In Re Pennaco Energy, Inc.

OPINION

Shareholder plaintiffs seek a preliminary injunction against the February 5, 2001 closing of a tender offer by an acquisition subsidiary of Marathon Oil (“Marathon”) for all the shares of Pennaco Energy, Inc. (“Pennaco”). The tender offer price is $19 per share and Marathon intends to consummate a back-end merger at the same price to cash-out any shares it does not acquire. The offer price is at a substantial premium to Pennaco’s pre-offer trading price.

The plaintiffs contend that the Pennaco directors did not undertake efforts that were reasonably calculated to secure the best value. Because the Pennaco board did not actively shop the company and relied solely on a post-agreement market check, the plaintiffs assert that the directors’ efforts were so deficient as to justify the entry of an injunction. The plaintiffs couple this argument with an attack on the directors’ motives. In particular, the plaintiffs claim that Pennaco’s two top-ranking officers, who are on the Pen-naco board, loaded themselves up with severance benefits and options in contempla *693 tion of a sale. These officers, plaintiffs contend, were motivated to secure less than the best price and diverted an unfair portion of the sale price to themselves.

Finally, the plaintiffs contend that the Pennaco directors have not disclosed all the material facts bearing on the decision facing the Pennaco stockholders. In particular, the plaintiffs argue that the Penna-co directors have not disclosed material information regarding the value of Penna-co that was generated by a director who is the company’s Chief Financial Officer (“CFO”). This information was contained in documents that were not produced in discovery until after the CFO had testified in his deposition in a manner that appeared to be contradicted by those late-emerging documents. If reliable, the information in the documents bears materially on the value of Pennaco.

In this opinion, I deny plaintiffs’ request for a preliminary injunction. To address the problematic evidentiary record that existed as of oral argument, the court suggested that the CFO be deposed again. He was, and his deposition testimony, coupled with the circumstances which gave rise to his creation of the documents plaintiffs seek to have disclosed, persuades me that the documents do not contain material information that should have been disclosed. Rather, the documents seem to be mere bargaining devices, which lack sufficient reliability and factual support to warrant disclosure.

Likewise, the court finds that the plaintiffs’ other claims will not support injunc-tive relief. Given the deference that must be afforded directors in deciding how to sell a corporation, the court cannot conclude that the Pennaco board failed to undertake reasonable efforts to get the best available price. Although the board negotiated with a single bidder, it bargained hard and made sure that the transaction was subject to a post-agreement market check unobstructed by onerous deal protection measures that would impede a topping bid.

Nor am I convinced that the directors were likely motivated by the desire for employment-related benefits rather than their desire to receive the best price. Pennaco’s two top executives owned a substantial amount of equity and the changes to their employment agreements challenged by the plaintiffs had a rational business purpose.

I. Factual Background

Pennaco And Its Directors

Pennaco is a Delaware corporation with its principal executive offices in Denver, Colorado. Pennaco was formed in early 1998 to explore for and produce natural “methane” gas from coal beds in the Powder River Basin in Wyoming.

The Pennaco board is comprised of five members, each of whom has been named as a defendant in this action:

• Paul M. Rady joined the company in July 1998 as Chief Executive Officer (“CEO”) and President, and assumed the additional title of Chairman of the Board in September 1999. Rady has spent his career in oil and gas exploration, and was CEO of Barrett Resources Corporation, an oil and gas exploration company, immediately before joining Pennaco.

• Glen C. Warren, Jr. came on board at Pennaco with Rady as CFO and Executive Vice President in July 1998. Before joining Pennaco, Warren was an investment banker with Lehman Brothers. At the inception of his career, Warren spent six years in the oil and gas business.

• Gregory V. Gibson is Pennaco’s Vice President for Legal Affairs and Secretary. Although he serves as an of *694 ficer of Pennaco, Gibson is a California-based attorney with the firm of Gibson, Haglund & Paulsen. Gibson specializes in securities law and has experience serving as counsel to other corporations.

• David W. Lanza has major managerial and equity positions in several diverse businesses. Among his activities has been the development of oil and gas properties in the Southwestern United States.

• Kurt M. Petersen is a partner in the natural resources department of Davis, Graham & Stubbs, a Denver law firm. Petersen has extensive experience in legal matters relevant to the acquisition and sale of energy-producing properties. Davis, Graham provides legal services to Pennaco, and billed the company over $286,000 in 1999.

Pennaco Gets Off To A Good Start

During its first year of existence, Penna-co’s business concentrated on those tasks necessary to begin producing natural gas, and acquired hundreds of thousands of acres from which natural gas could be extracted. To facilitate its ability to produce natural gas from the properties it believed would yield good results, Pennaco also sought out a strategic relationship with a more established energy company.

To that end, Pennaco had discussions about entering into a strategic partnership with twenty to thirty other companies, including Marathon. On October 28, 1998, Pennaco consummated such a partnership with CMS OH & Gas Co (“CMS”). The partnership involved the sale to CMS of a 50% working interest in nearly 500,000 acres in an “Area of Mutual Interest” (“AMI”) in the Powder River Basin. The sale price yielded Pennaco a hefty profit on its costs to purchase the acreage, thereby allowing the company to develop its other acreage in the Powder River Basin at a productive clip. The partnership also gave Pennaco access to CMS’s pipeline infrastructure, which facilitated extraction from the AMI properties.

Pennaco Receives Feelers About A Sale

Pennaco’s ability to identify and acquire the production rights on attractive energy-producing properties was soon noticed by other industry players. Thus, in the first half of 2000, the company received feelers about whether it was willing to be acquired. Rather than resisting any overtures, Rady and his management team were willing to provide information and discuss an acquisition with any reputable company in the industry. Rady also made it a practice to inform the board about these inquiries.

Interestingly, although they draw different inferences from this fact, both the plaintiffs and the defendants agree that there was significant industry interest in Pennaco in 2000, that Pennaco was covered by several industry analysts, and that Pennaco was the subject of takeover rumors.

The April 2000 Annual Meeting

At the 2000 annual meeting of the company, the directors proposed that Pennaco be reincorporated into Delaware to “enhance [Pennaco’s] ability to consider all appropriate courses of action with respect to significant transactions for the benefit of all stockholders.” 1 The stockholders agreed.

In addition, the Pennaco stockholders assented to the issuance of 1,000,000 additional options under the company’s stock option plan. The company’s stockholders were told that the 269,272 shares remaining under the option plan were insufficient to fully serve the company’s long-term *695 compensation needs in the year 2000 and beyond.

The Pennaco Board Issues Options And Amends Certain Employment Agreements At Its July 28, 2000 Board Meeting

On July 28, 2000, the Pennaco board met. At that meeting, the board’s compensation committee - comprised of directors Petersen and Lanza - met to consider management’s recommendations regarding the issuance and allocation of new options. The committee agreed to management’s recommendations and the full board thereafter granted a substantial number of the newly authorized options at an exercise price of $12 per share. Each of the defendant directors received options in the following amounts: Rady, 140,000; Warren, 100,000; Gibson, 50,000; Petersen, 40,000; and Lanza, 40,-000. Over 400,000 options were issued to employees who were not directors. 2 These option grants increased the directors’ total holdings 3 of Pennaco shares as follows:

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It is important to note that it was already the case that any options issued to Pennaco employees and directors would vest in the event of a change in control. That is, in a change of control, all issued options could be exercised by the optionee at the strike price.

The Pennaco Board Begins To Amend The Employment Agreement Of Key Executives

At its July 28, 2000 board meeting, the Pennaco board also amended the employment contracts of certain top Pennaco executives and began a discussion of changing Rady’s and Warren’s contracts.

The board’s actions on July 28, 2000 manifest concerns that Rady had begun to address earlier in the year. In January 2000, Rady met with representatives of the consulting firm Arthur Andersen to discuss the possibility of improving the compensation arrangements between Pennaco and its top executives. Some time lapsed, however, before Rady reinitiated contact with Arthur Andersen in early July.

Two primary issues occupied Rady’s discussions with Arthur Andersen. One, both Warren and Rady had employment agree *696 ments that provided them with non-discretionary bonuses tied to the company’s cash flow. Rady was concerned that this arrangement might not be the optimal way to align his and Warren’s interests with those of the equity holders.

Two, since the time they joined Pennaco, Rady and Warren had agreements that provided them with the right to severance payments of $3 million and $1.5 million respectively in the event of change of control (“Change In Control Severance”). The Change In Control Severance, however, was not tied to any provision that would prevent them from competing with Pennaco. This raised two subsidiary issues. The first is that any acquiror of Pennaco would have no protection from competition from Rady and Warren, as well as other key Pennaco executives. This could be of concern to an acquiror because Rady had left his previous employer, Barrett Resources, and immediately began to compete with it in the Powder River Basin.

The second and much larger concern was the potentially very large tax benefits that would arise from tying severance in a change of control to a non-competition agreement. Absent a non-compete, the Change In Control Severance owed to Rady and Warren might be subject to adverse tax treatment. Rady and Warren could be subject to a substantial excise tax on top of the normal federal income tax that would apply to the Change In Control Severance. For its part, Pennaco could lose the right to deduct the Severance as a compensation expense.

If the Change In Control Severance was tied to a non-compete that provided real value to Pennaco, Pennaco was advised that the risk of such adverse tax treatment would be minimized. The other way that it could protect employees was to provide so-called “gross up” protection that would obligate Pennaco to bear any excise tax imposed on the Change In Control Severance.

As of the July 28, 2000 board meeting, Rady had reinitiated contact with Arthur Andersen, but the meeting occurred before Arthur Andersen had begun serious work on Rady’s and Warren’s contract.

At the board meeting, the directors discussed Rady’s and Warren’s contracts, but did not act on them. Upon management’s recommendation, however, the compensation committee did authorize the company to enter into employment contracts with three top Pennaco executives, Terry Dob-kins, Brian Kuhn, and director Gibson. Each of these agreements had two key severance elements: (1) “Termination Severance” that would be made to the employee if the employee were terminated without cause and no change of control occurred; this element was not subject to a non-compete agreement; and (2) Change In Control Severance that bound the employee not to compete for two years in the Powder River Basin. The Change of Control Severance was in each case substantially higher than the Termination Severance.

Rady And Warren Meet With Arthur Andersen To Discuss Their Own Employment Contracts

On August 3, 2000, Rady and Warren met with Arthur Andersen to discuss their own employment agreements. As of that time, Rady and Warren had packages with the following core elements: (1) salary; (2) stock options, all of which would vest upon a change in control; (3) a non-discretionary annual bonus tied to cash flow; (4) Termination Severance; and (4) Change In Control Severance not tied to a non-compete.

At the meeting, the participants discussed many of the issues highlighted above, including the possibility that the *697 current agreements subjected Rady, Warren, and Pennaco to adverse tax consequences in the event of a change in control. The participants focussed on the use of non-competes as a way to reduce this risk.

At a later September 7, 2000 meeting, Arthur Andersen was asked to calculate the potential implications of adverse tax treatment on a potential acquiror and departing executives in the event of a change in control.

Marathon Contacts Pennaco

The very next day-September 8, 2000-Marathon contacted Rady. Douglas Brooks, manager of Business Development for Marathon’s Rocky Mountain Region, called Rady to ask if Pennaco would be interested in exploring a business combination with Marathon.

As was his consistent approach to such overtures from industry players, Rady welcomed discussions with Marathon. He promptly sent Marathon a Pennaco financial presentation and a package of other materials Pennaco used with the investment community. Rady heard nothing further from Marathon until early November.

In the same time period, Rady also received an expression of interest from Alberta Energy Company. Rady and Warren met with Alberta and provided Alberta with Pennaco’s “pitch” book, but Alberta never expressed any serious intent to proceed with acquisition discussions.

Rady, Warren, And Arthur Andersen Meet Again

On October 11, 2000, Arthur Andersen again met with Rady and Warren. At that meeting, Arthur Andersen advised Rady and Warren that it was likely that the acceleration of vesting on their options at a change in control would expose them to the excise tax and Pennaco to loss of de-ductibility. Similarly, Arthur Andersen believed that the Change In Control Severance would receive similarly negative treatment. Arthur Andersen advised that non-competes could be used to ameliorate this risk and that Arthur Andersen should perform valuations of non-compete agreements in order to shape new employment agreements for Rady and Warren.

Pennaco And CMS Amend Their Joint Venture Agreement

On November 8 or 9, 2000, Rady secured an important amendment to the company’s agreement with CMS. The amendment eliminated a provision of the agreement that required that if either of the parties experienced a change in control, the other party would have the right to take over the operations in the AMI. Without this amendment, it would be difficult, if not impossible, to sell Pennaco at a favorable price.

The amendment was also important to CMS, which was in the midst of planning an initial public offering (“IPO”) scheduled for early 2001. Without an amendment to the joint venture agreement, Pennaco’s take-over rights would dampen investors’ interest and impair the IPO price.

Marathon Comes Around Again

On November 8, 2000, Rady heard fimn Marathon again. This time the inquiry came from a much higher-placed Marathon executive: its President, Clarence Cazalot. Cazalot asked Rady whether he would be open to discussing an acquisition of Penna-co by Marathon.

Rady said yes and agreed to meet with Cazalot two days later in Houston. Rady promptly advised the other Pennaco directors of these events. On November 10, 2000, Rady and Warren met with Cazalot and other Marathon executives in Houston. The parties agreed to explore a combination and to begin due diligence on a *698 fast track. Upon his return to Denver, Rady brought the other directors up to date.

Pennaco Enters Into A Confidentiality Agreement With Marathon And Amends Rady’s And Warren’s Employment Agreements - On The Same Day

On November 15, 2000, two important events occurred. First, Pennaco executed a final confidentiality agreement, which was accepted by Marathon the next day. This opened the way for due diligence to begin November 16. As a price of obtaining access to information, Marathon acceded to a stand-still that prevented it from making a hostile overture for Pennaco for two years.

The second key event occurred at a Pen-naco board meeting, which focussed on the executive compensation issues that Arthur Andersen had been examining. Arthur Andersen representatives were present at the initial portion of the meeting and reported to the board on the tax implications of the company’s current agreements with its executives and the ramifications of changing the structure of these agreements.

After Arthur Andersen was excused, the full board had a discussion, followed by a compensation committee meeting. At that meeting, the compensation committee agreed to management’s recommendations for changes. These changes involved, among other things: (1) the provision of gross-up protection to eleven Pennaco officers and directors, including all the directors; (2) the consummation of non-compete agreements between Pennaco and five of its executives, including Rady, Warren, and Gibson; (8) the retention of Arthur Andersen to provide opinion letters supporting favorable tax treatment of non-compete agreements between Pennaco and its executives; (4) the extension of one year of health benefits to certain executives upon a change in control for five Pennaco executives, including Rady, Warren, and Gibson.

The change most relevant to this case, however, was to Rady’s and Warren’s own employment agreements. The board authorized that the Change In Control Severance Rady and Warren would receive would be increased substantially in exchange for a non-compete agreement. Warren recommended the levels of these increases, which were apparently accepted by the compensation committee without resistance. A comparison of their then-existing contracts with the board’s decision on November 15 follows:

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As shown, while Rady and Warren gave up their non-discretionary bonuses in years after 2000, they did not waive their right to their bonuses for year 2000 and in fact received those bonuses later in the year.

All of the employment changes approved were voted upon by the full board, despite the fact that the changes affected Rady, Warren, and Gibson in clearly material ways and that all the directors received gross-up protection.

At the end of the meeting, Rady brought the board up to speed on where things stood with Marathon, and the fact that the company had also received feelers from Alberta.

What The Pennaco Board Did Not Do

Although Pennaco was not prohibited by its confidentiality agreement with Marathon from exploring if other parties were interested in purchasing the company, neither Pennaco’s board nor its management did anything to canvass the market. Nor did Pennaco retain an investment banker for this purpose. Instead, the directors focussed solely on Marathon.

Management, however, did begin to identify investment bankers for possible retention in connection with Marathon’s interest or an alternative transaction that might arise. Among the firms that management contacted were Lehman Brothers, Credit Suisse First Boston (“CSFB”), and Bear Stearns.

Pennaco received pitch books from Lehman and CSFB, both of which were distributed to the board. 4 The Lehman pitch book emphasized that Pennaco’s ability to get the best price in a sale would largely turn on the certainty potential buyers had about Pennaco’s future production potential. To that end, Lehman recommended, among other things, that Pennaco procure a “Third-party audited year-end reserve report” to display the company’s natural gas reserves as credibly and accurately as possible. 5 Lehman also outlined the pro’s and con’s of selling the company through a process focussing on one or a small group of selected buyers at one time as opposed to a broader canvass, and identified several potential buyers.

CSFB provided Pennaco with various preliminary valuation analyses, including an NAV indicating a range of value for Pennaco between $17.88 and $20.81 per share, using Pennaco’s June 30, 2000 Reserve Report (the “June 30 Reserve Re *700 port”). 6 Like Lehman, CSFB stressed the importance of the company’s production potential as a driver of value and outlined the advantages and risks of various approaches to selling the company.

Marathon Makes Its First Bid

After three weeks of due diligence involving regular communications with Pen-naco executives, Marathon made its first specific offer. On December 7, 2000, Ca-zalot offered to purchase all of Pennaco’s shares at $17 per share.

The Pennaco board met the next day and decided that the offer was inadequate. After considering the advisability of pursuing a sale in view of the potential gains and risks associated with continuing to operate Pennaco as a stand-alone, the board decided, however, to continue discussions with Marathon because a sale at the right price could be the company’s best strategy. The board authorized Rady to reject the $17 offer and to seek a price “north of $20 a share.” 7 Management was also authorized to retain outside counsel and a financial advisor.

On December 9, 2000, Rady told Cazalot that his offer was insufficient and tried to convince Cazalot to raise his bid. In support of that effort, Warren sent a key Marathon executive an e-mail the next day containing arguments justifying a higher value for Pennaco (the “Warren E-Mail”).

The Warren E-Mail first tried to convince Marathon that Pennaeo’s oh reserves were more extensive than were indicated by Pennaco’s most recent reserve report, which was the internal June 30 Reserve Report. Without burdening the reader with an explanation of the nuances involved, it is critical to note that gas companies like Pennaco are valued principally on their ability to produce natural gas. Thus, purchasers such as Marathon will look to the so-called “reserves” of a target company as an important part of their pricing decisions. For purposes of this opinion, it is sufficient for the reader to understand that the market places the highest value on “proven” reserves, less value on “probable” reserves, even less value on “possible” reserves, and the lowest value on unevaluated land whose reserve potential is not known. 8

As of June 30, 2000, Pennaco’s proven oil reserves were estimated at 195 billion cubic feet of natural gas, and its combined probable/possible reserves were possibly as high as 875 billion cubic feet of natural gas, for a total of 1.070 trillion cubic feet. Pennaco also owned 273,000 acres that had not been evaluated.

In his E-Mail, Warren attempted to convince Marathon that Pennaco’s reserve numbers as of that time exceeded the publicly disclosed June 30, 2000 estimates. In particular, Warren stated:

We would expect our year-end proved to exceed the 195 Bcf mid-year number. ...

We are in the process of engineering ... additional probable reserves and would fully expect our total proved, probable and possible reserves to then exceed 1.5 Tcf based on our current acreage position.... 9

At the same time as he was trying to convince Marathon that Pennaco’s reserves were higher than on June 30, 2000, Warren also tried to convince Marathon that Pennaco was worth more than $20 a share based on the June 30 Reserve Re *701 port. To that end, Warren presented a net asset valuation (the “Warren NAV”) using the June 30 Reserve Report. That valuation placed a value of $200 an acre on Pennaco’s unevaluated acreage, a per acre figure that Warren identified as “conservative.” The Warren NAV produced a per share valuation range of $21.23 to $24.93 a share.

Pennaco And Marathon Agree In Principle To A Deal At $19 A Share

On December 14, 2000, Cazalot increased Marathon’s offer to $19 a share. Rady took this offer to his board the same day. The board instructed Rady to see if there was “any more room above the $19 a share.” 10

At the same meeting, the board authorized the retention of Lehman Brothers as the company’s investment banker. 11 The Lehman team was to be led by Gregory Pipkin, an extremely well-qualified investment banker who leads Lehman’s energy practice. Pipkin also happened to be a personal friend of Rady’s and Warren’s. Lehman was to receive a fee for issuing its fairness opinion, as well as a percentage of transaction value. The percentage Lehman was to receive was lower for the $19 deal with Marathon than it would have been for a higher value transaction with another party. Nonetheless, the lower percentage provided Lehman with $3 million for a deal at the $19 level then on the table.

The next day, Rady contacted Cazalot and tried to get Marathon to go to $20 a share, or at least to $19.50. Cazalot refused, stating that $19 was Marathon’s “absolute, final best, top offer” and that they could “not go even a penny above $19 a share.” 12 Rady then relented and agreed to recommend that price to his board.

Pennaco held a board meeting that day. Lehman was authorized to begin work on a fairness opinion as a prelude to any formal board action on the $19 price. The board also discussed with outside counsel its fiduciary duties and issues relating to the opportunities for a post-agreement “market check.”

Lehman Issues Its Fairness Opinion And An Agreement With Marathon Is Finalized

On December 22, 2000, the Pennaco board met to hear an oral presentation from Lehman regarding its fairness opinion. Lehman’s presentation to the board displayed several different ways of valuing Pennaco’s equity, including trading price, comparable companies, comparable acquisitions, and NAV calculations.

The Lehman analysis showed that the Marathon offer looked quite attractive in comparison to Pennaco’s historical trading price:

*702 Date Price Offer Price Premium / /Discount! 13

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This analysis was more significant because Pennaco had typically traded in the top quartile of gas companies. The comparable companies and acquisition analyses also tended to confirm the fairness of the $19 offer.

Lehman’s NAV was based on three different “base cases” ranging from a very conservative case to a less conservative one. The Lehman NAV was based on the June 30 Reserve Report. In preparing its fairness analysis, Lehman had requested updated reserve information, 14 but had been told that no reliable updated information existed. 15 It is undisputed that Lehman was never shown the Warren E-Mail or the Warren NAV.

The Lehman NAVs most aggressive case produced a range of value of $15.14 to $18.89 a share. That is, Lehman’s most aggressive case produced a high value lower than the lowest value in the Warren NAV. These differences are accounted for by, among other things, Lehman’s use of more conservative assumptions of the value of different asset categories. For example, Lehman valued the unevaluated land at $100-$150 an acre, a value less than Pennaco’s recent purchase prices and a value less than the $200 figure used in the Warren E-Mail.

At the end of its presentation, Lehman issued its oral opinion that $19 a share was a fair price. The Pennaco board then voted to formally approve a sale at that price as fair and in the best interest of Pennaco’s stockholders.

Pennaco Negotiates For Minimal Deal Protections So As To Ensure That There Will Be A Post-Agreement Market Check

As of December 22, 2000, Pennaco had done nothing to see whether other buyers might exist. But Pennaco did negotiate for itself a relatively non-restrictive no-shop clause in the merger agreement. That clause permitted Pennaco to talk and provide information to any party that could reasonably be expected to make a superior offer that could be consummated without undue delay.

Furthermore, Pennaco had resisted Marathon’s request for a termination fee equal to 5% of the value placed on Penna-co’s equity in the transaction, and had settled on a termination fee at the more traditional level of 3%. 16 The merger *703 agreement was otherwise devoid of impediments to a higher bid.

As another assurance that a post-agreement market check would exist, Pennaco obtained an agreement that Marathon would not commence its tender offer until the second week of January, 2001. This breathing room was designed to give potential bidders time to examine the transaction, get over any holiday reveries, and make a competing bid.

At the close of business December 22, 2000, Pennaco announced the transaction by press release. Pipkin of Lehman Brothers got edgy at the time of the release and made phone calls to a list of industry players who he believed might be inclined to make a topping bid. Pipkin did so without Pennaco’s knowledge and in arguable violation of the no-shop clause.

On December 27, 2000, Pennaco filed a form 8-K with the merger agreement and December 22, 2000 press release as exhibits. These documents gave the marketplace knowledge of Pennaco’s ability to speak with rival bidders and the standard nature of the termination fee.

Marathon Commences Its Offer And Pennaco Files Its Schedule HD-9

On January 8, 2001, Marathon formally commenced its tender offer. The same day Pennaco filed its Schedule 14D-9 (the “14D-9”) recommending that Pennaco’s stockholders tender into the offer. The 14D-9 contained a list of the reasons the Pennaco board supported the transaction that were written in the typically oblique style of such documents, but which boiled down to the board’s belief that $19 was an extremely favorable price at which to sell the company.

The next day, lawsuits challenging the transaction were filed in this court. The parties agreed that the matter should be heard on an expedited basis. A February 1 hearing date was set and expedited discovery ensued.

In advance of the hearing, Pennaco supplemented the 14D-9 with additional disclosures that provide a detailed explanation of the various valuation analyses underlying Lehman’s fairness opinion. The supplement did not, however, disclose the Warren NAY or the Warren E-Mail.

II. An Overview Of The Plaintiffs’ Claims

The plaintiffs take aim at several aspects of the transaction. As an initial matter, they point out that the Pennaco directors are recommending the sale of the company for cash. In this context, the Pennaco directors therefore undertook the duty to obtain the highest value reasonably obtainable for Pennaco’s shares, and bear the burden under the Revlon standard 17 to demonstrate that they acted in a manner reasonably calculated to accomplish that end.

The plaintiffs contend that the Pennaco directors’ decision to focus exclusively on Marathon and not to seek out other bidders was not a reasonable one. This failure, plaintiffs assert, cannot be cured by a post-market check occurring in the midst of holiday distractions - especially a market check hampered by the termination fee.

Furthermore, the plaintiffs argue that the Pennaco board was a cozy one dominated by defendants Rady and Warren, who had interests adverse to those of the other Pennaco stockholders. According to the plaintiffs, Rady and Warren intention *704 ally dressed the company up for sale while stocking their own larders with options and enhanced severance packages. These emoluments gave Rady and Warren an incentive to lock in a deal that could be closed at less than the best price, because it was to their unique benefit to secure a solid price that would accelerate their options and guarantee them immediate severance benefits over five times more lucrative than their total compensation for the year 2000. If they pushed Marathon too hard for a good price, they could endanger their lucrative severance packages. Better for Rady and Warren, plaintiffs suggest, to lock in a good deal and their severance, than to risk their severance by seeking the best deal available. In addition, the plaintiffs also insinuate that the substantial increase in severance to Rady and Warren materially reduced the consideration a potential acquiror would pay for Pennaco’s shares.

The plaintiffs also contend that the transaction should be preliminarily enjoined because the 14D-9 fails to set forth certain material facts. In particular, the plaintiffs contend that the 14D-9 is deficient because it fails to disclose the Warren E-Mail’s statements regarding Penna-co’s reserves and land value, and the Warren NAV.

III. Legal Analysis

A. The Relevant Procedural Standard

To obtain a preliminary injunction, the plaintiffs must demonstrate: (1) a reasonable probability of success on the merits; (2) that they will suffer irreparable injury if an injunction does not issue; and (3) that the harm the plaintiffs will suffer absent an injunction outweighs the harm to the defendants that will result from the injunction. 18 A preliminary injunction is a powerful remedy that must be earned, 19 and this court is cautious about using that remedy where it might endanger or delay stockholders’ receipt of a control premium in a situation where no competing bid has emerged. 20

B. Have The Plaintiffs Demonstrated A Probability Of Success On The Merits?

Have The Plaintiffs Shown That It Is Likely That The Pennaco Board Of Directors Failed To Carry Out Their Fiduciary Duty To Secure The Transaction Offering T-he Best Value Reasonably Available?

The Marathon Transaction is a transaction that, if consummated, will result in the sale of all of Pennaco’s stock from its current stockholders to Marathon in exchange for cash. Thus, it is an end-game transaction that represents the final opportunity for Pennaco’s stockholders to realize value from their investment in the company-

12] Because the Pennaco directors undertook a strategy that involved the sale of the company, they concomitantly focused their own fiduciary duties in a legally and *705 practically consequential manner. Having decided to sell the enterprise, the directors became charged with the fiduciary responsibility to attempt to get the best price. As our Supreme Court has put it:

In the sale of control context, the directors must focus on one primary objective-to secure the transaction offering the best value reasonably available for the stockholders-and they must exercise their fiduciary duties to further that end. 21

The sale of control context also invokes a specific form of enhanced judicial review that involves two “key features”:

(a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision; and

(b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably. 22

In applying this standard, the court must be mindful that its task is to examine whether the directors have undertaken reasonable efforts to fulfill their obligation to secure the best available price, and not to determine whether the directors have performed flawlessly:

Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board’s actions, a court should not ignore the complexity of the directors’ task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board’s determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors’ decision was, on balance, within a range of reasonableness. 23

For several reasons, I conclude that the plaintiffs do not have a reasonable probability of ultimate success on their so-called Revlon claim. While one would not commend the Pennaco board’s actions as a business school model of value maximization, the process the directors used to sell the company cannot be characterized as unreasonable.

The board’s actions must be evaluated in the context of Pennaco’s market posture. Even the plaintiffs concede that Pennaco was a source of industry interest. The company was followed by reputable analysts. The company communicated with the market in a bullish manner, and freely communicated with interested parties. The company had done an extensive search for a joint venture partner in 1998, which brought it to the attention of twenty to thirty industry players. Not only that, the company had reincorporated in Delaware to facilitate its participation in the mergers and acquisitions market.

*706 As important, the Pennaco board’s knowledge of the company has not been seriously challenged. The board is comprised of members with relevant expertise and experience in the energy business, and who had grown a start-up energy business impressively in a short period of time. There is no basis to believe that the board itself did not have a sound basis to evaluate the price at which a sale of the company would be advantageous.

In these circumstances, the court cannot say that it was unreasonable for the Pen-naco board to deal with Marathon on an exclusive basis. Marathon was a major industry player with great financial clout. As all of the investment banks seeking Pennaco’s business pointed out, there is no risk-free approach to selling a company, and dealing with one bidder at a time has its own advantages. Thus, the mere fact that the Pennaco board decided to focus on negotiating a favorable price with Marathon and not to seek out other bidders is not one that alone supports a breach of fiduciary duty claim. 24

Nor does the record support the inference that the Pennaco board’s negotiating strategy was unreasonable and perfunctory. To the contrary, the record suggests that Rady and Warren bargained hard to get a favorable price. They succeeded in obtaining a $2 per share increase in Marathon’s initial offer, but were unable to get any offer over $19. Given what Rady knew about the company and the information contained in the pitch books from Lehman and CSFB, his decision to recommend that price to his board subject to a formal fairness opinion from Lehman is not a seriously litigable quibble.

Likewise, the court is unpersuaded by the plaintiffs’ argument that the Pennaco board should have obtained an updated reserve report to justify a higher price. To conclude that the board’s decision not to do so and instead to bargain based on the June 30 Reserve Report was unreasonable would involve second-guessing of the kind QVC proscribes.

The plaintiffs, of course, place heavy weight on the timing of Lehman’s involvement and the fact that it entered the fray after the shooting had stopped. That chronological fact is true, but depends for its legal force on the assertion that a board must use an outside advisor to negotiate price and cannot do so itself on an informed basis. While there is case law that might be read as suggesting that a board’s knowledge of the value of its own business is not sufficient, 25 the more traditional view is that an informed board is, of course, free to manage a corporation in all its aspects. 26 It is unlikely the court will later conclude that it was unreasonable for Pennaco’s *707 board to conclude price negotiations, subject to confirmation from Lehman that the tentatively-fixed $19 price was fair.

On the other hand, there is little doubt that the validity of the Pennaco board’s decision to proceed in the manner it did would be subject to great skepticism had the board acceded to demands to lock up the transaction from later market competition. That is, if the merger agreement with Marathon contained onerous deal protection measures that presented a formidable barrier to the emergence of a superior offer, the Pennaco board’s failure to canvass the market earlier might tilt its actions toward the unreasonable.

But it appears that the Pennaco board was careful to balance its single buyer negotiation strategy by ensuring that an effective post-agreement market check would occur. The merger agreement’s provisions leave Marathon exposed to competition from rival bidders, with only the modest and reasonable advantages of a 3% termination fee and matching rights. The plaintiffs’ attack on the termination fee’s level is make-weight and at odds with precedent upholding the validity of fees at this level. 27

The board also retained significant flexibility to deal with any later-emerging bidder and ensured that the market would have a healthy period of time to digest the proposed transaction. As such, no substantial barriers to the emergence of a higher bid existed. Indeed, the fact that no higher bid has come forth in these circumstances is itself “evidence that the directors, in fact, obtained the highest and best transaction reasonably available.” 28

Finally, it is worth noting that the board had information that suggested that the Marathon offer was highly attractive from a financial point of view. Putting aside the formal valuation techniques that support this inference, the price’s relationship to Pennaco’s prior trading history buttresses this conclusion. Although Pennaco was a company that enjoyed favorable market treatment from the get-go, the Marathon offer exceeded the company’s all-time trading high by nearly 10% and presented a healthy premium to all relevant benchmarks.

For all these reasons, I conclude that the plaintiffs are not likely to succeed on their Revlon claim. 29

Are The Plaintiffs Likely To Prove That The Board Placed Its Self-Interest Ahead Of Its Duty To The Pennaco Stockholders?

The plaintiffs argue that what really