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May 28 — A Delaware Chancery Court judge May 27 threw out shareholder derivative claims accusing rare-earth mining company Molycorp Inc. directors and private equity investors of improperly excluding the company from the equity market at a time it needed capital.
Vice Chancellor John W. Noble concluded that the minority shareholders could not seek derivative relief when PE investors that collectively owned 44.1 percent of the company's stock invoked a registration rights agreement allowing them to sell their shares through a secondary stock offering at an “unusually high price.”
Primarily, the court held that the plaintiffs failed to state breach of fiduciary duty claims against both the private equity investors and directors, “in light of the investors’ contractual right to sell and the absence of a demonstrable basis for recovery.”
“The Registration Rights Agreement, facts contradicting a cash crunch, and the human inability to predict the future preclude a conceivable finding that Defendants violated their fiduciary duties,” Vice Chancellor Noble opined.
In litigation that began in 2011, the plaintiffs alleged that the defendants shut Molycorp out of the equity market at a time it needed funding by allowing the PE investors to sell their own shares.
Even though there was no reason to doubt that the selling defendants benefited from the offering, Vice Chancellor Noble rejected a conclusion that the PE investors and directors took advantage of Molycorp and its minority shareholders.
Noting that a breach of fiduciary duty claim requires a cognizable wrong, he found that the investors had not done anything impermissible by exercising certain rights that they bargained for before the company's initial public offering, even though those rights benefited themselves and not the corporation.
“A finding otherwise could discourage would-be investors from funding start-ups for fear that their investment value will not be preserved despite disclosed, carefully negotiated agreements” he wrote.
Noble also did not find support for allegations that the defendants breached their fiduciary duties because they knew of the company's pressing need for funding and the lack of other financial avenues that would be available going forward.
Finding that the plaintiffs could not rely on discovery to prove its assertions, the court rejected speculation about the defendants' understanding of the company's stock value as a function of a boom-bust cycle.
“Emails might prove informative, but speculation of that sort should not accompany a decision on a motion to dismiss. The Court must base its decision on the facts as set forth by the Plaintiffs in the [complaint], not conclusory statements,” Noble wrote. “It simply is not a wrong to sell stock knowing that ‘a pin lies in wait for every bubble,' before a company with other opportunities decides to sell its own stock.”
The court additionally concluded that because the plaintiffs' complaint lacked specific factual allegations that the defendant directors knew the company's stock price would rise and fall as dramatically as it did, there was a strong argument that the directors had not committed a reasonably conceivable wrong.
“A director is not liable for failing to predict the movement of stock prices, and a stockholder is generally allowed to sell her shares,” he wrote adding that “[t]he Court declines to charge a director with knowing (or at least having sufficient reason to know), based on pleadings of a cyclical market and an unusual political event, that prices will decrease, within a narrow time frame, below the level needed to raise funds that her company needs.”
In dicta, Noble observed that the court did not need to address demand futility arguments, although he conceded having questions.
The plaintiffs were represented by Rosenthal, Monhait & Goddess, P.A.; and Biggs & Battaglia.
The defendants were represented by Potter Anderson & Corroon LLP; Richards, Layton & Finger, P.A.; Morris James LLP; Prickett, Jones & Elliott, P.A.; Blank Rome LLP; and Pepper Hamilton LLP.
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The opinion is available http://courts.delaware.gov/opinions/download.aspx?ID=224000.
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