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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 ...


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