fitzgerald to review the facts of the transaction in case it later was instructed to deliver an independent fairness opinion.
But plaintiffs, who received copies of Paramount's board minutes during discovery, do not allege that the Paramount board later "instructed" or "required" Cantor Fitzgerald to deliver an independent fairness opinion.
Plaintiffs' final disclosure challenge is that the Registration Statement omitted certain material facts relating to Scotia's fee arrangement. The Registration Statement disclosed that Paramount engaged Scotia as its financial advisor on October 14, 2014, and that Paramount and Scotia executed a new engagement letter on November 12, 2014.
Plaintiffs do not contend that any of the information quoted above was erroneous or misleading. They instead argue that the Registration Statement also should have disclosed the reason for the amendment to Scotia's engagement letter on November 12, 2014. Plaintiffs cite to minutes of a meeting of the Paramount board held on November 11, 2014, which stated the following:
Plaintiffs argue that the reason for amending Scotia's engagement letter should have been disclosed because this information was relevant to assessing Scotia's potential conflicts of interest.
For the reasons explained above, plaintiffs' disclosure challenges are without merit and thus the stockholder vote approving the Merger was fully informed.
Because the Merger was approved by a majority of Paramount's disinterested stockholders in a fully informed, uncoerced vote, the business judgment rule applies to the Paramount board's decision to approve the Merger, and the transaction may only be attacked on the ground of waste.
As a separate ground for dismissal, I find that even if Corwin did not apply in this case, plaintiffs' fiduciary duty claim still fails to state a claim for relief. As explained above, plaintiffs do not contend that the transaction at issue implicates either a Revlon or entire fairness standard of review, and plaintiffs' invocation of Unocal fails because the Royalty Agreement was not a deal protection device. Thus, the decision to enter the Merger, a stock-for-stock transaction, presumptively would be governed by the business judgment rule.
Paramount's certificate of incorporation contains a § 102(b)(7) provision exculpating its directors from monetary liability for breach of fiduciary duty "to the fullest extent permitted by the Delaware General Corporation Law."
To state a bad faith claim, "a plaintiff must show either an extreme set of facts to establish that disinterested directors were intentionally disregarding their duties, or that the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith."
Plaintiffs argue that the Paramount board acted in bad faith by approving certain preclusive deal protections in the form of the termination fee and the Royalty Agreement, and by failing to disclose certain material information. Both of these grounds are without merit for reasons already discussed, namely that the Royalty Agreement plainly did not operate as a deal protection device and the termination fee by itself was reasonable,
Plaintiffs next argue that the defendants acted in bad faith by failing to inform themselves of Paramount's value by running "a rushed process" with Coeur and failing to conduct an auction or to negotiate a go-shop.
Mainly relying on analyst commentary and target prices, plaintiffs assert that the merger consideration "significantly undervalued" Paramount.
Finally, plaintiffs assert that Scotia's fairness opinion "was utterly lacking and far from complete."
For all the foregoing reasons, plaintiffs have failed to state a claim for breach of fiduciary duty, and defendants' motion to dismiss the Complaint with prejudice is GRANTED.
Id. at 68.
