On September 27, 2016, Appaloosa Investment Limited Partnership I ("Appaloosa"), TerraForm Power, Inc. ("TF Power"), and certain current and former TF Power executives and board members filed a settlement resolving the derivative lawsuit filed this past January in the Delaware Chancery Court by Appaloosa on behalf of TF Power against SunEdison, Inc. ("SunEdison"), currently a debtor in a Chapter 11 bankruptcy case. Appaloosa's claims arose from alleged self-dealing by SunEdison in connection with an agreement ("Vivint Dropdown Agreement") that SunEdison caused TF Power, its affiliated yieldco, to enter into in December 2015 as part of SunEdison's attempt to acquire Vivint Solar, Inc. ("Vivint").
Under the terms of that agreement, TF Power would have been required to purchase a portfolio of Vivint residential solar assets from SunEdison at the time of the merger and to continue acquiring residential solar assets from SunEdison for five years.
In its initial claim, Appaloosa—one of TF Power's largest stockholders—requested a temporary restraining order and permanent injunction prohibiting TF Power from entering into the arrangement, which Appaloosa claimed had been pushed through improperly by SunEdison, resulting in a substantively unfair agreement for TF Power and its shareholders. While Chancellor Bouchard described the process SunEdison used to secure TF Power's approval of the Vivint Dropdown Agreement as "inherently suspect," he denied Appaloosa's request to enjoin the deal from going through. Ultimately, however, Vivint terminated the merger agreement with SunEdison in March 2016 after four banks reneged on their commitments to finance SunEdison's acquisition, effectively mooting Appaloosa's injunction request.
Nevertheless, Appaloosa twice amended its complaint prior to SunEdison's April 2016 bankruptcy filing. In the First Amended Complaint, Appaloosa added four additional executives and board members as defendants, three of whom were also SunEdison executives and the fourth of whom was a SunEdison investor. Appaloosa alleged that SunEdison and these individual defendants had violated their fiduciary duties as TF Power's controlling stockholder and board members, respectively, by altering the composition of TF Power's board of directors and conflicts committee in order to secure approval of the Vivint Dropdown Agreement. Appaloosa requested a court order requiring that: certain of the individual defendants be removed from the conflicts committee; another be removed as TF Power's CEO; shareholders other than SunEdison choose conflict committee members and a new board member; and a monitor be appointed to scrutinize the board of directors.
Partially in response to this First Amended Complaint, TF Power's CEO resigned. To manage the company's operations, the TF Power board formed an "Office of the Chairman" comprising board members, several of whom were members of the conflicts committee. Appaloosa then filed a Second Amended Complaint, alleging that the individual defendants had breached their fiduciary duties by failing to ensure an independent conflicts committee when they did not relieve the "Office of the Chairman" directors from their service on the conflicts committee. SunEdison filed for bankruptcy the day after Appaloosa filed its Second Amended Complaint.
Under the terms of the Appaloosa settlement agreement, TF Power has agreed to segregate its information technology systems from those of SunEdison (including those used for accounting and human resources) and to adopt corporate governance reforms, including ceding management responsibility for ordinary course commercial operations to the company's chief operating officer for two years (or until SunEdison is no longer a controlling shareholder) and appointing an additional independent director to its board of directors. TF Power has also agreed to pay Appaloosa's legal fees (subject to a maximum amount of $3 million).
The case and its settlement are the latest cautionary tale on the importance of empowering a yieldco to exercise independent judgment when acquiring assets from the yieldco's parent company—and, indeed, on the importance of a yieldco maintaining its independence generally in matters of corporate governance. Ultimately, unless yieldcos build in such protections and ensure procedural fairness on the front end, defeating lawsuits from activist investors will require proving entire fairness on the back end.
As is evident from the settlement of the Appaloosa matter, such lawsuits have the power to force corporate reforms at yieldcos and diminish the sponsor's influence. And, of course, in the case of SunEdison and its yieldcos, that influence looks to be nearing an end, as SunEdison is in the process of selling assets in the hopes of emerging from Chapter 11 and faces a November 17, 2016 deadline to submit its plan of reorganization. TF Power and its sister yieldco, TerraForm Global, Inc. ("TF Global"), two of SunEdison's most valuable assets based on its controlling stock position in each, have begun exploring strategic options, including the possibility that they could operate independently or seek a new sponsor.
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