Riverstone is a private equity fund that owned and controlled Pattern Energy Group Inc. (the Company) and Pattern Energy Group LP (the LP). The LP had a substantial stake in the Company, and because the LP was mostly owned by Riverstone, Riverstone was the Company’s majority shareholder.
In 2018, the Company’s board began exploring a potential sale. The board formed a disinterested and independent special committee, which followed many standard procedures, including identifying conflicts, obtaining advice from an unconflicted banker and counsel, and conducting a lengthy process that attracted tens of suitors that the special committee pressed for value. Ultimately, however, the special committee selected a lower bid made by Canada Pension Plan Investment Board (the Buyer), despite a competing bid from Brookfield that offered shareholders greater value.
The plaintiff alleged that the process the committee followed suffered from numerous deficiencies, including allowing a conflicted director and officer to engage with potential bidders. The plaintiff alleged that the Company’s board of directors had breached their duty of loyalty, and that the Company’s officers, Riverstone, and the LP formed a “controlling group” that owed and breached their fiduciary duties to shareholders. The court found that the plaintiff had adequately alleged bad faith by the defendants and rejected the defendants’ arguments that they were protected by the company’s exculpatory charter provision or that any deficiencies in the sale process were “cleansed” by an informed stockholder vote under Corwin. The court noted in rejecting these defenses that, among other things, the buyer’s inferior bid allegedly was preferred and shaped with the directors’ and officers’ involvement by a private equity investor in the seller.
The court first considered what standard of review would apply to the transaction. The court found that because shareholders were cashed out, the transaction was subject to enhanced scrutiny under Revlon. The plaintiff argued that the standard of review should be even higher – the court should consider the transaction under the entire fairness standard. The court declined to apply the “entire fairness” standard of review at the motion to dismiss stage, but did not rule out the possibility that the transaction could be examined later under the entire fairness standard in the event it were determined based on a fuller record that a control group stood on both sides of the transaction.
On the question of whether the directors breached their duty of loyalty, the court found that the special committee had taken “reasonable actions” to fulfil their duties, and was disinterested and independent. The special committee also hired independent advisors, and engaged with several bidders, providing many of them with the opportunity to conduct due diligence. Furthermore, the special committee refused to grant exclusivity to any particular buyer and also attempted to keep Brookfield at the table.
The court found, however, that all of these reasonable steps were colored by the directors placing the interests of Riverstone, the LP, and the officers above maximization of shareholder value. The court found that the plaintiff had sufficiently alleged that the defendants may have acted in bad faith. That bad faith was evidenced by certain interested directors involvement in the special committee’s meetings and discussions with potential buyers; the preference for the Buyer throughout the process, despite Brookfield’s superior offers; and misuse of Riverstone’s consent right over changes of control. The court held that these issues outweighed whatever reasonable steps that the directors took. Thus, the court found it reasonably conceivable that the Board failed to comply with its duty to maximize shareholder value.
Although the court noted that Revlon claims “do not admit of easy categorization as duties of care or loyalty[,]” the court held that the plaintiff’s allegations made it reasonably conceivable that the director defendants acted in bad faith by (1) placing others’ interests above their duty to maximize stockholder value and (2) abdicating their duty of disclosure. As a result, the court held that the exculpation provision in the Company’s charter did not support dismissal of the claims against the directors at the pleading stage. The court also held that the plaintiffs pleaded claims against certain officers (who are not protected by an exculpatory charter provision) based on their alleged conflicts.
The court further concluded that the defendants could not invoke Corwin’s protections because, among other things, a majority of the vote was cast by a stockholder that was contractually obligated to vote its preferred shares in accordance with the board’s recommendation and otherwise was interested in the transactions because it stood to receive non-ratable benefits.
Authored by Ryan M. Philp, David R. Michaeli, and Shannon Zhang.