In an alternate universe, the Twitter v. Musk dispute could have ended up like Anaplan

A former shareholder of Anaplan recently filed a lawsuit against several of its former officers and directors, alleging a variety of fiduciary breaches in connection with the company sale to Thoma Bravo (“TB”).

As you may recall from news reports at the time – or Matt Levine’s column – Anaplan signed a deal to sell itself to TB at $66 per share.  Then, the bottom fell out of the market, and suddenly that looked like a very generous price.  TB was stuck, though, until Anaplan screwed up by approving a bunch of new bonus payments to executives that violated the merger agreement’s ordinary course covenant.  That gave TB an excuse to threaten to walk away unless Anaplan agreed to a lower deal price, and the merger ultimately closed at $63.75 - a reduction of $400 million.

Pentwater Capital, a hedge fund with a substantial stake in Anaplan, is now suing, alleging that compensation committee directors, and the officers involved with the awards, breached their duties of loyalty and committed waste, and that the officers – including the company CEO, who was also Chair – acted with gross negligence. 

(Side note: to distinguish the CEO’s behavior in his capacity as officer, where he was not exculpated for negligence, from his behavior in his capacity as Chair, where he was, the complaint points out that he participated in Compensation Committee meetings, though he could not legally have been a member of that committee since NYSE requires that Compensation Committee members be independent).

And what leaps out to me from this suit is how Delaware law has taken some wrong turns.

First and most obviously, as I previously blogged, Delaware now permits officers, as well as directors, to be exculpated for negligence in connection with direct claims.  Though the Anaplan complaint tries to make out a claim for conscious wrongdoing, which would violate the duty of loyalty via bad faith action, that seems like a tall ask; there’s no argument that the excess compensation awards were self-dealing, only that they were obviously barred by the merger agreement, and that the defendants forged ahead heedlessly nonetheless.  Pentwater doesn’t even claim that the excess awards were actually material to TB or the merger agreement.  Instead, it admits that their significance was that they handed TB the excuse it needed to escape the deal, and claims that the defendants should have anticipated that TB would make use of any leverage it could.

So this, to me, is a scenario where negligence liability would help remedy a tangible harm inflicted on the shareholders.  But in future years, it’s likely that any officers who behave similarly will be entirely in the clear.  I’ll note that Pentwater makes much of the CEO’s golden parachute and other payments he received in connection with the merger – to the tune of over $250 million – but this is not like those cases where the CEO negotiates a bad deal to get his severance; here, the CEO already had a great deal on the table and no reason to blow it, especially since a lot of his payments were equity.  Still, the payments do suggest that there would be some justice in forcing him personally to make up a lot of what shareholders lost.

Second, this case highlights the fallacy of Corwin.  Because the biggest stumbling block for Pentwater is that shareholders approved the merger.  Of course they did!  The bottom fell out of the market; they weren’t going to get a better deal, even at the revised price.  That hardly means they wanted to cleanse the fiduciary breaches that cost them $400 million.  But Corwin requires that these two actions – approval of the substance of the deal, and ratification of the managers’ conduct – be bundled into a single vote.  Which is precisely the objection several commenters have raised with respect to Corwin, see, e.g., James D. Cox, Tomas J. Mondino, & Randall S. Thomas, Understanding the (Ir)relevance of Shareholder Votes on M&A Deals, 69 Duke L.J. 503 (2019).  In fact, as I previously blogged, VC Glasscock recently had the exact same intuition outside the Corwin context.  In Manti Holdings v. The Carlyle Group, 2022 WL 444272 (Del. Ch. Feb. 14, 2022), he held that shareholders did not waive their rights to bring fiduciary duty claims in connection with a merger merely because they signed a contract agreeing not to challenge the merger itself.  Because challenging a merger, and alleging fiduciary breaches in connection with a merger, are different things, as the Anaplan case highlights, but as Corwin conflates.

That said, Pentwater knows all this and has seeded its complaint with potential end-runs around Corwin.  Starting with, it argues that the vote was coerced: “stockholders had a metaphorical gun to their head,” Pentwater alleges.  And, that’s not wrong, but defendants presumably will argue, not without force, that the “coercion” was simply that the shareholders liked the deal on the table and didn’t expect a better one would be forthcoming.  The facts may be extreme, but they’re the same as every other merger that Corwin deems cleansed; what this situation really highlights is just how unsatisfying Corwin is for that reason.

Pentwater also argues that the proxy materials were misleading because they didn’t make clear exactly how egregious the defendants’ conduct was, and how aware they were that they were in breach.  Which may be true – I have no idea – but the whole point of the coercion argument is that shareholders were forced to vote in favor anyway, which kind of suggests that those details were immaterial. 

Finally, Pentwater argues waste.  Pentwater makes the not unreasonable point that when a company is on the verge of being sold for cash, new retention awards add zero value to current shareholders.  Waste, of course, can only be approved with a unanimous shareholder vote, see Harbor Fin. Partners v. Huizenga, 751 A.2d 879 (Del. Ch. 1999), and while the vote in favor of the deal was nearly 99%, it wasn’t actually unanimous.

I actually can see this one having legs, especially if Pentwater can make the case that the defendants knew they violated the agreement or acted without heed of it.  Not only is the waste argument persuasive, but waste is useful from Delaware’s perspective because it would allow justice to be done in this particular case without forcing a confrontation with the paradoxes created by Corwin.  But that doesn’t mean the problems have gone away.