Brookfield Asset Management, Inc. v. Rosson
265 A.3d 1032 (Del. 2021) (2021)
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Rule of Law:
Claims alleging that a corporation issued stock to a controlling stockholder for inadequate consideration, thereby diluting the economic value and voting power of minority stockholders, are exclusively derivative under Delaware law, as the harm is suffered by the corporation and any recovery would benefit the corporation.
Facts:
- In October 2017, Brookfield Asset Management, Inc. ("Brookfield") became the controlling stockholder of TerraForm Power, Inc. ("TerraForm"), holding 51% of its outstanding Class A common stock and appointing four of its seven directors.
- Around January 2018, Brookfield approached TerraForm regarding an opportunity to acquire Saeta Yield, S.A. ("Saeta") for $1.2 billion and suggested funding it with an equity offering backstopped by Brookfield, despite TerraForm having sufficient debt capacity.
- On February 6, 2018, TerraForm's Conflicts Committee (composed of non-Brookfield directors) approved a Support Agreement for Brookfield to backstop up to $400 million of a public equity offering at $10.66 per share, initially without consulting an independent financial advisor.
- On May 23, 2018, after stockholders approved the share issuance, TerraForm's CEO, John Stinebaugh (a Brookfield appointee), proposed increasing the equity offering to $650 million and suggested that if a public offering proved too risky, the full amount could be offered to Brookfield via a private placement at the $10.66 per share price.
- After limited consultation with its newly engaged independent financial advisor, Greentech Capital Advisors Securities, LLC, and largely relying on advice from Brookfield and TerraForm management, the Conflicts Committee approved a private placement of $650 million of TerraForm stock exclusively with Brookfield at $10.66 per share on June 4, 2018.
- On June 7, 2018, TerraForm's Board authorized the sale of 60,975,609 shares of common stock to Brookfield for $650 million through this Private Placement, which increased Brookfield's economic interest and voting power in TerraForm from 51% to 65.3%.
- By June 25, 2018, TerraForm's stock was trading at $11.77 per share, 10.4% above the Private Placement price, representing an unrealized profit of $68 million for Brookfield.
Procedural Posture:
- On September 19, 2019, Martin Rosson filed a verified derivative and purported class action complaint in the Court of Chancery of the State of Delaware against Brookfield and its affiliates for breach of fiduciary duties.
- On January 27, 2020, City of Dearborn Police and Fire Revised Retirement System ("Dearborn") filed a similar verified derivative and purported class action complaint against the same defendants.
- The Court of Chancery consolidated the two actions and designated Dearborn's complaint as the operative complaint in the consolidated action.
- Defendants moved to dismiss Plaintiffs’ direct claims, arguing they were entirely derivative.
- Following a merger on July 31, 2020, in which Brookfield affiliates acquired all outstanding TerraForm shares, the Court of Chancery granted an order dismissing the derivative counts of the consolidated complaint due to the plaintiffs' loss of standing.
- On October 30, 2020, the Court of Chancery denied the defendants' motion to dismiss the remaining direct claims, concluding that while the claims would be derivative under a pure Tooley v. Donaldson analysis, they qualified as direct claims under Gentile v. Rossette, which the Vice Chancellor felt bound to apply due to the factual similarities.
- Defendants submitted an application to the Court of Chancery for certification of an interlocutory appeal of the decision denying their motion to dismiss.
- The Court of Chancery granted Defendants’ application on November 24, 2020, finding that the appeal could end the litigation and would serve considerations of justice by clarifying an area of law in flux.
- Defendants filed a timely Notice of Appeal on November 30, 2020, and the Delaware Supreme Court accepted the interlocutory appeal on December 14, 2020.
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Issue:
Does a dilutive stock issuance to a controlling stockholder for allegedly inadequate consideration, which also impacts the economic value and voting power of minority stockholders, give rise to a direct claim for those minority stockholders under Delaware law, or is such a claim exclusively derivative?
Opinions:
Majority - Justice Valihura
No, a dilutive stock issuance to a controlling stockholder for allegedly inadequate consideration does not give rise to a direct claim for minority stockholders under Delaware law; such claims are exclusively derivative. The Court explicitly overruled Gentile v. Rossette, which had created a dual-natured claim exception for such transactions, finding it to be inconsistent with the direct/derivative test established in Tooley v. Donaldson, Lufkin & Jennette, Inc. Under Tooley, a claim is derivative when the corporation suffers the alleged harm (e.g., asset reduction from overpayment for shares) and would receive the benefit of any recovery. Here, TerraForm was allegedly harmed by issuing shares for an unfairly low price, and any economic and voting dilution to minority stockholders flowed indirectly through their proportional ownership in the corporation. The Gentile carve-out, which focused on the identity of the alleged wrongdoer (a controller) and deemed certain dilution claims dual-natured, was found to create doctrinal confusion, rely on precedents (like In re Tri-Star Pictures, Inc. Litig.) previously criticized by Tooley, and be superfluous given other existing legal remedies (e.g., Revlon claims). The Court determined that stare decisis did not compel adherence to Gentile because it was a departure from sound precedent, created unworkable law, and its viability had already been questioned by subsequent rulings.
Analysis:
This case significantly clarifies Delaware's direct/derivative distinction by unequivocally reaffirming the Tooley test and eliminating the 'dual-natured' claim exception created by Gentile v. Rossette. The ruling streamlines the standing analysis for stockholder claims, particularly those involving dilutive transactions initiated by controlling stockholders, reinforcing that corporate overpayment or asset dilution claims are typically derivative. This decision will likely reduce litigation over standing in such cases, ensuring that claims focused on harm to the corporate entity are treated consistently, regardless of whether a controller is involved, and are subject to extinguishment upon a subsequent merger.
