In re Pattern Energy Group Inc: Risks for Directors and Officers of Failing to Maximize Shareholder Value – Corporate Decision / Mergers and Acquisitions Update Series | Hogan Lovells
Riverstone is a private equity fund that owned and controlled Pattern Energy Group Inc. (the Company) and Pattern Energy Group LP (the LP). The limited partnership held a substantial interest in the company and, as the limited partnership was primarily owned by Riverstone, Riverstone was the majority shareholder of the company.
In 2018, the company’s board of directors began to explore a potential sale. The board formed a selfless and independent ad hoc committee, which followed many standard procedures, including identifying conflicts, obtaining advice from a non-confrontational banker and lawyer, and conducting business. a long process that attracted dozens of suitors that the special committee asked to be valued. Ultimately, however, the special committee accepted an inferior offer made by the Canada Pension Plan Investment Board (the buyer), despite a competing offer from Brookfield that offered greater shareholder value.
The plaintiff alleged that the process followed by the committee suffered from many shortcomings, including allowing a conflicting director and officer to engage with potential bidders. The plaintiff alleged that the board of directors of the company had breached its duty of loyalty and that the officers of the company, Riverstone, and the LP formed a “control group” which owed and had breached its fiduciary duties to shareholders. The court concluded that the plaintiff had sufficiently alleged the bad faith of the defendants and rejected the defendants’ arguments that they were protected by the company’s discharge charter provision or that any loophole in the sale process had been ” cleaned ”by an informed vote of shareholders under Corwin. The court noted in rejecting these defenses that, among other things, the buyer’s inferior offer would have been preferred and shaped by the involvement of directors and officers of a private investor in the seller.
The court first considered what standard of review would apply to the transaction. The court concluded that since the shareholders had been cashed in, the transaction was under scrutiny under Revlon. The plaintiff argued that the standard of review should be even higher – the court should view the transaction on the overall standard of fairness. The court declined to apply the “full fairness” standard of review at the dismissal stage, but did not rule out the possibility that the transaction could be reviewed later under the full standard of review. equity in the event that it is determined on the basis of a more complete dossier. that a control group stood on both sides of the deal.
On whether the directors breached their duty of loyalty, the court found that the special committee had taken “reasonable steps” to perform its duties and was selfless and independent. The special committee also hired independent consultants and spoke to several bidders, providing many with the opportunity to exercise due diligence. Additionally, the special committee refused to grant exclusivity to any particular buyer and also attempted to keep Brookfield at the table.
The court, however, found that all of these reasonable steps were influenced by the directors putting the interests of Riverstone, the LP and executives above maximizing shareholder value. The court concluded that the plaintiff had sufficiently alleged that the defendants may have acted in bad faith. This bad faith was demonstrated by the participation of certain interested directors in the meetings of the special committee and in the discussions with the potential buyers; buyer preference throughout the process, despite Brookfield’s superior offerings; and abuse of Riverstone’s right of consent over control changes. The court ruled that these issues outweighed the reasonable steps taken by the directors. Thus, the court found it reasonably conceivable that the board of directors did not meet its obligation to maximize shareholder value.
Although the court noted that Revlon allegations “do not admit of easy categorization as duties of care or loyalty[,]”The court found that the plaintiff’s allegations made it reasonably conceivable that the defendant directors acted in bad faith by (1) placing the interests of others above their duty to maximize shareholder value and (2) by abdicating their duty of disclosure. Therefore, the court ruled that the disclaimer of the Company’s charter did not justify the dismissal of the claims against the directors at the pleading stage. The court also ruled that the plaintiffs had argued claims against certain officers (who are not protected by an exculpatory provision of the charter) on the basis of their alleged conflicts.
The court further concluded that the defendants could not invoke by Corwin protections because, among other things, a majority of the votes were cast by a shareholder who was contractually obligated to vote his preferred shares in accordance with the recommendation of the board and who was otherwise interested in the transactions because he was likely to receive tax-free benefits.