Hogan Lovells Publications | Quarterly Corporate and M&A Decisions Update | May 2021

2021 Q1 Decisions Update

In re Columbia Pipeline Group, Inc. Merger Litigation, C.A. No. 2018-0484-JTL (Del. Ch. Mar. 1 2021)

Summary

In December 2014, NiSource spun off Columbia Pipeline Group, Inc. (Columbia), with Robert Skaggs, Jr. serving as CEO and chairman of the board, and Steven Smith serving as CFO. The plaintiffs alleged that Skaggs and Smith, even before the spin-off, planned to sell Columbia for their own financial benefit. From July 2015 to November 2015, several companies proposed acquiring Columbia. Columbia executed NDAs with all of these companies, with standstill and “don’t ask, don’t waive” (DADW) provisions.

Plaintiffs alleged that Skaggs and Smith showed favoritism to TransCanada as a bidder for Columbia. In December 2015, a TransCanada officer contacted Columbia in violation of the standstill provision in the NDA. Nevertheless, Smith allegedly provided TransCanada with 190 pages of confidential information, including notes from Columbia’s financial advisor discussing how to convince Columbia’s board to agree to a merger, without exposing TransCanada to a competitive auction for Columbia. Smith told TransCanada that Columbia had eliminated other possible acquirers. The board of directors was not aware of communication between TransCanada and Columbia, and Skaggs and Smith allegedly did not engage with any other acquirers, even when instructed to do so by the board.

On March 9, 2016, TransCanada sent a proposal to Columbia. After another bidder emerged, TransCanada is alleged to have demanded a “moral commitment” that Columbia would only respond to other bids, if that bid was fully financed and subject only to confirmatory diligence. Skaggs agreed. Thereafter, TransCanada lowered its offered share price and included additional restrictions on Columbia’s ability to consider other bids. Nevertheless, the board approved the merger, which closed on July 1, 2016; Skaggs and Smith retired shortly afterwards.

After the merger was complete, shareholders filed both appraisal litigation in the Delaware Court of Chancery and a securities class action in the United States District Court for the Southern District of New York. The Chancery Court found that the plaintiffs had received fair value for their shares, despite material omissions. The Southern District of New York dismissed the class action without certifying a class. Later, the plaintiffs in this case sued in the Court of Chancery, alleging breach of fiduciary duty by Skaggs and Smith, and aiding and abetting breaching of fiduciary duty by TransCanada. The plaintiffs were not parties in any of the prior proceedings.

The defendants moved to dismiss, making two procedural argument (that the plaintiffs were barred by issue preclusion or stare decisis) and arguing substantively that the plaintiffs had failed to state a claim for relief. Vice Chancellor Laster rejected the procedural arguments, finding that aligned interests or prior adequate litigation efforts alone do not bar a non-party from bringing suit. Instead, the plaintiff must have been a party to the prior litigation to be bound. Regarding the stare decisis argument, the court noted that no prior court had decided whether there was a breach of fiduciary duty under Delaware law, so the court had to consider the case before it under Delaware’s pleading standard.

The court then considered whether the complaint’s allegations pleaded a claim for breach of fiduciary duty. The court applied enhanced scrutiny because the complaint alleged conflicts of interest rather than the business judgment rule. In doing so, the court rejected the defendants’ argument that the business judgment rule should apply under the Corwin doctrine. Specifically, the court concluded that Corwin cleansing did not apply because the proxy statement made three material omissions, and thus the shareholder vote was not fully informed.

The court next examined whether the decision-making process behind the transaction and the directors’ actions were reasonable in light of the circumstances at the time. The court found that the plaintiffs had alleged sufficient details to overcome a motion to dismiss, relying on the allegations that the defendants provided confidential information to TransCanada and failed to keep the Columbia board fully informed. Furthermore, the court found that the plaintiffs had pleaded a sufficient claim against TransCanada for aiding and abetting Skaggs’ and Smith’s breaches because TransCanada allegedly breached its DADW standstill, became aware of Skaggs’ and Smith’s fiduciary duty breaches, and failed to disclose these breaches in its proxy statement.

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