In Re Cnx Gas Corporation Shareholders Litigation

Facts

CONSOL (D) formed CNX Gas Corporation (D1) to conduct D's natural gas operations. D's board of directors authorized a public offering of less than 20% of the common stock of D1 as the first step towards a potential spin-off. D1 sold approximately 27.9 million shares in a private placement. 

D and D1 entered into a number of agreements to govern their relationship, including a Master Separation Agreement, a Master Cooperation and Safety Agreement, a Tax Sharing Agreement, and a Services Agreement. As long as D beneficially owns at least 50% of D1's common stock, D1 was not (i) take any action to limit the ability of D to transfer its shares, (ii) take any action that could reasonably result in D defaulting under any contract or agreement, or (iii) issue any additional equity without D's consent if the issuance would result in CONSOL owning less than 80% of D1's outstanding shares. D had right to purchase additional shares of common stock in order to maintain at least 80% ownership in D1 or to enable D to distribute its shares of D1 in a tax-free spin-off. D1 also agreed not to buy or sell any assets, dispose of any assets, or acquire any equity or debt securities of a third party, in each case in excess of $ 30 million, without D's prior consent. As of April 26, 2010, D owned 83.5% of D1's shares. D proposed to acquire the public shares of D1 through an exchange offer. D publicly announced that it would exchange 0.4425 shares of D common stock for each share of D1 it did not own. The value of the consideration was $ 33.70. The reaction was negative. D1 formed a special committee to evaluate the exchange offer, but D withdrew its proposal without ever formally commencing an exchange offer and before the special committee had a chance to consider it. D then decided to revamp the corporate governance structure of D1. All board committees other than the audit committee were eliminated. The size was decreased from eight directors to five. A subsequent resignation reduced its membership to four. The CEO of D, Harvey, took over as Chairman and CEO of D1. The CEO of CNX Gas became COO of D and D1. Other senior executives also hold dual roles. D then approached T. Rowe Price about acquiring its D1 shares. They discussed the deal while attending an investor conference in Orlando, Florida. A price range for deals was discussed. Nothing was agreed upon. D then began acquiring assets to which D1 had a first right of refusal. The board of D board concluded that D1 did not have the financial resources to close the deal. It closed the deal. T.Rowe and D again met and negotiated and eventually agreed to $38.25 in cash. On April 28, 2010, D commenced a tender offer to acquire the outstanding public shares of D1 at a price of $ 38.25 per share in cash. The price represents a premium of 45.83% over the closing price of D1's common stock. On the day before D announced the Dominion Transaction and its intent to acquire the shares of D1 that it did not already own. D committed to effect a short-form merger promptly after the successful consummation of the Tender Offer. In the merger, remaining stockholders will receive the same consideration of $ 38.25 per share in cash. Consummation of the Tender Offer is subject to a non-waivable condition that a majority of the outstanding minority shares be tendered, excluding shares owned by directors or officers of D or D1. With the T. Rowe Price shares locked up, D only needs to obtain an additional 3,006,316 shares, or approximately 12% of the outstanding stock, to satisfy the condition. D and D1 discussed with Pipski, the lone independent director of D1, to form a special committee in connection with the D Tender Offer. Pipski asked D1 to form a special committee to evaluate the proposed Tender Offer and elect an additional director who could join Pipski on the special committee. D1's board approved the formation of a special committee but not an additional director. The Committee was authorized to review and evaluate the Tender Offer, to prepare a Schedule 14D-9, and to engage legal and financial advisors for those purposes. There was no authorization to negotiate the terms of the Tender Offer or to consider alternatives. Pipski asked for the authority to consider alternatives, but D1's board declined. Pipski and his advisors believed that D was not paying the highest price it was prepared to pay. The D1 board retroactively granted the Special Committee authority to negotiate. On the next day, May 11, Pipski and his advisors held a call with D senior executives and their advisors. D declined to increase the price. The Special Committee remained neutral with respect to the offer and stated its concerns about the process by which D determined the offer price' and its 'view that D was unwilling to negotiate the offer price.' D1 shares had not traded more than a couple of pennies above the $ 38.25 per share agreed to by T. Rowe Price.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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