Officer Liability in M&A Transactions: Lessons from In re Columbia Pipeline Group, Inc. Merger Litigation
On March 1, 2021, the Court of Chancery of Delaware denied a motion to dismiss in a closely watched case involving an ill-fated 2016 merger between Columbia Pipeline Group, Inc. and TransCanada. In denying the motion, the Court found that two officers involved in the transaction may have breached their fiduciary duties to the shareholders during merger negotiations.
These two officers, Robert Skaggs Jr., Columbia Pipeline Group, Inc.’s former CEO, and Chairman, and Steven Smith, Columbia’s previous CFO, now face potential liability for their role in the deal.
The Court found it “reasonably conceivable” that Skaggs and Smith breached their duty of loyalty by manipulating the sales process for TransCanada’s advantage so that they could receive their change-in-control benefits. It also noted that TransCanada could face liability for aiding and abetting Skaggs and Smith in breaching their fiduciary duties. The shareholder plaintiffs argued that because of the manipulation in the sale, Columbia’s stockholders did not receive the best value for their shares.
This lawsuit is not the first complaint about the deal. In fact, it has been challenged in Court four different times since the sale closed in 2016. Although the other lawsuits were for all intents and purposes unsuccessful, one of them—an appraisal action—uncovered the material misstatements and omissions that made the basis of the current lawsuit.
Merger and acquisition deals are historically rife with lawsuits and disgruntled investors. In such a litigious arena, it’s important for M&A law firms, officers, and companies alike to learn from cases like this one. Below are some key takeaways from this recent mergers and acquisition example, and helpful pointers for any officer of director navigating the sale of their company.
In this Article:
Background of the Case
- Certain deal flaws are likely to lead to director liability for duty of loyalty violations.
- Key officer actions and omissions that exposed the directors to liability for violating their duty of loyalty.
- What is “reasonably conceivable”?
- The Court returns to the “fraud on the board” theory of liability.
- When Corwin cleansing of alleged fiduciary breaches isn’t available…
- Acquiring companies might be liable for exploiting someone else’s breach
Navigating a Sale in Light of Columbia Pipeline
Background of the Case
Skaggs and Smith made a plan to retire in 2016 and consulted outside financial advisors to plan for the transition. Their retirement packages contained valuable change-in-control arrangements that were trigged if their retirement was the result of a merger or acquisition of Columbia’s parent entity. Because selling Columbia outright would not trigger the arrangement, the Skaggs and Smith spun-off Columbia, intending to sell it later. As executives of the now spun-off company, Skaggs and Smith included similar change-in-control arrangements that were triggered upon sale.
After the spin-off, or even while it was developing, Columbia Pipeline began searching for a purchaser. Columbia’s financial advisor, Lazard Frères & Co., presented strategic alternatives to Columbia’s managers, including possible acquisitions by Dominion Energy, Berkshire Hathaway Energy, Spectra Energy, and NextEra Energy. Lazard also informed TransCanada about Columbia’s plan to sell after the spinoff but urged TransCanada to wait until the spin-off was complete before beginning acquisition discussions.
Potential Buyers Show Interest
Spectra and Dominion both showed interest in acquiring Columbia. Skaggs quickly dismissed Spectra because he believed that Spectra would require a majority purchase to be paid in stock and Skaggs wanted cash since he was retiring. The Board then rejected Dominion’s offer of between $32.50 to $35.50 per share in cash, saying Columbia was worth more because of the significant post-sale growth it was expecting.
Columbia is Strapped for Cash and Starts a Dual Track Strategy
In the fall of 2015, Skaggs realized Columbia was strapped for cash, so he initiated a dual-track strategy where Columbia would prepare an equity offering and simultaneously continue merger discussions. Unless Columbia received an offer of at least $28 per share, it would continue with the equity offering so it could raise the needed capital.
In November 2015, Columbia entered into non-disclosure agreements (“NDA”) with Dominion, Berkshire, and NextEra. Each NDA contained a standstill “don’t ask don’t waive” (DADW) provision that prohibited them from making a purchase offer unless requested by the Board.
Skaggs and Smith then informed TransCanada and Berkshire that if they did not make a bid by November 24 then Columbia would proceed with the equity offering. Skaggs and Smith never told Dominion, Spectra, or NextEra about the deadline, but he told the Board that there was “no additional word” from them. This was the officers’ first omission that, according to the Court, suggested they favored TransCanada in the sales process, thereby violating their duty of loyalty.
TransCanada made a bid at $25 to $26 per share and Berkshire expressed interest at $23.50 per share. The Board found the offers too low and instead voted to terminate the merger discussions and proceed with the equity offering.
Smith Reaches Out to TransCanada About an M&A Deal After Discussions are Terminated
Despite informing the other potential buyers that the merger discussions were terminated, Smith told a friend of his at TransCanada, Poirier, that Columbia would probably begin the merger discussions again in the upcoming weeks. Smith did not provide this insight to any of the other potential buyers, nor did he have authorization from the Board to make the statement.
A few weeks later, Poirier violated the DADW agreement and called Smith to emphasize TransCanada’s continued interest in purchasing Columbia. Instead of telling Poirier that he violated the DADW provision, Smith set up a meeting with him for January 7, 2016. Smith told Skaggs and the financial advisor, but he did not tell the Board.
The January 7 Meeting
The January 7th meeting between Skaggs, Smith, and TransCanada is the strongest evidence that Smith and Skaggs favored TransCanada as a potential buyer.
Prior to the meeting, Smith gave TransCanada 190 pages of confidential information about Columbia that was not distributed to the other potential buyers. Smith also gave Poirier “talking points” for TransCanada to use to convince the Board to make a sale without putting Columbia “in play.” This would allow TransCanada to make a bid without Skaggs and Smith having to worry about entertaining bids from other buyers who may be willing to pay more. Smith also told Poirier that Columbia had “eliminated the competition.”
On January 25, 2016, TransCanada breached the DADW by making an offer to acquire Columbia within the range of $25 to $28 a share. Skaggs then made a presentation that overemphasized Columbia’s short-term risk and incorrectly presented the analysis provided by the company’s financial advisors. This convinced the Board to ignore the breach of the DADW provision and instead directed Columbia’s managers to enter into an exclusivity agreement with TransCanada.
Two months later, the Board requested a formal merger proposal from TransCanada and asked Skaggs and Smith to waive all DADW provisions with the other bidders. Skaggs and Smith did not tell the other bidders about the waiver for an entire week and only did so when the Board reminded the officers for a second time what they were instructed to do. The Court found that it was reasonable to infer that the officers’ choice to delay carrying out the Board’s instruction was because Skaggs and Smith preferred selling Columbia to TransCanada.
On March 9th, the day after the exclusivity agreement with TransCanada expired, TransCanada made an offer to acquire Columbia for $26 per share, with 90% of the consideration as cash and 10% as TransCanada Stock.
Wall Street Article Leads the officers to Shut Other Bidders out with a new NDA
The next day, the Wall Street Journal released an article about the TransCanada merger. This news reignited interest from previous bidders. Spectra was once again the first to reach out to Skaggs about the merger, but Skaggs downplayed Spectra’s offer to the Board.
Possibly worried that Spectra would not be the only bidder to express interest after reading the Wall Street Journal’s article, Skaggs renewed TransCanada’s exclusivity agreement.
The terms of the new exclusivity agreement required any other bid to be fully financed before Columbia would consider it. This term, the “moral commitment” prevented potential bidders from gaining access to Columbia’s confidential information, which was necessary for due diligence purposes if the potential bidder wanted to secure financing.
Skaggs and Smith knew that it was “highly unlikely that a potential bidder could meet this standard” since any potential bidder would want to conduct due diligence before making an offer. Moving forward, Skaggs and Smith instructed their financial advisors to screen Spectra’s calls so they could not talk with Columbia’s management. Spectra continued to call and at one point told the financial advisor to expect a written offer over the next few days. Ultimately, Spectra never made an offer and was not a major competitor to TransCanada in the bidding possibly because of the terms of the exclusivity agreement that required a fully financed bid.
TransCanada Takes Advantage
On March 14, 2016, TransCanada lowered its offer by 50 cents to $25.50 and placed a three-day expiration on the offer. The Court found it reasonable to believe that TransCanada lowered its bid because Skaggs and Smith’s favorable treatment of TransCanada put the bidder in a better bargaining position. If Columbia did not accept the offer, the news stories would break about the failed merger, which could make it more difficult for Columbia to secure a future offer. On the other hand, it was possible that the officers were not getting the best value for Columbia from TransCanada since they lowered their bid last minute. Columbia was essentially handcuffed by the officers who put the company in a poor bargaining position. Two days later, the Board accepted TransCanada’s offer and approved the merger agreement. Columbia’s stockholders approved the transaction on June 22 and the merger closed on July 1, 2016.
Skaggs and Smith received enormous retirement benefits from exiting Columbia through a sale. Skaggs received roughly $27 million while Smith received around $11 million. Had the officers retired without selling Columbia, Skaggs would have only received a $9 million bonus while Smith would have received a $3.5 million bonus. Clearly, the officers took full advantage of the “golden parachute” which provided an additional $17.9 million for Skaggs and $7.5 million for Smith.
1. Certain Deal Flaws are Likely to Lead to Director Liability for Duty of Loyalty Violations
When it comes to mergers and acquisitions, the main flaw that could subject a director or officer to liability for breaching their duty of loyalty is when they favor a particular buyer in a manner that reduces competition in the sales process.
In most M&A processes, officers and directors will usually have a preferred buyer, perhaps because the particular buyer’s offer is superior to other offers, the parties have a good relationship, or other factors. Favoritism is okay as long as the directors and officers act in good faith.
However, M&A law firms and officers alike have to be careful with tipping the scale. Problems with favoritism in M&A transactions arise when the officers and directors make it easier for their preferred buyer to complete the transaction. If company leaders show this kind of favoritism, the buyer and seller negotiations are no longer considered in good faith, and the directors' and officers' duties of loyalty are likely being violated.
The Court’s decision in Columbia makes it clear that tipping the scale to favor a particular buyer could be done by providing the preferred buyer with confidential information that is not disclosed to other buyers, failing to follow the board’s instructions in the M&A process, or withholding material information from the board that relates to the M&A process.
2. Key Officer Actions and Omissions That Exposed the Directors to Liability for Violating their Duty of Loyalty
- Allowing TransCanada to breach the standstill DADW provisions multiple times;
- Disclosing confidential information with TransCanada that was not made available to other interested buyers in the M&A process;
- Providing TransCanada with a “game plan” for approaching Columbia’s Board in a manner that reduced competition;
- Failing to give timely notice to the other interested buyers that the standstill agreements had been terminated;
- Deceiving the Board into believing that the previously interested buyers had not expressed a continued interest when the lack of interest stemmed from the buyers not knowing that the DADW provision had been terminated;
- Influencing the Board to enter into an exclusivity agreement with TransCanada; and
- Entering into a “moral commitment” with TransCanada that created a standard that no other interested buyer could meet and effectively reduced competition.
3. What is Reasonably Conceivable?
Despite the fact that the officers would have received the change-in-control benefits no matter who they sold Columbia to, the Court still found that the officers favored TransCanada.
At such an early stage in litigation, the Court refrained from commenting on what it believed the Officer’s economic interests in dealing to TransCanada were, but the Officer’s actions made it clear that they preferred a timely sale as opposed to one that captured the full value of Columbia. Since their change-in-control benefits would be triggered upon a sale, the Court found it reasonably conceivable that the officers favored TransCanada, otherwise, the officers would not have rushed the sale and would have waited for a better offer.
4. The Court Returns to the “Fraud on the Board” Theory of Liability.
In many cases, M&A law firms have argued that a plaintiff has to plead a nonexculpated claim against a majority of the board to state a claim for breach of fiduciary duty.
In this case, the Court rejected this argument and noted that the plaintiff only held the burden of showing that an officer withheld information from the board that affected their decision-making or that the officer took action without informing the board that adversely affected the sales process.
Vice Chancellor Laster recently discussed the fraud on the board theory of liability in Firefighters' Pension System of the City of Kansas City v. Presidio Inc where the CEO of the target company favored a buyer which led to a shortened sales process and less value for the shareholders.
5. When Corwin Cleansing of Alleged Fiduciary Breaches is not Available…
The first suit that challenged the merger was dismissed under Corwin because the Court held that the merger disclosure made to the stockholders was adequate. In that case, the plaintiffs argued that the officers breached their fiduciary duties when they failed to disclose that they “acted for selfish and self-interested reasons.”
In this case, however, the Court held that the disclosures were inadequate because the proxy did not disclose:
- that the other bidders were subject to standstill agreements with DADW provisions;
- details regarding the officers’ retirement plans; and
- that TransCanada was invited to make a bid despite the existence of the standstill agreements.
6. Acquiring Companies Might Be Liable for Exploiting Someone Else’s Breach
The Officers’ favoritism was so blatant in this case that TransCanada could be held liable for taking advantage of the situation.
Aiding and abetting claims are typically difficult for the plaintiff to win because the plaintiff must show that the buyer knowingly participated and had “scienter.” The Court’s holding rested on the facts that TransCanada knew that Columbia allowed them to breach the standstill agreement, the officers were acting without authorization from the Board, and that they could take advantage of the Officer’s favoritism by lowering their bid at the last minute.
It seems clear that TransCanada had the “knowledge” required for aiding and abetting liability, but it is less clear whether they had “scienter,” or in other words, whether TransCanada had knowledge of the wrongness of the Officer’s actions. The plaintiffs are likely to argue that TransCanada did have scienter because TransCanada knew it was breaching the standstill agreement and that the officers allowed them to. The tips provided at the January 7th meeting may also support the plaintiff’s argument, but TransCanada is likely to argue that they had no scienter because it was unclear whether the information the officers were sharing with TransCanada was also being made available to the other bidders.
Navigating a Sale in Light of Columbia Pipeline
The decision in this case may make a director, officer, or other individual involved in the sale of a company worried about facing liability when it makes more sense to sell Columbia to one buyer as opposed to another.
What’s key here, is that a seller can prefer a buyer as long as their actions do not make the M&A process less competitive, and they make the proper disclosures to the board and shareholders.
Sellers should disclose the following:
- Why they think a potential buyer is preferred. Maybe the seller believes a certain buyer could bring additional growth to Columbia that other buyers can’t offer. If so, the seller should make note of these advantages and disclose them to the board and shareholders.
- If the Seller has a personal interest in the transaction, they should disclose the conflict to the board and to the shareholders via a proxy statement.
- Columbia Pipeline also noted the importance of keeping communications equivalent between all bidders, unless there is an exclusivity agreement. Sellers should ensure that if they make a disclosure to one bidder, the same disclosure is made to all other interested bidders.
If the officers in this case had disclosed more in the proxy statement about the standstill agreements, their retirement plan, and the discussions with TransCanada before and on January 7th, this case would have been dismissed under Corwin.
Further, boards should make sure that they are aware of the actions their officers and any conflicts of interest. This situation may have been avoided entirely if the Board was more involved in the sales process. Depending on the relationship between the board and management, the board could require management to receive authorization before engaging with interested bidders and continually update the board on any developments with the bidder.