Earthstone Energy Shareholders Score Partial Victory in Delaware Supreme Court

The Delaware Supreme Court ruled in favor of oil and gas firm Earthstone Energy Inc., tossing shareholders’ claims that the company misled them into approving an unfair transaction between Earthstone and Bold Energy III LLC, but the court stopped short from killing the case altogether.

The disputed deal was spearheaded by EnCap Investments L.P. which controls both companies and allegedly caused Earthstone shareholders to enter into the agreement through misleading proxy statements, which ultimately harmed Earthstone’s shareholders, according to the ruling.

Before reaching Delaware Supreme Court, the shareholders’ claims were heard by the Delaware Court of Chancery which also agreed with Earthstone’s motion to dismiss the claim. The Chancery Court found that the proxy statement issued by Earthstone properly informed shareholders of all relevant material facts surrounding the transaction.

The Chancery Court also found shareholders failed to state a disclosure claim, but the Delaware Supreme Court did not find the complaint should be dismissed as a whole.

Chief Justice Leo E. Strine Jr. wrote in the 32-page ruling that the deal was subject to so-called “MFW conditions,” referring to conditions found in Kahn v. M&F Worldwide Corp.

The MFW conditions, had the been properly considered, would’ve determined that the derivative action would not result in a full dismissal if “‘plaintiff has pled facts that support a reasonable inference that the two procedural protections were not put in place early and before substantive economic negotiations took place,'” according to the ruling.

“The Court of Chancery held correctly that the plaintiff failed to state a disclosure claim. But, the complaint should not have been dismissed in its entirety,” Strine wrote for the panel.

The panel also found that the plaintiff presented facts that supported a reasonable inference that Earthstone, Bold and EnCap all engaged in negotiations before an Earthstone special committee put any MFW conditions in place. Under that standard, the Chancery Court improperly dismissed the derivative action as a whole.     

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