Brookfield Asset Management, Inc. v. Rosson

Facts

TerraForm Power, Inc. (TerraForm) is a publicly traded Delaware corporation with its principal place of business in New York City. TerraForm acquired, owned, and operated solar and wind assets in North America and Western Europe. D is a Canadian corporation headquartered in Toronto. D is an alternative asset manager that primarily conducts business through subsidiaries. At the time the Complaint was filed, D and its affiliates beneficially owned 61.5 percent of TerraForm. In October 2017, D became Terraform's controlling stockholder, owning through Brookfield's affiliates 51 percent of Terraform's outstanding Class A common stock. D had the power to appoint Terraform's CEO, CFO, and General Counsel pursuant to a Master Services Agreement and governance agreement. Pursuant to TerraForm's certification of incorporation and its majority holdings, D had the right to designate four of Terraform's seven directors and used that power to designate four members of D's senior management to Terraform's Board. The Charter required that the TerraForm Board have a Conflicts Committee composed of the three non-D directors (the Conflicts Committee).The Conflicts Committee was responsible for reviewing and approving material transactions and matters in which a conflict may exist between TerraForm and D (and its affiliates). TerraForm's Charter contained a supermajority voting provision, requiring an affirmative vote of at least two-thirds of the outstanding shares of common stock to amend certain Charter provisions. D approached TerraForm to acquire for $1.2 billion Saeta Yield, S.A. (Saeta), a publicly-traded Spanish company that owned and operated wind and solar energy assets. D recognized the substantial upside associated with the Saeta Acquisition and steered TerraForm towards funding it with a backstopped equity offering that, according to Ps, allowed D to increase its ownership percentage of TerraForm at a discount to TerraForm's anticipated fair value. D and TerraForm informed the Conflicts Committee that, in addition to funding the Saeta Acquisition with debt, TerraForm would raise approximately $600 - $700 million of equity in the public markets. D indicated that in addition to participating up to its pro rata portion of the equity offering (i.e., 51 percent), it was willing to backstop part of the equity offering. The Conflicts Committee decided not to retain an independent financial advisor and relied on advice from Barclays Capital, Inc. which was serving as TerraForm's financial advisor. The Conflicts Committee determined that the proposed backstop was advisable and in TerraForm's best interests. The Conflicts Committee still had not engaged or consulted with a financial advisor. It relied on the members of TerraForm's management and D representatives for advice. The Conflicts Committee approved a support agreement with D to backstop up to 100 percent of a $400 million public equity offering if the offering price equaled TerraForm's five-day volume weighted average price ending February 6, 2018, which was $10.66 per share. D's Backstop obligations were contingent on the successful commencement of a tender offer for Saeta and on the prior effectiveness of the TerraForm registration statement if required. TerraForm and D agreed that the pricing, size, and timing of the Equity offering, including the decision to use the Backstop, would be subject to prior review and approval of the Conflicts Committee, together with any other necessary approvals. TerraForm and the Conflicts Committee were to retain an independent financial advisor to provide advice regarding the Equity Offering. TerraForm publicly disclosed the deal. TerraForm filed its definitive proxy statement with the SEC seeking stockholder approval for the issuance of up to 61 million shares of Class A Common Stock in connection with the planned Equity Offering. TerraForm's stockholders approved the share issuance on May 23, 2018, at TerraForm's annual meeting. The full Board met to discuss the Equity Offering and backstop. By that point, the Tender Offer to acquire Saeta was scheduled to expire in only a few weeks, and TerraForm had little time to finalize its financing plan. Stinebaugh then proposed that if the Equity Offering presented too much market risk, the full amount be offered to D through a private placement at $10.66 per share. TerraForm's Board determined that the Conflicts Committee should consider D's proposal to increase the size of the Backstop to $650 million. The Conflicts Committee had its first meeting with its financial advisor, Greentech. Greentech reviewed with the Conflicts Committee the materials provided the previous day. These materials revealed that a $650 million equity offering would 'significantly reduce returns' and accretion from the Saeta Acquisition relative to a $400 million offering. Nonetheless, Greentech advised the Conflicts Committee that it would be 'difficult to predict the price at which the Equity Offering could be executed (and whether it could be executed at a price above [$10.66]).' Greentech also noted that a backstop covering the full amount of the Equity Offering 'was very beneficial. The Conflicts Committee received no advice concerning whether a private placement with TerraForm's controller was fair or superior to TerraForm's financing alternatives. For the next two-week period TerraForm received lots of advice toward convincing it to abandon the Equity Offering in favor of a $650 million private placement exclusively with D. After receiving a single slide deck from Greentech, and relying largely on the advice of D, TerraForm management, and Barclays, the Conflicts Committee approved exercising the $650 million Backstop in lieu of the Equity Offering. The Conflicts Committee never received advice concerning a private placement with D. The Conflicts Committee accepted TerraForm management's recommendations and approved the full exercise of the Backstop-that is, a private placement of $650 million of TerraForm stock with D at $10.66 per share. The Board authorized the sale. The Private Placement increased D's economic interest in and voting power over TerraForm from 51 percent to 65.3 percent. TerraForm acquired approximately 95 percent of Saeta's shares for an aggregate of $1.12 billion on June 12, 2018. TerraForm completed a squeeze-out under Spanish law for the remaining shares of Saeta that were not tendered. TerraForm's stock price increased in the aftermath of the Saeta Acquisition and was trading at $11.77 per share, This represented an unrealized profit of $68 million to D. On January 23, 2020, prior to the Complaint's filing, TerraForm's stock closed at $17.30 a share, representing $400 million in unrealized profit to D since the Private Placement. P filed a derivative and direct complaint against Ds. The Complaint alleges that D caused TerraForm to issue its stock in the Private Placement for inadequate value, diluting both the financial and voting interests of the minority stockholders. The Complaint also alleges that the Company was damaged as a result. Ds moved to dismiss Ps' direct claims on the basis that they are entirely derivative. On March 16, 2020, BR Partners and BR Corp agreed to acquire all TerraForm stock not held by D (i.e., the 'Merger'). On July 31, 2020, D's affiliates acquired all outstanding TerraForm shares not already owned by D. In light of the Merger, the trial court granted an order dismissing the derivative counts of the Complaint. Following the Merger, TerraForm's public stockholders ceased to have any interest in TerraForm, and all of TerraForm's assets, liabilities, rights, and causes of action became the property of TerraForm's acquirer. The Court of Chancery rejected Ps' arguments that they have standing to pursue direct claims against the Ds under Tooley v. Donaldson, Lufkin & Jennette, Inc. The Court explained that under Tooley, dilution claims are classically derivative, i.e., 'the quintessence of a claim belonging to an entity: that fiduciaries, acting in a way that breaches their duties, have caused the entity to exchange assets at a loss.' The court explained further that the claims are still derivative, and that '[t]his rationale extends even where a controlling stockholder allegedly causes a corporate overpayment in stock and consequent dilution of the minority interest.' It held that 'under Tooley alone, Ps' overpayment claims neatly fall into the derivative category.' The Court of Chancery rejected Ps' arguments that they have standing to pursue direct claims against the The court then found that Ps had stated direct claims because the claims were predicated on facts similar to those presented in Gentile v. Rossette. The court held that Ps have made a sufficient pleading that D is TerraForm's controller, that D caused TerraForm to issue excessive shares of its stock in exchange for insufficient consideration, and that the exchange caused an increase in the percentage of the outstanding shares owned by d, and a corresponding decrease in the share percentage owned by the public (minority) stockholders. Such a pleading is sufficient, under controlling Supreme Court precedent, to withstand Dt's Motion to Dismiss Ps' direct claims. Thus Ps had standing to assert direct claims and denied Ds' Motion to Dismiss. The court granted Ds application for an interlocutory appeal. Ds contend that Ps' claims are exclusively derivative under Tooley and that the Supreme Court's decision in Gentile deviated from, and is doctrinally inconsistent with, the 'simple analysis' set forth in Tooley.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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