Case Title: Morris v. Spectra Energy Partners

Citation: 

Docket Number: 489, 2019

State: delaware

Court: Delaware Supreme Court

Date: 2021-01-22T00:00:00Z

Document:
IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
PAUL MORRIS, on behalf of all 
similarly situated unitholders of 
SPECTRA ENERGY PARTNERS, 
L.P., 
 
          Plaintiff Below,  
          Appellant, 
 
v. 
 
SPECTRA ENERGY PARTNERS 
(DE) GP, LP, 
 
          Defendant Below,        
          Appellee. 
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No. 489, 2019 
 
          Court Below – Court of Chancery 
 
of the State of Delaware 
 
          Consolidated 
 
C.A. No. 2019-0097 
 
Submitted: October 28, 2020 
Decided: 
January 22, 2021 
 
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and 
MONTGOMERY-REEVES, Justices, constituting the Court en Banc. 
 
 
Upon appeal from the Court of Chancery.  REVERSED and REMANDED. 
 
Michael J. Barry, Esquire (argued) and Rebecca A. Musarra, Esquire, GRANT & 
EISENHOFFER P.A., Wilmington, Delaware; Peter B. Andrews, Esquire, Craig J. 
Springer, Esquire, and David M. Sborz, Esquire, ANDREWS & SPRINGER LLC, 
Wilmington, Delaware; and Jeremy S. Friedman, Esquire, Spencer Oster, Esquire, 
and David F.E. Tejtel, Esquire, FRIEDMAN OSTER & TEJTEL PLLC, Bedford 
Hills, New York; Attorneys for Plaintiff-Appellant Paul Morris and all similarly 
situated unitholders of Spectra Energy Partners, L.P. 
 
Robert S. Saunders, Esquire, Ronald N. Brown, III, Esquire, Ryan M. Linsay, 
Esquire, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, 
Delaware; Noelle M. Reed, Esquire (argued) and Daniel S. Mayerfeld, Esquire, 
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Houston, Texas; 
Attorneys for Defendant-Appellee Spectra Energy Partners (DE) GP, LP. 
2 
 
SEITZ, Chief Justice: 
 
With limited exceptions, a merger extinguishes an equity owner’s standing 
to pursue a derivative claim against the target entity’s directors or controller.  But 
the same plaintiff has standing to pursue a post-closing suit if they challenge the 
validity of the merger itself as unfair because the controller failed to secure the 
value of a material asset—like derivative claims that pass to the acquirer in the 
merger.  Given the difficulties of pursuing such claims, not the least of which is 
proof that the equity owner received an unfair merger price for their ownership 
interest, the plaintiff might not prevail on the merits, but they have sufficiently 
alleged a direct claim to survive a motion to dismiss for lack of standing.    
After a $3.3 billion “roll up” of minority-held units involving a merger 
between Enbridge, Inc. (“Enbridge”) and Spectra Energy Partners L.P. (“SEP”), 
Paul Morris, a former SEP minority unitholder, lost standing to litigate an alleged 
$661 million derivative suit on behalf of SEP against its general partner, Spectra 
Energy Partners (DE) GP, LP (“SEP GP”).  Morris reprised the derivative claim 
dismissal by filing a new class action complaint that alleged the Enbridge/SEP 
merger exchange ratio was unfair because SEP GP agreed to a merger that did 
not reflect the material value of his derivative claims.   
The Court of Chancery granted SEP GP’s motion to dismiss the new 
complaint for lack of standing.  The court held that, to have standing to bring a 
3 
 
post-merger claim, Morris had to allege a viable and material derivative claim 
that the buyer would not assert and provided no value for in the merger.  Focusing 
on the materiality requirement, the court first discounted the $661 million 
recovery to $112 million to reflect the public unitholders’ beneficial interest in 
the derivative litigation recovery.  Then, the court discounted the $112 million 
further to $28 million to reflect what the court estimated was a one in four chance 
of success in the litigation.  After the discounting, the $28 million—less than 1% 
of the merger consideration—was immaterial to a $3.3 billion merger.   
 
On appeal, Morris argues that the court should not have dismissed the 
plaintiff’s direct claims for lack of standing.  We agree with Morris and find that, 
on a motion to dismiss for lack of standing, he has sufficiently pled a direct claim 
attacking the fairness of the merger itself for SEP GP’s failure to secure value 
for his pending derivative claims.  Thus, we reverse the Court of Chancery’s 
judgment and remand for further proceedings. 
I. 
 
 
The plaintiff, Paul Morris, owned common units of SEP, a master limited 
partnership that traded on the New York Stock Exchange.1  Enbridge owned 83% of 
 
1 We take the facts from the complaint and the Court of Chancery’s decision.  Morris v. Spectra 
Energy Partners (DE) GP, LP, 2019 WL 4751521 (Del. Ch. Sept. 30, 2019). 
4 
 
SEP’s outstanding units through a series of wholly-owned subsidiaries, including 
SEP GP.2  Spectra Energy Corp (“SE Corp”) was Enbridge’s predecessor-in-interest.   
 
Prior to selling to Enbridge, SE Corp agreed to a 50-50 joint venture with 
Phillips 66 whereby Phillips would contribute $1.5 billion and SE Corp would 
contribute a one-third interest in two long haul natural gas pipelines, implying a $1.5 
billion valuation of the contributed assets.  Because SEP owned the assets, the parties 
proposed a “reverse dropdown” to sell the assets from SEP to SE Corp.  To purchase 
the assets from SEP, SE Corp offered to “(i) surrender 20 million SEP limited partner 
units to SEP for redemption . . . and (ii) waive its right to receive up to $4 million in 
incentive distribution rights [] for twelve consecutive quarters . . . .”3  SEP GP 
authorized a conflicts committee to evaluate the reverse dropdown. 
 
SEP’s limited partnership agreement required the general partner’s conflicts 
committee to act in “subjective good faith.”4  According to the complaint’s 
allegations, a financial advisor identified three ways the transaction would provide 
value to SEP: the redeemed units, the waived distribution rights, and other reduced 
cash flow due to the loss of assets.  Later, however, the adviser included only the 
first two components as consideration—valued at $946 million—and issued a 
 
2 Enbridge owned Spectra Energy Partners GP, LLC, which owned SEP GP. 
3 Morris, 2019 WL 4751521, at *3. 
4 Id.  A “good faith” finding requires that “the person acting ‘must believe that the determination 
or other action is in the best interests of the Partnership.’”  Id. (citation omitted). 
5 
 
fairness opinion.  The conflicts committee recommended approval, and SEP GP’s 
board approved the reverse dropdown. 
 
After reviewing SEP’s books and records, the plaintiff filed a class action 
derivative complaint on behalf of all owners of SEP public units against SEP GP and 
SE Corp.  The complaint alleged that SEP only received $946 million in the reverse 
dropdown when SE Corp valued the assets at $1.5 billion.  Morris pleaded three 
derivative claims, including a claim for breach of the limited partnership 
agreement’s “good faith” obligation in approving the reverse dropdown.5  The court 
dismissed two of the claims for failure to state a claim, but declined to dismiss the 
breach of the “good faith” obligation claim.  The court found, after drawing all 
reasonable inferences in Morris’s favor, that the complaint “made adequate 
allegations showing that under reasonably conceivable circumstances a facially 
unreasonable gap in consideration exists sufficient to infer subjective bad faith.”6  
According to the court, “it was ‘reasonably conceivable that the General Partner 
acted in subjective bad faith.’”7  The parties conducted discovery and SEP GP moved 
for summary judgment.  During the litigation, and with the motion summary 
 
5 The plaintiff also pled breach of the implied covenant of good faith and fair dealing against SEP 
GP and tortious interference with the limited partnership agreement against SEP Corp.   
6 Morris, 2019 WL 4751521, at *5 (quoting Morris v. Spectra Energy Partners (DE) GP, LP, 2017 
WL 2774559, at *16 (Del. Ch. June 27, 2017)). 
7 Id.   
6 
 
judgment pending, Enbridge acquired SE Corp in a stock-for-stock merger, 
becoming SEP GP’s ultimate parent and controller of SEP. 
 
In March 2018, SEP’s stock price declined by twenty percent in reaction to 
announcements from the Federal Energy Regulatory Commission (“FERC”).  SEP 
recognized in its filings with the U.S. Securities and Exchange Commission that 
“[t]he change in FERC’s policy has had a negative impact on the MLP sector” and 
that SEP “would attempt to mitigate the impact of the policy change.”8  In May, 
Enbridge offered a stock-for-stock exchange to buyout SEP’s public unitholders.  
SEP’s public unitholders would receive 1.0123 common shares of Enbridge in 
exchange for each publicly held common unit of SEP based on the SEP common 
units’ and Enbridge common shares’ closing price on the NYSE as of May 16, 2018.  
SEP closed at a unit price of $33.10 and Enbridge common shares closed at $32.70.  
According to the plaintiff, this was an opportunistic offer to squeeze out the public 
unitholders due to an artificially depressed trading price.  Another three-member 
SEP GP conflicts committee went to work, two of whom were on the committee that 
reviewed the reverse dropdown transaction.   
 
8 Id. at *6 (alteration in original).  Later, however, and “contrary to initial expectations,” “it did 
not ‘meaningfully limit an MLP’s ability to recover an income tax allowance in its cost of 
service.’”  Id. at *7. (quoting Compl. ¶ 57).  “SEP’s public units realized a corresponding increase 
in market price.”  Id. 
7 
 
 
Morris’s counsel sent a letter to the conflicts committee and told them that the 
derivative claim was worth more than $500 million and must be taken into account 
when negotiating the merger exchange ratio.  Counsel also noted that the proposed 
offer was “woefully inadequate” and “fail[ed] to provide SEP and its public 
unitholders with any value associated with” the derivative claim.9  After Morris’s 
counsel met with the conflicts committee’s legal and financial advisors, the conflicts 
committee ultimately determined that the value of the derivative claim, net of 
defense costs, “was less than $0.”10  The conflicts committee also found the value of 
the reverse dropdown to SEP to be about $1.5 billion after adding back the reduced 
distributions its advisor previously excluded. 
As the parties negotiated the buyout, the conflicts committee decided to give 
no value to the derivative claim but attributed $4 million in saved litigation costs.  
They also agreed to an exchange ratio “whereby Enbridge would acquire all publicly 
held SEP units at an exchange ratio of 1.111 shares of Enbridge stock for each 
publicly held unit of SEP.”11  On August 24, 2018, SEP announced a definitive 
merger agreement with Enbridge and its wholly-owned subsidiaries where Enbridge 
would acquire all publicly held SEP units at an exchange ratio of 1.111 shares of 
Enbridge stock for each publicly held unit of SEP.  The transaction was not subject 
 
9 Id. at *6 (quoting the record). 
10 Id. at *8. 
11 Id. at *9 (citation omitted). 
8 
 
to approval by a majority of the minority unitholders.  The transaction was approved 
on December 13, 2018.  At that time, Enbridge affiliates held about 83% of the 
outstanding units.  About 39% of publicly held units voted in favor of the transaction.  
After the deal closed, the court dismissed the derivative claim by stipulation of the 
parties.12 
 
After another books and records request, Morris filed this class action on 
February 8, 2019 against SEP GP, as SEP’s general partner, for breaching SEP’s 
limited partnership agreement and the implied covenant of good faith and fair 
dealing.  Morris claimed that the conflicts committee and SEP GP’s board of 
directors failed to attribute appropriate value to the pre-merger derivative claim or 
secure any value for the claim.  SEP GP moved to dismiss for lack of standing and 
failure to state a claim. 
 
The Court of Chancery dismissed Morris’s complaint for lack of standing 
without reaching the arguments for failure to state a claim.  The court applied the 
three-part test from its decision in In re Primedia, Inc. Shareholders Litigation.13  
The Primedia test applies to claims challenging a merger because the equity owners 
are not being fairly compensated for the value of material derivative claims.  To 
establish standing the plaintiff must allege a viable derivative claim, that is material 
 
12 The Order dismissing the derivative claim “did not preclude the Plaintiff from prosecuting this 
Action.”  Id. at *9. 
13 67 A.3d 455 (Del. Ch. 2013). 
9 
 
to the overall transaction, and will not be pursued by the buyer and is not reflected 
in the merger consideration.14   
The court found Morris’s derivative claim viable because it had already 
survived a motion to dismiss.15  Also, the parties did not dispute that SEP’s public 
unitholders received no value for the derivative claim, Enbridge did not intend to 
pursue the derivative claims post-merger, and Morris pled damages of $661 million.  
But the court dismissed Morris’s two direct claims.  First, the court discounted the 
$661 potential recovery to $112 million to reflect the public unitholders’ 
proportionate share of the litigation recovery.  And second, the court discounted the 
$112 million further to about $28 million to reflect a one-in-four chance of prevailing 
in the litigation.  Finally, the court compared the $28 million to the $3.3 billion 
merger transaction and found it immaterial.  Thus, the court granted SEP GP’s 
motion to dismiss for lack of standing without reaching SEP GP’s alternative 
argument that Morris failed to state a claim for relief.   
II. 
 
 
On appeal the parties have focused their attention on the Court of Chancery’s 
application of its Primedia decision to assess standing.  To reiterate, under 
Primedia’s three-part test, which applies to claims alleging an unfair merger because 
 
14 Morris, 2019 WL 4751521, at *11. 
15 Id. at *12 (“Primedia asks whether the claim has ‘survived a motion to dismiss.’  The answer 
for the Derivative Claim is in the affirmative.  That is the end of the viability inquiry.”). 
10 
 
the price does not reflect the value of derivative claims, the plaintiff must allege a 
viable derivative claim assessed by a motion to dismiss standard.16  The plaintiff 
must also allege that the derivative claim was material to the overall merger 
transaction, will not be pursued by the buyer, and is not reflected in the merger 
consideration.17   
According to Morris, the Court of Chancery should not have dismissed his 
complaint for lack of standing because he pled in detail a direct claim that satisfied 
the Primedia factors.  The parties and the court agreed that the derivative claim was 
viable because it had survived a motion to dismiss.  They also agreed that Enbridge 
would not assert the claim and provided no value for the claim in the exchange ratio.  
And, as Morris alleged, the $112 million potential recovery was material to the $3.3 
billion transaction.  According to Morris, if the Court of Chancery had accepted his 
well-pleaded factual allegations as true and drawn all reasonable inferences in his 
favor, it would not have discounted the potential value of the claim such that it 
became immaterial to the merger value.   
 
The defendants counter that Morris supposedly did not challenge the fairness 
of the exchange ratio, undermining the claim that SEP GP did not negotiate fair 
 
16 Primedia, 67 A.3d at 477 (“First, the plaintiff must plead an underlying derivative claim that 
has survived a motion to dismiss or otherwise could state a claim on which relief could be 
granted.”). 
17 Id. 
11 
 
consideration for the public unitholders’ SEP units.  For the litigation discount issue, 
the defendants contend that Morris conceded in the Court of Chancery that the 
derivative claim should be discounted for litigation risk.  The defendants also argue 
that discounting for litigation risk is consistent with prior cases.18  And, according to 
the defendants, the “fraud exception to the continuous ownership rule” is the proper 
method to assess the plaintiff’s standing to assert post-merger claims.19   
We review de novo the Court of Chancery’s finding that the plaintiff lacked 
standing to pursue his post-merger claims challenging the fairness of the merger 
consideration for failure to recoup some or all of the value of the derivative claims.20 
A. 
The Court of Chancery dismissed Morris’s complaint for lack of standing.  
Standing “refers to the right of a party to invoke the jurisdiction of a court to enforce 
a claim or redress a grievance.”21  Standing is required to “ensure that the litigation 
before the tribunal is a ‘case or controversy’ that is appropriate for the exercise of 
the court’s judicial powers.”22  It allows Delaware courts, “as a matter of self-
 
18 As they argue, “the legal principle of whether a court should adjust for risk when valuing a 
derivative claim does not turn on the nature and degree of that risk.  It is either appropriate to risk 
adjust or it is not.”  Answering Br. at 32.  And they assert Delaware law supports their position in 
other contexts.  Id. at 32–33 (citing ONTI, Inc. v. Integra Bank, 751 A.2d 904 (Del. Ch. 1999); 
Bomarko, Inc. v. Int’l Telecharge, Inc., 794 A.2d 1161 (Del. Ch. 1999), aff’d, 766 A.2d 437 (Del. 
2000)). 
19 Answering Br. at 35. 
20 El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1256 (Del. 2016). 
21 Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1382 (Del. 1991) (citation omitted). 
22 Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110 (Del. 2003). 
12 
 
restraint,” to “avoid the rendering of advisory opinions at the behest of parties who 
are mere intermeddlers.”23  “[S]tanding is properly a threshold question that the 
Court may not avoid.”24 
The standing inquiry “has assumed special significance in the area of 
corporate law.”25  Classifying a claim as either direct or derivative bears directly on 
standing and is in many ways outcome-determinative in post-merger litigation.26  If 
a plaintiff alleges a direct claim, it means that the equity owner has alleged that they 
have suffered the injury, and will receive the benefit of any recovery.27  Thus, at least 
at the pleading stage, the plaintiff has met the injury-in-fact requirement and 
properly invoked the court’s jurisdiction to redress an injury.   
In contrast, for a derivative action, the equity owner acts in a representative 
capacity on behalf of an entity.  In that representative capacity, the plaintiff steps 
into the shoes of the entity and asserts the injury on its behalf.28  If the equity holder 
has successfully jumped over 8 Del. C. § 327 of the Delaware General Corporation 
 
23 Ala. By-Prods. Corp. v. Cede & Co. on Behalf of Shearson Lehman Bros., Inc., 657 A.2d 254, 
264 (Del. 1995) (quoting Stuart Kingston, 596 A.2d at 1382). 
24 Gerber v. EPE Hldgs. LLC, 2013 WL 209658, at *12 (Del. Ch. Jan. 18, 2013) (“If there is no 
standing, there is no justiciable substantive controversy.”). 
25 Ala. By-Prods., 657 A.2d at 264. 
26 See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004) (“The 
decision whether a suit is direct or derivative may be outcome-determinative.”). 
27 Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999) (“Stockholders may sue on their 
own behalf (and, in appropriate circumstances, as representatives of a class of stockholders) to 
seek relief for direct injuries that are independent of any injury to the corporation.”). 
28 Id. (“A derivative claim is one that is brought by a stockholder, on behalf of the corporation, to 
recover for harms done to the corporation.”). 
13 
 
Law, Court of Chancery Rule 23.1, and our decisional law hurdles, standing exists 
to pursue a derivative claim on behalf of the entity.29  But, under Lewis v. Anderson,30 
the equity owner no longer has standing to pursue derivative claims post-merger 
except in two instances—when the merger itself is the subject to a fraud claim, 
perpetrated to deprive shareholders of their standing to bring or maintain a derivative 
action; and when the merger is essentially a reorganization that does not affect the 
equity owner’s relative ownership in the post-merger enterprise.31 
The Supreme Court and the Court of Chancery are frequently called upon to 
draw the dividing line between direct and derivative claims following a merger.  Our 
recent decision in El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff32 is particularly 
relevant here, as it addressed standing following a merger in the context of a master 
limited partnership.  In El Paso, the plaintiff filed derivative claims on behalf of the 
limited partnership against the general partner claiming that the limited partnership 
substantially overpaid for the assets in a transaction.  While the derivative suits were 
 
29 Ala. By-Prods., 657 A.2d at 264 (“For example, in order to have standing to initiate a shareholder 
derivative suit, a plaintiff must have been a shareholder at the time of the challenged transaction, 
as well as at the commencement of suit.  In addition, this Court has held that a plaintiff must also 
maintain his shareholder status throughout the derivative litigation.”); see also Urdan v. WR 
Capital Partners, LLC, --- A.3d ----, 2020 WL 7223313, at *8 (Del. Dec. 8, 2020) (recognizing 
that a stockholder who is involuntarily forced to sell their stock in a merger maintains the right to 
assert post-merger direct claims as an exception to the continuous ownership rule). 
30 477 A.2d 1040 (Del. 1984). 
31 Feldman v. Cutaia, 951 A.2d 727, 731 & n.20 (Del. 2008) (“It is now well established that a 
plaintiff may avoid dismissal of his derivative claims following a merger in only two distinct 
circumstances:  where the claims asserted are direct, rather than derivative, or where one of the 
exceptions recognized in Lewis v. Anderson applies.”). 
32 152 A.3d 1248 (Del. 2016). 
14 
 
pending, the limited partnership was acquired in a merger.  Although the Court of 
Chancery recognized that a merger typically results in the plaintiff losing standing 
to pursue pending derivative claims, it characterized the plaintiff’s claims as both 
direct and derivative, circumventing the post-merger standing impediment.  The 
court also held that, even if the plaintiff’s claims were purely derivative, they 
survived the merger because dismissal would leave the minority equity owners 
without a remedy for the general partner’s unfair dealing. 
On appeal, this Court reversed.  First, we noted that standing in corporate 
cases is a threshold inquiry because it implicates the exercise of the court’s 
jurisdiction.33  We observed that derivative standing is a “creature of equity” that 
allows a court of equity to hear claims by equity owners “to prevent a complete 
failure of justice on behalf of the corporation.”34  We also viewed standing as a fluid 
concept, that can change as a result of “a myriad of subsequent legal or factual causes 
that occur while the litigation is in progress” such as the loss of the plaintiff’s status 
 
33 El Paso, 152 A.3d at 1256 (“Standing is therefore properly viewed as a threshold issue to ‘ensure 
that the litigation before the tribunal is a “case or controversy” that is appropriate for the exercise 
of the court’s judicial powers.’”) (quoting Dover Historical Soc’y, 838 A.2d at 1110). 
34 Id. (quoting Schoon v. Smith, 953 A.2d 196, 202, 208 (Del. 2008)). 
15 
 
as an equity holder.35  If standing is lost, “the court lacks the power to adjudicate the 
matter, and the action will be dismissed as moot unless an exception applies.”36 
Second, we held that the plaintiff brought his claims as derivative claims, and 
his claims remained derivative claims throughout the litigation.  Even though the 
plaintiff’s derivative claims involved a limited partnership, where most rights are 
governed by agreement rather than fiduciary duties, our Court held that Tooley v. 
Donaldson, Lufkin & Jenrette, Inc.,37 and its two-part test for drawing a line between 
direct and derivative claims, applied.38  Under Tooley, the court must answer two 
questions: “[w]ho suffered the alleged harm—the corporation or the suing 
stockholder individually,” and “who would receive the benefit of the recovery or 
other remedy?”39  In El Paso, we found under Tooley that the limited partnership 
 
35 Id. (quoting Gen. Motors Corp. v. New Castle Cty., 701 A.2d 819, 824 (Del. 1997)).  As we 
recognized in Lewis v. Anderson, with limited exception, “[a] plaintiff who ceases to be a 
shareholder, whether by reason of a merger or for any other reason, loses standing to continue a 
derivative suit.”  477 A.2d at 1049; see also El Paso, 152 A.3d at 1265 (“This rule flows from the 
fact that, following a merger, ‘the derivative claim—originally belonging to the acquired 
corporation—is transferred to and becomes an asset of the acquiring corporation as a matter of 
statutory law.’”) (citation omitted). 
36 El Paso, 152 A.3d at 1256–57. 
37 845 A.2d 1031 (Del. 2004). 
38 El Paso, 152 A.3d at 1260 (“Because Brinckerhoff’s claim sounds in breach of a contractual 
duty owed to the Partnership, we employ the two-pronged Tooley analysis to determine whether 
the claim ‘to enforce the [Partnership’s] own rights must be asserted derivatively’ or is dual in 
nature such that it can proceed directly.”) (alteration in original) (quoting Loral Space & 
Commc’ns, Inc. v. Highland Crusader Offshore Partners, L.P., 977 A.2d 867, 868 (Del. 2009)). 
39 845 A.2d at 1035.  It is worth noting that under Tooley, a claim can—in certain circumstances—
be considered a dual-natured claim, i.e., one that is both direct and derivative.  El Paso, 152 A.3d 
at 1262 (“In unique circumstances, this Court has recognized that some claims can be dual-
natured—that is, both direct and derivative.”). 
16 
 
suffered the harm and would benefit from any recovery.  Thus, the plaintiff’s claims 
were purely derivative, and under Lewis v. Anderson the derivative claims passed to 
the buyer following the merger.  The plaintiff no longer had standing to pursue the 
derivative claims.             
Finally, and directly relevant to this appeal, we recognized in El Paso that, 
even though the plaintiff lost standing to pursue derivative claims post-merger, a 
narrow avenue of relief was still available to the plaintiff—a direct claim challenging 
the validity of the merger when the general partner failed to secure the value of 
material derivative claims in the merger for the minority equity owners:  
Under our law, equity holders confronted by a merger in which 
derivative claims will pass to the buyer have the right to challenge the 
merger itself as a breach of the duties they are owed.  In many cases, it 
might be difficult to allege that the value they are receiving in the 
merger is unfair simply as a result of the failure to consider value 
associated with their derivative suit.  But that reality may also suggest 
that, even according full value to the potential recovery in the derivative 
suit (rarely a guarantee), the plaintiffs still received fair value in the 
merger. . . . The derivative plaintiff’s recourse was to file a money 
damages challenge to the merger and prove that the failure to accord 
value to the limited partnership in the merger was somehow violative 
of his rights.40 
 
In reaching this conclusion, we relied on our decision in Parnes v. Bally 
Entertainment Corp.41  In Parnes, the plaintiff alleged that in negotiations between 
Bally Entertainment Corp. and Hilton Hotels Corp., the CEO’s actions—requiring a 
 
40 El Paso, 152 A.3d at 1251–52. 
41 722 A.2d 1243 (Del. 1999). 
17 
 
bribe of “several substantial cash payments and asset transfers” before consenting to 
a merger—resulted in the stockholders receiving an unfair price.42  After the merger 
closed, the Court of Chancery found the claim derivative and dismissed the 
complaint for lack of standing.  We reversed, finding that the complaint “directly 
challenges the fairness of the process and the price in the Bally/Hilton merger.”43   
We distinguished the direct claim attacking the merger itself from the 
derivative claim in Kramer v. Western Pacific Industries.44  In Kramer, the plaintiff 
alleged “wrongful transactions associated with the merger (such as the award of 
golden parachutes) [that] reduced the amount paid to [the target’s] stockholders,” 
but “did not allege that the merger price was unfair or that the merger was obtained 
through unfair dealing.”45  Our Court held that the complaint stated only a derivative 
claim for mismanagement.46  Although the plaintiff alleged that wrongful 
transactions associated with the merger reduced the amount paid to the target’s 
stockholders, “it did not allege that the merger price was unfair or that the merger 
was obtained through unfair dealing.”47  That “such a claim is asserted in the context 
of a merger does not change its fundamental nature.”48   
 
42 Id. at 1246. 
43 Id. at 1245. 
44 546 A.2d 348 (Del. 1988). 
45 Parnes, 722 A.2d at 1245. 
46 See Kramer, 546 A.2d at 353. 
47 Parnes, 722 A.2d at 1245. 
48 Id. 
18 
 
Thus, in Kramer what the plaintiff failed to plead was a challenge to the 
merger itself rather than attack the side benefits secured by some merger 
participants.  After Parnes, “to state a direct claim with respect to a merger, a 
stockholder must challenge the validity of the merger itself, usually by charging the 
directors with breaches of fiduciary duty resulting in unfair dealing and/or unfair 
price.”49  Finally, in Parnes we separated the standing inquiry from whether the 
complaint states a claim for relief.50  After reversing the court on standing, we also 
reversed the court’s conclusion that the complaint failed to state a claim under Rule 
12(b)(6) because the complaint alleged sufficient facts of unfairness to overcome 
business judgment rule review.51 
B. 
As noted in Parnes, “it is often difficult to determine whether a stockholder is 
challenging the merger itself, or alleged wrongs associated with the merger . . . .”52  
After Parnes, the Court of Chancery was left to fill in the details.  It was not an easy 
assignment.  In Golaine v. Edwards,53 the plaintiff challenged a $20 million payment 
to Kohlberg Kravis Roberts & Co., L.P. (“KKR”) made in connection with a merger 
 
49 Id. 
50 See id. at 1246 (“Although we conclude that the Parnes complaint directly challenges the Bally 
merger, it does not necessarily follow that the complaint adequately states a claim for relief.”). 
51 See id. 1247 (“Using [the pleadings stage] standard, we find that the complaint states a claim 
challenging the fairness of the Bally/Hilton merger and challenging the Bally directors’ approval 
of the merger as having lacked a rational basis.”). 
52 Id. at 1245. 
53 1999 WL 1271882 (Del. Ch. Dec. 21, 1999). 
19 
 
between The Gillette Company and Duracell International, Inc.  KKR’s affiliate, 
KKR Associates, L.P., owned 34% of Duracell’s outstanding common stock. The 
defendants filed a motion to dismiss and claimed that Golaine’s challenge to the $20 
million payment was a derivative rather than direct claim because the plaintiff failed 
to allege that the merger terms were tainted by the $20 million fee.  In granting the 
defendants’ motion to dismiss, the court concluded that the fee did not taint the 
merger negotiation process or the merger terms.  Thus, the transaction was not unfair 
to Duracell’s non-KKR stockholders, and the plaintiff failed to state an individual 
claim.  It also held that the complaint failed to plead facts rebutting the business 
judgment rule’s presumptive applicability to the Duracell board’s decision to award 
KKR the fees or plead facts to support a waste claim.   
In applying Parnes, the court in Golaine focused less on standing and more 
on the merits of a post-merger direct claim, and remarked about how the two 
inquiries overlap at times:  
the derivative-individual distinction as articulated in Parnes is revealed 
as primarily a way of judging whether a plaintiff has stated a claim on 
the merits. . . . Parnes can be straightforwardly read as stating the 
following basic proposition:  a target company stockholder cannot state 
a claim for breach of fiduciary duty in the merger context unless he 
adequately pleads that the merger terms were tainted by unfair dealing.  
If the plaintiff cannot meet that pleading standard, then he has simply 
not stated a claim under Rule 12(b)(6).  This merits focus of Parnes is, 
in my view, a more candid approach that places primary emphasis on 
whether compensable injury to the target stockholders is alleged rather 
than on whether the target stockholder’s complaint has articulated only 
20 
 
a waste or mismanagement claim for which there is likely no proper 
plaintiff on earth.54 
 
In In re Massey Energy Co. Derivative & Class Action Litigation,55 
stockholders of a coal mining corporation filed derivative suits against the board and 
company officers for lack of oversight and to hold them responsible for the financial 
harm from a tragic mine disaster.  While the derivative suits progressed, Massey’s 
board entered into a merger agreement with another mining company.  The plaintiffs 
sought a preliminary injunction to prevent the merger from closing, claiming that 
the Massey Board should have negotiated to have the derivative claims transferred 
into a litigation trust for the benefit of Massey stockholders.  According to the 
plaintiffs, the merger was unfair because it allowed the buyer to acquire Massey 
without paying fair value for the value of the derivative claims.  
While the merger had not yet closed and the court viewed the case through a 
preliminary injunction lens, the court had to grapple with the value of derivative 
claims and the loss of standing to pursue them once the merger closed.56  First, the 
court found the Caremark57 claims against the defendants viable.  Second, and fatal 
 
54 Id. at *7 (footnotes omitted). 
55 2011 WL 2176479 (Del. Ch. May 31, 2011). 
56 In Massey, the plaintiffs sought to enjoin the merger or create a litigation trust pre-closing to 
hold the derivative claims. 
57 In re Caremark Int’l. Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).  Caremark claims govern 
director oversight liability, which require a plaintiff to show that “(a) the directors utterly failed to 
implement any reporting or information system or controls; or (b) having implemented such a 
system or controls, consciously failed to monitor or oversee its operations thus disabling 
themselves from being informed of risks or problems requiring their attention.”  Stone ex rel. 
21 
 
to the plaintiffs’ preliminary injunction claim, the court found that a best-case 
successful recovery of $95 million was immaterial to an $8.5 billion merger.  Thus, 
given the relative immateriality of the derivative claims, the court was not persuaded 
on a preliminary injunction record that the merger would likely be found to be 
economically unfair to the Massey stockholders for failing to capture the value of 
the derivative claims.  Importantly, the court did not couch its ruling on standing 
grounds.  Instead, the court found that the plaintiff had failed to demonstrate a 
likelihood of success on the merits to earn a preliminary injunction enjoining the 
merger. 
After Golaine and Massey, the Court of Chancery in Primedia gathered the 
strands of these and other post-Parnes cases and knitted them together into a three-
part test.  In Primedia, the plaintiffs filed a derivative action on Primedia Inc.’s 
behalf and alleged that KKR traded on inside information in a 2002 preferred stock 
purchase.  They sought disgorgement of KKR’s profits under Brophy v. Cities 
Service Co.58  While they litigated the derivative case, Primedia, Inc. merged with a 
 
AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006) (emphasis in original).  “Because of 
the difficulties in proving bad faith director action, a Caremark claim is ‘possibly the most difficult 
theory in corporation law upon which a plaintiff might hope to win a judgment.’”  City of 
Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017) (quoting In re Caremark, 
698 A.2d at 967). 
58 70 A.2d 5 (Del. Ch. 1949).  Brophy and its progeny recognize a cause of action for a plaintiff to 
recover for misuse of confidential corporate information, which requires a plaintiff to demonstrate 
that “1) the corporate fiduciary possessed material, nonpublic company information; and 2) the 
corporate fiduciary used that information improperly by making trades because she was motivated, 
in whole or in part, by the substance of that information.”  In re Oracle Corp. Deriv. Litig., 867 
22 
 
private equity entity.  The plaintiffs then filed a class action suit and alleged that the 
merger terms were unfair because the Primedia directors failed to obtain any value 
for the Brophy claim.  They also argued that the merger conferred a special benefit 
on KKR because KKR knew any acquirer was unlikely to pursue the Brophy claim 
post-merger.  The special benefit, according to the plaintiffs, required court review 
of the merger under entire fairness.    
Recognizing that the post-merger class action complaint required application 
of the Parnes decision, on a motion to dismiss the Court of Chancery read Parnes to 
require first an inquiry into standing, and second, an evaluation of the merits of the 
claims.59  Drawing from the court’s Golaine and Massey decisions, the court distilled 
the standing inquiry into a three-part test:  
A plaintiff claiming standing to challenge a merger directly under 
Parnes because of a board’s alleged failure to obtain value for an 
underlying derivative claim must meet a three part test.  First, the 
plaintiff must plead an underlying derivative claim that has survived a 
 
A.2d 904, 934 (Del. Ch. 2004), aff’d, 872 A.2d 960 (Del. 2005) (TABLE); see also Kahn v. 
Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831, 840 (Del. 2011) (“Brophy focused on the public 
policy of preventing unjust enrichment based on the misuse of confidential corporate 
information.”). 
59 Primedia, 67 A.3d at 477 (“As I understand the framework established by Parnes, a plaintiff 
wishing to assert such a claim must first establish standing to sue.  If standing exists, then the 
plaintiff must still plead a viable claim.”); see also In re Straight Path Commc’ns Inc. Consol. 
S’holder Litig., 2018 WL 3120804, at *14 (Del. Ch. June 25, 2018) (“Having held that the 
Plaintiffs have standing to sue under Parnes, I next consider whether the Complaint states viable 
claims for breach of fiduciary duty.”), aff’d sub nom. IDT Corp. v. JDS1, LLC, 206 A.3d 260 (Del. 
2019) (TABLE); In re Ply Gem Indus., Inc. S’holders Litig., 2001 WL 755133, at *6 (Del. Ch. 
June 26, 2001) (“Thus, by putting fairly before the Court the contention that [the plaintiffs] are 
challenging the fairness of the merger price or the merger process, Plaintiffs can survive the 
derivative-individual obstacle yet still fail to assert a claim that would allow them to move beyond 
a Rule 12(b)(6) confrontation.”). 
23 
 
motion to dismiss or otherwise could state a claim on which relief could 
be granted.  Second, the value of the derivative claim must be material 
in the context of the merger.  Third, the complaint challenging the 
merger must support a pleadings-stage inference that the acquirer 
would not assert the underlying derivative claim and did not provide 
value for it.60 
 
The Court of Chancery found the Brophy derivative claim viable because it 
would survive a motion to dismiss.  For the materiality requirement, the court found 
potential recoverable damages of $190 million plus substantial prejudgment interest, 
which was material when compared to the $330 million merger.  The court also 
noted that the amounts were material even if discounted to reflect the minority 
stockholders’ beneficial interest in the litigation recovery.  Primedia’s minority 
stockholders owned 42% of its outstanding stock.  Their pro rata share of the merger 
consideration was $133 million.  Their pro rata share of a $190 million recovery on 
the Brophy claim would be $80 million.   
In a parting comment illustrating the materiality of the derivative claims, the 
court risk-adjusted the potential recovery and found it material in relation to the 
proceeds the minority would receive in the merger: 
Clearly there is risk in the litigation, and to succeed, plaintiffs will have 
to prove materiality and scienter.  These challenges, however, are not 
similar to those that led Chancellor Strine in Massey Energy to discount 
so heavily the value of the derivative claims.  If I assume prevailing on 
the Brophy claim was a toss-up, or even a 1–in–5 proposition, the risk-
adjusted, pre-interest recoveries for the minority of $40 million and $16 
 
60 Primedia, 67 A.3d at 477. 
24 
 
million, respectively, remain material when compared to their $133 
million share of the proceeds from the Merger.61 
 
After finding that the derivative claims were viable and material, the court 
also found that the acquirer would not assert the Brophy claim post-merger and 
provided no value for it in the merger consideration.  Turning to whether the 
plaintiffs stated a claim for relief, the court held that it was reasonably conceivable 
that KKR received a special benefit in the merger because no acquirer likely would 
have pursued the Brophy claim post-merger, and the defendants did not extract value 
for or take steps to preserve the Brophy claim.  Thus, the entire fairness standard of 
review applied to the merger, and the plaintiffs alleged sufficient grounds that the 
merger was not entirely fair.62   
C. 
In this appeal the procedural issues do not warrant lengthy discussion.  After 
a review of the record, we are satisfied that Morris preserved for appeal a challenge 
to the fairness of the merger itself, and SEP GP disputed how the court should 
consider litigation risk when assessing materiality.  Morris alleged that former public 
unitholders were harmed because “SEP GP has allowed Enbridge to engineer the 
Roll-Up Transaction on terms that were patently unfair and unreasonable to SEP and 
 
61 Id. at 483 (emphasis in original). 
62 The Court of Chancery has since followed Primedia in the context of post-merger challenges.  
See In re Riverstone Nat’l, Inc. S’holder Litig., 2016 WL 4045411, at *8 (Del. Ch. July 28, 
2016); Houseman v. Sagerman, 2014 WL 1600724, at *10–13 (Del. Ch. Apr. 16, 2014).  
25 
 
its public unitholders, and that could not have been approved in good faith by the 
New Conflicts Committee or the SEP GP Board.”63  Specifically, Morris pled that 
“the New Conflicts Committee and the SEP GP Board utterly failed to attempt to (i) 
appropriately value the Derivative Claim, or (ii) secure any value for the Derivative 
Claim in its negotiations concerning the Roll-Up Transaction.”64  SEP GP also 
argued that Morris’s chance of prevailing on the derivative claims was a “toss-up” 
or a “one-in-five” chance, essentially copying the odds from the Primedia decision.65  
Thus, the parties preserved their appellate arguments about materiality.       
The main issue on appeal is whether the Court of Chancery stayed true to the 
standard of review on a motion to dismiss for lack of standing.  In other words, did 
the court accept as true all reasonable factual allegations in the complaint and 
consider whether it was reasonably conceivable that Morris asserted a direct claim 
that could lead to a $661 million recovery on the derivative claims?  After our review 
of the complaint, we find that the court strayed from the proper standard of review, 
and Morris had standing to pursue his post-merger complaint.   
 
63 App. to Opening Br. at A077 (Compl. ¶ 105). 
64 Id. 
65 See id. at A0122 (Defendant Spectra Energy Partners (DE) GP, LP’s Opening Br. in Support of 
its Mot. to Dismiss the Verified Class Action Compl. at 31 n.12) (“For instance, if the derivative 
claim were considered a toss-up, a theoretical $47 million recovery (without interest) would 
represent just 1.4% of the $3.3 billion merger consideration.  If instead the claim had a one-in-five 
shot, the potential recovery of $19 million (without interest) for the unaffiliated unitholders would 
be just 0.57% of the total merger value.”). 
26 
 
As discussed earlier, to have standing, the plaintiff must plead a direct claim.  
Under Parnes, to plead a direct claim, the plaintiff must allege that the merger itself 
was unfair, “by charging the directors with breaches of fiduciary duty resulting in 
unfair dealing and/or unfair price.”66  When the court is faced with a post-merger 
claim challenging the fairness of a merger based on the defendant’s failure to secure 
value for derivative claims, we think that the Primedia framework provides a 
reasonable basis to conduct a pleadings-based analysis to evaluate standing on a 
motion to dismiss.   
First, the court must decide whether the underlying derivative claims were 
viable, meaning they would survive a motion to dismiss.  Meritless derivative claims 
would have no impact on the merger price.  Second, the derivative claim recovery 
as pled must be material in relation to the merger consideration.  An immaterial 
derivative claim would have little or no impact on the merger price.  For example, a 
$10 million derivative claim could not reasonably be expected to be material to a $1 
billion merger value.  The same derivative claim would be material to a $20 million 
merger.  And finally, the court should also assess whether the complaint alleges that 
 
66 Parnes, 722 A.2d at 1245. 
27 
 
the acquirer would not assert the underlying derivative claim and did not provide 
value for it.67   
When assessing standing at the motion to dismiss stage of the proceedings, 
the court must accept the plaintiff’s factual allegations as true and draw all 
reasonable inferences in his favor.  This does not mean that the court is bound by 
unreasonable, unsupported, or speculative derivative suit damages claims.  But if it 
is reasonably conceivable that the plaintiff could recover the damages claimed in the 
complaint, the court must accept that allegation as true for purposes of the motion to 
dismiss for lack of standing.    
Here, the parties do not dispute the viability of the derivative claim.  Morris’s 
derivative claim survived a motion to dismiss.  The parties also did not dispute that 
SEP GP secured no value for the derivative claim, and Enbridge would not assert 
the claim post-merger.  Regarding materiality, Morris alleged that his derivative 
claim could lead to a more than $660 million damages award, including prejudgment 
interest, which was material when compared to a $3.3 billion merger.68  The court 
could reasonably infer that if Morris prevailed on his challenge to the reverse 
dropdown transaction, Morris could recover at least $660 million.   
 
67 Primedia, 67 A.3d at 483.  The rationale for this prong is that “[w]ithout such allegations and 
the resulting inferences, the merger consideration logically would incorporate value for the 
litigation, and the merger would not have harmed the sell-side stockholders.”  Id. 
68 App. to Opening Br. at A0023 (Compl. ¶ 1 & n.3) (describing the derivative claim that survived 
the motion to dismiss as “potentially worth more than $660 million to SEP (and more than $110 
million to SEP’s public unitholders)”). 
28 
 
The court, however, discounted the potential $660 million recovery to $112 
million to reflect the minority unitholders’ 17% beneficial interest in the derivative 
litigation recovery.  The Court of Chancery then reduced the $112 million further to 
account for litigation risk because it was still “a litigable question whether Reduced 
GP Cash Flow represented value to the Partnership in the Reverse Dropdown, which 
would vindicate the Defendant’s approval of the transaction objectively.”69  The 
court also held that even if SEP GP’s valuation was incorrect, it would not breach 
the limited partnership agreement because Morris would still have to prove “the 
work of the Defendant’s advisor, Simmons, on the Reverse Dropdown did not fit in 
the parameters of Section 7.10(b) of the Second A&R LPA.”70  The court observed 
that Morris would have to demonstrate that “SEP GP did not ‘reasonably believe’ 
that the valuation of the transaction was within Simmons’ competence, negating any 
‘safe harbor’ for the Defendant.”71  Finally, Morris would also “have to demonstrate 
the Defendant’s subjective bad faith to recover damages on behalf of SEP . . . .”72  
Taking these difficulties into account, the court concluded: 
I find that the chance of success of the Derivative Claim was slim, and 
certainly less than one-in-four.  Twenty-five percent of $112,370,000 
is $28,092,500.  This represents less than one percent of the total value 
of the Roll-Up.  One percent is not material in the context of the Roll-
 
69 Morris, 2019 WL 4751521, at *13. 
70 Id. 
71 Id. 
72 Id. at *14. 
29 
 
Up.  The Plaintiff consequently does not have standing to pursue his 
claims.73 
 
We see two errors in the court’s materiality analysis at the motion to dismiss 
stage of the proceedings.  First, as discussed earlier, the court must accept Morris’s 
factual allegations as true and draw all reasonable inferences in his favor.74  In its 
prior decision the court found that Morris’s complaint “made adequate allegations 
showing that under reasonably conceivable circumstances a facially unreasonable 
gap in consideration exists sufficient to infer subjective bad faith.”75  Thus, “it was 
‘reasonably conceivable that the General Partner acted in subjective bad faith.’”76  It 
was also reasonably conceivable that, had Morris succeeded in the derivative suit 
challenging the reverse drop down transaction, the recovery could have been at least 
$660 million.  Applying a further litigation risk discount at the pleading stage was 
inconsistent with the court’s standard of review on a motion to dismiss for lack of 
standing. 
Second, even if it was proper to discount the $660 million in damages alleged 
in the complaint to reflect the public unitholders’ interest in the derivative recovery, 
 
73 Id. (footnotes omitted). 
74 See Parnes, 722 A.2d at 1247 (finding that, after taking all pleaded facts as true and drawing 
reasonable inferences in the plaintiff’s favor, the plaintiff’s claim was direct and withstood 
dismissal); Primedia, 67 A.3d at 479 (“Assuming these allegations are true, as I must at this 
procedural stage, . . . .”). 
75 Morris, 2019 WL 4751521, at *5 (quoting Morris v. Spectra Energy Partners (DE) GP, LP, 
2017 WL 2774559, *16 (Del. Ch. June 27, 2017)). 
76 Id.   
30 
 
to maintain equivalence, the court should have compared the $112 million pro rata 
interest in the derivative claim recovery to the public unitholders’ proportional 
interest in the merger consideration.  The public unitholders had a 17% interest in 
SEP.  The merger consideration was valued at $3.3 billion.  An apples-to-apples 
comparison would have compared $112 million to $561 million.77  Under this 
calculation, the derivative claim was material at the motion to dismiss stage. 
Neither Massey nor Primedia require a different result.  As discussed earlier, 
in Massey the plaintiffs alleged in their complaint Caremark damages equal to the 
damages that the company suffered from the mining disaster—estimated to be $900 
million to $1.4 billion.  Even though the plaintiffs pled a viable Caremark claim, the 
court refused to equate the value of the Caremark claim with the damages suffered 
from the mine explosion.  Unlike here, where Morris is entitled to certain 
presumptions in his favor, the court made its assessment as part of a preliminary 
injunction motion, where likelihood of success is one of the requirements.  The court 
properly took into consideration the substantive difficulties confronting the plaintiff 
in proving and collecting on their Caremark claims.  On an extensive record before 
the court, it predicted that the best-case recovery was $95 million, based not on the 
 
77 See Primedia, 67 A.3d at 482–83 (after finding the $190 million Brophy claim material to the 
$316 million merger, the court also discounted the Brophy claim’s recovery to $80 million to 
reflect the stockholders’ beneficial interest in the litigation recovery and compared it to the 
stockholders’ $133 million pro rata share of the merger consideration).  
31 
 
full damages caused the company by the mine disaster but on the policy limits for 
directors’ and officers’ insurance coverage.  The plaintiff did not show a likelihood 
that it would succeed on its challenge to the fairness of the merger for failing to 
secure value for a $95 million derivative claim recovery as part of a $8.5 billion 
merger.78  Importantly, the court did not apply a percentage reduction based on 
litigation risk.  Instead, on a substantial record, the court gave the plaintiffs the 
benefit of their realistic, best-case recovery.            
Primedia is also distinguishable.  The court in Primedia found that the 
plaintiffs’ Brophy claim was material and did not face the same impediments to 
recovery as the plaintiffs faced in Massey.  It was only after the court found that the 
plaintiffs had a strong and material derivative case that the court concluded its 
analysis with what can be best characterized as confirmation of its materiality 
conclusion.  The court stated that even if the Brophy claim “was a toss-up, or even a 
1–in–5 proposition, the risk-adjusted, pre-interest recoveries for the minority of $40 
million and $16 million, respectively, remain material when compared to their $133 
million share of the proceeds from the Merger.”79  As we interpret the court’s 
percentage risk adjustment, it served only as a hypothetical to illustrate the strength 
and materiality of the plaintiffs’ claims even if there were obstacles to recovery. 
 
78 In re Massey Energy Co., 2011 WL 2176479, at *28–29. 
79 Primedia, 67 A.3d at 483. 
32 
 
In any event, on a motion to dismiss for lack of standing, we are not addressing 
the likelihood of success on a preliminary injunction record.  A percentage-based 
risk reduction should not be applied at this stage of the proceedings.  If the plaintiff 
has alleged a viable derivative claim, where it is reasonably conceivable that the 
claim is material when compared to the merger consideration and could result in the 
damages pled in the complaint, the plaintiff has satisfied the materiality requirement 
at the motion to dismiss stage for standing purposes.  Morris has met this standard 
and his claims should not be dismissed for lack of standing.               
III. 
 
Standing is concerned “only with the question of who is entitled to mount a 
legal challenge and not with the merits of the subject matter in controversy.”80  If the 
court finds that the plaintiff has standing, on the defendant’s motion the court should 
also consider a motion to dismiss for failure to state a claim.  For the first time on 
appeal, SEP GP has asked us to consider its motion to dismiss for failure to state a 
claim.  Because the record is complex and it is not clear what has been incorporated 
by reference, we think that the Court of Chancery should consider the motion first.  
It also might be a better use of the court’s scarce resources to consider a motion for 
summary judgment, after the completion of discovery, rather than a motion to 
 
80 Dover Historical Soc’y, 838 A.2d at 1110 (emphasis in original) (quoting Stuart Kingston, 596 
A.2d at 1382). 
33 
 
dismiss.  But we leave it to the Court of Chancery’s discretion.  We reverse the Court 
of Chancery’s judgment and remand for further proceedings.  Jurisdiction is not 
retained.