Opinion · Supreme Court of North Carolina
Corwin as Trustee for Beatrice Corwin Living Irrevocable Trust v. British American Tobacco PLC
371 N.C. 605
- Type
- Opinion
- Court
- Supreme Court of North Carolina
- Jurisdiction
- North Carolina
- Date
- 2018-12-07
- Topic
- litigation
stating that whether plaintiff had standing under the special duty exception depended on whether defendant owed plaintiff fiduciary duties | noting that “the majority stockholder of a corporation owes fiduciary duties to the minority stockholders” | stating that “the second Barger exception[ ] focuses on whether the stockholder suffered a harm that is distinct from the harm suffered by the corporation” | stating that “the second Barger exception[ ] focuses on whether the stockholder suffered a harm that is distinct from the harm suffered by the corporation” | providing that whether the first Barger exception applied depended on whether the plaintiff sufficiently alleged that the controlling stockholder owed the plaintiff fiduciary duties | observing that a shareholder with “a contractual right to withhold its consent and effectively veto any dividend payment” does not become a controlling shareholder by exercising that right | explaining that only controlling shareholders owe fiduciary duties to other stockholders | dismissing the plaintiff’s claim for breach of fiduciary duty due to an absence of facts in the complaint that established control | relying on Delaware caselaw to resolve a legal issue arising in a shareholder suit | relying on Delaware caselaw to resolve a legal issue arising in a shareholder suit | discussing restrictions that require “unaffiliated stockholders to approve specific transactions,” among others | relying on Delaware decisions to decide voting power issues in shareholder suit | “This Court has never held that a minority stockholder owes fiduciary duties to other stockholders, but it has also never held that a minority stockholder cannot owe fiduciary duties to other stockholders.” | “This Court has never held that a minority stockholder owes fiduciary duties to other stockholders, but it has also never held that a minority stockholder cannot owe fiduciary duties to other stockholders.” | “[W]e agree with the relevant reasoning of the Delaware courts.” | “[W]e agree with the relevant reasoning of the Delaware courts.”
Citator
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IN THE SUPREME COURT OF NORTH CAROLINA
No. 56PA17
Filed 7 December 2018
DR. ROBERT CORWIN AS TRUSTEE FOR THE BEATRICE CORWIN LIVING
IRREVOCABLE TRUST, on Behalf of a Class of Those Similarly Situated
v.
BRITISH AMERICAN TOBACCO PLC, REYNOLDS AMERICAN, INC., SUSAN
M. CAMERON, JOHN P. DALY, NEIL R. WITHINGTON, LUC JOBIN, SIR
NICHOLAS SCHEELE, MARTIN D. FEINSTEIN, RONALD S. ROLFE,
RICHARD E. THORNBURGH, HOLLY K. KOEPPEL, NANA MENSAH, LIONEL
L. NOWELL, III, JOHN J. ZILLMER, and THOMAS C. WAJNERT
On discretionary review pursuant to N.C.G.S. § 7A-31 of a unanimous decision
of the Court of Appeals, ___ N.C. App. ___, 796 S.E.2d 324
(2016), affirming in part
and reversing and remanding in part an order and opinion entered on 6 August 2015
by Judge James L. Gale, Chief Special Superior Court Judge for Complex Business
Cases, in Superior Court, Guilford County. Heard in the Supreme Court on 9 January
2018.
Mullins Duncan Harrell & Russell PLLC, by Alan W. Duncan and Stephen M.
Russell, Jr.; and Block & Leviton LLP, by Jason M. Leviton, pro hac vice, for
plaintiff-appellee.
Robinson & Lawing, LLP, by H. Brent Helms; and Cravath, Swaine & Moore
LLP, by Gary A. Bornstein, pro hac vice, for defendant-appellant British
American Tobacco PLC.
Bell Davis & Pitt, P.A., by Alan M. Ruley and William K. Davis, for North
Carolina Association of Defense Attorneys, amicus curiae.
MARTIN, Chief Justice.
CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
This appeal arises from the agreement of Reynolds American, Inc. to purchase
Lorillard, Inc. Defendant British American Tobacco PLC (BAT) owned 42% of the
stock in Reynolds and agreed to fund part of the Lorillard transaction by purchasing
enough of the newly acquired shares to maintain that 42% ownership interest. The
terms of this agreement diluted the voting power of Reynolds’ other minority
shareholders, including plaintiff Dr. Robert Corwin. Plaintiff then filed a putative
class action suit on behalf of similarly situated stockholders asserting a claim for
breach of fiduciary duty against, among others, BAT.
In this appeal, we consider whether BAT owed fiduciary duties to those other
shareholders in the context of the Lorillard acquisition. The Business Court
concluded that BAT did not owe fiduciary duties to the other shareholders and
granted BAT’s motion to dismiss. We agree with the Business Court and therefore
reverse the decision of the Court of Appeals.
I. Background
The matter before us is an appeal of a determination under Rule 12(b)(6) of the
North Carolina Rules of Civil Procedure, so we accept all of the facts pleaded in
plaintiff’s First Amended Class Action Complaint (the operative pleading here, which
we will hereinafter refer to as the Complaint) as true. See Arnesen v. Rivers Edge
Golf Club & Plantation, Inc., 368 N.C. 440, 448
,781 S.E.2d 1, 7
(2015) (quoting Sutton
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
v. Duke, 277 N.C. 94, 98
,176 S.E.2d 161, 163
(1970)). Our statement of the facts of
this case is derived from the Complaint, as well as from other documents that the
Complaint incorporates by reference.
Reynolds, an American tobacco company, was created after Reynolds’
predecessor entity acquired Brown & Williamson (B&W), another tobacco company.
B&W was a subsidiary of BAT, a tobacco holding company that is headquartered in
London. As a result of the transaction, BAT became a 42% stockholder of Reynolds,
and BAT and Reynolds entered into a governance agreement dated 30 July 2004 (the
Governance Agreement).
The Governance Agreement contained specific limitations on BAT’s power. 1
BAT could effectively nominate only five members to Reynolds’ thirteen-member
Board of Directors, and three of those nominees had to be “Independent Directors.”
The Governance Agreement defined the term “Independent Director” to mean a
director who was considered independent of Reynolds under the New York Stock
Exchange Rules2 and who had not been a director, officer, or employee of BAT or its
1 Most of the provisions of the Governance Agreement that we discuss here refer not
to BAT but to its subsidiary, B&W. However, the Governance Agreement specifically
provides that “B&W may assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to BAT or any of its Subsidiaries that agrees in writing to
be bound by the provisions hereof.” We can find no portion of the record indicating that B&W
made such an assignment to BAT, but, because the courts below and both parties to this
appeal treat BAT as having assumed B&W’s rights and obligations under the Governance
Agreement, we also do so for the purpose of our decision here.
2 This portion of the definition of the term “Independent Director” applies only if
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
subsidiaries within the past three years. Reynolds’ Corporate Governance and
Nominating Committee (the Committee) had the right to nominate the remaining
eight directors, seven of whom had to be Independent Directors. All members of the
Committee itself had to be Independent Directors, and, provided that the Reynolds
board was fully staffed, the majority of those directors had to be non-BAT-nominated
Independent Directors. During a standstill period imposed by the Governance
Agreement,3 BAT could not seek removal of any of the directors that it did not
nominate, unless the Reynolds board amended or waived that limitation. Further, a
majority of the Independent Directors who were not nominated by BAT had to
approve any material transaction between, or involving, Reynolds and BAT (with
certain narrow exceptions that no party asserts as being relevant here). These
restrictions, along with the rest of the Governance Agreement, would continue until
BAT’s ownership interest reached 100% or fell below 15% (or until a person or group
other than BAT, with some other exceptions not relevant here, owned or controlled
Reynolds is listed on the New York Stock Exchange. Because the Complaint alleges that
Reynolds “trades on the New York Stock Exchange,” though, that portion of the definition
applies to the term for the purposes of this motion.
3 The standstill period was set to run from 30 July 2004—the effective date of the
Governance Agreement—until either the tenth anniversary of the Governance Agreement or
the date on which a significant transaction occurred, whichever was earlier. According to the
Governance Agreement, a significant transaction would be “any sale, merger,
acquisition . . . , consolidation, dissolution, recapitalization or other business combination
involving Reynolds American or any of its Subsidiaries pursuant to which more than 30% of
the Voting Power or the consolidated total assets of Reynolds American would be acquired or
received” by an outside party.
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
more than 50% of the voting power of all voting stock), at which point the Governance
Agreement would terminate by its own terms.
Alongside these restrictions, the Governance Agreement conveyed certain
contractual rights to BAT. The Governance Agreement required the approval of a
majority of the BAT-nominated directors for certain actions such as stock issuances
if that stock would have voting power greater than or equal to 5% of the voting power
outstanding before that issuance. It also required the approval of BAT as a
stockholder for certain actions such as the sale of specified intellectual property.
In September 2012, Reynolds, the second-largest tobacco company in the
United States, began considering a merger with Lorillard, the third-largest tobacco
company in the United States. Reynolds met with BAT before entering negotiations
with Lorillard. BAT indicated that it would support the Lorillard merger only on
terms that it approved of and expressed its desire to maintain its 42% ownership
interest in Reynolds. BAT was willing to provide financing for the transaction
through purchasing enough of the newly acquired shares to maintain its ownership
interest, and the parties agreed to a term sheet regarding that financing. BAT
insisted that this term sheet contain a provision that prevented BAT or Reynolds
from seeking to change the Governance Agreement in connection with the proposed
transaction. BAT also indicated that it was not willing to extend the standstill period
specified in the Governance Agreement.
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
Initially, discussions proceeded toward what Lorillard hoped would be a
merger of equals. The Other Directors—a term that the Governance Agreement
defined (in its singular form) to mean an Independent Director of the Reynolds board
who was not nominated by BAT—even discussed reducing BAT’s ownership
percentage after the merger to allow a greater ownership level for Lorillard’s
stockholders. But this change ultimately did not happen. Eventually, Lorillard
terminated negotiations after concluding that the transaction was not truly a merger
of equals given the power that BAT would wield over the combined company.
Reynolds then decided to pursue an acquisition of Lorillard instead.
During subsequent negotiations, the Other Directors requested the removal of
a provision in the proposed merger agreement that required BAT to vote its shares of
Reynolds stock in favor of the transaction regardless of whether the Reynolds board
changed its recommendation in favor of the transaction. Lorillard, however, insisted
that this provision remain in the agreement. BAT said that it would consider
Lorillard’s demand but would not commit over the objections of the Other Directors.
The Other Directors agreed to allow the provision to remain in the proposed merger
agreement, so it did, in fact, remain there.
On 15 July 2014, the companies announced that they had reached a final
agreement. Reynolds would purchase Lorillard and pay the Lorillard stockholders a
combination of 0.2909 shares of Reynolds common stock plus $50.50 for each share of
Lorillard stock that they owned. At the time, this price corresponded to a value of
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
$68.88 per Lorillard share based on the closing price of Reynolds stock on 14 July
2014.
To help finance the acquisition, Reynolds would divest a package of assets,
including several cigarette brands, to Imperial Tobacco Group PLC. Additionally,
BAT would help finance the acquisition by purchasing enough additional shares of
Reynolds for it to maintain its 42% ownership of Reynolds after the completion of the
transaction. BAT would be permitted to purchase these additional Reynolds shares
for $60.16 per share—the price of Reynolds stock on 2 July 2014, which was also used
to determine the stock component of the Lorillard shareholders’ consideration. This
price was $3.02 less than the closing price of Reynolds stock on 14 July 2014, the day
before the transaction was executed. Reynolds and BAT also agreed to pursue a
technology-sharing initiative for next-generation tobacco products such as digital
vapor cigarettes. The entire Reynolds board, including the Other Directors,
unanimously approved these transactions.4
In response to the announcement of these transactions, plaintiff Dr. Robert
Corwin filed a class action complaint against BAT, Reynolds, and a group of Reynolds’
directors (director defendants) in his capacity as trustee for the Beatrice Corwin
Living Irrevocable Trust and on behalf of other stockholders similarly situated. The
However, the Complaint indicates that plaintiff lacks specific information about
4
whether a separate vote by the Reynolds board on the technology-sharing agreement
occurred (or, by necessary implication, how the board voted if a vote did occur).
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
case was designated as a mandatory complex business case to be heard by the
Business Court. The Complaint (which, again, is the operative pleading here) alleges,
among other things, that BAT was a controlling stockholder of Reynolds, that BAT
therefore owed fiduciary duties to plaintiff, and that BAT breached those fiduciary
duties through its conduct in connection with the Lorillard transaction. Although
BAT was not a majority stockholder of Reynolds, plaintiff bases his claim that BAT
was nevertheless a controlling stockholder on various aspects of the Reynolds-BAT
Governance Agreement and BAT’s involvement in the Lorillard transaction. Plaintiff
claims that BAT’s control over Reynolds allowed BAT to negotiate benefits for itself
that were not shared with other Reynolds stockholders.
BAT, Reynolds, and director defendants moved to dismiss plaintiff’s
Complaint. BAT argued that it was not a controlling stockholder of Reynolds and did
not owe fiduciary duties to plaintiff under North Carolina law because it owned less
than a majority of Reynolds stock. BAT also argued that plaintiff’s claim was
derivative and that plaintiff therefore lacked standing because he had not made a
pre-suit demand on the Reynolds board, as North Carolina law requires before a
plaintiff files a derivative suit. Plaintiff, on the other hand, urged the Business Court
to adopt the standard that Delaware uses to determine whether a stockholder is a
controlling stockholder, which would impose fiduciary duties on a minority
stockholder who is found to be controlling.
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
The Business Court granted all of the defendants’ motions to dismiss.
Regarding BAT, the Business Court concluded that, even if the Delaware standard
applied, the Complaint failed to allege that BAT exercised actual control over the
Reynolds board regarding the transaction. In reaching this conclusion, the Business
Court noted the “extraordinary” limitations that the Governance Agreement placed
on BAT’s ability to control the Reynolds board. Plaintiff appealed the dismissal of his
claims to the Court of Appeals.
In a unanimous opinion, the Court of Appeals reversed the Business Court’s
dismissal of plaintiff’s claims against BAT but affirmed the dismissal of plaintiff’s
claims against Reynolds and director defendants. Corwin v. British Am. Tobacco
PLC, ___ N.C. App. ___, ___, 796 S.E.2d 324, 340
(2016). The Court of Appeals used the Delaware approach to determine whether BAT was a controlling stockholder and concluded that plaintiff alleged enough facts to support a reasonable inference that BAT was a controlling stockholder.Id.
at ___, ___,796 S.E.2d at 332, 337
. The Court of Appeals also concluded that plaintiff had standing to bring a direct claim against BAT because plaintiff sufficiently pleaded that BAT owed plaintiff a special duty.Id.
at ___,796 S.E.2d at 338
(citing Barger v. McCoy Hillard & Parks,346 N.C. 650, 658
,488 S.E.2d 215, 219
(1997)).
BAT petitioned this Court for discretionary review on various issues related to
whether a minority stockholder could owe fiduciary duties to other stockholders
under North Carolina law and whether the Court of Appeals correctly found that a
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
controlling stockholder necessarily owes a special duty to other stockholders for
standing purposes. This Court allowed BAT’s petition.
II. Analysis
BAT moved to dismiss plaintiff’s Complaint for lack of standing under Rule
12(b)(1) and for failure to state a claim under Rule 12(b)(6) of the North Carolina
Rules of Civil Procedure. The Business Court assumed without deciding that plaintiff
had standing, and then dismissed plaintiff’s Complaint for failure to state any claim
for breach of fiduciary duty. Nevertheless, we will consider the issue of standing
before addressing the Rule 12(b)(6) issue because “standing is a ‘necessary
prerequisite to a court’s proper exercise of subject matter jurisdiction.’ ” Willowmere
Cmty. Ass’n v. City of Charlotte, 370 N.C. 553, 561
,809 S.E.2d 558, 563
(2018) (quoting Crouse v. Mineo,189 N.C. App. 232, 236
,658 S.E.2d 33, 36
(2008)).
A. Standing
The Court of Appeals concluded that plaintiff had standing to bring a direct
claim against BAT because the Complaint contained enough allegations to support a
determination that BAT owed a special duty to plaintiff. Corwin, ___ N.C. App. at
___, 796 S.E.2d at 338
(citing Barger,346 N.C. at 658
,488 S.E.2d at 219
). BAT
argues, however, that plaintiff’s claims are derivative and that plaintiff lacks
standing because he failed to make a pre-suit demand on Reynolds. Because this
appeal stems from a trial court’s order granting a motion to dismiss under Rule
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
12(b)(1), we apply de novo review, accepting the allegations in the complaint as true
and viewing them in the light most favorable to the non-moving party. Mangum v.
Raleigh Bd. of Adjustment, 362 N.C. 640, 644
,669 S.E.2d 279, 283
(2008).
A derivative proceeding is defined as “a civil suit in the right of a domestic
corporation.” N.C.G.S. § 55-7-40.1 (2017). Before commencing a derivative
proceeding, a stockholder must make a written demand “upon the corporation to take
suitable action.” Id. § 55-7-42 (2017). In line with this requirement, this Court has
stated that “[t]he general rule is that ‘[s]hareholders . . . generally may not bring
individual actions to recover what they consider their share of the damages suffered
by [a] corporation.’ ” Green v. Freeman, 367 N.C. 136, 142
,749 S.E.2d 262, 268
(2013) (second alteration in original) (quoting Barger,346 N.C. at 660
,488 S.E.2d at 220-21
). There are two exceptions to this general rule: shareholders “may bring an individual action . . . when (1) ‘the wrongdoer owed [them] a special duty’ or (2) they suffered a personal injury ‘distinct from the injury sustained by . . . the corporation itself.’ ” Id. at 142,749 S.E.2d at 268
(second and third alterations in original) (quoting Barger,346 N.C. at 659, 661
,488 S.E.2d at 219, 221
).
The first exception applies when the wrongdoer owes a duty that is “personal
to plaintiffs as shareholders and [is] separate and distinct from the duty defendant[ ]
owe[s] the corporation,” such as a fiduciary duty owed to the stockholders. Barger,
346 N.C. at 659
,488 S.E.2d at 220
. In this case, whether plaintiff had standing to
bring a direct claim under the first exception depends on whether BAT was a
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
controlling stockholder that owed plaintiff fiduciary duties. This issue is the same
issue that we must decide in order to determine whether the Business Court properly
dismissed plaintiff’s Complaint under Rule 12(b)(6) for failure to state a claim. We
will therefore determine whether plaintiff has standing under the second exception
before addressing whether BAT owed plaintiff fiduciary duties, to ascertain whether
it gives us an independent basis for asserting jurisdiction.
The second Barger exception applies when a plaintiff suffers an injury that is
“distinct from the injury suffered by the corporation itself.” Green, 367 N.C. at 144
,749 S.E.2d at 269
(quoting Barger,346 N.C. at 661
,488 S.E.2d at 221
). In this case,
plaintiff asserts that he and the Reynolds stockholders other than BAT have been
injured by the reduction of their percentage ownership of Reynolds. Before the
transaction, BAT owned 42% of the outstanding shares, and plaintiff and other
stockholders owned the remaining 58% of shares. Under the transaction agreement,
however, former Lorillard stockholders would own approximately 15% of Reynolds
shares, and BAT would be permitted to purchase additional shares to maintain its
42% ownership. That means that plaintiff and the other stockholders would only own
43% of Reynolds shares after the transaction. Plaintiff claims that this arrangement
allowed BAT to “maintain[ ] its own ownership stake and control over [Reynolds]
while diluting the stake of Plaintiff and the Class by means of the BAT Share
Purchase.” This dilution translates to a reduction in voting power for plaintiff and
the other non-BAT stockholders, and that alleged injury affects the voting power of
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
plaintiff and the non-BAT stockholders rather than the corporation itself. We
therefore conclude that plaintiff had standing to bring a direct claim against BAT
under the second Barger exception due to the alleged dilution of plaintiff’s voting
power.
While this Court has never before addressed whether a stockholder can bring
a direct claim for voting power dilution, caselaw from Delaware permits it, and we
find that caselaw to be persuasive. In Tooley v. Donaldson, Lufkin & Jenrette, Inc.,
the Supreme Court of Delaware held that whether an action is direct or derivative is
determined by “(1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and (2) who would receive the benefit of any recovery or
other remedy (the corporation or the stockholders, individually)[.]” 845 A.2d 1031, 1033
(Del. 2004) (en banc). Before Tooley, Delaware applied a “special injury” test, which Tooley rejected.Id. at 1038-39
. At first glance, it might appear that Delaware precedent should therefore be irrelevant to our analysis, on the assumption that the special injury test that Tooley rejected is similar to our Court’s current “distinct injury” exception under Barger. The special injury test in Delaware, however, was different than the distinct injury exception in North Carolina. The phrase “special injury” referred to a “wrong . . . inflicted upon the stockholder alone” and not shared by the other stockholders, seeid. at 1037
, whereas “distinct injury” in North Carolina means that the injury to the stockholder is distinct from the injury suffered by the corporation, Green,367 N.C. at 144
,749 S.E.2d at 269
. So the Tooley analysis, like
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Opinion of the Court
the second Barger exception, focuses on whether the stockholder suffered a harm that
is distinct from the harm suffered by the corporation. Focusing on the stockholder’s
harm compared to the corporation’s harm rather than on the harm of one stockholder
compared to the harm of other stockholders makes sense because, as Tooley
explained, “a direct, individual claim of stockholders that does not depend on harm
to the corporation can also fall on all stockholders equally, without the claim thereby
becoming a derivative claim.” 845 A.2d at 1037
.
The Supreme Court of Delaware has recognized in In re Tri-Star Pictures, Inc.,
Litigation, furthermore, that voting power dilution is a harm to stockholders when
the minority stockholders’ voting power is decreased while the majority stockholder’s
power is increased. 634 A.2d 319, 330
(Del. 1993). In Tri-Star, the Supreme Court of Delaware noted that the plaintiffs, who were minority stockholders, “suffer[ed] harm by voting power dilution which, in essence, is no more than a relative diminution in the minority’s proportionate influence over corporate affairs.”Id.
The court further explained that “[v]oting power dilution is a harm distinct and separate from” other harms suffered by the minority stockholders, such as alleged nondisclosure in proxy materials, because “[t]he harm from voting power dilution goes to the impact of an individual stockholder’s vote.”Id.
at 330 n.12. Although
Tri-Star was decided before Tooley, Delaware courts, including the Supreme Court of
Delaware, have continued to cite the pertinent analysis from Tri-Star while applying
the Tooley test for distinguishing between direct and derivative claims. See, e.g.,
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
Gentile v. Rossette, 906 A.2d 91, 101-03
(Del. 2006) (noting that Tri-Star provides the
“analytical framework” for claims based on dilution of stockholder voting power and
then applying Tooley to determine that the claim at issue was direct rather than
derivative because the harm to minority stockholders was unique from any injury
suffered by the corporation and because the only available relief would exclusively
benefit those minority stockholders).
Using the Tooley test, the Delaware Court of Chancery has determined that a
claim of voting power dilution can be a direct claim “where a significant stockholder’s
interest is increased at the sole expense of the minority.” In re J.P. Morgan Chase &
Co. S’holder Litig., 906 A.2d 808, 818
(Del. Ch. 2005) (quoting In re Paxson Commc’n Corp. S’holders Litig., No. Civ.A. 17568,2001 WL 812028
, at *5 (Del. Ch. July 12, 2001)).5 The Court of Chancery has explained that “[v]oting power dilution may constitute a direct claim, because it can directly harm the shareholders without affecting the corporation, and any remedy for the harm suffered under those circumstances would benefit the shareholders.” Oliver v. Boston Univ., No. Civ.A. 16570-NC,2006 WL 1064169
, at *17 (Del. Ch. Apr. 14, 2006) (unreported).6
5The Supreme Court of Delaware has likewise clarified that, although Tri-Star itself
speaks of, and the facts in Tri-Star involved, a majority stockholder’s power being increased,
the Tri-Star rule applies when a “significant or controlling stockholder[’s]” interest is
increased. See In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 774-75
(Del. 2006) (en banc) (emphasis added) (quoting In re Paxson,2001 WL 812028
, at *5).
6Delaware allows unpublished cases to be cited as precedent. Stephen R. Barnett,
No-Citation Rules Under Siege: A Battlefield Report and Analysis, 5 J. App. Prac. & Process
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
In this case, BAT’s voting power did not increase, but it was allowed to remain
constant at the sole expense of plaintiff and the other non-BAT stockholders, whose
voting power significantly decreased. This voting power dilution did not harm the
corporation itself, but it did harm the non-BAT stockholders. Thus, although this
case is the first time that this Court has considered whether voting power dilution is
a direct claim, we agree with the relevant reasoning of the Delaware courts that we
have discussed, and hold that plaintiff has pleaded “a personal injury.” See Green,
367 N.C. at 142
,749 S.E.2d at 268
. We further hold that the alleged personal injury,
in conjunction with plaintiff’s legal claim that BAT breached a purported fiduciary
duty to himself and his fellow non-BAT minority stockholders, is enough to confer
subject-matter jurisdiction on this Court. Because we have concluded that plaintiff
had standing to bring a direct claim for voting power dilution, we will now address
whether the Business Court properly granted BAT’s motion to dismiss under Rule
12(b)(6).
B. Fiduciary Duties
On appeal from the dismissal of a complaint pursuant to North Carolina Rule
of Civil Procedure 12(b)(6), we conduct de novo review to determine “whether the
473, 481 (2003). Specifically, the Rules of the Court of Chancery of the State of Delaware
refer to both reported and unreported Delaware cases as “principal Delaware decisions” that
can be included in a party’s compendium of authorities for the court to review along with its
brief. Del. Ch. Ct. R. 171(i). In ascertaining the nature of Delaware law, therefore, we cite
both reported and unreported Delaware Court of Chancery cases throughout this opinion and
consider them to have equal authority for the purposes of our analysis.
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CORWIN V. BRITISH AM. TOBACCO PLC
Opinion of the Court
allegations of the complaint, if treated as true, are sufficient to state a claim upon
which relief can be granted under some legal theory.” CommScope Credit Union v.
Butler & Burke, LLP, 369 N.C. 48, 51
,790 S.E.2d 657, 659
(2016) (quoting Bridges v. Parrish,366 N.C. 539, 541
,742 S.E.2d 794, 796
(2013)). It is well established that dismissal pursuant to Rule 12(b)(6) is proper when “(1) the complaint on its face reveals that no law supports the plaintiff’s claim; (2) the complaint on its face reveals the absence of facts sufficient to make a good claim; or (3) the complaint discloses some fact that necessarily defeats the plaintiff’s claim.” Wood v. Guilford County,355 N.C. 161, 166
,558 S.E.2d 490, 494
(2002) (citing Oates v. JAG, Inc.,314 N.C. 276, 278
,333 S.E.2d 222, 224
(1985)).7
This Court held in Gaines v. Long Manufacturing Company that the majority
stockholder of a corporation owes fiduciary duties to the minority stockholders.
234 N.C. 340, 344
,67 S.E.2d 350, 353
(1951). This Court reasoned that majority
stockholders owe fiduciary duties to minority stockholders because majority
7 The dissent relies heavily on the Rule 12(b)(6) standard recited in cases such as
Turner v. Hammocks Beach Corp., 363 N.C. 555, 559
,681 S.E.2d 770, 774
(2009), and State ex rel. Cooper v. Ridgeway Brands Mfg., LLC,362 N.C. 431, 444
,666 S.E.2d 107, 116
(2008), which, in turn, finds its genesis in Conley v. Gibson,355 U.S. 41, 45-46
,78 S. Ct. 99, 102
(1957), abrogated by Bell Atlantic Corp. v. Twombly,550 U.S. 544
,127 S. Ct. 1955
(2007). We decline to address what admittedly may be a lack of doctrinal consistency in our standard of review for Rule 12(b)(6) motions when that question was not among “the issues stated in . . . the petition for discretionary review and the response thereto filed.” N.C. R. App. P. 16(a). In any event, this Court routinely uses the Rule 12(b)(6) standard that we apply here in assessing the sufficiency of complaints in the context of complex commercial litigation. See, e.g., Krawiec v. Manly,370 N.C. 602, 606
,811 S.E.2d 542, 546
(2018); Christenbury Eye Ctr., P.A. v. Medflow, Inc.,370 N.C. 1, 5
,802 S.E.2d 888, 891
(2017).
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Opinion of the Court
stockholders “have a community of interest with the minority holders in the same
property and because the latter can act and contract in relation to the corporate
property only through the former.” Id. at 344, 67 S.E.2d at 353
(quoting 13 Am. Jur. Corporations § 423 (1938)). “It is the fact of control of the common property held and exercised . . . that creates the fiduciary obligation on the part of the majority stockholders in a corporation for the minority holders.” Id. at 344-45,67 S.E.2d at 353
(quoting 13 Am. Jur. Corporations § 423). Under Gaines, BAT did not necessarily
owe fiduciary duties to the other stockholders because BAT was not a majority
stockholder.
This Court has never held that a minority stockholder owes fiduciary duties to
other stockholders, but it has also never held that a minority stockholder cannot owe
fiduciary duties to other stockholders. We do not need to decide that question today,
however. Even if we agreed with Delaware courts that a minority stockholder may
owe fiduciary duties to other stockholders based on its exercising actual control over
the board of directors, the complaint in this case would still fail to state a claim upon
which relief can be granted because the Complaint does not adequately allege that
BAT exercised actual control over the Reynolds board here.
In Delaware, “[i]t is well settled law that only a ‘controlling stockholder’ owes
fiduciary duties to other stockholders.” In re Primedia Inc. Derivative Litig., 910 A.2d 248, 257
(Del. Ch. 2006) (citing Kahn v. Lynch Commc’n Sys., Inc.,638 A.2d 1110, 1113-14
(Del. 1994)). A stockholder is considered controlling if it owns more than
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50% of the corporation’s voting power or if it “exercises control over the business and
affairs of the corporation.” Id.
(quoting Kahn,638 A.2d at 1113
(emphasis omitted)). Put another way, a minority stockholder is considered a controlling stockholder if the minority stockholder exercises “domination . . . through actual control of corporate conduct.” In re Morton’s Rest. Grp., Inc. S’holders Litig.,74 A.3d 656, 664
(Del. Ch. 2013) (quoting Citron v. Fairchild Camera & Instrument Corp.,569 A.2d 53, 70
(Del. 1989)). This inquiry focuses on actual control over the board of directors. Id. at 664-65; In re KKR Fin. Holdings LLC S’holder Litig.,101 A.3d 980, 993-94
(Del. Ch. 2014), aff’d sub nom. Corwin v. KKR Fin. Holdings LLC,125 A.3d 304
(Del. 2015). Actual control exists only when the allegedly controlling stockholder “exercises such formidable voting and managerial power that [it], as a practical matter, [is] no differently situated than if [it] had majority voting control.” In re KKR,101 A.3d at 993
(alterations in original) (quoting In re Morton’s,74 A.3d at 665
) (internal quotations omitted). As a necessary prerequisite for a minority stockholder to exercise actual control, then, the stockholder’s “power must be so potent that independent directors . . . cannot freely exercise their judgment, fearing retribution.”Id.
(emphasis omitted) (quoting In re Morton’s,74 A.3d at 665
(alteration in original))
(internal quotations omitted).
To survive a motion to dismiss in Delaware, a claim for breach of fiduciary duty
by a minority stockholder must contain more than “[t]he bare conclusory allegation
that a minority stockholder possessed control . . . . Rather, the [c]omplaint must
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Opinion of the Court
contain well-pled facts showing that the minority stockholder ‘exercised actual
domination and control over . . . [the] directors.’ ” In re Morton’s, 74 A.3d at 664-65
(emphasis added) (fourth and fifth alterations in original) (quoting In re Sea-Land Corp. S’holders Litig., No. Civ.A. 8453,1988 WL 49126
, at *3 (Del. Ch. May 13, 1988) (unreported)). Even at the motion to dismiss stage, Delaware courts have noted that “[t]his actual control test is ‘not an easy one to satisfy’ as ‘stockholders with very potent clout have been deemed, in thoughtful decisions, to fall short of the mark.’ ” Sciabacucchi v. Liberty Broadband Corp., No. CV 11418-VCG,2017 WL 2352152
, at *16 (Del. Ch. May 31, 2017) (unreported) (quoting In re PNB Holding Co. S’holders Litig., No. Civ.A. 28-N,2006 WL 2403999
, at *9 (Del. Ch. Aug. 18, 2006)
(unreported)).
That the actual control standard emphasizes the exercise of actual control over
the board—an affirmative act by the minority stockholder—and not just the mere
possession of power means that an allegation that a minority stockholder has some
leverage over the board of directors is not enough. See In re Sea-Land, 1988 WL 49126
, at *3 (stating that allegations that amount to significant “leverage” will not
allow a complaint to survive because “ ‘leverage’ is not actual domination and
control”). A party may, after all, use its leverage to negotiate favorable terms in a
transaction with another party even when it has no control (and thus has exercised
no control) over that other party. Applying this standard in the context of a Rule
12(b)(6) motion, plaintiff’s Complaint necessarily fails if it “reveals the absence of
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facts” that BAT engaged in some affirmative act to direct or compel the Reynolds
board to enter into the Lorillard transaction on the terms that plaintiff takes issue
with here. Wood, 355 N.C. at 166
,558 S.E.2d at 494
(citing Oates,314 N.C. at 278
,333 S.E.2d at 224
). In other words, the complaint must allege, through well-pleaded facts, actual control, see Sciabacucchi,2017 WL 2352152
, at *16, which refers to control that prevents a company’s directors from “freely exercis[ing] their judgment in determining whether or not to approve and recommend” a transaction, In re KKR,101 A.3d at 993
.
In the same vein, the fact that a stockholder possesses contractual rights
permitting it to restrict corporate action and thereby giving it leverage over board
decisions does not necessarily mean that the stockholder is exercising actual control.
Thermopylae Capital Partners, L.P. v. Simbol, Inc., C.A. No. 10619-VCG, 2016 WL 368170
, at *13 (Del. Ch. Jan. 29, 2016) (unreported). Unexercised contractual rights alone, such as board veto power, do not equate to actual control over a board. Williamson v. Cox Commc’ns, Inc., No. Civ.A. 1663-N,2006 WL 1586375
, at *5 (Del. Ch. June 5, 2006) (unreported). Even a stockholder who exercises its contractual rights to further its own goals “is simply exercising [its] own property rights, not that of others, and is no fiduciary.” Thermopylae,2016 WL 368170
, at *14. For example, in Superior Vision Services, Inc. v. ReliaStar Life Insurance Co., No. Civ.A. 1668-N,2006 WL 2521426
(Del. Ch. Aug. 25, 2006) (unreported), the allegedly controlling
stockholder had a contractual right to withhold its consent and effectively veto any
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Opinion of the Court
dividend payment that the board voted to approve, id. at *4. The stockholder
exercised that right, but the Delaware Court of Chancery concluded that the
stockholder was not controlling solely by virtue of “exercis[ing] a duly-obtained
contractual right.” Id. at *5. The court reasoned that to hold otherwise would mean
that “any strong contractual right, duly obtained by a significant shareholder (a
somewhat elusive term in itself), would be limited by and subject to fiduciary duty
concerns.” Id.
A minority stockholder who exercises contractual rights may, however, be
considered a controlling stockholder if the stockholder “achieved control or influence
over a majority of directors through non-contractual means.” Thermopylae, 2016 WL 368170
, at *14. Additionally, it could be possible to determine that a stockholder is a controlling one “where the holding of contractual rights [is] coupled with a significant equity position and other factors, . . . especially if those contractual rights are used to induce or to coerce the board of directors to approve (or refrain from approving) certain actions.” Superior Vision,2006 WL 2521426
, at *5. In Williamson v. Cox Communications, Inc., for example, the court found that unexercised veto power was significant in denying a motion to dismiss because the stockholder had veto power over all board decisions and could use that veto power “to shut down the effective operation of the . . . board of directors.”2006 WL 1586375
, at *5. The veto power therefore gave that stockholder coercive leverage because the board effectively had to get the stockholder’s approval in order to take any action whatsoever.Id.
But “a
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significant shareholder, who exercises a duly-obtained contractual right that
somehow limits or restricts the actions that a corporation otherwise would take, does
not become, without more, a ‘controlling shareholder’ for that particular purpose.”
Superior Vision, 2006 WL 2521426
, at *5.
On the other hand, the existence of contractual restrictions on a stockholder’s
ability to exercise control may prevent a finding of control at the pleading stage. See
Sciabacucchi, 2017 WL 2352152
, at *17-18. In Sciabacucchi v. Liberty Broadband
Corp., for instance, contractual restrictions prevented the allegedly controlling
stockholder from designating a majority of the board, soliciting proxies, or obtaining
more than 35% of the voting stock. Id. at *18. The restrictions also required certain
directors and unaffiliated stockholders to approve specific transactions like the one
at issue. Id. The court concluded that these “contractual handcuffs,” among other
things, prevented a finding that the plaintiff had adequately pleaded actual control.
Id. at *20.
Threats and demands, however, may support a claim that the stockholder
exercised actual control. See Kahn, 638 A.2d at 1114
. In Kahn v. Lynch Communication Systems, Inc., the Supreme Court of Delaware affirmed the Court of Chancery’s determination that a minority stockholder was controlling when the 43.3% stockholder threatened the board, saying, “[Y]ou must listen to us. We are 43 percent owner. You have to do what we tell you.”Id.
There was also evidence in
Kahn that board members were intimidated by this stockholder and therefore
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Opinion of the Court
complied with its demands instead of exercising their own independent business
judgment. Id. at 1114-15
. Thus, Kahn suggests that allegations of a threat by a
significant minority stockholder, plus allegations that the board was intimidated by
that threat, may be enough to establish actual control.
As we have already said, we do not need to decide whether to adopt the
Delaware approach to determining controlling-stockholder status in order to decide
this case. Even under the Delaware approach, we conclude that plaintiff has failed
to allege facts that, if true, would establish that BAT exercised actual control over the
Reynolds board of directors, and therefore that plaintiff has failed to plead a
breach-of-fiduciary-duty claim.
Plaintiff claims that the Governance Agreement gave BAT the ability to control
the Reynolds board. In fact, the exact opposite is true. In several ways, the
Governance Agreement placed “contractual handcuffs” on BAT that prevented it from
controlling the Reynolds board. See Sciabacucchi, 2017 WL 2352152
, at *20. BAT
could nominate only five of the thirteen Reynolds directors, and three of those
directors could not currently be (or have been in the past three years) an officer,
director, or employee of BAT. Generally, BAT was required to vote all of its shares
in favor of electing the directors that it did not nominate, and, if their removal was
sought, BAT was required to vote all of its shares against their removal. And BAT
could not seek to remove any of the directors that it did not nominate. BAT therefore
had no means of retribution against the majority of the directors that could have
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Opinion of the Court
impaired the ability of those directors to exercise independent judgment. See In re
KKR, 101 A.3d at 993-94
. BAT also could not increase its ownership percentage
during the standstill period, which was in effect when this transaction occurred. And
the Other Directors who were not nominated by BAT or recently affiliated with BAT
had to approve this transaction in a separate vote—which they did unanimously.
Plaintiff argues that BAT’s contractual approval rights over the issuance of
shares and the sale of intellectual property in this transaction gave BAT actual
control, but contractual approval rights do not equate to actual control. Superior
Vision, 2006 WL 2521426
, at *4-5. Although BAT could stop this transaction from happening, BAT could not make it happen. To be a controlling stockholder, the minority stockholder must have “such formidable voting and managerial power that [it], as a practical matter, [is] no differently situated than if [it] had majority voting control.” In re PNB,2006 WL 2403999
, at *9. Merely being able to stop a transaction does not give a minority stockholder the same level of power that a majority stockholder would have, because a majority stockholder would have the power both to stop a transaction and to make it happen. See Gaines,234 N.C. at 344
,67 S.E.2d at 353
(noting that a majority stockholder has “the power, by the election of directors and by the vote of [its] stock, to do everything that the corporation can do” (quoting 13 Am. Jur. Corporations § 422)). Although a minority stockholder with veto power might be able to exercise that same level of power through coercion, see Williamson,2006 WL 1586375
, at *5, merely having veto power over the Board’s ability to enter
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Opinion of the Court
into this particular transaction is not enough. To be clear, plaintiff does not allege
that Reynolds had to enter into this transaction—much less to enter into this
transaction as it was structured, which is what triggered BAT’s contractual right to
veto it. So the fact of BAT’s contractual rights did not, on its own, give BAT the kind
of coercive power over the Reynolds board that could allow BAT to exercise actual
control. Cf. Kahn, 638 A.2d at 1112-13
(noting that the Lynch board had determined
that Lynch needed to obtain certain technology to remain competitive and that
Lynch’s “alternatives to [the] cash-out merger” that its significant stockholder Alcatel
had proposed “had been investigated but were impracticable”).
As we have already said, of course, a stockholder who holds contractual rights
could be considered a controlling stockholder “where the holding of contractual rights
[is] coupled with a significant equity position and other factors.” Superior Vision,
2006 WL 2521426
, at *5. But as we discuss more fully below, plaintiff has failed to
plead sufficient “other factors” to support such a finding in this case.
Plaintiff claims that BAT’s involvement in the negotiations demonstrates
actual control. Plaintiff does not allege that BAT ever threatened the Reynolds board
in any way, however—unlike, for example, the stockholder who was considered
controlling in Kahn, 638 A.2d at 1114
-15—even though BAT was involved in many of
the discussions regarding the Lorillard transaction from an early date. Admittedly,
BAT did represent that it would support the transaction only on terms that were
agreeable to BAT. BAT wanted to maintain its 42% ownership interest after the
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Opinion of the Court
transaction and did not want the transaction to affect the terms of the Governance
Agreement, but in expressing that, BAT was making a statement only about
exercising its veto power. And a statement that does not express the intent to do
anything other than exercise veto power does not make BAT a controlling
stockholder, because, in making that statement, BAT was merely informing the board
of how it would exercise its contractual rights—rights that were the property of BAT
alone and that could not turn BAT into a fiduciary. See Thermopylae, 2016 WL 368170
, at *14.
Plaintiff also alleges that BAT had additional leverage in the transaction due
to the threat that BAT would buy the remaining 58% of Reynolds’ shares at the
expiration of the standstill. But the Complaint does not actually allege that BAT ever
threatened to do that. It merely refers to news outlet reports that speculated that
BAT would buy the remaining shares at that time: specifically, to a report from the
Telegraph stating “that Citigroup analysts had ‘talked up the likelihood’ that BAT
would buy the remaining 58% of Reynolds” and to a report from the Daily Mail that
there was “growing speculation [that BAT] is ready to splash out billions of pounds
buying the 58 per cent of US rival Reynolds American it does not already own.” And
the Complaint alleges that the CEO of BAT told stockholders at its 2014 annual
stockholder meeting “that BAT looks at acquiring Reynolds on a yearly basis.”
Accepting these allegations in the complaint as true merely requires us to accept that
the Telegraph and the Daily Mail reported on this “speculation” and that BAT’s CEO
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Opinion of the Court
told stockholders that BAT considered acquiring Reynolds every year. None of these
allegations, if taken as true, indicate that BAT was actually planning to acquire
Reynolds, or, more importantly, that BAT had actually threatened Reynolds with the
idea of purchasing the remaining shares at the expiration of the standstill if BAT’s
preferences were not accommodated. And, more generally, taking as true plaintiff’s
allegation that “[t]he threat of a complete takeover gave BAT additional leverage to
impose its terms on the Reynolds Board during [ ] negotiations,” we must note again
that the mere existence of leverage does not equate to the exercise of actual control.
See In re Sea-Land, 1988 WL 49126
, at *3. Where, as here, the “threat” to which a
complaint refers is the mere ability to take over a company, that ability does not
amount to actual control because it does not involve a stockholder who prevents board
members from exercising their own independent judgment.
Plaintiff suggests in the complaint that the board was not independent of BAT
in this transaction for other reasons. Plaintiff claims that the Other Directors—who
were not nominated by BAT or recently affiliated with BAT—did not engage
independent legal counsel soon enough and should have also engaged independent
financial advisors. Plaintiff alleges that there is no evidence that Reynolds explored
other financing options until just weeks before the transaction was executed.
Plaintiff also suggests that many of Reynolds’ directors had conflicts of interest in the
transaction because seven of the directors were either current or former officers,
directors, or attorneys for BAT or its affiliates. And, at times, BAT-appointed
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Opinion of the Court
Reynolds directors even spoke on behalf of BAT during meetings about the proposed
transactions, according to plaintiff’s allegations.
But, aside from the fact that any BAT nominees representing BAT’s interests
to the board were necessarily in the minority, the presence of board members who
merely share interests with a significant stockholder does not give that stockholder
actual control of the board; the proper focus is on whether the allegedly controlling
stockholder exercised power over the board rather than on whether the directors had
conflicts of interest. See Sciabacucchi, 2017 WL 2352152
, at *17. To the extent that
plaintiff relies on any of the above actions by the directors to state that BAT exercised
actual control over the board, moreover, plaintiff’s allegations are insufficient because
plaintiff does not allege any act by BAT to direct, compel, or coerce the actions of the
directors. As to the claim at issue here, after all, plaintiff is claiming a breach of
fiduciary duty by BAT, not by any of the Reynolds directors (whether they be directors
designed by or otherwise connected to BAT or not).
The dissent’s reliance on plaintiff’s allegations that the board failed to obtain
outside and independent advice and counsel is marked by the same erroneous
reasoning. Even if the Reynolds board should have engaged, but failed to engage,
independent counsel, or otherwise failed to comply with its own legal obligations
(which we take no position on), that would in no way show that BAT “prevent[ed]
the . . . board from freely exercising its independent judgment in considering the
[transaction].” In re KKR, 101 A.3d at 995
. Plaintiff cannot simply allege that the
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Opinion of the Court
Reynolds board failed to comply with all of its legal duties (assuming, for the sake of
argument, that he has at least done that); he must allege facts that would show that
BAT prevented the board from acting independently. He has failed to do so.
Plaintiff points to recommendations of the Other Directors that were
ultimately rejected as further evidence that BAT had actual control over the board.
During negotiations, the Other Directors discussed reducing BAT’s ownership
percentage after the merger to allow a greater ownership level for Lorillard’s
stockholders, but this change ultimately never happened. Plaintiff does not allege
any facts showing that the ultimate rejection of this change was due to BAT’s
intervention, though; the mere fact that this change was considered and rejected does
not mean that BAT had actual control of the board. And even if BAT had influenced
the decision on this particular aspect of the transaction, that does not mean that BAT
exerted actual control over the board with respect to the transaction as a whole. Once
again, its influence on the decision would be readily explained by BAT’s leverage over
the transaction, as a major financer of the transaction and as a holder of contractual
rights implicated by the transaction. Because that leverage did not equate to actual
control over the Reynolds board with respect to the transaction, anything that arose
from that leverage does not equate to actual control, either.
Similarly, the Other Directors sought to remove a provision in the proposed
merger agreement that required BAT to vote its shares of Reynolds stock in favor of
the transaction regardless of whether the Reynolds board changed its
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Opinion of the Court
recommendation on the transaction. Lorillard, however, insisted that the provision
remain in the agreement. Far from controlling this decision, BAT said that it would
not commit to the provision over the objections of the Other Directors. The Other
Directors ultimately agreed to allow the provision to remain in the proposed merger
agreement, though, and remain it did. This change, then, was not rejected because
of BAT’s control over the Reynolds board. Instead, it was rejected because of
Lorillard’s demands and the Other Directors’ acquiescence to those demands.
Anyway, it is unclear why plaintiff thinks that the retention of this provision is
helpful to his cause. All that the provision did was to restrict BAT’s ability to freely
decide whether to vote in favor of the transaction.
To the extent that plaintiff argues that terms in the agreement that are
favorable to BAT demonstrate control, those arguments also fail. It is reasonable to
infer, based on the pleadings, that Reynolds wanted BAT’s support for the transaction
and that BAT had some leverage because of the number of shares that it owned and
its willingness to help finance the transaction (and because BAT could veto a
transaction that, like the one proposed, was structured in a way that stock
representing over 5% of Reynolds’ stockholders’ voting power had to be issued).
Leverage is not the same as actual control, though, and does not, on its own,
transform a minority stockholder into a controlling stockholder. See In re Sea-Land,
1988 WL 49126
, at *3.
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Opinion of the Court
At best, the allegations that some terms in the transaction agreement were
favorable to BAT show only that BAT’s contractual rights gave it the ability to secure
some favorable terms from the board. Those allegations do not show that BAT
exercised control over the board—that is, to make it take action. If they did, then
every contractual right that allowed a stockholder to exert some leverage over a
transaction would automatically convert the stockholder into a controlling
stockholder. That, in turn, would contravene the principle that a “contractual
right . . . , without more,” does not turn “a significant shareholder” into “a ‘controlling
shareholder.’ ” Superior Vision, 2006 WL 2521426
, at *5.
The terms of the agreement allowed BAT to maintain its 42% ownership
interest in Reynolds by purchasing shares at a rate lower than the closing price for
Reynolds shares the day before the transaction agreements were signed. That
purchase price was based on the closing price of Reynolds stock on 2 July 2014, which
was the date used to set the financial terms of the acquisition. Setting the purchase
price ahead of time makes sense because Reynolds would have needed to know how
much money it would receive from BAT in order to secure the rest of the financing
required to complete the transaction. Further, using this date allowed the purchase
price to be set before news of the proposed transaction was publicly released and
affected stock prices. This term of the agreement therefore does not indicate actual
control.
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Opinion of the Court
Reynolds and BAT also agreed to pursue a technology-sharing initiative for
next generation tobacco products such as digital vapor cigarettes. Plaintiff alleged
that “the Director Defendants . . . agreed to allow BAT to access Reynolds’[ ]
game-changing technology without adequate compensation,” thereby removing any
“need for BAT to pay the Public Shareholders a control premium to buy the rest of
the Company.” But it is unclear how this agreement demonstrates that BAT had
actual control of the Reynolds board with respect to the transaction to purchase
Lorillard. The dissent points to the perceived threat of a takeover by BAT and to the
allegation that this technology-sharing agreement made Reynolds a “significantly
less attractive takeover target for BAT” and contends that these allegations, taken as
true, show that BAT exercised actual control over the board. Again, though, leverage
to obtain favorable terms in an agreement does not necessarily indicate that the
beneficiary of those favorable terms was a controlling stockholder.
Overall, plaintiff’s allegations and the incorporated Governance Agreement
demonstrate that BAT did not have majority voting power either on the board or as
a stockholder, that BAT could not retaliate against the non-BAT appointed directors
who made up a majority of the board, and that the Lorillard transaction could not be
approved without the separate approval of the Other Directors, who were
Independent Directors not nominated by BAT. Because of these facts, BAT could not
and did not exercise actual control over the Reynolds board. Additionally, plaintiff
has filled his Complaint with allegations of BAT’s leverage and bargaining power—
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Opinion of the Court
contractual or otherwise—and has also demonstrated that BAT was able to obtain
favorable terms for itself during Reynolds’ acquisition of Lorillard. But again, BAT’s
having bargaining power and negotiating a good deal because of it does not mean that
BAT engaged in any coercive behavior or otherwise exercised actual control over the
board.
Considering the restrictions in the Governance Agreement that we discuss
above, and considering the absence of allegations of coercive or otherwise controlling
actions on the part of BAT, plaintiff has failed to allege that BAT exercised such
domination and control over the Reynolds board that BAT was indistinguishable from
a majority stockholder. See In re KKR, 101 A.3d at 993-94
. Under the Delaware controlling-stockholder standard, therefore, plaintiff’s Complaint “on its face reveals the absence of facts sufficient to make a good claim” that BAT owed plaintiff fiduciary duties because it controlled the Reynold’s board, and it also “discloses some fact[s] that necessarily defeat[ ] the plaintiff’s claim” that BAT could even exercise such control. Wood,355 N.C. at 166
,558 S.E.2d at 494
(citing Oates,314 N.C. at 278
,333 S.E.2d at 224
).
III. Conclusion
For the reasons stated above, the Court of Appeals erred in concluding that
plaintiff’s allegations, if true, would satisfy the actual control test as that test is
elucidated in Delaware caselaw. Because BAT was not a majority or controlling
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Opinion of the Court
stockholder, it did not owe fiduciary duties to the other Reynolds stockholders, and
the Business Court properly dismissed plaintiff’s breach-of-fiduciary-duty claim
against BAT. We accordingly reverse the decision of the Court of Appeals on this
issue. Plaintiff has not appealed the dismissal of his claims against defendant
directors or Reynolds to this Court. The dismissal of those claims is therefore not
before us, and the decision of the Court of Appeals as to those claims remains
undisturbed.
REVERSED.
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Hudson, J., dissenting
Justice HUDSON dissenting.
Here the majority concludes that plaintiff’s complaint fails to adequately allege
actual control by BAT over the Reynolds board of directors in the context of the
Lorillard acquisition and that, as a result, we need not decide whether, in accordance
with Delaware courts that have addressed the issue, “a minority stockholder may owe
fiduciary duties to other stockholders based on its exercising actual control over the
board of directors.” Accordingly, the majority holds that the Business Court properly
dismissed plaintiff’s breach of fiduciary duty claim against BAT. In my opinion the
complaint sufficiently alleges actual control by BAT; therefore, I would proceed to
address whether this Court follows the Delaware approach on the issue of whether a
minority stockholder who exercises actual control over the board of directors owes
fiduciary duties to other stockholders. As such, I respectfully dissent.
The relevant inquiry in reviewing a trial court’s ruling on a motion to dismiss
under Rule 12(b)(6) is “whether, as a matter of law, the allegations of the complaint,
treated as true, are sufficient to state a claim upon which relief may be granted.”
Newberne v. Dep’t of Crime Control & Pub. Safety, 359 N.C. 782, 784
,618 S.E.2d 201, 203
(2005) (quoting Meyer v. Walls,347 N.C. 97, 111
,489 S.E.2d 880, 888
(1997)).
Under N.C.G.S. 1A-1, Rule 8(a)(1) (2017), a complaint must contain “[a] short and
plain statement of the claim sufficiently particular to give the court and the parties
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
notice of the transactions, occurrences, or series of transactions or occurrences,
intended to be proved showing that the pleader is entitled to relief.” (Emphasis
added.) “The system of notice pleading affords a sufficiently liberal construction of
complaints so that few fail to survive a motion to dismiss.” Wray v. City of Greensboro,
370 N.C. 41, 46
,802 S.E.2d 894, 898
(2017) (quoting Ladd v. Estate of Kellenberger,314 N.C. 477, 481
,334 S.E.2d 751, 755
(1985)); see also id. at 50, 802 S.E.2d at 900 (“In light of the low bar for notice pleading under Rule 12(b)(6), . . . the averments in plaintiff’s first amended complaint are sufficient . . . .”). “The complaint should be liberally construed and should not be dismissed ‘unless it appears beyond doubt that the plaintiff could prove no set of facts in support of his claim which would entitle him to relief.’ ” Turner v. Hammocks Beach Corp.,363 N.C. 555, 559
,681 S.E.2d 770, 774
(2009) (quoting State ex rel. Cooper v. Ridgeway Brands Mfg., LLC,362 N.C. 431, 444
,666 S.E.2d 107, 116
(2008) (brackets omitted)); see alsoid. at 559
,681 S.E.2d at 774
(stating that the complaint must be viewed “in the light most favorable to plaintiffs, giving them the benefit of every reasonable inference that can be drawn therefrom”). “We review appeals from dismissals under Rule 12(b)(6) de novo.” Arnesen v. Rivers Edge Golf Club & Plantation, Inc.,368 N.C. 440, 448
,781 S.E.2d 1, 8
(2015) (citing Bridges v. Parrish,366 N.C. 539, 541
,742 S.E.2d 794, 796
(2013)).
I agree with much of the majority’s discussion of the Delaware approach, under
which a minority stockholder is considered to be a controlling stockholder—therefore
owing fiduciary duties to other stockholders—if the minority stockholder exercises
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
“domination . . . through actual control of corporate conduct.” In re Morton’s Rest.
Grp. S’holders Litig., 74 A.3d 656, 664
(Del. Ch. 2013) (quoting Citron v. Fairchild Camera & Instrument Corp.,569 A.2d 53, 70
(Del. 1989)); see also id. at 664-65 (“[T]he Complaint must contain well-pled facts showing that the minority stockholder ‘exercised actual domination and control over . . . [the] directors.’ ” (second and third alterations in original) (quoting In re Sea-Land Corp. S’holders Litig., Civ.A. No. 8453,1988 WL 49126
, at *384 (Del. Ch. May 13, 1988))). A complaint must allege facts from which it is reasonable to infer that the allegedly controlling stockholder could “prevent the [company’s] board from freely exercising its independent judgment in considering the [transaction] or . . . exact retribution by removing the [company’s] directors from their offices.” In re KKR Fin. Holdings LLC S’holder Litig.,101 A.3d 980, 995
(Del. Ch. 2014), aff’d sub nom. Corwin v. KKR Fin. Holdings LLC,125 A.3d 304
(Del. 2015). A plaintiff is not required to plead actual control by a minority stockholder of the “day-to-day operations” of the board of directors; rather, a “[p]laintiff can survive the motion to dismiss by alleging actual control with regard to the particular transaction that is being challenged.” Williamson v. Cox Commc’ns, Inc., No. Civ.A. 1663-N,2006 WL 1586375
, at *4 (Del. Ch. June 5, 2006) (citing In re W. Nat’l Corp. S’holders Litig., No. 15927,2000 WL 710192
, at *20 (Del. Ch. May 22, 2000)); see also Super. Vision Servs. v. ReliaStar Life Ins. Co., No. Civ.A. 1668-N,2006 WL 2521426
, at *4 (Del. Ch. Aug. 25, 2006) (explaining that “pervasive control over
the corporation’s actions is not required” and a plaintiff can allege “ ‘actual control
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
with regard to the particular transaction that is being challenged’ ” (quoting
Williamson, 2006 WL 1586375
, at *4)).
Here the allegations of control are “with regard to a particular transaction that
is being challenged”—the Lorillard acquisition. Among the allegations that in my
view sufficiently allege actual control by BAT are the following1:
5. As a July 15, 2014 CNBC story put it, “the
real victor” in the Proposed Transaction is neither
Reynolds nor Lorillard, but BAT, which “solidified its
position in a larger company without paying a
premium.” The Proposed Transaction enriches BAT by
extracting and transferring value from all other Reynolds
shareholders (the “Public Shareholders”) to BAT. As a
result of the Proposed Transaction, the Public
Shareholders will not only lose out on the economic value
of the “game changing” e-cigarette and heat-not-burn
technology being transferred to BAT, but their share of the
combined company will be notably diluted and they will
lose out on the control premium that BAT should have been
required to pay to maintain its effective control over the
Company.
....
34. In addition to the power to designate five
board members, the Governance Agreement gives BAT
significant additional means by which it exerts control over
Reynolds. For example, as Reynolds disclosed in its most
recent Form 10-K, BAT has a veto over “the sale or transfer
of certain RAI intellectual property associated with B&W
brands having an international presence, other than in
connection with a sale of [Reynolds]; and [Reynolds’s]
adoption of any takeover defense measures that would
apply to the acquisition of equity securities of Reynolds by
1 Allegations pertaining to the threat of takeover are summarized with that part of
the discussion below.
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
[BAT] or its affiliates, other than the re-adoption of the
[Reynolds] rights plan in its present form.” Moreover, “the
approval of a majority of [BAT’s] designees on [Reynolds’s]
Board is required in connection with the following matters:
any issuance of [Reynolds] securities in excess of 5% of its
outstanding voting stock, unless at such time [BAT’s]
ownership interest in [Reynolds] is less than 32%; and any
repurchase of [Reynolds] common stock, subject to a
number of exceptions, unless at such time [BAT’s]
ownership interest in [Reynolds] is less than 25%.”
35. Finally, the mere size of BAT’s stake gives it
significant control over Reynolds. As the Preliminary
Proxy notes, “[u]nless substantially all RAI shareholders
other than BAT vote together on matters presented to RAI
shareholders, BAT would have the power to determine the
outcome of matters submitted to a shareholder vote, which
could result in RAI taking actions that RAI’s other
shareholders do not support.”
36. The Governance Agreement will terminate,
however, if BAT owns either 100% or less than 15% of
Reynolds. The Governance Agreement will also terminate,
automatically, if a third party acquires a majority stake in
Reynolds.
....
41. Reynolds’s release also disclosed that BAT
would receive two significant benefits stemming from the
Proposed Transaction that were not shared with Public
Shareholders: (i) the Technology Sharing Agreement will
give BAT access to Reynolds’s “game-changing” e-cigarette
technology; and (ii) the BAT Share Purchase will allow
BAT to maintain its pre-acquisition share of the Company
and avoid being diluted along with the Public Shareholders
by purchasing new shares at a discount to the Company’s
trading price:
. . . . As part of the transaction, BAT will
maintain its 42 percent ownership in
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
RAI through an investment of
approximately $4.7 billion (based on
RAI’s closing share price of $60.16 as of
July 2, 2014, the same share price used to
determine the stock component of
Lorillard shareholders’ consideration).
In addition, RAI and BAT have agreed in
principle to pursue an ongoing
technology-sharing initiative for the
development and commercialization of
next-generation tobacco products,
including heat-not-burn cigarettes and
vapor products.
....
C. BAT’s De Facto Control Over the
Reynolds Board Enabled It To Dominate
The Board’s Decision Making Process
42. The “Background of the Merger” section in the
Form S-4 that Reynolds filed with the Securities and
Exchange Commission on October 17, 2014 (the
“Preliminary Proxy”) underscores that the Proposed
Transaction was driven by the interests of BAT, at the
expense of the Public Shareholders.
43. BAT was involved in the negotiation of the
Proposed Transaction from the beginning. According to the
Preliminary Proxy, Reynolds met with BAT before it
presented any proposal to Lorillard or Imperial. In
discussions between Reynolds and BAT in January 2013,
BAT’s representatives made clear that BAT would dictate
the terms of any transaction:
BAT’s representatives reiterated BAT’s
support, as a RAI shareholder, for a business
combination of RAI and Lorillard. They also
indicated BAT would wish to maintain its
approximately 42% beneficial ownership
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
interest in RAI after the transaction and was
willing to provide equity financing for such a
transaction in order to maintain its
ownership interest. BAT’s representatives
also stated that decisions as to whether and
how to pursue a business combination
between RAI and Lorillard were to be made
by the RAI board of directors, but that BAT,
in its capacity as a substantial financing
source and holder of contractual approval
rights, would cooperate with combining the
companies only on transactional terms and
with an execution strategy of which it
approved. Such issues included, among
others, the brands to be divested, the
subscription price for any additional BAT
investment, maintaining the terms of the
governance agreement, avoiding a RAI
commitment to pay any material ‘reverse
termination fee’ due to the failure to obtain
regulatory clearance and an executive
succession plan for the combined company.
44. In June 2013, BAT and RAI agreed to a term
sheet “with respect to the subscription by BAT for
additional shares of RAI common stock in order to provide
financing for the potential transaction involving RAI and
Lorillard and to maintain BAT’s approximately 42%
beneficial ownership interest in RAI” (the “2013 Term
Sheet”). At “the insistence of BAT,” the 2013 Term Sheet
included a provision “that neither BAT nor RAI would seek
any changes in the governance agreement in connection
with the possible acquisition of Lorillard.” The
Preliminary Proxy does not disclose any other material
terms of the 2013 Term Sheet.
45. According to the Preliminary Proxy, the 2013
Term Sheet was approved by a vote of “the independent
directors of RAI [i.e., directors who are neither officers nor
employees of Reynolds] not designated by B&W, referred
to as the Other Directors.” Yet there is no indication in the
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Hudson, J., dissenting
Preliminary Proxy that the Other Directors hired
independent counsel or an independent financial advisor to
assist them in evaluating or negotiating the 2013 Term
Sheet.
46. Indeed, it does not appear that the Other
Directors played any significant role in the negotiations
with BAT over the 2013 Term Sheet. Rather, according to
the Preliminary Proxy, the Board established a strategic
matters review committee (“SMRC”), which existed and
operated on behalf of Reynolds from September 2012 to
May 2014. The Preliminary Proxy does not disclose the
members of the SMRC. Between September 2012 and the
signing of the 2013 Term Sheet in June 2013, Reynolds’s
primary negotiator was Daniel M. Delen, the then-CEO of
Reynolds. Mr. Delen worked for BAT from 1989 through
2006.
47. Later in the summer of 2013, “representatives
of BAT indicated to representatives of RAI that BAT was
not prepared to provide financial support to a transaction
that would include a divestiture of the ‘e-vapor’ brand blu,
as requested by Imperial, although eventually it changed
its position.” Reynolds and BAT then worked hand-in-
hand to negotiate the divestments. According to the
Preliminary Proxy, “[i]n July 2013, with the support of the
RAI board of directors, [Thomas R.] Adams [an RAI
executive], along with Scott M. Hayes, then group head of
mergers & acquisitions for BAT, contacted representatives
of another potential divestiture partner to inquire about
the possibility of such party’s participation in a brand
divestiture transaction.”
48. Mr. Hayes continued to function as a de facto
member of the Reynolds team. According to the
Preliminary Proxy, on November 21, 2013, Reynolds’s
SMRC met with “representatives of RAI’s senior
management, [Reynolds’s legal advisors] Jones Day, [and]
Richards Layton and [Reynolds’s financial advisor] Lazard.
Mr. Hayes also participated in part of the meeting.” And,
“[a]t the request of the SMRC, Mr. Hayes presented BAT’s
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
view of a possible transaction with Lorillard and expressed
BAT’s support for such a transaction.”
49. BAT continued to give strong direction to the
Reynolds Board. On December 4 and 5, 2013, “the RAI
board of directors met . . . with representatives of Jones
Day, Richards Layton and Lazard. . . . Representatives of
BAT provided BAT’s view of the potential transaction,
including BAT’s belief that the transaction was value
enhancing for all RAI shareholders and important from a
competitive perspective and that, given the status of
discussions with Imperial, BAT supported renewing
contact with Lorillard.” After that presentation, “the RAI
board of directors authorized Mr. Wajnert to contact Mr.
Kessler [Lorillard’s Chairman and CEO] to explore the
possibility of a potential transaction between RAI and
Lorillard on the terms reviewed at the meeting.”
50. According to the Preliminary Proxy, on
December 19, 2013, Mr. Wajnert conveyed the following
proposal to Mr. Kessler:
• the proposed business combination would
be a market based transaction structured
in a manner similar to a ‘merger-of-
equals,’ in which Lorillard shareholders
would receive consideration consisting of a
mix of cash and stock at market value
without a premium and both Lorillard’s
and RAI’s shareholders would realize
future value creation through the
realization of meaningful synergies and
changed market dynamics;
• BAT would maintain a significant
beneficial ownership interest in the
combined company, including through an
investment of approximately $4.5 billion
in cash at the consummation of the
proposed business combination
transaction;
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
• the leadership and governance of the
combined company would be structured as
a balance between the two organizations,
subject to BAT’s expressed desire to
preserve its right to designate five
members to the board of directors of the
combined company (three of whom would
be required to be independent of both BAT
and the combined company); and
• in connection with a proposed business
combination, RAI’s subsidiaries’
WINSTON, SALEM and KOOL and
Lorillard’s Maverick cigarette brands and
Lorillard’s ‘e-vapor’ brand blu (including
SKYCIG) would be divested to Imperial in
an effort to enhance the receipt of
antitrust clearance from the regulatory
authorities.
51. After discussions amongst the Lorillard
Board, Mr. Kessler contacted Mr. Wajnert on January 11,
2014 to inform him that “while the Lorillard board of
directors was potentially interested in the strategic and
long-term financial aspects of a potential business
combination between the companies, they did not think the
RAI proposal provided sufficient value to Lorillard
shareholders. Mr. Kessler indicated, however, that the
Lorillard board of directors was willing to explore a
business combination that was structured like a ‘merger-
of-equals’ if the key terms were improved[.]”
52. According to the Preliminary Proxy, the
Reynolds Board met by phone on January 14, 2014. At that
meeting, “[a] representative of Lazard reported that he had
contacted representatives of UBS Limited and Deutsche
Bank AG, financial advisors to BAT, referred to as UBS
and Deutsche Bank, respectively, to discuss potential pro
forma ownership.” There is no indication that any of the
BAT Designees recused themselves from this call. It
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
appears that the Other Directors had not retained
independent counsel or an independent financial advisor
prior to Lazard initiating negotiations with UBS and
Deutsche Bank regarding BAT’s stake in the combined
company.
53. Indeed, the Preliminary Proxy does not
reference any separate action by the Other Directors—
other than a separate vote on the 2013 Term Sheet—until
January 18, 2014, more than a year after serious
discussions began. On January 18, 2014, the Other
Directors held a telephone meeting with Lazard, Jones
Day, and Richards Layton separately from the other
Reynolds directors.
54. That same day, a “representative of Lazard . .
. introduc[ed] a [possible] alternative approach in which
cash available as consideration would be distributed on a
pro rata basis to Lorillard shareholders and to RAI
shareholders other than BAT.” Lazard also reported on
discussions regarding “potential solutions that would be in
the best interests of RAI shareholders other than BAT and
continue to meet the objectives of both Lorillard and BAT.
These discussions included the possibility that BAT and/or
RAI shareholders other than BAT could have decreased
post-closing ownership interest in the combined company.”
This appears to be the first time that the Reynolds Board
considered the obvious tension between the interests of
BAT and the Public Shareholders.
55. According to the Preliminary Proxy, the
Other Directors did not discuss obtaining independent
counsel until February 2014. During meetings between
February 4 and 7, 2014, “[r]epresentatives of Lazard
presented a variety of modifications to the proposal made
in December in connection with the exploration of an
alternative proposal to present to Lorillard. The
modifications considered included providing a premium on
cash paid to Lorillard shareholders, a premium on shares
of RAI common stock issued, changes to the BAT
investment and incremental changes to RAI’s leverage and
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
cash allocation. It was the consensus of the Other
Directors that RAI shareholders other than BAT should
receive at least 30% of the equity ownership of the
combined company and receive a pro rata portion of the
cash distribution. The Other Directors discussed
engaging independent legal counsel.”
56. The Other Directors finally engaged separate
legal counsel on February 12, 2014—retaining Moore &
Van Allen. Based on the Preliminary Proxy, however, it
appears that the Other Directors never retained any
independent financial advisors. Moreover, as set forth
below, Moore & Van Allen appears to have frequently been
excluded from crucial negotiations.
57. At the February 12, 2014 meeting of the
Other Directors, “[t]here was extensive discussion
regarding the consideration to be received by RAI
shareholders other than BAT and BAT’s willingness to
move from its initial position regarding post-transaction
equity ownership.” According to the Preliminary Proxy,
later in February 2014, there were discussions regarding a
proposal to provide extra equity to Lorillard shareholders
by reducing BAT’s stake: “the ownership level of Lorillard
shareholders in the combined company would be
approximately 36.5%, with RAI shareholders other than
BAT and BAT holding approximately 30% and 33.5% of the
outstanding common stock of the combined company,
respectively” (subject to a provision allowing BAT to
subscribe for additional shares in phases over two years).
58. Ultimately, however, BAT’s ironclad control
over the Board won out. The Public Shareholders will
receive no separate consideration and BAT did not move
from its initial position regarding post-transaction equity
ownership.
59. Similarly, during the course of discussions in
February 2014, “[r]epresentatives of Cravath[, BAT’s
attorneys,] indicated that BAT was not prepared to extend
the standstill covenant in the governance agreement in
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
connection with the proposed business combination
transaction[.]” As with its other demands, BAT got its way.
The Standstill would still expire on schedule on July 30,
2014.
60. On March 10, 2014, the Lorillard board met
and discussed the fact that the proposed transaction was
not appropriately viewed as a merger of equals given BAT’s
control over the combined company. According to the
Preliminary Proxy, Lorillard’s board believed that the
proposed transaction would not be a merger-of-equals
because “BAT would continue to be the most significant
shareholder of the combined company with the right to
board representation in accordance with the governance
agreement and . . . BAT would resist agreeing to an
extension of the standstill agreement in the governance
agreement[.]”
61. On March 13, 2014, the Lorillard board
“determined not to proceed with the proposed business
combination transaction and to terminate the related
discussions with RAI, BAT and Imperial. Among other
things . . . the Lorillard board of directors did not believe
that the proposed transaction in fact reflected a ‘merger-of-
equals’-like transaction[.]” Lorillard informed Reynolds of
its decisions and discussions between Lorillard and
Reynolds ceased until May 10, 2014.
62. On May 1, 2014, Ms. Cameron was elected
CEO of Reynolds, following Mr. Delen’s retirement.
63. The Preliminary Proxy states that on May 7,
2014, “the Other Directors met with RAI senior
management, representatives of RAI’s outside legal and
financial advisors and Moore & Van Allen to consider
further the possibility of an acquisition of Lorillard.” The
Preliminary Proxy claims that “[t]here was extensive
discussion, among other things, of the potential benefits to
[the Public Shareholders] of BAT’s commitment to
purchase additional shares of RAI common stock as part of
the financing for the proposed transaction, including that
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
it was unlikely RAI would be able to obtain equity
financing from a third party on terms as favorable as those
offered by BAT.”
64. There is no indication in the Preliminary
Proxy, however, that Reynolds, its advisors or the Other
Directors had, at this point, (i) compared the terms of
BAT’s proposed equity financing to potential debt financing
options that might be available (including the potential tax
benefits thereof); (ii) actually contacted other potential
sources of equity financing or (iii) determined that BAT
was unwilling to offer more favorable terms.
65. According to the Preliminary Proxy, the
Reynolds Board dissolved the SMRC on May 7 or 8, 2014
“in light of the role required by the governance agreement
of the Other Directors in considering the transaction and
the fact that the SMRC was not otherwise operative at this
time.” The Preliminary Proxy does not explain why it was
appropriate for the SMRC—instead of the Other
Directors—to act on behalf of Reynolds, for approximately
a year and a half prior to May 2014, during which period
all of the fundamental aspects of BAT’s role in the Proposed
Transaction were negotiated.
66. On May 10, 2014, Mr. Wajnert sent Mr.
Kessler a proposal for Reynolds to acquire Lorillard for
cash and stock worth approximately $65 per share. The
proposal provided for BAT to maintain its 42% stake in
exchange for an additional cash investment of
approximately $5 billion.
67. Reynolds and Lorillard engaged in
negotiations over this proposal between May 15 and May
20, 2014. “Representatives of Centerview [Lorillard’s
financial advisor] telephoned representatives of Lazard
and indicated that Mr. Kessler would be prepared to
discuss with the Lorillard board of directors the proposed
acquisition if RAI increased its offer to $68 per share.”
68. At a May 20, 2014 meeting of the Reynolds
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
Board, Reynolds’s Directors “determined it would not agree
to a ‘reverse’ termination fee”—which was, of course, one of
BAT’s conditions—but authorized a proposal to Lorillard
with a range of $67 to $68 per share. The Preliminary
Proxy states that, during the discussions, “representatives
of BAT on the RAI board of directors reported, on behalf of
BAT, support for the proposed transaction at the higher
price.”
69. The fact that the BAT Designees were
designated by BAT does not change the fact that they owed
independent fiduciary duties to Reynolds and its public
shareholders. It was inappropriate for the BAT Designees
to act “on behalf of BAT,” in any capacity, while acting as
members of the Reynolds Board. That the BAT Designees
were speaking for BAT while sitting as Reynolds directors
in a Reynolds board meeting underscores BAT’s dominance
over Reynolds’s decision making.
70. On May 27, 2014, Reynolds and Imperial
executed a non-binding memorandum of understanding
with respect to the proposed asset sale. According to the
Preliminary Proxy, “Over the next several weeks,
representatives of RAI, Imperial, Lorillard, and in some
cases BAT, engaged in discussions regarding the
divestiture transaction, including with respect to ‘route to
market,’ reciprocal contract manufacturing and other
commercial arrangements.” Then, “[f]rom June 11, 2014
through July 15, 2014, legal counsel to RAI, BAT and
Lorillard, with the assistance of RAI’s and Lorillard’s
senior managements and financial advisors, engaged in
extensive negotiations concerning, and exchanged
numerous drafts of, the proposed merger agreement and its
key terms, including the allocation of antitrust risk and
required efforts in the proposed transaction.”
71. The Preliminary Proxy identifies only one
specific recommendation made by the Other Directors
during this period. That recommendation was ultimately
rejected. According to the Preliminary Proxy, “on July 2,
2014, Moore & Van Allen reviewed the proposed draft of
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
the subscription and support agreement with the Other
Directors, who requested that BAT’s draft provision for an
unconditional commitment to vote the shares of RAI
common stock it beneficially owned in favor of the
transaction (regardless of any change in recommendation
of the RAI board of directors) be deleted.” Yet, on July 5,
2014 “Simpson Thacher [counsel for Lorillard] advised
Jones Day [counsel for Reynolds] that Lorillard was
insistent, as a condition of proceeding, on having a
commitment from BAT to vote the shares of RAI common
stock it beneficially owned in favor of the transaction even
if the RAI board of directors changed its recommendation
of the transaction. Cravath [counsel for BAT] advised
Jones Day that BAT would consider this demand but would
not give such a commitment over the objections of the
Other Directors. The Other Directors agreed to accept that
commitment.”
72. The Preliminary Proxy suggests that even
after Moore & Van Allen—independent counsel to the
Other Directors—was retained, the firm was frequently
excluded from discussions amongst counsel for the parties.
For example:
• Between February 20 and February 24,
2014, “representatives of Jones Day [for
Reynolds], Cravath [for BAT] and Simpson
Thacher [for Lorillard] began to discuss
the outlines of other potential terms in the
‘merger-of-equals’-like transaction.”;
• “[C]ommencing on May 21, 2014,
representatives of Jones Day, Cravath and
Simpson Thacher began discussing
various process matters, including those
relating to structure, due diligence,
documentation and various matters
relating to the Imperial asset divestiture.”;
• “On June 3, 2014, representatives of Jones
Day, Cravath and Simpson Thacher held a
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
telephonic meeting to discuss certain legal
matters, including the potential key
terms of the definitive transaction
agreements expected to be entered into
among the parties, including the allocation
of antitrust risk and required efforts.”; and
• “On July 5, 2014, . . . representatives of
Jones Day, Cravath and Simpson Thacher
met to discuss the proposed merger
agreement, including the allocation of
antitrust risk and required efforts in the
proposed transaction, and the status of the
other definitive transaction documents,
including the subscription and support
agreement”
73. The Other Directors should have insisted—
yet apparently did not—that Moore & Van Allen be
included in every discussion amongst counsel for the
parties, including those listed above.
74. On July 13 and 14, 2014, the Other Directors
reviewed and unanimously approved the Proposed
Transaction. They did not retain any independent
financial advisor to assist them in evaluating the fairness
of the Proposed Transaction to the Public Shareholders.
The Reynolds Board also unanimously approved the
Proposed Transaction.
II. THE PROPOSED TRANSACTION UNFAIRLY
BENEFITS BAT AT THE EXPENSE OF
PUBLIC SHAREHOLDERS
A. The Proposed Transaction Will Give BAT
Access To Reynolds’s “Game-Changing”
E-Cigarette Technology Without
Adequately Compensating Public
Shareholders
....
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
B. The Proposed Transaction Will Dilute
Public Shareholders But Permit BAT To
Retain Its Blocking Position Without
Paying A Control Premium
....
87. Under the terms of the Subscription and
Support Agreement dated as of July 15, 2014, BAT will
purchase the additional shares at a reference price of
$60.16 per share. This is $3.02 per share less than
Reynolds’s closing price on July 14, 2014 of $63.18 per
share—representing a negative 4.8% premium. In a truly
arm’s-length negotiation, Reynolds should have required
BAT to pay a significant, positive premium to purchase
sufficient shares to maintain its controlling blocking
position.
Construing the complaint liberally and drawing every reasonable inference
therefrom, the complaint alleges that BAT used its significant forty-two percent
minority stake (the Preliminary Proxy, incorporated by reference, reveals that the
next largest ownership block was five percent) and its veto power over the board to
dictate the terms of the Lorillard acquisition in order to enrich itself at the expense
of other shareholders, namely, by gaining access to Reynolds’s lucrative e-cigarette
technology and by maintaining its acquisition share while other shareholders’ shares
were diluted. The complaint further alleges that BAT employed additional coercive
leverage to control the board in the Lorillard acquisition, including by implicitly
threatening a takeover of Reynolds made possible by the impending expiration of the
Standstill, as well as by acting as a major source of financing for the transaction. The
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CORWIN V. BRITISH AM. TOBACCO PLC
Hudson, J., dissenting
complaint also alleges that during discussions the representatives of BAT on the
board spoke “on behalf of BAT,” in contravention of their fiduciary duties as board
members, further underscoring BAT’s coercive influence over the board. Finally, the
complaint alleges that, as a result of BAT’s control of the board in this transaction,
the other board members (several of whom are alleged to have close ties with BAT)
delayed in retaining separate legal counsel and then failed to adequately utilize that
counsel, never retained an independent financial advisor, never received a separate
fairness opinion regarding the BAT share purchase, and never considered other
options to finance the transaction besides BAT equity financing. In my view, “[i]n
light of the low bar for notice pleading under Rule 12(b)(6),” Wray, 370 N.C. at 50
,802 S.E.2d at 900
, these allegations are more than sufficient to allege that BAT
exercised actual control over the board and prevented the board from “freely
exercising its independent judgment” in considering the Lorillard acquisition.
The majority recognizes that the complaint alleges that BAT possessed
significant veto power and used this to its advantage in the transaction, but the
majority concludes that in the absence of “other factors,” the veto power, as the mere
exercise of a contractual right, cannot alone support a finding of actual control. See
Super. Vision, 2006 WL 2521426
, at *5 (“There may be circumstances where the
holding of contractual rights, coupled with a significant equity position and other
factors, will support the finding that a particular shareholder is, indeed, a ‘controlling
shareholder,’ especially if those contractual rights are used to induce or to coerce the
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Hudson, J., dissenting
board of directors to approve (or refrain from approving) certain actions.”). In light
of the complaint’s allegations of the threat posed by an acquisition of Reynolds by
BAT, BAT’s role as the major source of equity financing, and the alleged
“inappropriate” role played by representatives of BAT on the board, I conclude these
allegations include such other factors.
The majority dismisses any alleged leverage over the board posed by the threat
of a takeover of Reynolds by BAT, asserting that the complaint merely alleges that
news outlets reported on “speculation” of a takeover and that the complaint fails to
allege that BAT actually threatened Reynolds with purchasing the remaining shares
at the end of the Standstill period. The majority further asserts that “BAT could not
seek to remove any of the directors that it did not nominate” and “therefore had no
means of retribution against the majority of the directors that could have impaired
the ability of those directors to exercise independent judgment.” In my view, the
majority reads the complaint’s allegations regarding the threat of a takeover too
narrowly and also ignores the fact that the restriction on BAT’s seeking to remove
any of the Other Directors, similar to the prohibition on BAT increasing its ownership
percentage, was one of the governance agreement restrictions set to expire with the
impending cessation of the Standstill period, which, according to the complaint, “
‘BAT was not prepared to extend[.]’ . . . As with its other demands, BAT got its way.
The Standstill would still expire on schedule on July 30, 2014.” Following the
expiration of the Standstill period, BAT could seek the removal of Other Directors, or
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Hudson, J., dissenting
it could effect their removal by doing precisely what the Standstill had prevented for
ten years—acquiring Reynolds. As the complaint alleges, “[t]he timing of the
Proposed Transaction is no coincidence.” Turning back to the complaint, which
alleges regarding the control exercised over the board by the threat of a takeover:
3. The Proposed Transaction is Reynolds’s first
significant strategic transaction since 2004. The Proposed
Transaction was announced just two weeks before the
expiration of a ten-year standstill provision (the
“Standstill”) that prevented BAT from purchasing the
Company in its entirety.
4. The timing of the Proposed Transaction is no
coincidence. The Proposed Transaction forestalls a
takeover by making Reynolds a significantly less attractive
takeover target for BAT.
....
A. The Impending Expiration Of The
Standstill Put The Directors’ Jobs At
Risk
32. Reynolds was created as a result of the 2004
acquisition of BAT’s U.S. subsidiary, B&W, by Reynolds’s
predecessor entity, the R.J. Reynolds Tobacco Company.
As part of the Brown & Williamson Acquisition, BAT
acquired a 42% stake in Reynolds.
33. In connection with the Brown & Williamson
Acquisition, BAT and Reynolds adopted a July 30, 2004
Governance Agreement (the “Governance Agreement”),
which included a provision that prohibited BAT from
increasing its percentage ownership of Reynolds until July
30, 2014—i.e., the Standstill.
....
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Hudson, J., dissenting
37. . . . . BAT cannot replace the Reynolds Board
in its entirety without purchasing 100% of the Company.
38. In the weeks leading up to the expiration of
the Standstill, there were reports suggesting that BAT
might be interested in doing just that. On March 10, 2014,
the Telegraph reported that Citigroup analysts had “talked
up the likelihood” that BAT would buy the remaining 58%
of Reynolds. At BAT’s annual shareholder meeting in April
2014, BAT CEO Nicandro Durante made a point of noting
that BAT looks at acquiring Reynolds on a yearly basis.
Such commentary resurfaced in early July 2014 when the
Daily Mail reported on “growing speculation [that BAT] is
ready to splash out billions of pounds buying the 58 per
cent of US rival Reynolds American it does not already
own.”
39. At the time of these reports, the Proposed
Transaction was already being negotiated. The threat of a
complete takeover gave BAT additional leverage to impose
its terms on the Reynolds Board during those negotiations.
40. The Director Defendants adopted a plan that
had the purpose and effect of allowing them to keep their
jobs. On July 15, 2014, Reynolds issued a press release
announcing the Proposed Transaction[.]
....
93. ....
• All members of the Reynolds Board have an
incentive to safeguard their comfortable and
lucrative positions, which could be lost in the
event of a BAT takeover of Reynolds.
....
97. As detailed in the Company’s most recent
annual proxy, Reynolds’s non-officer directors are paid
hundreds of thousands of dollars each year to serve on the
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Hudson, J., dissenting
Board[.]
(Emphases added.) Construing these allegations liberally, there appears to be more
than a reasonable inference that the threat of a takeover of Reynolds by BAT loomed
large; indeed, the specter of a BAT takeover would seem to be a familiar shadow to
Reynolds by then, given that it was apparently the entire purpose of the ten-year-old
Standstill provision. In my view, the distinct message of plaintiff’s allegations is that
after the expiration of the Standstill period a takeover could well follow along with
the loss of a board position if the Other Directors did not agree to BAT’s transaction
terms in the Lorillard acquisition. These allegations set forth a scenario in which
BAT in effect coerced the Other Directors into acceding to exceedingly favorable terms
for BAT in order to maintain their positions in the company. The likelihood that
plaintiff could ultimately prove these allegations is an entirely different issue, and
one on which I express no opinion. The majority appears to focus on likely proof of
the allegations, rather than sufficiency of the allegations themselves; our review in
accord with Rule 12(b)(6) requires focus on the latter.
In that respect, I note that the majority also asserts that “[p]laintiff does not
allege that BAT ever threatened the Reynolds board in any way, however—unlike,
for example, the stockholder who was considered controlling in Kahn[ ]—even though
BAT was involved in many of the discussions regarding the Lorillard transaction from
an early date.” See Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113-15
(Del.
1994) (concluding that a minority stockholder was controlling when the minority
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Hudson, J., dissenting
stockholder intimidated the board and at one point threatened them, saying, “[y]ou
must listen to us. We are 43 percent owner. You have to do what we tell you.”). But
Kahn was not decided on a motion to dismiss for failure to state a claim; rather, the
Court of Chancery determined that the minority stockholder was controlling after a
three-day trial. Id. at 1111
. As the majority states, “[t]here was also evidence in
Kahn that board members were intimidated by this stockholder and therefore
complied with its demands instead of exercising their own independent business
judgment.” An explicit statement like the one in Kahn, or testimonial evidence that
board members were intimidated, would certainly be beneficial to a claimant in
plaintiff’s position, but these are examples of evidence that will only be made known
or available through discovery or at trial.
On the other hand, portions of the complaint pertaining to information
available to a stockholder situated like plaintiff are summarily dismissed by the
majority. For instance, plaintiff alleges that the other board members delayed in
retaining separate legal counsel and then failed to adequately utilize that counsel,
never retained an independent financial advisor, never received a separate fairness
opinion regarding the BAT share purchase, and never considered other options to
finance the transaction besides BAT equity financing. The majority briefly touches
on some of these allegations but concludes that because they focus on the actions of
the Other Directors rather than on the actions of BAT, these allegations “would in no
way show that BAT” exercised actual control of the board in the Lorillard transaction.
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Hudson, J., dissenting
(Emphasis added.) Given that plaintiff—with his allegations that BAT dictated the
terms of the Lorillard transaction by means of its significant forty-two percent
minatory stake, its veto power over the board, its role as a major source of equity
financing for the transaction, and the threat of a takeover and the termination of the
Other Directors following the expiring Standstill, as well as the allegation that BAT’s
representatives on the Board acted in breach of their fiduciary duties—has alleged
that BAT exercised actual control of the board in this transaction, i.e. “prevent[ing]
the [company’s] board from freely exercising its independent judgment in considering
the [transaction],” In re KKR, 101 A.3d at 995
, and given that these allegations reflect that the other board members were in fact not “freely exercising [their] independent judgment,”id.,
I find perplexing the majority’s conclusion that such allegations are
essentially irrelevant.
Similarly, with regard to the complaint’s allegations of the “Technology
Sharing Agreement” concerning “the development and commercialization of next-
generation tobacco products, including heat-not-burn cigarettes and vapor products,”
the majority dismisses these allegations with an oft-repeated refrain, stating “[a]gain,
though, leverage to obtain favorable terms in an agreement does not necessarily
indicate that the beneficiary of those favorable terms was a controlling stockholder.”
Indeed, in the majority’s view, nearly everything can be reduced to the “mere
existence of leverage.” See In re Sea-Land, 1988 WL 49126
, at *3 (“Plaintiffs allege
only that LLC and its affiliates had significant ‘leverage,’ (i.e., a superior bargaining
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Hudson, J., dissenting
position) because they owned 39.5% of Sea-Land’s stock. But ‘leverage’ is not actual
domination and control.”). But as the majority recognizes elsewhere in its opinion, a
minority stockholder may employ means beyond its mere ownership percentage or
contractual rights that amount to “coercive leverage” and actual control over the
board. See Williamson, 2006 WL 1586375
, at *5 (“Cox and Comcast’s potential veto power is significant for analysis of the control issue, however, because it supports plaintiff’s allegation that Cox and Comcast had coercive leverage over At Home. Cox and Comcast had the ability to shut down the effective operation of the At Home board of directors by vetoing board actions. Plaintiff may be able to prove facts showing that this leverage (together with the special business relationships and other circumstances mentioned above) was enough for Cox and Comcast to obtain a far better deal th[a]n they would have in an arm’s-length transaction.” (emphasis added)). In light of the allegations of coercive leverage discussed above, I also view as relevant the allegations regarding the “Technology Sharing Agreement,” which is alleged to have been significant, if not vital, to the Lorillard transaction; these allegations demonstrate that BAT was able “to obtain a far better deal th[a]n [it] would have in an arm’s-length transaction.”Id.
For instance, the complaint included numerous allegations about the
importance to Reynolds of its “game-changing” VUSE brand of e-cigarettes, as well
as its heat-not-burn technology, asserting that e-cigarettes are “the future of the
tobacco industry” and that before the Lorillard acquisition, Reynolds was predicted
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Hudson, J., dissenting
to “have $4 billion in revenue from e-cigs in 2021, compared with $3.9 billion from
conventional cigarettes.” The complaint alleges further that news reports prior to the
transaction had recognized that “gaining access to Reynolds’s e-cigarette and heat-
not-burn technology was one of the primary reasons that BAT might want to buy the
Company.” Due to BAT’s control of the board, however, “the Director Defendants
have agreed to allow BAT to access Reynolds’s game-changing technology without
adequate compensation, [and] there is no need for BAT to pay the Public
Shareholders a control premium to buy the rest of the Company.” The complaint
alleges that this “forestalls a takeover by making Reynolds a significantly less
attractive takeover target for BAT,” or in other words, it allows BAT to “get the milk
without buying the cow.” Based on these allegations, I disagree with the majority’s
assertion that “it is unclear how this agreement demonstrates that BAT had actual
control of the Reynolds board with respect to the transaction to purchase Lorillard.”
In sum, looking solely at the allegations in the complaint and taking them as
true, I conclude that plaintiff has sufficiently alleged actual control by BAT over the
board in the Lorillard acquisition. As such, I respectfully dissent.
Justices BEASLEY and MORGAN join in this dissenting opinion.
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