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In re Meadwestvaco Stockholders Litigation

Court of Chancery of Delaware

August 17, 2017

IN RE MEADWESTVACO STOCKHOLDERS LITIGATION

          Submitted: May 15, 2017

          Peter B. Andrews, Craig J. Springer, and David M. Sborz of ANDREWS & SPRINGER LLC, Wilmington, Delaware; Gregory M. Nespole, Mark C. Rifkin, Anita B. Kartalopoulos, and Kevin G. Cooper of WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP, New York, New York; Lead Attorneys for Plaintiff.

          Gregory P. Williams and Sarah A. Clark of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Rachelle Silverberg and A.J. Martinez of WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendants MeadWestvaco Corporation, John A. Luke, Jr., Michael E. Campbell, James G. Kaiser, Richard B. Kelson, Susan J. Kropf, Gracia C. Martore, James E. Nevels, Timothy H. Powers, and Alan D. Wilson.

          William M. Lafferty and Ryan D. Stottmann of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Gary A. Bornstein of CRAVATH, SWAINE & MOORE LLP, New York, New York; Attorneys for Defendant Rock-Tenn Company.

          MEMORANDUM OPINION

          BOUCHARD, C.

          In this action, stockholders of MeadWestvaco Corporation seek damages relating to a strategic stock-for-stock merger of equals between MeadWestvaco and Rock-Tenn Company that closed in July 2015. The transaction was the product of on-again, off-again negotiations that occurred over a period of about nine months, and yielded a 9.1% premium for MeadWestvaco's stockholders. Eight of the nine MeadWestvaco directors who approved the merger were outside directors whose independence and disinterestedness are unquestioned. Five months elapsed between the signing of the merger agreement and the stockholder vote, but no other suitor emerged with a superior proposal even though the deal protections in the merger agreement concededly were reasonable. The merger received favorable recommendations from two leading proxy advisory firms, and was approved overwhelmingly by 98% of the MeadWestvaco stockholders who voted-after plaintiffs took some discovery and waived their disclosure claims.

         The complaint asserts a claim for breach of fiduciary duty against the members of the MeadWestvaco board, and a second claim for aiding and abetting against Rock-Tenn. The thesis of the complaint is that the directors entered into the merger in bad faith in reaction to a threatened proxy contest by an activist investor. According to plaintiffs, the directors "flew blind" and left behind $3 billion of value in a transaction that impliedly valued MeadWestvaco at $9 billion. Defendants have moved to dismiss both claims for failure to state a claim for relief.

          The core issue before the Court is whether the complaint contains factual allegations sufficient to state a reasonably conceivable claim against MeadWestvaco's directors for bad faith in connection with their approval of the merger. For the reasons explained below, I conclude that the complaint does not and thus must be dismissed.

         I. BACKGROUND

         Unless otherwise noted, the facts recited in this opinion come from the allegations in the Amended Verified Consolidated Class Action Complaint filed on June 21, 2016 (the "Complaint"), documents incorporated therein, [1] and additional documents the parties agreed could be considered on a motion to dismiss.[2] Any additional facts are either undisputed or subject to judicial notice.

         A. The Parties

         Before the merger, defendant MeadWestvaco Corporation ("MeadWestvaco" or the "Company") was a publicly-traded Delaware corporation headquartered in Richmond, Virginia. MeadWestvaco was a global packaging company that also produced specialty chemicals for automotive, energy, and infrastructure businesses in a separate operating segment. Defendant Rock-Tenn Company ("RockTenn") was a Georgia corporation with headquarters in Norcross, Georgia. RockTenn was a packaging company that also manufactured containerboard and paperboard.

         The Complaint names as defendants the nine members of the MeadWestvaco board of directors during the period leading up to and including its approval of the merger: Michael E. Campbell, James G. Kaiser, Richard B. Kelson, Susan J. Kropf, John A. Luke, Jr., Gracia C. Martore, James E. Nevels, Timothy H. Powers, and Alan D. Wilson. Luke was Chief Executive Officer and Chairman of the Board. The other eight members of the board were outside directors whose independence is not challenged.

         Plaintiffs CWA Local 1180 Administrative Fund and CWA Local 1180 Members Annuity Fund allege they held shares of MeadWestvaco at all relevant times.

         B. MeadWestvaco Begins to Consider a Transaction with RockTenn

         In March 2014, Vertical Research Partners published an analyst note proposing a merger between RockTenn and MeadWestvaco. The note stated that RockTenn, which faced a billion-dollar pension deficit, could benefit from MeadWestvaco's pension surplus, which exceeded $1 billion. That same month, Starboard Value LP, a well-known activist investment firm, began purchasing MeadWestvaco stock.

         In April 2014, MeadWestvaco's Chairman and CEO, John Luke, Jr., engaged in preliminary discussions with RockTenn's CEO, Stephen Voorhees, regarding a potential merger. On April 28, Luke presented the idea of a merger to the rest of MeadWestvaco's board, which asked a number of questions, including:

• who were the alternative candidates to RockTenn?
• why would MeadWestvaco bring RockTenn's valuation up as opposed to RockTenn dragging MeadWestvaco's valuation down?
• what RockTenn assets did MeadWestvaco want and which would MeadWestvaco want to dispose of?
• why was MeadWestvaco unable to create the same added value from divesting its Specialty Chemicals Segment and its remaining land development interests by acting alone?[3]

         The next day, Luke told a fellow director that "[t]he questions were right on target, and we have or will have all answers shortly"[4]

         C. Starboard Acquires a 5.6% Stake and Sends a Letter to the Board

         On June 2, 2014, the MeadWestvaco board received a letter from Starboard stating that it had acquired approximately 5.6% of MeadWestvaco's outstanding common stock, making it one of the Company's largest stockholders. Starboard asserted in the letter that the Company was not operating at its full potential and demanded an overhaul of the Company through cost cutting and the sale of its specialty chemicals business. Starboard also suggested a stock repurchase or an outright sale or merger of the Company. The letter was publicly filed on the day it was sent, putting the market on notice of Starboard's agenda.[5]

         Later on June 2, after receiving Starboard's letter, the MeadWestvaco board convened a telephonic meeting with management. During the meeting, senior management reviewed and discussed with the board relative valuation, potential deal terms, negotiating strategy, and the culture and governance of a combined entity.[6] At the end of the meeting, the board directed Luke to explore a potential merger with RockTenn and to engage in negotiations with Voorhees.[7]

         D. Merger Negotiations Proceed Over the Next Six Months but are Terminated Twice by MeadWestvaco

         In the two months following the June 2 meeting, Luke and Voorhees met in person at least five times to discuss the terms of a potential transaction.[8] On August 20, members of senior management for MeadWestvaco and RockTenn met face-to-face to conduct merger discussions along with the companies' respective financial advisors.[9] Bank of America Merrill Lynch and Goldman, Sachs & Co. participated as MeadWestvaco's financial advisors. MeadWestvaco terminated the negotiations and the meeting ended without an agreement because MeadWestvaco refused to accept an exchange ratio below the then-market price of its stock.

         On September 29, 2014, Voorhees called Luke to re-engage in merger negotiations. Given the gap that existed between the parties in August, MeadWestvaco would agree to engage in merger discussions only if MeadWestvaco were valued at least at its market price.[10] Because RockTenn's overture was sufficiently constructive to meet this minimum condition, the parties re-engaged in merger discussions.

         Negotiations with RockTenn continued throughout October 2014, but stalled again in November. On November 16, Luke informed the MeadWestvaco board that RockTenn was unwilling to proceed on terms acceptable to MeadWestvaco. This was the second time over the past several months that MeadWestvaco terminated merger negotiations with RockTenn.

          E. MeadWestvaco Decides to Spin-Off its Specialty Chemicals Business as Starboard Signals a Potential Proxy Fight

         On October 2, 2014, in the midst of its on-again, off-again merger discussions with RockTenn, the MeadWestvaco board considered a potential spin-off of its specialty chemicals business.

         On November 10, 2014, shortly before MeadWestvaco broke off negotiations with RockTenn for a second time, its board met with Starboard, which made a presentation about enhancing the Company's value. One of Starboard's suggestions was to spin-off the Company's specialty chemicals business. During the same meeting, the board and its outside legal and financial advisors discussed the possibility of a spin-off, allegedly as part of a response to the threat that Starboard would run a proxy contest against the MeadWestvaco board, [11] and reviewed again the rationale for a combination with RockTenn and the value to stockholders it could create.[12]

         In December 2014, Starboard increased its ownership stake in MeadWestvaco to 6.1%. Also in December, signaling a potential proxy fight, Starboard announced it had entered into advisory agreements with the previous Chief Operating Officer of Smurfit-Stone Container Corp. before it was acquired by RockTenn in 2012, and the Chairman of Soundview Paper Company.

         On January 8, 2015, MeadWestvaco issued a press release announcing that the board had approved a plan to spin off the specialty chemicals division into a separate, publicly-traded company. The Company also announced that it was selling off its Europe-based tobacco folding carton business for an undisclosed amount. On the day of the January 8 press release, the Company's stock price rose approximately 5.8% higher on the news to close at $45.59 per share, but fell the next day to close at $44.50.

         F. RockTenn Seeks to Resume Merger Discussions, and the Parties Reach an Agreement in Principle on an Exchange Ratio

         On January 9, 2015, Luke and Voorhees met for the first time since discussions fell apart in November to resume discussions about a potential merger. During the meeting, Voorhees proposed an "at market" stock-for-stock merger based on the ratio of the market value of MeadWestvaco stock to RockTenn stock at the time, meaning that each share of MeadWestvaco stock would be converted into 0.71 shares of the combined entity.[13] Voorhees also proposed that the combined entity would have a twelve-person board, with RockTenn appointing seven directors and MeadWestvaco appointing five directors; that Voorhees would remain as CEO; and that Luke would become Chairman of the combined company.[14]

         On January 13, Luke sent an email to Michael Campbell, MeadWestvaco's lead director, stating: "We have also had outreach from [RockTenn]. We are working with our advisors to assess the seriousness of their intent. If there is substance worth discussing, I will let you know."[15]

         The next day, on January 14, after Luke informed Voorhees that an at-market transaction would not be acceptable to MeadWestvaco, Luke and Voorhees agreed to proceed on the basis of a 0.78 exchange ratio.[16] Two days later, on January 16, Luke and Voorhees further agreed to amend the prior proposal to increase the size of the board for the combined company to fourteen directors, with RockTenn appointing eight directors and MeadWestvaco appointing six directors.

         On January 19, the MeadWestvaco board met to discuss the proposed merger terms with their financial and legal advisors. In addition to Bank of America Merrill Lynch and Goldman Sachs, Greenhill & Co., LLC had been added as a third financial advisor. Wachtell, Lipton, Rosen & Katz provided outside legal counsel.

         On January 23, in the midst of its deliberations over the proposed merger, the board agreed to extend the deadline for Starboard to nominate a dissident slate to February 27, 2015.

         On January 25, the MeadWestvaco board met and unanimously approved an Agreement and Plan of Merger (the "Merger Agreement") under which MeadWestvaco stockholders would receive 0.78 shares of stock in the combined entity for each MeadWestvaco share. The "indicated price" derived from this exchange ratio was $49.13 per share, representing a 9.1% premium over the Company's stock price on the last trading day before the transaction was announced.[17] According to the definitive proxy statement (the "Proxy"), MeadWestvaco's stockholders would receive approximately 50.1% of the shares of the combined entity and RockTenn's stockholders would receive the balance. Both parties estimate that the transaction implied a value for the Company of approximately $9 billion.[18] All three of MeadWestvaco's financial advisors opined that the transaction was fair to the Company's stockholders.[19]

          The Merger Agreement contained a non-solicitation clause, matching and information rights, a fiduciary-out in case of a superior offer, and a $230 million termination fee[20] equating to less than 3% of the value attributed to the Company in the transaction. The Merger Agreement also provided that the spin-off of the specialty chemicals division would occur after the merger closed.[21]

         On May 20, 2015, the Proxy was issued in advance of a MeadWestvaco stockholder meeting scheduled for June 24 to consider the proposed merger. In June 2015, ISS Proxy Advisory Services and Glass Lewis & Co., LLC both issued advisory reports recommending that stockholders vote in favor of the proposed merger.[22] On June 24, 2015, MeadWestvaco's stockholders approved the merger, with 83% of the outstanding shares voting, of which 98% were voted in favor of the transaction.[23] The transaction closed on July 1, 2015.

         II. ...


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