C & J Energy Services, Inc. v. City of Miami General Employees'
107 A.3d 1049
| Del. | 2014Background
- C&J Energy (Delaware) agreed to merge with Nabors’ CPS unit via a deal that re-domiciled the surviving company to Bermuda so Nabors would hold 53% and C&J stockholders 47%; tax and operational synergies were primary drivers.
- C&J’s board (five of seven independent) negotiated governance protections (board seats, a five‑year bye‑law protecting pro rata sale consideration, standstill limits on Nabors, and a buyer-friendly “fiduciary out”) and a modest $65M termination fee.
- Plaintiffs (City of Miami retirement trust) sued for breach of fiduciary duties (invoking Revlon) alleging the board failed to shop the company and was influenced by CEO/founder Comstock’s self-interest and banker conflicts.
- The Court of Chancery granted a 30‑day preliminary injunction ordering C&J to solicit alternative proposals and stating such solicitation would not breach the merger agreement.
- The Delaware Supreme Court reviewed on interlocutory appeal and reversed, holding the Chancery Court misapplied the preliminary injunction standard and Revlon doctrine and improperly issued a mandatory injunction that impaired Nabors’ contractual rights absent findings supporting aiding-and-abetting liability.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs showed a reasonable probability of success on Revlon-style claim | Board approved a change-of-control transaction without actively shopping, so it likely breached its duty to seek highest immediate value | Board negotiated protections, ran a viable passive market check, was informed, independent, and acted to maximize stockholder value | Reversed: plaintiffs did not show a reasonable probability of success; Revlon does not mandate a single shopping blueprint and passive market checks plus stockholder vote can suffice |
| Whether Revlon required a pre-signing active auction here | Plaintiffs: yes — change-of-control implications required affirmative pre‑signing shop | Defendants: no — board reasonably pursued strategic transaction with post-signing fiduciary out and protections; no single required process | Rejected Chancery’s view that active pre-signing shop was mandatory; courts assess reasonableness and effectiveness of market check contextually |
| Whether a mandatory injunction ordering affirmative solicitation (and excising no‑shop consequences) was procedurally proper | Plaintiffs: injunction merely required the board to do what it should have done — shopping | Defendants/Nabors: injunction improperly commanded positive action and altered third‑party contractual rights without trial or undisputed facts | Reversed: mandatory injunction inappropriate on paper record; such relief requires trial findings or undisputed facts and cannot strip third‑party contractual rights absent aiding‑and‑abetting findings |
| Whether Nabors could be bound or its rights altered absent showing it aided and abetted any breach | Plaintiffs: court may reform contract to allow go‑shop if necessary to protect shareholders | Defendants: no basis that Nabors aided or abetted; court cannot blue‑pencil contract or force Nabors to accept altered obligations | Held: Court of Chancery made no finding Nabors aided/abetted; it erred in purporting to neutralize contract protections and bind Nabors without requisite findings |
Key Cases Cited
- Revlon v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1986) (establishes duty to seek the highest value in a change-of-control sale)
- Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1993) (addresses board conduct in sale contexts and limits on majority‑control protections)
- Lyondell Chemical Co. v. Ryan, 970 A.2d 235 (Del. 2009) (courts should not prescribe a single blueprint; review asks whether directors’ choice was reasonable)
- Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995) (discusses enhanced scrutiny and reasonableness standard)
- In re Netsmart Technologies, Inc. S’holders Litig., 924 A.2d 171 (Del. Ch. 2007) (declines to reform/enforce deal terms to bind buyer absent buyer misconduct)
- In re El Paso S’holders Litig., 41 A.3d 432 (Del. Ch. 2012) (approves cautious approach to mandatory injunctions; emphasizes trial or undisputed facts for affirmative relief)
- In re Pennaco Energy, Inc., 787 A.2d 691 (Del. Ch. 2001) (cautions about granting preliminary injunctions when no competing bidder exists and deal protections are mild)