Olenik v. Lodzinski, et al.

Nicholas Olenik, a stockholder of nominal defendant Earthstone Energy, Inc., brought class and derivative claims against defendants challenging a business combination between Earthstone and Bold Energy III LLC. As alleged in the complaint, EnCap Investments L.P. controlled Earthstone and Bold and caused Earthstone stockholders to approve an unfair transaction based on a misleading proxy statement. Defendants moved to dismiss the complaint on several grounds, principal among them that the proxy statement disclosed fully and fairly all material facts about the transaction, and Earthstone conditioned its offer on the approval of a special committee and the vote of a majority of the minority stockholders. The Court of Chancery agreed with defendants and dismissed the case. Two grounds were central to the court’s ruling: (1) the proxy statement informed the stockholders of all material facts about the transaction; and (2) although the court recognized that EnCap, Earthstone, and Bold worked on the transaction for months before the Earthstone special committee extended an offer with the so-called MFW conditions, it found those lengthy interactions “never rose to the level of bargaining: they were entirely exploratory in nature.” Thus, in the court’s view, the MFW protections applied, and the transaction was subject to business judgment review resulting in dismissal. While this appeal was pending, the Delaware Supreme Court decided Flood v. Synutra International, Inc. Under Synutra, to invoke the MFW protections in a controller-led transaction, the controller must “self-disable before the start of substantive economic negotiations.” The controller and the board’s special committee must also “bargain under the pressures exerted on both of them by these protections.” The Court cautioned that the MFW protections will not result in dismissal when the “plaintiff has pled facts that support a reasonable inference that the two procedural protections were not put in place early and before substantive economic negotiations took place.” The Supreme Court determined the Court of Chancery held correctly that plaintiff failed to state a disclosure claim. But, the complaint should not have been dismissed in its entirety: applying Synutra and its guidance on the MFW timing issue, which the Court of Chancery did not have the benefit of at the time of its decision, plaintiff has pled facts supporting a reasonable inference that EnCap, Earthstone, and Bold engaged in substantive economic negotiations before the Earthstone special committee put in place the MFW conditions. The Supreme Court also found no merit to defendants’ alternative ground for affirmance based on EnCap’s supposed lack of control of Earthstone. The Court of Chancery’s decision was affirmed in part and reversed in part, and the case was remanded for further proceedings. View "Olenik v. Lodzinski, et al." on Justia Law