Corwin v. British American Tobacco PLC
| Citation | 796 S.E.2d 324,251 N.C.App. 45 |
| Decision Date | 20 December 2016 |
| Docket Number | No. COA15-1334,COA15-1334 |
| Court | Court of Appeal of North Carolina (US) |
| Parties | Dr. Robert CORWIN As Trustee for the Beatrice Corwin Living Irrevocable Trust, on Behalf of a Class of Those Similarly Situated, Plaintiff, v. BRITISH AMERICAN TOBACCO PLC; Reynolds American, Inc.; Susan M. Cameron; John P. Daly ; Neil R. Withington; Luc Jobin ; Sir Nicholas Scheele; Martin D. Feinstein; Ronald S. Rolfe; Richard E. Thornburgh; Holly K. Koeppel; Nana Mensah ; Lionel L. Nowell Iii; John J. Zillmer; and Thomas C. Wajnert, Defendants. |
Mullins Duncan Harrell & Russell PLLC, by Alan W. Duncan and Stephen M. Russell, Jr. ; and Block & Leviton LLP, by Jason M. Leviton, pro hac vice, for Plaintiff-Appellant.
Robinson & Lawing, LLP, by H. Brent Helms ; and Cravath, Swaine & Moore LLP, by Gary A. Bornstein, pro hac vice, for Defendant-Appellee British American Tobacco p.l.c.
Womble Carlyle Sandridge & Rice, LLP, Winston-Salem, by Ronald R. Davis, W. Andrew Copenhaver, and James A. Dean ; and Jones Day, by Robert C. Micheletto, pro hac vice, for Defendant-Appellees, Reynolds American, Inc., Susan M. Cameron, John P. Daly, Sir Nicholas Scheele, Martin D. Feinstein, Ronald S. Rolfe, and Neil R. Withington.
Moore & Van Allen PLLC, Charlotte, by James P. McLoughlin, Jr., Mark A. Nebrig, and Johnathan M. Watkins, for Defendant-Appellees, Luc Jobin, Holly K. Koeppel, Nana Mensah, Lionel L. Nowell, Richard E. Thornburgh, Thomas C. Wajnert, and John J. Zillmer.
In this case of first impression, reviewing the sufficiency of the pleadings to state a claim for relief, we hold that a minority shareholder which owns shares eight times greater than any other shareholder, is the sole source of equity financing for a transformative corporate transaction, has a contractual right to prohibit the issuance of shares and the sale of intellectual property necessary for the transaction, and which pledges support for the transaction contingent on terms more favorable to it than to other shareholders may owe a fiduciary duty to other shareholders who claim they were harmed by the transaction. We also hold that claims for diminished share value and diluted voting power, as alleged in this case, cannot be the basis for a direct claim against a board of directors.
Dr. Robert Corwin ("Plaintiff"), acting as trustee for the Beatrice Corwin Living Irrevocable Trust, on behalf of a Class of Shareholders so similarly situated, appeals from an Order and Opinion in favor of Defendants—British American Tobacco PLC ("Defendant-Shareholder" or "BAT" or "British American") and Reynolds American, Inc. ("Defendant-Corporation" or "RAI" or "Reynolds") and Susan M. Cameron, John P. Daly, Neil R. Withington, Luc Jobin, Sir Nicholas Scheele, Martin D. Feinstein, Ronald S. Rolfe, Richard E. Thornburgh, Holly K. Koeppel, Nana Mensah, Lionel L. Nowell III, John J. Zillmer, and Thomas C. Wajnert (collectively "Defendant-Directors" or "Reynolds Board of Directors") dismissing Plaintiff's claims for breach of a fiduciary duty and aiding and abetting a breach of fiduciary duty.
This appeal presents three issues: (1) whether a minority shareholder may be a controlling shareholder, and thus, owe a fiduciary duty to other shareholders; (2) whether a shareholder is permitted to bring a direct suit against a board of directors for the loss of value and voting power of the shareholder's shares; and (3) whether a shareholder may bring a claim for aiding and abetting a breach of fiduciary duty against a corporation based on the actions of the corporation's board of directors. After careful review, we hold that a minority shareholder may in certain circumstances control a corporation, and thus, owe the other shareholders a fiduciary duty. We also hold that Plaintiff does not have standing to bring a direct suit against the corporation's board of directors for his shares’ loss of value and voting power alone. Finally, we hold that without an underlying claim against the board of directors for a breach of fiduciary duty, Plaintiff cannot assert a claim of aiding and abetting for breach of a fiduciary duty against the corporation. Accordingly, we reverse and remand the trial court's order in part and affirm the trial court's order in part.
This dispute arises out of a merger (the "Transaction") between Reynolds and Lorillard, Inc. ("Lorillard"), funded in part by an equity financing share purchase by Defendant-Corporation's largest shareholder, British American. The following facts are alleged in Plaintiff's Amended Complaint and are accepted as true for purposes of our review.
In 2004, R.J. Reynolds Tobacco Company acquired British American's U.S. subsidiary, Brown & Williamson, and formed a successor entity, Reynolds American Inc., in which British American took a forty-two percent stake. In connection with this acquisition, British American and Reynolds adopted a Governance Agreement (the "Governance Agreement") on 30 July 2004. The Governance Agreement included a standstill provision ("the Standstill provision"), which prevented British American from increasing its percentage ownership in Reynolds for ten years, until 30 July 2014. The Governance Agreement also limited British American's ability to control Reynolds by: (1) permitting British American to designate no more than five of the thirteen board members of Reynolds, (2) requiring British American to vote its shares in favor of any board candidates selected by a Corporate Governance and Nominating Committee, comprised solely of non-British American designees, and (3) requiring non-British American designees to approve of any entrance into a contract between British American and Reynolds or any of their subsidiaries. The Governance Agreement also provided contractual rights to British American, including granting British American the right to prohibit the sale or transfer of certain intellectual property, veto amendments to the Articles of Incorporation and By-laws and adoptions of any takeover defenses, and approve the issuance of equity securities in an amount of five percent or more of the voting power of outstanding shares. The Governance Agreement terminates when British American's ownership share in Reynolds reaches one-hundred percent, drops below fifteen percent, or if a third party acquires a majority stake in Reynolds.
In or around September 2012, the Reynolds board of directors, together with Reynolds senior management, began contemplating a merger with Lorillard as a means of alternative strategic growth. Before approaching Lorillard, the president and chief executive officer and a director of Reynolds met with representatives of British American to discuss, among other things, the potential merger. On 15 November 2012, Reynolds formally expressed to Lorillard its interest in a merger, and negotiations ensued.
Throughout the negotiations process, British American insisted that it would support the Transaction only on terms that would allow it to maintain its forty-two percent ownership in Reynolds. British American also insisted—and Reynolds agreed—that neither British American nor Reynolds would seek to amend the Governance Agreement in connection with the Transaction. The Standstill provision in the Governance Agreement was scheduled to expire on 30 July 2014; without changing that provision or extending the expiration date, Reynolds ultimately could not prevent British American from taking control of Reynolds through the purchase of the remaining fifty-eight percent of Reynolds's outstanding shares.
In February 2014, Lorillard expressed concerns over the proposed terms of the Transaction and sought an additional ownership percentage for the Lorillard shareholders following the merger. Reynolds directors not designated by British American (the "Other Directors") expressed that any additional equity provided to Lorillard should come from a reduction of British American's ownership as opposed to a reduction of the non-British American shareholders’ ownership. However, the Other Directors acknowledged that British American's ownership share would not be decreased without British American's consent.
By March 2014, the Lorillard Board of Directors determined the proposed terms did not reflect a "merger-of-equals," decided not to proceed with the Transaction, and terminated the related discussions with Reynolds. Reynolds senior management then explored the possibility of acquiring Lorillard at a premium. With British American as the equity financing source, Reynolds and Lorillard reopened negotiations for the Transaction.
In July 2014, the Reynolds Board of Directors unanimously approved the Transaction. Lorillard's shares were to be purchased for a price per share of $50.50 in cash, plus 0.2909 shares of Reynolds stock. The cash portion of the Transaction was financed by the sale of Reynolds stock to British American at a price of $60.16 per share for a total of approximately $4.7 billion. This price was $3.02 less than the fair market value of the shares on the date of approval by the Reynolds Board of Directors. This sale assured that British American would maintain its forty-two percent ownership share in the remaining company following the Transaction.
When the Transaction closed in June 2015, Reynolds stock was publicly trading at $72 per share, or $11.84 greater per share than the price British American paid for its additional stock as part of the Transaction. The post-closing value constituted a profit of approximately $920 million for British American, a profit no other shareholder enjoyed.
Plaintiff filed suit in August 2014 in Guilford County Superior Court, just after the Reynolds Board of Directors approved the Transaction. The case was assigned to the North Carolina Business Court ("trial court") with Chief Special Superior Court Judge for Complex Business Cases James L. Gale presiding. Following Reynolds's filing of a Form S-4 (the "Proxy...
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