City of Miami General Employees’ and Sanitation Employees’ Retirement Trust v. Comstock, et. al. (C&J Energy Services, Inc. Deal Litigation)

Court: Court of Chancery of the State of Delaware
Case Number: C.A. No. 9980-CB
Judge: Hon. Bouchard
Case Contacts: Mark Lebovitch, Jeroen van Kwawegen, Christopher J. Orrico

This action alleges breaches of fiduciary duties and aiding and abetting thereof in connection with Nabors Industries Ltd. (“Nabors”) acquisition of C&J Energy Services, Inc. (“C&J” or the ‘Company”) for inadequate consideration pursuant to an Agreement and Plan of Merger dated June 25, 2014 as amended on February 6, 2015, that closed on March 20, 2015 (the “Acquisition” or “Nabors Deal”), to the detriment of C&J’s public stockholders.  On July 30, 2014, concurrently with the initial complaint, Plaintiff, City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, filed a motion for preliminary injunction to enjoin Defendants and anyone acting in concert with them from convening the stockholder vote on the Nabors Deal, or consummating the Nabors Deal.

Although billed as a “stock-for-stock merger,” the Nabors Deal was a “sale of control” transaction as C&J stockholders now hold a minority interest in a foreign company controlled by a majority stockholders.  Prior to the consummation of the deal, C&J stockholders collectively held a majority of C&J’s outstanding common stock and governed the Company by way of an effective voting franchise and with the protections of Delaware corporate law.  Now, C&J stockholders have a 47% minority interest in a company that is controlled by Nabors and incorporated under the laws of Bermuda – a far different equity and corporate governance profile than what C&J stockholders previously enjoyed.

Accordingly, the C&J Board was required to conduct a good faith negotiation, exercise independence and seek the best value reasonably available for C&J stockholders. Instead, the self-interested C&J CEO and Chairman, C&J management and the majority of the Board structured the Nabors Deal to entrench themselves in the post-merger Board and to obtain lucrative employment contracts and merger success bonuses.  The C&J CEO and Board’s self-dealing resulted in an unfair sale value of C&J.

Plaintiff filed its Opening Brief in Support of its Motion for Preliminary Injunction on November 11, 2014 and asked the Court to preliminary enjoin the vote on the Nabors Deal arguing that the Board failed to fulfill its Revlon duties when approving the change in control transaction.  Specifically, Plaintiff positioned that the Board failed to fulfill its Revlon duties because it approved the Nabors Deal on incorrect and misleading information including, but not limited to, incorrect and unsupported EBITDA projections and analyzing the deal as an acquisition of assets rather than a change in control transaction.

The Court held the hearing on Plaintiff’s Motion for Preliminary Injunction on November 24, 2014, and preliminary enjoined the Acquisition for a period of 30 days, finding that the Board likely breached its Revlon duties by considering the Nabors Deal as an acquisition of assets by C&J rather than a sale of control to Nabors.  The Order required that a special committee of the Board – comprised of directors who were not conflicted by expecting to join the new company board – oversee a 30-day solicitation process.  The Order expressly required the Special Committee to compare the value of competing bids to the value of the Nabors Deal for C&J stockholders.  The Order also stayed the solicitation process pending Defendants’ appeal to the Delaware Supreme Court, however, Defendants waived the stay to voluntarily comply with the Order while simultaneously pursuing the expedited appeal. 

Confronted with a Preliminary Injunction Order and real concerns about the process that resulted in the deal, any fiduciary acting in good faith would not only comply with the Order, but would redouble efforts to ensure that his or her post-injunction conduct would be above reproach.  C&J’s CEO, management team and Board did just the opposite and doubled-down on their fiduciary breaches to protect the Nabors Deal and their personal benefits.

Specifically, as detailed in Plaintiff’s Amended Complaint (here) C&J’s CEO coopted Morgan Stanley to run the solicitation process to his liking by promising lucrative future business with the combined company.  Further, despite the Order’s requirement that supposedly unconflicted directors run the sales process, the Special Committee abdicated its oversight to the conflicted C&J CEO, management and Morgan Stanley.  This allowed conflicted management to control the timing and information flow of the solicitation process.

Despite C&J’s CEO, management and Morgan Stanley’s best efforts to dissuade such, on December 11, 2014, Cerberus submitted a detailed proposal to acquire a majority stake in C&J in which C&J stockholders would receive $5.25 per share cash dividend and a 49% minority interest in a company that would combine C&J with one of Cerberus’s portfolio companies, Keane.  Instead of using the competing bid to extract more value for C&J stockholders, C&J management and Morgan Stanley skewed the analysis of the Cerberus bid to protect the Nabors Deal and their personal benefits.  The Special Committee never compared the actual value of the Nabors Deal to the value of the Cerberus bid for C&J stockholders as the Order required. 

On December 19, 2014, the Supreme Court reversed the Order, holding that C&J’s passive market check was sufficient to satisfy Revlon.  However, C&J never disclosed to the Supreme Court that a competing bid had emerged at the hearing on the appeal of the injunction.  Indeed, in inducing stockholder approval of the Nabors Deal, among other things, the Board never disclosed the terms of the competing Cerberus Bid.

The Court held oral argument on Defendants’ motions to dismiss the Amended Complaint and C&J’s motion to recover damages against the bond on April 26, 2016. The transcripts of those hearings can be found here and here.