In re Molycorp, Inc. Shareholder Derivative Litigation: Court of Chancery Dismisses Derivative Action Based on Terms of Registration Rights Agreement
August 6, 2015
In In re Molycorp, Inc. Shareholder Derivative Litigation, 2015 WL 3454925 (Del. Ch. May 27, 2015), the Court of Chancery granted under Rule 12(b)(6) defendants’ motions to dismiss a derivative complaint that alleged breaches of fiduciary duties, among other claims, in connection with a secondary stock offering that was initiated at the request of Molycorp, Inc.’s private equity investors pursuant to the terms of a Registration Rights Agreement.
In 2010, before Molycorp’s initial public offering, certain private equity investors executed a Stockholders Agreement and a Registration Rights Agreement with the company. The Stockholders Agreement granted the investors the right, among others, to nominate directors to Molycorp’s board. The Registration Rights Agreement granted the investors a contractual right to have Molycorp register their shares for a secondary offering upon demand by the private equity investors. Under the Registration Rights Agreement, the private equity investors were also granted the right to have their shares given priority over any shares offered by the company in a secondary offering.
In 2011, the private equity investors invoked their rights under the Registration Rights Agreement to cause Molycorp to offer their shares in a secondary offering. In the offering, the private equity investors and certain directors of Molycorp sold shares of Molycorp stock at $51 per share, generating approximately $575 million. Molycorp, on the other hand, conducted a private offering of convertible notes, which raised only $223 million. During this period, as plaintiffs alleged in the complaint, Molycorp was in financial distress and in need of capital. At the time of the challenged secondary offering, the private equity investors owned approximately 44 percent of the company’s outstanding stock and had nominated four directors. As result, plaintiffs asserted that the private equity investors and the company’s directors breached their fiduciary duties by favoring the interests of certain private equity stockholders over the interests of the company. Among other arguments, plaintiffs asserted that the board should have delayed the secondary offering and allowed Molycorp to make its own offering in order to raise capital.
Defendants moved to dismiss plaintiffs’ complaint pursuant to Court of Chancery Rule 23.1 for failure to make a demand on the board of directors and pursuant to Court of Chancery Rule 12(b)(6) for failure to state a claim. Because the Court dismissed the complaint for failure to state a claim, it did not address defendants’ Rule 23.1 arguments, nor did it decide which standard of review applied to the breach of fiduciary duty claims. The Court, however, assumed without deciding that a majority of the directors had disqualifying interests by reason of personal gains or fiduciary relationships with the private equity investors and that demand would be excused.
In opposition to the motions to dismiss, plaintiffs asserted that defendants sold their stock and prevented the company from participating in the secondary offering at a time when Molycorp needed funding. The Court rejected plaintiffs’ argument and observed that “[a]ppointment by a powerful shareholder does not automatically render a director’s decision suspect” and that it is not wrong, without more, for a director to buy or sell company shares. Indeed, the Court noted, “[i]f such conduct were actionable, ‘directors of every Delaware corporation would be faced with the ever-present specter of suit for breach of their duty of loyalty if they sold stock in the company on whose Board they sit.’”
In granting defendants’ motions to dismiss, the Court observed that the Registration Rights Agreement informed the context in which defendants were acting and could not be ignored. Importantly, plaintiffs did not contend that the Registration Rights Agreement was invalid or unenforceable. Instead, plaintiffs essentially argued that Molycorp’s board of directors should have interfered with the private equity investors’ contractual rights. The Court declined to accept plaintiffs’ argument. Indeed, the Court noted that “[a] finding otherwise could discourage would-be investors from funding start-ups for fear that their investment value will not be preserved despite disclosed, carefully negotiated agreements.” Accordingly, the Court granted defendants’ motions to dismiss.