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Chatham Asset Management, LLC v. Papanier

Court of Chancery of Delaware

December 22, 2017

Chatham Asset Management, LLC

          Date Submitted: September 15, 2017

         Dear Counsel:

         This letter constitutes the Court's decision on defendants' motion to dismiss the Verified Amended Complaint filed on April 10, 2017. For the reasons explained below, the motion is granted in part and denied in part.

         I. Background

         Unless otherwise noted, the facts recited in this letter decision come from the allegations in the Amended Complaint and documents incorporated therein.[1] Any additional facts are either undisputed or subject to judicial notice.

         A. The Parties

         Plaintiffs Chatham Asset Management, LLC, Chatham Fund, LP, and Chatham Asset High Yield Master Fund, Ltd. ("Chatham") hold common stock of Twin River Worldwide Holdings, Inc. ("Twin River"). Pursuant to a waiver granted by the Rhode Island Department of Business Regulation, Chatham is permitted to own up to, but not more than, 15% of Twin River's common stock.[2]

         Defendants consist of six individuals who served at relevant times as directors or officers of Twin River. George Papanier, John E. Taylor, Jr., Soo Kim, and Stephen H. Capp served as directors. Papanier is Twin River's President and Chief Executive Officer; the other three individuals are outside directors. The remaining two individual defendants-Craig L. Eaton and Glenn Carlin-served as officers of Twin River.

         Non-party Twin River conducts casino and other operations in Rhode Island, Mississippi, and Colorado through its subsidiaries. Twin River's stock does not trade on a national securities exchange but does trade on institutional trading desks, where only qualified institutional buyers are permitted to purchase shares.[3] Quotes on the stock and trading activity are disseminated via Bloomberg. According to Chatham, "[a]s a result of this generally small trading community, the trading price of the stock reacts swiftly and significantly to any newly disclosed information that changes the balance of supply and demand."[4]

         B. The Tender Offer

         On November 15, 2016, when its stock was trading for approximately $70 per share, Twin River announced a tender offer to purchase up to 250, 000 shares of its common stock for $80 per share in cash (the "Tender Offer").[5] Immediately after the Tender Offer was announced, Twin River's stock was quoted at $80 per share and "remained[ed] available at that price" until early April 2017 "for very small volume transactions."[6]

         On December 16, 2016, Twin River announced that 1, 738, 293 shares were validly tendered and that it would purchase 14.38% of the shares tendered by each participating investor.[7] Chatham alleges that "despite having specifically increased Twin River's credit facility to allow the Company to purchase $50 million worth of shares, only $20 million was used-a paltry sum compared to Twin River's approximately $780 million market capitalization."[8]

         C. The Offer to Purchase

         Twin River made the Tender Offer through an offer to purchase circular dated November 15, 2016 ("Offer to Purchase"). The Offer to Purchase stated that "[t]he purpose of the Offer is to return cash to our Shareholders by providing them the opportunity to tender all or a portion of their Shares and, thereby, receive a return of some or all of their investment if they so elect."[9] The Offer to Purchase also stated that Twin River's directors and executive officers did not "currently intend" to participate in the Tender Offer but that they may sell their shares in the post-Tender Offer market "from time to time":

Our directors, executive officers and affiliates may, subject to applicable law and applicable policies of the Company, sell their Shares from time to time pursuant to the terms of equity compensation awards or in open-market and/or other transactions at prices that may be more or less favorable than the Purchase Price to be paid to our Shareholders pursuant to the Offer.[10]

         The Tender Offer expired on December 15, 2016.[11]

         D. Defendants' Alleged Plan to Sell Their Shares

         Chatham alleges that when defendants made the Tender Offer, they planned to sell their shares, not "from time to time, " but shortly after the Tender Offer closed.[12] According to Chatham, "a representative of Defendants informed certain stockholders of Twin River (other than Chatham) that the Defendants had wanted to participate in the Tender Offer, " but when they learned that it would be problematic for them to do so, they "quickly determined to sell their shares promptly after the Tender Offer closed."[13]

         "Within weeks of the Tender Offer closing, " defendants allegedly shopped "at least 125, 000 shares, half of the total Twin River purchased through the Tender Offer, through at least one broker."[14] According to Chatham, the broker provided "big-boy" letters to prospective purchasers to facilitate the sale of defendants' shares.[15] The Amended Complaint, which was filed on April 10, 2017, does not allege that defendants actually sold any shares since the Tender Offer expired on December 15, 2016. Defendants represented that they still had not done so as of June 9, 2017, when their reply brief was filed.[16]

         Before the Tender Offer closed, Chatham owned 14.98% of Twin River's stock.[17] Chatham alleges it had "no choice" but to tender some of its shares into the Tender Offer because of the 15% cap on its holdings, which it did.[18] As a result, Chatham held a 14.91% position in Twin River after the Tender Offer closed.[19] In the months after the Tender Offer closed, Twin River stock traded between approximately $80 and $82 per share.[20]

         E. Twin River Sends a Letter to Rhode Island Regulators Concerning Chatham

         Twin River is party to a Regulatory Agreement, dated July 1, 2016, with the Rhode Island Department of Business Regulation and the Division of Lotteries of the Rhode Island Department of Revenue (the "Regulators"). The Regulatory Agreement contains a provision obligating Twin River to comply with, and to cause owners of 5% or more of its stock to comply with, certain legal requirements:

[Twin River] shall at all times comply and remain in compliance with and shall cause its Senior Executives, directors and owners of a direct or indirect Financial Interest of 5% or greater in any class of Financial Interests in each Rhode Island Company to comply and remain in compliance with: (i) all applicable requirements under all laws, statutes and rules and regulations; (ii) this Agreement; (iii) the VLT Contract; (iv) the Newport VLT Contract; and (v) all applicable decrees and orders of any Governmental Authority.[21]

         According to defendants, Twin River could face various penalties if it fails to comply with its obligations under the Regulatory Agreement.[22]

         On April 7, 2017, Twin River sent a letter to the Regulators (the "April 7 Letter") bringing to their attention certain "recent events involving Chatham."[23] The April 7 Letter stated that these events called into question whether Chatham was in compliance with its institutional shareholder license, which "requires that institutional investors have (1) no involvement in the Company's business activities and (2) no intention of influencing, affecting or participating in the Company's affairs."[24] The April 7 Letter identified four such events: the frequency of Chatham's contacts with Twin River, the fact that Chatham representatives expressed a desire for "immediate liquidity" for their investment in Twin River in June 2016, the filing of this lawsuit in February 2017, and an investor call that occurred on April 4, 2017.[25]

         The April 7 Letter, a copy of which was sent to Chatham's counsel, also stated that Twin River "necessarily cannot be sure of all potentially relevant information because some of it is not available to us and in some respects Chatham's subjective intent may be relevant."[26] Chatham contends that defendants submitted the April 7 Letter to "retaliate[] against Chatham for seeking to protect [its] rights via this lawsuit."[27]

         II. Procedural Posture

         On February 6, 2017, Chatham filed its original complaint, which it amended on April 10, 2017. The Amended Complaint asserts three claims, each of which Chatham has brought individually. None of the claims is asserted derivatively or on behalf of a putative class.

         On April 25, 2017, defendants moved to dismiss the Amended Complaint under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. Argument on the motion was held on August 8, 2017, and the parties filed supplemental briefs on September 15, 2017.

         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.[28]

         Although this standard is minimal, the Court "will not credit conclusory allegations or draw unreasonable inferences in favor of the Plaintiffs, "[29] nor will it "accept every strained interpretation of the allegations proposed by the Plaintiff."[30]

         A.Count I States a Claim ...

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