City of Miami General Employees' and Sanitation Employees' Retirement Trust v. C&J Energy Services, Inc.

          Submitted: October 13, 2017

          Stuart M. Grant and Mary S. Thomas, GRANT & EISENHOFER P.A., Wilmington, Delaware; Mark Lebovitch, Jeroen van Kwawegen, and Christopher J. Orrico, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York, Attorneys for Plaintiff.

          Stephen C. Norman, Michael A. Pittenger, and Jaclyn C. Levy, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Michael C. Holmes, Craig E. Zieminski, Olivia D. Howe, and Meriwether Evans, VINSON & ELKINS LLP, Dallas, Texas, Attorneys for Defendants C&J Energy Services, Inc., Jerry M. Comstock, Jr., as Independent Executor of the Estate of Joshua E. Comstock, Randall C. McMullen, Darren M. Friedman, Adrianna Ma, Michael Roemer, C. James Stewart, III, H.H. "Tripp" Wommack, III, and Theodore "Ted" Moore.

          William M. Lafferty, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Defendants Nabors Industries Ltd. and Nabors Red Lion Limited.

          OPINION

          BOUCHARD, C.

          In this case, a stockholder of C&J Energy Services, Inc. ("C&J Inc.") seeks an award of $5 million in attorneys' fees for plaintiff's alleged role in reducing the amount of cash that C&J Inc. needed to pay Nabors Industries Ltd. ("Nabors") in connection with a transaction that closed in March 2015. The beneficiary of the price reduction was C&J Inc. and, indirectly, all of its stockholders.

         Defendants vigorously dispute that plaintiff's complaint had any merit when it was filed or that its lawsuit caused the price reduction in any way. According to defendants, the sole reason the C&J Inc. board negotiated for the price reduction was to secure stockholder approval of the transaction, which was threatened because of a dramatic decline in oil and natural gas prices that impacted the economic merits of the transaction after it was originally negotiated.

         Plaintiff's application also arises in an odd posture. It was filed after C&J Inc. went through a bankruptcy proceeding discharging it from any potential liability for a fee award. As a result, plaintiff asks the court to require that the estate of Joshua Comstock pay the full amount of any fee award. Before his untimely death, Comstock was C&J Inc.'s CEO and Chairman of the Board, who owned approximately 11% of C&J Inc.'s shares before the transaction and who was plaintiff's primary target in this litigation. Thus, plaintiff's application presents a novel question: whether a plaintiff may target a particular stockholder or subset of stockholders to pay a fee award when the alleged benefit redounded to the benefit of all stockholders.

         For the reasons discussed below, I conclude that plaintiff's fee application must be denied for two independent reasons: (1) because defendants successfully rebutted the presumption that plaintiff's litigation efforts caused the price reduction, and (2) because plaintiff's demand that Comstock's estate (or any of C&J Inc.'s other directors) pay a fee award is inconsistent with the rationale of the corporate benefit doctrine and would be inequitable.

         I. BACKGROUND

         The factual background and procedural history of this litigation are discussed in detail in earlier opinions of the Delaware Supreme Court and this court.^[1] The court assumes the reader's familiarity with those opinions and recites below only those facts directly relevant to the pending motion.

         On June 25, 2014, C&J Inc. and Nabors entered into a merger agreement to combine C&J Inc. with certain business segments of Nabors. The transaction was structured as a merger between C&J Inc. and a wholly-owned subsidiary of Nabors Red Lion Limited, which was wholly-owned by Nabors. C&J Inc. was the surviving entity of the merger. Nabors Red Lion Limited was renamed C&J Energy Services, Ltd. ("C&J Ltd.") after the merger.^[2] Under the original terms of the proposed transaction, Nabors was to receive approximately $938 million in cash from C&J Inc. and approximately 53% of the shares of C&J Ltd., and the public stockholders of C&J Inc. were to receive approximately 47% of the shares of C&J Ltd. The relationship between the relevant entities after the merger is depicted below in simplified form:

         (Image Omitted)

         On July 30, 2014, plaintiff filed its original complaint, asserting that C&J Inc.'s directors breached their fiduciary duties in negotiating and approving the proposed transaction with Nabors. The named defendants were C&J Inc., the seven members of its board, its Executive Vice President and General Counsel, Nabors, and Nabors Red Lion Limited, which became C&J Ltd. after the merger.^[3]

         On November 25, 2014, the court issued a preliminary injunction enjoining the proposed transaction from closing until after C&J Inc. solicited alternative proposals to purchase the company during a thirty-day period. A special committee of the C&J Inc. board was formed to undertake the solicitation process. During that process, on December 11, 2014, Cerberus Capital Management made a proposal to combine C&J Inc. with Keane Energy, one of Cerberus' portfolio companies.

         On December 18, 2014, during a special meeting of the C&J Inc. board, certain directors asked Comstock to provide an update on "any attempts to negotiate a reduction in the purchase price [of the Nabors transaction] in light of changing market conditions."^[4] The board minutes state that "Mr. Comstock explained that he had initiated such negotiations with Nabors and anticipated additional discussions prior to an agreement on any reduction in purchase price."^[5] The next day, on December 19, 2014, the Delaware Supreme Court reversed the Court of Chancery's decision and lifted the preliminary injunction, reinstating the no-shop provision in the merger agreement.

         On February 6, 2015, C&J Inc. and Nabors reached an agreement to reduce the cash portion of the consideration C&J Inc. would pay to Nabors by $250 million ("Price Reduction"), from approximately $938 million to $688 million. The proxy statement for the proposed transaction explained the circumstances surrounding the Price Reduction, as follows:

Following significant dislocation in oil and natural gas prices that began in late 2014 and continued into 2015, and as a result of concerns that C&J shareholders would not support the Transactions on the terms set forth in the Original Merger Agreement and Original Separation Agreement in light of such price changes, in late 2014, Messrs. Petrello and Comstock entered into discussions with respect to a restructuring of the Transaction that would reduce the amount of cash paid to Nabors at closing. Discussions continued through February 2015.^[6]

         After receiving the approval of over 97% of the C&J Inc. stockholders who voted, the transaction closed in March 2015.

         Over the next seven months after the transaction closed, plaintiff made little effort to advance its claims. The primary activity during this period concerned defendants' efforts to collect damages against a $650, 000 bond plaintiff had posted as a condition to entry of the preliminary injunction.

         On October 29, 2015, plaintiff amended its complaint. On August 24, 2016, the court granted defendants' motions (i) to dismiss the amended complaint and (ii) to recover approximately $542, 000 in damages against the injunction bond.

         In the meantime, on July 20, 2016, C&J Inc., C&J Ltd., and certain other affiliated entities (the "Debtors") filed for bankruptcy protection in the United States Bankruptcy Court for the Southern District of Texas. On September 25, 2016, the bankruptcy court entered an order setting November 8, 2016 as the bar date for submitting proofs of claim for any "claim against the Debtors that arose before the Petition Date, " i.e., before July 20, 2016.^[7] The order further provides that any person "who is required, but fails, to file a Proof of Claim in accordance with the Bar Date order on or before the applicable Bar Date shall be forever barred, estopped, and enjoined from asserting such claim against the Debtors" and that "the Debtors and their property shall be forever discharged from any and all indebtedness or liability with respect to or arising from such claim."^[8]

         Plaintiff's fee claim accrued in February 2015, when the Price Reduction was secured.^[9] Accordingly, plaintiff was required to file a proof of claim by November 8, 2016 if it wished to obtain a recovery for its fee claim from C&J Inc. or C&J Ltd. It is undisputed that plaintiff never filed such a proof of claim.

         On December 9, 2016, plaintiff informed the bankruptcy court that it was not objecting to the confirmation of a proposed plan of reorganization but was reserving its rights "with respect to pursuing any claims against defendants in [this action] other than the Debtors, the Reorganized Debtors, or their Estates."^[10] On December 16, 2016, the bankruptcy court approved the proposed plan of reorganization, discharging the Debtors of any responsibility for plaintiff's fee application.^[11]

         On March 23, 2017, the Delaware Supreme Court affirmed this court's dismissal of plaintiff's amended complaint and its grant of defendants' motion to recover damages against the injunction bond. On April 7, 2017, plaintiff filed the present motion for an award of attorneys' fees and expenses.

         On October 13, 2017, the court heard argument on plaintiff's application for a fee award and on defendants' request for release of the balance of the injunction bond.^[12] At the conclusion of the hearing, the court ruled in defendants' favor concerning the injunction bond, and took the fee application under advisement.

         II. ANALYSIS

         Plaintiff contends that it is entitled to a $5 million fee award for playing a role in causing the Price Reduction. According to plaintiff, its "original complaint created the pressure that led to the injunction, the solicitation process and [the] Cerberus Bid that played a role in the Price Reduction and the improvement of the Merger terms."^[13] In plaintiff's view, the $250 million Price Reduction is "akin to a common fund, ...