Plaintiffs Were Unable To Rouse Support For Their Position That A Minority Stockholder Was A Controller And Breached Fiduciary Duties Because They Did Not Plead Sufficient Facts
In In re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS, the George Leon Family Trust and Dr. Robert A Corwin (the “Plaintiffs”) sought to recover damages on behalf of Rouse Properties Inc. (“Rouse”) stockholders, for breach of fiduciary duties and aiding and abetting breaches of fiduciary duties against Brookfield Asset Management Inc. (“Brookfield”) and five Rouse directors individually arising out of a July 2016 merger between two mall real estate holding companies (the “Merger”). The court dismissed all claims finding that Brookfield was not a minority controlling stockholder of Rouse and did not wield undue influence over the board of directors of Rouse in general or during Merger discussions and that the Plaintiffs failed to well plead that the stockholder vote approving the Merger was uninformed or coerced.
Prior to a spin-off to its stockholders in 2012, Rouse was a wholly-owned subsidiary of General Growth Properties, Inc., which, at the time, was 40% owned by Brookfield. As part of the spin-off, Brookfield appointed four of the individual defendants as independent directors on Rouse’s Board. Rouse conducted a stock purchase rights offering in 2012. When that offering was in danger of failure, Brookfield stepped in and paid $6 million to guarantee its success. At the conclusion of the offering, Brookfield was a 54% owner and controlling stockholder in Rouse. Brookfield appointed several directors to Rouse’s board of directors between 2012 and 2016, while reducing its ownership percentage to 33.5%, before deciding to acquire the remaining Rouse shares in 2016.
On January 16, 2016, Brookfield made an unsolicited proposal to acquire Rouse’s outstanding common stock. The three Rouse directors designated as Brookfield representatives recused themselves from all matters related to the Merger. The remaining directors for Rouse formed a special committee with authority over all Merger related matters (the “Committee”). After “negotiat[ing] hard through several rounds” the Committee approved the Merger and on June 23, 2016, 82.44% of Rouse’s unaffiliated shares voted in favor of the transaction, which closed in July of 2016.
Plaintiffs’ original complaint sought to enjoin the Merger, but the court declined to expedite the motion prior to the stockholder vote because no superior proposal was likely if an injunction was entered. In their post-closing complaint, Plaintiffs alleged (1) Brookfield breached its fiduciary duties as controlling stockholders; (2) the individual Committee members had breached their fiduciary duties in considering the merger; and (3) that Brookfield aided and abetted the Committee in its breach. Both defendants moved for dismissal based on inadequate pleading of Counts I and III, and dismissal of Count II based on Corwin, which gives business judgment rule deference to the Merger because it was approved by a majority of the unaffiliated Rouse stockholders in a fully-informed, uncoerced vote.
The Court reviewed the case under the business judgment rule applying Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), as no controlling stockholder is involved and majority of disinterested stockholders approved the transaction with “a fully informed, uncoerced majority of the disinterested stockholders.” The business judgment rule cannot, however, protect against transactions where there is a controlling stockholder because such a transaction is inherently coercive. Plaintiffs alleged Brookfield was a controlling stockholder, and that Corwin would not apply here.
A stockholder is a controller only if it “(1) owns more than 50% of the voting power of a corporation or (2) owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation.” Corwin, 101 A.3d at 991. As Brookfield only owned 33.5% of Rouse, Plaintiffs alleged that the close relationship between the corporations amounted to actual control by Brookfield. A minority controller relationship only exists when the stockholder’s power is such that independent directors cannot freely exercise their own judgment. The facts plead must support a reasonable inference that the minority stockholder (1) actually dominated and controlled the corporation, its board, or the deciding committee with respect to the transaction; or (2) actually dominated and controlled the majority of the board generally. Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375m at *4 (Del Ch. June 5, 2006); Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *17 (Del. Ch. May 31, 2017).
Plaintiffs’ allegations recite conclusions in their favor, but the facts do not support a reasonable inference of those allegations, while also failing as a matter of law. Plaintiffs alleged two of the five directors on the Committee were not independent because they were appointed by, and therefore beholden to, Brookfield. However, as a matter of law, the appointment of a director onto the Board, even if Brookfield was a controlling stockholder, does not call into question the independence of a director. In addition, even if the two Committee directors were not independent, the unanimous Committee vote (5-0) would still cleanse the problem, as three of the Committee directors remained independent. Finally, the court found that the facts neither supported a reasonable inference that the two alleged controlled Committee directors were not independent nor did they indicate a dominated negotiation. The facts as plead actually indicated the opposite; negotiations between Brookfield and Rouse were contentious. The court held Brookfield was not a controlling shareholder of Rouse and therefore owed no fiduciary duty, dismissing Plaintiff’s claim that Corwin does not apply.
In the absence of a controller, a Plaintiff must well-plead that the stockholder vote approving a transaction was either coerced or uninformed. Here, Plaintiff’s alleged “situational coercion,” which “can arise when the board, by its conduct, creates a situation where ‘stockholders are being asked to tender shares in ignorance or mistaken belief as to the value of the shares.’” Plaintiffs’ theory of situational coercion is that the Board (and Brookfield) knew that Rouse’s price was undervalued and would increase when the quarter’s financial results were released. However, Plaintiffs’ theory fails because the quarter’s results were available and disclosed to stockholders four months before the stockholder vote in favor of the merger, in addition to being clearly set forth in the proxy. Plaintiffs also alleged that the stockholder was uninformed because certain facts considered by financial advisers regarding the merger were not disclosed in the proxy statement. However, such omissions do not create uninformed votes per se unless, unlike in the instant case, they are material omissions.
Lastly, the court dispensed with Plaintiff’s aiding and abetting claim, finding that there was no basis for the claim in the absence of a breach of fiduciary duties. In dismissing all of Plaintiffs’ claims, the court repeatedly highlighted the importance of well-plead complaints to survive the motion to dismiss stage. The presumption in favor of the Plaintiffs’ facts as pleaded at the motion to dismiss stage did not prevent the court from spending substantial effort in considering the reasonable extent to which those facts could support Plaintiffs’ underlying allegations.