Topley v. SemGroup Corporation

Background

SemGroup Corporation and Energy Transfer LP announced a proposed merger valued at approximately $5 billion. SemGroup shareholders would receive cash and Energy Transfer common units. SemGroup filed and distributed a 241-page proxy statement describing the merger, including financial information, the merger process, risk factors, financial projections, and Jefferies’ fairness opinion.

Mark Topley and Barb Hills separately sued SemGroup and members of its board. They alleged that the proxy statement omitted material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 14a-9. They sought to prevent the shareholder vote until the alleged omissions were corrected. Their lawsuits were two of seven actions asserting substantially similar disclosure deficiencies.

SemGroup later filed supplemental disclosures containing, among other things, additional financial projections, more information about the assumptions and valuation measures underlying Jefferies’ fairness analysis, an explanation of Jefferies’ limited conflict of interest, and additional information about outreach to potential buyers. SemGroup stated that it issued the disclosures to avoid the risk that the lawsuits would delay the merger and to reduce the expense of defending them. Topley and Hills then dismissed their actions as moot. The merger was approved by 99.8% of the shareholder vote.

The plaintiffs’ attorneys billed 131.8 hours and stated that their fees totaled $75,737. They ultimately moved for an award of $400,000 in fees and expenses, using a 5.25 multiplier.

Legal standard

The general rule is that each side pays its own attorneys’ fees unless a statute, contract, or recognized exception applies. The court considered the common-benefit doctrine, which can allow fees when litigation confers a substantial benefit on an identifiable group and the litigation costs can be spread among those who benefited. A plaintiff seeking fees bears the burden of showing that a substantial benefit was conferred. When the requested relief has already been obtained and the case becomes moot, the defendant bears the burden of showing that the lawsuit did not cause the defendant’s action.

Causation

The defendants argued that Topley’s and Hills’ lawsuits could not have caused the supplemental disclosures because other similar lawsuits were filed earlier. The court rejected that argument. SemGroup’s own filing referred to all seven lawsuits and stated that the supplemental disclosures were issued to avoid delay and reduce defense costs. The court therefore concluded that the defendants had not shown an absence of a causal connection between the plaintiffs’ lawsuits and the supplemental disclosures.

Substantial benefit

The court nevertheless held that the supplemental disclosures did not confer a substantial benefit on SemGroup shareholders. A disclosure must do more than produce a technical or cosmetic change; it must correct or prevent an abuse prejudicial to the corporation or affect an essential shareholder right. The court recognized that helping shareholders cast an informed vote can qualify, but it held that providing additional information does not automatically create a substantial benefit.

The court found that shareholders already had enough information to make an informed merger decision. The additional SemGroup and Energy Transfer financial projections did not establish a substantial benefit because the proxy statement already contained four years of SemGroup cash-flow projections, and the plaintiffs did not show that the additional projections materially changed shareholders’ ability to evaluate the merger. The court also found that shareholders were not entitled to all of the acquiring company’s internal future projections merely because part of the merger consideration consisted of the acquiring company’s units.

The court likewise rejected the claim that the additional details about Jefferies’ valuation inputs and assumptions provided a substantial benefit. It explained that shareholders generally are not entitled to enough information to perform their own independent valuation and that a proxy statement need only provide a fair summary of the basis for a financial adviser’s fairness opinion. The court found the additional valuation details insufficient to establish a substantial benefit.

The plaintiffs did not argue that the additional information about Jefferies’ limited conflict of interest substantially benefited shareholders. The court found that the conflict was consistently described as de minimis, or minimal, and was not material for purposes of the merger. The plaintiffs also did not show that the additional description of outreach to potential counterparties provided shareholders with information that substantially benefited them.

State-law fee request

The plaintiffs alternatively sought fees under Delaware law because SemGroup was incorporated in Delaware. The court stated that the plaintiffs had apparently abandoned this argument by failing to adequately present it in their reply. The court also held that the claim failed because the complaints asserted only federal securities-law violations, not state-law causes of action. The court therefore denied the state-law request for attorneys’ fees.

Disposition

The court denied the motions for attorneys’ fees. It directed the clerk to terminate the motion at docket entry 6 in case number 19-CV-9630 and the motion at docket entry 13 in case number 19-CV-10412, and to close both cases.