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Corwin Stops Litigation Where Deal Protection Measures are not Preclusive

by   |   April 17, 2017

In Re Paramount Gold And Silver Corp. Stockholders Litigation examines the interaction of Corwin, Unocal and deal protection measures.  At issue was a Merger Agreement which provided for Coeur Mining, Inc. to acquire all of the outstanding shares of Paramount Gold and Silver Corporation’s common stock after Paramount spun off its Nevada assets into SpinCo. Upon completion of the Merger, Paramount would become a wholly owned subsidiary of Coeur. Paramount stockholders would receive 0.2016 of a share of Coeur common stock in exchange for each share of Paramount common stock. They also would receive a pro rata share of a 95.1% interest in SpinCo. Coeur would provide SpinCo with $10 million in cash and hold the remaining 4.9% interest in SpinCo.

On the same day Paramount and Coeur entered into the Merger Agreement, Paramount and certain of its subsidiaries entered into a Royalty Agreement concerning a project located in Mexico, referred to as the San Miguel Project, with a wholly-owned subsidiary of Coeur. Under the Royalty Agreement, Coeur Mexicana would receive a perpetual royalty “privileged and preferential in payment” of 0.7% of the net smelter returns from the sale or other disposition of productions produced from the San Miguel properties in exchange for a payment of $5.25 million.

Over 54% of Paramount’s outstanding common stock voted to approve the Merger Agreement. The Court noted in Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court explained “when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.”

The plaintiffs contended Corwin did not apply because the combined effect of the termination fee in the Merger Agreement and of certain provisions in the Royalty Agreement constituted a “preclusive and per se unreasonable” deal protection device “rendering the vote coerced.”

The Court observed that deal protection devices ordinarily should be reviewed under the Unocal enhanced judicial scrutiny standard.  The defendants claimed that the Unocal standard did not apply because the Merger was approved by a fully informed and uncoerced vote of a majority of Paramount’s disinterested stockholders. Plaintiffs claimed that this position could not be squared with the Delaware Supreme Court’s earlier decision in In re Santa Fe Pacific Corporation Shareholder Litigation. Santa Fe held, in the context of a post-closing challenge, that a fully informed stockholder vote approving a merger did not preclude review of certain deal protection devices under Unocal. The Court stated the Supreme Court in Corwin did not discuss or expressly overrule this aspect of Santa Fe. The Court decided it did not need to reconcile Corwin and Santa Fe because it was apparent the provisions challenged by Plaintiff did not constitute an unreasonable deal protection device.

The plaintiffs conceded that the $5 million termination fee in the Merger Agreement—representing 3.42% of the estimated value of the Merger excluding SpinCo, and about 2.72% of the estimated value of the overall transaction including SpinCo—was not unreasonable by itself. The ultimate question was whether the termination fee, when coupled with provisions of the Royalty Agreement, were unreasonable.  The Court examined the Royalty Agreement and determined that was not the case, as the Royalty Agreement was not a deal protection mechanism.

Important to the Court’s reasoning was a superior bidder did not have any obligation to buy out Coeur’s royalty interest in the San Miguel Project in order to propose or consummate a transaction with Paramount. A potential bidder could simply acquire Paramount subject to the Royalty Agreement.

Plaintiffs argued that Coeur could use the Royalty Agreement to block Paramount from entering into an alternative transaction because a competing offer would require the consent of Coeur under a change of control provision. The Court rejected this reasoning, because the Royalty Agreement only referred to a change of control of Paramount’s subsidiaries, and not Paramount itself.  The Court similarly rejected that a topping bid would violate an anti-assignment provision in the Royalty Agreement, because the properties referred to in the Royalty Agreement were again owned by Paramount’s subsidiaries, and not Paramount itself.

The Court concluded that the Royalty Agreement was not a deal protection device because Coeur did not have a “block right” under the Royalty Agreement to veto an alternative transaction to the Merger. Because the plaintiffs conceded that the $5 million termination fee in the Merger Agreement alone was not an unreasonable deal protection device, plaintiffs’ assertion that defendants adopted unreasonable deal protection devices in connection with the Merger failed to state a claim for relief.

The Court then rejected several alleged disclosure violations, noted that the business judgment rule applied under Corwin, and that the Complaint must be dismissed for failure to state a claim.