The Huff Energy Fund, L.P. v. Gershen
CA 11116-VCS
| Del. Ch. | Sep 29, 2016Background
- Huff Energy owned ~40% of Longview and had a Shareholders Agreement giving it the right to designate two directors and containing: a right of first offer, a two‑thirds Board vote for certain major transactions, and a unanimity requirement for any act that would have a “material adverse effect on the rights of any Shareholder as set forth in this Agreement.”
- In 2014–2015 Longview pursued sale of its California oil & gas assets; after a 2014 deal fell apart, Longview circulated a May 2015 PSA to sell those assets for $28M and also proposed a Plan of Dissolution to address post‑sale winding up and reserves.
- At the May 18, 2015 Board telephonic vote, Huff’s designee D’Angelo abstained (citing inadequate information); the Board nevertheless approved the asset sale and the Plan of Dissolution, and stockholders later approved both in June 2015.
- Huff Energy sued, alleging (a) breach of the Shareholders Agreement because the Plan of Dissolution materially impaired Huff’s transfer/other rights and required unanimous Board approval, and (b) director fiduciary‑duty breaches (Revlon/Unocal/waste). Huff did not challenge the asset sale itself.
- Defendants moved to dismiss arguing (1) individual directors are not parties to the shareholders agreement and cannot be sued for breach of it; (2) the unanimity clause covers only rights created by the agreement, not pre‑existing transfer rights; (3) Revlon/Unocal do not apply; and (4) the fully informed, uncoerced stockholder vote cleansed any board action.
- The Court granted the motion to dismiss in full, holding Huff failed to state claims for contract breach or fiduciary breach and that the stockholder vote validated the Board action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Board’s adoption of the Plan of Dissolution breached the Shareholders Agreement’s unanimity clause (Section 10(b)(iii)) | The Plan materially impaired Huff’s rights (e.g., transferability) which are “set forth” in the Agreement, so unanimity was required and the abstention rendered approval invalid | Section 10(b)(iii) covers only rights created by the Agreement; the Agreement does not create a right to transfer, so unanimous approval was not required | Court held “set forth” means rights created by the Agreement; no such right exists there — no breach pleaded |
| Whether individual directors can be liable for breach of the Shareholders Agreement | Directors caused Longview to breach the Agreement and thus should be liable (or via tortious interference) | Only parties to a contract can be sued for breach; officers/directors acting for the corporation are not personally liable; tortious interference was not pled | Directors not liable for contract breach; tortious interference claim not pleaded and insufficiently alleged |
| Whether the directors breached fiduciary duties under Revlon (enhanced scrutiny) | Plan of Dissolution was a “final stage”/break‑up decision requiring value‑maximizing conduct and enhanced scrutiny | The Plan initiated winding up but did not end board authority or effect a change of control; it was not a Revlon “final stage” transaction | Revlon inapplicable — dissolution filing begins winding up but directors retain fiduciary duties and Revlon scrutiny not triggered |
| Whether Unocal intermediate scrutiny applies (board adopted Plan as defensive/entrenching measure) | Plan acted as a defensive poison‑pill to block Huff from acquiring control or tendering | No cognizable takeover threat; dissolution and filing of certificate are not typical defensive entrenchment measures | Unocal not implicated; no reasonable inference of a takeover threat or defensive entrenchment |
| Whether the stockholder vote was fully informed so as to “cleanse” any fiduciary review (Corwin) | Proxy omitted material facts (e.g., D’Angelo’s abstention and reasons) so vote was uninformed and does not cleanse | Omission of a director’s abstention (and reasons) was not material; vote was uncoerced and stockholders were informed of key risks/reserves | Vote was fully informed for Corwin purposes; even if enhanced scrutiny applied, the stockholder approval irrebuttably invoked business judgment review |
Key Cases Cited
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (establishes enhanced scrutiny where directors must maximize sale value in “final stage”/break‑up transactions)
- Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (intermediate review for defensive measures where board faces a real threat of takeover/entrenchment)
- Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015) (a fully informed, uncoerced vote of disinterested stockholders cleanses board action and reinstates business judgment review)
- Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) (governs burden to plead director interestedness to rebut business judgment presumption)
- Lonergan v. EPE Holdings, LLC, 5 A.3d 1008 (Del. Ch. 2010) (describes when Revlon concerns arise for transactions that alter ownership rights)