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In re Molycorp, Inc. Shareholder Derivative Litigation

Court of Chancery of Delaware

May 12, 2014

In re Molycorp, Inc. Shareholder Derivative Litigation

Submitted: February 7, 2014

Jessica Zeldin, Esquire Rosenthal, Monhait & Goddess, P.A., Stephen C. Norman, Esquire, Potter Anderson & Corroon LLP P. Clarkson Collins, Jr., Esquire Morris James LLP Michael D. DeBaecke, Esquire Blank Rome LLP.

Robert D. Goldberg, Esquire Biggs & Battaglia Raymond J. DiCamillo, Esquire Richards, Layton & Finger, P.A. Elizabeth M. McGeever, Esquire Prickett, Jones & Elliott, P.A. M. Duncan Grant, Esquire Pepper Hamilton LLP.

Dear Counsel:

The Plaintiffs[1] in this stockholder derivative action filed on behalf of Nominal Defendant Molycorp, Inc. ("Molycorp") have moved to lift the stay entered by the Court in May 2013 (the "Stay"). The Court granted the Stay as to the claims asserted in the Verified Consolidated Amended Shareholder Derivative Complaint (the "Operative Complaint")[2] in light of a federal securities fraud class action pending in the United States District Court for the District of Colorado (the "Federal Securities Action").[3] The Defendants oppose any lifting of the Stay, maintaining that the Plaintiffs have not shown the requisite good cause for the Court to do so.[4] In addition, the Plaintiffs have moved for leave to file their Second Amended Verified Consolidated Stockholders' Derivative Complaint (the "Proposed Amended Complaint"), [5] which the Defendants also oppose.

The Federal Securities Action involves eighteen claims for relief asserted against twenty-six named defendants.[6] Among other claims, the class action stockholders allege that Molycorp, its directors, and others made material misstatements to inflate artificially the price of the company's stock and that certain of these individuals and entities then illegally sold Molycorp stock on the basis of material, non-public information. The Federal Securities Action includes claims for violations of the Securities Exchange Act of 1934 and of the Securities Act of 1933.[7]

In granting the Stay, the Court concluded that, even though the allegations in the Operative Complaint did not overlap entirely with those of the Federal Securities Action, there were sufficient practical considerations that discouraged the simultaneous prosecution of both actions. In particular, the Court noted that both actions implicated a substantially similar scheme of securities fraud, and that the derivative indemnification claims asserted in the Operative Complaint depended on a predicate finding of liability against Molycorp in the Federal Securities Action.[8]

I. BACKGROUND[9]

Molycorp is a Delaware corporation that mines rare earth elements used in various industrial products. Its headquarters are in Colorado, and its primary asset is a mining and manufacturing facility in Mountain Pass, California. Certain private equity investors founded Molycorp, and the company then went public in 2010. The Plaintiffs generally contend that after its initial public offering, Molycorp struggled financially because the company underestimated the significant costs necessary to modernize and expand its Mountain Pass facility.[10]

During this time, according to the Plaintiffs, the Defendants dominated and controlled the Molycorp board of directors. Certain Defendants, but not Molycorp, participated in two expedited stock offerings in which they (or their affiliates) sold substantial numbers of Molycorp shares in February 2011 and June 2011. Molycorp was precluded from issuing stock even though it had a pressing need for cash. As a result, the Plaintiffs allege, Molycorp had to raise capital at inferior rates through a preferred stock offering concurrent with the February 2011 offering[11] and a convertible note private placement alongside the June 2011 offering.[12]

A. The Operative Complaint

The allegations of the Operative Complaint center on the February 2011 and June 2011 offerings. In the Operative Complaint, the Plaintiffs allege four causes of action: (i) a breach of fiduciary duty claim against certain Molycorp directors and officers primarily seeking damages for permitting these expedited stock offerings without allowing Molycorp to participate, for purported material misstatements, and for indemnification for any liability Molycorp may have in the Federal Securities Action;[13] (ii) a Brophy[14] breach of fiduciary duty claim against certain Molycorp directors, officers, and private equity investors for misusing material, non-public information while selling Molycorp stock;[15] (iii) an unjust enrichment claim in parallel with the Brophy claim;[16] and (iv) an aiding and abetting claim against the company's private equity investors.[17] The overlap between the Operative Complaint and the Federal Securities Action is evident: both actions implicate whether there were material misstatements and improper trading in Molycorp stock by certain Defendants. Accordingly, the Stay was appropriate.

B. The Proposed Amended Complaint

The Proposed Amended Complaint, by contrast, focuses exclusively on the Molycorp board's decisions surrounding the June 2011 offering. The Plaintiffs primarily allege that Molycorp directors breached their fiduciary duties by permitting the company's private equity investors, who exercised their contractual rights to require the company to initiate the June 2011 offering, to sell their Molycorp stock and receive approximately $575 million in gross proceeds while preventing the company from participating and raising much-needed capital.[18] In addition, the Molycorp board purportedly decided not to exercise its own contractual rights under the governing Registration Rights Agreement to delay the June 2011 offering for up to 90 days, during which time the company could have made its own secondary stock offering.[19] According to the Plaintiffs, a majority of Molycorp's directors were not independent and disinterested when making this decision because of alleged conflicts of interest due to their material relationships with the private equity investors.[20] Therefore, the Plaintiffs' argument goes, the Molycorp board must establish that the June 2011 offering was entirely fair.[21]

In the Proposed Amended Complaint, the Plaintiffs allege three causes of action: (i) a breach of fiduciary duty claim against the Molycorp board for its decisions regarding the June 2011 offering;[22] (ii) breach of fiduciary duty and aiding and abetting claims against Molycorp's private equity investors;[23] and (iii) unjust enrichment and disgorgement claims against the Defendants who sold stock in the June 2011 offering.[24] Because the Plaintiffs no longer seek to prosecute claims for material misstatements, for indemnification, or for trading on material, non-public information under Brophy, the potential overlap between the Proposed Amended Complaint and the Federal Securities Action is not readily apparent.

II. ANALYSIS

A. Motion for Leave to File an Amended Complaint

Under Court of Chancery Rule 15(a), the Court should freely grant leave to amend a pleading "when justice so requires, " provided that there is no "bad faith, undue delay, dilatory motive, undue prejudice or futility of amendment."[25] The Defendants mainly contend that they would be unfairly prejudiced if the Court grants leave to amend and then finds it appropriate to lift the Stay on the basis of the Proposed Amended Complaint.[26] But, according to the Plaintiffs, there is no reason for the Court to deny leave to amend not only because this action is still in its early stages, but also because the theories of liability under the Proposed Amended Complaint do not overlap with those of the Federal Securities Action, thereby eliminating the risk of prejudice that the Defendants could face from mounting duplicative defenses or being subject to inconsistent judgments.[27]Moreover, in addition to eliminating certain claims against all Defendants, the Plaintiffs propose to eliminate all claims presently asserted against Molycorp officers.

The Court concludes that the Plaintiffs should be given leave to amend their pleading. The possible burden of defending against the Federal Securities Action and the Proposed Amended Complaint does not appear to be of the variety of prejudice that would cause the Court to withhold what should otherwise be freely granted.[28] Rather, the potential prejudice identified by the Defendants speaks to whether the Court should lift the Stay.

B. Motion to Lift the Stay

The Plaintiffs assert there is good cause for the Court to lift the Stay for two related reasons. First, in June 2013, the staff of the Securities and Exchange Commission (the "SEC") determined, after an investigation of Molycorp, that it would not recommend formal action against the company for potential securities laws violations.[29] This development likely contributed to the second reason: the Proposed Amended Complaint, in which the Plaintiffs eliminated the material misstatements, indemnification, and Brophy allegations and related claims.[30] In light of these developments, the Plaintiffs argue, there is good cause to lift the Stay because the absence of material overlap in claims or theories of liability between the Proposed Amended Complaint and the pending Federal Securities Action means that there are few, if any, practical considerations that discourage prosecuting both actions simultaneously.[31]

The Defendants, in opposition, contend that it is inappropriate for the Plaintiffs to claim good cause through what they criticize as "manipulating the allegations of their case" by "dropping claims which never should have been brought."[32] They emphasize that some practical considerations that initially motivated the Stay—especially the potential for duplicative discovery regarding many of "the same facts and circumstances" implicated by the Federal Securities Action—still exist, regardless of whether the Proposed Amended Complaint no longer includes indemnification or Brophy claims.[33] In sum, the Defendants maintain that "there remains substantial overlap in the underlying facts, the relevant parties and legal issues" for the Court to reaffirm the Stay.[34]

The Court may, in the interests of comity and judicial efficiency, stay an action before it in favor of another with an identity of parties and issues pending in another forum.[35] There is no right to a stay of litigation in Delaware, even where the lawsuit pending elsewhere was initiated first.[36] In considering whether to grant a stay, the Court should exercise its discretion rationally.[37] As appropriate, the Court should give due weight to "practical considerations" that could cause proceeding with litigation in this forum before resolution of another action to be "unduly complicated, inefficient, and unnecessary."[38]

It may be appropriate for the Court to lift a stay when "the circumstances that justified the entry of the stay . . . no longer obtain."[39] This may arise if there "will no longer be a prior action which should take precedence over the Delaware action."[40] Framed slightly differently, good cause to lift the Stay here may exist if the present circumstances are those that would not support the Court's entering of a stay of the Proposed Amended Complaint.

This Court has long recognized Delaware's strong interest in promptly, uniformly, and authoritatively deciding corporate governance disputes of Delaware corporations arising, pursuant to the internal affairs doctrine, [41] under Delaware law.[42] Depending on the circumstances, this interest, particularly when there are breach of fiduciary duty claims, can be so compelling that it may "outweigh the policy underlying the doctrine of comity"[43] in the Court's determination of whether a stay of a Delaware action in favor of litigation elsewhere is appropriate.[44] That is, the Court may rationally conclude that this interest militates against a stay of an important Delaware corporate law claim even where, for example, the complaint filed in Delaware asserting breaches of fiduciary duty includes several allegations duplicative of a complaint pending elsewhere asserting federal securities law violations.[45]

That well-recognized interest, however, may not support the simultaneous prosecution of a federal securities law class action against the corporation and a later-filed derivative action seeking indemnification for the corporation's liability from the directors. This Court frequently stays such derivative claims in favor of the actions in which the corporation's primary liability will be adjudicated.[46] In doing so, this Court has recognized that a corporation may be unfairly prejudiced if forced to adopt conflicting litigation strategies in related actions where it is simultaneously a defendant and a plaintiff.[47] But, a derivative action that seeks distinct damages for alleged breaches of fiduciary duty, rather than indemnification for possible securities laws violations, does not implicate the same practical considerations in the Court's calculus of whether to grant a stay. In those circumstances, the Court may rationally conclude that a stay is not warranted if the potential overlap between the actions is not prejudicial.[48]

This is one of those circumstances. Although they partially overlap with those of the Federal Securities Action, the allegations at the heart of the Proposed Amended Complaint—that purportedly interested and not independent Molycorp directors decided not to have the corporation delay or participate in the June 2011 offering, but, instead, to permit just the company's private equity investors to sell stock—implicate an evolving and important question of Delaware corporate law regarding the fairness of business decisions made by conflicted boards, especially where at least half the directors involved may be dual fiduciaries with conflicting beneficiaries.[49] This Delaware corporate law claim is not raised in the Federal Securities Action, which alleges violations of the federal securities laws only. Nor does this theory appear to have been raised in any of the derivative actions currently stayed in favor of this action.

The need for expeditious treatment of the Proposed Amended Complaint is not as persuasive as it may be in a summary proceeding under 8 Del. C. § 225[50] or in other contexts, [51] but the Court nonetheless concludes that an efficient resolution of the Plaintiffs' claims is appropriate.

An answer regarding the legality of these practices pursuant to Delaware law plainly will affect not only the parties to this action, but also parties in other civil and criminal proceedings where Delaware law controls or applies. By directly stating the fiduciary principles applicable in this context, Delaware courts may remove doubt regarding Delaware law and avoid inconsistencies that might arise in the event other state or federal courts, in applying Delaware law, reach differing conclusions.[52]

Balancing all these factors, [53] the Court concludes that Delaware's interest in having the Court decide this action promptly, uniformly, and authoritatively would counsel against granting a stay of the Proposed Amended Complaint. On these facts, the Court further concludes that there is good cause to lift the Stay.[54]

Molycorp's directors owe fiduciary duties to the corporation.[55] Its directors and private equity investors are also subject to the federal securities laws.[56]Liability under the Proposed Amended Complaint is separate from, and not contingent on, a finding of liability in the Federal Securities Action, and lifting the Stay would offend neither comity nor the efficient administration of justice. As the circumstances here demonstrate, it is conceivable that the directors and stockholders of a corporation may be defendants in two simultaneous lawsuits with closely related factual underpinnings but where neither the claims nor the theories of liability overlap. Defending these two actions at the same time cannot be said to be unfairly prejudicial; to a certain extent, it may be an inherent risk of being a director of a publicly traded Delaware corporation.

III. CONCLUSION

For the foregoing reasons, the Plaintiffs' Motion to Lift the Stay and for Leave to File an Amended Complaint is granted. The Plaintiffs shall serve the Proposed Amended Complaint within ten days. The remaining Defendants shall then respond to it in the time and manner contemplated by the Court of Chancery Rules.[57]

IT IS SO ORDERED.

Very truly yours,

JOHN W. NOBLE, VICE CHANCELLOR.


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