Delaware Court Of Chancery Relies On Corwin To Dismiss Post-Closing Fiduciary Duty Claims After Finding Acquiror Was Not A Controlling Stockholder
On March 9, 2018, Vice Chancellor Joseph R. Slights III, of the Delaware Court of Chancery, dismissed a stockholder class action complaint seeking damages for alleged breaches of fiduciary duty by directors of Rouse Properties Inc. (“Rouse”) and its 33.5% stockholder, Brookfield Asset Management, Inc. (“Brookfield”), arising out of Rouse’s merger with Brookfield in 2016. In Re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS (Del. Ch. Mar. 9, 2018). Plaintiffs, pre-merger stockholders of Rouse, alleged that breaches of fiduciary duty by a special committee of the Rouse board that negotiated the deal, and Brookfield, as an alleged controlling stockholder, led to a transaction that grossly undervalued Rouse. The Court found that the complaint did not come even “remotely close” to pleading that Brookfield exercised the “managerial clout and retributive power to infer actual control.” Concluding that Brookfield was not a controlling stockholder, the Court dismissed the breach of fiduciary duty claims against Brookfield and, in light of the approval of the deal by a majority of the disinterested stockholders, applied the business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), to dismiss the claims against the special committee directors as well.
In January 2016, Brookfield made an offer to acquire the outstanding stock of Rouse that it did not already own for $17 per share. Rouse’s board formed a special committee of five directors to negotiate with Brookfield, as well as to consider other strategic alternatives. The negotiations ultimately led to a deal at $18.25 per share. The merger closed in July 2016, after 82.44% of Rouse’s unaffiliated stockholders voted in favor. Asserting claims for breaches of fiduciary duty, plaintiffs challenged the sale process and the price. They argued that Rouse’s price was temporarily depressed and the process favored Brookfield. Plaintiffs attempted to plead that Brookfield was a controller that dominated the special committee during the merger negotiations. Among other things, plaintiffs alleged that two of the five directors on the committee “lacked independence from Brookfield.” As to one of them, Rouse’s CEO, plaintiffs alleged that he was “beholden” to Brookfield for various reasons, including that Brookfield sought pre-merger discussions with him regarding post-merger employment. As to the other, plaintiffs alleged that he was designated as a director by Brookfield and had “strong past ties” to Brookfield through prior service on the board of a Brookfield affiliate.
The Court found plaintiffs’ allegations of control insufficient. The Court explained that “our courts generally recognize that demonstrating the kind of control required to elevate a minority blockholder to controller status is ‘not easy.’” The Court noted that there had been no pre-merger discussions with Rouse’s CEO because they were precluded by the special committee, and that the CEO resigned immediately following the merger. As to the other challenged director, the Court explained that appointment to a board is “insufficient to call into question” such director’s independence. In any event, plaintiffs did not plead that the three remaining special committee members were compromised or demonstrate that Brookfield otherwise controlled Rouse’s decision-making process. To the contrary, the Court found it clear that the special committee “negotiated hard” with Brookfield, successfully achieving “a majority of the minority voting condition despite real resistance from Brookfield” and a significant increase in the deal consideration. Given the absence of fiduciary duties owed by non-controlling stockholders, the Court dismissed the breach claims against Brookfield.
Having found no controller, the Court considered the applicability of the business judgment rule under Corwin. Plaintiffs argued that the stockholder vote was the result of “situational coercion” because the board (and Brookfield) knew that Rouse’s trading price was temporarily depressed when the deal was initiated and that the impending release of new financial results would lift the stock price. But the Court highlighted that these new financial results were released well in advance of the stockholder vote. The Court also rejected various assertions by plaintiffs of inadequate disclosures in the merger proxy, explaining that “the type of particulate detail that [p]laintiffs fault [defendants] for not providing . . . is simply not required by our law.” Concluding that the complaint did not adequately plead the vote was coerced or uninformed, the Court dismissed the claims against the special committee as well.