IRA Trust FBO Bobbie Ahmed v. David Crane
CA 12742-CB
| Del. Ch. | Dec 11, 2017Background
- NRG Energy controlled NRG Yield ("Yield"), a publicly traded yieldco, through Class B shares; public investors held Class A shares. Prior to 2015, both classes had one vote per share; NRG’s voting power had declined from ~65% to ~55% due to issuances.
- NRG proposed a recapitalization to preserve control by exchanging Class A shares for newly created lower-vote Class C shares (and Class B for Class D), to be used as acquisition currency; the proposal required a majority-of-the-minority (unaffiliated Class A) approval.
- Yield’s independent Conflicts Committee (three independent directors) negotiated terms with independent counsel and Moelis as financial advisor; the final plan gave Class C shares 1/100 of a vote and expanded a ROFO (right-of-first-offer) asset pipeline for Yield.
- The Proxy recommended the Reclassification; a majority of outstanding shares and a majority of unaffiliated Class A holders approved it in May 2015, and the reclassification went into effect.
- A Class A stockholder sued in 2016 alleging breaches of fiduciary duty by the board and that NRG, as controller, breached duties by causing the Reclassification. Defendants moved to dismiss under Court of Chancery Rule 12(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Reclassification was a conflicted controller transaction triggering entire fairness | Reclassification gave NRG a unique, non-ratable benefit (perpetuation of control), so entire fairness applies | It was a pro rata distribution; no unique benefit to NRG, so business judgment applies | Court: Plaintiff pled facts that, if true, make Reclassification a conflicted transaction (non-ratable benefit) and thus subject to heightened review at pleading stage |
| Whether the MFW (Kahn v. M&F Worldwide) framework applies to this non-merger reclassification | MFW should not apply beyond squeeze-out mergers | MFW procedural protections (special committee + majority-of-the-minority) can apply to other controller transactions and shift review to business judgment | Court: MFW framework may apply outside mergers; it applies here because controller conditioned transaction on committee approval and majority-of-the-minority vote |
| Whether the MFW procedural protections were satisfied (committee independence, empowerment, advisors, informed minority vote, no coercion) | Minority vote was uninformed because Proxy omitted material facts (alternatives, ROFO asset impact, value transfer to NRG, timing of likely loss of NRG control, Moelis conflicts/fees) | Conflicts Committee was independent and empowered; Proxy disclosures were adequate or omissions were speculative/non-material; Moelis’s compensation was non-contingent | Court: Plaintiff failed to plead material disclosure omissions or other defects; all six MFW elements sufficiently alleged; business judgment rule applies |
| Whether plaintiff stated a viable fiduciary-duty claim after MFW analysis | Reclassification unfair; disclosure defects render vote uninformed; entire fairness should apply and survive dismissal | Because MFW protections were in place and Proxy adequate, plaintiff cannot state a claim | Court: Dismissed Complaint with prejudice for failure to state a claim; even if entire fairness applied, 102(b)(7) exculpation shields committee members absent bad faith |
Key Cases Cited
- Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (establishes MFW framework: conditioning controller transactions on independent committee approval and an uncoerced majority-of-the-minority vote permits business judgment review)
- Williams v. Geier, 671 A.2d 1368 (Del. 1996) (upheld business judgment review of a pro rata recapitalization where record did not show controller extracted a non-ratable benefit)
- Sinclair Oil Corp. v. Levien, 280 A.2d 717 (Del. 1971) (as a general matter, a pro rata dividend does not trigger entire fairness absent the parent receiving something exclusively)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (standards for pleading director interest and demand futility; foundational duty presumptions)
- Savor, Inc. v. FMR Corp., 812 A.2d 894 (Del. 2002) (pleading standard on motion to dismiss: accept well-pleaded facts and draw inferences for plaintiff)
- In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173 (Del. 2015) (Section 102(b)(7) exculpation can bar claims against directors absent bad faith)