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In re Paramount Gold and Silver Corp. Stockholders Litigation

Court of Chancery of Delaware

April 13, 2017

IN RE PARAMOUNT GOLD AND SILVER CORP. STOCKHOLDERS LITIGATION

          Submitted: February 10, 2017

          Seth D. Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley, RIGRODSKY & LONG, P.A., Wilmington, Delaware; Derrick B. Farrell, DLA PIPER U.S. LLP, Wilmington, Delaware; Michael Van Gorder, FARUQI & FARUQI, LLP, Wilmington, Delaware; Peter Andrews, ANDREWS & SPRINGER LLC, Wilmington, Delaware; Shannon L. Hopkins and Sebastiano Tornatore, LEVI & KORSINSKY LLP, Stamford, Connecticut; Michael Palestina, KAHN SWICK & FOTI LLP, Madisonville, Louisiana; Juan E. Monteverde and James M. Wilson, Jr., FARUQI & FARUQI, LLP, New York, New York; Joshua Lifshitz, LIFSHITZ & MILLER, Garden City, New York, Attorneys for Plaintiffs.

          Albert H. Manwaring, IV and Albert J. Carroll, MORRIS JAMES LLP, Wilmington, Delaware, Attorneys for Defendants Christopher Crupi, John Carden, Michel Stinglhamber, Robert Dinning, Eliseo Gonzalez-Urien, Christopher Reynolds, and Shawn Kennedy.

          MEMORANDUM OPINION

          BOUCHARD, C.

         In this action, former stockholders of Paramount Gold and Silver Corporation ("Paramount") sued the members of its board of directors challenging a transaction Paramount entered with Coeur Mining, Inc. ("Coeur") that closed in April 2015. Defendants have moved to dismiss the complaint for failure to state a claim for relief.

         Before the transaction, Paramount had two mining projects, one in Mexico and the other in Nevada. The transaction involved (1) the spin-off of the Nevada mining assets into a separate entity, approximately 95% of the shares of which were distributed to Paramount's stockholders, and (2) a stock-for-stock merger of a subsidiary of Coeur into Paramount (the "Merger"), which then held the Mexican mining assets but not the Nevada mining assets. On the same day it entered into the merger agreement, Paramount entered into a royalty agreement pursuant to which a wholly-owned subsidiary of Coeur acquired a 0.7% royalty interest in the Mexican mining project in exchange for a payment of $5.25 million.

         The complaint asserts a single claim for breach of fiduciary duty against the seven members of Paramount's board. Plaintiffs do not challenge the independence or disinterestedness of the majority of the board, nor do they contend that the transaction should be subject to Revlon or entire fairness review.

         Plaintiffs' primary contention is that Unocal enhanced scrutiny should apply on the theory that the royalty agreement, when combined with the termination fee provision in the merger agreement, constituted an unreasonable deal protection device. For the reasons explained below, I conclude that this contention is without merit because the terms of the royalty agreement did not prevent any interested party from making a competing bid for Paramount and because the termination fee in the merger agreement by itself concededly was reasonable.

         I also conclude that the stockholder vote approving the transaction was fully-informed. Therefore, under Corwin v. KKR Financial Holdings LLC and its progeny, the Paramount board's decision to enter into the merger agreement with Coeur is subject to business judgment rule, and the complaint must be dismissed. Finally, I conclude as a separate ground for dismissal that, even if Corwin did not apply, the complaint must be dismissed because plaintiffs have failed to state a non-exculpated claim for breach of fiduciary duty against the defendants.

         I. BACKGROUND

         Unless noted otherwise, the facts recited in this opinion come from the allegations of the Verified Third Amended Class Action Complaint (the "Complaint") and the documents incorporated therein.[1]

         A. Paramount and the Parties

         Before the Merger, Paramount Gold and Silver Corporation was a precious metals exploration company headquartered in Winnemucca, Nevada that had two advanced stage mining projects: the Sleeper Gold Project and the San Miguel Project. The Sleeper Gold Project was located off a main highway about 25 miles from the town of Winnemucca, Nevada. The San Miguel Project consisted of over 142, 000 hectares (over 353, 000 acres) in the Palmarejo District of northwest Mexico.

         Paramount had not generated any revenue of its own and was heavily dependent on its largest stockholder, FCMI Financial Corp., to fund its operations and expansion. As of the date of the Merger, FCMI Financial Corp. owned approximately 15.7% of Paramount's outstanding common stock, which was listed on the New York Stock Exchange under the ticker symbol "PZG."

         Plaintiffs Fernando Gamboa, Justin Beaston, Rob Byers, Jerry Panning, James Alston, and Jonah Weiss, IRA allege they were stockholders of Paramount at all times relevant to this action.

         Defendants Christopher Crupi, Robert G. Dinning, Michel Stinglhamber, Shawn V. Kennedy, Christopher Reynolds, John Carden, and Eliseo Gonzalez-Urien each served as a member of Paramount's board of directors since at least 2009, and were the seven members of Paramount's board of directors when it approved the Merger. Crupi, the then-President and Chief Executive Officer of Paramount, was the only management director on the board. Reynolds and Gonzalez-Urien were designated to the board by FCMI Financial Corp.

         B. Early Expressions of Interest in Paramount

         At various times from 2007 to 2014, Coeur Mining, Inc. had expressed an interest in acquiring Paramount's San Miguel Project, and had entered into several confidentiality agreements with Paramount to obtain confidential information in pursuit of its interest in the San Miguel Project. During this period, Paramount also explored the possibility of a business combination with other exploration and mining companies, and entered into confidentiality agreements with those companies to facilitate due diligence. None of these discussions resulted in a proposal that Paramount's board could recommend to its stockholders.

         In October 2012, Coeur inquired whether Paramount would be interested in selling a portion of its San Miguel Project for cash and shares. Paramount rejected this proposal. In February 2013, Coeur again expressed its interest in the San Miguel Project, which led the Paramount board to invite five investment banks to make proposals to serve as its financial advisor in connection with a possible sale of all or a portion of the company. The Paramount board ultimately deferred the decision to hire a financial advisor.

         C. Negotiations Leading to the Merger

         In September 2014, Coeur sent Paramount a letter of intent describing a proposed transaction that would result in Coeur acquiring Paramount, with Paramount spinning off its Nevada business into a standalone public company ("SpinCo"). The letter of intent contemplated mixed consideration of 20.6 million shares of Coeur common stock and $19.7 million in cash. Coeur also would receive 9.9% of the fully diluted equity of SpinCo.

         Later in September, the Paramount board made a counter-proposal to the Coeur offer, which contemplated mixed consideration of 20.7 million shares of Coeur common stock and $85.2 million in cash and required Coeur to purchase a 9.9% equity interest in SpinCo for an additional $6.2 million. The counter-proposal also included the sale to Coeur of a 0.5% royalty interest in the Sleeper Gold Project for $12 million in cash, and the sale of certain mining claims in the Spring Valley District of Nevada for $6 million in cash. Coeur's board rejected this counterproposal.

         On October 14, 2014, the Paramount board engaged Scotia Capital (USA) Inc. ("Scotia") as its financial advisor.

         On November 7, 2014, Coeur sent Paramount another draft letter of intent setting forth the general terms under which Coeur would acquire Paramount in a stock-for-stock transaction. The letter of intent provided for the issuance of approximately 32.7 million shares of Coeur common stock, equating to approximately 0.20 share of Coeur common stock for each outstanding share of Paramount common stock. The letter of intent again contemplated that Paramount would spin off its Nevada operations into SpinCo. It also contemplated that Coeur would invest $10 million in cash in SpinCo and that SpinCo would combine with another public company, with Coeur receiving a 4.9% interest in the combined company. Coeur also proposed to enter into a royalty agreement with respect to the San Miguel Project for $5.25 million.

         On November 10, 2014, Paramount's board met to consider Coeur's most recent proposal and created a special committee comprised of "all of the independent members of the board excluding one independent member who had disclosed to the board his potential conflict of interest due to his relationship with the third party proposed to combine with SpinCo."[2] The board created the special committee "solely to consider the proposed transaction between SpinCo and the third party."[3]

         On November 14, 2014, the special committee decided to abandon the proposed business combination between SpinCo and the third party and instructed management to seek an alternative structure for the spin-off. Over the next several weeks, Paramount and Coeur continued to engage in discussions and their counsel exchanged drafts of documents for a proposed transaction.

         D. The Merger Agreement and the Royalty Agreement

         On December 15, 2014, Paramount's board met to consider the terms of a proposed merger transaction with Coeur, which it unanimously approved after receiving a fairness presentation from Scotia. The next day, on December 16, Paramount and Coeur entered into a merger agreement (the "Merger Agreement").

         The Merger Agreement provided for Coeur to acquire all of the outstanding shares of Paramount common stock after Paramount spun off its Nevada assets into SpinCo. Upon completion of the Merger, Paramount would become a wholly owned subsidiary of Coeur. Paramount stockholders would receive 0.2016 of a share of Coeur common stock in exchange for each share of Paramount common stock. They also would receive a pro rata share of a 95.1% interest in SpinCo. Coeur would provide SpinCo with $10 million in cash and hold the remaining 4.9% interest in SpinCo.

         The 0.2016 share of Coeur common stock represented an implied value of $0.90 per share of Paramount common stock based on Coeur's 20-day volume weighted average price and a 19.8% implied premium over Paramount's trading price as of its last trading day. The implied value of the transaction was approximately $146 million, without attributing any value to SpinCo. The estimated aggregate value of SpinCo was approximately $37.5 million.

         Section 7.3 of the Merger Agreement provides, in general terms, that if Paramount's stockholders voted against the Merger, Paramount would be obligated to pay Coeur a $5 million termination fee if (1) an alternative acquisition proposal was made to Paramount's stockholders or to Paramount, and (2) within twelve months after the termination of the Merger Agreement, Paramount consummated an alternative transaction.

         On the same day Paramount and Coeur entered into the Merger Agreement, Paramount and certain of its subsidiaries entered into a royalty agreement concerning the San Miguel Project with Coeur Mexicana S.A. de C.V. ("Coeur Mexicana"), a wholly-owned subsidiary of Coeur (the "Royalty Agreement"). Under the Royalty Agreement, Coeur Mexicana would receive a perpetual royalty "privileged and preferential in payment" of 0.7% of the net smelter returns from the sale or other disposition of productions produced from the San Miguel properties in exchange for a payment of $5.25 million.[4]

         E. The Merger Closes

         On January 7, 2015, Paramount and Coeur filed a joint preliminary registration statement with the Securities and Exchange Commission, which was amended three times, on February 9, 2015, March 4, 2015, and March 16, 2015 (the "Registration Statement").

         On April 17, 2015, stockholders of Paramount holding over 54% of Paramount's outstanding common stock voted to approve the Merger, with approximately 97% of those voting expressing their approval.[5] The Merger closed on the same day.

         F. Procedural History

         Shortly after the Merger's announcement on December 17, 2014, six actions were filed in this Court challenging the transaction. On February 18, 2015, the Court consolidated the various actions into this action and appointed lead counsel.

         By the end of March 2015, Paramount voluntarily produced limited discovery, including board minutes and Scotia's fairness presentation. Plaintiffs took no action after receiving this discovery to enjoin the proposed transaction, which closed on April 17, 2015.

         On February 1, 2016, after this action had been dormant for ten months, the Court requested a status report from plaintiffs' counsel. On April 8, 2016, plaintiffs filed a Second Amended Complaint in which they deleted disclosure claims that they previously had asserted.

         On August 18, 2016, plaintiffs filed their Third Amended Complaint (as defined above, the "Complaint"), asserting a single claim for breach of fiduciary duty against the seven members of Paramount's board in connection with their approval of the transaction. The Third Amended Complaint added back allegations challenging certain disclosures in the Registration Statement, including allegations that plaintiffs had deleted just four months earlier.

         On September 28, 2016, defendants moved to dismiss the Complaint for failure to state a claim for relief. Argument was held on February 2, 2017, during which the Court requested supplemental submissions, which were provided on February 10, 2017.

         II. ANALYSIS

         The standards governing a motion to dismiss for failure to state a claim for relief are well settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are "well-pleaded" if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the "plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."[6]

         The Court is not required, however, to accept mere conclusory allegations as true or make inferences unsupported by well-pleaded factual allegations.[7] The Court also "is not required to accept every strained interpretation of the allegations proposed by the plaintiff."[8]

         Defendants' primary argument in favor of dismissal is that plaintiffs have failed to state a claim for breach of fiduciary duty because of the effect of the Paramount stockholders' approval of the Merger. In Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court explained that "[f]or sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests."[9] Thus, "when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies."[10]

         In Singh v. Attenborough, the Supreme Court further explained that: "When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result. That is because the vestigial waste exception has long had little real-world relevance."[11] Recently, the Supreme Court twice affirmed the Court of Chancery's dismissal of post-closing challenges to merger transactions based on the Corwin doctrine.[12]

         Plaintiffs do not challenge the disinterestedness of the stockholder vote. Nor do plaintiffs allege that the Merger, which involved a stock-for-stock exchange and was approved by a majority independent and disinterested board, should be subject to either a Revlon or an entire fairness standard of review.[13] Plaintiffs instead contend that Corwin does not apply here for two reasons: (1) because the combined effect of the termination fee in the Merger Agreement and of certain provisions in the Royalty Agreement constituted a "preclusive and per se unreasonable" deal protection device "rendering the vote coerced, " and (2) because the stockholder vote was uninformed.[14] As discussed below, neither argument has merit in my opinion.

         A. The Complaint Fails to Allege Facts Supporting a Reasonable Inference that Defendants Implemented Unreasonable Deal Protections

         Our Supreme Court has held that a "board's decision to protect its decision to enter a merger agreement with defensive devices against uninvited competing transactions that may emerge is analogous to a board's decision to protect against dangers to corporate policy and effectiveness when it adopts defensive measures in a hostile takeover contest, " and thus should be reviewed under the Unocal enhanced judicial scrutiny standard.[15] In this context, "defensive devices, " or "deal protection devices" describe "any measure or combination of measures that are intended to protect the consummation of a merger transaction. Defensive devices can be economic, structural, or both."[16]

         Invoking Corwin, defendants contend that the Unocal intermediate standard of review does not apply here because the Merger was approved by a fully informed and uncoerced vote of a majority of Paramount's disinterested stockholders. Plaintiffs counter that this position cannot be squared with the Delaware Supreme Court's earlier decision in In re Santa Fe Pacific Corporation Shareholder Litigation, [17] where the Court held in the context of a post-closing challenge that a fully informed stockholder vote approving a merger did not preclude review of certain deal protection devices under Unocal.[18] The Supreme Court in Corwin did not discuss or expressly overrule this aspect of Santa Fe.[19] I need not address the apparent tension between Corwin and Santa Fe that plaintiffs focus on because it is apparent from the face of the Complaint and documents incorporated therein that the provisions challenged here do not constitute an unreasonable deal protection device.

         As noted above, plaintiffs assert that the combination of the Royalty Agreement and the termination fee in the Merger Agreement constituted an unreasonable deal protection device under Unocal. In making this argument, plaintiffs concede that the $5 million termination fee in the Merger Agreement- representing 3.42% of the estimated value of the Merger excluding SpinCo, and about 2.72% of the estimated value of the overall transaction including SpinCo-is not unreasonable by itself.[20] This concession is sensible given that this Court routinely has upheld termination fees of this magnitude.[21]

         As a threshold matter, plaintiffs' Unocal argument hinges on whether the Royalty Agreement constitutes a deal protection device in the first place. Plaintiffs assert that the Royalty Agreement "effectively served as a second termination fee because the Royalty Agreement would have required the payment of at least an additional $5.25 million (or approximately 3.6% of the Transaction's value) by any superior bidder to unshackle the San Miguel Project from Coeur and its subsidiaries."[22] Thus, according to plaintiffs, "the combined Royalty Agreement/termination fee reached $10.25, or 7.02% of the Transaction value."[23]This amount would be problematic if plaintiffs' assertion were true, but I conclude for the reasons explained below that the contention is plainly incorrect.

         The Royalty Agreement became effective when it was signed and was not contingent on consummation of the Merger.[24] More importantly, plaintiffs have not pled any facts suggesting that a superior bidder had any obligation to buy out Coeur's royalty interest in the San Miguel Project (for $5.25 million or any other price) in order to propose or consummate a transaction with Paramount. Instead, absent some impediment built into the Royalty Agreement, which I address below, a potential bidder could simply acquire Paramount subject to the Royalty Agreement, thereby assuming the obligations under the Royalty Agreement and reaping the benefit of the $5.25 million cash infusion. In that regard, it is significant that plaintiffs do not allege that Paramount received inadequate consideration in exchange for the 0.7% royalty provided in the Royalty Agreement.

         In their Complaint and in briefing, plaintiffs relied on Section 17.2(3) of the Royalty Agreement to argue that Coeur could use the Royalty Agreement to block Paramount from entering into an alternative transaction.[25] Section 17.2(3) of the Royalty Agreement provides that: "The Owners and Parent shall not allow a Change of Control of the Owners without the prior written consent of [Coeur Mexicana and its successors-in-interest], such consent not to be unreasonably withheld."[26]

         Under the Royalty Agreement, "Owners" refers to the two Paramount subsidiaries (Paramount Mexico and Minera Gama) that owned the San Miguel Project, "Parent" means "Paramount Gold and Silver Corp. and includes all of Parent's successors-in-interest, " and "Change of Control" means "Parent" ceasing to own all of the issued and outstanding voting securities and participating securities of either Owner."[27] Thus, Section 17.2(3) applies only if there is a change of control of the two specified subsidiaries of Paramount. Critically, Section 17.2(3) does not apply to a change of control of Paramount itself. If Paramount itself were acquired, Paramount (or its successor-in-interest in a merger where it is not the surviving entity) still would own all of the securities of the two Paramount subsidiaries and there would be no "Change of Control of the Owners" that could trigger Section 17.2(3).

         Recognizing the flaw in their reliance on Section 17.2(3), plaintiffs abandoned the theory at oral argument, where they argued for the first time that a different provision of the Royalty Agreement-Section 17.2(1)-could be used to block an alternative transaction.[28] As an initial matter, plaintiffs waived this argument by not raising it in their brief.[29] In any event, Section 17.2(1) also is of no help to plaintiffs.

         Section 17.2(1) of the Royalty Agreement provides, in relevant part, that:

The Owners and Parent shall not, directly or indirectly, Encumber, sell, option, assign, lease, license, transfer or otherwise dispose of, the Mineral Property or any material portion thereof (other than pursuant to an internal reorganization or to or with an affiliate or subsidiary of the Owners or Parent provided such affiliate or subsidiary first enters into an agreement, in form satisfactory to Holder, under which such party assumes the Owners's [sic] obligations to Holder under the Agreement) without the prior written consent of Holder, such consent not to be unreasonably withheld.[30]

         "Mineral Property" means "the properties collectively and commonly known as San Miguel, " and "Holder" refers to Coeur Mexicana and its successors-in-interest.[31]

         Plaintiffs contend that, if a third party wished to top Coeur's bid to acquire Paramount, then Paramount would "directly or indirectly . . . sell, assign, . . ., transfer or otherwise dispose of, the Mineral Property, "[32] thus triggering Coeur Mexicana's qualified consent right.[33] But the San Miguel Project was owned by two Paramount subsidiaries: Paramount Mexico and Minera Gama. Paramount, as the parent company, only owns all of the outstanding securities of the two subsidiaries.[34] Thus, a sale of Paramount as a whole would not disturb the property ownership structure at ...


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