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California State Teachers' Retirement System v. Blankenship

Supreme Court of West Virginia

May 25, 2018

CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM, AMALGAMATED BANK AS TRUSTEE FOR THE LONGVIEW COLLECTIVE INVESTMENT FUNDS, MANVILLE PERSONAL INJURY SETTLEMENT TRUST, DERIVATIVELY ON BEHALF OF MASSEY ENERGY COMPANY, PHILIP R. ARLIA, AND BRIAN LYNCH, Plaintiffs Below, Petitioners,
v.
DON L. BLANKENSHIP; BAXTER F. PHILLIPS, JR.; DAN R. MOORE; E. GORDON GEE; RICHARD M. GABRYS; JAMES B. CRAWFORD; BOBBY R. INMAN; ROBERT H. FOGLESONG; STANLEY C. SUBOLESKI; J. CHRISTOPHER ADKINS; JEFFREY M. JAROSINSKI; M. SHANE HARVEY; AND MARK A. CLEMENS, Defendants Below, Respondents, and MASSEY ENERGY COMPANY, A DELAWARE CORPORATION, Nominal Defendant Below, Respondent.

          Submitted: March 6, 2018

          Appeal from the Circuit Court of Kanawha County Honorable Charles E. King, Jr. Civil Action No. 10-C-715

          Badge Humphries, Esq. Lewis Babcock L.L.P. Sullivan's Island, South Carolina and Anne McGinness Kearse, Esq. Motley Rice LLC Mount Pleasant, South Carolina Lead Counsel for Petitioners

          Carl N. Frankovitch, Esq. Frankovitch, Anetkis, Simon, Decapio & Pearl LLP Weirton, West Virginia Counsel for Petitioner Arlia and Executive Committee Member

          Kevin A. Seely, Esq., pro hac vice Robbins Arroyo, LLP San Diego, California Executive Committee Member

          Jay N. Razzouk, Esq., pro hac vice Jay N. Razzouk, Attorney at Law San Bernardino, California Executive Committee Member

          Alfred G. Yates, Jr., Esq. Law Offices of Alfred G. Yates, Jr., P.C. Pittsburgh, Pennsylvania Counsel for Petitioner Arlia and Executive Committee Member

          A. L. Emch, Esq. Jonathan L. Anderson, Esq. Albert F. Sebok, Esq. Jackson Kelly PLLC Charleston, West Virginia Counsel for Respondents Moore, Gee, Gabrys, Crawford, Inman, Foglesong, and Suboleski

          Thomas V. Flaherty, Esq. Flaherty Sensabaugh Bonasso PLLC Charleston, West Virginia Counsel for Respondents Blankenship, Phillips, Adkins, Jarosinski, Harvey, and Clemens

          Jeffrey K. Phillips, Esq. Steptoe & Johnson PLLC Lexington, Kentucky and Mitchell A. Lowenthal, Esq., pro hac vice Boaz S. Morag, Esq., pro hac vice Cleary Gottlieb Steen & Hamilton LLP New York, New York Counsel for Respondent Massey Energy Company n/k/a Alpha Appalachia Holdings, Inc.

          JUSTICE DAVIS, deeming herself disqualified, did not participate.

         SYLLABUS BY THE COURT

         1."'A trial court is vested with a sound discretion in granting or refusing leave to amend pleadings in civil actions. Leave to amend should be freely given when justice so requires, but the action of a trial court in refusing to grant leave to amend a pleading will not be regarded as reversible error in the absence of a showing of an abuse of the trial court's discretion in ruling upon a motion for leave to amend.' Syllabus point 6, Perdue v. S.J. Groves & Sons Co., 152 W.Va. 222, 161 S.E.2d 250 (1968)." Syl. Pt. 4, Bowyer v. Wyckoff, 238 W.Va. 446, 796 S.E.2d 233 (2017).

         2. "Appellate review of a circuit court's order granting a motion to dismiss a complaint is de novo." Syl. Pt. 2, State ex rel. McGraw v. Scott Runyan Pontiac-Buick, Inc., 194 W.Va. 770, 461 S.E.2d 516 (1995).

         3. "The local law of the state of incorporation should be applied to determine who can bring a shareholder derivative suit." Syl. Pt. 2, State ex rel. Elish v. Wilson, 189 W.Va. 739, 434 S.E.2d 411 (1993).

         4. "The procedural laws of this state necessarily apply to matters that are brought in the courts of West Virginia." Syl., in part, State ex rel. Airsquid Ventures, Inc. v. Hummel, 236 W.Va. 142, 778 S.E.2d 591 (2015).

         5."The purpose of the words 'and leave [to amend] shall be freely given when justice so requires' in Rule 15(a) W.Va. R. Civ. P., is to secure an adjudication on the merits of the controversy as would be secured under identical factual situations in the absence of procedural impediments; therefore, motions to amend should always be granted under Rule 15 when: (1) the amendment permits the presentation of the merits of the action; (2) the adverse party is not prejudiced by the sudden assertion of the subject of the amendment; and (3) the adverse party can be given ample opportunity to meet the issue." Syl. Pt. 3, Rosier v. Garron, Inc., 156 W.Va. 861, 199 S.E.2d 50 (1973), overruled on other grounds by Bradshaw v. Soulsby, 210 W.Va. 682, 558 S.E.2d 681 (2001).

         6. "A fundamental principle of the law of corporations is that a shareholder derivative action is an equitable proceeding in which a shareholder asserts, on behalf of the corporation, a claim that belongs to the corporation rather than the shareholder." Syl. Pt. 2, Manville Pers. Injury Settlement Tr. v. Blankenship, 231 W.Va. 637, 749 S.E.2d 329 (2013).

          LOUGHRY, JUSTICE:

         The petitioners, who were several shareholders of the former company/nominal respondent Massey Energy Company ("Massey" or "the company"), appeal the November 20, 2014, Amended Final Order of the Circuit Court of Kanawha County denying their motion for leave to file a Second Amended Complaint and dismissing their pending Amended Complaint. The petitioners argue that if permitted to once again amend their complaint, they would assert facts sufficient to establish their standing to pursue a derivative shareholder action on behalf of Massey against former corporate directors and officers, even though the petitioners are no longer Massey shareholders. With their proposed Second Amended Complaint, the petitioners also seek to add new claims on behalf of themselves and a putative class alleging that the respondents breached fiduciary duties owed directly to Massey shareholders when negotiating and agreeing to a corporate merger.

         The circuit court concluded that under controlling Delaware law, the petitioners lack standing to pursue a derivative shareholder suit. Furthermore, the circuit court found that it would be futile to allow the petitioners to file their proposed Second Amended Complaint. For the reasons set forth below, we find no error in the circuit court's rulings and, accordingly, we affirm.

         I. Factual and Procedural Background

         On April 5, 2010, a devastating explosion occurred at Performance Coal's Upper Big Branch ("UBB") underground coal mine in Montcoal, West Virginia. Tragically, twenty-nine men working at UBB were killed. Performance Coal was a subsidiary of Massey, a Delaware corporation headquartered in Virginia. In the wake of the explosion, allegations arose of systemic mine safety compliance failures. See Manville Pers. Injury Settlement Tr. v. Blankenship ("Manville"), 231 W.Va. 637, 640, 749 S.E.2d 329, 332 (2013). Several investigations[1] and lawsuits ensued.

         The instant litigation began as a derivative shareholder lawsuit filed in the Circuit Court of Kanawha County on April 15, 2010, by Manville Personal Injury Settlement Trust, a Massey shareholder. Subsequently, the lawsuit was consolidated with derivative actions instituted by other Massey shareholders, including California State Teachers' Retirement System and Amalgamated Bank as Trustee for the Longview Collection Investment Funds, and an Amended Complaint was filed on June 7, 2010.[2] (All of the shareholder plaintiffs are collectively referred to herein as "the petitioners"). In their derivative shareholder claims, the petitioners seek to hold individual members of Massey's then-Board of Directors, as well as certain Massey corporate officers, personally liable to the company based upon the alleged breach of fiduciary duties. At its core, the Amended Complaint asserts that the directors and officers knowingly allowed Massey's employees to disregard worker safety laws, regulations, and procedures, which resulted in the UBB explosion. The individual defendants named in the Amended Complaint are Donald L. Blankenship, Baxter F. Phillips, Jr., Dan R. Moore, E. Gordon Gee, Richard M. Gabrys, James B. Crawford, Bobby R. Inman, Robert H. Foglesong, Stanley C. Suboleski, J. Christopher Adkins, Jeffrey M. Jarosinski, M. Shane Harvey, and Mark A. Clemens (hereinafter collectively "the respondents").

         In addition, other Massey shareholders filed similar derivative lawsuits against Massey directors and officers in the Delaware Court of Chancery. See In re Massey Energy Co. Derivative and Class Action Litig., 160 A.3d 484 (Del. Ch. 2017) ("Massey Energy II").[3]The Delaware cases were subsequently consolidated with one another and amended to include direct claims on behalf of the shareholders themselves. Id.[4]

         Weeks after the explosion, another company in the coal industry, Alpha Natural Resources, Inc. ("Alpha"), initiated discussions with Massey about a possible corporate merger.[5] Initially, Massey's Board of Directors ("Massey Board") dismissed the idea. However, Alpha approached Massey again in August 2010 with a non-binding proposal offering twenty percent over Massey's then-current stock price of $30.99 per share. The Massey Board rejected this offer as insufficient, but determined that exploration of a merger was warranted. In September 2010, Alpha increased its offer to $41.07 for each share of Massey stock. After an October 2010 article in the Wall Street Journal reported that Massey was reviewing alternatives, Massey received proposals from two additional companies, Arcelor Mittal S.A. and Arch Coal, Inc.[6] Massey's discussions with Alpha were ongoing during this time. In early January 2011, Arch Coal submitted a non-binding offer of $70 per share; the following day, Alpha submitted an offer of $60.51 per share. Later in January, Alpha raised its bid to $65 per share, while Arch Coal lowered its bid to $55 per share. Following further negotiations, Alpha and the Massey Board reached a Merger Agreement on January 28, 2011, whereby Alpha would pay $69.33 per share of Massey stock.

         The Merger Agreement between Massey and Alpha was announced on January 29, 2011. The Agreement provided that if Massey's stockholders approved, then on June 1, 2011, Massey would merge with and into a company named Mountain Merger Sub, Inc. that was formed by Alpha solely to effectuate this merger. The surviving corporation would be a wholly-owned subsidiary of Alpha named Alpha Appalachia Holdings, Inc., a Delaware corporation. As part of the Merger Agreement, each outstanding share of Massey common stock would be converted into the right to receive 1.025 shares of Alpha common stock plus $10 in cash (which calculates to $69.33 per share). As proposed, total consideration for the merger would be in excess of $7 billion dollars.

         Faced with the potential merger, on May 2, 2011, the petitioners filed a motion with the Circuit Court of Kanawha County for leave to file a Second Amended Complaint that, in addition to re-asserting derivative claims on behalf of the company, sought to add individual and class action claims on behalf of the shareholders themselves.[7] The petitioners' individual and class action claims assert that the respondents violated fiduciary duties owed to the shareholders when negotiating and approving the Merger Agreement at an inadequate price. In their brief, the petitioners report that the parties conducted discovery pertaining to both the safety and the merger issues, but the petitioners desire additional discovery.

         On May 16, 2011, the petitioners filed a motion in the circuit court to preliminarily enjoin Massey's merger with Alpha. Unable to obtain a circuit court hearing in the time frame they requested, the petitioners filed an emergency petition with this Court on May 25, 2011, also seeking a preliminary injunction to halt the merger. After recognizing that the motion had not yet been acted upon by the circuit court, that Alpha would be impacted by an injunction but was not named as a party, and that a motion to enjoin the merger was already pending in the Delaware litigation, this Court denied the emergency petition. See California State Teachers' Ret. Sys. v. Blankenship, No. 11-0839 (W.Va. May 31, 2011) (memorandum order).

         In a lengthy order entered on May 31, 2011, the Delaware Court of Chancery refused to enjoin the merger and refused to create a "litigation trust" in which to maintain the Delaware plaintiffs' derivative claims. See In re Massey Energy Co. Derivative and Class Action Litig., C.A. No. 5430-VCS, 2011 WL 2176479 (Del. Ch. May 31, 2011) (unpublished opinion) ("Massey Energy I"). In short, the Court of Chancery concluded that the proposed merger would be beneficial to Massey's shareholders. The court explained, inter alia, that

[o]n the day the Massey Board unanimously approved the Merger, January 27, 2011, the Merger consideration amounted to a 25% premium over Massey's stock price based on the previous day's closing price of Massey and Alpha stock, a 95% premium over the closing price of Massey stock on October 18, 2010 before it was publicly reported that Massey was engaged in a strategic alternatives review, and even a 27% premium over Massey's stock price the day of the explosion at the Upper Big Branch mine.

Id. at * 1.

         It is undisputed that the merger proposal was thereafter submitted to a stockholder vote, where ninety-nine percent of the Massey shares that were voted were cast in favor of the transaction. Accordingly, the merger became effective June 1, 2011. The company formerly known as Massey became a wholly-owned subsidiary of Alpha and, as the sole shareholder, Alpha replaced Massey's entire Board of Directors with a single director of its choosing.[8] Importantly, upon the merger, the petitioners ceased being Massey stockholders.

         In addition to the case sub judice, on May 31, 2011, the petitioners brought a separate legal proceeding in the Circuit Court of Kanawha County seeking to hold Massey corporate directors and officers in contempt for failing to comply with an order entered by the circuit court in 2008 in a prior shareholder derivative lawsuit. See Manville, 231 W.Va. 637, 639-40, 749 S.E.2d 329, 331-32. The circuit court's 2008 order had required Massey to adopt and follow certain mine safety standards and procedures, but the petitioners asserted that the directors and officers failed to comply, resulting in the UBB explosion. Id. The contempt proceeding was dismissed in September 2011 upon the circuit court's conclusion that after the merger, the petitioners were no longer Massey shareholders and, therefore, lacked derivative standing under the applicable Delaware law to pursue relief on behalf of the company. Id. at 643, 749 S.E.2d at 335. Subsequently, this Court affirmed the circuit court's dismissal of the Manville contempt action. Id. at 648, 749 S.E.2d at 340.

         Meanwhile, on June 24, 2011, the respondents filed a motion in the case at bar asking the circuit court to dismiss the petitioner's Amended Complaint pursuant to Rule 12(b)(6) of the Rules of Civil Procedure. They also opposed the petitioners' motion for leave to file the proposed Second Amended Complaint. The respondents argued that after the merger, the petitioners were no longer Massey shareholders and lacked standing to assert derivative claims, and that amending their complaint a second time would be futile. After briefing and a hearing, the circuit court entered an order on November 14, 2013, [9] that both dismissed the Amended Complaint and denied the motion for leave to file the Second Amended Complaint. The circuit court's only explanation was that the rulings were "[b]ased upon, and for the reasons set forth in, " this Court's opinion in Manville, 231 W.Va. 637, 749 S.E.2d 329. The petitioners appealed and, on August 26, 2014, we entered an order remanding the case back to the circuit court for entry of an order containing findings of fact and conclusions of law.

         Following remand, the petitioners sought a scheduling order for additional briefing and a hearing, but the circuit court concluded that further proceedings would be beyond the scope of the remand. The circuit court did grant the parties the opportunity to submit proposed orders that included findings of fact and conclusions of law. On November 20, 2014, the circuit court entered an Amended Final Order explaining its reasons for dismissing the Amended Complaint and for denying the motion for leave to file the Second Amended Complaint.

         In the Amended Final Order, the circuit court explained that upon the consummation of the merger with Alpha, the petitioners were no longer shareholders of Massey and, therefore, had lost standing under the applicable Delaware law to pursue a shareholder derivative suit. The circuit court rejected the petitioners' argument that they retained standing under a fraud exception in Delaware law, concluding that the petitioners could not prove that the merger had been effectuated "solely" to deprive them of derivative standing. Moreover, the circuit court found it would be futile to allow the petitioners to file their Second Amended Complaint. To the extent that the Second Amended Complaint reasserted the derivative claims, the circuit court reiterated that the petitioners had lost shareholder standing and could not prove the fraud exception. With regard to the direct claims that the petitioners sought to add, the circuit court ruled that to be entitled to money damages under Delaware law, the petitioners would need to prove that the officers and directors acted in bad faith to approve a sale of Massey at a materially inadequate and unfair price. The circuit court found that the proposed Second Amended Complaint did not allege facts to establish that the merger was "materially inadequate" or that any inadequacy was the result of "bad faith" conduct by the respondents. Furthermore, the circuit court recited with approval the findings of the Delaware Chancery Court about the respondents' "reasonable efforts to get the highest price it could from Alpha" and the substantial premium received by shareholders as a result of this merger. See Massey Energy I, 2011 WL 2176479, at *4. Finally, the circuit court concluded that it would be prejudicial to the respondents to allow the petitioners to pursue futile claims in another amended complaint.

         The petitioners once again appeal to this Court. While this appeal was pending, [10] the Delaware Court of Chancery entered its final order on May 4, 2017, dismissing all of the Delaware plaintiffs' claims-both derivative and direct-in that Massey litigation. See Massey Energy II, 160 A.3d 484. Thereafter, we allowed the parties to file supplemental briefs addressing the ...


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