Nonparties Isramco and Naphtha completed an all-cash going-private transaction. Naphtha's main businesses focused on the exploration and production of oil and natural gas. Until the consummation of the merger, Defendant Tsuffh was Isramco's President and Chairman of its Board. Tsuff indirectly controlled all entities on both sides of the transaction. Defendants Max Pridgeon, Asaf Yarkoni, and Nir Hasson all served as members of the Board until the closing of the Merger.
Defendants Pridgeon, Yarkoni, and Hasson were selected to serve as members of the Special Committee. The Special Committee noted the potential impact of an arbitration concerning royalties owed to Isramco by a Tsuff-controlled entity related to production in an offshore Israeli oil field, the Tamar Field. Since Isramco's interest in revenues from the Tamar Field was a primary source of revenue, the Tamar Arbitration was a key factor impacting valuation. After several days of in-person negotiations, the Special Committee eventually accepted Naphtha's offer of US$121.40 per share.
Ligos, a minority stockholder squeezed out in the merger, filed a complaint on June 4, 2020, alleging that Tsuff and the Special Committee defendants breached their fiduciary duties and were unjustly enriched. In Ligos I, Tsuff moved to dismiss, arguing that the business judgment rule applied pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). The court denied the motion, finding that there was a plausible inference that the stockholder vote was not fully informed because the proxy failed to disclose that the Board approved Tsuff's participation in the Tamar Arbitration and his participation itself, both of which would have been material to a stockholder’s evaluation of the proposed merger.
Turning to the Special Committee defendants' motion to dismiss, the court held that In re Cornerstone provided the appropriate legal standard to determine whether Ligos pleaded a viable, non-exculpated claim against the Special Committee defendants for breach of the duty of loyalty. The court focused its analysis on (1) the Special Committee defendants' interest in the transaction and independence from Tsuff; and (2) the Special Committee defendants' good faith.
First, the court noted that Ligos did not assert facts indicating that the Special Committee defendants were interested in the merger. Rather, Ligos argued that the Special Committee defendants lacked independence from Tsuff. The court rejected the argument that Tsuff’s position as a controller militates against a finding of independence. Analyzing the allegations as to each director, the court found that the complaint’s conclusory allegations regarding board service, employment and approval of Tsuff proposed transactions were conclusory and insufficient to allege any beneficial relationship or material benefit that would cause a breach of the duty of loyalty.
Second, the court concluded that the Complaint’s allegations were not sufficiently egregious to find it reasonably conceivable that the Special Committee defendants were acting against Isramco's interests, including allegations regarding: (1) the Board's decision to allow for Tsuff's participation in the Tamar Arbitration; (2) the Special Committee's disclosure of a price floor; (3) the "rapid" acceptance of Naphtha's final offer; and (4) the failure to investigate Naphtha’s risks to Isramco business. The court also rejected the claim that the omission of certain information from the proxy, including with respect to the Tamar arbitration, supported a finding of scienter.
Since there were no surviving non-exculpated claims, the court held that the Complaint failed to state a claim, and granted the Special Committee defendants' motion to dismiss.
Authored by Ryan Philp and Jocelyn Hassel.
