Delaware Chancery Court Holds Corwin Prevents Claims Where Deal Protection Measures Are Reasonable
In In re Paramount Gold and Silver Corp. Stockholders Litigation, Consol. C.A. No. 10499-CB (Del. Ch. Apr. 13, 2017), the Delaware Chancery Court dismissed a stockholder derivative suit asserting a claim for breach of fiduciary duty against the directors (“Defendants”) of Paramount Gold and Silver Corporation (“Paramount” or the “Company”) in connection with Paramount’s merger with Coeur Mining, Inc. (“Coeur”). The Court dismissed the claim finding that a side royalty agreement entered into by Paramount and Coeur did not constitute a deal protection device and because the Court found that Plaintiffs had failed to identify any material deficiencies in Paramount’s registration statement.
Paramount had two mining projects, one in Nevada and another in Mexico. The transaction between Paramount and Coeur involved two parts. First, the spin-off of the Nevada mining assets into a separate entity, with about 95% of the shares distributed to Paramount’s stockholders, with the remaining shares distributed to Coeur. Second, a stock-for-stock merger of a subsidiary of Coeur into Paramount that then held only the Mexican mining project. The merger agreement included a $5 million termination fee to be paid to Coeur in the event the transaction was not consummated. On the same day in April 2015 Paramount and Coeur also entered into a royalty agreement under which a wholly-owned subsidiary of Coeur paid $5.25 million for a 0.7% royalty interest in the Mexican mining project. The royalty agreement was effective upon signing and was not contingent on the consummation of the merger.
Plaintiffs filed a stockholder derivative suit against the Defendants for breach of fiduciary duty contending that the Defendants agreed to unreasonable deal protection devices in the merger agreement and that they rushed the sale process, and did not negotiate a pre-signing auction or a post-signing go-shop of the Company. Defendants moved to dismiss claiming that Plaintiffs failed to state a claim for breach of fiduciary duty because of the effect of the Paramount stockholders’ approval of the merger. In Corwin v. KKR Financial Holdings LLC, 125 A.D.3d 304 (Del. 2015), the Delaware Supreme Court held that when a transaction is approved by a fully informed uncoerced vote of disinterested stockholders the business judgment standard of review applies. The Defendants contended that as in Corwin, the business judgment rule should apply to their decision to enter into the transaction with Coeur. In this case the merger was approved by 54% of the fully-informed stockholders (representing 97% of those voting).
Plaintiffs argued that the combined effect of the $5 million termination fee in conjunction with the $5.25 million royalty agreement created a “preclusive and per se unreasonable” deal protection device because the combined $10.25 million deterrent would have been 7.02% of the total transaction value. Plaintiffs argued that the court should apply an enhanced scrutiny analysis to the deal under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) because of the combined deterrent effect of the termination fee and the royalty agreement. Plaintiffs also alleged that a Paramount shareholder vote approving the transaction was not fully informed because of certain alleged deficiencies in the registration statement.
The Court rejected Plaintiffs’ arguments and held that the breach of fiduciary duty claim was without merit because the terms of the royalty agreement did not prevent any interested party from submitting a competing bid for Paramount and because the merger agreement’s termination fee was reasonable. The Court concluded that a potential bidder could have acquired Paramount subject to the royalty agreement and reaped the benefit of the $5.25 million cash infusion. The Court noted that it did not need to reconcile possible contradictions between Corwin and In re Santa Fe Pacific Corporation Shareholder Litigation, 669 A.2d 59 (Del. 1995) (where the court held in the context of a post-closing challenge that a fully informed stockholder vote approving a merger did not preclude review of certain deal protection devices) because the deal protection device was not unreasonable. The Court held the Paramount registration statement was not deficient as alleged by the Plaintiffs and therefore there was a fully-informed vote. Alternatively, the Court noted that even if Corwin did not apply Plaintiffs did not allege any facts that would support a non-exculpated claim for breach of fiduciary duty against the Paramount directors. Ultimately, the Court granted the Defendants’ motion to dismiss with prejudice.
In re Paramount Gold & Silver Corp. Stockholders Litigation memorandum opinion 170413