This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.
On May 31, 2011, in In Re: Massey Energy Company Derivative and Class Action Litigation, C.A. No. 5430-VCS, Vice Chancellor Strine, in an 81-page opinion, denied the plaintiffs’ request for a preliminary injunction against a merger between Massey Energy Company and Alpha Natural Resources, Inc. The Merger had been unanimously approved by the Massey Board on January 27, 2011 and the stockholders were scheduled to vote on the Merger on June 1, 2011.
The plaintiff stockholders of Massey alleged that the Massey Board breached their fiduciary duties by not negotiating to have the pending “Derivative Claims” transferred into a litigation trust for the exclusive benefit of Massey stockholders. The Derivative Claims were the result of an April 5, 2010 explosion which occurred at Massey’s Upper Big Branch mine in West Virginia and as a result, 29 miners died. In addition to the subsequent lawsuits and regulatory proceedings brought by families of the lost and injured miners and regulators seeking a reason as to what caused the disaster, 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.”
The plaintiffs argued that the Merger was unfair because it would result in Alpha being able to acquire Massey without paying fair value for the economic value of the Derivative Claims. In addition, plaintiffs alleged 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 Court noted that:
[a]s 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. The Merger with Alpha was not a mere reorganization, and given the record here, it appears highly doubtful that the plaintiffs will be able to show that Massey’s directors and officers sought to sell the company to Alpha solely in order to extinguish their potential liability for the pending Derivative Claims… [or] that the Merger was inspired solely, or even in any material way, by a desire of the Massey directors to extinguish the Derivative Claims or to insulate themselves from liability.
The Court noted that “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.” While the Court found that the Derivative Claims likely stated a claim for director oversight liability under Caremark, the record did not support the inference that the Derivative Claims were material in comparison to the overall value of Massey as an entity and that the record did not persuade the Court that the Merger would likely be found to be economically unfair to the Massey stockholders. Moreover, the Court found that the plaintiffs had failed to show that they faced irreparable injury by essentially admitting that a later award of monetary damages could make Massey and its current stockholders whole.
In rejecting the plaintiffs’ arguments and concluding that the record did not support the issuance of a preliminary injunction, the Court stated:
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 and a recent Supreme Court case, Arkansas Teacher Retirement System v. Caiafa, they believe modifies Lewis v. Anderson in their favor. Because of these factors, the plaintiffs have not proven that the Merger’s consummation presents them with a threat of irreparable injury.
Supplement: Kevin LaCroix, on his blog called The D & O Diary, provides a characteristically insightful analysis of the opinion here, including references to the realities of D & O coverage and overviews of a footnote that he counts as being over 1,000 words.