Opinion ID: 2763005
Heading Depth: 2
Heading Rank: 2

Heading: The Key Players in the Deal Dynamic

Text: C&J, a Delaware corporation founded in 1997, is an oilfield services provider. The company went public in 2011 and currently has a market capitalization of over $730 million.13 C&J‟s board has seven directors, five of whom are independent. The only management directors are C&J‟s founder, chairman, and CEO, Comstock, and its CFO, Randy McMullen. Nabors, which has a total market capitalization of over $3 billion, is a Bermuda exempt company that also provides oilfield services.14 As noted, Nabors‟ CEO and chairman is Anthony Petrello. Nabors has two primary divisions: a completions and productions services division (“Nabors CPS”) and a drilling and rig services division. None of C&J‟s board members had any prior affiliation with Nabors before beginning discussions about the transaction challenged in this litigation. deal in her response email, nor does she mention the possibility again, at least in the record before us. Without any other evidence, we do not find it plausible that Ma, a General Manager at a private equity firm with a $12 billion portfolio, which owned a 10% equity interest in C&J, would be co-opted by the possibility of a paid consultancy for Ma on this transaction. 12 Reply Br. at 7 (quoting In re Pennaco Energy, Inc., 787 A.2d 691, 705 (Del. Ch. 2001)). 13 C&J Energy Services Current Stock Information, http://phx.corporateir.net/phoenix.zhtml?c=242928&p=irol-IRHome (last visited Dec. 17, 2014). 14 Nabors Fundamentals, http://investor.nabors.com/phoenix.zhtml?c=70888&p=irolfundTrading (last visited Dec. 17, 2014). 7 C. Citi’s Trauber Introduces Nabors’ Petrello and C&J’s Comstock In 2013, C&J‟s board began to explore strategic acquisitions to grow its business, and authorized Comstock to lead the search. By the end of the year, Comstock had identified at least three potential “strategic partners” and made an offer for one company, but no discussions advanced beyond the initial stages.15 In January 2014, Stephen Trauber, Vice Chairman and Global Head of Energy Investment Banking at Citi, approached Comstock with an unsolicited pitch book, suggesting Nabors CPS as a target. Nabors was at that point considering different options for Nabors CPS, including selling it or taking it public.16 Citi had previously worked as a financial advisor to Nabors, and Trauber was a social acquaintance of Petrello‟s.17 Before identifying Nabors CPS as a target, C&J‟s primary financial advisor was Goldman Sachs,18 but when the companies began negotiating, Petrello told Comstock that Nabors‟ board wanted to use Goldman, and suggested that Comstock work with Citi instead.19 Comstock complied, asserting that it was “the right thing to do” because Citi had surfaced the deal for C&J to consider.20 But Comstock testified at his 15 See App. to Opening Br. at 1643 (Comstock Deposition at 18-19). 16 According to Petrello‟s deposition, “every banker in the world was approaching us about ideas to do something.” App. to Opening Br. at 628 (Petrello Deposition at 15). 17 App. to Opening Br. at 633-36 (Petrello Deposition at 35-46). Petrello testified that “prior to 2011,” when he became CEO, Nabors had used Citi “more than any other banker,” but “Trauber never had a lock” on Nabors‟ business, and when Petrello became CEO, he began working with other banks, including Goldman, more than Citi. Id. at 638-39 (Petrello Deposition at 58-62). 18 Goldman helped advise C&J‟s board on three potential acquisition targets in the fall of 2013, and led C&J‟s IPO in 2011. App. to Opening Br. at 1643 (Comstock Deposition at 19). 19 Petrello testified at his deposition that he wanted Nabors to use Goldman because he considered them “best in class” on strategic issues. App. to Opening Br. at 640 (Petrello Deposition at 62). 20 App. to Answering Br. at 718 (Comstock text message to McMullen dated Feb. 28, 2014). 8 deposition that he would have otherwise chosen to work with Goldman because Goldman “really knows [the] business well.”21 Ma further explained that the board did not consider engaging other bankers because Comstock “wanted to keep it confidential and not let [the deal] leak to other banks in the industry,” and the other directors agreed that the deal was “a highly confidential situation” and that “any leak could meaningfully change the economics of the transaction.”22 In May 2014, C&J‟s board asked Citi to provide C&J with financing for the transaction in addition to serving as the financial advisor. The directors recognized the conflict that would result, so they asked Tudor, Pickering, Holt & Co. Securities, Inc. (“Tudor”) for another independent fairness opinion. As mentioned, the plaintiffs argue that Citi‟s Trauber seemed to act more as a banker for the deal than for C&J. Comstock testified during his deposition that he believed Trauber was communicating with Petrello without Comstock‟s authorization: “I felt like Mr. Trauber was giving feedback to Tony [Petrello]. So if I was negotiating with Mr. Trauber, I was negotiating with Tony.”23 Comstock‟s perception of needing to “negotiate” with his own financial advisor gives color to the plaintiffs‟ allegation that the deal process fell short of the ideal. D. Negotiating the Deal Consistent with the plaintiffs‟ depiction of Trauber as a banker for the deal, the transaction process began with a January 2014 meeting between Comstock and 21 App. to Opening Br. at 1647 (Comstock Deposition at 36). 22 App. to Opening Br. at 3167 (Ma Deposition at 16-17). 23 App. to Opening Br. at 1655 (Comstock Deposition at 67-68). 9 McMullen, on behalf of C&J, and Petrello, on behalf of Nabors, with Trauber in an asyet-undefined role.24 After that meeting, Comstock believed that a transaction was worth pursuing: he perceived that Nabors CPS was underutilized by Nabors because the company was focused on its other division, and he thought that Nabors CPS would be a “good fit . . . operationally, culturally, and strategically.”25 Discussions between Comstock and Petrello continued over the next several months. On March 5, C&J‟s senior management met with Petrello and other Nabors executives to analyze the transaction, including the possibility of structuring the deal so that the surviving company would be domiciled outside of the U.S. and thus pay tax at lower rates, through what is now widely called a “corporate inversion.”26 Because Nabors is a Bermuda-based company, C&J could avoid paying U.S. corporate taxes by merging into Nabors and re-domiciling in Bermuda. The tax benefits from structuring the transaction in this way are substantial – Citi estimated the savings as worth $200 million in net present value.27 Both parties agreed that Comstock and C&J‟s management team would manage the combined entity. But for the re-domiciling to be effective for tax purposes, Nabors would need to own a majority of the new company. On April 3, 2014, Comstock 24 Serge Tismen, who worked with Trauber on the team at Citi that advised C&J, testified during his deposition that Citi understood itself as working solely for C&J from the initial discussions between Comstock and Petrello in January. App. to Opening Br. at 658 (Tismen Deposition at 31). C&J‟s board did not formally discuss the terms of the engagement letter with Citi until a board meeting on April 8. See App. to Opening Br. at 1619 (April 8 Meeting Minutes). 25 App. to Opening Br. at 2352 (email chain from Comstock to Petrello, dated Jan. 16, 2014). 26 See Fact Sheet: Treasury Actions to Rein in Corporate Tax Inversions, U.S. DEPT. OF THE TREASURY, Sept. 22, 2014, available at http://www.treasury.gov/press-center/pressreleases/Pages/jl2645.aspx. 27 App. to Opening Br. at 2032-33 (Citi Presentation to C&J Board, June 24, 2014). 10 convened a special board meeting to discuss the potential deal. Comstock had previously discussed acquiring Nabors CPS with some of the directors, but the April 3 meeting appears from the record to be the first time he received formal approval to negotiate.28 C&J‟s board conveyed excitement about the substantial tax benefits that re-domiciling in Bermuda would provide, in addition to the other deal synergies, but also expressed worry about losing control because Nabors would own a majority of the stock in the surviving entity.29 Director Ma testified in her deposition that the board was aware of the importance of a change of control because legal counsel had explained during a board call “what the Revlon rules were.”30 After discussing the tradeoffs between losing control and tax savings, C&J‟s directors unanimously approved a non-binding offer of $2.6 billion, which Comstock delivered in a letter to Petrello dated April 4. E. Pricing the Deal Petrello rejected the April 4 offer, asserting that Nabors CPS was worth a minimum of $3.2 billion. The parties continued to negotiate over price while Comstock and his team conducted due diligence on Nabors CPS. The plaintiffs contend that these negotiations were tainted by Comstock‟s self-interest, because Petrello made overtures 28 See App. to Opening Br. at 2225. 29 The board was advised on tax issues by representatives from Deloitte Tax LLP, which C&J had retained to conduct tax and accounting due diligence on Nabors CPS. 30 App. to Opening Br. at 3169 (Ma Deposition at 24). 11 assuring Comstock that he would receive a lucrative compensation package if the deal was completed.31 After Petrello rejected Comstock‟s offer, Comstock emailed the other directors on April 14 to inform them of his intention to raise C&J‟s offer to $2.75 billion to keep the deal alive. He explained that he believed “[t]he upside potential here is like no other M&A deal we have come across.”32 But he acknowledged concerns from board members about “the slippery slope up on pricing,” and the need to “be very vigilant” in proving “the possibility of . . . results in due diligence.”33 The other board members agreed to raise the offer.34 Accordingly, Comstock sent a second letter to Petrello on April 16, offering $2.75 billion, which represented a multiple of 6.9 over 2014 EBITDA. On April 22, Nabors released its first quarter results for 2014, which were lower than Nabors expected and worse than Comstock or C&J‟s board had anticipated.35 Comstock expressed concern that Nabors CPS was unlikely to generate its forecasted EBITDA for 2014, which would threaten the proposed valuation for the deal.36 At the same time, Comstock questioned the credibility of Nabors‟ financial results, although he 31 For example, the plaintiffs point out that Comstock‟s initial offer letter on April 4 stated that employment agreements would “need to be incorporated into our definitive transaction agreements.” App. to Opening Br. at 1864. Comstock also mentioned in a text message to McMullen on April 11 that Petrello said “he would give us what we wanted as management contracts but he wanted us there.” App. to Answering Br. at 781. 32 App. to Opening Br. at 703 (Comstock email dated April 14, 2014). 33 Id. 34 Comstock testified during his deposition that he did not need the board‟s formal approval to increase the offer, because he had received board approval on April 3 to “negotiate the best deal possible for the shareholders. . . .” But he was “just keeping my board abreast of everything that we were doing.” App to Opening Br. at 1664 (Comstock Deposition at 103-04). 35 App. to Opening Br. at 1660 (Comstock Deposition at 89) (“We were caught completely off guard with [the first quarter performance.]”). 36 App. to Opening Br. at 1660 (Comstock Deposition at 88-89). 12 stated in his deposition that he was reacting to what turned out to be an error in Nabors‟ proprietary accounting system.37 Notwithstanding these negative developments for Nabors, Petrello rejected the $2.75 billion offer on April 23, arguing that the proposal did not reflect the full intrinsic value of Nabors CPS, or the value of the synergies the combination would create.38 According to Nabors Red Lion Ltd.‟s Form S-4 filing with the SEC, C&J‟s board members discussed Petrello‟s demands, but there is no evidence of these discussions in the record before us. Comstock responded to Petrello in a letter dated April 25, noting his fear that Nabors CPS would be unable to achieve the level of EBITDA projected earlier in the month. But rather than reduce the valuation he was using as a basis for price negotiations, Comstock agreed to use more favorable forward-looking projections into 2015 and “stretch” the multiple from 6 to 6.5.39 The April 25 letter set a maximum value for Nabors CPS at $2.9 billion.40 Because there is no evidence that this new offer was approved by the board in advance, there is at least some support for the plaintiffs‟ contention that Comstock at times proceeded on an “ask for forgiveness, rather than permission” basis. But as the defendants hasten to point out, the board gave Comstock broad authority to negotiate, and 37 App. to Opening Br. at 859 (email chain between Comstock and Rice, dated June 13, 2014) (“Costs aren‟t matching up, costs are moved out, etc, etc, just to show improved results. I‟m close to calling it quits on this deal.”). But C&J‟s diligence team ultimately determined that what had seemed to be “creative accounting” was actually miscoded expenses. See App. to Opening Br. at 1673-75 (Comstock Deposition at 141-148). 38 App. to Opening Br. at 1888. 39 App. to Opening Br. at 945 (email chain between Restreppo and Petrello, dated June 19). 40 App. to Opening Br. at 1878. 13 he kept them apprised of major developments, even if he did not seek approval at every stage of the process.41 To wit, on April 29, C&J‟s board met for its regularly scheduled meeting. According to the minutes, Comstock presented an update on the negotiations with Nabors, including Petrello‟s response to the April 23 offer.42 That evening, after the board meeting, Comstock and Petrello agreed to a deal based on a valuation of $2.925 billion for Nabors CPS during a telephone conversation. The plaintiffs accurately contend that Petrello used this conversation to assure Comstock that he and his fellow C&J managers would receive aggressive employment agreements. But the record also reflects that Comstock did not follow up on these overtures to discuss specifics during the negotiation process. The plaintiffs allege that the valuation adjustments made following the announcement of Nabors CPS‟ decline in performance demonstrate that the C&J stockholders got a bad deal. But there is also a colorable basis to believe that Comstock was playing the negotiation game skillfully when he reacted to the downward movement in Nabors CPS‟ performance as he did.43 The record contains evidence that Comstock 41 See, e.g., App. to Opening Br. at 3174 (Ma Deposition at 42-43). 42 The record does not reflect any additional detail beyond that update, including whether or not the board formally approved offering more than $2.75 billion. App. to Opening Br. at 1623. 43 Although the plaintiffs attempt to cast many of Comstock‟s statements in an ominous light, at least a plausible reading of the record suggests that Comstock was aggressively negotiating to create value for C&J‟s stockholders, and that his belief that the deal would be valuable to them was sincere. Comstock could have been using his communications as a “cover” for his true selfinterest in pursuing a deal, but many of his emails and text messages – in which he discusses his often negative perceptions of Nabors; Nabors‟ banker, Goldman; his own bankers, Citi and Tudor; Petrello; and others – read as authentically salty, sent by a sophisticated businessman and 14 attempted to protect C&J stockholders using strategic negotiating tactics; for example, Comstock made clear throughout the process that he was willing to cease negotiations if terms protecting C&J‟s stockholders were not reflected in the final deal.44 He also revealed in internal emails with McMullen and other C&J directors that he thought focusing on Nabors CPS‟ declining performance would be an effective negotiating strategy to keep the price low, and that the deal was worthwhile because of the value he and his management team could bring to the combined entity. 45 In other words, the record can be reasonably read to suggest that Comstock believed in good faith that he should not pile onto Nabors‟ woes, but rather use the evidence of Nabors CPS‟ declining performance to keep the price negotiations at a positive value for C&J while ensuring that, in the end, the company secured an asset whose acquisition he believed would generate valuable benefits for C&J‟s stockholders. We also note that Comstock ultimately lowered C&J‟s offer to $2.86 billion days before closing because C&J‟s “diligence only proved” some of Nabors CPS‟ projected EBITDA.46 the founder of the company, who believed he had found a deal that would grow “his” company and benefit all stockholders. 44 See, e.g., App. to Opening Br. at 2343 (email from Comstock to Ma, dated April 30, 2014, explaining that “If we find on Monday [during a meeting with Nabors] that we can‟t get our needs on governance, we walk”); 2487 (email from Comstock to Citi advisors, dated June 11, stating that “At the end of the day [] to lose all the work we‟ve done, but fair is fair. I can‟t do the deal without these concessions. I‟m even struggling with $2.8b. The shareholder value is at [C&J] not [Nabors CPS]. I have to create more through this deal, not less”); 2489 (earlier email in exchange from Comstock noting that “I think this move is necessary for Fairness Opinion and to meet my and my Board‟s fiduciary duties to our shareholders”). 45 See, e.g., App. to Opening Br. at 703-06. 46 App. to Opening Br. at 2432. 15 Moreover, we note that Comstock continually shared the details of the valuation changes and negotiations with the C&J board,47 which was majority-independent, and which had the final say in approving the deal before it went to a stockholder vote. Although it authorized Comstock to continue negotiations on its behalf in the April 3 meeting, C&J‟s board remained engaged in the process. By way of example, the board met seven times between April 3 and June 24. The truncated record contains several emails from Comstock to the other directors during that time, keeping them apprised of relevant findings from his diligence, including the declining state of Nabors CPS‟ business. Ma confirmed in her affidavit and deposition that the board broadly authorized Comstock to negotiate a deal and he “brief[ed] us all along the way.”48 During the negotiating process, Trauber remarked in an email to Comstock that in his “26 years” of doing “hundreds” of deals, he had “never seen a CEO have to provide their board so much data day-to-day and have to constantly answer emails from the board.”49 Even if the board was not aware of every “blow by blow,”50 the record suggests that the board 47 See, e.g., App. to Opening Br. at 703-706 (email exchange between Comstock and other board members about valuation, dated April 13-14, 2014); 2291 (email Comstock to directors Ma, Roemer, and Friedman, dated April 10, 2014) (“Since you three are the PE professionals on the board, I wanted to get your advice on a few things tonight [for a meeting with Petrello].”). 48 App. to Opening Br. at 3174 (Ma Deposition at 42-43). Ma recalled that “[i]t was never my expectation for [Comstock] to check with us every single step of the way in arriving at an agreed upon price below 3 billion that‟s non-binding where we can go and diligence the business and go after synergies. [Comstock] chose to keep us abreast every step of the way partly because he always keeps the Board involved.” App. to Opening Br. at 3172 (Ma Deposition at 36). 49 App. to Opening Br. at 709 (Trauber email to Comstock dated April 15, 2014). 50 App. to Opening Br. at 3176 (Ma Deposition at 53). 16 was informed about the transaction they would eventually vote to approve, especially the final terms of the deal.51 The board also considered whether to actively shop C&J to potential buyers. Ma testified at her deposition that the board asked Citi whether “other strategic bidders” would be interested in C&J, and the board “considered potential strategic bidders for C&J as part of our ability and certainty in closing the Nabors transaction.”52 She noted that Citi assessed the probability of engagement from other potential buyers as “low.”53 F. The Final Deal Terms After these extensive negotiations, Comstock and Petrello agreed to a valuation for Nabors CPS of $2.86 billion, which was premised on a forecast of Nabors CPS‟ 2015 EBITDA of $445 million54 and an implied multiple of 6.4.55 This price was lower than Petrello‟s initial ask of $3.2 billion, but higher than C&J‟s initial offer of $2.6. 51 For example, Comstock testified at his deposition that he did not inform the board of his decision to change the multiple used to value Nabors CPS. App. to Opening Br. at 1680 (Comstock Deposition at 168). But Ma testified that the board “recognized the multiple that we‟re paying for [Nabors CPS] going into this deal.” App. to Opening Br. at 3177 (Ma Deposition at 55). And Comstock did discuss his plan to offer to use a 6.5 multiple to increase the valuation with directors Ma, Roemer, and Friedman in an email dated April 10, 2014. App. to Opening Br. at 2291. 52 App. to Opening Br. at 3168 (Ma Deposition at 19-20). 53 Id. at 3169 (Ma Deposition at 22). 54 Although the plaintiffs discovered an email purportedly from C&J‟s CFO, McMullen, to Comstock calling $445 million an “upside case,” McMullen asserted in an affidavit that $445 represented “management‟s expected or base case,” not an “upside case.” App. to Opening Br. at 1853 (McMullen Affidavit at 3). McMullen‟s email did not originally contain the phrase “upside case,” but in a version forwarded to Petrello, Comstock added a sentence suggesting that $445 was “an upside case.” Compare App. to Opening Br. at 1856 (original email from McMullen) with 1860 (email forwarded by Comstock). Comstock submitted an affidavit recalling that he had added the sentence as “a negotiating tactic.” App. to Opening Br. at 2553 (Comstock Affidavit at 2). Comstock also explained to the Citi team that his team was comfortable with forecasting EBITDA of $450 million based on their diligence. App. to 17 To consummate the transaction, Nabors would create a new subsidiary, Red Lion, into which it would transfer its CPS business. C&J would then merge with Red Lion. C&J‟s former stockholders would own 47% of the combined entity, and their shares would be converted into Red Lion common stock on a 1:1 basis in a tax-free transaction. Nabors would own the remaining 53%, and receive approximately $938 million in cash.56 The entity would then be renamed C&J Energy Services, Ltd., and be listed under C&J‟s current ticker, CJES, on the New York Stock Exchange. Because New C&J would be a Bermuda corporation, the rights of its stockholders would be governed by Bermuda law, rather than Delaware law. To ensure that C&J‟s stockholders would retain some control over New C&J, C&J‟s board also insisted on several corporate governance protections. Under the merger agreement, C&J stockholders would have the power to designate four board members, including Comstock as the chairman of the board.57 Comstock would become CEO and Opening Br. at 2517. The defendants also point out that because their deal thesis was premised on what “C&J could do with” Nabors CPS, it “benefitted C&J to steer price negotiations away from pro forma value” (i.e., how valuable Nabors was when the synergies with C&J were considered) and focus on stand-alone EBITDA (what it could earn on its own as a going concern). Reply Br. at 15. 55 See App. to Opening Br. at 2023 (Citi valuation analysis presented to C&J board on June 24). Alternatively, the deal reflected a 7.3 multiple of Nabors CPS‟ estimated EBITDA for the second quarter of 2014 through the first quarter of 2015, which was forecast as $390 million. By comparison, Nabors CPS‟ 2014 EBITDA was estimated at $340 million. Both companies considered Nabors CPS‟ first quarter 2014 performance to be anomalous because of weather conditions that did not affect C&J‟s business. 56 The total will be dependent on C&J‟s stock price at the time of closing. 57 Nabors described the selection of Comstock as chair as a mutual decision. See App. to Opening Br. at 633 (Petrello Deposition at 34). The plaintiffs attempted to portray the decision to guarantee board seats to four former C&J directors as a potential conflict, which the Court of Chancery effectively rejected: “The five-year guarantee is a unique status and it raises concern. But it certainly does not call into question the independence of the board or the disinterestedness 18 McMullen would become President and CFO. To ensure that C&J retained a controlling interest in the entity, C&J also negotiated the following requirements: (i) For a period of five years, a two-thirds vote of the stockholders of the combined entity will be required to amend the bye-laws (unless approved by Comstock and at least three directors not nominated by Nabors); sell the company; issue stock; or repurchase more than 15% of the outstanding shares of the company in a given year; (ii) In the event of a sale of the company or major assets, all stockholders will receive consideration of the same type and of the same amount calculated on a per share basis. This bye-law provision cannot be amended without a unanimous stockholder vote; (iii) From the closing date until the earlier of the five year anniversary of the effective date or the date that Nabors owns less than 15% of the combined entity‟s shares (the “standstill” period), Nabors will be prohibited (without a two-thirds board vote) from acquiring additional shares beyond its ownership stake as of closing; soliciting or encouraging any proposal for a business combination; soliciting or becoming a participant in the solicitation of any proxy related to any vote, or agreeing to vote with any person undertaking a “solicitation”; participating in a “group” with respect to securities of the combined entity; granting proxies to any third party (other than as recommended by the board) or entering into any understanding or agreement with respect to the voting of equity securities of the combined entity; seeking additional representation on, or proposing any changes to the size of, the board of directors; (iv) Board members will be nominated by a three-member nominating committee, two of whom will be current C&J directors. The board will be classified with current C&J directors in each class; (v) Without a two-thirds vote of the combined entity‟s board, and during the standstill period, Nabors can only sell its stock to a person or group that is not subject to SEC Rule 13d, i.e., the transferee cannot (i) hold the securities with the “purpose, or with the effect of, changing or influencing the control” or (ii) own more than 20% of of the board, especially since who was going to serve on the new board was not fully determined at the time the merger agreement was entered into.” Bench Opinion at 12. 19 the combined entity. If Nabors chooses to sell more than 10% of the outstanding shares to a person or group, the combined entity will have a right of first refusal. Nabors will be prohibited from selling its stock to certain competitors. If any other company wishes to buy a controlling stake in the combined entity, they will be required to make an offer for the whole company; and (vi) If Nabors violates any of the standstill provisions of the merger agreement, the violation will provide a basis to terminate the employment of certain members of the post-merger management team who are currently affiliated with Nabors.58 C&J also bargained for a no-solicitation clause with a “fiduciary out” to allow C&J to negotiate with third parties under certain circumstances; a “fiduciary out” allowing C&J to terminate the deal in favor of a superior proposal; and a modest $65 million termination fee (2.27% of the deal value). And although Comstock signed a voting support agreement committing his shares to vote for the merger, he would be released from that agreement if the C&J board changed its recommendation in favor of the deal or otherwise exercised its “fiduciary out.”59 C&J‟s board considered the formal terms of the transaction at a special board meeting on June 24. Citi and Tudor both presented valuation analyses and fairness opinions to the board. Both financial advisors found that the transaction would be fair to stockholders, and that it would add value to C&J‟s stock.60 58 App. to Opening Br. at 146-243 (Merger Agreement). 59 See App. to Opening Br. at 372 (Support Agreement Section 1.3: Non-Solicitation); 377 (Section 2.12: Stockholder Capacity). 60 Citi estimated that C&J stockholders would enjoy a 27% increase in EPS in 2015, an 18% increase in 2016, and a 17% increase in 2017. Citi‟s discounted cash flow model predicted a 15% premium. Tudor estimated that the value of C&J‟s stock would increase between $1.09 and $3.17 per share. 20 Following discussions, the board unanimously approved the transaction, subject to the approval of C&J stockholders, with the intention to close before the end of 2014. The deal was publicly announced the following day, on June 25. The stock market reacted positively to the news: shares of both companies‟ stock rose, and analyst coverage largely viewed the transaction as favorable to C&J‟s stockholders.61 G. Comstock’s Compensation Package C&J‟s attorneys advised the current board that it would be “best from a fiduciary perspective to negotiate the deal terms and get those settled and agreed to before introducing the employment agreements.”62 Consistent with this approach, Comstock deferred negotiating about the specifics until late June.63 But as the plaintiffs point out, Petrello had assured Comstock throughout the process that he would be aggressive in protecting Comstock‟s financial interests if a deal was consummated. 61 See, e.g., Tess Stynes, C&J Energy to Merge With Nabors Industries Unit, WALL STREET JOURNAL (June 25, 2014) (“C&J Energy shares soared 20% to $39.50 in after-hours trading, while Nabors shares rose as much as 10% to $30.”); see also C&J Energy’s $2.8B Merger with Nabors Fracking Unit is Win-Win for Both, THESTREET.COM (June 26, 2014), http://www.thestreet.com/_yahoo/video/12758635/cj-energys-28b-merger-with-nabors-frackingunit-is-win-win-for-both.html; Matt DiLallo, Deal Pushes C&J Energy Services Inc. Into the Fracking Top 5, THE MOTLEY FOOL (June 26, 2014), http://www.fool.com/investing/general/2014/06/26/fracking-deal-fuels-cj-energy-services-incinto-th.aspx (“With one deal, C&J Energy Services has transformed from a niche premium completion service provider to an all-around oil-field service provider.”). 62 App. to Opening Br. at 2519 (Comstock email dated June 12, 2014). Comstock stated in an email exchange on June 11 to the Citi advisors that “once agreed on terms [of the merger agreement], we will then share employment agreements. I don‟t want one leveraged against the other and the potential conflict associated with that. We can negotiate those separately once deal terms are set.” App. to Opening Br. at 2489. 63 The Court of Chancery also observed that the employment “agreements were not negotiated until a couple of months after the merger agreement was signed.” Bench Opinion at 6. 21 At approximately the same time that C&J‟s board approved the deal, Comstock asked Petrello to sign a side letter affirming that C&J‟s management would run the surviving entity and endorsing a generous compensation package. Comstock negotiated for: a $1.1 million annual base salary, in addition to a bonus targeted at 200-300% of that amount; a lump-sum $3.3 million “success cash bonus”; and a “success equity bonus” of 500,000 restricted stock units, vested over three years, worth approximately $15.8 million.64 He would also be paid approximately $173 million in severance if his employment was terminated without cause.65 By comparison, Comstock‟s base salary in 2014 is $875,000, with a target bonus range of 100-200%. He also received a grant of restricted stock worth $3.27 million.66 Comstock‟s current severance package is also less generous, in part because it was premised on a lower salary level, but also by its own terms.67 His current compensation package at C&J is thus more modest than what he stands to receive as CEO of New C&J if the deal is consummated. 64 Nabors Red Lion Limited Form S-4, as filed with the Securities and Exchange Commission on December 1, 2014, available at http://www.cjenergy.com/downloads/Nabors_Red_Lion_Limited_-_Form_S-4__Amendment_4.pdf. 65 App. to Opening Br. at 1691 (Comstock Deposition at 210). 66 Comstock‟s base salary in 2013 was $740,000. He also received a bonus of $1,110,000 and 138,033 restricted stock units, worth $3.27 million. See C&J Energy Services, Inc. Definitive Proxy Statement, Schedule 14A, April 10, 2014. 67 For example, under his current severance package, Comstock is only entitled to a prorated percentage of his annual bonus if the date of severance is after June 30; immediate vesting of unvested options and restricted stock; additional severance payments based on his base salary in effect on the date of termination; and a lump sum equal to COBRA premiums for the longer of the remaining term of his employment agreement or one year (not to exceed two years). C&J Energy Services, Inc. Definitive Proxy Statement, Schedule 14A, April 10, 2014. Under the proposed severance package, Comstock will be entitled to his full annual bonus, regardless of when he is terminated; full vesting of his long-term equity compensation with his unexercised stock options exercisable for the full term; severance payments equal to two times the sum of his 22 When Petrello hesitated to sign the letter, objecting to some of Comstock‟s demands, Comstock threatened to “not sign . . . and not announce the transaction.”68 Comstock emailed the other directors to keep them informed of what he characterized as Petrello‟s “last minute gamesmanship.”69 But a few hours later, Petrello agreed to sign the letter with some modifications,70 and the deal was announced as planned.71