Walter Ryan, Jr. v. Alan S. Armstrong
CA 12717-VCG
| Del. Ch. | May 15, 2017Background
- Williams Companies (Williams) owned ~60% of Williams Partners L.P. (WPZ) and controlled its GP; WPZ generated the bulk of Williams’ revenues. Williams negotiated and signed an agreement to acquire WPZ (the WPZ Acquisition) including a force-the-vote provision and a $410 million termination fee.
- Energy Transfer Equity (ETE) expressed interest in acquiring Williams; shortly after the WPZ deal was announced ETE offered to buy Williams conditioned on Williams cancelling the WPZ Acquisition.
- Williams rescinded the WPZ Acquisition to pursue ETE and paid ~$428 million (termination fee + related costs); the later ETE-Williams merger ultimately failed when a condition precedent did not occur.
- Plaintiff Ryan, a Williams shareholder, filed a derivative suit alleging the Williams directors adopted the WPZ Acquisition as an entrenchment/defensive device, breaching their duty of loyalty and causing Williams’ losses.
- Williams’ charter contains a 102(b)(7)-style exculpatory provision for director care claims; thus, to recover damages plaintiff needed to plead disloyalty (bad faith/self-dealing). Plaintiff did not make a pre-suit demand on the board and sought to excuse demand as futile.
- The Court assumed, for pleading-stage purposes, that Unocal could be triggered (i.e., the WPZ Acquisition could be a defensive measure), but held Ryan failed to plead particularized facts showing demand futility or a substantial likelihood of non-exculpated liability against a majority of the board and dismissed under Ch. Ct. R. 23.1.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Unocal/heightened review attaches and aids a damages claim or excuses demand | Ryan: WPZ deal was a defensive, entrenching measure; Unocal applies and supports demand excusal | Directors: Even if Unocal might apply pre-closing, Unocal is a review standard not a substitute for pleading non-exculpated disloyalty; business judgment applies | Court: Assumed Unocal could be triggered for pleading-stage inference but Unocal alone does not excuse demand in a damages action protected by exculpation |
| Whether demand was excused under Rule 23.1 / Rales-Aronson tests | Ryan: Allegations of timing, rapid approval, deal protections, and Armstrong’s motive create reasonable doubt about board independence and a substantial likelihood of liability | Directors: Complaint lacks particularized, director-specific facts showing disinterest, domination, or a substantial likelihood of non-exculpated liability | Court: Demand was not excused—complaint failed to plead particularized facts showing a disabling interest or bad faith by a majority of directors |
| Whether Exculpatory charter clause bars recovery absent pleading of loyalty breach | Ryan: Unocal-based allegations show disloyalty sufficient to plead a non-exculpated claim | Directors: Exculpation requires plaintiff to plead particularized facts of disloyalty; mere allegation of unreasonable defense is insufficient | Court: Agreed with defendants—because of exculpation plaintiff needed particularized allegations of disloyalty and failed to provide them |
| Whether alleged entrenchment/bad faith was pleaded with requisite particularity | Ryan: Board enacted WPZ deal to preserve power and thwart ETE; Armstrong had motive and other directors were protecting fees/positions | Directors: Allegations are conclusory; no particularized facts about other directors’ motives, compensation, or domination by Armstrong | Court: Dismissed—conclusory entrenchment allegations without director-specific facts do not meet the heightened Rule 23.1 pleading standard |
Key Cases Cited
- Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (articulates enhanced judicial scrutiny for director defensive measures in response to takeover threats)
- Aronson v. Lewis, 473 A.2d 805 (Del. 1984) (sets test for demand futility when challenging a board decision)
- Rales v. Blasband, 634 A.2d 927 (Del. 1993) (frames the Rales demand-futility inquiry for derivative suits where board action is challenged)
- Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) (explains effect of an informed, uncoerced stockholder vote and observes limitations of Unocal/Revlon as post-closing damage tools)
- In re Cornerstone Therapeutics, Inc. Stockholder Litigation, 115 A.3d 1173 (Del. 2015) (holds plaintiffs seeking only monetary damages must plead non-exculpated claims against directors to survive dismissal)
- Ryan v. Gifford, 918 A.2d 341 (Del. Ch. 2007) (example of rare cases where particularized facts supported a substantial likelihood of director liability for demand excusal)
- In re Baxter International, Inc. Shareholders Litigation, 654 A.2d 1268 (Del. Ch. 1995) (explains that a substantial likelihood of liability must be pled with particularity and that mere threat of liability is insufficient)