In re Columbia Pipeline Grp., Inc. Merger Litig.
| Decision Date | 01 March 2021 |
| Docket Number | Cons. C.A. No. 2018-0484-JTL |
| Parties | IN RE COLUMBIA PIPELINE GROUP, INC. MERGER LITIGATION |
| Court | Court of Chancery of Delaware |
Ned Weinberger, Derrick Farrell, LABATON SUCHAROW LLP, Wilmington, Delaware; Gregory V. Varallo, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, Wilmington, Delaware; Stephen E. Jenkins, Marie M. Degnan, ASHBY & GEDDES, P.A, Wilmington, Delaware; Jeroen van Kwawegen, Christopher J. Orrico, Alla Zayenchik, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Attorneys for Plaintiffs.
Martin S. Lessner, James M. Yoch, Jr., Paul J. Loughman, Kevin P. Rickert, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Brian J. Massengill, Matthew C. Sostrin, Linda X. Shi, MAYER BROWN LLP, Chicago, Illinois; Attorneys for Defendants.
LASTER, V.C.
The plaintiffs are former stockholders of Columbia Pipeline Group, Inc. ("Columbia" or the "Company"). On July 1, 2016, TransCanada Corporation acquired the Company (the "Merger") under an agreement and plan of merger dated March 17, 2016 (the "Merger Agreement" or "MA"). Each share of Columbia common stock was converted into the right to receive $25.50 in cash, subject to each stockholder's right to eschew the consideration and seek appraisal.
During the sale process, Robert Skaggs, Jr., served as the Company's Chief Executive Officer and as chairman of its board of directors (the "Board"). Steven Smith served as the Company's Executive Vice President and Chief Financial Officer. The plaintiffs contend that Skaggs and Smith wanted to retire in 2016 and engineered a sale of the Company so that they would receive their change-in-control benefits. The plaintiffs contend that once TransCanada emerged as a committed bidder, Skaggs and Smith persistently favored TransCanada during the sale process. The plaintiffs detail a series of actions that Skaggs and Smith took which inferably undercut the Company's bargaining leverage with TransCanada and prevented the Company from developing other transactional alternatives. As a result, during the final phases of the negotiations, TransCanada was able to lower its bid below the range it had offered to obtain exclusivity, demand an answer within three days, and threaten to announce publicly that merger negotiations had terminated unless the Company accepted the lowered bid. Faced with the bad situation that Smith and Skaggs had created, the Board entered into the Merger Agreement.
The plaintiffs contend that by taking these actions, Skaggs and Smith breached their fiduciary duties. The plaintiffs contend that TransCanada knew that Skaggs and Smith were breaching their duties, in part because their actions were so extreme, and exploited the resulting opportunity, making TransCanada potentially liable for aiding and abetting the breaches.
The defendants point out that this is the fourth lawsuit arising out of the Merger. Immediately after the Merger was announced, a group of traditional stockholder plaintiffs attacked the deal in this court (the "Original Fiduciary Action"). The defendants prevailed on a motion to dismiss.
Next, a group of hedge funds pursued their appraisal rights (the "Appraisal Proceeding"). That case was litigated through trial, resulting in a decision holding that the Company's fair value for purposes of appraisal was equal to the deal price of $25.50 per share (the "Appraisal Decision").
While the Appraisal Proceeding was moving forward, the plaintiffs in this action filed suit, relying on discovery from the Appraisal Proceeding that had become publicly available. The plaintiffs in this action sought to consolidate this litigation with the Appraisal Proceeding and to have a single trial on all issues, but TransCanada—the real part in interest in the Appraisal Proceeding—successfully opposed that result. This action then lay dormant until after the issuance of the Appraisal Decision.
Finally, while the Appraisal Proceeding was moving forward, two other stockholders filed an action in federal court that asserted claims under the federal securities laws (the "Federal Securities Action"). The plaintiffs in the Federal Securities Action alsoasserted claims under Delaware law for breach of the fiduciary duty of disclosure. The defendants prevailed on a motion to dismiss, but the federal court declined to reach the claims for breach of fiduciary duty (the "Federal Securities Decision").
Now, the plaintiffs in this action wish to proceed with their litigation. The defendants have moved to dismiss the complaint, arguing that the Appraisal Decision and the Federal Securities Decision mandate dismissal under principles of collateral estoppel. The defendants understandably want those prior rulings to be binding, but the current plaintiffs do not have a relationship with either the petitioners in the Appraisal Proceeding or the plaintiffs in the Federal Securities Action that would support the application of issue preclusion.
As a fallback, the defendants maintain that dismissal is warranted under the doctrine of stare decisis because the Appraisal Decision and the Federal Securities Decision are persuasive authorities that ruled on the issues presented in this case. Unfortunately for the defendants, the Appraisal Decision addressed a narrow question: the fair value of the Company as a standalone entity operating as a going concern. The Appraisal Decision held that the sale process was sufficiently reliable that the deal price provided a sound indication of the Company's standalone value. The Appraisal Decision did not determine whether Skaggs and Smith breached their fiduciary duties, nor did it address the claim that the Company could have obtained a higher deal price from TransCanada or from a competing bidder if Skaggs and Smith had not acted as they did. The rulings in the Federal Securities Decision likewise do not translate to the current setting, because the district court appliedthe higher federal pleading standard of plausibility to address claims under the federal securities laws that required the pleading of particularized facts.
The allegations of the complaint support a reasonably conceivable inference that Skaggs and Smith breached their duty of loyalty. Although the allegations against TransCanada are weaker, they support a reasonably conceivable inference that TransCanada aided and abetted breaches of fiduciary duty by Skaggs and Smith. The defendants' motion to dismiss is denied.
The facts are drawn from the amended complaint (the "Complaint"), the documents that it incorporates by reference, and pertinent public records that are subject to judicial notice.1 At this procedural stage, the Complaint's allegations are assumed to be true, and the plaintiffs receive the benefit of all reasonable inferences.
At the time of the events giving rise to the Complaint, Columbia was a Delaware corporation headquartered in Houston, Texas. The Company developed, owned, and operated natural gas pipeline, storage, and other midstream assets. As a midstream company, Columbia's operations centered on the transportation and storage of oil andnatural gas. The Company's success depended on its contracts with oil and gas producers, known as counterparty agreements.
Columbia's primary operating asset consisted of 15,000 miles of interstate gas pipelines that served the strategically important Marcellus and Utica natural gas basins in Appalachia. The Company's management team had developed a growth-oriented business plan that sought to exploit a production boom in the basins. The plan required substantial capital investment, which in turn required large amounts of financing.
Columbia itself was a holding company. Its principal asset was an 84.3% interest in the Columbia OpCo LP ("OpCo"), a Delaware limited partnership that owned the Company's operating assets. Columbia also owned 100% of the general partner interest and 46.5% of the limited partner interest in Columbia Pipeline Partners, L.P. ("CPPL"), a master limited partnership ("MLP") whose common units traded on the New York Stock Exchange. CPPL owned the other 15.7% interest in OpCo.
The Company used CPPL to raise capital. As a pass-through entity, CPPL could raise funds at a lower cost of capital than the Company. CPPL raised capital by selling limited partner interests to the public. For CPPL to raise capital efficiently, the trading price of CPPL's units needed to remain in line with management's projections.
Before the events challenged in the Complaint, Columbia was a wholly owned subsidiary of NiSource Inc., a publicly traded utility headquartered in Indiana. Skaggs was the CEO of NiSource and chairman of its board of directors. Smith was its CFO.
Skaggs and Smith had been planning for retirement, and both had selected 2016 as their target year. Skaggs had served as CEO since 2005, and he believed that a CEO had a "shelf-life" of about ten years. Compl. ¶ 27. Skaggs' personal financial advisor used March 31, 2016, as Skaggs' anticipated retirement date for planning purposes. He told Skaggs that "the single greatest risk" to the retirement plan was Skaggs' "single company stock position in NiSource." Id. ¶ 28. Smith considered fifty-five to be the "magical age" to retire. Id. ¶ 29. He would turn fifty-five in 2016.
Skaggs and Smith enjoyed compensation packages that included lucrative change-in-control arrangements. Those arrangements would provide materially greater benefits if their employment ended after a sale of NiSource. A sale of assets comprising more than 50% of NiSource's book value satisfied the requirement for a sale. The midstream assets that NiSource held through the Company comprised less than 50% of NiSource's book value, so a sale of the Company by NiSource would not trigger the change-in-control benefits. But if NiSource spun off the Company and if Skaggs and Smith became executives of the Company with similar...
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