TerraForm – Please accept this as a revised demand for access to corporate books and records pursuant to Section 220 of the General Corporation Law of the State of Delaware (the “DGCL”) designed to address the objections contained in the letter, dated December 31, 2015, from Michael G. Bongiorno, Esq. to Steven Siesser, Esq. and Lawrence M. Rolnick, Esq., a copy of which is attached hereto as Exhibit C. Appaloosa LP, a Delaware limited partnership (“ALP”), is the investment adviser to the following funds:
(i) Appaloosa Investment Limited Partnership I, a Delaware limited partnership (“AILP”); and
(ii) Palomino Master Ltd., a British Virgin Islands company (“Palomino” and collectively with AILP, the “Funds”).
As publicly disclosed, the Funds collectively own 7,600,000 shares, or 9.5%, of the outstanding Class A common stock, par value $0.01 per share (the “Common Stock”) of TerraForm Power, Inc. (the “Company”), in the applicable amounts set forth on Schedule A, annexed hereto and made part hereof. Enclosed with this letter as Exhibit A is a true and correct copy of documentary evidence of the Funds’ respective ownership of the Common Stock set forth on Schedule A. Also enclosed as Exhibit B is a Power of Attorney executed by the Funds, which designates ALP as the Funds’ agent for purposes of pursuing this Section 220 demand.
SECTION 220 DEMAND FOR ACCESS TO BOOKS AND RECORDS
Pursuant to Section 220 of the DGCL, on behalf of the Funds, ALP hereby demands that it and its attorneys, representatives and agents be given, during usual business hours, the opportunity to inspect the following books and records of the Company:
1. All minutes of meetings and written consents of the Company’s board of directors (the “Board”) or any committee thereof relating to the Company’s and/or its controlled subsidiaries’ transactions with SunEdison Inc. (“SUNE”) regarding Vivint Solar Inc. (“Vivint”), and any modifications thereto, announced on or after June 1, 2015 (including the take/pay arrangement referred to in paragraph 5 hereof) (the “Subject Transactions”), and all documents or other materials presented to the Board or any committee at such meetings relating to those transactions. This shall include any minutes or written consents related to the financing of the Subject Transactions, including any purported warehouse facilities or the assumption of debt at the acquired companies.
2. All minutes or other records of meetings of the Corporate Governance and Conflicts Committee of the Board (the “Committee”) related to the Subject Transactions, including, all materials provided to any Committee members in connection with any such meetings, all records of any negotiations conducted by or on behalf of the Committee with SUNE in connection with the Subject Transactions, and all opinions or analyses received by the Committee from professionals concerning the fairness of the Subject Transactions to the Company.
3. Fully executed copies of all transaction documents, including any related financings, related to the Subject Transactions, which have not been publicly filed.
4. All records reflecting the analysis, if any, conducted by the Board and/or the Committee related to the Subject Transactions, including, but not limited to, any valuation of the renewable assets constituting Vivint’s rooftop solar portfolio (the “Rooftop Assets”) to be acquired by TerraForm Power, LLC, a controlled subsidiary of the Company (“Terra LLC”).
5. All records reflecting the Board’s and/or the Committee’s consideration, discussion and acceptance of the terms of that certain agreement, dated as of July 20, 2015 and amended as of December 9, 2015, by and among SUNE, SEV Merger Sub Inc., a wholly-owned subsidiary of SUNE, and Terra LLC (the “Interim Agreement”), particularly as it relates to the decision to enter into the take/pay arrangement with SUNE and its subsidiaries for the sale of residential solar systems (the “Solar Residential Systems”), rather than a right of first refusal (“ROFR”) pursuant to standard industry custom and practice.
6. All bids, term sheets, letters of intent or other offers examined by the Board and/or the Committee (as part of its analysis of the Subject Transactions) that were made by third parties for the purchase of assets comparable to the Rooftop Assets or Solar Residential Systems (collectively, the “Asset Bids”).
7. All minutes of meetings of the Board or any committee thereof at which the Asset Bids were discussed and all documents or other materials presented to the Board or any committee thereof (including without limitation, the Committee) at such meetings relating to the Asset Bids.
8. All minutes from the meeting of the Board held on November 20, 2015 and any and all documents or other materials relating thereto, including any correspondence prior to or after such meeting, relating to the changes made to the Board and the Committee.
9. All minutes of meetings and written consents of the Board or any committee thereof relating to the departure of Cleary Gottlieb Steen & Hamilton LLP as counsel to the Committee and its replacement with Greenberg Traurig LLP and all documents or other materials presented to the Board or any committee at such meetings relating to that subject.
10. Complete copies of all of the Company’s current directors’ and officers’ liability (or equivalent) insurance policies, binders, supplements and agreements.
ALP also demands the right to make copies or extracts from the foregoing.
ALP further demands the right to inspect all information referred to in this letter that is within the legal possession, custody or control of the Company, including, but not limited to, such information that is within the possession, custody or control of the Company’s subsidiaries or the Company’s outside legal counsel, accountants, auditors, financial advisors and other agents, representatives and advisors.
ALP demands that all modifications, additions or deletions to any and all information referred to above be immediately furnished to ALP as such modifications, additions or deletions become available to the Company or its agents, representatives or advisors.
All of the foregoing requested items constitute part of the Company’s books and records as set forth in Section 220(b)(1) of the DGCL.
Upon presentment of appropriate documentation therefor, ALP will bear the reasonable costs incurred by the Company, in connection with the production of the information demanded.
TerraForm PURPOSE OF THE DEMAND AND REASONS FOR DOCUMENTS REQUESTED
The purpose of this demand is to enable ALP and the Funds to investigate potential wrongdoing by SUNE and/or the Board in connection with the Subject Transactions and the Interim Agreement. As explained below, this potential wrongdoing consists of breaches of Delaware common and statutory law and breaches of fiduciary duties owed to the Funds and other stockholders of the Company by SUNE, the Board and certain of the Company’s officers arising from these recent business decisions and corporate actions.
SUNE is the Company’s controlling shareholder. By virtue of its ownership of Class B shares, SUNE controls a majority of the Company’s shareholder voting power and has the power to appoint the entire Board of Directors. In addition, the Company has virtually no operating employees of its own, and depends on SUNE to provide the human resources and expertise necessary to run its business. As a controlling shareholder, SUNE owes the Company’s minority shareholders fiduciary duties when it exercises control over the Company’s affairs.
As we understand the Subject Transactions and take/pay arrangement, SUNE has agreed to acquire Vivint in a multi-billion dollar stock and cash deal. In connection with that merger, SUNE is forcing Terra LLC to immediately purchase from SUNE approximately $799 million of Vivint’s residential solar assets, and, per the take/pay arrangement, to commit to purchase 400-450 MW of additional residential solar systems per year over the next five years. SUNE plans to use the proceeds of the immediate sale to Terra LLC to finance part of the consideration it must pay to Vivint stockholders in the merger. Moreover, TerraForm Power Operating, LLC (“TPO”), a Terra LLC subsidiary, has entered into a $795 million unsecured bridge facility to potentially help finance the Company’s obligations to SUNE in connection with the Vivint transaction.
The Subject Transactions constitute self-dealing by SUNE. According to public reports, SUNE has recently experienced a great deal of financial stress and is over-leveraged. It is clear that SUNE wants to acquire Vivint for its own business purposes, but lacks the resources to do so on its own (at least on reasonable terms). Consequently, SUNE used its control over the Company to gain access to the Company’s liquidity and financial resources to assist SUNE in completing the acquisition, at the expense of the interests of the Company and its other shareholders, and in violation of SUNE’s fiduciary duties to those shareholders. In turn, the Board breached its own fiduciary duties to shareholders by approving the Subject Transactions despite the unfairness of their forms and the clear harm they will cause to the Company.
Three undisputed facts support these conclusions. First, the residential solar assets that the Company is being required to buy are inconsistent with the Company’s repeated representations to shareholders concerning its corporate purpose and business objectives. As reaffirmed in its most recent Form 10-Q, the Company’s “business objective is to acquire, operate and own renewable energy generation assets serving utility and commercial customers that generate high-quality contracted cash flows.” Yet, the assets to be acquired from SUNE have weaker counterparties (homeowners) and a higher risk profile, and are the antithesis of assets that serve “utility and commercial customers” and “generate high-quality contracted cash flows.” They do not fit with the Company’s existing assets, and are being acquired at the cost of significantly straining the Company’s liquidity resources and increasing leverage without serving any legitimate business objective of the Company. Moreover, the effective acquisition price of $1.70 per kw/h likely overstates the contracted cash flows being acquired. SUNE thus is trying to have its cake and eat it too: it will keep for itself the Vivint development assets that it covets, while dumping the lower return/less desirable Vivint assets into the Company at an inflated price, thereby plundering the Company of cash and transferring the risks inherent in those assets to the Company’s minority shareholders. The Company has provided no explanation for why it even wants to purchase Vivint’s residential solar assets, leaving investors with the conviction that the Company is doing so only because that is what its controlling shareholder wants it to do. There is no indication the Company would ever have sought to acquire these assets on its own – and certainly not at the price indicated. SUNE’s conduct is thus a consummate example of self-dealing by a controlling shareholder.
Second, even before closing, the Subject Transactions have already harmed the Company. Not only has the Company’s stock price declined substantially, but Moody’s downgraded TPO’s credit rating as a result of the increased leverage it will incur by virtue of the Subject Transactions. This market reaction is not surprising given the Subject Transactions’ clearly unfavorable terms for the Company. The increased leverage and downgraded credit rating will compromise the Company’s ability to acquire assets that would actually enhance shareholder value, further harming the minority.
Third, the take/pay arrangement further demonstrates that the Subject Transactions were not negotiated at arm’s-length. From the Company’s perspective, there is no business justification for a contractual arrangement requiring it to take whatever assets SUNE wants to sell over a five-year period (subject to a cap), as opposed to a traditional right of first refusal/call right on those assets, which is the standard and custom in this industry and which has previously characterized the Company’s relationship with SUNE. Indeed, in explaining its rationale for downgrading TPO’s credit rating, Moody’s noted that the take/pay “obligation under the interim agreement is in contrast to the ‘call rights’ arrangement TPO typically has with SUNE.” Moody’s Investors Service, Rating Action: Moody’s downgrades Terraform Power and Terraform Global to B2 CFR on parent weakness, negative rating outlook, at 1. Adopting an arrangement whereby the Company lacks the option to refuse to purchase inferior assets offered by SUNE benefits only SUNE. It is inherently unfair, is of no conceivable benefit to the Company whatsoever, and again harms the minority. The Board’s responsibility is to maximize value for all of the Company’s shareholders by acquiring high-quality assets consistent with the Company’s corporate purpose and at a reasonable price, not to allow the Company to be used as a dumping ground for inferior assets SUNE does not want. Moreover, the fact that the Company’s obligation terminates upon the paydown of the $300 million senior secured credit facility at SUNE suggests that the sole purpose of the arrangement is to support such facility. The Company and its subsidiaries are effectively providing a financial backstop to SUNE (with all the risks that entails) for which they are not being compensated in any way.
Because SUNE is a controlling shareholder of the Company, stands on both sides of the Subject Transactions, and has a financial interest in those transactions not shared by other shareholders, the Subject Transactions can only be valid if they pass muster under Delaware’s entire fairness standard of review. When that standard is applied, Defendants bear the burden of demonstrating that the transaction at issue was entirely fair to the corporation. The Board’s subjective belief is irrelevant. The transaction itself must be objectively fair, independent of the Board’s beliefs. Entire fairness entails an inquiry into both fair dealing and fair price. “Fair dealing” embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and stockholders were obtained, including whether the company was represented by a special committee of independent directors empowered to negotiate with the controlling stockholder at arm’s-length and whether the transaction was subject to approval by a majority vote of the minority stockholders. “Fair price” relates to the economic and financial considerations of the proposed transaction, including all relevant economic factors. Although the two aspects may be examined separately, the test for fairness is unitary; all aspects of fair dealing and fair price must be examined as a whole to determine whether the transaction is entirely fair. Entire fairness is a much more rigorous test than the business judgment rule.
The objective facts described above give rise to a strong inference that the Subject Transactions are not entirely fair to the Company and are being entered into for SUNE’s sole benefit. The Company is buying inferior assets, at inflated prices, that contradict its stated business objectives, and agreed to an above-market price and unfavorable terms that benefit only SUNE. It is doing so as part of a larger merger transaction that furthers SUNE’s business interests, not the Company’s. And the Company has already begun to suffer the harmful effects in the form of a lower stock price and downgraded credit rating for one of its major subsidiaries. Added to this mix is the fact that there is no indication that any meaningful process checks were implemented to ensure that the interests of the Company’s minority stockholders were adequately protected. No arms’-length negotiations between the Company and SUNE appear to have taken place, and there has been no opportunity for the Company’s minority stockholders to vote on the Subject Transactions. Although a Corporate Governance and Conflicts Committee (the “Committee”) was ostensibly in place to approve related party transactions with SUNE, it appears to have acted as nothing but a rubber stamp here without any mandate from the Board to negotiate hard with SUNE. Moreover, we cannot avoid noting that on November 20, 2015, without explanation and before the revised deal with SUNE was announced, SUNE unilaterally replaced two members of the Committee with three hand-picked successors. In a clear effort to further cement its control over the Company, SUNE stacked the Board in its favor, and also replaced the Company’s CEO and CFO with SUNE officers. These changes, among other things, prompted the former chairman of the Committee (among others) to resign, stating that as a result of the Board’s actions he did not believe he could continue to work to protect the interests of the Company’s stockholders. The Subject Transactions are harmful to the Company, contradict its fundamental business objectives, resulted from an unfair process and are being executed at an unfair price. They are not entirely fair to the Company.
Taken together, the facts recited herein form a credible basis for inferring possible mismanagement and wrongdoing that warrants further investigation and, potentially, litigation. Consequently, this Section 220 Demand is made for a proper purpose under the DGCL.
Furthermore, the documents sought by ALP are essential and sufficient for ALP’s articulated investigatory purpose. Requests 1-5 seek materials that are essential to understanding, among other things, the process by which the Subject Transactions and their related transaction documents were approved, what materials the Board and Committee considered, the Board and Committee’s views of the Subject Transactions, whether the Committee acted independently of SUNE’s influence, the extent to which the interests of the Company’s minority shareholders were considered and protected, and the degree to which any arm’s-length negotiations with SUNE actually occurred. Requests 4 and 6-7 focus on materials the Board considered relating to valuation of the assets the Company is required to purchase from SUNE, which is essential to confirming whether the Subject Transactions are entirely fair to the Company. Requests 8 and 9 seek information concerning the changes made to the Committee and the replacement of the Committee’s outside counsel. Given the suspicious timing of these changes, the materials sought are essential to ascertaining whether these changes were made by, or at the insistence of, SUNE for the purpose of increasing SUNE’s control over the Company and facilitating SUNE’s achievement of a deal that furthered its interests at the expense of those of the Company and the minority shareholders. Finally, Request 10 is necessary to understand the degree to which the Company is insured against possible litigation relating to these matters. None of the materials sought are publicly-available, and the requests are narrowly focused in a manner that will not cause any undue burden on the Company in order to comply. The requested documents are thus well within the scope of a legitimate Section 220 Demand under the DGCL.