IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

CHATHAM ASSET MANAGEMENT,
LLC, CHATHAM FUND, LP, and
CHATHAM ASSET HIGH YIELD
MASTER FUND, LTD.,

individually and derivatively on behalf
of TWIN RIVER WORLDWIDE
HOLDINGS, INC.,

Plaintiffs,

Vv. C.A. No. 2017-0088-AGB
GEORGE PAPANIER, JOHN E.
TAYLOR, JR., SOO KIM, STEPHEN
H. CAPP, CRAIG L. EATON, GLENN
CARLIN, PHIL JULIANO, and JAY
MINAS,

Defendants,
and

TWIN RIVER WORLDWIDE
HOLDINGS, INC.,

eNO Ne ee ee le ee ee ee ee eee mS’

Nominal Defendant.

ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS’ PARTIAL MOTION TO DISMISS

WHEREAS:
A. Nominal defendant Twin River Worldwide Holdings, Inc. (“Twin
River” or the “Company”), a Delaware corporation, is a holding company in the

gaming industry with casinos and other operations in Rhode Island, Mississippi, and
Colorado.! Twin River has its principal place of business in Lincoln, Rhode Island.
The Rhode Island Department of Business Regulation (“DBR”) regulates the
Company and imposes limitations on the ownership of Twin River stock, which are
set forth in regulatory agreements with the Company’s stockholders.’

B. On November 15, 2016, Twin River announced a tender offer to
purchase up to 250,000 shares of its common stock (the “Tender Offer”). Twin
River sent its stockholders a 23-page Offer to Purchase (“OTP”) describing the
background and terms and conditions of the Tender Offer. The Tender Offer closed
on December 16, 2016.

C. Plaintiffs Chatham Fund, LP and Chatham Asset High Yield Master
Fund, Ltd. hold common stock of Twin River. The investment advisor of these
entities is plaintiff Chatham Asset Management, LLC. This order refers to these
three entities together as “Chatham.” Before the Tender Offer, Chatham owned just
under 15% of Twin River’s stock, which was its regulatory limit.’

D. At the time of the Tender Offer, the directors of Twin River were
George Papanier, John E. Taylor, Soo Kim, and Stephen H. Capp (together, the

“Director Defendants”). Kim also is the Managing Partner and Chief Investment

 

| The facts recited herein are taken from the Second Amended Complaint (“Compl.”) and
documents incorporated therein. (Dkt. 94)

* Compl. § 22.
3 Id.
Officer of Standard General, L.P. (“Standard General”), a hedge fund that has voting
and investment control over Standard RI Ltd., Twin River’s largest stockholder.*

E. The Complaint names as the “Officer Defendants” two individuals:
Craig L. Eaton, Senior Vice President, General Counsel, Secretary, and Compliance
Officer of Twin River; and Glenn Carlin, Executive Vice President of Corporate
Development, Chief Financial Officer, and Treasurer of Twin River.

F. | The remaining two individual defendants are Phil Juliano, Senior Vice
President and Chief Marketing Officer of Twin River; and Jay Minas, Vice President
of Finance of Twin River.

G. On January 9, 2019, Chatham filed the Second Amended Complaint
(the “Complaint”), asserting fourteen claims. On February 20, 2019, defendants
moved to dismiss nine of those claims under Court of Chancery Rule 12(b)(6) for
failure to state a claim for relief.

H. On September 4, 2019, the court heard oral argument on the partial
motion to dismiss. By that time, the parties had stipulated to or did not oppose the
dismissal of four of the nine claims (Counts VI, VIII, X, and XI).° At the conclusion

of oral argument, the court denied the motion to dismiss as to Count III, granted the

 

4 Id. FF 25-26.
5 Dkt. 123; Dkt. 128; Pls.” Opp’n Br. 6 n.5 (Dkt. 111).

3
motion as to Count VII, and requested supplemental briefing, which the parties
completed on October 4, 2019.°

I. This order addresses the remaining three claims, which are for breach
of fiduciary duty: Counts IV, V, and IX. Counts IV and V are disclosure claims.
Count IX challenges the purpose and structure of the Tender Offer.

NOW THEREFORE, the court having considered the parties’ submissions,
IT IS HEREBY ORDERED this 13" day of January, 2020, as follows:

1, The standards governing a motion to dismiss for failure to state a claim
for relief are well-settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even

vague allegations are “well-pleaded” if they give the opposing party

notice of the claim; (iii) the Court must draw all reasonable inferences

in favor of the non-moving party; and ([iv]) dismissal is inappropriate

unless the “plaintiff would not be entitled to recover under any

reasonably conceivable set of circumstances susceptible to proof.”’

2. Under Delaware law, an omitted fact is material if “there is a substantial

likelihood that a reasonable shareholder would consider it important in deciding how

to vote.’ Stated differently, to be material, an omitted fact, if disclosed, “would

 

6 Mot. to Dismiss Hr’g Tr. 142-144 (Sept. 4, 2019) (Dkt. 131); Dkt. 128.
7 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted).

8 Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)).
have been viewed by the reasonable investor as having significantly altered the ‘total
mix’ of information made available.”?

3. Count IV. This is a direct claim against the Director and Officer
Defendants for breaching their fiduciary duties by failing to disclose in the OTP the
“preferential treatment given to one stockholder, Standard General,” at the time of
the Tender Offer.'° According to Chatham, the gravamen of this claim is that
defendants “breached their disclosure duties by failing to inform stockholders that
they had secured approval for Standard General to exceed regulatory limits as a
result of its non-participation in the Tender Offer.”'' The “approval” in question
refers to a November 9, 2016 letter from the DBR confirming that, by not
participating in the Tender Offer, Standard General “will not be in violation” of a
previous DBR approval allowing it to acquire up to 19.9% of Twin River’s stock,
which had expired over two years before the Tender Offer closed."

4, Defendants’ motion to dismiss Count IV is GRANTED because
Chatham has failed to show that the OTP omitted any facts concerning Standard

General that would have been material to a reasonable stockholder in deciding

whether to participate in the Tender Offer.

 

9 Id.

10 Compl. § 130.

' Pls.’ Opp’n Br. 39.
12 See Compl. Ex. F.
5. The OTP disclosed that (i) Twin River had 9,831,069 outstanding
shares of common stock as of November 15, 2016, (ii) Standard General owned
1,560,831 shares or approximately 15.9% of Twin River’s outstanding common
shares as of that date; and (iii) Standard General did not intend to participate in the
Tender Offer.'2 From these disclosures, Twin River’s stockholders could determine
the potential impact Standard General would have on the Tender Offer, i.¢., the level
of proration a stockholder might experience in deciding to tender given that Standard
General would not be tendering. Insofar as Standard General is concerned,
Chatham has failed to demonstrate that a reasonable stockholder would need any
additional information to decide whether to participate in the Tender Offer.

6. Chatham argues that “the DBR’s approval was material to Chatham,”
which allegedly “‘believed . . . that it had no choice but to participate in the Tender
Offer because of regulatory requirements.”'* It defies reason that Chatham-——a
sophisticated hedge fund—was unaware that it could have tried to seek approval

from the DBR in order to avoid having to tender irrespective of whether Standard

 

13 Iq Ex. K, at 2, 4, 7, 16. The OTP further disclosed that affiliates of Standard General
had “entered into agreements to purchase, subject only to regulatory approvals” that were
“expected to be received this calendar quarter,” an additional 1,658,937 shares
(approximately 16.9%) from affiliates of Bain Capital Credit LP. Jd. at 2, 7, 16.

14 See Pls.’ Suppl. Br. 9-10 (contending that a “disclosure that could impact the number of
shares tendered by other stockholders” would be material) (Dkt. 132).

'5 Pls.’ Opp’n Br. 40 (emphasis added); Compl. { 60.
6
General had obtained such an approval. Indeed, Chatham acknowledges it could
have sought such approval “directly” from the DBR without Twin River’s
assistance.!© In any event, Chatham’s interest in obtaining an approval from the
DBR to avoid tendering is idiosyncratic to Chatham and thus irrelevant to whether
Count IV states a claim for relief because “[t]he adequacy of disclosure is determined
by focusing upon a reasonable investor, and not by considering the attributes of the
particular investor at issue."

7. Count V. This is a direct claim against the Director and Officer
Defendants for breaching their fiduciary duties by failing to disclose in the OTP
approximately $3.8 million in “Make-Whole Payments” that were paid to certain
directors and officers of Twin River in November 2016.'® The background
concerning these payments follows.

8. In November 2010, when Twin River emerged from bankruptcy, the
claims of its second lien debtholders were discharged in exchange for Collateral

Value Rights (“CVRs”) entitling those holders to receive certain payments upon the

occurrence of a “CVR Payment Event.”!? In or around January 2013, Twin River

 

16 Pls.” Opp’n Br. 40 (“[I]f defendants had disclosed the DBR’s approval, Chatham would
have sought similar approval from the DBR, directly or with Defendants’ assistance.”).

\'7 Hubbard v. Hibbard Brown & Co., 633 A.2d 345, 352 (Del. 1993).
18 Compl. ¥ 136.
19 Id. 4 39-40.
entered into “Make-Whole Agreements” with certain insiders, “purportedly . . . to
align [the] economic incentives” of these individuals and the CVR holders.”? Under
the Make-Whole Agreements, Twin River would pay a cash award upon the
occurrence of a CVR Payment Event.?!

9. In December 2015, Twin River announced a CVR repurchase, which
prompted the filing of a derivative action in the Court of Chancery challenging that
transaction.”2 The parties to that action negotiated a settlement whereby Twin River
increased the price of the offer to purchase the CVRs from $400 to $450.7 In June
2016, the CVR repurchase closed.”

10. In November 2016, the Director Defendants authorized a total of $3.8
million in Make-Whole Payments to the Director Defendants (except Kim) and the
Officer Defendants.2> Twin River references these payments in its 2016 financial
statements for the year ended December 31, 2016, which the Company disclosed on

March 30, 2017—after the Tender Offer closed.”

 

20 Id 4 41,

21 Dkt, 112 9 1.

22 Compl. ¥ 44.

23 Id 49 43, 45.

4 Id. | 50.

5 Id 4 52.

26 Pls.” Opp’n Br. 43; Defs.’ Reply Br. 28 n.10 (Dkt. 115).

8
11. Defendants contend that Twin River was contractually obligated to pay
the $3.8 million under the Make-Whole Agreements because the CVR repurchase
triggered a CVR Payment Event.2”? Chatham disagrees. It contends that the CVR
repurchase did not trigger a CVR Payment Event.’* Chatham further contends that
the failure to disclose in the OTP that defendants “paid themselves $3.8 million of
Company funds to which they were not entitled . . . harmed Chatham and Twin
River’s stockholders generally by distorting their ability to value their shares and
make informed decisions as to whether they should sell their shares in the Tender
Offer.”??

12. Defendants’ motion to dismiss Count V is GRANTED for two reasons.
First, insofar as Chatham contends that the defendants were obligated to disclose
that “they were not entitled” to the Make- Whole Payments, such a disclosure would
violate the rule against “self-flagellation.”*° Second, the OTP’s omission of any

disclosure concerning the $3.8 million in Make-Whole Payments—even unadorned

 

27 See Compl. 4 55.
8 Id 52.
29 Pls.” Opp’n Br. 48.

30 See Stroud v. Grace, 606 A.2d 75, 84 n.1 (Del. 1992) (“[T]o comport with its fiduciary
duty to disclose all relevant material facts, a board is not required to engage in ‘self-
flagellation’ and draw legal conclusions implicating itself in a breach of fiduciary duty
from surrounding facts and circumstances prior to a formal adjudication of the matter.”);
Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143 (Del. 1997) (“The directors’
duty of disclosure does not oblige them to characterize their conduct in such a way as to
admit wrongdoing.”).
by a characterization of wrongdoing—would not have been financially material to a
reasonable stockholder in deciding whether to participate in the Tender Offer.

13. The OTP incorporates by reference a number of financial documents
posted on Twin River’s investor website, including (i) its financial statements for
the year ended December 31, 2015, and the nine months ended September 30, 2016;
and (ii) an October 20, 2016 lender presentation, which included an estimate of its
results of operation for all of 2016.3! The OTP also states that, on or before
December 12, 2016, the Company would publish on its website (and thus incorporate
into the OTP by reference) its investor presentation for the third quarter of 2016.

14. Given the financial information that was available to the Company’s
stockholders, including the documents described above, the relevant question is
whether the failure to make a disclosure concerning the $3.8 million in Make-Whole
Payments in connection with the Tender Offer would have significantly altered the
“total mix” of information available to stockholders. In the court’s opinion, it would
not have done so.

15. Based on the Tender Offer price of $80 per share and the number of
Twin River shares outstanding (9,831,069) when the Tender Offer commenced,

Twin River’s market capitalization was approximately $786.5 million. According

 

3! Compl. Ex. K, at 15.
32 Td.

10
to the Complaint, Twin River’s market capitalization was approximately $766.5
million as of December 30, 2016, about two weeks after the Tender Offer closed.*
Thus, by either measure, the $3.8 million in Make-Whole Payments equated to less
than 0.5% of Twin River’s market capitalization. Even if one assumed that the $3.8
million in Make-Whole Payments were improper and that Twin River could recover
this full amount—a highly questionable assumption**—disclosure of such a potential
recovery would not have significantly altered the “total mix” of information in my
view.

16. Notably, Chatham does not contest the financial immateriality of $3.8
million relative to Twin River’s market capitalization. Chatham argues instead that
one should compare the $3.8 million in Make-Whole Payments to Twin River’s
working capital, the size of the Tender Offer, or the amount of compensation paid to
Twin River’s directors.*> Chatham provides no authority for making any of these
comparisons, and the court is unpersuaded that any of them makes sense in the
context of the Tender Offer. It is far more logical that a reasonable stockholder
would consider the overall value of the corporation to be the key consideration in

deciding whether the Tender Offer price offered fair value for one’s shares.

 

33 Compl. ¢ 14.

34 One logically would discount a potential recovery of $3.8 million based on, among other
factors, the probability of the recovery and the costs of obtaining any recovery.

35 Pls.’ Suppl. Br. 12.
11
17. Count IX. This is a direct claim against the Director and Officer
Defendants for breaching their fiduciary duties “by making decisions with respect
to the form, size, and price of the Tender Offer to benefit their own personal interests
rather than those of the stockholders generally, and by granting preferential
treatment to one stockholder to the detriment of others.”°° More specifically, the
Complaint alleges that these individuals structured the Tender Offer as a scheme to
force other stockholders who were close to their regulatory limits of ownership to
decrease their holdings in Twin River so that the Company would be able to purchase
shares that some of them had “put” to the Company.*’ The Complaint further alleges
that to make the scheme work, the Company obtained DBR “approval” that Standard
General would not violate its regulatory limit by not tendering.*® This was necessary
because Standard General was in the process of trying to increase its ownership of
the Company—to exceed 30%—and did not want to tender any of its shares.”

18. The Complaint explains that five individuals (Papanier, Taylor, Capp,
Eaton, and Juliano) who were parties to “Put Agreements” executed irrevocable put

requests in October 2016 to sell a total of 124,758 shares back to the Company for

 

36 Compl. ¢ 154.

37 Td. FF 87-91, 154.

38 Id. 4] 66-68.

39 Id. J 62; id. Ex. K, at 7, 16.

12
approximately $9.15 million“? Honoring these puts was problematic, however,
because the Company’s purchase of these shares would decrease the number of its
outstanding shares and concomitantly increase the ownership percentage of the other
stockholders, which could cause some of those stockholders to exceed their
regulatory ownership limits. Thus, as Chatham alleges, one of the purposes of the
Tender Offer was to force “stockholders, like Chatham, that were close to the
regulatory limits to decrease their holdings so the Company could honor the Selling
Defendants’ Puts.’*! Chatham further alleges that it was harmed by the scheme
because it was forced to tender 35,954 shares for $80 per share that it believes were
worth more.”

19. Although the Company ultimately did not purchase any of the shares
that had been put to it in October 2016,*? and although it is far from clear that the
alleged scheme could even work,“ the allegations of the Complaint are sufficient to
support a reasonably conceivable claim for breach of fiduciary duty against the

Director Defendants and Eaton.

 

40 Compl. 4 78.

41 Id. 488.

2 Id. 4156.

3 Td. 96; id. Ex. O.

44 See, e.g., Compl. 4 95 (alleging that defendants realized two days after the Tender Offer
closed that “the Tender Offer had not decreased the ownership of stockholders near a
regulatory limit enough to permit Twin River to settle the Puts”).

13
20. As to the Director Defendants, who “authorized the Tender Offer’s
form, size, price, and launch,’ they each allegedly expected to receive in
connection with the transaction a “personal financial benefit . . . as opposed to a
benefit which devolves upon the corporation or all stockholders generally,”*° which
would subject the transaction to entire fairness review.*’ In the case of Papanier,
Capp, and Taylor, the alleged benefit was the hoped-for opportunity to sell a
substantial number of their shares to the Company: 61,703 shares for Papanier for
$4,535,170; 20,203 shares for Capp for $1,484,920; and 12,000 shares for Taylor
for $858,000."8 In the case of Kim, the alleged benefit was securing an approval that
the hedge fund he managed, Standard General, would not need to tender any of its
shares.

21. As to Eaton, he interacted with the DBR as part of the alleged scheme

to secure approval for Standard General to abstain from the Tender Offer and

 

45 1d 458.
46 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).

47 Paramount Commce’ns Inc. v. QVC Network Inc., 637 A.2d 34, 42 n.9 (Del. 1994)
(“Where actual self-interest is present and affects a majority of the directors approving a
transaction, the court will apply even more exacting scrutiny to determine whether the
transaction is entirely fair to the stockholders.”); Frederick Hsu Living Tr. v. ODN Hldg.
Corp., 2017 WL 1437308, at *26 (Del. Ch. Apr. 14, 2017) (“At the pleading stage, to
change the standard of review from the business judgment rule to entire fairness, the
complaint must allege facts supporting a reasonable inference that there were not enough
sufficiently . . . disinterested individuals who acted in good faith when taking the
challenged actions to comprise a board majority.”).

48 Compl. 78; id. Exs. G, H, J.
14
allegedly hoped to benefit from the scheme by selling 20,568 of his shares to the
Company for $1,511,748.”

22. Count IX fails, however, to plead a reasonably conceivable claim for
breach of fiduciary duty against Carlin because he was not a party to a Put
Agreement and is not alleged to have sought or obtained a personal benefit from the
transaction.

23. For these reasons, defendants’ motion to dismiss Count IX is DENIED

as to the Director Defendants and Eaton but GRANTED as to Carlin.

Chancellor

 

49 Compl. 4 63, 66, 78; id. Ex. I.
15
