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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
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IN AND FOR NEW CASTLE COUNTY I, “1
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IN RE FREEPORT-MCMORAN
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SULPHUR, INC. SHAREHOLDERS
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MEMORANDUM OPINION
Date Submitted: September 26,200O
January 5,200l
Date Decided:
Pamela S. Tikellis, Robert J. Kriner, Jr., and Timothy R. Dudderar, Esquires, of
CHIMICLES & TIKELLIS, Wilmington, Delaware and Norman M. Monhait,
Esquire, ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A., Wilmington,
Delaware; and GOODKIND LABATON, RUDOFF & SUCHAROW LLP, New
York, New York; Attorneys for Plaintiffs
Henry N. Herndon, Jr., and Lewis H. Lazarus, Esquires, of MORRIS, JAMES,
HITCHENS & WILLIAMS, Wilmington, Delaware; and Robert B. Bieck, Jr., David
G. Radlauer and Amy L. Landry, Esquires of JONES, WALKER, WAECHTER,
POITEVENT, CARRERE & DENEGRE, L.L.P.; Attorneys for Defendant McMoRan
Oil & Gas Company
A. Gilchrist Sparks, III, Alan J. Stone and Christopher F. Carlton, Esquires, of
MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware, and Dennis E.
Glazer and John J. Clarke, Jr., Esquires of DAVIS POLK & WARDWELL, New
York, New York; Attorneys for Defendants James R. Moffett, Rene L. Latiolais, B.M.
Rankin, Jr., Richard C. Adkerson, Robert M. Wohleber and Freeport-McMoRan
Sulphur Inc.
JACOBS, VICE CHANCELLOR
The plaintiffs in this shareholder class action challenge a stock-forstock merger on the basis that the interestedness of the directors of the
subject corporation resulted in its stockholders receiving an unfair price for
their shares. It is claimed that those directors breached their fiduciary duty
of loyalty and that the other constituent corporation aided and abetted that
breach. All defendants have moved to dismiss the complaint under Court of
Chancery Rule 12(b)(6). The director-defendants have moved to dismiss on
the additional ground that any monetary recovery is barred by the
exculpatory clause of the corporation’s certificate of incorporation. This
Opinion decides those motions.
I. FACTS’
On August 3, 1998, Freeport-McMoRan Sulphur Inc. (“FSC”)
announced that it had entered into an agreement to merge with a “sister”
corporation, McMoRan Oil & Gas Co. (MOXY).’ That transaction took the
form of FSC and MOXY being merged into McMoRan Exploration Co.
(“MEC”), a new holding company specially created for purposes of the
’ The pertinent facts are as alleged,in the complaint and documents incorporated therein
by reference, including the Joint Proxy Statement/Prospectus (“the Proxy Statement”).
Recited at this point are certain background facts. Other facts are set forth in the
Analysis of the issues. See Part III, infra., of this Opinion.
’ Both MOXY and FSC are (at least) majority-owned by Freeport-McMoran, Inc.
(“FTX”). FTX owns 100% of MOXY and 51.6% of FSC. The remaining shares of FSC
are owned by members of the public. See Proxy Statement at 27-28.
Merger. The shareholders of FSC and MOXY would receive, as
consideration, stock of MEC in exchange for their shares in FSC and
MOXY. The MEC stock they would receive would be allocated among
FSC’s and MOXY’s shareholders on the basis of .625 MEC shares for each
share of FSC and .2 MEC shares for each share of MOXY.
The merger was negotiated on behalf of FSC by a special committee
of directors, none of whom (it appears) were employed by FSC or MOXY.
On October 9, 1998, the Proxy Statement was mailed to the shareholders of
both companies, soliciting their approval of the Merger. The Proxy
Statement disclosed MOXY shareholders would receive approximately 6 1%,
and that FSC shareholders would receive approximately 39%, of the MEC
stock being distributed in the Merger. Both the FSC and MOXY
shareholders approved the Merger on November 17,1998.
The Amended Consolidated Complaint (the “complaint”) was filed as
both an individual and as a class action on February 18,200O. That
complaint alleges that the FSC board of directors (the “FSC Defendants”)
breached their fiduciary duty of loyalty in connection with the Merger, by
permitting MOXY shareholders to receive a disproportionate share of the
Merger consideration. It is also claimed that MOXY aided and abetted those
fiduciary breaches. The defendants have challenged the legal sufficiency of
all these claims. 3
II.
THE LEGAL STANDARD AND
THE PARTIES’ CONTENTIONS
A. The Legal Standard
On a motion to dismiss under Court of Chancery Rule 12(b)(6), the
Court must assume the truthfulness of all well-pled allegations of the
complaint and draw all reasonable inferences therefrom.4 A complaint will
not be dismissed unless it can be determined with reasonable certainty that
the plaintiff could not prevail on any set of facts that are reasonably inferable
from the complaint’s allegations.5 These standards govern the Court’s
analysis of the issues presented.
B. The Contentions
The FSC defendants’ position is that the complaint must be dismissed
for failure to state a cognizable legal claim. The premise of that position is
3 The original complaint, captioned Krasner v. Moffett, et al., C.A. No. 16792, was
consolidated with Sheffield & Katz v. Adkerson, et al., C.A. No. 16845. Defendants
moved to dismiss the complaint on December 17 & l&l998 and tiled briefs in support
of that motion on January 29, 1999. On February 18,2000, plaintiffs filed the
Consolidated Amended Complaint, which is the subject of the current motion to dismiss.
4 Grobow v. Perot, Del. Supr., 539 A.2d 180, 187 n.6 (1988); see also In re USA Cafes,
L.P. Litin., Del. Ch., 600 A.2d 43,47 (1991).
5 Solomon v. Pathe Comm. Coq., Del. Supr., 672 A.2d 35, 39 (1996).
3
that the applicable standard under which the Merger will be reviewed is the
business judgment rule. Under that standard of review, the defendants urge,
the complaint states no claim because it fails to allege that the FSC directors
acted in a manner that was either grossly negligent or disloyal. The director
defendants additionally argue that the plaintiffs claims for money damages
are barred by the exculpatory provision in FSC’s certificate of incorporation
which tracks 8 Del. C. 0 102(b)(7) of the Delaware General Corporation
Law.
Defendant MOXY argues that the complaint must be dismissed as
against it, for failure to state a cognizable claim for aiding and abetting.
In defense of its complaint, the plaintiffs argue that because the
complaint alleges that a majority of the FSC directors were interested in the
Merger transaction, the applicable standard of review is entire fairness”
Under that standard, the plaintiffs contend, the complaint states a cognizable
claim because it alleges that the Merger resulted in unfair consideration
being paid to FSC and MOXY shareholders, and also was the product of an
unfair decision making process. Those allegations, plaintiffs maintain, are
sufficient to state a claim for breach of the FSC directors’ fiduciary duty of
loyalty, which cannot be exculpated under $ 102 (b)(7). The plaintiffs
further argue that the complaint sufficiently charges MOXY with having
aided and abetted that fiduciary breach.
III. ANALYSIS
A. The Standard of Review
The parties agree that the critical issue on this motion is what standard
of review-business judgment or entire fairness-governs the Merger. That
issue is critical because it is outcome-determinative: if the standard is entire
fairness, the motion must be denied because the complaint adequately states
a claim that the Merger consideration was unfair. If, however, the applicable
standard of review is business judgment, the complaint states no cognizable
claim because (a) the plaintiffs have not adequately pled that the FSC
defendants acted disloyally or in a grossly negligent manner, and (b) even if
the Merger consideration paid to FSC shareholders was unfair, to overcome
the business judgment rule presumption the plaintiff must allege that the
price was so low as to constitute waste or fraud.6 Neither claim is alleged
here.
I turn to the determinative issue: which of the standards of review
applies?
6 See Smith v. Van Gorkom, Del. Supr., 488 A.2d 858, 889 (1985) (stating that in order
for the plaintiff to overcome the presumption of the business judgment rule, they “have
the heavy burden of proving that the Merger price was so grossly inadequate as to display
itself as a badge of fraud.“).
B. The Special Committee
In determining what review standard applies, the Court is constrained
to address a threshold matter-the legal consequence of the fact that the FSC
special committee negotiated the Merger terms on behalf of FSC. Under
Delaware law, where a transaction is negotiated and approved by an
independent committee of directors and is subsequently approved by the
stockholders of the company in an uncoerced, fully informed vote, the
transaction is normally reviewed under the business judgment standard.7 In
this case it appears undisputed that the two FSC board members who made
up the special committee were disinterested and independent.’ I say
7 See In re Western Nat’1 Corn. Shareholders Litia., Del. Ch., C.A. No. 15927, Chandler,
C, Mem. Op. at 67-68 (May 22,200O): Where the merger involves a parent corporation
and its controlled subsidiary, the review standard remains entire fairness, with the burden
of proving unfairness shifting to the plaintiff shareholder. Kahn v. Lunch Communication
Svs., Inc., Del. Supr., 638 A.2d 1110 (1994). Although FSC and MOXY were controlled
by a common parent (FTX), the complaint here does not allege that the FSC/MOXY
transaction was a parent-subsidiary merger.
’ The plaintiffs do not specifically allege that the FSC special committee members were
interested or lacked independence. Instead, they advance the argument that because the
MOXY independent committee members held significantly more shares of MOXY than
the FSC committee members held stock of FSC, the MOXY committee had an
“overwhelmingly greater personal financial interest in obtaining the most advantageous
exchange ratio for MOXY.” Complaint, at 121. That argument, while creative, is not
supported by any legal authority in the plaintiffs brief and, moreover, would be unwieldy
and uncertain in its application. Under that rule, a board would not only have to decide
each candidate’s independence when appointing a special committee, but also it would
have to measure each candidate’s stockholdings against the stockholdings of each of the
other candidates for appointment to the special committee, and then speculate whether
the special committee collectively has a stronger interest in protecting its corporation’s
shareholders than would the counterpart special committee on the other side of the
bargaining table.
6
“appears,” because the role of the committee is barely alluded to, let alone
developed, in the briefs. Yet, the Proxy Statement, which is incorporated
into the complaint by reference,g is replete with disclosures-not disputed by
the plaintiffs-that .the FSC special committee retained independent legal
and financial advisors, met on several occasions, and recommended the
Merger to the full board, which approved the Merger terms as
recommended.” If true, those disclosures would establish that the Merger
terms were negotiated by directors who had acted “on an informed basis, in
good faith and in the honest belief that their actions [were] in the
corporation’s best interest.“” In that case the business judgment review
standard would govern, and the result would be the dismissal of the
complaint for failure to state a claim upon which relief could be granted.
Because the parties nowhere address in a reasoned or developed way
the legal import of a relevant reality-that the Merger appears to have been
negotiated by a special committee of independent, disinterested FSC
directors-the briefs on the instant motion have an unreal quality. Instead,
the parties ignore that subject and frame the issues in terms of whether a
9 Complaint, at 7 16.
lo Proxy Statement at 28-29.
” See Grobow v. Perot, Del. Supr., 539 A.2d 180, 187 (1988).
7
majority of the &J FSC board that approved the Merger was (or was not)
disinterested or independent.12 But even under that approach, the complaint
fails to allege facts that would establish that the Merger was approved by a
majority of interested directors. My reasons for this conclusion next follow.
C. The Interestedness of the FSC Board of Directors
A transaction will be reviewed under the entire fairness standard
“where actual self-interest is present and affects a majority of the directors
approving a transaction.“‘3 That exacting standard is also applied where a
minority of interested directors exercises a dominating influence over a
sufficient number of board members to constitute a majority.14 A director is
“interested” in a transaction if he or she appears on both sides of the
transaction or expects to derive a “personal financial benefit from [the
l2 One reason for the defendants’ failure to raise that issue may be that the facts
pertaining to the special committee were disclosed in the Proxy Statement but not in the
complaint. If the plaintiffs were challenging the Proxy disclosures, then the truth of those
disclosures could not be assumed for purposes of a dismissal motion, In re Santa Fe
Pacific Corn. Shareholders Litig., Del. Supr., 669 A.2d 59,70 (1995). But, the Proxy
Statement is incorporated by reference into the complaint and the plaintiffs do not claim
that the disclosures in the Proxy Statement were materially false or misleading. Thus, the
reason for the defendants’ failure to raise this issue remains mysterious.
l3 Paramount Comm., Inc. v. OVC Network, Inc., Del. Supr., 637 A.2d 34,42 n.9 (1994).
I4 In re Frederick’s of Hollywood. Inc. Shareholders Litig., C.A. No. 15944, Jacobs, V.C.
(Jan. 31,2000), Mem. Op. at 17.
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transaction] in the sense of self-dealing, as opposed to a benefit which
devolves upon the corporation or all stockholders generally.“1s
These standards govern the Court’s inquiry into the disinterest and
independence of each of the FSC directors who approved the Merger.
1 y Directors Moffett, Adkerson and Rankin
These three gentlemen were directors of both MOXY and FSC at the
time of the Merger. Defendant James R. Moffett was co-chairman of the
boards of both FSC and MOXY. Mr. Moffett was also the board chairman
and the chief executive officer of Freeport-MOXY Copper and Gold, Inc.
(“Freeport Copper”), an affiliate of FSC and MOXY. Mr. Moffett held
1,774,359 shares of MOXY stock and 130,670 shares of FSC stock.16
Defendant Richard C. Adkerson was vice chairman of the board of
FSC and also co-chairman of the board and chief executive officer of
MOXY. In addition, he was the president and chief operating officer of
Freeport Copper.17 Mr. Adkerson held 492,892 shares of MOXY stock and
28,186 shares of FSC.”
I5 Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984).
I6 Complaint 7 18.
171cJ.,aty5.
“Id., at8 18.
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Defendant B.M. Rankin, Jr. served as a director of FSC, MOXY and
Freeport Copper.lg Mr. Rankin held 1,109,290 shares of MOXY stock and
37,736 shares of FSC stock.20
By virtue of being directors and officers of both FSC and MOXY,
these three directors stood on both sides of the Merger, and accordingly,
must be deemed to have had a conflicting interest in that transaction.21 Being
thus conflicted, these three directors could not independently and
disinterestedly consider the Merger on behalf of the FSC public
shareholders.
Because three of FSC’s seven board members were clearly interested,
it follows that if even one of the four remaining directors was either
interested or not independent, then the entire fairness standard of review
would apply.
Of the remaining four directors, the plaintiff concedes that two were
independent and disinterested. These two directors, Terre11 J. Brown and
Thomas D. Clark, were directors of only FSC. Neither held any MOXY
stock, Brown held no FSC stock, and Clark held only 500 FSC shares.
I9 Id., at 117.
2oIcJ,atT 18.
” See note 15 m.
10
Thus, only the disinterest and independence of the two remaining
directors-Richard M. Wohleber (“Wohleber”) and Rene L. Latiolais
(“Latiolais”)-are disputed and need be addressed.
2. Wohleber
Mr. Wohleber was FSC’s chief executive officer, president and a
director.22 He was also a senior vice president of Freeport Copper.23 The
complaint alleges that in connection with the Merger, Mr. Wohleber was
promised that he would become the executive vice president, chief financial
officer and a director of MEC.24 That promise allegedly was made before
Wohleber voted in favor of the Merger.25 In 1998, Wohleber received a
bonus of $250,000 in addition to his salary of $225,000.26 Finally, it is
alleged that Wohleber served as senior vice president of Freeport Copper,
and that Mr. Moffett served as chairman and CEO of the same entity. The
plaintiffs argue that it is reasonable to assume that in those capacities, Mr.
Wohleber was subordinate to Mr. Moffett and that Mr. Moffett was in a
” Complaint 16.
23 a
241cJ, atfi 17.
2s I& at 7 22.
a5 Id., at 1 19.
position to influence, if not determine, Mr. Wohleber’s continued
employment at Freeport Copper.
I
conclude that the foregoing facts, even if taken as true, do not
establish that Mr. Wohleber lacked independence. The plaintiffs’ position
appears to rest on the supposition that Wohleber’s position as senior vice
president of Freeport Copper made him vulnerable to pressure from Mr.
Moffett to vote (as a director of FSC) in favor of the Merger. This
supposition is nowhere straightforwardly pled, let alone supported by any
factual allegations in the poorly drafted complaint. Moreover, the complaint
alleges no facts that shed any light on the relationship between FSC (and/or
MOXY) and Freeport Copper. Nor are any facts alleged from which one
might infer that Moffett had the authority either to fire Mr. Wohleber or
significantly to influence a decision by others to fire him, or that Wohleber
had a substantial financial stake in maintaining his job at Freeport Copper.27
These woeful deficiencies in the complaint preclude any determination that
Mr. Wohleber was either interested or lacked the independence to consider
the Merger transaction impartially.
27 See Rales v. Blasband, Del. Supr., 634 A.2d 927 (1993); Benerofe v. Cha, Del. Ch.,
C.A. No. 14614, Chandler, V.C., Mem. Op. (Sept. 12, 1996).
12
3. Latiolais
Mr. Latiolais was both a director of FSC and the vice chairman of the
board of Freeport Copper. In addition, he provided consulting services to
FSC before the Merger, and thereafter will continue to provide such services
to MEC. After the Merger, the consulting fee Mr. Latiolais received for
those services was increased from $230,000 to $330,000-a nearly 43%
increase.
The FSC defendants argue that the increase in Latiolais’ consulting
fees is not material and, moreover, that there is no allegation that Latiolais
knew his fees would be increased at the time he voted on the Merger. The
plaintiff rejoins that (1) a $100,000 (or 43%) increase is inherently material,
(2) a $230,000 consulting contract, in and of itself, is a material financial
interest regardless of whether the fee was increased, (3) Latiolais had a
conflicting interest in continuing to render the consulting services for a fee
to MEC after the Merger.
In support of their position, the defendants rely upon In re Walt
Disnev Co. Derivative Litigation,28 where Chancellor Chandler, in granting a
motion to dismiss the complaint, found that a director who received
2X In re Walt Disney Co. Derivative Litin., Del. Ch., 731 A.2d 342 (1999) aff’d in part,
rev’d in part on other grounds sub nom Brehm v. Eisner, Del. Supr., 746 A.2d 244
(2000).
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consulting fees could not be deemed interested where the complaint did not
allege facts that would establish that those fees were material to that
director.2g The plaintiff has failed to allege such facts in this case.
Accordingly, here, as in Disney, the Court is unable to conclude that the
current pleading sufficiently alleges that Latiolais lacked independence or
had a conflicting self-interest in the Merger.
Because neither Wohleber or Latiolais can be deemed interested or to
lack independence on the facts alleged, the pled facts do not establish that
entire fairness is the applicable standard of review. Because (on the current
pleading) the Merger would be reviewed under the business judgment
standard, and because no facts are alleged that would establish that the
Merger consideration was so low as to constitute fraud or waste, the
complaint fails to state a cognizable claim that the FSC directors breached
any fiduciary duty owed to the corporation.30
29 In discussing consulting fees paid to Senator George Mitchell, the Court stated that the
“plaintiffs have not alleged that the . . . consulting fees [were] even material to
[defendant].” & at 360.
3o Because the complaint cannot survive the FSC defendants’ motion to dismiss, I need
not address MOXY’s motion to dismiss the aiding and abetting claim against it, because
an underlying breach of fiduciary duty an essential element of a claim for aiding and
14
IV. CONCLUSION
For the foregoing reasons, the FSC defendants motion to dismiss is
granted, with leave to amend the complaint within 30 days of this Opinion to
add nonconclusory factual allegations that would establish that the Merger is
not governed by the business judgment standard, either because (a) the FSC
independent committee process did not merit business judgment rule
protection, or (b) a majority of the FSC directors who approved the Merger
were interested and were not independent. If no further amended complaint
is filed within that 30 day period, the dismissal of this action shall be final.
IT IS SO ORDERED.
abetting. See In re Santa Fe Pac. Corn Litk., 669 A.2d 59,72 (1995) (citing Weinberger
v. Rio Grande Indus., Inc., Del. Ch., 519 A.2d 116, 131 (1986)).
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