C&J Energy Services, Inc. v. City Of Miami General Employees' And Sanitation Employees' Retirement Trust

107 A.3d 1049 (2014)


D, a U.S. corporation, was to acquire a subsidiary of Nabors, which is domiciled in Bermuda. Nabors will retain a majority of the equity in the surviving company. The surviving entity, C&J Energy Services, Ltd. (LTD), will be based in Bermuda, and thus subject to lower corporate tax rates than D currently pays. Citi estimated the tax savings as worth $200 million in net present value. After discussing the tradeoffs between losing control and tax savings, D's directors unanimously approved a non-binding offer of $2.6 billion. D negotiated a by-law guaranteeing that all stockholders would share pro rata in any future sale of LTD, which can only be repealed by a unanimous stockholder vote. D also got a 'fiduciary out' if a superior proposal was to emerge during a lengthy passive market check. After extensive negotiations, they agreed to a valuation of $2.86 billion, which was premised on a forecast of Nabors' 2015 EBITDA of $445 million. At the same time that D's board approved the deal, a side letter affirming that D's management would run the surviving entity and endorsing a generous compensation package. Comstock, D's current CEO,  negotiated for: a $1.1 million annual base salary, in addition to a bonus targeted at 200-300% of that amount; a lump-sum $3.3 million 'success cash bonus'; and a 'success equity bonus' of 500,000 restricted stock units, vested over three years, worth approximately $15.8 million. He would also be paid approximately $173 million in severance if his employment was terminated without cause. Comstock's base salary in 2014 is $875,000, with a target bonus range of 100-200%. He also received a grant of restricted stock worth $3.27 million. Comstock's current severance package is also less generous. Ps sued Ds to and applied for an injunction to stop a shareholder vote. Ps argued that D's board entered into a change of control transaction without recognizing that it was doing so. Ps claim the board never conducted an active market check to see if there were other buyers. Ps also argued that the board was overly influenced by the CEO, chairman, and founder, Joshua Comstock, who was allegedly looking to acquire Nabors to secure a new employment package for himself, and was therefore willing to cause D to pay more than it should. Ps argued that the board failed to fulfill its fiduciary duties under Revlon in approving a transaction where Nabors would end up with majority voting control of D. Ds counter that Comstock owned a 10% stake in D, and had no incentive to do anything to harm the value of those shares. Ds argued that the entire board was apprised of the process throughout and approved the deal because it was beneficial to stockholders. Ds argued that Revlon does not apply, but even if it did, the board satisfied its requirement to 'act reasonably . . . to secure the transaction offering the best value reasonably possible.' The Chancery found that the D's board had no conflict of interest and was fully informed about its own company's value.  The Chancery then determined there was a 'plausible' violation of Revlon duties because the board did not affirmatively shop the company either before or after signing. The Chancery enjoined the stockholder vote for 30 days. The Chancery's order also required D to shop itself in violation of the merger agreement between D and Nabors, which prohibited D from soliciting other bids. Ds contend the Chancery misapplied the standard for a preliminary injunction and also misinterpreted Revlon when it granted one and required D to shop the deal.