Securities Litigation, Investigations & Enforcement Alert | August.04.2016
On July 28, 2016, the Delaware Court of Chancery held that stockholders of Riverstone National, Inc. had adequately stated a breach of fiduciary duty claim against the company's directors who approved a merger that extinguished threatened derivative claims against them. See In re Riverstone Nat'l, Inc. S'holder Litig., C.A. No. 9796-VCG (Del. Ch. July 28, 2016). The court concluded that the plaintiffs had sufficiently rebutted the business judgment rule and stated claims under "entire fairness" review because they alleged that a majority of Riverstone's directors had usurped a corporate opportunity by personally investing $4.65 million in other companies operating in Riverstone's general line of business, knew that Riverstone's shareholders were investigating potential derivative claims against them in connection with those investments, and nonetheless proceeded to negotiate a sale of the company for $94 million to an acquirer that agreed not to pursue any litigation against them, including, by implication, the threatened usurpation claims. In re Riverstone is a cautionary reminder to directors that self-interested motives for negotiating mergers and other transactions will be subject to enhanced scrutiny, and may even lead to personal liability in the event directors are found to have acted disloyally to their shareholders.
In 2008, Riverstone—then a multi-family property management company—became interested in the single family home rental business. At the time of the transaction at issue, Riverstone's majority stockholder was CAS Capital Limited, a company controlled by two of Riverstone's five directors, Nicholas and Peter Gould. In March 2012, Riverstone formed an investment fund, which it pitched to institutional investors, including Blackstone Group LP. Blackstone, in turn, agreed to "help execute" Riverstone's business plan, including by forming a limited partnership known as Invitation Homes. Riverstone was allegedly integral to Invitation Homes's business, serving as property manager of its properties and advancing significant funds to develop the company. Riverstone also assisted Blackstone in its development of another company, B2R, which provided residential buy-to-rent mortgages for large scale single family portfolio investors. Even though Riverstone never received an ownership interest in Invitation Homes, all but one of its directors were given the opportunity to, and did, acquire a stake in the company. In addition, the Goulds were offered ownership interests in B2R, and the Goulds and another Riverstone director were also offered, and took, executive positions at Invitation Homes and B2R.
On May 20, 2014, two of Riverstone's stockholders informed Riverstone that its directors and officers breached their fiduciary duties by usurping Riverstone's corporate opportunity to invest in Invitation Homes and demanded that all their equity interests in Invitation Homes be transferred to Riverstone. The stockholders also sent two books and records demands to investigate this issue, and, after those demands were rebuffed, the stockholders filed suit in the Chancery Court under 8 Del. C. § 220. That same day, Riverstone executed a merger agreement with Greystar Real Estate Partners, LLC, which had been approved by CAS, pursuant to which Riverstone's stockholders would receive cash equal to their pro rata share of the total $94 million purchase price, less certain adjustments based on Riverstone's debt at closing. The merger agreement provided, inter alia, that Greystar would not pursue litigation against the directors, including, implicitly, any derivative claims arising out of their alleged usurpation of the Invitation Homes opportunity.
The same stockholders that had brought the records demands then filed suit against Riverstone's officers and directors, alleging that they breached their fiduciary duties by, inter alia, usurping a corporate opportunity owed to Riverstone by investing in Invitation Homes. The stockholders also alleged that CAS breached its fiduciary duties as Riverstone's controlling stockholder when, inter alia, it failed to obtain any value from the company for the usurpation of the Invitation Homes opportunity. Finally, the stockholders alleged that Riverstone's directors and CAS breached their fiduciary duties because they intentionally misclassified $20 million in capital contributions from CAS as "debt due to affiliates" instead of equity in order to reduce the amount paid to Riverstone's stockholders in connection with the merger. Vice Chancellor Glasscock held that the plaintiffs had alleged sufficient facts to rebut the business judgment rule and trigger "entire fairness" review, and held that the plaintiffs had adequately stated a breach of fiduciary duty claim against Riverstone's directors. The Vice Chancellor did not address the claims against CAS because CAS did not move to dismiss the plaintiffs' claims.