September 21, 2021
On September 20, 2021, Weil won a once-in-a-generation interlocutory appeal for Brookfield Asset Management and certain of its affiliates before the Delaware Supreme Court that reversed Delaware’s oft-criticized 2006 precedent, Gentile v. Rossette. The court’s unanimous, 52-page opinion reversed a Delaware Court of Chancery order denying Brookfield’s motion to dismiss in a consolidated stockholder derivative and class action, and will have a significant impact on Delaware corporate law and M&A practice generally.
The case arose from a June 2018 private placement in which Brookfield affiliates acquired $650 million of TerraForm Class A common stock. The private placement increased Brookfield’s economic and voting interest in TerraForm from approximately 51% to approximately 65.3%. Plaintiffs – stockholders in TerraForm – alleged that the transaction was unfair to TerraForm and its minority stockholders because, among other things, the price Brookfield paid was too low. In their consolidated complaint, the plaintiffs alleged that Brookfield and its affiliates breached their fiduciary duties as an alleged controlling stockholder of TerraForm in connection with the private placement; they sought hundreds of millions of dollars in damages.
The plaintiffs originally asserted their claims both directly and derivatively, but after a subsequent July 2020 merger in which affiliates of Brookfield acquired all remaining outstanding shares of TerraForm common stock, the plaintiffs lost standing to pursue their derivative claims. Weil had previously moved to dismiss the plaintiffs’ direct claims on the basis that they are exclusively derivative under Delaware’s Tooley precedent (Del. 2004), and that the plaintiffs’ attempt to invoke the concept of “dual-standing” set forth in Gentile should be rejected because, among other reasons, Gentile is inconsistent with pre-existing Delaware precedent, muddies the clarity of Delaware law, and, therefore, ought to be overruled.
In denying the defendants’ motion to dismiss, the Delaware Chancery Court agreed with Weil’s arguments that, under Tooley, the plaintiffs’ claims were exclusively derivative. However, the court went on to find that Plaintiffs’ claims were predicated on facts similar to those at issue in Gentile and, therefore, determined that it was bound to treat Gentile as controlling precedent. Weil sought an interlocutory appeal from Vice Chancellor Glasscock, who, in what he called a “rare exception,” certified the appeal mid-case in November 2020.
In its opinion, the Delaware Supreme Court unanimously reversed, notably holding, in agreement with Weil’s arguments, that: “[W]e can properly say that the practical and analytical difficulties courts have encountered in applying [Gentile] reflect fundamental unworkability and not growing pains[.]…Moreover…Gentile is more of a departure from the then-recent Tooley than the continuation we perceived it to be at the time [in 2006]. Any reliance is further muted by El Paso, from which parties could rightly anticipate that Gentile’s continued viability was in doubt. Finally, in overturning it today we speak unanimously, with the concomitant aid to certainty that provides. Having given all due consideration to the weight of precedent, the circumstances persuade us that we should overrule the Gentile exception to our Tooley test for derivative and direct standing. Accordingly, Gentile should be, and hereby is, overruled.”
The Weil team was led by Securities Litigation Co-Head John Neuwirth, who argued the appeal, and included counsels Stefania Venezia and Amanda Pooler, and associates Andrew Cauchi, Austin Coe, Anna Gordan, Andy Meerwarth, Salam Sheikh-Khalil, Elizabeth Sytsma, and Maggie Vogel.