On February 28, 2022, the Delaware Court of Chancery denied in part a motion to dismiss an investor class action arising out of a January 2021 merger between Left Coast Ventures, Inc. (Left Coast), a cultivator and distributor of cannabis products, and TPCO Holding Corp. (TPCO), a SPAC entity of Subversive Capital, which would combine Left Coast and another cannabis company under the TPCO umbrella.
The plaintiffs, former Left Coast stockholders and optionholders, challenged the fairness of the merger in a March 2021 lawsuit, alleging that defendants Fireman Capital Partners LLC (Fireman Capital), Fireman Capital Partners III, L.P. (Fireman Capital III, and together with Fireman Capital, Fireman), Bassler Co Corp. (Bassler), Crocket Resources S.A. (Crocket), along with individual director defendants (the Directors), diverted material consideration from Left Coast stockholders through improper side transactions. In April 2021, Fireman and the Directors filed motions to dismiss, arguing that plaintiffs lacked standing because all claims were derivative, and in the alternative, that the plaintiffs failed to properly plead their claims.
The court first analyzed whether plaintiffs’ claims were direct or derivative, explaining that a derivative claim is one in which a corporation’s stockholders would recover pro rata in proportion with their ownership of the corporation’s stock (i.e., that the injury was to the corporation), as opposed to a direct claim, in which the duty breached was owed to the individual stockholder. The court also noted that a stockholder does not lose standing to challenge a merger after the merger is complete, if the challenge is based on the fairness of the merger itself. As a rule, for a claim involving a side transaction to be a direct claim: (1) the side transaction must have diverted merger consideration from stockholders, rather than from the acquirer; (2) the diversion must have been improper (i.e., as a result of defendants’ misconduct); and (3) the diversion must have materially affected the merger’s process or price, calling the merger’s fairness or validity into question.
The court first held that plaintiffs’ breach of fiduciary claim was a direct claim, finding the alleged side transactions engaged in by Fireman and the Directors diverted assets the stockholder plaintiffs otherwise would have received, and that those assets were material. The court credited plaintiffs’ allegations that Fireman Capital threatened to block the merger if the Directors did not approve favorable amendments to the deal, which allegedly diverted approximately $40 million of the approximately $120 to $130 million total merger consideration, which the court noted was material. The court likewise concluded that Fireman Capital was a controller, and thus had fiduciary duties to the plaintiffs, because it held debt and a Class B proxy that would have allowed it to exercise 83% of the Company’s outstanding voting power, even though it was technically a creditor, not a traditional stockholder. The court held that Fireman Capital’s procurement of the favorable amendments triggered entire fairness review, and directed the parties to confer on supplemental briefing to address whether the entire fairness review should apply to the whole merger or just to the amendments.
The court likewise concluded that plaintiffs’ tortious interference claim was also a direct claim, reasoning that defendants’ misconduct allegedly rendered options held by optionholders worthless, and the benefit of any recovery would run to individual optionholders rather than the company. The court dismissed this claim, however, holding that the plaintiffs had not alleged the reasonable probability of a business opportunity, as the pleading lacked detailed facts to quantify the expectancy. The court found that a “mere hope” of an upside on option contracts is too uncertain to support reasonable probability of a business opportunity.
The court finally held that both of plaintiffs’ civil conspiracy claims were also direct claims, as they were premised on the direct harm stated in the breach of fiduciary duty and the tortious interference claims. As to the civil conspiracy claim based on the fiduciary duty claim, the court denied the motion to dismiss, holding that plaintiffs adequately pleaded that these entities participated in unlawful acts in furtherance of the conspiracy, causing actual damage. The court also noted that “knowing participation” is not a required element of civil conspiracy and denied the motion to dismiss on this basis as well. The court, however, dismissed the civil conspiracy claim premised on the tortious interference claim, as the plaintiffs failed to adequately plead the underlying claim for tortious interference. The court ordered the parties to submit a stipulated implementing order by March 21, 2022, and to confer on a stipulated briefing schedule as to the scope of Fireman Capital’s entire fairness burden.
Source: https://www.jdsupra.com/legalnews/eleventh-circuit-overturns-dismissal-of-2451962/
