The Huff Energy Fund, L.P. v. Gershen: Court of Chancery Holds Adoption of Plan of Dissolution Does Not Trigger Enhanced Scrutiny under Revlon or Unocal
January 12, 2017
In The Huff Energy Fund, L.P. v. Gershen, 2016 WL 5462958 (Del. Ch. Sept. 29, 2016), the Court of Chancery rejected a significant stockholder’s claim that the implementation and adoption of a plan of dissolution was subject to enhanced scrutiny under Revlon and Unocal. Furthermore, finding that the adoption of the plan of dissolution had been approved by a fully informed, non-coerced vote of the stockholders, the Court held that under Corwin the business judgment rule irrebuttably applied to the board’s decision to approve the plan of dissolution and granted the defendants’ motion to dismiss.
In Huff Energy, The Huff Energy Fund, L.P. (“Huff Energy”), the holder of approximately 40% of the issued and outstanding shares of common stock of Longview Energy Company (“Longview”), challenged the adoption and implementation of a plan of dissolution in connection with the sale of a significant portion of Longview’s assets. The plan of dissolution and asset sale were approved by Longview’s board of directors and stockholders following Longview’s active pursuit of a liquidity event that had allegedly been motivated by the desire of Longview’s chief executive officer and chief operating officer (each of whom also served as a director) to trigger the significant severance payments upon a change of control under their employment agreements. At the board meeting to approve the sale and dissolution, one of the directors designated by Huff Energy who was present abstained from voting due to “the insufficiency of information and the rushed nature of the process.” The abstention and the reasons for it were not disclosed in the proxy statement soliciting the vote of Longview’s stockholders. Following the adoption and implementation of the plan of dissolution, Huff Energy filed an action in the Court of Chancery against Longview and the directors not designated by Huff Energy, alleging, among other things, that the directors had breached their fiduciary duties and had violated a stockholder agreement in adopting and implementing the plan of dissolution.
Addressing Huff Energy’s fiduciary claims, the Court held that Huff Energy had failed to allege facts allowing for a reasonable inference that a majority of the board acted under a disqualifying conflict of interest with respect to the decision to adopt and implement the plan of dissolution. The Court then turned to Huff Energy’s claims that the decision was subject to enhanced scrutiny under Revlon or Unocal. With respect to the applicability of Revlon, the Court explained that policy concerns implicated by “final stage” transactions such as a cash sale, break-up or change of control transaction were not present in the dissolution context because Longview would continue its existence for a period of at least three years following its dissolution to wind up its affairs. During the wind-up period, the board would maintain its control over Longview and would retain its duty to act in the best interests of Longview’s stockholders as well as its creditors. Accordingly, because the adoption of the plan of dissolution did not constitute a final stage transaction or otherwise constitute a change of control implicating Revlon concerns, the Court held that Revlon did not apply.
With respect to the applicability of Unocal, the Court was unpersuaded by Huff Energy’s argument that adoption and implementation of the plan of dissolution constituted the adoption of an “unreasonable poison pill” due to, among other things, the inability of Longview to purchase any additional shares of common stock following Longview’s dissolution. Noting that the only allegations in the complaint that supported Huff Energy’s argument that Unocal applied to the dissolution were that the adoption of the plan of dissolution constituted a defensive measure designed to wrest control over a sale process from Huff Energy and its director designees and that the defendant directors perceived Huff Energy as a threat to the chief executive officer’s power over Longview, the Court found that Huff Energy had failed to cite any support for the proposition that such allegations implicated the “omnipresent specter” present in cases invoking Unocal scrutiny. In particular, the Court noted that the adoption and implementation of a plan of dissolution avoids any specter of entrenchment due to the fact that following dissolution, the corporation is required to wind up its affairs. Accordingly, the Court held that Unocal did not apply.
Following its determination that Revlon and Unocal did not apply, the Court noted that even if the adoption and implementation of the plan of dissolution did implicate some form of enhanced scrutiny, the approval of the plan of dissolution by the Longview stockholders cleansed the transaction, thereby irrebuttably reinstating the protection of the business judgment rule under Corwin. In so holding, the Court rejected Huff Energy’s argument that the vote of the stockholders was not fully informed due to the failure of the proxy statement to include the fact that Huff Energy’s designee had abstained from the decision to approve the dissolution and the reasons for his abstention. Stating that Delaware law is clear that individual directors need not state the grounds of their judgment for or against a proposed stockholder action, the Court further explained that the fact of an abstention was not material because the adoption of the plan of dissolution did not require unanimous approval. Accordingly, because the information was not material and the omission of the information was not misleading, the Court held that Huff Energy failed to plead that the stockholder vote was uninformed. As such, and in the absence of any allegations that the stockholder vote was coerced or tainted by interestedness, the Court held that Corwin applied and dismissed the fiduciary claims against the director defendants.
In addition to rejecting the fiduciary claims raised by Huff Energy, the Court also held that the approval of the plan of dissolution did not constitute a breach of the stockholder agreement between Longview, Huff Energy and the other stockholders party thereto. As a preliminary matter, the Court upheld settled Delaware law that only a party to an agreement may be sued for breach of such agreement and held that individual Longview directors could not be held individually liable for a breach of the stockholder agreement because those directors had not signed the stockholder agreement in an individual capacity.
With respect to Huff Energy’s claims that Longview breached the stockholder agreement, Huff Energy highlighted, among other things, a provision that required unanimous board approval of “any action or omission that would have a material adverse effect on the rights of any Shareholder, as set forth in [the stockholder agreement].” In rejecting Huff Energy’s claim that the approval of the plan of dissolution triggered the unanimous board approval requirement, the Court held that the requirement only applied to rights created by the agreement, such as the right to designate two directors to the board (which the Court noted “continue[d] without infringement throughout the winding up process”) and not rights merely referenced in such agreement, such as the right of Huff Energy to transfer shares of its Longview stock. The Court was also unpersuaded that the approval of the plan of dissolution violated a covenant under the stockholder agreement that Longview “continue to exist,” which the Court noted “appear[ed] to be nothing more than a recognition by Longview that it will remain in good standing as a Delaware corporation” and was not a provision that required Longview to“exist eternally unless Huff Energy agrees otherwise.”