Submitted: September 18, 2019
Michael Sirkin, Benjamin Z. Grossberg, R. Garret Rice, ROSS
ARONSTAM & MORITZ LLP, Wilmington, Delaware; Jonathan D.
Schiller, Christopher D. Belelieu, Karen A. Chesley, Gary R.
Studen, BOIES SCHILLER FLEXNER LLP, New York, New York;
Counsel for Plaintiff.
Michael A. Pittenger, Timothy R. Dudderar, Mathew A. Golden,
David M. Hahn, POTTER ANDERSON & CORROON LLP, Wilmington,
Delaware; Kenneth B. Black, Lauren A. Shurman, Wesley F.
Harward, STOEL RIVES LLP, Salt Lake City, Utah; Counsel for
Red Leaf Resources, Inc. ("Red Leaf" or the
"Company") is a Delaware corporation seeking to
develop technology to extract oil from shale. Under the
certificate of designations that governs its Series A
Preferred Stock, the consent of holders of a majority of the
Series A shares is necessary for authorizing or effecting (i)
any transaction for the benefit of an affiliate of a director
of the Company, (ii) any material change in the Company's
business plan, and (iii) any purchase or redemption of any
equity interest in the Company. At all relevant times,
plaintiff PWP Xerion Holdings III LLC ("Xerion")
held a majority of the Series A shares, meaning that
Xerion's consent was required before the Company could
authorize or effect any of the foregoing actions.
2012, the Company entered into a set of joint venture
agreements with TOTAL E&P USA Oil Shale, LLC ("TOTAL
Sub"), an indirect, wholly owned subsidiary of TOTAL
S.A. ("TOTAL Parent"). TOTAL Parent is one of a
handful of supermajor oil companies in the world. For a
company seeking to develop oil shale technology, an alliance
with a supermajor like TOTAL Parent was obviously a
significant development. Not surprisingly, the Company told
its investors that the joint venture represented a material
change in its business plan. As part of the parties' new
relationship, TOTAL Sub purchased an equity interest in the
Company and received the right to designate a member of the
Company's board of directors (the "Board").
2016, TOTAL Sub notified the Company that it was exiting from
the joint venture, before the planned completion date and
without fulfilling all of its contractual obligations. To
settle the ensuing dispute, TOTAL Sub agreed to pay the
Company $85 million and return its equity interest. When the
Board authorized the settlement, an officer of TOTAL Sub
served as its director designee on the Board.
Company initially asked Xerion to consent to the settlement.
After Xerion declined, the Company and TOTAL Sub went forward
without Xerion's consent. In an effort to sidestep the
consent requirement, the Company obtained a non-reasoned,
conclusory opinion from its outside counsel stating that
TOTAL Sub and the officer of TOTAL Sub who served on the
Board were not affiliates. The Company also tweaked the
settlement so that TOTAL Sub would remain the owner of its
equity interests in the Company unless and until Xerion
consented to the settlement and released any claims it might
have under a stockholders agreement and an investors'
unwinding of the joint venture represented a material change
in the Company's business plan. Before the settlement,
TOTAL Sub was supporting the Company with financial,
operational, and technological assistance. Together, the
Company and TOTAL were pursuing a pilot project in Seep
Ridge, Utah, designed to demonstrate the viability of
extracting oil by heating shale in a single-use, earthenware
capsule. After the settlement, the Company no longer had the
support of a supermajor oil company. Moreover, the Company
decided to pivot away from its pilot project in Utah and
attempt instead to commercialize a multi-use, steel capsule
that could extract oil from a different form of shale found
in the middle eastern country of Jordan.
filed this lawsuit for breach of its consent rights. This
decision grants Xerion's motion for summary judgment on
the question of breach. For the reasons set forth herein, the
Company breached Xerion's consent rights by failing to
obtain Xerion's consent before (i) authorizing and later
effecting a transaction for the benefit of an affiliate of a
director and (ii) authorizing and later effecting a material
change in the Company's business plan. The Company did
not breach its obligation to obtain Xerion's consent
before authorizing a redemption.
facts are drawn from the materials that the parties submitted
in connection with the motion for summary
judgment. When considering Xerion's motion, any
conflicts in the evidence are resolved in the Company's
favor, and the Company receives the benefit of all reasonable
inferences that can be drawn from the evidence. At this stage
of the case, the court cannot weigh the evidence, decide
among competing inferences, or make factual findings.
The Series A Issuance
Company is a privately held Delaware corporation formed in
2006. For over a decade, the Company has sought to develop
and commercialize technology for extracting oil from shale.
2010, the Company raised capital by issuing shares of Series
A Preferred Stock. Xerion is a hedge fund that purchased and
continues to own a majority of the issuance.
the negotiations over the terms of the Series A Preferred
Stock, Xerion insisted on a "consent rights
package" for "fundamental business events." OX
2 at '748. The final certificate of designations stated:
For so long as shares of the Series A Preferred representing
in aggregate more than 4.5% of the outstanding equity
interests in the Corporation on a fully-diluted and
as-if-converted basis are outstanding in addition to any
other vote or consent required herein by law, the vote or
written consent of the holders of more than 50% of the
outstanding shares of Series A Preferred, voting together as
a single class, shall be necessary for authorizing, effecting
or validating the following actions (whether by merger,
amendment, consolidation, reclassification, reorganization,
recapitalization or otherwise) by the Corporation . . . .
§ 3(b)(i). The certificate of designations then listed
thirteen different categories of actions. See id.
Three are relevant to this case:
• "Any purchase or redemption of, or payment of any
dividend or other distribution on, any capital stock or any
other equity interest in the [Company] . . . ."
Id. § 3(b)(i)(F) (the "Redemption
• "Any material alteration to, or change of, the
business or business plan of the [Company] or any of its
subsidiaries." Id. § 3(b)(i)(I) (the
"Business Plan Clause").
• "Any transaction with or for the benefit of any
director or officer (or their respective affiliates)."
Id. § 3(b)(i)(M) (the "Interested Party
Xerion purchased and has continued to hold a majority of the
Series A shares, Xerion's consent was necessary for
authorizing or effecting any transaction that fell within the
scope of the Redemption Clause, the Business Plan Clause, or
the Interested Party Clause.
The Joint Venture
2012, the Company entered into a set of joint venture
agreements with TOTAL Sub, a Delaware limited liability
company. The sole member of TOTAL Sub was TOTAL
E&P USA, Inc. ("TOTAL USA"), which in turn was
a wholly owned subsidiary of TOTAL Parent. To reiterate,
TOTAL Parent is one of the few supermajor oil companies in
the terms of the Joint Venture Agreements, TOTAL Sub made an
initial investment of $25 million in the Company and
committed to provide personnel and advisory support for the
Company's laboratory and scientific work. In return,
TOTAL received (i) 16, 667 shares of the Company's common
stock, reflecting a 3.5% ownership stake in the Company, (ii)
a warrant exercisable for additional shares of the
Company's common stock, and (iii) a worldwide license to
use the Company's EcoShale Technology. TOTAL Sub also
received the right to designate a member of the Board.
Joint Venture Agreements provided that TOTAL Sub and the
Company would each own a 50% interest in certain oil shale
assets and projects located in Utah. The Joint Venture
Agreements contemplated that the parties would develop the
Utah projects in a coordinated manner and identify and
acquire additional oil shale assets for joint exploration and
entering into the Joint Venture Agreements, the Company
"planned to develop the EcoShale technology and move
directly into commercial production." AB 11. Under the
Joint Venture Agreements, the parties agreed first to pursue
an "Early Production System Phase" (the "EPS
Phase") during which the parties would develop and test
the EcoShale technology at a site in Seep Ridge, Utah. AX 21
at 47. The Seep Ridge project sought to demonstrate the
Company's ability to extract oil from shale by heating
the rock inside a single-use, earthenware capsule. See
generally AX 22, AX 23, AX 25, AX 26.
Sub committed to invest $160 million towards developing the
EcoShale Technology, representing 80% of the project budget.
OX 9 at '367. If the technology proved commercially
viable, then the parties would move on to a production phase.
See OX 1 at '462; AX 10 at '739; AX 13 at
Company asked Xerion for its consent before entering into the
Joint Venture Agreements. Xerion provided it.
The Company's Pursuit Of The Joint
the next four years, the Company's business plan
consisted of pursuing the joint venture with TOTAL Sub. In
2013, a Board member suggested relocating the EPS Phase from
Utah to Jordan, arguing that it would save the Company money.
OX 10 at '056. The Company's CEO opposed the idea,
stressing that the Company needed to remain focused on
"execut[ing] our business plan as defined by the Board
and our JV Partner." OX 10 at '057.
2014, after the price of oil dropped significantly, the
Company and TOTAL Sub agreed to reduce the size of the
capsule and to extend the anticipated completion date of the
EPS Phase by eighteen months. In May 2015, the Company and
TOTAL Sub agreed to suspend all work for a period of two
years to give the Company an opportunity to re-engineer a
more cost-effective capsule. See AB 13; AX 23 at
'179, '185; AX 28 at '730; AX 29 § 2;
DeRidder Dep. 123-25. The re-engineered capsule would still
be earthenware and single-use, but it would have a partially
re-designed heating system. AX 23 at '185.
The Agreement In Principle
2016, TOTAL Sub informed the Company that it wanted to exit
the joint venture, citing concerns over the Company's
technology, declining oil prices, and environmental issues.
See AX 33 at '533 to '535; DeRidder Dep. at
138, 143, 147-48, 150- 52, 154. The Company estimated that
TOTAL Sub still owed $150 million in commitments to the joint
venture through 2020. OX 11 at '712.
Company decided to negotiate a settlement with TOTAL Sub.
See OX 13 at '159. Around the time that
negotiations began, TOTAL Sub replaced its Board designee
with Pierre Germain, an officer of TOTAL Sub who was employed
as Vice President for Business Development at TOTAL USA, the
immediate parent of TOTAL Sub. Recognizing the conflicts of
interest that would arise from Germain's affiliation with
TOTAL Sub, the Company asked Germain to recuse himself from
any board discussions regarding the settlement negotiations.
January 2017, the parties had reached an agreement in
principle that contemplated the Company releasing TOTAL Sub
from all of its obligations under the Joint Venture
Agreements in return for TOTAL Sub (i) paying the Company $85
million, (ii) forgoing all right, title, and interest in any
assets related to the joint venture, and (iii) returning its
16, 667 shares of common stock and the warrant to the Company
(collectively the "Equity Interests"). See
AX 39 at '695 to '696. During the settlement
negotiations, both the Company's General Counsel and its
outside counsel concluded that Germain's affiliations
with TOTAL Sub meant that Xerion's consent would be
required under the Interested Party Clause. See OX
16. The Company's General Counsel prepared a "voting
matrix" for the Board, which noted that Xerion would
need to approve the settlement. OX 17 at '094. When the
Board met to approve the agreement in principle, the
Company's General Counsel advised the Board that the
Company "will need to obtain approval from [Xerion] . .
. because Pierre [Germain] is serving as Director so the
transaction may be considered to be a transaction for the
benefit of an affiliate of a Director." AX 39 at
Board approved the agreement in principle subject to
"receiving an affirmative vote in favor of the . . .
settlement from [Xerion]." Id. at '696.
Xerion's designee to the Board voted in favor of the
resolution. Id. at '697.
Xerion Objects To The Post-TOTAL Business
during January 2017, the Board considered what the
Company's business plan should be after the termination
of the joint venture. Without TOTAL Sub, the Company lacked
the funds to finish the EPS Phase. The Company's CEO
believed that pursuing the EPS Phase was the Company's
"only approved business plan." OX 34; see
OX 23 at '554. Put differently, the Company had no
"approved plan forward other than to advance the
EPS." OX 35.
January 28, 2017, the Company's CEO advised the Board
that "hav[ing] completed a successful negotiation with
TOTAL, . . . the [Company] management team is turning our
full attention back to the task of executing our business
plan to advance the Ecoshale technology." OX 23 at
'555. Xerion's director designee objected, asserting
that this course of action was not "funded, wise, or
authorized by the board or the shareholders." OX 23 at
'555. As he saw it, TOTAL Sub's exit meant there was
"no funding or approved business plan." OX 23 at
Xerion Withholds Consent.
January 31, 2017, the Company formally asked Xerion for
consent to the agreement in principle, explaining that its
consent was required "[b]ecause a TOTAL representative
is currently serving ...