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Virtus Capital L.P. v. Eastman Chemical Co.

Court of Chancery of Delaware

February 11, 2015

VIRTUS CAPITAL L.P., individually and on behalf of all others similarly situated, Plaintiff,

Submitted: December 9, 2014

Joel Friedlander, Jeffrey M. Gorris, Benjamin P. Chapple, FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; Attorneys for Plaintiff.

T. Brad Davey, J. Matthew Belger, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Barry S. Pollack, POLLACK SOLOMON DUFFY LLP, Boston, Massachusetts; Attorneys for Defendants Martin D. Sass, M.D. Sass Associates, Inc. Employee Profit Sharing Plan, M.D. Sass Investor Services, Inc., Resurgence Asset Management, L.L.C., and RE/Enterprise Asset Management L.L.C.

A. Thompson Bayliss, Adam K. Schulman, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Attorneys for Defendant John V. Genova.

Thomas W. Briggs, Jr., Kevin M. Coen, Frank R. Martin, Brendan W. Sullivan, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Defendants Eastman Chemical Company, and Eastman TC, Inc.

Lewis H. Lazarus, Brett M. McCartney, Patricia A. Winston, MORRIS JAMES LLP, Wilmington, Delaware; Attorneys for Defendants John L. Teeger, Richard K. Crump, and John W. Gildea.

Rolin P. Bissell, Paul J. Loughman, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Paul D. Flack, Reagan D. Pratt, PRATT & FLACK LLP, Houston, Texas; Attorneys for Defendant Walter B. Treybig.

Gregory P. Williams, Susan M. Hannigan, J. Scott Pritchard, RICHARDS LAYTON & FINGER, P.A. Wilmington, Delaware; Yosef J. Reimer, Matthew Solum, KIRKLAND & ELLIS LLP, New York, New York; Attorneys for Defendants Philip M. Sivin, Karl W. Schwarzfeld, and Daniel M. Fishbane.

David E. Ross, S. Michael Sirkin, SEITZ ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; William Savitt, Benjamin D. Klein, WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendant Moelis & Company LLC.



Defendant Martin D. Sass controlled Sterling Chemicals, Inc. ("Sterling" or the "Company"), a publicly traded Delaware corporation. The complaint contains detailed allegations sufficient to state a claim that Sass breached his duty of loyalty by causing Sterling to be sold at a fire-sale price to alleviate a liquidity crisis that Sass was facing at his investment funds. The complaint also contains detailed allegations sufficient to state a claim that Eastman Chemical Company ("Eastman"), the acquirer, aided and abetted Sass' breaches of fiduciary duty by exploiting the conflicts of interest that Sass faced. None of the defendants have moved to dismiss the complaint for failing to state a claim on which relief could be granted.

Instead, Sass has moved to dismiss the complaint pursuant to Rule 12(b)(2), arguing that this court lacks personal jurisdiction over him. So has one of the entities through which he controlled Sterling: the M.D. Sass Associates, Inc. Employee Profit Sharing Plan (the "Sass Plan"). Because the defendants engaged in acts within the State of Delaware and purposefully availed themselves of the benefits of Delaware law, this court has jurisdiction over Sass and the Sass Plan.


The facts are drawn principally from the Verified Class Action Complaint (the "Complaint") and the documents it incorporates by reference. At this procedural stage, the Complaint's allegations are assumed to be true, and the plaintiff receives the benefit of all reasonable inferences. For purposes of evaluating whether a defendant is subject to the court's jurisdiction, "the court may go beyond the pleadings and look to affidavits and other discovery of record." Chandler v. Ciccoricco, 2003 WL 21040185, at *8 (Del. Ch. May 5, 2003) (Strine, V.C). The factual recitation therefore also incorporates matters drawn from the parties' submissions in connection with the motions to dismiss.

A. Resurgence and Sterling

Sass controlled a financial complex comprising various investment funds and related entities that operated under the "Resurgence" trade name. The investment funds included defendants Resurgence Parallel Fund, L.L.C.; Resurgence Parallel Fund II, L.L.C.; Resurgence Parallel Fund III, L.L.C.; Corporate Resurgence Partners, L.L.C.; Corporate Resurgence Partners II, L.L.C.; M.D. Sass Corporate Resurgence Partners III, L.P.; M.D. Sass RE/Enterprise Portfolio Company, L.P.; and M.D. Sass RE/Enterprise II, L.P. Other funds that Sass controlled included the Sass Plan; the Resurgence Asset Management, L.L.C. Employee Retirement Plan; the Kodak Pension Plan; and Trust "O" For a Portion of the Assets Of The Kodak Retirement Income Plan. This decision refers to these funds collectively as the "Resurgence Funds." The Resurgence financial complex also included fund"management entities such as defendants Resurgence Asset Management, L.L.C; Resurgence Asset Management International, L.L.C; and RE/Enterprise Asset Management, L.L.C. This decision refers to the asset management entities as the "RAM Entities." The pinnacle entity through which Sass controlled the Resurgence financial complex was defendant M.D. Sass Investors Services ("Sass Services"), which controlled the RAM Entities. This decision refers to the Resurgence Funds, the RAM Entities, and Sass Services collectively as "Resurgence."

In 2002, Resurgence made a substantial investment in Sterling. Headquartered in Houston, Sterling owned a 290-acre petrochemical manufacturing facility in Texas City on Galveston Bay. The facility had two primary manufacturing plants: an acetic acid plant and a temporarily idled plasticizer plant. The facility also had other underutilized assets, including storage tanks, deep injection wells for hazardous waste disposal, two deep water docks, three barge docks, and direct access to two railways. Additionally, Sterling owned 160 acres of excess land, NOx credits worth millions of dollars, and more than $90 million in federal net operating losses that could be used as a tax shield.

Through its 2002 investment, Resurgence acquired beneficial ownership of approximately 56% of Sterling's common stock and 100% of Sterling's preferred stock. Sass allocated these holdings across the Resurgence Funds, the RAM Entities, and Sass Services. Through their aggregate ownership stake, the entities controlled over 88% of Sterling's voting power. Through Resurgence, Sass controlled Sterling.

B. The Fund Expirations

In 2008, the largest Resurgence Fund, defendant M.D. Sass Corporate Resurgence Partners, L.P. ("Fund I") reached the end of its ten-year term. Fund I owned over 25% of Sterling's equity. Resurgence negotiated with Fund I's biggest investor to extend Fund I's term for another year. In return, Sass agreed to fund personally a cash escrow that would cover his portion of the returns owed to Fund I's investors. After obtaining the biggest investor's support, Resurgence sought and obtained consents to the extension from other Fund I investors.

When soliciting and obtaining the consents, Resurgence represented that the additional time was critical to maximizing the value of Sterling, which was Fund I's most significant remaining investment:

Sterling will have approximately $150 million in cash, leaving it with no net debt, a strong acetic acid business and an attractive footprint at its Texas City site for future development. We believe that there is significant value to the underutilized assets (including the real estate, deepwater port, rail and access to the electrical grid and gas pipelines, chemical permits next to large refineries and valuable NOX credits)
In summary, we believe the best way to maximize this value, which we believe could be materially more than recent valuation levels, is to continue to work on attracting a significant development opportunity to replace businesses that we have closed at Sterling's valuable deep water dock and adjoining gulf coast facility.

Compl. ¶ 24.

At its annual investor conference on September 10, 2008, Resurgence again represented to its investors that Sterling had significant upside. Resurgence stated that Sterling could be worth between $437.7 million and $1.037 billion with a projected 10-20% ownership of a potential $2-4 billion project at the Texas City site. Resurgence also stated that Sterling was negotiating with potential partners to develop the 160 acres of excess land for a production process project.

In February 2009, Resurgence sought consents from Fund I's investors to extend its life for another year, until March 16, 2010. Once again Resurgence emphasized Sterling's potential to deliver value. Resurgence told investors that the "development potential of Sterling's assets remains substantial" and "selling the Partnership's interests [in Sterling] in the current extremely depressed financial and economic environment would result in a very unattractive price." Compl. ¶ 26. Resurgence received the necessary consents, but Fund I's partnership agreement forbade any further extensions.

With the second extension, the expiration of Fund I in March 2010 corresponded with the expiration of two other Resurgence Funds: M.D. Sass Corporate Resurgence Partners II, L.P. ("Fund II") and M.D. Sass Corporate International (the "International Fund"). Fund II held approximately 9.4% of Sterling's equity; the International Fund held approximately 5% of Sterling's equity. In total, Resurgence funds holding approximately 40% of Sterling's equity would dissolve in March 2010 and be forced to wind up.

C. Mid-2009: Resurgence Decides To Sell Sterling.

Until mid-2009, Resurgence focused on operating Sterling and developing the Texas City site. Within Resurgence, the champion of this strategy was Byron Haney, the portfolio manager with primary responsibility for the Sterling investment. Haney believed sufficiently in Sterling's value that he turned down premium offers for Sterling. In 2007, Gulf Hydrogen and Energy, LLC ("Gulf Hydrogen") offered approximately $392 million to acquire Sterling. In February 2008, D.E. Shaw proposed a range of $300 to $350 million on behalf of an investor group that included Gulf Hydrogen. The principal behind Gulf Hydrogen, Ken Berry, believed that Sterling rejected both offers because Haney thought Resurgence could execute the acquirer's plans for Sterling and capture the bulk of the resulting $1 billion in value for Resurgence.

Then, in mid-2009, the hedge funds managed by Resurgence suffered significant losses. Redemption requests poured in. Haney, who was the chief investment officer for the hedge funds, abruptly left Resurgence.

Faced with a need for liquidity, Resurgence changed its plans. Despite having told its investors in February 2009 that selling Sterling "in the current extremely depressed financial and economic environment would result in a very unattractive price, " Resurgence decided to sell. Sterling's CEO, defendant John V. Genova, understood that the redemption demands and concomitant need for liquidity drove the decision.

Defendant Moelis & Company, LLC ("Moelis") pitched Sterling for the sell-side work. Moelis understood the liquidity concerns driving the sale and was skeptical about the timing for purposes of maximizing value. The Moelis pitchbook noted that "resolution" of Resurgence's liquidity issues was "the primary factor driving the timing of a potential transaction involving Sterling" and that "the current economic, financial and chemical industry environment [was] not ideal for realizing the highest value." Compl. ¶ 29. Moelis managing director David Faris expressed surprise that Resurgence would explore a sale in 2009. He advised that it "was not the ideal time [to sell] given what was going on in the overall economy and what was going on in the chemical industry specifically." Id.

Sterling did not retain Moelis in 2009. Instead, Sterling hired Jefferies LLC ("Jefferies"). Jefferies contacted sixty-four potential buyers and made it clear that Resurgence was looked for prices north of $250 million. Jefferies could not generate any interest at that price.

Despite Jefferies' failure to find a buyer for the Company at a price above $250 million, Resurgence still needed to sell. In pursuit of that goal, Sass recommended that Sterling add defendant John L. Teeger to its board of directors (the "Board"). Teeger was a close personal friend of Sass who played golf and tennis with him regularly. Teeger joined the Board, increasing its size from six to seven. The other six directors, all of whom are defendants, were:

• Philip M. Sivin, an employee of Resurgence and Sass' son-in-law;
• Karl W. Schwarzfeld, an employee of Resurgence;
• Daniel M. Fishbane, an employee of Resurgence;
• Genova, Sterling's CEO;
• Richard K. Crump, who appears at this stage to be an independent, outside director; and
• John W. Gildea, who appears at this stage to be an independent, outside director.

From the outset, Sass envisioned that Teeger would work to monetize Resurgence's investment in Sterling. On July 10, 2010, Sass emailed Teeger, Siven, Schwarzfeld, and Sterling's CFO about the need to sell the Company. He wrote: "John Teeger & I discussed the need for a strong focus on finding an acquirer to monetize RAM's investment. John made the suggestion, which I support, of forming a Special Committee for that purpose comprised of the 3 of you & John Genova and our new CFO . . . ." Compl. ¶ 33. Teeger responded privately to Sass: "Wow-you sure don't mess around!" Id.

Prompted by Sass' email, Sterling formed an informal M&A committee. On July 28, 2010, Schwarzfeld emailed Sass with an update after the committee's first meeting:

Phil [Sivin] and/or I are going to have a call with Genova tomorrow (without his team who was on the phone today) to reiterate our priority (cash today being priority #1, building in a meaningful way towards cash tomorrow being priority #2) and refocus his demeanor in interacting with this or future potential buyers (ie. "I know you are at $100 to $150m, but come out for a plant tour and we will show you why were are worth substantially more" as opposed to "You can come for a plant tour, but it is a waste of time if the number is $100m").

Id. ¶ 35. Sass responded: "I'm glad you will continue to focus on priority #1." Id.

On August 19, 2010, Schwarzfeld emailed Sass and Sivin, copying Teeger, with an update on a subsequent committee meeting. Although the email discussed potential alternatives Genova had identified to unlock the value of Sterling's underutilized assets, none contemplated a sale of Sterling. Sass responded that Genova "still isn't focused on our top priority – selling Sterling Chemicals. Please send us a summary of his financial incentives on a sale – did we not [provide] sufficient motivation for him?" Id. Teeger reassured Sass that a sale was his first priority: "The first choice is selling the company and getting an exit-tough to do." Id. Sass then reiterated his bottom line: "Our largest Resurgence PE fund has reached the end of its term and needs to monetize Sterling asap." Compl. ¶ 36.

On September 7, 2010, Genova emailed Sivin and Schwarzfeld a letter of intent from a potential acquirer, which Sivin forwarded to Sass. Sass asked him to "share [it] confidentially w/ John Teeger and provide his feedback prior to our meeting today[.]" Dkt. 66, Ex. 9. Sivin indicated that he and Schwarzfeld "would like to discuss [the letter of intent] with [Sass] before sharing it with John." Id. When Sass asked why, Sivin replied, "better to explain in our in person meeting but relates to different constituencies/duties." Id. Sass then made Teeger's role clear:

John [Teeger] is on our side and knows RAM's #1 priority is to sell the company. he [sic] can help us in that process. i [sic] believe that blocking him out or delaying information flow to him is wasting his expertise = he know [sic] that I asked [him] to join the Board to help us make the best deal we can for our Funds.


D. Eastman Expresses Interest.

In August 2010, Eastman approached Sterling about a supply agreement for plasticizer, referred to in the industry as a tolling agreement. Eastman is a global specialty chemical company and the world's largest manufacturer of non-phthalate plasticizer.

Eastman wanted access to Sterling's plasticizer manufacturing capacity to capitalize on a shift in plasticizer demand. Due to regulatory issues and health concerns, demand for phthalate plasticizers was declining. Eastman had developed a non-phthalate plasticizer known as "Eastman 168, " and Eastman saw an opportunity to capture market share if it could bring a significant volume to market quickly. But Eastman had limited production capacity, especially in North America, and Eastman needed additional capacity to achieve its goals.

Eastman regarded Sterling's plasticizer manufacturing capacity at the Texas City plant as a key asset. Eastman wanted either to get a tolling agreement in place or acquire Sterling. In August 2010, the head of Eastman's plasticizer business explained Eastman's position in an internal email to members of Eastman's M&A team:

[W]e will need an additional North American plasticizer asset in order to make an orderly transition over the next few years – in particular to deal with the [Eastman 168] transition . . . . Our preferred position is Sterling and [we have] been in discussions with Sterling to get a CDA in place to allow tolling discussions to occur, but we believe we need to go ahead and simultaneously begin an effort to acquire Sterling . . . . [A] number of market issues are putting some urgency on our finding a 3rd plant option in the near term if possible.

Compl. ΒΆ 39. A twenty-two page internal Eastman presentation from the same month identified a tolling agreement or an acquisition as the options giving Eastman the highest returns. ...

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