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Chatham Asset Management, LLC v. Papanier

Court of Chancery of Delaware

January 13, 2020




         A. Nominal defendant Twin River Worldwide Holdings, Inc. ("Twin River" or the "Company"), a Delaware corporation, is a holding company in the gaming industry with casinos and other operations in Rhode Island, Mississippi, and Colorado.[1] Twin River has its principal place of business in Lincoln, Rhode Island. The Rhode Island Department of Business Regulation ("DBR") regulates the Company and imposes limitations on the ownership of Twin River stock, which are set forth in regulatory agreements with the Company's stockholders.[2]

         B. On November 15, 2016, Twin River announced a tender offer to purchase up to 250, 000 shares of its common stock (the "Tender Offer"). Twin River sent its stockholders a 23-page Offer to Purchase ("OTP") describing the background and terms and conditions of the Tender Offer. The Tender Offer closed on December 16, 2016.

         C. Plaintiffs Chatham Fund, LP and Chatham Asset High Yield Master Fund, Ltd. hold common stock of Twin River. The investment advisor of these entities is plaintiff Chatham Asset Management, LLC. This order refers to these three entities together as "Chatham." Before the Tender Offer, Chatham owned just under 15% of Twin River's stock, which was its regulatory limit.[3]

         D. At the time of the Tender Offer, the directors of Twin River were George Papanier, John E. Taylor, Soo Kim, and Stephen H. Capp (together, the "Director Defendants"). Kim also is the Managing Partner and Chief Investment Officer of Standard General, L.P. ("Standard General"), a hedge fund that has voting and investment control over Standard RI Ltd., Twin River's largest stockholder.[4]

         E. The Complaint names as the "Officer Defendants" two individuals: Craig L. Eaton, Senior Vice President, General Counsel, Secretary, and Compliance Officer of Twin River; and Glenn Carlin, Executive Vice President of Corporate Development, Chief Financial Officer, and Treasurer of Twin River.

         F. The remaining two individual defendants are Phil Juliano, Senior Vice President and Chief Marketing Officer of Twin River; and Jay Minas, Vice President of Finance of Twin River.

         G. On January 9, 2019, Chatham filed the Second Amended Complaint (the "Complaint"), asserting fourteen claims. On February 20, 2019, defendants moved to dismiss nine of those claims under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief.

         H. On September 4, 2019, the court heard oral argument on the partial motion to dismiss. By that time, the parties had stipulated to or did not oppose the dismissal of four of the nine claims (Counts VI, VIII, X, and XI).[5] At the conclusion of oral argument, the court denied the motion to dismiss as to Count III, granted the motion as to Count VII, and requested supplemental briefing, which the parties completed on October 4, 2019.[6]

         I. This order addresses the remaining three claims, which are for breach of fiduciary duty: Counts IV, V, and IX. Counts IV and V are disclosure claims. Count IX challenges the purpose and structure of the Tender Offer.

         NOW THEREFORE, the court having considered the parties' submissions, IT IS HEREBY ORDERED this 13th day of January, 2020, as follows:

         1. 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 to proof."[7]

         2. Under Delaware law, an omitted fact is material if "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."[8] Stated differently, to be material, an omitted fact, if disclosed, "would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."[9]

         3. Count IV. This is a direct claim against the Director and Officer Defendants for breaching their fiduciary duties by failing to disclose in the OTP the "preferential treatment given to one stockholder, Standard General," at the time of the Tender Offer.[10] According to Chatham, the gravamen of this claim is that defendants "breached their disclosure duties by failing to inform stockholders that they had secured approval for Standard General to exceed regulatory limits as a result of its non-participation in the Tender Offer."[11] The "approval" in question refers to a November 9, 2016 letter from the DBR confirming that, by not participating in the Tender Offer, Standard General "will not be in violation" of a previous DBR approval allowing it to acquire up to 19.9% of Twin River's stock, which had expired over two years before the Tender Offer closed.[12]

         4. Defendants' motion to dismiss Count IV is GRANTED because Chatham has failed to show that the OTP omitted any facts concerning Standard General that would have been material to a reasonable stockholder in deciding whether to participate in the Tender Offer.

         5. The OTP disclosed that (i) Twin River had 9, 831, 069 outstanding shares of common stock as of November 15, 2016, (ii) Standard General owned 1, 560, 831 shares or approximately 15.9% of Twin River's outstanding common shares as of that date; and (iii) Standard General did not intend to participate in the Tender Offer.[13] From these disclosures, Twin River's stockholders could determine the potential impact Standard General would have on the Tender Offer, i.e., the level of proration a stockholder might experience in deciding to tender given that Standard General would not be tendering.[14] Insofar as Standard General is concerned, Chatham has failed to demonstrate that a reasonable stockholder would need any additional information to decide whether to participate in the Tender Offer.

         6. Chatham argues that "the DBR's approval was material to Chatham" which allegedly "believed . . . that it had no choice but to participate in the Tender Offer because of regulatory requirements."[15] It defies reason that Chatham-a sophisticated hedge fund-was unaware that it could have tried to seek approval from the DBR in order to avoid having to tender irrespective of whether Standard General had obtained such an approval. Indeed, Chatham acknowledges it could have sought such approval "directly" from the DBR without Twin River's assistance.[16] In any event, Chatham's interest in obtaining an approval from the DBR to avoid tendering is idiosyncratic to Chatham and thus irrelevant to whether Count IV states a claim for relief because "[t]he adequacy of disclosure is determined by focusing upon a reasonable investor, and not by considering the attributes of the particular investor at issue."[17]

         7. Count V. This is a direct claim against the Director and Officer Defendants for breaching their fiduciary duties by failing to disclose in the OTP approximately $3.8 million in "Make-Whole Payments" that were paid to certain directors and officers of Twin River in November 2016.[18] The background concerning these payments follows.

         8. In November 2010, when Twin River emerged from bankruptcy, the claims of its second lien debtholders were discharged in exchange for Collateral Value Rights ("CVRs") entitling those holders to receive certain payments upon the occurrence of a "CVR Payment Event."[19] In or around January 2013, Twin River entered into "Make-Whole Agreements" with certain insiders, "purportedly ... to align [the] economic incentives" of these individuals and the CVR holders.[20] Under the Make-Whole Agreements, Twin River would pay a cash award upon the occurrence of a CVR Payment Event.[21]

         9. In December 2015, Twin River announced a CVR repurchase, which prompted the filing of a derivative action in the Court of Chancery challenging that transaction.[22] The parties to that action negotiated a settlement whereby Twin River increased the price of the offer to purchase the CVRs from $400 to $450.[23] In June 2016, the CVR repurchase closed.[24]

         10. In November 2016, the Director Defendants authorized a total of $3.8 million in Make-Whole Payments to the Director Defendants (except Kim) and the Officer Defendants.[25] Twin River references these payments in its 2016 financial statements for the year ended December 31, 2016, which the Company disclosed on March 30, 2017-after the Tender Offer closed.[26]

         11. Defendants contend that Twin River was contractually obligated to pay the $3.8 million under the Make-Whole Agreements because the CVR repurchase triggered a CVR Payment Event.[27] Chatham disagrees. It contends that the CVR repurchase did not trigger a CVR Payment Event.[28] Chatham further contends that the failure to disclose in the OTP that defendants "paid themselves $3.8 million of Company funds to which they were not entitled . . . harmed Chatham and Twin River's stockholders generally by distorting their ability to value their shares and make informed decisions as to whether they should sell their shares in the Tender Offer."[29]

         12. Defendants' motion to dismiss Count V is GRANTED for two reasons. First, insofar as Chatham contends that the defendants were obligated to disclose that "they were not entitled" to the Make-Whole Payments, such a disclosure would violate the rule against "self-flagellation."[30] Second, the OTP's omission of any disclosure concerning the $3.8 million in Make-Whole Payments-even unadorned by a characterization of wrongdoing-would not have been financially material to a reasonable stockholder in deciding whether to participate in the Tender Offer.

         13. The OTP incorporates by reference a number of financial documents posted on Twin River's investor website, including (i) its financial statements for the year ended December 31, 2015, and the nine months ended September 30, 2016; and (ii) an October 20, 2016 lender presentation, which included an estimate of its results of operation for all of 2016.[31] The OTP also states that, on or before December 12, 2016, the Company would publish ...

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