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Ira Trust FBO Bobbie Ahmed v. Crane

Court of Chancery of Delaware

December 11, 2017

IRA TRUST FBO BOBBIE AHMED, on behalf of similarly situated Class A stockholders of NRG YIELD, INC., Plaintiff,
v.
DAVID CRANE, JOHN F. CHLEBOWSKI, MAURICIO GUTIERREZ, KIRKLAND B. ANDREWS, BRIAN R. FORD, FERRELL P. MCCLEAN, CHRISTOPHER S. SOTOS and NRG ENERGY, INC., Defendants.

          Submitted: September 22, 2017

          Peter B. Andrews, Craig J. Springer & David M. Sborz of ANDREWS & SPRINGER LLC, Wilmington, Delaware; Jeremy S. Friedman, Spencer Oster & David Tejtel of FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Jason M. Leviton & Joel Fleming of BLOCK & LEVITON LLP, Boston, Massachusetts; Counsel for Plaintiff.

          William M. Lafferty & D. McKinley Measley of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Counsel for Defendants John F. Chlebowski, Brian R. Ford, and Ferrell P. McClean.

          Brian C. Ralston, Andrew H. Sauder & Mathew A. Golden of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Counsel for Defendants David Crane, Mauricio Gutierrez, Kirkland B. Andrews, Christopher S. Sotos, and NRG Energy, Inc.

          OPINION

          BOUCHARD, C.

         This action arises out of a reclassification of the shares of NRG Yield, Inc. ("Yield" or the "Company") that went into effect in May 2015. Yield's business model is to own a portfolio of income-producing energy generation and infrastructure assets from which dividends can be distributed to public stockholders-a model often referred to as a "yieldco." Since its formation in 2012, Yield has been controlled by NRG Energy, Inc. ("NRG"), which manages Yield's day-to-day affairs and is responsible for identifying and placing assets into Yield.

         After its initial public offering in 2013, Yield had two classes of stock, both of which were entitled to one vote per share. NRG then held approximately 65% of Yield's voting power through its ownership of all of Yield's Class B shares, and public stockholders held approximately 45% of Yield's voting power through their ownership of Class A shares. The prospectus for the Class A shares stated that NRG intended to maintain its controlling interest in Yield.

         By 2015, NRG's voting control of Yield had been diluted to approximately 55% as a result of Class A shares being issued to acquire assets to transfer to Yield. Concerned that its voting control of Yield was in jeopardy if Yield continued to fund asset acquisitions with Class A shares, NRG proposed that Yield undertake a recapitalization where Class A stockholders would be issued one share of a new class of non-voting common stock for each Class A share they held. NRG intended for Yield to use the non-voting common stock as currency to acquire assets in the future.

         NRG's proposal was conditioned from the beginning on the receipt of the approval of a majority of the outstanding shares of Yield not affiliated with NRG, meaning a majority of Yield's outstanding Class A shares. Upon receipt of the proposal, Yield's board delegated to its standing Conflicts Committee the authority to evaluate and negotiate the proposal. The independence of the three members of the Conflicts Committee is not challenged.

         Through negotiations with the Conflicts Committee, NRG's proposal was revised so that newly-created Class C and Class D shares would be issued on a one-for-one basis to Class A and Class B stockholders, respectively, i.e., stockholders would receive one Class C share for every Class A share and one Class D share for every Class B share. The Class C and Class D shares would have the right to 1/100 of one vote per share instead of being non-voting, as initially proposed. NRG also agreed to amend a contract, under which Yield had a right of first offer on certain NRG assets, to include some additional assets. As finally negotiated, the proposal is referred to herein as the "Reclassification." In May 2015, the Reclassification received the necessary stockholder approvals and went into effect that same month.

         In September 2016, a Class A stockholder filed this action asserting that the members of the Yield board breached their fiduciary duties in connection with their approval of the Reclassification, and that NRG breached its fiduciary duty as a controlling stockholder by causing Yield to undertake the Reclassification. Defendants moved to dismiss the complaint for failure to state a claim for relief.

         Resolution of this motion implicates three questions: (1) Is the Reclassification a conflicted transaction subject to entire fairness review even though it nominally involved a pro rata distribution of shares? (2) If so, should the analytical framework articulated in Kahn v. M&F Worldwide, Corp., [1] a squeeze-out merger case, apply to the Reclassification? (3) If so, has that framework been satisfied in this case from the face of the pleadings? For the reasons explained below, I conclude that the answer to each of these questions is yes, and thus the Complaint must be dismissed for failure to state a claim for relief.

         I. BACKGROUND

         Unless noted otherwise, the facts in this decision are drawn from the Verified Class Action Complaint (the "Complaint") and documents incorporated therein, [2]which include documents produced to plaintiff in response to a books and record demand made under 8 Del. C. § 220.[3] Any additional facts are either not subject to reasonable dispute or subject to judicial notice.

         A. The Parties and Relevant Non-Parties

         Plaintiff IRA Trust FBO Bobbie Ahmed alleges it was a Class A stockholder of Yield at all relevant times.

         Defendant NRG is a power company that produces, sells, and delivers energy, energy products, and energy services in the United States. NRG is headquartered in both West Windsor Township, New Jersey, and Houston, Texas. Non-party Yield, a Delaware corporation, owns a portfolio of energy generation and infrastructure assets in the United States. As a result of the Reclassification, Yield now has four classes of common stock. The Company's Class A and C shares are listed on the New York Stock Exchange. The Company's Class B and D shares are held by NRG and not publicly traded.

         When it approved the Reclassification, Yield's board (the "Board") was comprised of the seven individual defendants: David Crane, John F. Chlebowksi, Mauricio Gutierrez, Kirkland B. Andrews, Brian R. Ford, Ferrell P. McClean, and Christopher S. Sotos. Four of the directors (Crane, Andrews, Gutierrez, and Sotos) were members of Yield's management at the time, and each of them held executive positions with NRG at various times.[4] The other three directors (Chlebowksi, Ford, and McClean) were not members of Yield's management and served on the Conflicts Committee (defined below) that evaluated and approved the Reclassification.[5] Their independence is not challenged.

         B. The Yield Business Model

         On December 20, 2012, NRG incorporated Yield as a dividend growth-oriented company to serve as the primary vehicle through which NRG would own, operate, and acquire energy generation and infrastructure assets.[6] Under a Management Services Agreement, NRG or its affiliates provide services to Yield, including carrying out all day-to-day management, accounting, banking, treasury, administrative, liaison, representative, regulatory, and reporting functions and obligations. The Management Services Agreement also allows NRG to make recommendations with respect to the payment of dividends and the exercise of any voting rights to which Yield is entitled with respect to its subsidiaries. For the fiscal year ended December 31, 2015, NRG received approximately $8 million in management fees and reimbursement for expenses under the Management Services Agreement.

         On July 22, 2013, Yield closed an initial public offering of 22, 511, 250 shares of Class A stock. NRG retained 42, 738, 750 shares of Class B stock, which were never offered to the public. Both classes of stock entitle their holders to one vote per share on all matters. NRG's Class B shares represented about 65% of Yield's total voting power at the completion of its initial public offering.

         In connection with its IPO, Yield established a standing Corporate Governance, Conflicts and Nominating Committee (the "Conflicts Committee") to review and approve proposed conflicted transactions between Yield and NRG.[7] The Conflict Committee's charter requires that "its members satisfy the requirements for independence under applicable law and regulations of the SEC and NYSE standards for directors and nominating committee members."[8]

         The prospectus for the IPO disclosed to prospective investors in Class A shares that "NRG will be our controlling stockholder and will exercise substantial influence over Yield and we are highly dependent on NRG."[9] The prospectus further explained NRG's intention to maintain its controlling interest and the consequences of that control:

NRG has also expressed its intention to maintain a controlling interest in us. As a result of this ownership, NRG will continue to have a substantial influence on our affairs and its voting power will constitute a large percentage of any quorum of our stockholders voting on any matter requiring the approval of our stockholders. Such matters include the election of directors, the adoption of amendments to our amended and restated certificate of incorporation and bylaws and approval of mergers or sale of all or substantially all of our assets. This concentration of ownership may also have the effect of delaying or preventing a change in control of our company or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. In addition, NRG will have the right to appoint all of our directors. NRG may cause corporate actions to be taken even if their interests conflict with the interests of our other stockholders (including holders of our Class A common stock).[10]

         From its inception, NRG always has appointed Yield's senior executives, and Yield has depended on NRG as a source for its income-producing assets. To facilitate these related-party transactions, NRG granted Yield and its affiliates a contractual right of first offer (the "ROFO Agreement") on any proposed sale of certain enumerated NRG assets. Yield distributes to stockholders the profits generated by its acquisitions through cash dividends. As explained in the prospectus for the Class A offering, Yield's "ability to grow through acquisitions depends, in part, on NRG's ability to identify and present us with acquisition opportunities."[11]

         To finance acquisitions, Yield frequently needs to raise new capital. Issuing equity or convertible notes dilutes all of the Company's common stockholders, but NRG suffers a unique detriment in that each new issuance also reduces its controlling stake in Yield. A dual-class voting structure was allegedly not implemented at the time of the IPO because NRG did not anticipate Yield's pace of acquisitions and rapid growth.[12] Between the July 2013 IPO and the fall of 2014, NRG's voting power fell from approximately 65% to approximately 55% due to equity issuances.[13]

         C. NRG and Yield Seek to Preserve NRG's Control Over Yield

         On October 8, 2014, NRG management presented to the Board several alternatives that would allow Yield to continue raising capital for acquisitions while preserving NRG's control. The proposed alternatives included issuing low or non-voting common stock, entering into a stockholder agreement that would allow NRG to maintain control over significant corporate events, issuing preferred stock in the Company or non-voting units in an LLC, merging Yield into a limited partnership structure, and having NRG invest 50% of the equity value in future Yield acquisitions.[14]

         On December 15, 2014, David Crane, Yield's then-Chief Executive Officer, and Kirkland Andrews, Yield's Chief Financial Officer, presented their fellow Board members with a proposal to create a new Class C stock that would carry no voting rights.[15] From the outset, the proposal was conditioned on obtaining the approval of Yield's public stockholders or a "majority of the minority" of the outstanding shares of Class A stock not affiliated with NRG.[16] The slide deck that accompanied the presentation indicated that issuing non-voting stock would "[p]reserve[] NRG's voting control of [Yield] above 50%" and "[b]etter manage future potential voting dilution."[17] At the end of the meeting, the Board authorized its Conflicts Committee, composed of Chlebowski, Ford, and McClean, to evaluate and negotiate the proposed reclassification with NRG.[18] The Conflicts Committee was advised by Crowell & Moring LLP as its legal counsel, and Moelis & Company LLC ("Moelis") as its financial advisor.

         On January 30, 2015, NRG presented the Conflicts Committee a proposal for Yield to issue a new class of non-voting common stock in connection with the proposed reclassification.[19] On February 6, 2015, NRG sent the Conflicts Committee a formal reclassification proposal where Class A stockholders would receive one share of a new class of non-voting common stock for each share of Class A stock held.[20]

         On February 9, 2015, after reviewing the February 6 proposal with its advisors, the Conflicts Committee rejected the proposal and made a counteroffer to NRG.[21] The counteroffer included four amendments to the February 6 proposal: (1) the addition of assets to the ROFO Agreement; (2) a special dividend or "true-up" to compensate Class C stockholders for the potential difference in the trading price of Class A and Class C shares; (3) dividend enhancements or protections for Class C stockholders; and (4) rights for Class C stockholders to convert their shares into voting shares upon the occurrence of certain events.[22]

         On February 17, 2015, the Conflicts Committee received a revised proposal from NRG under which: (1) the proposed new class of stock would entitle holders to 1/100 of one vote per share, rather than no vote at all; and (2) NRG would make additional assets available to Yield for purchase under a new ROFO Agreement (the "Amended ROFO Agreement").[23] On February 19, 2015, the Conflicts Committee met with its advisors and NRG to discuss the February 17 proposal.[24]

         On February 24, 2015, the Conflicts Committee met again with its advisors and NRG to discuss the February 17 proposal.[25] After NRG left the room, Moelis made a presentation that stated, absent any reclassification, "NRG's ownership could be reduced below 50.1% as early as 2015."[26] At the conclusion of the meeting, the Conflicts Committee approved the February 17 proposal.[27] Under the final terms of the transaction, Yield would establish two new classes of common stock (Class C and Class D) and distribute shares of Class C and Class D stock to holders of then outstanding Class A and Class B shares, respectively, through a stock split.[28] Yield and NRG also would enter into the Amended ROFO Agreement, making additional assets potentially available to Yield.[29]

         D. Stockholder Approval of the Reclassification

         On March 26, 2015, Yield issued a proxy statement (the "Proxy") to solicit stockholder approval of the Reclassification, which was conditioned on the approval of two separate proposals: (1) a proposal to approve the adoption of amendments to Yield's certificate of incorporation to establish new series of Class C and Class D stock; and (2) a proposal to approve the adoption of amendments to Yield's certificate of incorporation to effectuate the stock split.[30]

         The Proxy stated that the Board, upon the unanimous recommendation of the Conflicts Committee, unanimously determined to recommend the Reclassification. The Board's rationale for approving the Reclassification included the Conflicts Committee's belief that the transaction would provide a means to continue raising capital through future equity issuances as well as to maintain Yield's relationship with NRG.[31] The Proxy explained that the Reclassification could prolong the period over which NRG could exercise a controlling influence over Yield, but that the Board believed that NRG's controlling influence would provide significant benefits.[32]

         At Yield's annual stockholders meeting held on May 5, 2015, over 80% of the outstanding shares of common stock (Class A and B) voted to approve both proposals concerning the Reclassification.[33] Additionally, a majority of the outstanding shares of Class A stock unaffiliated with NRG voted in favor of both proposals.[34] The Reclassification was effected on May 14, 2015. The next day the Class C shares began trading on the New York Stock Exchange.[35]

         II. PROCEDURAL HISTORY

         On September 12, 2016, plaintiff filed the Complaint on behalf of a putative class of Class A stockholders, asserting two claims. Count I asserts that the members of the Board breached their fiduciary duties in connection with their approval of the Reclassification. Count II asserts that NRG breached its fiduciary duty as the controlling stockholder of Yield by causing Yield to undertake the Reclassification.

         On November 4, 2016, defendants filed a motion to dismiss the Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. The Court heard the motion on June 20, 2017. At the Court's request, the parties submitted supplemental briefing on September 22, 2017 to address Vice Chancellor Slights's decision in In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig., [36] which was rendered after the oral argument.

         III. 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."[37]

         The standards are minimal, but the Court "will not credit conclusory allegations or draw unreasonable inferences in favor of the Plaintiffs."[38]

         The Court's consideration of this motion hinges on what standard of review governs plaintiff's claims. Plaintiff argues that the Reclassification was a conflicted transaction that is subject to entire fairness review. According to plaintiff, NRG obtained a unique benefit in the Reclassification that the minority stockholders did not enjoy because the transaction perpetuated NRG's majority stake in Yield at a time when that control was slipping away.

         Defendants argue that the business judgment rule should apply for two reasons. First, defendants argue that the Reclassification was a pro rata transaction that affected all of Yield's stockholders equally. In other words, defendants contend that NRG did not receive a unique benefit from the Reclassification so that it was not a conflicted transaction.

         Second, defendants posit that even if, arguendo, the Reclassification was a conflicted transaction, the business judgment rule still applies because the framework set forth in Kahn v. M&F Worldwide, Corp. ("MFW") should apply to the Reclassification, and plaintiff has failed to plead sufficient non-conclusory facts that any of the elements of that framework was not satisfied.[39]

         I address each of these arguments in turn.

         A. Plaintiff Has Pled Sufficient Facts to Warrant Review of the Reclassification as a Conflicted Controller Transaction

         One of the most fundamental principles of Delaware corporate law is that directors are presumed to have acted "independently, with due care, in good faith and in the honest belief that [their] actions were in the stockholders' best interests."[40]Because of this presumption, controlling stockholders are not automatically subject to entire fairness review when a controlled corporation effectuates a transaction. Rather, the "controller also must engage in a conflicted transaction" for entire fairness to apply.[41]

         Conflicted transactions come in many forms. In In re Crimson Expl. Inc. Stockholder Litig., the Court identified two categories of conflicted transactions involving controlling stockholders that have triggered entire fairness review in the context of a merger or acquisition: "transactions where the controller stands on both sides, " such as a parent-subsidiary merger, and "transactions where the controller competes with the common stockholders for consideration" in a sale of the corporation to a third party.[42] The Court also identified three examples within the second category: (1) where the controller receives greater monetary consideration for its shares than the minority stockholders;[43] (2) where the controller takes a different form of consideration than the minority stockholders;[44] and (3) where the controller gets a "unique benefit" by extracting "something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders."[45]

         More recently, in In re EZCORP Inc. Consulting Agreement Derivative Litig., Vice Chancellor Laster comprehensively reviewed Delaware case law and identified numerous types of transactions involving controlling stockholders outside the context of a merger or acquisition that have triggered entire fairness review. [46] He explained that, in all of these transactions, the controller extracted "a non-ratable benefit" that warranted heightened scrutiny.[47] Examples of "non-ratable benefit" transactions he identified include: (1) security issuances, purchases, and repurchases;[48] (2) asset leases and acquisitions;[49] (3) compensation arrangements, consulting agreements, and service agreements;[50] (4) settlements of derivative actions;[51] and (5) recapitalizations.[52] Applying its "non-ratable benefit" rationale, the Court held that a derivative challenge to three advisory agreements between EZCORP and an entity affiliated with its controlling stockholder was governed by the entire fairness standard.[53]

         Turning to this case, plaintiff argues that the entire fairness standard applies because NRG received a uniquely valuable or "non-ratable" benefit in connection with the Reclassification that was not shared with the Company's other stockholders, namely the ability to perpetuate its majority control over Yield.[54] In this vein, the Complaint alleges that, "[b]y the fall of 2014, it became clear to NRG that it would lose majority control over Yield as early as 2015, " and thus NRG "hatched" the Reclassification "to solve this problem."[55]

         In an effort to avoid the presumptive application of entire fairness review, defendants make essentially three arguments as to why NRG did not obtain a unique benefit in connection with the Reclassification. I find none of them convincing, at least at this stage of the case where I must accept plaintiff's allegations as true and draw all reasonable inferences in its favor.

         First, defendants point to Sinclair Oil Corp. v. Levien[56] for the proposition that "[a]s a general matter, entire fairness does not apply to a pro rata dividend paid to all stockholders."[57] In Sinclair, a parent corporation caused its 97%-owned subsidiary to pay large cash dividends on a pro rata basis to each of its stockholders. The Court determined that, because the cash was distributed on a pro rata basis, entire fairness did not apply "[s]ince the parent received nothing from the subsidiary to the exclusion of the minority stockholders of the subsidiary."[58] In reaching this conclusion, the Court cautioned that "[w]e do not accept the argument that the intrinsic fairness test can never be applied to a dividend declaration by a dominated board."[59] Here, unlike in Sinclair, the well-pled allegations of the Complaint show that NRG did receive something from Yield to the exclusion of the minority stockholders-the means to perpetuate its control position by financing future acquisitions with the low-vote Class C stock authorized in the Reclassification.

         Second, defendants argue that "Delaware courts have applied entire fairness to nominally pro rata transactions in only a limited circumstance-where the controlling stockholder receives a unique benefit."[60] They point to examples such as where the sale of the corporation to a third-party terminated derivative claims the corporation had against the controller, [61] and where a controlling stockholder's immediate need for liquidity resulted in the sale of the corporation for a sub-optimal price.[62] Relying on our Supreme Court's decision in Williams v. Geier, [63] defendants argue that this line of precedent should not be extended to this case.

         In Williams, a controlled corporation was recapitalized to:

provide for a form of "tenure voting" whereby holders of common stock on the record date would receive ten votes per share. Upon sale or other transfer . . . each share would revert to one-vote-per-share status until that share is held by its owner for three years. The Reclassification applied to every stockholder, whether a stockholder was a minority stockholder or part of the majority bloc.[64]

         The plaintiff argued that entire fairness should apply because the reclassification impermissibly favored the majority bloc by entrenching its control.[65] On appeal from the Court of Chancery's grant of partial summary judgment in defendants' favor "[a]fter discovery was nearly complete, "[66] the Delaware Supreme Court applied business judgment review because it found plaintiff's claims to be "conclusory" and to "have no factual support in this record."[67] As the Court explained:

There was on this record: (1) no non-pro rata or disproportionate benefit which accrued to the Family Group on the face of the Reclassification, although the dynamics of how the Plan would work in practice had the effect of strengthening the Family Group's control; (2) no evidence adduced to show that a majority of the Board was interested or acted for purposes of entrenching themselves in office; (3) no evidence offered to show that the Board was dominated or controlled by the Family Group; and (4) no violation of fiduciary duty by the Board.[68]

         This case and Williams both involve a nominally pro rata distribution of new shares. But here, unlike in Williams, the case is at the pleadings stage and no discovery has been taken. This distinction is significant because the Supreme Court in Williams did not stop its analysis once it found that the tenure voting recapitalization was pro rata. Instead, as the above quotation reflects, the Supreme Court specifically considered the board's motivations and other factors based on a developed factual record, including that there was "no evidence offered to show that the Board was dominated or controlled by the Family Group."[69] Notably, during a settlement hearing concerning Google's pro rata issuance of non-voting stock to perpetuate the founders' control of the company, then-Chancellor Strine commented that, if Williams applied, "a big part of what the trial [would be] about" would be whether the defendants "were well-motivated independent directors . . . who believed [the reclassification] was the right thing for [the company's] public stockholders."[70] Because the parties have not developed a factual record from which the motivations of defendants can be assessed, and because NRG's control over the Board is self-evident here, Williams is not dispositive and it would be premature for me to apply its reasoning at the pleadings stage.[71]

         Third, defendants argue that NRG's extension of control was not a unique benefit because "[n]o reasonable stockholder could have expected control to shift to the minority through dilution caused by voluntary issuances."[72] According to defendants, Yield's public filings undermine such an expectation, the "yieldco" structure is premised on a parent-subsidiary relationship that benefits all stockholders, and NRG had no duty to allow its controlling position to be sacrificed through equity issuances.[73] This argument fails in my view.

         Notwithstanding defendants' contentions, plaintiff has pled non-conclusory facts to support a reasonable inference that, whatever may have been the intentions behind Yield's original business model, NRG nevertheless was on the cusp of losing its control position in Yield when it undertook the Reclassification, which admittedly was done to perpetuate that control. Although "Delaware law does not . . . impose on controlling stockholders a duty to engage in self-sacrifice for the benefit of minority shareholders, "[74] a refusal to require that a controller be altruistic is not relevant to what standard of review should apply to a transaction in which the controller "extracts something uniquely valuable to the controller, even if the controller nominally receives the same consideration as all other stockholders."[75]Here, that "something" was a means for NRG to ensure it would be able to retain voting control of Yield well into the future without abandoning a key aspect of its original business model, i.e., using Yield equity to acquire income-producing assets. Thus, plaintiff has pled sufficient facts for purposes of this motion to warrant review of the Reclassification as a conflicted controller transaction that presumptively would be subject to entire fairness review.

         B. The MFW Framework Applies to the Reclassification

         Having decided that the Reclassification should be analyzed as a conflicted controller transaction, the next issue is whether the MFW framework should be applied to analyze plaintiff's challenge to the transaction. I conclude that it should for the reasons discussed below.

         In MFW, our Supreme Court held that the business judgment rule is the appropriate standard of review for a challenge to a squeeze-out merger by a controlling stockholder if the transaction satisfies certain procedural protections:

We hold that business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.[76]

         The Supreme Court enumerated several reasons for its holding. One is that the "simultaneous deployment of [these] procedural protections . . . create[s] a countervailing, offsetting influence of equal-if not greater-force" than the undermining influence of a controller.[77] Another is that the dual protections of special committee review and the approval of a majority of the minority stockholders are "consistent with the central tradition of Delaware law, which defers to the informed decisions of impartial directors, especially when those decisions have been approved by the disinterested stockholders on full information and without coercion."[78] Although MFW itself was decided after discovery on a motion for summary judgment, its framework has been applied at the pleadings stage as well.[79]

         Two years after the Supreme Court's MFW decision, Vice Chancellor Laster in EZCORP endorsed using the MFW framework outside of the context of a squeeze-out merger. As discussed above, he explained that the entire fairness standard presumptively governs "any transaction between a controller and the controlled corporation in which the controller receives a non-ratable benefit."[80] He further reasoned that the MFW framework should apply to all transactions where the controller receives a non-ratable benefit to potentially lower the standard of review:

If a controller agrees up front, before any negotiations begin, that the controller will not proceed with the proposed transaction without both (i) the affirmative recommendation of a sufficiently authorized board committee composed of independent and disinterested directors and (ii) the affirmative vote of a majority of the shares owned by stockholders who are not affiliated with the controller, then the controller has sufficiently disabled itself such that it no longer stands on both sides of the transaction, thereby making the business judgment rule the operative standard of review. [MFW], 88 A.3d at 644. If a controller agrees to use only one of the protections, or does not agree to both protections up front, then the most that the controller can achieve is a shift in the burden of proof such that the plaintiff challenging the transaction must prove unfairness.[81]

         The Court in EZCORP ultimately did not apply the MFW framework because the advisory agreements at issue were not subject to a majority-of-the-minority vote.[82] Nevertheless, the decision is a broad endorsement of the application of the MFW framework to any form of conflicted controller transaction.

         Earlier this year, in In re Martha Stewart Living Omnimedia, Inc. Stockholder Litig., [83] Vice Chancellor Slights also endorsed the application of the MFW framework to a transaction other than a squeeze-out merger, which was the factual context before the Court in MFW. Martha Stewart involved a challenge to a controlling stockholder's alleged receipt of disparate consideration through "side deals" in a sale of the corporation to a third party.[84] The Court ultimately held that the business judgment rule was the appropriate standard of review because "the Complaint does not adequately plead that Stewart, as a controlling stockholder, engaged in a conflicted transaction."[85] In the course of its analysis, however, the Court opined that, had it found the transaction to be conflicted, the MFW framework would have applied because it could "see no principled basis to conclude that it would be somehow less important" that the controller and the third-party acquirer "be incentivized from the outset of their negotiations to take positions and to reach side deals that will be acceptable to the other stockholders than it would be if" the controller was negotiating to acquire the company herself:[86]

In both instances, the key is to ensure that all involved in the transaction, on both sides, appreciate from the outset that the terms of the deal will be negotiated and approved by a special committee free of the controller's influence and that a majority of the minority stockholders will have the final say on whether the deal will go forward. Regardless of which side of the transaction a conflicted controller stands, it is critical that the process is designed from the outset to incentivize the special committee and the controller to take positions at every turn of the negotiations . . . which will later score the approval of the majority of other stockholders. Only then is it appropriate to reward the controller with pleadings-stage business judgment rule deference.[87]

         The broad application of the MFW framework to a range of transactions involving controllers would parallel the evolution of MFW's doctrinal predecessor, Kahn v. Lynch Commc'n Sys., Inc.[88] In Lynch, our Supreme Court held, in the context of a parent-subsidiary merger, that "approval of the transaction by an independent committee of directors or an informed majority of minority shareholders shifts the burden of proof on the issue of fairness from the controlling or dominating shareholder to the challenging shareholder-plaintiff."[89] Two years later, in Kahn v. Tremont Corp., Chancellor Allen applied the burden shift endorsed in Lynch to a transaction where a controller caused a subsidiary to purchase shares of a related entity from its parent company.[90] In doing so, the Chancellor explained that "no plausible rationale for a distinction between mergers and other corporate transactions" had been offered and that he "in principle [could] perceive none."[91]

         I find the reasoning of EZCORP, Martha Stewart, and Tremont persuasive and hold that the MFW framework should apply to the Reclassification, as I can see no principled basis on which to conclude that the dual protections in the MFW framework should apply to squeeze-out mergers but not to other forms of controller transactions. The animating principle of the MFW framework is that, if followed properly, the controlled company replicates an arm's-length bargaining process in negotiating and executing a transaction.[92] In my opinion, the use of these types of protections should be encouraged to protect the interests of minority stockholders in transactions involving controllers, whether it be a squeeze-out merger (MFW), a merger with a third party (Martha Stewart), or one in which the minority stockholders retain their interests in the corporation (EZCORP).

         Plaintiff makes essentially two arguments why the MFW framework should not apply to the Reclassification, neither of which I find persuasive. First, plaintiff argues that the framework applies only to mergers because of "the Supreme Court's repeated emphasis that its holding applied in the context of mergers between a controlling stockholder and its subsidiary."[93] The repeated use of the word "merger" in the MFW opinion, however, simply reflects the factual scenario that was before the Court. The Supreme Court's decision never indicated that the rationale for its holding only applied to mergers and, to repeat, I see no principled reason why that rationale would not apply equally to other conflicted controller transactions. Put differently, the Supreme Court's silence as to other potential applications for the framework does not preclude an evolution of the doctrine.

         Second, plaintiff argues that the MFW framework should not apply outside of the "controller merger scenario" because of other "protections" that may be present in that context but were not present in the Reclassification.[94] Plaintiff names three: (1) appraisal rights; (2) the provision of a fairness opinion; and (3) the loss of seats held by "directors of the controlled subsidiary."[95]

         The lack-of-appraisal-rights argument is a non sequitur because the Reclassification was not a game-ending transaction. In defined circumstances, appraisal rights are available for minority stockholders who have lost their interest in a company as a result of a merger.[96] The principle behind appraisal is "that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern."[97] Here, Yield's minority stockholders did not lose their proportionate interest in the Company and, unlike in a squeeze-out merger, they still have the choice whether to remain owners of Yield.

         Plaintiff's assertion that MFW should not apply because Moelis did not provide a fairness opinion is equally unconvincing. As plaintiff concedes, fairness opinions are not required for any form of transaction, including mergers.[98] Indeed, the six-element framework laid out in MFW does not require the provision of a fairness opinion even for a squeeze-out merger.[99]

         Plaintiff's last point-concerning the loss of director seats-is puzzling. Plaintiff contends that, "in the merger context, some (and often all) of the directors of the controlled subsidiary will lose their board seats, " and those "who will lose their board seats are less susceptible . . . to future retribution by the controller."[100] This is not a legally-created protection and plaintiff offers no support for this contention. Attempting to predict whether a person will lose a director seat as a result of a transaction is purely conjectural. In any event, the issue is irrelevant here, where the independence of the members of the Conflicts Committee who negotiated and approved the Reclassification is unchallenged.

         Because the MFW framework applies to the Reclassification, the operative question is whether the process implemented here satisfied that framework. I turn to that issue next.

         C. Application of the MFW Framework

         The MFW Court laid out six elements that are required for the business judgment standard of review to apply to a conflicted transaction:

(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.[101]

         Plaintiff's only serious challenge to the application of the MFW framework concerns the fifth element.[102] According to plaintiff, the vote of the minority in support of the Reclassification was not informed because there were disclosure deficiencies in the Proxy.[103]

         "[D]irectors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action."[104] A fact is material if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."[105]Stated differently, material facts are those that, if disclosed, would "significantly alter[] the 'total mix' of information made available."[106]

         "The application of [the materiality] standard does not require a blow-by-blow description of the proposed transaction. That is, the directors are 'not required to disclose all available information, ' but only that information necessary to make the disclosure of their recommendation materially accurate and complete."[107] That said, "[w]hen fiduciaries undertake to describe events, they must do so in a balanced and accurate fashion, which does not create a materially misleading impression."[108]

         Plaintiff's disclosure challenges fall into five categories: (1) potential alternatives to the Reclassification; (2) the additional assets that were added to the ROFO pipeline; (3) the value of the Reclassification to NRG; (4) the tenuous status of NRG's majority position in Yield before the Reclassification and the characterization of the Class C shares as a "sunset provision"; and (5) potential conflicts involving Moelis. I address each category, in turn, below.

         1. Potential Alternatives to the Reclassification

         Plaintiff argues that the Proxy's failure to disclose certain alternatives to the Reclassification that NRG discussed with the Board constitutes a material omission.[109] These alternatives were presented to the Board at an October 8, 2014 meeting, more than two months before the Board delegated to the Conflicts Committee the task of evaluating and making a recommendation whether to approve the Reclassification.[110]

         Plaintiff's argument ignores the well-settled principle that "Delaware law does not require management to discuss the panoply of possible alternatives to the course of action it is proposing."[111] Directors are required to provide stockholders with "an accurate, full, and fair characterization of the events leading to a board's decision, " but they do not have to provide a "play-by-play description of every consideration or action taken by a Board."[112] "[R]equiring disclosure of every material event that occurred and every decision not to pursue another option would make proxy statements so voluminous that they would be practically useless."[113]Relatedly, ...


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