Shearman & Sterling LLP | M&A Litigation Blog | Delaware Chancery Court Applies <em >Corwin</em > To Dismiss Post-Merger Fiduciary Duty Claim After Finding A Royalty Agreement Did Not Constitute An Unreasonable Deal Protection Device<br >  
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  • Delaware Chancery Court Applies Corwin To Dismiss Post-Merger Fiduciary Duty Claim After Finding A Royalty Agreement Did Not Constitute An Unreasonable Deal Protection Device
    On April 13, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a shareholder derivative suit alleging a breach of fiduciary duty against the directors of Paramount Gold and Silver Corp. (“Paramount”) in connection with Paramount’s merger with Coeur Mining, Inc. (“Coeur”).  In re Paramount Gold and Silver Corp. Stockholders Litigation, Consol. C.A. No. 10499-CB (Del. Ch. Apr. 13, 2017).  In doing so, the Court (i) rejected plaintiffs’ contention that certain consent rights in a royalty agreement entered into by the parties at the time of the merger agreement constituted an unreasonable deal protection device, and (ii) found that plaintiffs had failed to identify any material deficiencies in the company’s disclosures in advance of a shareholder vote on the merger.  Chancellor Bouchard, therefore, relied on the doctrine set forth in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and applied the business judgment rule to the directors’ decision “because the [m]erger was approved by a fully informed and uncoerced vote of a majority of Paramount’s disinterested stockholders.”

    Before the transaction, Paramount, a precious metals exploration company, owned two “advanced stage mining projects,” located in Nevada and Mexico, respectively.  On December 15, 2014, Paramount’s board unanimously approved a proposed merger with Coeur and the companies entered into a merger agreement the following day.  The transaction involved (i) the spin-off of the Nevada project with 95% of the shares distributed to Paramount’s stockholders, and (ii) the acquisition of Paramount, then owning only the Mexico assets, by Coeur in a stock-for-stock merger.  The merger agreement also provided for a $5 million termination fee to be paid by Paramount to Coeur if Paramount’s stockholders voted against the merger and Paramount entered into an alternative transaction.  At the same time, the companies entered into a royalty agreement providing that a Coeur subsidiary would receive a perpetual royalty on certain productions from the Mexican assets in exchange for a $5.25 million payment.  On April 17, 2015, Paramount shareholders holding over 54% of outstanding shares voted to approve the merger (approximately 97% of those voting).  The merger closed the same day.  

    Plaintiffs thereafter filed this lawsuit asserting a claim against Paramount’s directors for breach of fiduciary duty.  Plaintiffs contended that the Court should apply enhanced scrutiny to the deal under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), because the royalty agreement, when combined with the merger agreement’s termination fee provision, constituted an unreasonable deal protection device.  Citing In re Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1995), in which the Delaware Supreme Court held that a fully informed stockholder vote approving a merger did not preclude enhanced scrutiny review of certain deal protection devices, plaintiffs argued that Corwin did not render Unocal inapplicable.  Plaintiffs further argued that Corwin should not apply because this same alleged deal protection device rendered the shareholder vote “coerced,” and, in any event, the vote was uninformed because of certain alleged disclosure deficiencies in the pre-vote registration statement.     

    Finding it “apparent from the face of the Complaint and documents incorporated therein that the provisions challenged here do not constitute an unreasonable deal protection device,” the Court rejected plaintiffs’ contentions without “address[ing] the apparent tension between Corwin and Santa Fe.”  First, Chancellor Bouchard noted that “plaintiffs prudently conceded that the $5 million termination fee . . . alone was not an unreasonable deal protection device,” as it amounted to approximately 3.42% of the merger value, in line with the magnitude “routinely . . . upheld.”  Second, the Court found that nothing in the royalty agreement identified by plaintiffs provided Coeur with a “block right” or the right “to veto an alternative transaction to the [m]erger.”  Therefore, the royalty agreement and termination fee did not together constitute an unreasonable deal protection device.  Notably, plaintiffs did not allege that Paramount had received inadequate consideration in exchange for the royalty interest, which amounted to 0.7% of the net smelter returns from the Mexican mining assets.

    The Court thus dismissed the complaint (including plaintiffs’ disclosure claims), holding that “[b]ecause the [m]erger 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 [m]erger, and the transaction may only be attacked on the ground of waste,” which was not alleged. 

    As alternative grounds for dismissal, the Court noted that a stock-for-stock merger is “presumptively . . . governed by the business judgment rule,” even setting aside Corwin, and held that plaintiffs’ complaint failed to allege facts sufficient to support a non-exculpated claim for breach of the duty of loyalty on the basis of “bad faith.”