IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN RE PATTERN ENERGY GROUP ) C.A. No. 2020-0357-MTZ INC. STOCKHOLDERS LITIGATION ) MEMORANDUM OPINION Date Submitted: December 10, 2020 Date Decided: May 6, 2021 Ned Weinberger and Mark Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; David MacIsaac and John Vielandi, LABATON SUCHAROW LLP, New York, New York; Chad Johnson, Noam Mandel, and Desiree Cummings, ROBBINS GELLER RUDMAN & DOWD LLP, New York, New York; Brian Schall and Rina Restaino, THE SCHALL LAW FIRM, Los Angeles, California, Attorneys for Lead Plaintiff Jody Britt. A. Thompson Bayliss and April M. Kirby, ABRAMS & BAYLISS LLP, Wilmington, Delaware; Alan S. Goudiss, K. Mallory Brennan, and Deke Shearon SHEARMAN & STERLING LLP; Christina Urhausen, SHEARMAN & STERLING LLP, San Francisco, California; Attorneys for Defendants Alan R. Batkin, Edmund John Philip Browne, Richard A. Goodman, Douglas G. Hall, Patricia M. Newson, Mona K. Sutphen, Michael Garland, Hunter Armistead, Daniel Elkort, Michael Lyon, and Esben Pedersen. Rudolf Koch, Matthew D. Perri, and Andrew L. Milam, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Matthew A. Schwartz, Y. Carson Zhou, John-Francis S. Flynn, SULLIVAN & CROMWELL LLP, New York, New York; Attorneys for Defendants Riverstone Holdings LLC, Riverstone Pattern Energy II Holdings, L.P., and Pattern Energy Group, Holdings 2 LP. ZURN, Vice Chancellor. The sales process of Pattern Energy Group Inc. (the “Company”) was run by an undisputedly disinterested and independent special committee that recognized and nominally managed conflicts, proceeded with advice from an unconflicted banker and counsel, and conducted a lengthy process attracting tens of suitors that the special committee pressed for value. But, even having acknowledged that one eager bidder offered superior value, the special committee ultimately selected a different bidder as the buyer. The buyer was preferred by a private equity investor, who formed the Company and its upstream supplier, which the investor controlled; appointed the Company’s management team; and held a consent right over Company changes of control. The investor favored the buyer because its proposal, as shaped by the investor, accomplished the investor’s goals of taking the Company private and consolidating it with the upstream supplier, while permitting the investor to retain its equity stake in the new company. In apportioning fault for the selection of the buyer’s inferior bid, the plaintiff primarily points to three forces: (1) the investor’s control over the Company together with the upstream supplier and management; (2) the Company’s CEO, who was conflicted in favor of the investor yet ran point on the sales process to stockholders’ detriment; and (3) the special committee’s prioritization of the investor’s goals over stockholder value and inability to say “no.” In her post-closing class action complaint, the plaintiff seeks entire fairness review due to the investor’s alleged 1 control group standing on both sides of the transaction, or due to the CEO’s alleged fraud on the board. She claims the special committee and management breached their fiduciary duties in a cash-out merger, and that the investor and supplier either controlled that process or participated as third-party tortfeasors. The defendants— the investor, the supplier, the conflicted directors, the special committee, and conflicted management—contend that the cash-out merger with Buyer was cleansed by an informed stockholder vote; that the directors were exculpated; and that no breaches of fiduciary duty or third-party liability torts have been pled. On the defendants’ motion to dismiss, the plaintiff prevails on most of her arguments. Recognizing that neither the investor nor the supplier owned Company stock, I leave open the possibility that the plaintiff may establish the investor, supplier, and management stockholders formed a control group, given the investor’s consent right and other pervasive sources of soft power over the Company and its sales process. Thus, it remains possible that the transaction may be subject to the entire fairness standard of review under a controller theory—but not a fraud on the board theory. At a minimum, the plaintiff has pled the special committee and management failed to manage conflicts and prioritized the investor’s goals over stockholder value in bad faith (as distinguished from dereliction of duty), and so states nonexculpated claims for breach of fiduciary duty that will be reviewed under enhanced scrutiny. 2 All but two management defendants allegedly contributed to flaws in the process. The sales process is not presumptively subject to the business judgment rule: the votes in favor fall below a majority of disinterested stockholders because the block at the tipping point was subject to a voting agreement that compelled favorable votes that were not informed, disinterested, or voluntary. Plaintiff has also pled the special committee improperly and completely delegated drafting the merger proxy (the “Proxy”) to conflicted management, and that the Proxy was inadequate. I. BACKGROUND1 The Verified Stockholder Class Action Complaint, filed on May 28, 2020 (the “Complaint”), challenges the March 16, 2020 all-cash acquisition (the “Merger”) of Pattern Energy Group Inc. by Canada Pension Plan Investment 1 I draw the following facts from the Verified Consolidated Stockholder Class Action Complaint, available at Docket Item (“D.I.”) 101 [hereinafter “Compl.”], as well as the documents attached and integral to it. See, e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018); In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). Citations in the form of “Kirby Decl. ––” refer to the exhibits attached to the Declaration of April M. Kirby, Esq. in Support of the Opening Brief in Support of Defendants’ Motion to Dismiss, available at D.I. 75 and D.I. 76. Citations in the form of “Weinberger Decl. ––” refer to the exhibits attached to the Transmittal Declaration of Ned Weinberger in Support of Plaintiff’s Answering Brief in Opposition to Defendants’ Motions to Dismiss, available at D.I. 82. Citations in the form of “Proxy ––” refer to the Company’s Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed February 4, 2020, attached as Exhibit 1 to the Kirby Declaration and available at D.I. 75. On the Motion, the Court may consider the Proxy, as well as other publicly filed documents regarding the Merger. See Orman v. Cullman, 794 A.2d 5, 15–16 (Del. Ch. 2002); In re Lukens Inc. S’holders Litig., 757 A.2d 720, 727 (Del. Ch. 1999), aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000); Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1168 n.3 (Del. Ch. 2002). 3 Board (“Buyer”).2 Lead Plaintiff Jody Britt (“Plaintiff”) was a Company stockholder at all relevant times, and brings her claims on behalf of all other similarly situated former public Company stockholders.3 A. The Company’s Longstanding Relationship To Riverstone Contextualizes And Bears On The Sales Process At Issue. The Company was formed by Riverstone to operate energy projects developed by another Riverstone entity.4 Riverstone “is a private equity fund investing primarily in energy, power, and infrastructure,” including renewable energy. The developer entity’s structure and ties to the Company changed with the energy market. The chronology of those changes is helpful background to this matter, as the Company’s ties to Riverstone and the developer loom large in the Company’s sales process. Riverstone has owned and controlled Pattern Energy Group LP (“Developer 1”) at all times.5 In October 2012, Riverstone, via Developer 1, incorporated the Company and thereafter controlled the Company through Riverstone’s stake in Developer 1.6 Riverstone arranged the Company and 2 See generally Compl. 3 Id. ¶ 23. 4 Id. ¶¶ 37, 43. Riverstone Pattern Energy II Holdings, L.P. is an affiliate of Riverstone Holdings LLC; this opinion refers to those entities collectively as “Riverstone.” Id. ¶ 39. 5 Id. ¶¶ 42, 46. 6 Id. ¶ 47. 4 Developer 1 in a symbiotic business relationship, in which Developer 1 created and constructed renewable energy projects, but did not operate them, and the Company had a right of first offer to purchase and operate Developer 1’s projects.7 Developer 1 and the Company were run as a single entity out of the same offices, and Developer 1 enjoyed the benefits of a management services agreement with the Company.8 In 2013, Developer 1 took the Company public via an initial public offering (the “IPO”).9 After the IPO, Riverstone still indirectly controlled the Company via Developer 1, which retained a 67.9% majority interest; public investors and Company management held the other third.10 Developer 1 also executed a shareholder agreement with the Company in connection with the IPO. That agreement gave Developer 1, and therefore Riverstone, a consent right over the Company’s major corporate transactions, including sales and acquisitions worth more than 10% of the Company’s market capitalization, so long as Developer 1 owned at least one third of the Company’s shares.11 Developer 1 continued to 7 Id. ¶ 46 n.2. 8 Id. ¶¶ 51–52. 9 Id. ¶ 47. 10 Id. ¶¶ 47, 49. 11 Id. ¶ 50. By February 2015, Developer 1’s ownership had dipped below the one-third threshold, so its consent right lapsed. Id. 5 develop new projects.12 The Company paid steady dividends and attracted long- term investors, but its share price remained flat.13 In 2017, inspired by record demand for renewable energy,14 Riverstone restructured its relationship with the Company, as Developer 1 seemingly lacked the capital resources needed to develop projects to keep up with demand.15 Developer 1 was replaced with a Riverstone-sponsored and controlled private equity fund, Pattern Energy Group Holdings 2, LP (together with any subsidiaries, “Developer 2”).