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Judge tosses suit over Talos deals using new demand futility test

3 minute read

Signage is seen on the exterior of the Sussex County Court of Chancery in Georgetown, Delaware. REUTERS/Andrew Kelly

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  • Follows Zuckerberg ruling last week creating new test
  • Suit didn't adequately allege most of board couldn't consider a demand impartially

A Delaware state judge has blocked a suit accusing investment firms Apollo Global Management Inc and Riverstone Holdings LLC of using their portfolio company Talos Energy Inc to complete unfair acquisitions.

Vice Chancellor Morgan Zurn said on Thursday that she was dismissing Vrajeshkumar Patel’s suit because the Talos investor didn’t have the right to sue under a new demand futility test announced last week in a Delaware Supreme Court ruling over a Facebook share reclassification.

The Supreme Court decision, called the Zuckerberg ruling, introduces a three-part test where the court must determine whether a director received a personal benefit from a suit's alleged misconduct, faced substantial risk of liability for shareholders’ claims or is dependent on someone who benefited from the alleged misconduct. If the answer is yes for a majority of the board, the suit can continue.

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Zurn’s opinion is the second to apply the Zuckerberg test in the dismissal of a derivative suit.

Attorneys for Patel did not immediately respond to requests for comment on Friday. Neither did attorneys and representatives for Riverstone or Apollo. Talos' attorneys from Latham & Watkins declined to comment.

The investor sued Talos’ board, major shareholders Apollo and Riverstone and underwriter Guggenheim Securities LLC over transactions that occurred after the company merged with Stone Energy Corp in a roughly $2.5 billion deal, according to the June 2020 complaint.

Patel said that after the merger closed in 2018, Apollo and Riverstone treated Talos as “their own personal piggy bank” by causing the company to purchase Whistler Energy II LLC, another energy company owned by Apollo.

The investor claimed that acquisition was completed at an “inflated” price so that Apollo could recoup losses on the “troubled” company. Patel also said that Talos purchased certain assets owned by Riverstone at an “unfair" price.

Both Apollo and Riverstone moved to dismiss the suit, arguing that they weren’t controlling shareholders and therefore did not breach any duty to protect the company’s and shareholders’ interests.

The investor also voluntarily dismissed some of its direct claims.

In Thursday’s ruling, Zurn said that the lawsuit fell short of alleging that Apollo and Riverstone had agreed to save each other from bad investments.

"From there, the rest of the stockholder’s claims unrave1,” Zurn said.

The judge also said that the suit did not adequately allege that a majority of the company’s board would have been incapable of impartially considering the investor’s claims.

The case is Patel v. Duncan, Delaware Court of Chancery, No. 2020-0418.

For Patel: Eduard Korsinsky, Greg Nespole and Daniel Tepper of Levi & Korsinsky

For Talos: David Zensky and Scott Barnard of Akin Gump Strauss Hauer & Feld

For Riverstone: Andrew Clubok, Christian Word and Stephen Barry of Latham & Watkins

For Apollo: Bruce Birenboim and Susanna Buergel of Paul, Weiss, Rifkind, Wharton & Garrison

For Guggenheim: William Chandler III and Andrew Cordo of Wilson Sonsini Goodrich & Rosati; and Mark Kirsch and Randy Mastro of Gibson, Dunn & Crutcher

(UPDATE: This story has been updated to include that Talos' attorneys from Latham & Watkins declined to comment.)

Read more:

Dela. Supreme Court tightens test for demand futility in derivative lawsuits

Offshore U.S. oil firms Talos, Stone Energy plan $2.5 billion merger

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Sierra Jackson reports on legal matters in major mergers and acquisitions, including deal work, litigation and regulatory changes. Reach her at sierra.jackson@thomsonreuters.com

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