## Facts

- Massey Energy Company was a large coal-mining corporation with a reputation for intentionally disregarding mine-safety regulations and taking an aggressive posture toward regulators.
- Massey had a history of regulatory violations, enforcement actions, and settlements, including a 2008 settlement of a prior stockholder derivative action alleging fiduciary breaches by the board.
- Despite prior settlements and judgments, plaintiffs alleged Massey’s corporate culture and compliance practices did not meaningfully improve.
- On April 5, 2010, an explosion at Massey’s Upper Big Branch mine killed 29 miners.
- Public reports by the West Virginia Governor and the Mine Safety and Health Administration attributed the disaster to Massey’s chronic noncompliance with federal and state safety requirements.
- Stockholders filed a consolidated action in the Delaware Court of Chancery asserting derivative claims (on Massey’s behalf) and related class claims, alleging that Massey’s directors and senior management knowingly continued unsafe and unlawful practices that exposed miners and the company to grave risk.
- In the aftermath of the disaster and the resulting liability and uncertainty, Massey pursued a sale and agreed to merge with Alpha Natural Resources, Inc. for consideration consisting of Alpha stock plus cash.
- Stockholder plaintiffs moved for a preliminary injunction to stop the stockholder vote and closing of the Massey–Alpha merger, arguing the board breached fiduciary duties by not identifying, valuing, and obtaining value for corporate derivative claims against Massey fiduciaries connected to the safety failures (the “Derivative Claims”).
- Plaintiffs also argued that the merger would, as a practical matter, shift control of those Derivative Claims to Alpha and thereby end stockholders’ ability to press them, warranting court intervention before the transaction closed.

## Issues

1. Whether plaintiffs showed a sufficient basis for a preliminary injunction to enjoin the stockholder vote or closing of the Massey–Alpha merger based on the board’s alleged failure to consider and obtain value for the company’s Derivative Claims.
2. Whether, under Delaware law, Massey’s pre-merger derivative claims would pass to the acquirer in the merger, and whether any recognized exception would allow Massey stockholders to retain standing to pursue those claims after closing.
3. Whether the record supported applying a conflict-based standard of review (including entire fairness) on the theory that directors approved the merger primarily to avoid personal liability on the Derivative Claims.

## Decision

- The Court of Chancery denied the motion for a preliminary injunction, permitting the stockholder vote to proceed and declining to block the merger.
- The court reaffirmed that pre-merger derivative claims are corporate assets that generally pass to the surviving or acquiring corporation in a merger.
- The court found that, on the preliminary record, neither recognized exception to the loss of derivative standing applied: (1) a merger undertaken fraudulently to eliminate derivative standing, or (2) a reorganization that leaves stockholders with the same relative ownership in the post-transaction entity.
- The court rejected the argument that Delaware law had created an additional exception when alleged fiduciary misconduct is so harmful that it contributes to the later decision to sell the company.
- Although the court expressed concern that the board did not evaluate the Derivative Claims “in an ideal manner,” it concluded plaintiffs had not shown a reasonable probability that the directors were motivated chiefly by a desire to extinguish personal liability.
- Because plaintiffs did not show a disabling conflict, the court declined to apply entire fairness review on the preliminary-injunction record.
- The court also found plaintiffs had not shown that the economic value of the Derivative Claims was material enough, relative to the overall merger consideration, to justify stopping a premium, arm’s-length transaction.
- In balancing harms, the court reasoned that enjoining the transaction risked losing Alpha’s offer and leaving Massey in a weakened condition, while stockholders could still pursue post-closing monetary remedies if warranted.

## Legal Principles

- A preliminary injunction requires (i) a reasonable probability of success on the merits, (ii) irreparable harm absent an injunction, and (iii) that the balance of equities favors injunctive relief.
- Corporate causes of action, including derivative claims against fiduciaries, are assets of the corporation; in a merger, those assets ordinarily transfer to the surviving/acquiring entity.
- Delaware recognizes narrow circumstances in which a merger does not eliminate a stockholder’s ability to pursue derivative claims: (1) a transaction structured as a fraud to deprive stockholders of standing, or (2) a transaction that is, in substance, a reorganization preserving stockholders’ relative ownership.
- A board negotiating a sale should seek value for the corporation’s material assets, which can include litigation claims; a less-than-optimal process alone does not establish that directors acted in bad faith or were disabled by self-interest.
- Entire fairness review is not triggered merely because directors face potential liability; plaintiffs must show a non-exculpated risk of liability and facts supporting an inference that the transaction was approved to benefit directors at stockholders’ expense.
- When equitable relief would risk the loss of a premium, arm’s-length deal, the court may deny an injunction and leave stockholders to decide whether to accept the transaction, while preserving the possibility of post-closing monetary relief.

## Conclusion

In this preliminary-injunction ruling, the Court of Chancery refused to block Massey’s merger with Alpha based on the board’s alleged failure to obtain value for the company’s safety-related Derivative Claims, holding that such claims ordinarily transfer to the acquirer in a merger, no recognized exception or conflict-based showing justified injunctive relief on the record presented, and the equities favored allowing stockholders to decide whether to accept the deal rather than stopping it.


In re Massey Energy Company Derivative and Class Action Litigation, 2011 Del. Ch. LEXIS 83 (2011)