STRINE, Vice Chancellor.
The plaintiffs are stockholders of Massey Energy Company, a coal mining corporation with a controversial reputation. Convinced that it knew better than the public authorities charged with enforcing laws designed to make mining a safer and cleaner business, Massey management, with board knowledge, fostered an adversarial relationship with the company's regulators and accepted as ordinary the idea that the company would regularly be accused of violating important safety regulations. On April 5, 2010, a massive explosion occurred at Massey's Upper Big Branch mine in West Virginia and as a result, 29 miners died. Although the worst human and business loss in Massey history, it was not the first time that Massey miners had suffered death and serious injuries.
Amidst public concern about the human loss at Upper Big Branch, the stock market focused on what it does, thereby allowing profit seekers to buy and sell Massey stock based on their differing views about what this terrible event, and Massey's mode of operating, portended for the company's ability to generate future cash flows. Likewise, lawsuits and regulatory proceedings ensued, in which families of the lost and injured miners sought recompense and regulators sought to figure out exactly what caused the disaster. Inevitably, stockholders of Massey filed derivative suits, seeking to ensure that to the extent that Massey itself was harmed by the legal obligation to pay fines, judgments to the lost miners' families, and by the lost cash flows from the destroyed mine, the corporate directors and officers who managed the firm were held responsible for what the plaintiffs argued was a failure to make a good faith effort to make sure that Massey complied with mine safety regulations.
In an industry that was already consolidating, the weakened position of Massey attracted the interest of industry rivals. In the wake of the disaster, Massey's stock price fell dramatically and its shares were arguably trading at a discount to its coal reserves in comparison to its competitors who were not under a regulatory cloud. After a lengthy process in which Massey's openness to a strategic transaction was made public, Massey's stock rebounded as a result, and several bidders had a chance to conduct due diligence and to make a bid, Massey's "Board," which is comprised almost entirely of independent directors, entered into a "Merger Agreement" with Alpha Natural Resources, Inc., a mining company with a good reputation and track record for miner safety and regulatory compliance. Under the terms of that Agreement, each Massey share will be converted into the right to receive 1.025 shares of Alpha common stock and $10.00 in cash if the Massey stockholders approve the "Merger" at a vote scheduled for June 1, 2011. On the day the Massey Board unanimously approved the Merger, January 27, 2011, the Merger consideration amounted to a 25% premium over Massey's stock price based on the previous day's closing price of Massey and Alpha stock, a 95% premium over the closing price of Massey stock on October 18, 2010 before it was publicly reported that Massey was engaged in a strategic alternatives review, and even a 27% premium over Massey's stock price the day of the explosion at the Upper Big Branch mine.
The plaintiffs seek a preliminary injunction against the Merger because the Massey Board did not negotiate to have the pending "Derivative Claims" transferred into a litigation trust for the exclusive benefit of Massey stockholders. They argue that the Merger is unfair because it results in Alpha being able to acquire Massey without paying fair value for the economic value of the Derivative Claims. They buttress this argument with the undisputed fact that the Massey Board never attempted to value the Derivative Claims but proceeded on the assumption that the Derivative Claims would survive the Merger. The record indicates that the Massey Board might not have had a clear understanding of what survival of the Derivative Claims meant, with some directors seeming to realize that the Claims would pass to Alpha in the Merger, and others believing that the current derivative plaintiffs would be able to continue to prosecute those Claims for the benefit of Massey and its current stockholders alone.
As a matter of black letter law — see Lewis v. Anderson — the Derivative Claims will pass to Alpha in the Merger unless the Merger itself is merely a fraudulent attempt to deprive the Massey stockholders of their derivative standing, or the Merger is a mere reorganization that otherwise does not affect the Massey stockholders' relative ownership in the resulting corporate enterprise.
Most importantly, the determination of the fate of the Derivative Claims is not one that should or must be made right now. The Massey Board's failure to address the value of the Derivative Claims is regrettable in view of the economic impact the Upper Big Branch Disaster had on Massey. That the Board failed to do so upon the advice of outside advisors is even more surprising. Any board negotiating the sale of a corporation should attempt to value and get full consideration for all of the corporation's material assets.
But even acknowledging that mundane reality, the record will not support the issuance of a preliminary injunction. This record does not support the inference that the Derivative Claims are material in comparison to the overall value of Massey as an entity. The plaintiffs' argument that they are conflates the value of two different things: the potential diminution in value of Massey as a result of the consequences of the Upper Big Branch Disaster and the loss in public confidence in Massey's management (i.e., the "Disaster Fall-Out") on the one hand, and the value of the Derivative Claims, on the other. It is entirely possible that Massey suffered a material drop in value as a result of the Disaster Fall-Out, including the public skepticism about Massey management's capability to simultaneously operate profitably, safely, and lawfully. But it is also possible for the loss-offsetting value of the Derivative Claims to be immaterial in comparison to Massey's enterprise value. The extent to which current and former Massey fiduciaries can be held responsible to make Massey whole for fines, settlements, and diminished profits the company suffers as a result of the Disaster and related circumstances is affected by, among other things, the difficulty of showing that any of those fiduciaries acted with a wrongful state of mind necessary to prove them liable in view of the exculpatory provision in Massey's charter; the reality that if the fiduciaries are proven to have acted with the requisite state of mind to impose liability, then insurance proceeds may not be available to pay for a judgment; the questionable ability of even the wealthy members of the Massey Board to satisfy any judgment that would be material in relationship to the company's overall value; and the fact that most of the defendants in the derivative actions are independent directors whose motivation to tolerate unsafe operational practices for the sake of profits is tempered. For these and other reasons, it could well be that any rational assessment would place a value on the Derivative Claims that would be immaterial in relation to the value that Alpha is paying in the Merger. At best, these Claims might be thought a way to obtain some recoupment of the continuing costs Massey will incur as a result of the Upper Big Branch Disaster and the need to improve its relations with regulators and society, as a whole. Therefore, it is unlikely that Alpha viewed these Claims as an asset at all, but merely as having some potential to reduce the gravity of the Disaster Fall-Out Alpha was inheriting.
As a result, even when considering the merits prong of the injunction inquiry, the record does not persuade me that the Merger would, after a trial, likely be found to be economically unfair to the Massey stockholders.
Of course, the prudential judgment before me is not whether the Massey stockholders should be satisfied with the predicament Massey found itself in after the Disaster or even the Merger price. The question is whether there is a sound basis to enjoin the Massey stockholders from deciding for themselves whether to exchange their status as Massey stockholders for a chance to receive substantial value from a third party in an arms-length Merger. The record will not bear the inference that any bidder prepared to pay more has been prevented from doing so. The Massey Board seems to have exerted reasonable efforts to get the highest price it could from Alpha. If Massey stockholders believe that the company can do better by remaining independent, they have the uncoerced, informed chance to make that decision for themselves. If they choose to remain independent, the Massey stockholders will have the chance to enjoy the fruits of any derivative recovery secured on the company's behalf.
Given that reality, it would threaten more harm than good for me to usurp the ability of Massey stockholders to decide this economic question themselves. That is especially the case when it is possible to craft a monetary remedy in the event that it were found, on a full record, that the Merger was tainted by non-exculpated breaches of fiduciary duty. Likewise, if the plaintiffs are correct about their view of the facts and the law, then they will be able to continue to prosecute the Derivative Claims even after the Merger under their reading of Lewis v. Anderson
Even by the standards of this court, the record on this preliminary injunction motion is fulsome, a word that is often mistakenly used as a positive adjective. Given the need to decide this motion in a timely manner, this decision will concentrate on the issue the plaintiffs themselves choose as the central one: whether the failure of the Massey Board to secure the Derivative Claims for Massey's current stockholders justifies the entry of a preliminary injunction against Massey's Merger with Alpha.
In their papers, the plaintiffs also make a cursory attempt to show that the Board failed to treat all bidders equally, did not seek out all logical acquirors, gave Alpha unreasonably preclusive deal protection measures, and failed to disclose to the Massey stockholders all material information about the proposed Merger. For reasons of economy, my factual findings address and reject these arguments, which are not borne out by the record, and which are not pressed hard by the plaintiffs.
In keeping with the plaintiffs' focus, this decision proceeds in the following manner. In the next section, I set forth the facts, applying the standard applicable to preliminary injunctions. In particular, I focus on: (i) Massey's business and its troubled regulatory and safety record before the Upper Big Branch Disaster; (ii) the Upper Big Branch Disaster and the ensuing Disaster Fall-Out; (iii) the Board's process leading to the signing of the Merger Agreement; and finally (iv) the extent to which the pendency of the Derivative Claims seems to have influenced that process and the resulting Merger Agreement.
I then address the primary argument of the plaintiffs, addressing in the first instance whether the plaintiffs have demonstrated that they are reasonably likely to succeed in showing that the Merger is tainted by breaches of fiduciary duty. Most importantly, I address whether the plaintiffs have demonstrated that they face a threat of irreparable injury and that the balance of the equities favors the issuance of an injunction.
As is required in considering a motion for a preliminary injunction, these are the facts that I conclude are likely to be found, based on the current record, after a trial in this matter.
Massey is the nation's sixth largest coal miner based on production and the nation's largest producer of Central Appalachian coal.
From November 2000 to December 2010, Massey's CEO was defendant Don Blankenship. Although Massey, like most other public companies, had a majority of independent directors, Blankenship was, by any measure, a high profile and dominant CEO.
Under what a key subordinate described as Blankenship's "autocratic" management style,
Claiming to have been misunderstood, Blankenship sent a follow-up memorandum days later, emphasizing that he did not mean to say profits came ahead of safety,
This perception that those who refused to ignore dangerous mining conditions faced the threat of adverse employment consequences was enhanced by the actual experience of one Massey in-house safety inspector. In a 2007 whistleblower's lawsuit, a West Virginia jury awarded that former Massey safety inspector a verdict of $2 million in punitive damages, back pay, and emotional and reputational damages after he was allegedly fired in retaliation for his reporting to the MSHA of unaddressed safety violations at a Massey mine.
Of course, when a company has strong opinions about knowing better than the regulators, it is optimal to match that with a record of worker safety and environmental protection that is substantively spotless. But in the case of Massey, no such match existed, at least insofar as one credits actual judgments and other regulation-related losses suffered by the company under Blankenship's tenure as CEO.
In 2008, following a joint MSHA and FBI investigation into the causes of a 2006 fire at Massey's Aracoma mine in West Virginia that cost the lives of 2 Massey miners, Massey pled guilty to criminal charges including one felony count for willful violation of mandatory safety standards resulting in death, eight counts for willful violation of mandatory safety standards, and one count for making a false statement, and agreed to pay a $4.5 million fine comprised of criminal fines and civil penalties.
In 2008, Massey also agreed to a $20 million settlement in a suit brought against it by the Environmental Protection Agency alleging 4,500 violations of Massey's Clean Water Act permits over a course of several years.
Further in 2008, as part of a West Virginia court-approved settlement of a 2007 derivative action accusing Blankenship and the rest of the Massey directors of failing to cause Massey to comply with applicable federal and state mine safety and environmental laws,
Although the Massey Board took action to comply with the 2008 derivative action settlement, and the Massey defendants cite other evidence that there was motion designed to improve Massey's compliance with safety regulations,
Instead of ameliorating his attitude in response to Massey's many losses in legal proceedings, Blankenship's attitude towards regulators "deteriorated very sharply" in the months after President Obama's inauguration in January 2009 when key union players with ties to the 1984 union showdown at Massey entered prominent new roles at the MSHA.
Massey's Upper Big Branch mine in Montcoal, West Virginia is an underground bituminous coal mine that employed, in 2009, roughly 195 persons.
The McAteer Report deplored Massey's compliance with federal and state safety regulations. It observed that the Upper Big Branch mine suffered from "chronic" ventilation problems that were "common knowledge" to those who regularly worked in the mine.
The McAteer Report also condemned the inadequate rock dusting practices at the Upper Big Branch mine.
Because the Derivative Claims are directed at Massey's top management and the Board itself, what the McAteer Report concluded as to their potential responsibility for the conditions at the Upper Big Branch mine is relevant to considering this motion. The McAteer Report focused on Massey's senior management, in particular Blankenship, as the source of the Upper Big Branch mine's departure from government-mandated minimum safety standards designed to prevent exactly the type of tragedy that occurred on April 5, 2010. "There is an obvious disconnect," summarized the Report, "between the lofty safety standards extolled by Blankenship and the reality of conditions inspectors and investigators found in the Upper Big Branch mine."
In the weeks that followed the explosion at the Upper Big Branch mine, Massey stockholders filed multiple actions in both West Virginia and Delaware asserting the Derivative Claims.
On April 26, 2010, less than one month after the explosion at Upper Big Branch, Michael Quillen, the Chairman of the board of directors of Alpha Natural Resources, Inc., America's third largest producer of coal, approached Blankenship and expressed Alpha's interest in a possible business combination with Massey.
This was not the first time Alpha had shown an interest in acquiring Massey. In 2006, Alpha had made a proposal that would have resulted in a new company that Alpha would manage, and one which the Massey stockholders would control two-thirds of the surviving company's stock.
Although over the course of the next two years, between 2007 and 2009, representatives from Alpha and Massey had periodic telephonic conversations, it was not until Quillen's overture on April 26, 2010 that discussions about a possible business combination were once more undertaken in earnest.
Blankenship's response to Quillen was not warm. Although he told Quillen that he would inform the Board of Alpha's interest in pursuing a transaction, Blankenship made clear to Quillen his opinion that a combination was not in the Massey stockholders' best interests due to Massey's depressed stock price in the wake of the explosion at the Upper Big Branch mine. Apart even from the Disaster Fall-Out, Blankenship believed the valuation metrics used by Wall Street did not adequately take into account Massey's extensive coal reserves.
Undeterred, Alpha sent Massey a non-binding proposal on August 11, 2010 to acquire all of Massey's outstanding stock in an all stock merger that would have offered Massey stockholders $37.19 a share representing a 20% premium over Massey's then current stock price of $30.99, which had continued its downward trend since the Upper Big Branch Disaster.
In response to the derivative actions filed against it, on August 16, 2010, the Board created an "Advisory Committee" comprised of two new independent directors appointed the same day, Linda J. Welty and Robert B. Holland III, charged with making recommendations to the full Board regarding: (i) whether Massey should pursue the Derivative Claims resulting from the Upper Big Branch mine explosion; and (ii) whether Massey should undertake any changes in "management, operations, practice and/or policies."
On September 13, Alpha followed its $37.19 bid with another non-binding offer to purchase Massey at $41.07 per share of Massey stock in an all stock merger which on that date represented a premium of 26% to Massey's then stock price of $32.49.
Coincidental with dealing with Alpha, the Massey Board was also coming to grips with the post-Disaster challenge of operating Massey. In particular, even those who had shared Blankenship's jaded views of the MSHA, like lead director Inman, realized that the company had to regain the confidence of the market and company's regulators if it was to succeed going forward. Inman had a distinguished career in the United States Navy and the CIA that imbued him with a belief system about how organizations should deal with crises.
As autumn approached, however, and Blankenship gave another scathing appraisal of the MSHA at a Massey press conference,
To that end, Inman initiated several actions in the fall of 2010 to make clear to Alpha and anyone else who was interested in acquiring Massey that Massey was open and willing to consider strategic combinations, regardless if Blankenship was not.
By the middle of October, Wall Street had gotten a whiff of what was going down between Alpha and Massey, and as a result of an October 19, 2010 article published in the Wall Street Journal, it became public knowledge that Massey was open to expressions of interest to engage in a business combination transaction.
On November 20, 2010, the independent directors met for dinner before the full Board's regular fourth quarter meeting scheduled for the next three days and were given a preliminary report by the Advisory Committee on the progress of its work.
At the quarterly Board meeting on November 21, Blankenship presented his 5-year strategic stand-alone plan for Massey.
Later that same evening, on November 21, the strategic alternatives review committee met at a special Board meeting, at which Perella Weinberg presented the alternatives under consideration, including its view on the viability of Massey's stand-alone plan.
The Board then held a meeting on December 3, at which time it presented Blankenship with the proposed severance package, which Blankenship signed. Blankenship left both his position as CEO and as a Massey director that day.
On December 10, 2010, Arch submitted its initial bid of 1.535 Arch shares plus $21.60 in cash for each Massey share which, on the basis of the closing price of Arch's stock on that date, represented $70.89 for each Massey share.
By January 3, 2011, both Alpha and Arch, the only two remaining bidders, had signed confidentiality and standstill agreements with Massey and commenced due diligence.
The Board met on January 14 for a presentation by Perella Weinberg, and determined that the synergies that could be achieved through a combination with Alpha exceeded those that were possible or likely with Arch.
Both Arch and Alpha submitted their final proposal on January 24, 2011. Arch dropped out of the running by reducing its bid to $55.50.
The plaintiffs do not seriously contend that the sales process that the Board undertook was flawed in the sense that the Board breached its fiduciary duties in running the sales process, or in executing a Merger Agreement with unreasonable deal protection devices. Because the plaintiffs' talented and diligent counsel did not make any substantial argument in support of theories of this kind, I do not burden the reader with explaining why arguments that were not made will not sustain an injunction.
Nor have the plaintiffs come close to establishing a reasonable probability of success on the merits on their claim that the Massey directors breached their fiduciary duties by failing to disclose all material information in the definitive proxy statement. To a large extent, the plaintiffs merely seek to have the defendants make self-flagellating disclosures about their alleged subjective motivations, a desire that does not support a disclosure claim.
Therefore, no Massey stockholder will vote for the Merger under the mistaken belief that the benefit of the Derivative Claims will belong only to the current Massey stockholders if the Merger closes. If a stockholder shares the plaintiffs' view and believes that Massey will do better by remaining independent and suing its fiduciaries, she can vote no.
Because the Board's treatment of the Derivative Claims in the Merger negotiation process is so central to the plaintiffs' motion, I discuss that subject separately now.
As noted, the Advisory Committee gave the Board a report on the status of its work at the Board's dinner meeting on November 20, 2010, in which it advised the Board that it had not come to any conclusion with respect to whether the Derivative Claims against the directors and management were meritorious and should therefore be pursued.
As is disclosed in the proxy statement,
But, the reality is that Cravath was the same law firm that was representing the Massey Board in defense of the Derivative Claims. It was therefore an awkward source of advice for the Board in considering what consideration, if any, to give to the Derivative Claims in negotiating the Merger. No doubt the better practice would have been for the Advisory Committee to have had its own independent counsel, Weil Gotshal, provide the Board with advice on this subject.
One additional facet of the record that bears mention is the extent to which Cravath was clear in informing the Board just what "survival" of the Derivative Claims in this context meant. That is, the Massey directors' testimony does not uniformly manifest the understanding that in the event that Massey was acquired, the Derivative Claims themselves would likely pass, as all assets would, to the third-party acquiror, thus extinguishing the Massey stockholders' standing to continue the Derivative Claims solely for the benefit of the Massey stockholders.
The plaintiffs make much of this gap and the failure of the Board to receive a valuation of the Derivative Claims as an "asset" of Massey for which value should be paid by Alpha or Arch. For reasons I later explain, I do not perceive this void as being poorly motivated. No rational inference emerges from the record that the Board or its advisors viewed the Derivative Claims as being valuable or something a rational acquiror would pay for, except in the sense of having some value in potentially reducing the Disaster Fall-Out that any acquiror of Massey would assume. Likewise, despite an aspect of the record I soon discuss, I perceive no basis to infer that the Massey Board members were secretly harboring a fear for their net wealths because of the pending Derivative Claims, and viewed the transaction as a way to ease those fears. The record simply does not surface such a motivation, and the fiduciary most targeted by the Derivative Claims, Blankenship, left the Board on December 3, 2010 and was not a fan of selling the company.
Thus, although it would have been better for the Board to have received clearer advice from a more independent source, the Board's ultimate decision about whether to sign the Merger Agreement does not seem to have been influenced in any material manner by a desire to limit the Board's exposure to the Derivative Claims. Of course, none of this is to say that the Disaster did not play into the Board's evaluation of Massey's value, both for purposes of negotiating a deal and for evaluating Massey's stand-alone potential. Massey faced a large credibility deficit following the Upper Big Branch Disaster, and its stock price had suffered as a result. The Board rightly saw a combination with a third-party acquiror with a good reputation for safety, like Alpha, as an opportunity to change the dynamic at Massey in a plain way.
In reaching my conclusions about the effect of the Derivative Claims on the board's deliberative process, I have carefully considered the plaintiffs' argument that a January 2011 draft of the Merger Agreement, written by Cravath, supports the inference that the Board sought to sell the company to avoid personal liability for the Derivative Claims. At a dinner meeting between the two CEOs on January 11, Crutchfield relayed to Phillips his belief that the draft's indemnification provision that arguably required Alpha to indemnify the Massey directors and management for "willful acts of misconduct," was "obnoxious."
As a result, the final Merger Agreement only had Alpha provide a guarantee that Alpha would accord the Massey directors and officers with the same protection they were afforded by Massey's certificate of incorporation. This did not immunize Massey directors or officers from liability to Massey or Alpha for non-exculpated breaches of fiduciary duty that harmed Massey. Although this exchange adds color to the plaintiffs' view that the directors were worried about personal liability for the Derivative Claims, I do not perceive it as skeptically as they do. It is typical for counsel for a seller to bargain for indemnity and the Cravath draft, although having an arguably unsavory effect, was amended when the problem with it was pointed out and, more important, there is no evidence that the Massey Board itself urged that this aggressive position be taken.
In order to succeed on their preliminary injunction motion, the plaintiffs must demonstrate: (i) a reasonable probability of success on the merits; (ii) that they will suffer irreparable injury if an injunction does not issue; and (iii) that the balance of the equities favors the issuance of an injunction.
In determining whether the plaintiffs have demonstrated a reasonable probability of success on the merits, I take into account the unusual context presented. As indicated, the major issue here is whether the defendants breached their fiduciary duties by entering into a Merger Agreement with Alpha that did not secure full value for the Derivative Claims. The plaintiffs argue that because a majority of the Massey Board was named as defendants in the Derivative Claims, the Merger itself is subject to the entire fairness standard. Moving beyond their standard of review argument, the plaintiffs say that the Merger price is materially suspect because of the Board's failure to value the Derivative Claims. In so arguing, the plaintiffs essentially embrace the holding of the Supreme Court's decision in Parnes v. Bally Entertainment Corp.,
The Massey defendants' papers have not been as helpful as they might be in addressing this argument because they depend largely on the strained notion that there is no reason to think that any Derivative Claim against a Massey director or officer could survive a pleading challenge, much less provide a basis for ultimate liability. That notion is not one, as I shall indicate, that I accept as resting on a realistic appraisal of the record. More helpful are their other arguments, which are buttressed by more realistic and balanced arguments by Alpha about the Derivative Claims, that focus on the facts regarding the process leading to the Alpha Merger and the reality that the consummation of the Merger does not end the Massey defendants' exposure to derivative liability.
To begin my consideration of whether the plaintiffs have demonstrated a reasonable probability of success on the merits that the defendants breached their fiduciary duties by entering into the Merger Agreement with Alpha, I note that there is some force to the plaintiffs' argument that the entire fairness standard applies because a majority of the Massey Board faced a substantial likelihood of liability on the basis of the Derivative Claims, the Merger could be perceived as lessening the chances for prosecution of those Claims, and thus the Merger could be seen as according to Massey directors a benefit that is not shared equally with other Massey stockholders.
But, for reasons I now explain, I am not persuaded that the Massey directors are likely to be found to have committed any more than a breach of the duty of care in their negotiation of and entry into the Alpha Merger. Before focusing specifically on the Derivative Claims' role in the Merger itself, I note again that the Massey Board and its advisors appear to have exercised reasonable, good faith efforts to get as favorable a deal as they could extract from Alpha. Contrary to what the plaintiffs say, I do not draw the inference that the Board rushed into the arms of Alpha in order to end the Derivative Claims. Rather, the Board took its time, compared what could be achieved for the Massey stockholders from remaining independent to merging with someone else like Alpha, and reached a reasoned determination that a merger with Alpha was in the best interests of the Massey stockholders. Throughout the process, the Massey Board appears to have bargained hard to get a good price and obtained a value that seems quite respectable when considered in view of the best estimates of Massey's discounted cash flow stand-alone value
With that foundation in mind, I now focus specifically on whether the Board likely breached its fiduciary duties and entered an unfair Merger Agreement by failing to secure the purported value of the Derivative Claims for the Massey stockholders. As will be seen, even if the Massey defendants face a non-frivolous threat of personal liability because of the Derivative Claims and would bear the burden to show that their actions were entirely fair in connection with the Merger, I am not convinced that after trial the defendants would likely fail to show that the Merger was economically fair to Massey's stockholders. But of course, that need and does not mean that the Board and its advisors addressed the Derivative Claims in an ideal manner.
In concluding that the Massey defendants' conduct did not likely result in an unfair Merger price, I begin by accepting a proposition of the plaintiffs that the defendants themselves, understandably, do not. That is that the plaintiffs in the pending derivative actions asserting the Derivative Claims have pled a non-frivolous claim that independent members of the Massey Board have engaged in non-exculpated breaches of fiduciary duty that can be proximately linked to the Upper Big Branch Disaster. That is even more the case as to current Massey director, Inman, and former Massey director and CEO, Blankenship, given their more intensive role in Massey's management.
The plaintiffs acknowledge that the Derivative Claims center on the allegation that directors and officers of Massey breached their fiduciary duties by failing to make a good faith effort to ensure that Massey complied with applicable laws designed to protect the safety of miners.
The plaintiffs allege that the independent directors of the Massey Board did not make a good faith effort to ensure that Massey complied with its legal obligations. Rather than respond to numerous red and yellow flags by aggressively correcting the management culture at Massey that allegedly put profits ahead of safety, the Board allowed itself to continue to be dominated by Blankenship. Although the defendants point to a lot of motion by the independent directors, some of which resulted from a 2008 court-ordered settlement, the plaintiffs in turn point to evidence creating a plausible inference that the independent directors of Massey did just that — go through the motions — rather than make good faith efforts to ensure that Massey cleaned up its act. Notably, the plaintiffs point to evidence that in the wake of pleading guilty to criminal charges and suffering liability for numerous violations of federal and state safety regulations, Massey mines continued to experience a troubling pattern of major safety violations.
In the limited amount of time I have had to consider this preliminary injunction motion, it would be hazardous and imprudent to make any broad pronouncements on the ultimate fate of the plaintiffs' Derivative Claims. But, I believe that I can safely say the following.
Although the ultimate ability of the plaintiffs to prove that the Massey directors and officers breached their fiduciary duty by knowingly failing to discharge their duty to try to make sure that Massey complied with its legal obligations is difficult to predict,
At a trial when a crucial issue would be the state of mind of each individual defendant charged with a Caremark violation, these arguments would require careful consideration. At a pleading stage, however, they are of little moment in light of the particularized facts pled by the plaintiffs. Despite the straw man arguments of certain academics,
Regrettably, a myriad of particularized facts have been pled that create a pleading-stage inference that the top management of Massey did just that. The objective facts are that Massey had pled guilty to criminal charges, had suffered other serious judgments and settlements as a result of violations of law, had been caught trying to hide violations of law and suppress material evidence, and had miners suffer death and serious injuries at its facilities. Instead of becoming a corporation with a new attitude and commitment to safety that won recognition for that change from its regulators, Massey continued to think it knew better than those charged with enforcing the law, and in fact, often argued with the law itself.
To be plain, when a company already has been proven to have engaged in illegal conduct, it is a high risk strategy for it to embrace the idea that its regulators are wrong-headed and to view itself as simply a victim of a governmental conspiracy. Relatedly, when a company has a "record" as a recidivist, its directors and officers cannot take comfort in the appearance of compliance motion at the pleading stage, when the plaintiffs are able to plead particularized facts creating an inference that the Board and management were aware of a troubling continuing pattern of non-compliance in fact and of a managerial attitude suggestive of a desire to fight with and hide evidence from the company's regulators. As a kid, most of us are taught that it is not a good excuse to argue with the rules. Telling your parents that all the kids are getting caught shoplifting, cheating, or imbibing illegal substances is not, fortunately, a good excuse. For fiduciaries of Delaware corporations, there is no room to flout the law governing the corporation's affairs.
It may well be that after a trial, the Massey directors and officers will be found to have acted in a manner that does not subject them to liability under the Caremark standard. But for purposes of this motion, candor requires acknowledging that the plaintiffs have likely pled Derivative Claims that would survive a motion to dismiss, even under the heightened pleading standard applicable under Rule 23.1.
The problem for the plaintiffs, however, is that my assessment that their Derivative Claims would survive a dismissal motion if Massey remained a stand-alone company does not equate to a belief on my part that those Claims are a material asset that Alpha is not paying fair value for in the Merger Agreement with Massey.
The plaintiffs make a plausible case that Massey, as a profit-making corporation, suffered a serious financial injury because of the Upper Big Branch Disaster and the market's perception in the wake of that Disaster that Massey's management approach was risky and that its cash generating potential should be accordingly discounted. As Massey's own public filings indicate, the company has already taken a charge to earnings of $166.6 million on account of the Disaster and will continue to suffer the loss of earnings from the Upper Big Branch mine itself,
The plaintiffs' expert, David G. Clarke, totals up the lost value attributable to "the breaches of fiduciary duty by the Massey [B]oard of directors and officers alleged in the operative complaint" as being in the range of $900 million to $1.4 billion.
The Derivative Claims are at best a way for Massey to offset some of the Disaster Fall-Out by requiring Massey's directors and officers to indemnify the company. A period of extended study would be required to identify all the reasons why one cannot equate the offsetting value of the Derivative Claims with the Disaster Fall-Out. But even under time pressure, one can confidently say there is likely a very large gap between those values.
Begin with the reality that in the absence of an improper motive or facts showing self-interest, when management decisions do not turn out well and a company suffers a loss in profits (or a decline in its trading multiple), this does not ordinarily translate into any basis to hold corporate fiduciaries liable in damages.
That is so for several well understood reasons. In the first instance, the business judgment rule would itself act to preclude any claim based on simple negligence against the Massey directors in that capacity.
Even as to someone like Blankenship, there is a distance between pleading a claim of conscious flouting of the law for the sake of generating profit and proving that claim after a trial. Failure to see grey is often an impediment to clear reasoning, even on a moral level. Subterranean mining will never be a risk-free or entirely clean business. That is a reality and every self-aware adult in this intensely energy-consuming society has coal on his conscience.
Let us complicate things further. From the perspective of Massey as a business and its stockholders as investors, it is hardly clear that it is in its interest for it to be proved that its directors and officers caused the corporation to engage in pervasive violations of the law. Such proof could expose the entity, and thereby indirectly its stockholders, to severe financial harm in the form of large judgments and fines, potentially including punitive damages awards.
That is why the notion that a third-party acquirer like Alpha would "pay" for these claims is dubious. If Alpha acquires Massey, it will acquire along with Massey's assets, the responsibility for Massey's pre-existing obligations and liabilities.
If the Merger is consummated, Alpha can expect to continue to have to address the direct claims against Massey of lost and injured miners, the regulatory inquiries of the MSHA and West Virginia state authorities, and other elements comprising the Disaster Fall-Out. To the extent that Alpha or another acquiror would "pay" for the value of the Derivative Claims, it would be in the sense of figuring out the extent to which a recovery against the derivative defendants would offset the likely continuing costs to Alpha of remedying, to the extent possible, the Disaster Fall-Out. For example, can it, by lawsuit or negotiations, obtain some recompense from Blankenship or others to cover some of the costs of settlements to the lost miners' families? That is, it would be more a consideration for Alpha in determining how much of a liability wildcard it was acquiring by purchasing Massey than a selling point for Massey in deal negotiations. The Derivative Claims are, in essence, just one part of the calculation of how big a liability Alpha is purchasing.
In that regard, this context is importantly distinct from other cases where it is unrealistic to think that an acquiror will pursue claims against the selling corporation's management. In Golaine v. Edwards,
The situation here is quite different. Alpha has to deal with all of the Disaster Fall-Out and Massey's unique approach to dealing with regulators. This will almost certainly require Alpha to pay settlements, fines, and remediation costs. To the extent that the direct actions against Massey result in findings that Massey, as a corporation, consciously violated the law, Alpha has a rational incentive to shift as much of that liability to the former Massey directors and officers as can efficiently and realistically be achieved. If Alpha does so, it would not be in the position of seeking any windfall, given that it assumed the risks that came with buying Massey and was simply using one tool belonging to Massey to reduce the harm to it.
In acknowledging what seems to me to be an economic reality, I do not mean to applaud how the Massey Board dealt with the Derivative Claims in considering whether to sell the company. It appears that counsel for the Board was so influenced by the fact that a majority of the Board were defendants in the Derivative Claims that counsel essentially told the Board not to give any weight to the pendency of those Claims in determining whether to do a deal with Alpha. Although the record is not clear, the plaintiffs themselves embrace the notion that the Board was told that the Claims would survive the Merger but that control over the Claims would pass to Alpha.
Given the seriousness of the Upper Big Branch Disaster and the regulatory issues facing Massey, the Board's failure to consider this question is concerning. Although for reasons I have already explained, I cannot conclude that the Board likely entered the Merger for the purpose of insulating itself from the Derivative Claims, and although the Board acted in good faith upon the advice of counsel, this failure generates credibility questions in an environment already fraught with them. No doubt the better practice would have been to have had the Advisory Committee, whose members are not defendants in the actions based on the Derivative Claims, consider the extent to which the Derivative Claims were an economic asset (even in the sense of arguing to Alpha that its concerns about ongoing liability were overstated because of the possibility to shift costs to the derivative action defendants), with the advice of the Advisory Committee's own advisors, who were not in the awkward position of also representing Massey Board members in the Derivative Claims, like Cravath.
But even acknowledging that the Board's approach fell short of the ideal and might even arguably be characterized as a breach of the duty of care, that does not do much to help the plaintiffs obtain an injunction preventing the Massey stockholders from deciding for themselves whether to approve the Merger with Alpha. Although the plaintiffs push the proposition that the Massey directors were motivated by a desire to diminish their exposure to liability for the Derivative Claims, I do not believe the injunction record bears out that proposition. Indeed, to the extent the record supports any inference, it is that the independent directors were led to believe that the Derivative Claims would survive the Merger and that, to the extent they had value, it was not value that was material, at least for purposes of securing a deal with Alpha. For better or worse, the record does not suggest that the independent directors of Massey feared that their net wealths were at risk or that their decision to sell to Alpha was colored by such a fear. In so finding, I note that the Massey director most clearly targeted by the Derivative Claims was Blankenship, who resisted the idea of a Merger, was pushed aside by the Board majority in the negotiation process, and left the Board on December 3, 2010, ten weeks before the final deal was inked on January 28, 2011.
The plaintiffs also push the proposition that Alpha itself is highly unlikely to pursue the Derivative Claims in its own self-interest. In support of that proposition, they rely on the ever-quotable lead independent director for Massey, Inman, who testified this way in his deposition:
The plaintiffs argue that Alpha will buy Massey on the cheap and has no incentive to pursue the Derivative Claims.
As a factual matter, the plaintiffs have failed to prove that Inman's view is Alpha's. The record does not support an inference that Alpha has made any commitment to Massey Board members not to pursue the Derivative Claims if that is in Alpha's best interest.
As an economic matter, the plaintiffs' argument that Alpha will never press the Derivative Claims is also suspect. I assume it is conceivable that a certain class of buyers would, because of its ongoing business, be unlikely to sue the past management of a firm it purchased. Think of private equity firms who compete by cultivating a reputation for doing well by the management teams of companies they acquire. That this rationale would apply to a company like Alpha seems unlikely and is not supported by rational argument by the plaintiffs.
More probable, however, is that Alpha will have to make a difficult business calculation about the extent to which it goes after Massey's former management.
One cannot even rationally determine what the potential derivative liability is until the direct liability Massey faces is determined. But to the extent that fact-finders actually find Massey liable for criminal acts or civil violations committed with scienter (i.e., punitive damages), Alpha would have a rational incentive to pursue the Derivative Claims against Massey's former directors and management as a way to mitigate the losses it would incur as a result of Massey's liability for its directors' and managers' pre-merger conduct. The indemnification provision in the Merger Agreement on which the plaintiffs so heavily depend to support their argument that Alpha has no incentive to prosecute the Derivative Claims does not in fact, help them. Alpha only promised to indemnify the Massey Board and management to the extent Massey itself could have and did in fact do so.
Assuming, therefore, that Massey is determined to be liable to miners and their families for violating the criminal law, and if the outcome of those proceedings suggests that top level Massey fiduciaries were responsible, it is not clear why Alpha would not seek to offset the costs to itself of those violations by suing previous management if by doing so it had a realistic chance of obtaining some meaningful recovery. The plaintiffs, somewhat puzzlingly, respond by arguing that Alpha would have no real incentive to prosecute the Derivative Claims because its very prosecution of them could increase the direct Massey liability that Alpha will inherit as a result of the pending or contemplated criminal and civil lawsuits against former Massey directors and officers for pre-merger conduct:
But the same realities would face Massey if Massey were to remain an independent company and the Massey stockholders continued the Derivative Claims. In other words, to the extent that the plaintiffs argue that Alpha would have no rational incentive to prosecute the Derivative Claims it will inherit as a result of the Merger until the direct actions against Massey are concluded because doing so would help make out other cases that would peg liability on Alpha as Massey's acquiror, so too would (or should) the plaintiffs, as fiduciaries for other Massey stockholders, be reluctant to prosecute the Derivative Claims they claim are so valuable until the direct claims against Massey are resolved. That is, the reality in either a Merger or non-Merger world is that much or perhaps most of the Derivative Claims' value is to reduce to some extent the liability Massey faces as a corporation. Thus, the Derivative Claims should follow, rather than precede, the resolution of the key direct suits and regulatory proceedings.
Therefore, the problem for the plaintiffs is that Alpha would face all the barriers previously identified to the same extent that the current Massey stockholders would, such as the need to prove scienter, as well as then come up against a few other factors. For one thing, if the Disaster Fall-Out is really above $1 billion as the plaintiffs' expert suggests, how likely it is that one can actually collect a judgment in that amount against the derivative action defendants? The plaintiffs' expert does not take this consideration or other related ones into account in valuing the Derivative Claims, and instead simply assumes that the value of the Derivative Claims equates with the Disaster Fall-Out. But to actually place a value on the Derivative Claims themselves, numerous issues of this kind must be considered. Start with the independent director issue. How many are likely to actually be held liable under a scienter-based standard?
Add in the reality that if one proves that a fiduciary acted with scienter, one has typically proven that the defendant has acted outside the coverage D & O insurers provide for judgments.
And if the hope is to settle for the full amount of the D & O insurance, it appears that the total amount of applicable coverage for all of the derivative action defendants is $95 million,
In this regard, I also note the absence of any substantial argument from the plaintiffs that the Derivative Claims are really of material value in the context of a transaction like the Alpha Merger. Massey's consideration of a strategic transaction has been public since at least October of last year.
The reason no such player has emerged is likely not because the Derivative Claims are being ignored, but because acquirors look at the Derivative Claims rationally not as an independent asset, but as at best a liability-reducing factor. One would suspect that if the Derivative Claims possessed the value that the plaintiffs and their expert ascribe to them — i.e., up to $1.4 billion — that rational would-be acquirors would have emerged and offered a price for Massey that materially exceeded what Alpha is set to pay under the Merger Agreement. It is likely, however, on account of what has actually transpired since the Alpha Merger has been made public, that potential acquirors of Massey do not share in the plaintiffs' optimistic valuation, a valuation that is flawed for the reasons I have discussed.
Moreover, any purchaser of Massey would recognize that a primary challenge will be to instill a new culture in the company that better fosters safety and a constructive relationship with the company's regulators, with the goal of generating profits in a durably sustainable manner.
For all these reasons, the plaintiffs have not convinced me that it is likely the Merger with Alpha is unfairly priced because the Derivative Claims have not been separately valued. On this record, I cannot conclude that it is probable that the Derivative Claims have a value that is material in relation to the value of Massey as an entity. In so finding, I again note that there is a difference between the economic harm that Massey suffered as a result of the Disaster Fall-Out and the value of the Derivative Claims.
We do not live in a perfect world and the ability of human institutions to do full justice will always fall short of the ideal. That Massey might be selling to Alpha at a price lower than it would have had the company been better managed is an idea one can embrace without also then concluding that there is a basis to conclude that the Merger with Alpha ought to be enjoined.
That is especially so for another reason, which I now explain.
This court will not lightly grant a preliminary injunction. That important restraint will only be imposed if: (i) a failure to do so presents a threat of irreparable injury; and (ii) the balance of harms weighs in favor of granting the injunction.
Initially, the plaintiffs themselves essentially admit that a later award of monetary damages can make Massey and its current stockholders whole. As the plaintiffs read Parnes v. Bally Entertainment Corp.
As the plaintiffs point out, they may also be able to continue to press the Derivative Claims as derivative claims even after the consummation of the Merger with Alpha.
And another recent Supreme Court decision identified another route, however difficult passage on it may be. In Lambrecht v. O'Neal,
To the extent that the plaintiffs would argue that any of these paths to monetary relief are difficult, I cannot part company with them. But such relief is potentially available and thus there is no threat of irreparable injury.
The difficulty of actually recovering a judgment on the Derivative Claims that would be material in relation to Massey's overall value also weighs heavily on my mind in assessing the balance of equities.
The Massey stockholders are well positioned to determine for themselves whether to accept the Alpha Merger. They can turn it down, continue as Massey stockholders, and enjoy or suffer as the case may be the outcome that comes from the status quo, including the net benefits or costs that come from the regulatory and legal proceedings involving the company — including from the outcome of the Derivative Claims. Or the Massey stockholders can decide that a deal with Alpha at price that is a premium to the price at which Massey was trading the day of the Upper Big Branch Disaster is, in a world of risk, the better bet, especially given the chance to benefit if Alpha's management approach enables the Massey coal reserves to be more safely and profitably extracted. Because it is the Massey stockholders' capital at stake and not mine, I am chary to substitute my judgment. The plaintiffs are institutional investors and could make their case to turn down the Merger at the ballot box. They are not well positioned to have this court risk the benefits the Alpha Merger promises to Massey stockholders by enjoining the Merger, and taking that decision out of the stockholders' own hands.
Nor is their some cost-free way to an injunction. Alpha argues with considerable force that it may well choose to sue former Massey fiduciaries if that is in its interest as an acquiror. To enjoin the Merger unless Alpha transfers the rights to the Derivative Claims to a litigation trust on behalf of the Massey stockholders would allow Alpha to walk away.
In so concluding, I also take into account the plaintiffs' argument that I should put the Merger on ice, and rush to hold a trial on the Derivative Claims before the Merger Agreement's drop dead date of January 27, 2012.
In my judgment, therefore, issuance of an injunction threatens more harm to Massey stockholders than its potential benefits to them. Massey stockholders who are persuaded that they will yield more value if the company remains independent and the Derivative Claims proceed are free to take action even more formidable than a preliminary injunction, by casting their ballots against the Merger and defeating it at the polls.
For all these reasons, the plaintiffs' motion for preliminary injunction is DENIED. IT IS SO ORDERED.
But although this may in fact be a market reality, it seems to me doubtful that this translates into a basis for a future damage award in a derivative case. An entertainment restaurant corporation whose non-executive Chairman is Warren Buffett and whose CEO is Jimmy Buffett might well trade at a higher multiple than its competitors because the market perceives it to be run by financial geniuses who are better than most. Its rivals may trade at lower multiples because they have more ordinary management or even because some have management that is perceived to be poor in quality. Such deviations would not ordinarily provide the basis for any imposition of fiduciary liability.
In a derivative suit, there is no doubt that Massey fiduciaries could face large liability claims. For example, it is plausible for Massey to seek to hold managers culpable if their non-exculpated breaches of fiduciary duty proximately caused the Upper Big Branch Disaster. Such proof could subject them to hundreds of millions of dollars in liability for items such as lost mining profits and the cost of settlements and fines. PX-32 at 8; PX-94 at 14. But the notion that a derivative judgment could be premised on the delta between Massey's trading multiple under the former fiduciaries and what it would be under non-breaching fiduciaries is not immediately plausible. There are numerous problems with such an adventurous approach, not the least of which is that the only damages that could be awarded would be based on an estimate of the extent to which the defendants' non-exculpated breaches affected the multiple, not the extent to which the market's overall assessment of their competence diminished the multiple. That is, to the extent that the market simply viewed the Massey management as grossly negligent or incompetent, that would provide no basis for an award, and it would be incredibly difficult to figure out what portion of the delta was attributable to what factors. Not only that, to the extent that the delta was attributable to other more traditional subjects of a damages award, such as lost profits from the Upper Big Branch mine or fines or settlement costs, that would have to be accounted for in order to avoid double counting. Given these factors, I am not convinced that an award of this type could be based on anything other than speculation.
This brings up another mundane, but important reality. The stockholders of Massey had an annual opportunity to elect directors. If the plaintiffs' rendition is correct — and it has plausibility — it was publicly and widely known that Massey took an adversarial approach to its relation to its regulators and had suffered adverse legal judgments and excessive miner injuries for years. The plaintiffs, as investors, continued to invest in a company they say was well known to treat its workers and the environment poorly and that viewed laws as something to avoid, rather than to comply with in good faith.
The primary protection for stockholders against incompetent management is selecting new directors. It may well be that the corporate law does not make stockholders whole in situations like this when it is alleged that corporate managers skirted laws protecting other constituencies in order to generate higher profits for the stockholders. If that be so, it should be no surprise as any human approach to justice will always fall short of the ideal. It also may be that if stockholders come out a bit worse, then justice is in fact done. Remember that to the extent that Massey kept costs lower and exposed miners and the environment to excess dangers, Massey's stockholders enjoyed the short-term benefits in the form of higher profits. The very reason for laws protecting other constituencies is that those who own businesses stand to gain more if they can keep the operation's profits and externalize the costs. Thus, the stockholders of corporations, especially given the short-term nature of holding periods that now predominate in our markets, have poor incentives to monitor corporate compliance with laws protecting society as a whole and may well put strong pressures on corporate management to produce immediate profits. William W. Bratton, Enron and the Dark Side of Shareholder Value, 76 TUL. L. REV. 1275, 1284 (2002) ("For equity investors in recent years, the practice of shareholder value maximization has not meant patient investment. Instead, it has meant obsession with short-term performance numbers."). Stockholder pressure to produce profits might increase the already well-known risk that profit-seeking entities have incentives to take the profits of their operations for themselves and externalize the risk of operations to others, be it to their workers or society as a whole in the form of environmental degradation.
This is not to say that our law does not permit Massey to recoup its proven lost profits and injury if it can link them to non-exculpated breaches of fiduciary duty by its directors and officers. It does. Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (citing Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 367 (Del. 2006); Malpiede v. Townson, 780 A.2d 1075 (Del. 2001); Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003)). But it is to say that to the extent that there is some residual damage to the corporation in a situation like this when the pursuit of profit for stockholders resulted in damage to other constituencies that is not capable of remediation, that might be thought to act as a useful goad to stockholders to give more weight to legal compliance and risk management in making investment decisions and in monitoring corporate performance. In the end, the most sympathetic victims here were not stockholders, they were Massey's workers and their families, who suffered injuries and lost lives and loved ones, and the communities who have suffered because of environmental degradation due to of the company's failure to meet its legal responsibilities.
But, the plaintiffs' reading of Countrywide seems strained. The plaintiffs overlook the fact that the Supreme Court specifically cited Lewis v. Anderson for its articulation of the two exceptions to the general rule that stockholders lose standing to continue derivative actions where their status as stockholders of the company on whose behalf they are suing is terminated as a result of a merger unless they show that the merger itself was fraud perpetrated merely to deprive them of their standing or that the merger was only a reorganization. Countrywide, 996 A.2d at 322-23 (citing Lewis v. Anderson, 477 A.2d at 1049). If what the Supreme Court intended to do in Countrywide was to, as the plaintiffs in effect urge, create a third category of exception to the general rule articulated in Lewis v. Anderson, such intent is not obvious from a plain reading of Countrywide, especially in light of an even more recent Supreme Court case, Lambrecht v. O'Neal, in which the Supreme Court again cites Lewis v. Anderson as the settled law. Lambrecht v. O'Neal, 3 A.3d 277, 284 n.20 ("Lewis v. Anderson recognizes only two exceptions to this loss-of-standing rule: (1) where the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive shareholders of their standing to bring the derivative action, or (2) where the merger is essentially a reorganization that does not affect the plaintiff's relative ownership in the post-merger enterprise.") (emphasis added).
What Countrywide seems to be saying is that a board may not immunize itself from liability by ruining a corporation's value, and then selling the wreckage to a third-party who is acting in good faith. The Supreme Court appears to have perceived that there was a factual basis for the fraud exception in Lewis to apply but that the objector had failed to invoke that exception in a fair and timely manner. To that point, the Supreme Court found that "[t]he extent of the Countrywide directors' allegedly fraudulent conduct and breach of fiduciary duties by failing loyally to oversee the company's practices in good faith would have necessitated (a) corporate rescue; and (b) individual legal protection. A merger was one of few available alternatives that met both of those objectives after the board's allegedly fraudulent schemes bankrupted a multibillion-dollar company." Countrywide, 996 A.2d at 323. "No one disputes," the Supreme Court goes on to say, "that Countrywide needed to sell itself, and at a price significantly below its recent share price." Id. (emphasis added). Further supporting the view that the Supreme Court was suggesting that the Lewis v. Anderson test might have been satisfied, rather than that it should be modified, is the fact that the Supreme Court treated the sale of Countrywide as being inseparable from the Countrywide directors' pre-merger fraudulent conduct, and cited Braasch v. Goldschmidt for support: "Delaware law recognizes a single, inseparable fraud when directors cover massive wrongdoing with an otherwise permissible merger. . . . [A]fter allegedly intentionally engaging in fraudulent conduct that caused the stock price to plummet near bankruptcy, Countrywide directors would understandably seek an acquirer to effect a merger that would extinguish potential derivative claims . . . . Whether this plausible scenario reflects this board's single, cohesive plan or merely ties together, like patchwork, a snowballing pattern of fraudulent conduct and conscious neglect, the result is the same and would not fairly constitute a proper discharge of the fiduciary duties of directors of a Delaware corporation." Id. at 323-24 (citing Braasch v. Goldschmidt, 199 A.2d 760, 764 (Del. Ch. 1964)) (emphasis added). Although finding that the objector had not framed its objection properly under Lewis as a claim that the merger was a fraud designed to extinguish standing to maintain the derivative claims, the Supreme Court made plain that "an otherwise pristine merger cannot absolve fiduciaries from accountability for fraudulent conduct that necessitated the merger." Id. at 323.
That statement embeds an important issue that might not have applied as to Countrywide. If an acquiror gets a bargain basement price for an asset in part because of former fiduciary wrongdoing and can enjoy use of the asset without bearing any material costs going forward as a result of that prior wrongdoing, the acquiror is unlikely to pursue those claims and it may be equitable to allow the selling stockholders to receive the claims.
The problem in that kind of allocation in a situation like that involving Alpha's purchase of Massey is that Alpha has good reason not to value the Derivative Claims as a "separate asset" from the assets and liabilities it is purchasing. Alpha will bear important ongoing costs to remedy the Disaster Fall-Out. The Derivative Claims are a tool by which Alpha can mitigate that liability. To divest Alpha of that tool and shift it to the Massey stockholders alone is therefore problematic as a matter of equity. So too would be exposing the Massey defendants to liability both to the former Massey stockholders and to Massey, through its new owners.
Moreover, the record in this case does not support the notion that the Massey Board's pre-Merger conduct necessitated the Merger with Alpha. Indeed, the record supports the inference that the Massey Board considered its stand-alone plan as being a viable option, but on the basis of the company's tarnished reputation and history of missing management's projections, determined that pursuing the profitable stand-alone plan was not the best choice available. On a more fact specific level, I also note the comparatively happy situation of the Massey stockholders to those of Countrywide. Countrywide was sold for $7.16 per share after the defendants' conduct allegedly caused Countrywide's stock price to plummet from a high of over $40. "Bank of America Buys Countrywide," NPR, available at http://www.npr.org/templates/story/story.php?storyId=18022987 (Jan. 11, 2008). On the day the Massey Merger Agreement with Alpha was reached, Massey stockholders stood to receive $69.33 per share in total value, a 27% premium to the price of Massey before the Upper Big Branch Disaster. That is a huge economic difference, and suggests that however serious the Disaster Fall-Out is, they were not nearly as material to Massey's overall value as the mismanagement and wrongdoing alleged to have occurred at Countrywide.
But, the key bottom line point about the meaning of Lewis v. Anderson is one that is undisputed. If the plaintiffs are correct and Countrywide did modify Lewis v. Anderson to allow them to keep the Derivative Claims for Massey stockholders, then the closing of the Merger does not threaten irreparable injury. Similarly, if Countrywide can be read as saying that the objector could have, but failed to mount, a viable direct challenge to the merger due to the failure of the selling board to obtain value for claims arguably worth more than the merger price, the plaintiffs can pursue that theory of Countrywide after closing. In so concluding, I decline the plaintiffs' invitation for this court to give hasty, emergency final rulings on such issues, which are traditionally determined after a merger has been consummated.
But that situation is importantly distinct in a key sense from what is at stake in this case. In the hypothetical, the claim is a pure asset. In this case, the Derivative Claims are not a freestanding asset because they are bound up with ongoing responsibilities the acquiror, Alpha, is buying with Massey, and their value is difficult, if not impossible, to untangle from the Disaster Fall-Out liability. The plaintiffs wish to leave Massey stockholders with the Derivative Claims but Alpha with the Disaster Fall-Out. That is a different deal. Alpha might well, one suspects, be happy to acquire all of Massey's assets and liabilities other than the Upper Big Branch assets and liabilities, including the Derivative Claims, and to leave the Upper Big Branch assets and liabilities behind in a stripped down, free-standing Massey. If such a merger was proposed, I suspect that lawyers for the lost miners and other possible victims of the Upper Big Branch Disaster would cry fraudulent conveyance because the entity holding the Upper Big Branch assets and the Derivative Claims would not be credit-worthy to answer their claims.
