Marcoux v. Prim,
2004 NCBC 5
NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF FORSYTH 04 CVS 920
RICHARD MARCOUX, on behalf of )
himself and all others similarly situated, )
)
Plaintiff, )
)
v. ) ORDER AND OPINION
)
BILLY D. PRIM, ANDREW J. )
FILIPOWSKI, MARK CASTANEDA, )
DAVID L. WARNOCK, RICHARD A. )
BRENNER, STEVEN D. DEVICK, )
ROBERT J. LUNN and JOHN H. )
MUEHLSTEIN, )
)
Defendants. )
{1} This case arises out of Plaintiff Richard Marcoux’s (“Marcoux”) claim that Defendants Billy D.
Prim, Andrew J. Filipowski, Mark Castaneda, David L. Warnock, Richard A. Brenner, Steven D. Devick,
Robert J. Lunn and John H. Muehlstein (collectively the “Individual Defendants”), in their capacities as
members of Blue Rhino Corporation’s Board of Directors, violated their fiduciary duties by approving a
merger with Ferrellgas Partners, L.P. Plaintiff specifically asserts that defendants violated the fiduciary
duties of loyalty and due care that directors owe to shareholders. The corporation is not a party to this
lawsuit. This matter comes before the Court on plaintiff’s motion for a preliminary injunction to prevent
the shareholders from voting on the Merger as well as defendants’ motion to dismiss. The shareholders
are scheduled to vote on April 20, 2004.
{2} After considering the briefs and oral arguments, the Court denies defendants’ motion to dismiss
and denies plaintiff’s motion for preliminary injunction.
McDaniel & Anderson, L.L.P. by L. Bruce McDaniel; Milberg Weiss Bershad Hynes & Lerach,
L.L.P. by William S. Lerach, Darren J. Robbins, Stephen J. Oddo, A. Rick Atwood, Jr., Randall J.
Baron and Shaun L. Grove; and Robbins Umeda & Fink, L.L.P. by Marc M. Umeda and Jeffrey P.
Fink for Plaintiff.
Bell, Davis & Pitt, P.A. by William K. Davis and Edward B. Davis for Defendants Billy D. Prim,
Andrew J. Filipowski and Mark Castaneda.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. by James T. Williams, Jr. and Mack
Sperling for Defendants David L. Warnock, Richard A. Brenner, Steven D. Devick, Robert J. Lunn
and John H. Muehlstein.
PROCEDURAL BACKGROUND
{3} This matter was designated a complex business case and assigned to the undersigned Special
Superior Court Judge for Complex Business Cases by order of the Chief Justice of the Supreme Court of
North Carolina dated March 25, 2004. A telephonic conference involving counsel for all parties was held
on Tuesday evening, March 30, 2004. Although the class action complaint filed February 12, 2004
involved challenges to the proposed merger, and the shareholders’ vote on the merger was set for April
20, 2004, at the time of the telephonic conference neither a motion for preliminary injunction nor motion
for expedited discovery had been filed, nor had any deposition been noticed. Defendants’ counsel had
previously filed a motion to dismiss in conjunction with their answer to the complaint. Plaintiff’s counsel
moved orally at the telephone conference for expedited discovery, while defendants’ counsel opposed any
discovery, asserting that the complaint is deficient on its face and discovery a mere fishing expedition.
{4} Given the short history of the case and under these importunate time considerations, the Court
established the following schedule by order dated April 1, 2004: opening briefs on plaintiff’s motion for a
preliminary injunction and defendants’ motion to dismiss were to be filed by April 9, 2004; opposition
briefs to plaintiff’s motion for a preliminary injunction and defendants’ motion to dismiss were due on
April 13, 2004; and, because the presiding judge is concurrently in trial in another county, a hearing on
plaintiff’s motion for a preliminary injunction and defendants’ motion to dismiss was held on April 15,
2004 at 7 p.m. and concluded at 10 p.m. A motion to amend the complaint was filed on April 13, 2004.
{5} The Court is placed in a procedural box. Plaintiff filed his complaint three days after the merger
was announced. Marcoux had few, if any, facts upon which to base a claim. Hence his allegations are
conclusory in nature. The Delaware courts have repeatedly urged plaintiffs to use the tools available under
Delaware law before filing shareholder suits. Plaintiff did not avail himself of that opportunity or wait for
the proxy statement to be filed, but rushed to the courthouse in North Carolina. He did not avail himself of
the case management benefits of the North Carolina Business Court until March 23, 2004.
{6} After having the benefit of the proxy statement and limited discovery, plaintiff has shifted his
theory of the case in his motion for preliminary injunction to one of a failure to disclose and has moved to
amend the complaint. While the Court is not inclined to condone or encourage the filing of complaints
without investigation supporting their basis, the Court is also cognizant of its duty to protect shareholders.
Accordingly the Court has addressed both the motion to dismiss and the motion for preliminary
injunction. Because plaintiff filed the motion to amend the complaint just days before the hearing, the
Court has based its decision on the motion to dismiss on the original complaint (“Complaint”).
I. FACTUAL BACKGROUND
A. THE MERGER
{7} On February 9, 2004, Blue Rhino Corporation (“Blue Rhino”) announced that it had entered into a
merger agreement (the “Merger Agreement”) with Ferrellgas Partners, L.P. (“Ferrellgas”). Blue Rhino is
a Delaware corporation with its principal offices located in Winston-Salem, North Carolina. The company
is publicly traded on the NASDAQ, and institutional investors and mutual funds own 41% of Blue
Rhino’s outstanding common stock. The primary business of Blue Rhino is exchanging propane cylinders
and providing propane-related products.
{8} Ferrellgas, a Delaware master limited partnership whose common units trade on the New York
Stock Exchange, is a Fortune 1000 company as well as one of the nation’s largest and fastest growing
marketers of retail propane. Ferrell Companies, Inc. (“Ferrell”) is a Kansas corporation that owns the
general partner of Ferrellgas, as well as approximately 45% of the outstanding common units of Ferrellgas.
{9} In addition to Ferrell’s ownership interest in Ferrellgas, it also owns FCI Trading Corporation
(“FCI”) and Diesel Acquisition, LLC (“Diesel”). FCI Trading is a Delaware corporation and a Ferrell
subsidiary established to purchase and sell energy commodities. Diesel is a Delaware limited liability
company and a wholly owned subsidiary of FCI recently formed solely to effect the Merger with Blue
Rhino.
{10} The Merger Agreement provides for shareholders of Blue Rhino to receive $17 in cash for each
share of common stock owned, an amount representing a 22% premium over the closing price the day
before the Merger announcement.[1] The Merger Agreement also includes a $10 million termination fee
which is approximately 2.9% of the $340 million value of the Merger. It also contains a “fiduciary out”
provision. Blue Rhino will hold a shareholders meeting on April 20, 2004, at which time its shareholders
may vote to approve or block the Merger with Ferrellgas. If the shareholders approve the transaction,
Blue Rhino will merge into Diesel and become a wholly owned subsidiary of FCI and thus part of the
Ferrellgas organization.
B. THE PLAINTIFF
{11} Marcoux owns 100 shares of Blue Rhino, which he purchased about a year ago for $10 per share.
Plaintiff will make a $700 profit on his $1,000 investment if the proposed Merger goes through. Marcoux
is also the plaintiff in a shareholder derivative action in California in which the Blue Rhino directors are
defendants. No other shareholder has joined Marcoux in this suit or filed similar claims.
C. THE BOARD OF DIRECTORS
{12} Plaintiff Marcoux filed this case as a class action, on behalf of the shareholders of Blue Rhino
against the Individual Defendants, on February 12, 2004 in Forsyth County. Plaintiff seeks to enjoin the
Merger, asserting that each member of Blue Rhino’s Board of Directors (the “Board”) violated his
fiduciary duties of loyalty and due care by pursuing and agreeing to the Merger with Ferrellgas. Plaintiff
named the following three persons, who constitute the inside directors on the Board, as defendants:
· Billy D. Prim (“Prim”) serves as the chairman of the Board and chief executive officer of Blue
Rhino. Prim was the co-founder of Blue Rhino and has served in the above capacities since
establishing the company in March 1994. Prim owns 8.9% of Blue Rhino’s common stock.
Prim is credited with creating the business concept which made Blue Rhino successful.
· Andrew J. Filipowski (“Filipowski”) is the vice chairman of the Board and was a Blue Rhino
co-founder. Filipowski owns 11.5% of Blue Rhino’s common stock.
· Mark Castaneda (“Castaneda”) is Blue Rhino’s chief financial officer and a member of the
Board. Castaneda owns 1.2% of Blue Rhino’s common stock.
{13} Plaintiff also named five other persons, who constitute the outside directors on the Board, as
defendants in the Complaint:
· David L. Warnock (“Warnock) is a director of Blue Rhino since 2000. Warnock is the
managing partner of the private investment firm Camden Partners, L.P. (“Camden Partners”).
Warnock owns 20,007 shares of Blue Rhino, which accounts for less than 1% of the
company’s common stock. An affiliated entity of Camden Partners, Camden Strategic Partners
II, LLC, owns 8.5% of Blue Rhino’s common stock.
· Richard A. Brenner (“Brenner”) is a director of Blue Rhino since 1998. Brenner is the chief
executive officer of Ammar Garage Doors, a manufacturer and distributor of garage doors.
Brenner owns 62,646 shares of Blue Rhino, which account for less than 1% of the company’s
common stock.
· Steven D. Devick (“Devick”) is a director of Blue Rhino since 1994. Devick is the chief
executive officer of DDE, Inc., a management services company. Devick owns 41,194 shares
of Blue Rhino, which account for less than 1% of the company’s common stock.
· Robert J. Lunn (“Lunn”) is a director of Blue Rhino since 1999. Lunn is the managing partner
of the private investment firm Lunn Partners, LLC. Lunn owns 24,341 shares of Blue Rhino,
which account for less than 1% of the company’s common stock.
· John H. Muehlstein (“Muehlstein”) is a director of Blue Rhino since 1995. Muehlstein is the
managing partner of the law firm Pederson & Houpt, P.C. Muehlstein owns 40,546 shares of
Blue Rhino, which account for less than 1% of the company’s common stock.
{14} In connection with the Merger, the parties entered into a voting agreement that provided for
several Blue Rhino shareholders to vote in favor of the Merger and in opposition to any measure adverse
to the Merger. Prim, Filipowski, Camden Partners and Malcolm R. McQuilkin (the CEO of Blue Rhino
Global Sourcing) agreed to the terms of the voting agreement. The combined common stock of these
shareholders represents approximately 26.5% of the outstanding stock of Blue Rhino.
D. MERGER NEGOTIATIONS AND THE SPECIAL COMMITTEE
{15} Blue Rhino employed several precautionary corporate governance and analytical measures before
entering into the Merger agreement. First, the Board considered several other merger opportunities before
electing to pursue the deal with Ferrellgas. For example, in November 2003 Blue Rhino entered into a
confidentiality agreement with a Fortune 500 company (the “Fortune 500 company”) to facilitate the
exchange of information necessary to evaluate a potential acquisition by this entity. The Fortune 500
company, however, later decided that it could not acquire Blue Rhino and declined to make an offer.
{16} The impetus for the search for strategic alternatives was the entry of AmeriGas Partners, L.P.
(“AmeriGas”) into the market. As a direct competitor to Blue Rhino, AmeriGas had the power to drive
down prices and margins in order to grab market share, an accomplishment made easier given the industry
customer concentration in big box retailers. In the view of the directors, AmeriGas posed a threat which
warranted the search for a larger partner. Awareness of that threat is a far more plausible reason for the
merger than plaintiff’s assertion that it was done to eliminate his derivative claim.
{17} After the Fortune 500 company declined to make an offer for Blue Rhino because of various
business considerations, the Board authorized management to engage Banc of America Securities to find
potential acquirers and explore other strategic alternatives. Shortly thereafter, Prim contacted Ferrell to
gauge if there was any interest on their part to acquire Blue Rhino. In late December 2003, Blue Rhino
and Ferrell executed confidentiality agreements and resolved to commence negotiations in the New Year.
The parties commenced negotiations in January 2004, holding several meetings in Winston-Salem. On
January 27 Ferrell offered to acquire Blue Rhino for $17 per share, which is the same price as the
proposed transaction that is the subject of this dispute.
{18} Banc of America Securities, at the request of Blue Rhino management, continued, however, to
evaluate other potential acquirers. On January 21 investment bankers from Banc of America Securities
met with representatives of a foreign multinational corporation (the “foreign company”) to determine if
that organization had any interest in acquiring Blue Rhino. The foreign company informed Banc of
America Securities that it had no interest. The foreign company believed that Blue Rhino was fully valued
at $13.50 per share. No entity other than Ferrellgas offered to merge with Blue Rhino.
{19} Second, the Board formed a special committee (the “Special Committee) consisting of independent
directors to evaluate and negotiate the Merger. The Board formed the Special Committee on January 28,
and the newly appointed members held their initial meeting that same day. Defendants point out that the
Special Committee met seventeen times before the announcement of the Merger. The Board authorized
the Special Committee to handle all aspects of the potential acquisition, including entertaining competing
offers, and to ultimately recommend a course of action to the Board. The Special Committee members
selected by the Board were four independent directors: Brenner, Devick, Muehlstein and Warnock. None
of these independent directors had an interest beyond that of a shareholder or as the holder of options or
warrants with their intrinsic value linked to Blue Rhino stock.
{20} On January 29 the Special Committee met, hired the law firm of Womble Carlyle Sandridge &
Rice (“Womble Carlyle”) to serve as its legal counsel, and engaged Banc of America Securities to prepare
a fairness opinion evaluating the potential transaction with Ferrell. Following these first two meetings,
the Special Committee held fifteen telephonic meetings in which Womble Carlyle apprised them of the
negotiations and legal matters. During this same period, Banc of America Securities prepared their
fairness opinion of the Merger.
{21} On February 7 the Special Committee met with Womble Carlyle and Banc of America Securities
to consider the proposed Merger and the related documents, including the Merger Agreement, Plan of
Merger, and Prim’s employment agreement. The full Board was not present initially at this meeting and
only joined the Special Committee when Banc of America Securities presented an updated financial
analysis and its fairness opinion of the proposed transaction. After the financial presentation, the Special
Committee again met without the other members of the Board. The Special Committee then considered
the advantages and disadvantages of the Merger before unanimously concluding that the Merger was in
the best interests of Blue Rhino shareholders and subsequently recommending that the Board approve the
Merger.
{22} The Special Committee provided a report to the Board that included its reasoning for
recommending the approval of the Merger with Ferrell. The Board considered the Special Committee’s
report and unanimously approved the Merger Agreement, Plan of Merger and related documents.
{23} Third, the Board obtained a detailed fairness opinion from Banc of America Securities that
evaluated the merits of the Merger. Banc of America Securities arrived at its opinion after reviewing the
financial statements, forecasts and stock performance of both Blue Rhino and other publicly traded
companies. There is no company comparable to Blue Rhino. The bankers also examined this data in the
context of the offer made by Ferrell to acquire Blue Rhino.
{24} Banc of Securities performed six analyses of selected transactions to arrive at the implied range of
equity values for Blue Rhino common stock. The analyses produced the following results:
Analysis Performed Implied Range of Value for
Blue Rhino Common Stock
Selected Publicly Traded Propane Companies $16.00-19.00 per share
Selected Publicly Traded Consumer Companies $10.00-14.00 per share
Selected Propane Acquisitions $10.00-14.00 per share
Selected Consumer Company Acquisitions $10.00-13.00 per share
Discounted Cash Flow Analysis $13.50-18.50 per share
Leveraged Buyout Analysis $11.00-14.00 per share
The analyses, aside from the upper end of two, all produced an implied value well below the $17 per share
offered by Ferrell. Thus, the bankers opined that from a financial standpoint the proposed Merger was
fair to the shareholders of Blue Rhino common stock.
E. PRIM’S EMPLOYMENT AGREEMENT
{25} The parties amended Prim’s employment agreement because under the former agreement the
Merger qualified as change of control, a qualification which triggered a potential payout to Prim. The
Special Committee examined Prim’s amended employment agreement with Ferrellgas and analyzed and
compared the terms of both the existing and amended agreements.
{26} Under a change of control scenario, Prim had the option to terminate his employment within the
twelve months following the closure of the merger. The termination of Prim’s existing employment
agreement entitled him to several benefits, including:
· Blue Rhino’s would continue to pay his base salary of $600,000 per annum plus cost of living
adjustments.
· Following the cessation of the base salary, Prim would receive cash retirement payments of
$778,000 per annum for ten years.
· Ferrellgas would provide Prim health care coverage for fifteen years.
The Special Committee requested and received a comparison of the original employment agreement and
Prim’s contract that would take effect if the merger were consummated. The Special Committee
determined the present value of the original agreement to be approximately $9.7 million in a change of
control merger.
{27} The amended employment agreement retained Prim and prevented the Merger from qualifying as
a change of control. The amended employment agreement includes the following key terms:
· Most notably, Prim would continue to work for the Blue Rhino following the merger. Prim
would assume the position of executive vice president of Ferrellgas, Inc. and chief executive
officer of the Blue Rhino Division of Ferrellgas Partners. Prim would also be nominated and
recommended for election to the Board of Directors of Ferrellgas, Inc.
· Prim would receive an annual base salary of $600,000 for his service in the above capacity. If
Ferrellgas terminates Prim “without cause” or Prim resigns for a “good reason” then Prim
would continue to receive the base salary for one year.
· The agreement provides Prim with a three-year term and automatic one-year extensions if
Ferrellgas does not terminate Prim 60 days before the end of any term.
· Prim is eligible for bonuses that do not exceed 100% of the above base salary. The agreement
evenly splits the bonuses between discretionary and incentive based bonuses.
· Ferrellgas would make a one-time payment of $2.5 million to Prim in exchange for his
agreeing to noncompetition and nonsolicitation clauses during the first three years of his
employment with Ferrellgas.
· Prim may receive stock options to purchase 250,000 shares of Ferrell stock. The stock options
are on a twelve-year vesting schedule. The Board of Ferrellgas shall determine the exercise
price.
· A retention payment to Prim would be made on either the three-year anniversary of the
Merger, or Mr. Prim’s termination of the amended employment agreement with good reason,
or Ferrellgas’ termination of Prim without cause. The retention payments consist of the
difference between the $17 per share and the applicable exercise price for Prim’s unvested
Ferrellgas stock options. The projected retention payment is $1,882,240.
F. PURCHASE OF PRIM’S REAL PROPERTY
{28} Prim entered into an agreement to sell a five-acre parcel of property that he owns to Ferrellgas.
The property had been in Prim’s family for five generations. Prim did not want to sell the property, but
Ferrellgas made it a condition of the transaction. Blue Rhino currently uses the property for propane
storage, as a warehouse facility and for other operating purposes. Prim will receive $3.15 million of
common units in limited partnership interest of Ferrellgas in exchange for his contributing the property.
At least two directors thought Ferrellgas was paying more than fair market value but were convinced that
overall no shareholder value had been diverted to Prim. Prim is the only witness to testify as to the value,
and he stated that the purchase price equaled the replacement value of the manufacturing facility. He also
testified that he did not wish to sell the property.
G. REINVESTMENT BY KEY MANAGEMENT
{29} Ferrellgas made Prim, Filipowski and McQuilkin agree to reinvest their net proceeds after taxes
from the transaction as a condition to the Merger. The reinvestment reduced the amount of capital that
Ferrellgas had to borrow to finance the transaction and was a condition to Ferrellgas consummating the
merger.
H. PLAINTIFF’S CONTENTIONS
{30} Plaintiff, however, claims that several provisions in the Merger Agreement undermine the
effectiveness of the aforementioned corporate governance and analytical measures. First, plaintiff claims
that Prim’s employment agreement with Ferrellgas, which names Prim as an executive vice president
following the Merger, is suspect. Plaintiff cites several ordinary provisions in the agreement as
questionable, including a $2.5 million lump sum payment and a $600,000 annual salary.
Plaintiff, moreover, particularly focuses on two clauses addressing Prim’s assistance in litigation
and confidential information. The clauses in Prim’s employment agreement that plaintiff takes issue with
are as follows:
11.1 ASSISTANCE IN LITIGATION. The Executive shall, upon reasonable notice,
furnish such information and assistance to the Company as may reasonably be required by
the Company in connection with any litigation in which it is, or may become, a party, and
which arises out of facts and circumstances known to the Executive. The Company shall
promptly reimburse the Executive for his out-of-pocket expenses incurred in connection
with the fulfillment of his obligations under this Section.
11.2 CONFIDENTIAL INFORMATION. The Executive acknowledges that all
Confidential Information has a commercial value in the Companies’ Business and is the
sole property of the Companies. The Executive agrees that he shall not disclose or reveal,
directly or indirectly, to any unauthorized person any Confidential Information, and the
Executive confirms that such information constitutes the exclusive properties of the
Companies; provided, however, that the foregoing shall not prohibit the Executive from
disclosing such information to third parties or governmental agencies in furtherance of the
interests of the Companies or as may be required by law.
{31} The alleged effect of these clauses is to stifle both a federal securities class action and a state
shareholder derivative claim pending against the directors in California. Plaintiff furthermore asserts that
defendants sought a purchaser that would provide them with continued employment as well as protect
them from potential liability in the other shareholder actions. The result, according to plaintiff, was that
the directors accepted a discounted share price from Ferrellgas in exchange for protecting their personal
interests. The Complaint, however, does not cite an employment agreement with Ferrellgas entered into
by a Board member other than Prim. More importantly, the proxy fully disclosed Prim’s employment
agreement with Ferrellgas.
{32} Second, plaintiff claims the Board members possess private information that provides insight into
the future value of Blue Rhino. This information allegedly concerns the financial condition and prospects
of Blue Rhino. Plaintiff asserts that this information supports the proposition that the Ferrellgas offer does
not adequately compensate Blue Rhino’s shareholders for the company’s present or future value.
{33} Third, plaintiff claims that the Board failed to study the merger and acquisition market to obtain
the highest bid possible for Blue Rhino’s shareholders. Defendants, however, claim that the Board
considered many strategic alternatives before pursuing the transaction with Ferrellgas.
{34} Fourth, plaintiff claims that Devick and Muehlstein did not qualify as outside directors and hence
tainted the evaluation of the Merger. The Complaint asserts that Devick had extensive business and
personal relationships with Prim and Filipowski. Plaintiff also claims that Muehlstein’s law firm received
legal fees in the past for its work on behalf of Blue Rhino as well as for the outside ventures of Prim and
Filipowski. Thus, plaintiff claims that Muehlstein does not qualify as an independent director. Muehlstein
and his firm ceased doing work for Blue Rhino after the passage of Sarbanes-Oxley.
{35} Plaintiff seeks to enjoin the Merger with Ferrellgas and have the Court determine that the Board
breached its fiduciary duties. The prayer for relief also seeks to enjoin Blue Rhino from combining with
any third party until the Board implements a procedure to obtain the highest possible price. In addition,
plaintiff seeks to tax defendants for cost and disbursements of this action, including reasonable attorney
and expert fees.
II. ANALYSIS OF MOTION TO DISMISS
A. THE REQUIREMENTS OF MAINTAINING A DERIVATIVE ACTION
{36} If this is a derivative action rather than a direct action, the plaintiff made three crucial mistakes as
to the Complaint filed in this action.
First, North Carolina law requires verification of the complaint in a derivative action:
In an action brought to enforce a secondary right on the part of one or more shareholders or
members of a corporation or an unincorporated association because the corporation or
association refuses to enforce the rights which may properly be asserted by it, the complaint
should be verified by oath.
N.C. Gen. Stat. § 1A-1, Rule 23 (b) (2003)(emphasis added). Plaintiff simply did not verify the
Complaint, which alone provides this Court the grounds for dismissal if this is a derivative action. The
verification requirement is not simply a technicality. It is required for a reason and plaintiff must fulfill
the requirement.
{37} Second, plaintiff did not comply with Delaware law because he did not join the corporation as a
party. See Agostino v. Hicks, 2004 WL 569353 (Del. Ch. Mar. 22, 2004).
{38} Third, the amended complaint does not contain allegations with respect to demand futility required
by Delaware law. If this is a derivative action, it is subject to dismissal.
B. ENJOINING THE NON-PARTY CORPORATION
{39} Plaintiff seeks relief that clearly affects the corporation, which is not a named party to this action.
The Complaint’s prayer for relief included only the following:
A. Declaring that this action is properly maintainable as a class action;
B. Declaring and decreeing that the Ferrellgas Merger agreement was entered into in
breach of the fiduciary duties of the Individual Defendants and is therefore unlawful
and unenforceable;
C. Enjoining defendants from proceeding with the Ferrellgas Merger agreement and
tender offer;
D. Enjoining defendants from consummating the Merger, or a business combination with a
third party, unless and until the Company adopts and implements a procedure or
process, such as an auction, to obtain the highest possible price for the Company;
E. Directing the Individual Defendants to exercise their fiduciary duties to obtain a
transaction which is in the best interests of shareholders until the process for the sale or
auction the Company is completed and the highest possible price is obtained;
F. Awarding plaintiff the costs and disbursements of this action, including reasonable
attorneys’ and experts’ fees; and
G. Granting such other and further relief as this Court may deem just and proper.
{40} There is no claim for monetary damages on behalf of the shareholder or corporation in the
Complaint. Plaintiff requests that the Court enjoin the directors from taking action to consummate the
merger with Ferrellgas and require the corporation to use a different process to obtain the highest possible
merger price. Clearly, this relief requires that the corporation halt its impending merger with Ferrellgas
and then subsequently auction itself to the highest bidder. The Court cannot enjoin a corporation from
merging with another entity if the corporation is not a party to this action. For that reason the Court would
decline to enter an injunction against the non-party corporation.
C. DERIVATIVE OR DIRECT ACTION?
{41} This Court must determine if plaintiff’s claims are direct or derivative under Delaware law.
Plaintiff asserts his claims are direct. Defendants, however, argue they are derivative and thus subject to
dismissal for failing to follow the required procedures for derivative actions. I n Tooley v. Donaldson,
Lufkin, & Jenrette, Inc., 2004 WL 728354 (Del. Apr. 2, 2004), the Supreme Court of Delaware set forth a
new standard to determine if a shareholder action was direct or derivative.[2] With respect to the
difference between a direct and a derivative claim the court stated as follows:
That issue must turn solely on the following questions: (1) who suffered the alleged harm
(the corporation or the suing stockholders individually); and (2) who would receive the
benefit of any recovery or other remedy (the corporation or the stockholders, individually)?
[A] court should look to the nature of the wrong and to whom the relief should go. The
stockholders claimed direct injury must be independent of any alleged injury to the
corporation. The stockholder must demonstrate that the duty breached was owed to the
stockholder and that he or she can prevail without showing injury to the corporation.
Id. at *6 (emphasis added).
{42} This Court has elected to address the direct/derivative issue in two ways. First, the Court has
looked to determine whether the claims fall under a line of case typified by Parnes v. Bally Entertainment,
Corp., 722 A.2d 1243 (Del. 1999). See also In re Ply Gem Indus., Inc. S’holder Litig.,
2001 Del. Ch.
LEXIS 84 (Del. Ch. 2001); Golaine v. Edwards ,
1999 Del. Ch. LEXIS 237 (Del. Ch. 1999). That line of
cases essentially holds that a shareholder may assert a direct claim based upon allegations that the merger
price received by the shareholders of a target corporation is the product of a breach of the duty of loyalty
by a fiduciary in which the directors acquiesced as a result of (a) being conflicted or (b) acting in bad
faith. If plaintiff has adequately pled a Parnes claim he has a viable direct claim. Tooley approved the
Parnes decision. This Court will address the adequacy of the pleading of a Parnes claim at the same time
it addresses the likelihood of success on such a claim.
{43} Second, the Court approached the claims as pure Revlon claims.[3] This analysis is appropriate
because the original complaint asserts Revlon claims and plaintiff did not change this approach with the
filing of the amended complaint.
{44} Tooley simplified the test to be applied and eliminated previously applied criteria such as “special
injury.” That case, however, did not address the specific issues raised by this motion to dismiss. This is a
pure Revlon claim. Plaintiff does challenge the deal protection devices.
{45} The question of whether claims that directors breached their Revlon duties are direct or derivative
claims remains undecided under Delaware case law. The primary reason that the Delaware courts have to
yet to resolve this issue is that most plaintiffs in Delaware file a derivative action to challenge the
fulfillment of Revlon duties. Delaware courts usually excuse demand when Revlon complaints are
properly pled. As a result, Delaware courts have not had the opportunity to tackle the issue of whether or
not plaintiffs can file these claims as a direct action.
{46} This Court must determine what the Delaware courts would decide on a motion to dismiss
challenges to a pending merger wherein a plaintiff filed direct claims alleging breaches of Revlon fiduciary
duties that prevent shareholders from receiving a fair price for stock. Two cases demonstrate the divergent
views held by the Chancery Court.
{47} In Agostino, the Delaware Court of Chancery advanced the argument that a plaintiff may not
maintain a direct action solely because a transaction did not maximize return. The directors in Agostino
issued warrants that transferred voting control of the company to another entity without compensating the
shareholders. 2004 WL 569353 at *2. The plaintiff claimed the issuance of the warrants and the change
in control prevented the corporation from pursuing other “value-maximizing transactions.” Id. at *2. The
plaintiff named the individual directors as defendants but did not join the corporation as a defendant. Id.
at *1.
{48} The Agostino court set forth the following test to determine whether an action is direct or
derivative: “Looking at the body of the complaint and considering the nature of the wrong alleged and the
relief requested, has the plaintiff demonstrated that he or she can prevail without showing an injury to the
corporation?” Id. at *7. The court found that the plaintiff offered no argument that precluding a value
maximizing transaction would harm the shareholders differently than the company. The court held that
the claim was derivative because the shareholder did not suffer an injury independent of the company. Id.
at *10. The court also dismissed the complaint because the plaintiff did not join the corporation as a
party. Thus, the mere decrease in the value of a business does not suffice to maintain a direct cause of
action against directors.
{49} Under Agostino, Chancellor Chandler views the injury to the corporation and all the shareholders
to be identical, thus producing no “individual” injury to the shareholders.[4] Applying his reasoning to the
case at hand supports a holding that Marcoux’s Revlon claims are derivative.
{50} The case of In re Gaylord Container Corp. S’holder Litig., 747 A.32d 71 (Del. 1999) takes a
different approach. In Gaylord, the plaintiffs alleged that the defendant’s board of directors caused the
plaintiffs special injury by restructuring the corporation and adopting a shareholder rights plan that
entrenched the directors in office. The corporation adopted the shareholders rights plan in response to an
acquisition proposal. The plan created a substantial obstacle for a potential acquirer. The plaintiffs sought
to employ a direct action rather than pursuing derivative claims.
{51} Vice Chancellor Leo Strine held that the complaint included direct claims because the plaintiffs
alleged they suffered an injury distinct from the injury to the corporation. The court reasoned so because
the shareholder rights plan was in response to an acquisition, and the action of the board prevented the
shareholders from maximizing the value of their shares. The proceeds from the sale of the corporation
affect the shareholders, not the corporate balance sheet.
{52} Under the Gaylord reasoning, Vice Chancellor Strine would find that the “injury” in a Revlon
claim is to the shareholders since the diminished value received in a merger flows to the shareholders.
Although Gaylord involved deal protection devices, which directly impacted the shareholders’ right to
vote on the merger, thus making it a more individual injury to the shareholder, the focus clearly is on the
injury, as in Parnes. The Parnes line of cases typically addressed claims for monetary damages.
{53} Similarly the Ply Gem court, relying on the Golaine decision, decided that the allegations did
support a direct action. The court used Golaine to apply the following reasoning:
As Golaine frames it, “the real question underlying the teaching of Parnes [is] whether the
Complaint states that the side transactions caused legally compensable harm to the target’s
shareholders by improperly diverting consideration from them to their fiduciaries.”
(footnote omitted).
In short, the Complaint can be read fairly to allege that, as the result of the unfair process
orchestrated by Silverman, Nortek reduced the per share price that it was willing to pay to
the Ply Gem shareholders in order to increase the amount that it was willing to pay
Silverman on his side transaction. (footnote omitted). Parnes teaches that such conduct
will serve as the basis for individual or direct claims.
Id. at *19-20.
{54} Plaintiff cites Ply Gem to support the proposition that a party may maintain a direct action that
challenges the process of considering a merger as unfair. In Ply Gem, the plaintiff alleged that the acquirer
reduced its offer by $0.75 per share to satisfy the demands of the target company’s chief executive office
and chairman of the board (the “CEO”). Id. at *13-14. The CEO allegedly manipulated the merger
process to obtain an extravagant personal compensation package at the direct expense of the shareholders.
The plaintiff contended that benefits received by the CEO constituted over 10% of the total value of the
merger.
{55} The contrary argument to Vice Chancellor Strine’s position holds that the corporation is being
sold as a result of this merger agreement. Thus, if the price at which the corporation sells is unfair, then
both the corporation and the shareholder suffer an identical injury. Where the corporation and shareholder
interests do not diverge, then the claim is derivative and not direct.
{56} While this Court might enjoy the opportunity to explore this issue in greater detail, the time
constraints involved require a quick judgment as to the outcome if, by chance, the issue were to arise in
Delaware.
{57} The Court concludes that the focus of the Supreme Court in Tooley on the “injury” involved leads
to the conclusion that a plaintiff may bring a pure Revlon claim as a direct claim. The “injury” results
from the diminished value that a shareholder would receive from a merger process that prevents the
shareholders from achieving the highest value for their shares in a change of control merger. The treasury
of the shareholder is depleted, not the treasury of the corporation.
{58} If Marcoux adequately alleged that Ferrellgas reduced its price to Blue Rhino shareholders to
increase the amount paid to Prim in response to Prim’s demands, then Marcoux adequately stated a direct
claim. For example, if plaintiff alleges that Prim refused to support the merger unless Ferrellgas diverted
funds from the transaction to Prim, then a direct claim exists and the Complaint is not subject to
dismissal.
{59} The Court will deal with the sufficiency of the pleading to assert both Parnes and Revlon claims
along with plaintiff’s likelihood of success on the merits in the preliminary injunction section of the
order.
{60} Similarly, if plaintiff has adequately alleged failure to disclose in the Proxy Statement, then he has
asserted a proper direct claim. That, however, is not the claim asserted in the Complaint.
III. ANALYSIS OF PRELIMINARY INJUNCTION
A. THE PRELIMINARY INJUNCTION STANDARD
{61} The Delaware courts often address the issue of whether to enjoin a shareholder vote on a merger
and the risks associated with the resultant delay of the proposed business combination. The Court turns to
the expertise of the Delaware Court of Chancery to establish the appropriate standard for evaluating the
motion for preliminary injunction in this matter. This Court must balance protecting shareholder rights
with preserving the freedom of shareholders to approve or block a proposed merger according to their own
economic interests. A standard that is too lenient in either direction can have adverse repercussions on
both shareholder rights and maximizing shareholder value.
{62} In Phelps Dodge Corp. v. Cyprus Amax Minerals Corp. , 2003 Del. Ch. LEXIS 210 (Del. Ch. Oct.
27, 1999), Chancellor William B. Chandler set forth a preliminary injunction standard requiring the
moving party to demonstrate three elements. First, the moving party must show a reasonable likelihood of
success on the merits. Second, the moving party must demonstrate a reasonable threat of irreparable
injury if the court does not issue an injunction. Third, Chancellor Chandler outlines “the balancing of the
equities part of the test.” The balancing part of the test requires the moving party to show that the threat
of injury from not issuing the injunction outweighs the possible injury from issuing the injunction.
{63} In Phelps, the court concluded that it should not enjoin the shareholder vote on the merger at
issue. Chancellor Chandler reasoned that the shareholders could simply vote down the merger if they
wished to avail themselves of another transaction that provided a premium. Furthermore, the shareholders
in Phelps also had the necessary information to render a fully informed vote. The court therefore found
that “the risk to the transaction already on the table . . . outweighs the de minimus harm that Phelps Dodge
and shareholder plaintiffs have asserted credibly here today.”
{64} Delaware law is clear that in the absence of a competing offer a plaintiff must make a particularly
strong showing on the merits to obtain a preliminary injunction because an injunction in such
circumstances risks significant injury to shareholders. In re The MONY Group, Inc. S’Holder Litig., 2004
Del. Ch LEXIS 16 (Del. Ch. 2004); In re Aquila, Inc. S’holder Litig., 805 A.2d 187, 189 (Del. Ch. 2002).
There is no competing offer here.
B. REASONABLE LIKELIHOOD OF SUCCESS ON MERITS
{65} Plaintiff’s Complaint is rife with conclusory allegations. The Court will examine both the
adequacy of the pleading in the Complaint and the likelihood of success on the merits at the same time.
1. Has plaintiff sufficiently alleged and is he likely to prevail on the merits in establishing a Parnes
claim?
Prim’s Employment Agreement
{66} Plaintiff is particularly critical of Prim’s amended employment agreement that he entered into with
Ferrellgas. The Court must compare the amended employment with the terms of Prim’s existing
employment agreement in order to understand the ramification of the amendments.
{67} The parties structured the amended agreement to retain Prim following the merger. The
consideration that Prim provides Ferrellgas in exchange for the added compensation is his continued
service, or at least the assurance that he will not compete with the newly merged entity. For example, the
vesting for the stock options is on a twelve-year schedule. The $2.5 million payment, moreover, is in
exchange for Prim signing restrictive covenants that prevent him from working in the industry to the
detriment of Ferrellgas. On the other hand, the former employment agreement merely provided Prim
compensation for his services at Blue Rhino.
{68} The failure to amend the employment agreement would have resulted in a change of control that
would have allowed Prim to terminate his employment following the closing of the Merger. The result
under the prior agreement is that Prim would receive a total package of $3 million in salary and
approximately $7.8 million in cash retirement payments from the new entity. Prim would not have to
render any additional services and would receive these funds without providing any additional
consideration. In contrast, the amended agreement prevents a change of control scenario and prohibits
Prim from both receiving consideration without rendering services and potentially competing with
Ferrellgas. The analysis presented to the Special Committee concluded that the future payments in the
buyout package would total $11.2 million, not including the upfront golden parachute payment. [5] See
Exhibits R and S to Affidavit of Richard A. Brenner.
{69} The amended employment agreement provides the new entity with the tangible benefit of
preventing Prim from leaving and potentially siphoning business away from Ferrellgas in a new venture.
The existing employment agreement would have allowed Prim to leave Ferrellgas following the Merger
and to reap gains without providing further consideration. Therefore, allegations that the amended
agreement unjustly enriches Prim have little basis.
{70} The Court is convinced, upon a thorough review of the evidence of record, that the benefits to Mr.
Prim from his individual contractual arrangements with Ferrellgas are no greater than, and in all
probability less than, the benefits he would have received under his employment agreement with Blue
Rhino in a change in control situation. The Court is further convinced that the Special Committee made a
good faith judgment to that effect. The Court believes that defendants will ultimately prove that the share
price was determined before any negotiation of Mr. Prim’s employment agreement and that the terms of
his agreement did not prevent an increased offer.
{71} Mr. Prim did not condition his support of the Ferrellgas offer on any agreement on his individual
benefits. Rather, the completion of Merger and receipt by the shareholders of $17 per share depended
upon Mr. Prim (and Mr. Filipowski) agreeing to certain conditions imposed by Ferrellgas which restricted
their economic freedom. There was no bribe and no “extraordinary” or “obscene” benefit to either Mr.
Prim or Mr. Filipowski, and the proxy materials adequately disclosed the arrangement between them and
Ferrellgas.
{72} Plaintiff also has trouble fitting within the precise confines of Parnes because he failed to show
that the Merger price reflects any differences in the value of Prim’s contractual benefits with Blue Rhino
and his benefits under the employment agreement with the purchaser. Plaintiff offers no pricing rationale
as to how the allegedly diverted benefits affect the share price. In fact, plaintiff seeks no monetary
recovery based upon diversion of benefits as was claimed in Parnes.
{73} Plaintiff will be unable to demonstrate a breach of the duty of loyalty by Prim. Plaintiff arguably
sufficiently pled the claim but will not prevail on the merits because he cannot show that part of the
merger value was diverted to Prim.
2. Has plaintiff sufficiently alleged and is he likely to prevail on the merits of his pure Revlon claim?
a. Revlon duties of Special Committee
{74} Plaintiff may have adequately stated a claim for the violation of Revlon duties in a conclusory
fashion. However, plaintiff will be unable to show that the Special Committee did not fulfill its Revlon
duties. The claim that the Special Committee failed to fulfill its Revlon duties, when it had only one offer
to entertain and that offer was at a 22% premium, is a difficult proposition because the Revlon duties
revolve around the Board obtaining the highest value possible for its shareholders.[6]
a. Independence of Special Committee
{75} In Aronson v. Lewis, 473 A2d 805 (1984), the Supreme Court of Delaware set forth a test as to the
independence and disinterestedness of directors. In Aronson, the court found that a director qualifies as
interested when he will obtain a personal financial benefit from the transaction at issue. In re Western
National Corp. S’holder Litig.,
2000 Del. Ch. LEXIS 82, at *37-38 (2000). Such a benefit disqualifies a
director as independent when stockholders do not equally share that benefit. A director is also not
independent if the transaction will adversely affect him, but not the corporation or other shareholders.
Id.
{76} The Aronson court defined independence as deciding a corporate matter based on the merits
presented to the board as opposed to extraneous considerations or influences. 473 A.2d 805 at (1984).
The Western National court established the plaintiff’s burden in proving that a director does not qualify as
independent by stating: “To establish lack of independence, a plaintiff meets his burden by showing that
the directors are either beholden to the controlling shareholder or so under its influence that their decision
is sterilized.”
2000 Del. Ch. LEXIS 82, at *37-38 (2000).
{77} The Ply Gem case specified the allegations that a plaintiff must assert to overcome the
presumption of independence as follows:
Plaintiffs are confronted with the challenge of pleading facts that create, at a minimum, a
reasonable doubt that the board members could not honestly and objectively evaluate the
Nortek merger, with its related Silverman agreement, because of their relationship with
Silverman. “Speculation on the motive for undertaking the corporate action” will not
satisfy Plaintiffs’ burden. Grobow v. Perot , 539 A.2d 180, 188 (Del. 1988). Similarly, the
mere assertion of personal or business relationships will not defeat the presumption of
independence. (footnote omitted).
2001 Del. Ch. LEXIS 84, at *26.
{78} Plaintiff’s allegations questioning the independence of Devick and Muehlstein are merely
assertions of personal and business relationships. These relationships alone do not suffice to defeat the
presumption of independence.[7] Plaintiff alleges that Devick, Prim and Filipowski serve on the boards of
each other’s companies, belong to the same club and socialize frequently. The Complaint asserts that
Devick and Filipowski often vacation together with their families in Maui to celebrate Christmas. Plaintiff
speculates that these relationships motivated Devick to approve the merger.
{79} Under the standard set forth in Aronson and Western National, these allegations do not
demonstrate that Devick did not qualify as an independent director. Plaintiff alleges that these
relationships exist but does not demonstrate that these relationships made Devick beholden to either Prim
or Filipowski. The allegations only advance that the relationships exist, not that the relationship
influenced or caused Devick’s decision regarding the merger.
{80} The evidence of record contains nothing to indicate that Mr. Prim possessed or exerted any
leverage on Mr. Devick that caused him to divert benefits from the shareholders to Prim. A more
colorable claim may be made for a lack of independence of Devick as to Filipowski, but that claim fails as
well. Devick and Filipowski are friends and have invested in companies together. They also have sat on
boards together and even served on each other’s compensation committees in the past. The assumption
that Devick was beholden to Filipowski, yet sacrificed the premium that he would receive from Ferrellgas’
merger with Blue Rhino to benefit Prim, defies logic. Any reduction in price per share diverted to Prim
would affect Devick and Filipowski dearly. Plaintiff’s speculation that Devick worked for a lower merger
price so Filipowski could later benefit from his Ferrellgas purchase after paying taxes on the sale of his
Blue Rhino stock defies logic and has no support in the record.
{81} Plaintiff alleges that Muehlstein did not qualify as an independent director because in the past his
law firm represented Blue Rhino as well as various ventures of Prim and Filipowski. The receipt of legal
fees by a director’s law firm does not, by itself, demonstrate that director’s lack of independence. In re Ply
Gem, 2001 Del. Ch. LEXIS 84, at *31; McMillan v. Intercargo Corp. ,
768 A.2d 492, 503 (Del. Ch.
2000). Legal fees from the corporation must be substantial in proportion to the size of the firm to rebut
the presumption that a director is independent. See In re Ply Gem,
2001 Del. Ch. LEXIS 84, at *31. Blue
Rhino, however, at the time of the merger no longer employed Muehlstein and his firm. Moreover, the
merger would likely extinguish a great deal of business for Muehlstein and his firm if Blue Rhino still
engaged his firm at the time of the merger. If his firm had hopes of receiving more legal work from Blue
Rhino, then Muehlstein had an incentive to reject the proposed merger.
{82} The independence of Warnock and Brenner are not seriously challenged. There is no evidence
that they were conflicted in anyway other than the existence of the shareholder derivative action. Plaintiff
has not sufficiently alleged nor is he likely to prove at trial that the members of Special Committee had
conflicts that compromised their independence.
{83} Plaintiff’s allegations fail to offer any proof that Devick or Muehlstein were subject to any
significant leverage from Prim. That they would sacrifice their own financial interests, their board seats
and tens of millions of shareholder dollars so Prim could sell property he did not want to sell at greater
than fair market value defies all logic and common sense.
{84} Time constraints prevent the Court from dealing with each of the allegations made with respect to
the independence of Devick and Muehlstein. Likewise, those time constraints do not permit a thorough
recitation of the applicable law. The Court is cognizant of the need to scrutinize carefully any allegations
of director conflict of interest. The Court has done so here and is satisfied that the members of the Special
Committee not only were independent for those purposes but also acted independently. There is no
showing that any of the Special Committee members were beholden to or under the control of Prim or
Filipowski or that either of them controlled the activities of the Special Committee. Mr. Brenner’s
independence is unchallenged, and he was the chairman of the Committee. There is no evidence of record
that Mr. Prim directed the Committee’s work in any way. There is evidence Mr. Brenner did.
a. The Board’s Activities
{85} The Board was not required to conduct an auction. Barker v. Amsted Ind., 567 A.2d 1279 (Del.
1989). The Board tested the market before executing the Merger Agreement. The Merger Agreement
allowed the Board to pursue other offers by providing a termination fee. In fact, the Board met with a
Fortune 500 company, and its investment bankers met with a foreign multinational company. Neither of
these parties decided to make an offer.
{86} After two months no other entity has expressed interest, and the market price reflects the reaction
that the proposed transaction will occur without the substantial prospect of a competing bid.[8] The Board
did not reject other offers or improperly favor the Ferrellgas proposal because the Board did not have any
other options.
{87} Blue Rhino was facing for the first time a much larger competitor with the ability to drive down
profit margins in order to take market share. That posed a particularly dangerous scenario in the
circumstances where Blue Rhino’s customer base was heavily concentrated in four huge retailers. The
Board’s decision to look at strategic alternative was prudent given the alternatives.
{88} Moreover, the Board and Special Committee consisted of shareholders who would suffer an
economic loss just as the ordinary shareholder would if this proved to be a bad deal. Warnock’s affiliates
held 8.5% of Blue Rhino stock. The Board had no incentive in this case to act improperly, and the
plaintiff does not offer evidence to the contrary. Plaintiff has not alleged nor is he likely to prevail on the
merits at trial on a claim that the Board acted in bad faith.
{89} Plaintiff is unlikely to prevail on the merits because the Special Committee was independent and
made a good faith business judgment that the process chosen was in the best interests of shareholders.
3. Is plaintiff likely to prevail on the merits on the claim that shareholders are being misled or denied
material information?
{90} When the proxy statement disclosures are challenged in a motion such as this, it becomes the
Court’s duty to see that shareholders have the information that they need to make a rational business
judgment about whether to sell their shares for the merger price. An alleged omission is material if the
fact is one “that would have assumed actual significance in the deliberations of a reasonable shareholder.”
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985). Plaintiff advances instances in which he
claims the proxy was deficient. The Court will address each in turn.
a. Sale of the Prim Property to Ferrellgas
{91} The proxy statement adequately discloses the Real Property Contribution Agreement. Plaintiff
faults the proxy statement for not disclosing (a) that the property had a fair market value less than the
amount Prim was receiving and (b) his proceeds might be tax deferred. Prim’s tax situation is unresolved,
and there was no need to speculate about it in the proxy. See Mendell v. Greenberg, 927 F.2d 667, 676 (2d
Cir. 1991). His tax treatment would not be material. If this were a case in which any excess above the fair
market value he received were funds diverted from shareholders, disclosure would be required. Here, the
Special Committee concluded that in totality Mr. Prim’s benefits received from Ferrellgas were (a) no
more than he would received under his current agreement and (b) did not cause any diversion of funds
from the shareholders to Prim. The Court also notes that Ferrellgas insisted in the transfer, and the
property had a personal value to Mr. Prim over and above its fair market value.
{92} As in other instances there is no quantification by plaintiff by which the Court can judge the
materiality of the alleged omission. Mr. Prim testified that it would cost about the same to build an
equivalent facility. Lacking a measure of materiality, the Court is hard pressed to find an omission which
would have been important to a shareholder.
{93} The real property transaction was adequately disclosed. It might have been preferable for the
proxy to articulate the Board’s decision-making process, but the necessary facts were disclosed.
a. Merger Synergies
{94} Plaintiff faults the directors for failing to disclose the benefits of merger synergies. Plaintiff
speculates that the shareholders might hold out for more if they thought Ferrellgas could afford to pay
more. Such speculation is just that. Ferrellgas had made an offer substantially greater that than the
market test indicated and had not budged on the price.
{95} The Special Committee had no quantifiable information on the synergistic benefit to Ferrellgas
and would have been guessing in this regard. To make such a guess could well have misled shareholders
into thinking that they could get more when there was no indication they could do so. Under Delaware
law, Blue Rhino was under no obligation to create information to make subjective projections about
potential synergies. See In re Siliconix Inc. S’holder Litig., 200 WL 716787, at *10 (Del Ch. 2001); In re
Data Prod. Corp. S’holder Litig.,
1991 WL 165301, at *8 (Del, Ch. 1991).
{96} The fact that the initial press release by both companies announcing the merger touted the
synergies between the two companies did not obligate them to produce a study that quantified the
synergies. A reasonable investor could infer from the premium paid that Ferrellgas expected some
benefits from the merger. Blue Rhino was not required to disclose what it guessed Ferrellgas thought the
synergies were worth. Given the premium paid for the shares and the lack of any quantifiable evidence of
what synergies were worth, the Court is again hard pressed to find that the omission was one which would
be material to a shareholder deciding how to vote.
a. Shareholder derivative suits
{97} Plaintiff faults defendants for failing to disclose in the proxy statement the existence of his
shareholder derivative action in California and the fact that Delaware law would operate to extinguish
those claims upon consummation of the merger. Similarly, six federal securities law cases and a federal
shareholder derivative action were pending in which the directors were defendants. Significantly those
other actions were all dismissed this week.[9] Those dismissals highlight the speculative nature of
derivative lawsuits, and it is unlikely that a reasonable investor would be influenced in this vote by the
prospect of a speculative recovery by the corporation in a shareholder derivative action sometime in the
future.
{98} The Court is further hampered by the fact that plaintiff’s complaint in the California action has
never been made a part of this record so the Court can make a judgment as to its materiality to a reasonable
shareholder in any event. Undoubtedly there have been and will be occasions on which the existence of
shareholder derivative suits are material.
{99} There is no showing on this record that this is one of them. For all the Court knows, Marcoux’s
claim may be subject to the same basis of dismissal as the Gish shareholders derivative action. This issue
is controlled by In re Siliconix Inc. S’holder Litig., 200 WL 716787, at *10 and In re JJC Holding Co.
Inc.,
2003 WL 22246591, at *5 (Del. Ch. 2003).
a. Director’s independence
{100} The Court has already determined that plaintiff is unlikely to prove that the members of the
Special Committee were not independent. Therefore a claim that they failed to disclose a lack of
independence would fail as well.
a. Banc of America’s Fairness Opinion
{101} After examining the depositions and reports, the Court finds that Banc of America’s fairness
opinion has more substance and proves more reliable than Dr. Hakala’s (plaintiff’s expert) position.
Several problems existed with Hakala’s declaration. First, Hakala’s declaration advocated that Banc of
America’s fairness opinion was flawed because it did not include an accretion analysis. Hakala later
agreed an accretion analysis was not a useful tool in a cash out merger such as the Blue Rhino and
Ferrellgas transaction.
{102} Second, Hakala maintained in his declaration that the fairness opinion should have included an
evaluation of Blue Rhino compared to other propane companies. It is difficult to contest the proposition
that Blue Rhino is a unique company that does not lend itself to a study wit h comparable companies.
Hakala conceded that even Ferrellgas and Blue Rhino have little in common beyond dealing with the same
product.
{103} Third, Hakala asserted that Blue Rhino failed to disclose synergies from the merger with Ferrellgas
in regards to the fairness opinion. However, Hakala did not perform an independent analysis of the
synergies and admits that attempting to value synergies is speculative.
{104} Fourth, Hakala challenges in his declaration Banc of America’s failure to account for a control
premium and their use of a small stock premium. As admitted by Hakala in his deposition, the central
premium in acquisitions is sometimes less than his suggested 30% and sometimes not a factor at all. He
also conceded that the small stock premium is a judgment call and that the disclosure in the proxy resolves
any problem with its use.
{105} The Court therefore finds that Dr. Hakala’s major points lack merit and would not support a
finding that the Banc of America Securities valuation was fraught with error or required material
disclosures that were not made.
B. IRREPARABLE HARM
{106} The harm that could result if the Court enjoins the shareholder vote is the loss of the 22%
premium that Ferrellgas offered for Blue Rhino. Plaintiff offers no evidence that another suitor will pay
more or even the same amount per share for Blue Rhino. The marketplace affirms this conclusion in that
Blue Rhino shares have yet to close above $17 since the merger announcement. An injunction threatens to
leave the shareholders empty handed without either the offer from Ferrellgas or a replacement offer. The
end result would likely be that Blue Rhino shares will begin to trade around the same $13 per share range
as before the merger announcement.
C. BALANCING OF THE EQUITIES
{107} The Court finds that plaintiff has not established a likelihood of success on the merits and that the
balance of harm tilts in favor of letting the shareholder vote proceed next week. The potential damage to
the shareholders from an injunction prohibiting the shareholder vote far outweighs the benefit associated
with an injunction. The Court is convinced that the shareholders have adequate information to make an
informed decision on whether or not to accept $17 per share for their stock and that the absence of another
bidder increases the prospect for irreparable injury from the Court enjoining the merger.
CONCLUSION
{108} Although this has been an expedited process, the Court is convinced that plaintiff is not likely to
prevail on the merits in the claims asserted in the Complaint or the issues raised in the preliminary
injunction motion. He will be unable to prove a Parnes claim because he cannot show any diversion of
the merger consideration to Prim or others. He also will be unable to establish a Revlon claim. Rather, it
appears to the Court that the directors secured the highest value possible for the shareholders in a change
of control situation. The members of the Special Committee were independent for the purposes for which
they were acting and acted to insure that the shareholders received full value and made a good faith
judgment that no value was diverted to Prim or others in the process.
{109} Most importantly, where, as here, there are no other bidders, plaintiff must make a strong showing
of likelihood of success on the merits to overcome the harm that could befall the shareholders if the
merger is enjoined. Marcoux has not done so.
{110} The Court is less certain about its conclusion that this is a direct and not a derivative claim under
Delaware law, but has made its best judgment in that regard. The alleged injury in the pure Revlon claim
depletes the treasury of the shareholder and the Court believes that Tooley requires the Court to focus on
that injury.
The motion to dismiss is denied.
The motion for preliminary injunction is denied.
Defendants have twenty days from today to respond to the motion to amend the Complaint.
SO ORDERED, this 16th day of April 2004.
[1] Since the merger announcement Blue Rhino stock has traded in the range of $16.72 to 16.97.
[2] In Tooley, the Supreme Court of Delaware also upheld the Kramer and Agostino decisions issued by the Chancery Court. 2004
WL 728354 at *3, 5.
[3] See Revlon, Inc. v. MacAndrews & Forbes,
506 A.2d 173 (Del. 1986). “[T]he duty of the board . . . changed from the
preservation of Revlon as a corporate entity to the maximization of the company’s value at a sale for the stockholders’ benefit . . . .
The whole question of defensive measures was moot. The directors’ role changed from defenders of the corporate bastion to
auctioneers charged with getting the best price from the stockholders at a sale of the company.”
506 A.2d at 181.
[4] The Supreme Court of Delaware’s decision in Kramer v. Western Pacific Industries, Inc.,
546 A.2d 348 (Del. 1988), explicitly
illustrates the type of injury in which a shareholder may seek redress using a derivative action. In Kramer, the plaintiff alleged that
two of the defendant directors of the target corporation negotiated and obtained compensation that decreased the value paid by the
acquirer.
Id. at 350. The court found that if the compensation directly resulted in a discount to the price paid by the acquirer for the
target corporation, then the plaintiff should bring these claims as a derivative action.
Id. at 353. The Kramer court reasoned that
the claims are derivative in nature because the plaintiff based the claims on the diminished share value and stated:
[W]here a plaintiff shareholder claims that the value of his stock will deteriorate and that thevalue of his
proportionate share of the stock will be decreased as a result of alleged director mismanagement, his cause of
action is derivative in nature. (citation omitted).
A claim of mismanagement resulting in corporate waste, if proven, represents a direct wrong to the corporation
that is indirectly experienced by all shareholders. Any devaluation of stock is shared collectively by all the
shareholders, rather than independently by the plaintiff or any other individual shareholder. Thus, the wrong
alleged is entirely derivative.
Id. (emphasis added).
[5] The analysis also found that the total buyout, the present value of the future payment plus the upfront payment, would cost $9.6
million. See Exhibit R to Affidavit of Richard A. Brenner
[6] See
Revlon, supra note 3, at 181.
[7] “Allegations of a mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a
reasonable doubt about the director’s independence.” Beam ex rel Martha Stewart Omnimedia v. Stewart,
2004 LEXIS 162, at
*22 (Del. Ch. 2004).
[8] See supra note 1.
[9] See Order of Dismissal, Gish v. Prim, CVO 3-04680-NM (AJWx) (U.S.D.C. Central District of Cal.) dated April 13, 2004, and
Order Granting Motion To Dismiss Consolidated Complaint, In Re Blue Rhino Corp. Securities Litigation, CV 03-3495 NM et seq.
(U.S.D.C. Central District of Cal.) dated April 12, 2004.
