In re: SunCoke Energy Partners, L.P.
Filing
61
MEMORANDUM OPINION Signed by Judge Colm F. Connolly on 9/9/2020. (nmf)
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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
IN RE SUNCOKE ENERGY
PARTNERS, L.P.
Civil Action No. 19-cv-693-CFC
Michael Van Gorder, FARUQI & FARUQI, LLP, Wilmington, Delaware; Nadeem
Faruqi, James M. Wilson, Jr., FARUQI & FARUQI, LLP, New York, New York
Counsel for Plaintiffs
Peter J. Walsh, Jr., Alan R. Silverstein, POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; S. Mark Hurd, Thomas P. Will, MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; David D.
Sterling, Paul R. Elliott, Matthew B. Allen, BAKER BOTTS L.L.P., Houston,
Texas; Michelle A. Reed, M. Scott Barnard, AKIN GUMP STRAUSS HAUER &
FELD LLP, Dallas, Texas
Counsel for Defendants
MEMORANDUM OPINION
September 9, 2020
Wilmington, Delaware
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COLM F. CONNOL
UNITED STATES
This case is a consolidation of three related actions: Marks v. Suncoke
Energy Partners, L.P., 19-cv-00693-CFC; Zolotarev v. Suncoke Energy Partners,
L.P., 19-cv-01055-CFC; and Cohn v. Suncoke Energy Partners, L.P., 19-cv-01107-
CFC. See D.I. 52. Pending before me is Defendants' Motion to Dismiss
Consolidated Class Action Complaint (D.I. 56).
I.
BACKGROUND 1
Lead Plaintiff Michael Cohn was a unitholder of SunCoke Energy Partners,
L.P. (SXCP), a Delaware limited partnership. D.I. 55
,r,r 23-24.
The sole general
partner of SXCP was SunCoke Energy Partners, G.P. LLC (SXCP GP), a
Delaware limited liability company. D.I. 55
,r 39.
Section 7.9( c) of the partnership agreement that governs SXCP contains the
following "safe harbor" provision:
Whenever a potential conflict of interest exists or arises
between the General Partner or any Affiliates, on the one
hand, and the Partnership, any Group Member or any
Partner, any other Person who acquires an interest in a
Partnership Interest or any other Person who is bound by
this Agreement on the other hand, the General Partner may
in its discretion submit any resolution or course of action
1
In considering Defendants' motion, I accept as true all factual allegations in the
Consolidated Class Action Complaint and view those facts in the light most
favorable to Plaintiffs. See Umland v. PLANCO Fin. Servs., 542 F.3d 59, 64 (3d
Cir. 2008).
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with respect to such conflict of interest for (i) Special
Approval or (ii) approval by the vote of a majority of the
Common Units (excluding Common Units owned by the
General Partner and its Affiliates). If such course of action
or resolution receives Special Approval or approval of a
majority of the Common Units (excluding Common Units
owned by the General Partner and its Affiliates), then such
course of action or resolution shall be conclusively
deemed approved by the Partnership, all the Partners, each
Person who acquires an interest in a Partnership Interest
and each other Person who is bound by this Agreement,
and shall not constitute a breach of this Agreement, of any
Group Member Agreement, of any agreement
contemplated herein or therein, or of any fiduciary or other
duty existing at law, in equity or otherwise or obligation
of any type whatsoever.
D.I. 57-2, Ex. D § 7.9( c ). "Special Approval" is defined by the partnership
agreement to mean "approval by a majority of the members of the Conflicts
Committee." Id. § I. I. The partnership agreement requires that the Conflicts
Committee be comprised of two or more directors who have no affiliation with or
ownership interest in SXCP GP or SXCP GP's affiliates. Id.
On February 5, 2019, SunCoke Energy, Inc. (SunCoke) and SXCP
announced an agreement for SunCoke to acquire all outstanding common units of
SXCP not already owned by SunCoke in a stock-for-unit merger transaction.
D.I. 55 ,I 44. The merger was approved by SXCP's Board of Directors and a
majority of the members of the Conflicts Committee. D.I. 57-2, Ex. A at 2-3. It
was also approved by "holders of a majority of the outstanding [SunCoke]
common shares and SXCP common units." D.I. 55 ,I 44. SunCoke "indirectly
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own[ed] a sufficient percentage of the SXCP common units to approve the
transaction on behalf of the holders of SXCP common units." Id. The merger
closed on June 28, 2019.
Plaintiffs allege in their Complaint that Defendants' actions taken in
connection with the merger violated federal securities laws, Defendants'
obligations under the SXCP partnership agreement, and Delaware state laws.
II.
LEGAL STANDARD
To state a claim upon which relief can be granted a complaint must contain
"a short and plain statement of the claim showing that the pleader is entitled to
relief." Fed. R. Civ. P. 8(a)(2). Detailed factual allegations are not required, but
the complaint must set forth enough factual matter, accepted as true, to "state a
claim to relief that is plausible on its face." Bell At/. Corp. v. Twombly, 550 U.S.
544, 570 (2007). A claim is facially plausible when the factual content allows the
court to draw the reasonable inference that the defendant is liable for the
misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). "Threadbare
recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice." Id.
When considering Rule 12(b)(6) motions to dismiss, the court must accept
as true all factual allegations in the complaint and view them in the light most
favorable to plaintiffs. Umland v. PLANCO Fin. Servs., 542 F.3d 59, 64 (3d Cir.
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2008). The court, however, is "not bound to accept as true a legal conclusion
couched as a factual allegation." Papasan v. Allain, 478 U.S. 265,286 (1986)
(citations omitted).
III.
ANALYSIS
A.
The§ 14(a) Claims
Counts I and II of the Complaint allege that all Defendants violated Section
14(a) of the Securities Exchange Act and rules promulgated pursuant to Section
14(a) by the U.S. Securities and Exchange Commission (SEC). D.I. 55 ,I,I 147162. Section 14(a) prohibits the solicitation of a shareholder's vote "in
contravention of such rules and regulations as the Commission may prescribe." 15
U.S.C. § 78n(a)(l ).
To prove a violation of Section 14(a), a plaintiff must prove transaction
causation, i.e., that the solicitation materials themselves, "rather than the particular
defect in the solicitation materials, w[ ere] an essential link in the accomplishment
of the transaction." Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 385 (1970).
Solicitation materials are only essential when they "link[] a directors' proposal
with the votes legally required to authorize the action proposed." Virginia
Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1102 (1991).
In this case, under Virginia Bankshares, Plaintiffs have not pleaded and
cannot plead transaction causation because their votes were not needed to authorize
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the merger. It is undisputed that SunCoke owned a sufficient percentage of SXCP
to approve the transaction on its own. Therefore, the solicitation materials were
not an essential link in the accomplishment of the transaction.
Citing § 7 .9(c) of the SXCP partnership agreement, Plaintiffs argue that
Virginia Bankshares does not apply because SunCoke "did not have the authority
to exercise its control in this Transaction unless it obtained the Special Approval
from minority unitholders' agent, the Conflicts Committee." D.I. 58 at 7
(emphasis in original). This argument fails for two reasons. First, the Conflicts
Committee was not the minority unitholders' agent. Rather, the Conflicts
Committee acted on behalf of the Partnership. See D.I. 57-2, Ex. D § 7.9(c).
Second, SXCP's authority to approve the transaction did not come from§ 7.9(c).
Section 14.3(b) of the partnership agreement governs approval of mergers and it
provides that a merger "shall be approved upon receiving the affirmative vote or
consent of the holders of a Unit Majority." See D.I. 57-2, Ex. D § 14.3(b).
Section 7 .9(c), by contrast, is a safe harbor provision for conflicted transactions.
Section 7.9(c) is not mandatory; nor is it a prerequisite for a merger. It merely
provides that if a contemplated transaction presents a conflict of interest, the
consummation of that transaction will not give rise to liability for breach of
contract, fiduciary, or other legal duty if either ( 1) the majority of the Conflicts
Committee approves the transaction (i.e., "Special Approval" is obtained) or (2)
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the majority of the unitholders not affiliated with the General Partner or its
affiliates approves the transaction.
Plaintiffs also argue that application of Virginia Bankshares is
"foreclose[d]" because the "Conflicts Committee's Special Approval was a sham
process undertaken in bad faith .... " D.I. 58 at 8. Plaintiffs allege that two
circumstances evince bad faith: ( 1) the Conflict Committee based its approval on
"incomplete and flawed information" and (2) the Committee's approval "was
obtained before the final S-4/A was issued." D.I. 58 at 8. Reliance on incomplete
and flawed information, however, does not constitute bad faith. Cf In re
Essendant, Inc. Stockholder Litig., 2019 WL 7290944, at * 13 (Del. Ch. Dec. 30,
2019) ("Plaintiffs' process-related allegations of bad faith are likewise deficient.
In the context of a sale of corporate control, bad faith is qualitatively different from
'an inadequate or flawed effort' to obtain the highest value reasonably available for
a corporation. Absent direct evidence of an improper intent, a plaintiff must point
to 'a decision that lacked any rationally conceivable basis' associated with
maximizing stockholder value to survive a motion to dismiss.") (citations omitted);
see also Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) ("[T]here is a
vast difference between an inadequate or flawed effort to carry out fiduciary duties
and a conscious disregard for those duties. Directors' decisions must be
reasonable, not perfect.") (citing Paramount Commc 'ns Inc. v. QVC Network Inc.,
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637 A.2d 34, 45 (Del. 1994)). And the parties to a merger agreement reach that
agreement before submitting the S-4 registration statement to the SEC. Indeed,
SEC merger and acquisitions regulations expressly require that the registrant
summarize the terms of the merger agreement in the Form S-4. 17 C.F .R. §
229.101 l(a)(l).
Because Plaintiffs have not pleaded and cannot plead transaction causation,
Plaintiffs have not alleged§ 14(a) violations.
B.
The§ 20(a) Claim
Count III of the Complaint alleges that members of SunCoke and SXCP
GP's boards of directors violated§ 20(a) of the Exchange Act. "Section 20(a)
imposes liability on controlling persons who aid and abet violations of the
[Exchange Act.]" In re Aetna, Inc. Sec. Litig., 617 F.3d 272, 285 (3d Cir. 2010).
Because Plaintiffs' § 20(a) claim is predicated on their§ 14(a) claims, the§ 20(a)
claim fails for the same reasons Plaintiffs' § 14(a) claims are not cognizable.
C.
The Safe Harbor Provision
Counts IV through VII of the Complaint allege that SXCP GP and the
members of its board breached their fiduciary duties, contractual obligations, and
the implied contractual covenant of good faith and fair dealing. D.I. 55 ,I,I 170--77.
Defendants argue that because SXCP GP complied with the safe harbor provision
in§ 7.9(c) by seeking and receiving Special Approval from the Conflicts
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Committee for the merger, Plaintiffs are barred from alleging these state law
claims. See D.I. 57 at 19.
"Delaware alternative entity law is explicitly contractual; it allows parties to
eschew a corporate-style suite of fiduciary duties and rights, and instead to provide
for modified versions of such duties and rights-or none at all-by contract."
Emps. Ret. Sys. of City ofSt. Louis v. TC Pipelines GP, Inc., 2016 WL 2859790, at
*1 {Del. Ch. May 11, 2016), affd sub nom. Emps. Ret. Sys. ofthe City ofSt. Louis
v. TC Pipelines GP, Inc., 152 A.3d 1248 (Del. 2016) (citation omitted). The only
duty parties '"may not eliminate"' is the "'implied contractual covenant of good
faith and fair dealing."' Norton v. K-Sea Transp. Partners L.P., 67 A.3d 354, 360
(Del. 2013) (quoting 6 Del. C. § 17-1 l0l(d)).
Because Defendants sought and received Special Approval for the merger
from the Conflicts Committee, they are entitled to the protection of§ 7.9(c)'s safe
harbor provision and cannot be sued for a breach of SXCP' s partnership agreement
or any fiduciary or other duty existing at law. Accord In re Encore Energy
Partners LP Unitholder Litig., 2012 WL 3 792997 at * 15 (Del. Ch. Aug. 31, 2012)
(holding that "[b]ecause the Conflicts Committee satisfied their express and
implied duties under the LPA in giving their Special Approval to the Merger,
Section 7.9(a) precludes Plaintiffs from stating a claim against any of the
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Defendants for breach of the LPA or of any duty stated or implied by law and
equity.")
Plaintiffs argue that under Dieckman v. Regency GP LP, 155 A.3d 358 (Del.
2017) even though Defendants received Special Approval from the Conflicts
Committee, Defendants are still liable because the Special Approval procedure was
"a sham process." D.I. 58 at 18. As in this case, the partnership agreement at issue
in Dieckman had a safe harbor provision that made the general partner immune
from conflict-of-interest-based liability if a challenged transaction were approved
by a conflicts committee comprised of members unaffiliated with the parties to the
transaction. Applying the doctrine of the implied covenant of good faith and fair
dealing, the Court held in Dieckman that the safe harbor provision
impl[ies] a condition that a [Conflicts] Committee has
been established whose members genuinely qualified as
unaffiliated with the General Partner and independent at
all relevant times. Implicit in the express terms [of the safe
harbor provision] is that the [Conflicts] Committee
membership be genuinely comprised of qualified
members and that deceptive conduct not be used to create
the false appearance of an unaffiliated, independent
[Conflicts] Committee.
155 A.3d at 369.
Plaintiffs argue that the Special Approval procedure was a "sham process"
for three reasons: (1) the Conflicts Committee "considered only information
provided and evaluated by conflicted parties;" (2) Defendants "hurriedly locked
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the deal in place whereby the Conflicts Committee could not review the
forthcoming public disclosures mandated and policed by the SEC;" and (3) the
Conflicts Committee "did not consider any new information about the Transaction
in the four months prior to closing, including a downturn in market conditions and
the allegations made in lawsuits by unitholders." D.I. 58 at 18. None of these
allegations, however, amount to misleading or deceptive conduct or call into
question the independence of the Conflicts Committee. Accordingly, Defendants
are entitled to the protection of the partnership agreement's safe harbor provision.
D.
Aiding and Abetting Breach of Contract
Count VIII of the Complaint alleges that SunCoke and its directors aided
and abetted breach of contract. D.I. 55 ,r,r 178-179. Because Plaintiffs fail to state
a claim for breach of contract, Plaintiffs necessarily fail to state a claim for aiding
and abetting breach of contract. See In re El Paso Pipeline Partners, L.P.
Derivative Litig., 2014 WL 2768782 at *23 (Del. Ch. June 12, 2014).
IV.
CONCLUSION
For the foregoing reasons, I will grant Defendants' motion to dismiss.
The Court will issue an Order consistent with this Memorandum Opinion.
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