City of Fort Myers General Employees' Pension Fund v. Haley, 063020 DESC, 368, 2019

Docket Nº368, 2019
Opinion JudgeVALIHURA, JUSTICE
Party NameCITY OF FORT MYERS GENERAL EMPLOYEES' PENSION FUND, and ALASKA LABORERS-EMPLOYERS RETIREMENT TRUST, on behalf of themselves and other similarly situated former stockholders of TOWERS WATSON & CO., Plaintiffs-Below, Appellants, v. JOHN J. HALEY, VALUEACT CAPITAL MANAGEMENT, L.P., and JEFFREY UBBEN, Defendants-Below, Appellees.
AttorneyMichael J. Barry, Esquire, Christine M. Mackintosh, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware. Of Counsel: Lee D. Rudy, Esquire, Geoffrey C. Jarvis, Esquire, J. Daniel Albert, Esquire, Stacey A. Greenspan, Esquire, Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, for Appella...
Judge PanelBefore SEITZ, Chief Justice; VALIHURA, VAUGHN and TRAYNOR, Justices; and DAVIS, Judge, constituting the Court en Banc. VAUGHN, Justice, dissenting:
Case DateJune 30, 2020
CourtSupreme Court of Delaware

CITY OF FORT MYERS GENERAL EMPLOYEES' PENSION FUND, and ALASKA LABORERS-EMPLOYERS RETIREMENT TRUST, on behalf of themselves and other similarly situated former stockholders of TOWERS WATSON & CO., Plaintiffs-Below, Appellants,

v.

JOHN J. HALEY, VALUEACT CAPITAL MANAGEMENT, L.P., and JEFFREY UBBEN, Defendants-Below, Appellees.

No. 368, 2019

Supreme Court of Delaware

June 30, 2020

Submitted: April 22, 2020

Court Below: Court of Chancery of the State of Delaware C.A. 2018-0132-KSJM

Upon appeal from the Court of Chancery. REVERSED and REMANDED.

Michael J. Barry, Esquire, Christine M. Mackintosh, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware. Of Counsel: Lee D. Rudy, Esquire, Geoffrey C. Jarvis, Esquire, J. Daniel Albert, Esquire, Stacey A. Greenspan, Esquire, Kessler Topaz Meltzer & Check, LLP, Radnor, Pennsylvania, for Appellants.

Raymond J. DiCamillo, Esquire, Daniel E. Kaprow, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware. Of Counsel: Richard S. Horvath, Jr., Esquire, Gavin P.W. Murphy, Esquire, Paul Hastings LLP, San Francisco, California for Appellees ValueAct Capital Management, L.P. and Jeffrey Ubben.

Bradley R. Aronstam, Esquire, Roger S. Stronach, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware. Of Counsel: John A. Neuwirth, Esquire, Joshua S. Amsel, Esquire, Matthew S. Connors, Esquire, Amanda K. Pooler, Esquire, Sean Moloney, Esquire, Weil, Gotshal & Manges LLP, New York, New York for Appellee John J. Haley.

Before SEITZ, Chief Justice; VALIHURA, VAUGHN and TRAYNOR, Justices; and DAVIS, Judge, [*] constituting the Court en Banc.

VALIHURA, JUSTICE

This appeal arises from the 2016 "merger of equals" between Towers Watson & Co. ("Towers") and Willis Group Holdings Public Limited Company ("Willis"). In June of 2015, the two publicly-traded firms executed a merger agreement with closing conditioned on the approval of their respective stockholders. Although Towers had stronger performance and greater market capitalization, under the agreement's terms, Willis stockholders were to receive the majority (50.1 percent) of the post-merger company. Towers stockholders were to receive a $4.87 per-share special dividend and would own the remaining 49.9 percent of the combined company. Moreover, the consideration per share of Towers stock was below the unaffected trading price.

Upon the merger's public announcement, several segments of the investment community criticized the transaction as a bad deal for Towers and a windfall for Willis. Towers' stock price declined and Willis's rose in reaction to the news. Proxy advisory firms recommended that the Towers stockholders vote against the merger, and one activist stockholder began questioning whether Towers' management's incentives were aligned with stockholder interests. The parties questioned whether Towers would be able to obtain stockholder approval.

Also after announcing the merger, ValueAct Capital Management, L.P. ("ValueAct"), an institutional stockholder of Willis, through its Chief Investment Officer, Jeffrey Ubben, presented to John J. Haley, the Chief Executive Officer ("CEO") and Chairman of Towers who was spearheading the merger negotiations, a compensation proposal with the post-merger company that would potentially provide Haley with a fivefold increase in compensation. Haley did not disclose this proposal to the Towers Board.

In light of the uncertainty of stockholder approval, Haley renegotiated the transaction terms to increase the special dividend to $10 per share. Towers eventually obtained stockholder approval of the renegotiated merger. The transaction closed in January 2016, and the companies merged to form Willis Towers Watson Public Limited Company ("Willis Towers"). Haley became the CEO of Willis Towers and was granted an executive compensation package with a long-term equity opportunity similar to ValueAct's proposal.

The merger spawned several lawsuits across different jurisdictions. The matter before us arose from separate stockholder actions that were filed in early 2018 and then consolidated in April 2018. In this matter, Towers stockholders alleged that Haley breached his duty of loyalty by negotiating the merger on behalf of Towers while failing to disclose to the Towers Board the compensation proposal that, according to the plaintiffs, "would increase his long-term equity incentive compensation from the approximately $24 million maximum equity compensation that he could have earned in his last three years as Towers' CEO to upwards of $140 million in his first three years as Willis Towers' CEO."1Plaintiffs alleged that this proposal misaligned Haley's incentives at a critical juncture in the negotiations, and incentivized him to seek no more of a dividend than he believed necessary to secure the Towers stockholders' approval. Plaintiffs further alleged that ValueAct and Ubben aided and abetted the breaches of fiduciary duty.

The defendants moved to dismiss the complaint on November 16, 2018. The Court of Chancery dismissed the claims, holding that the business judgment rule applied because "a reasonable board member would not have regarded the proposal as significant when evaluating the proposed transaction," and further holding that plaintiffs had failed to plead a non-exculpated bad faith claim against the Towers directors. In view of its dismissal of the predicate breach of fiduciary duty claim, the court dismissed the aiding and abetting claim.

On appeal, plaintiffs contend that the Court of Chancery erred in holding that the executive compensation proposal was not material to the Towers Board. They argue further that because the predicate breach of fiduciary duty is adequately pleaded, the aiding and abetting claim survives as well. We hold that the Court of Chancery erred in granting the defendants' motion to dismiss the claim that Haley breached his fiduciary duty by failing to disclose material information to the Board. For the reasons more fully explained below, we REVERSE the decision below, and REMAND for further proceedings consistent with this opinion.

I.

Factual and Procedural Background

We take the facts, for the most part, from the Verified First Amended Class Action Complaint ("Complaint"), and the Court of Chancery's recitation of the facts in its opinion (the "Opinion"), 2 which in turn, was drawn from the Complaint and documents incorporated into the Complaint.

A. The Parties and Relevant Non-Parties

Non-party Towers, a Delaware corporation, was a publicly traded professional services firm focused on helping organizations improve performance through risk management, human resources, and actuarial and investment consulting.[3] Prior to the merger, the Towers Board of Directors consisted of Haley, Victor F. Ganzi, Leslie S. Heisz, Brendan R. O'Neill, Linda D. Rabbitt, Gilbert T. Ray, Paul Thomas, and Wilhem Zeller. Haley served as the Chairman and CEO of Towers.

Non-party Willis was a publicly traded corporation chartered in Ireland and was in the global advisory, brokering, and solutions business. Dominic Casserley was the CEO of Willis, and James McCann served as Chairman of the Willis Board.

ValueAct, a Delaware limited partnership, managed over $15 billion on behalf of large institutional investors. Immediately preceding the merger, ValueAct was the second-largest stockholder of Willis, beneficially owning approximately 10.3 percent of Willis's outstanding shares. Ubben was the co-founder and Chief Investment Officer of ValueAct and a member of its Management Committee. Ubben served on Willis's Board of Directors from 2013 until the merger closed, and then subsequently served on the Willis Towers Board of Directors until November 17, 2017. During his tenure on the Willis Towers Board, Ubben served on the Compensation Committee.

We refer to the directors of Towers' Board, ValueAct, and Ubben collectively as the "Defendants," and Haley, ValueAct, and Ubben together as the "Appellees."

City of Fort Myers General Employees' Pension Fund and Alaska Laborers-Employers Retirement Trust were Towers stockholders. We refer to them as "Plaintiffs."

B. ValueAct's Investment in Willis

ValueAct had held over five percent of Willis's equity since 2010, and held over ten percent of the outstanding ordinary shares by late 2014. ValueAct typically holds investments for three to five years, and its investment in Willis was approaching the end of its typical investment horizon.

Following the 2008 economic crisis, Willis posted flat earnings between 2008 and 2013, and experienced operating margin contraction between 2010 and 2013. Willis was also highly leveraged. In an effort to jumpstart the company, Willis replaced its CEO with Casserley in 2013, and in April 2014, announced a four-year restructuring plan. Ubben, attempting to salvage ValueAct's investment, reached out to Willis to consider strategic alternatives. Among these were a break-up of Willis (which management was reluctant to implement), or a business combination with Towers, which had a robust financial history and outlook that could benefit Willis.

C. The Negotiations and Merger Agreement

Willis, at Ubben's recommendation, began a review of strategic alternatives in late 2014. On January 26, 2015, Casserley met with Haley in London and raised the possibility of a business combination between Willis and Towers. The two agreed to discuss the possibility further, including with the members of their respective management teams, and agreed on a preliminary scope of work to further explore the possibility. On February 18, 2015, the two followed up on their discussion, refined the preliminary scope of work, and planned to meet to review their work on April 10.

On March 2, 2015, Haley exercised 106,...

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