Manti Holdings, LLC v. The Carlyle Group Inc. ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MANTI HOLDINGS, LLC, MALONE )
MITCHELL, WINN INTERESTS, LTD., )
EQUINOX I. A TX, GREG PIPKIN, )
CRAIG JOHNSTONE, TRI-C )
AUTHENTIX, LTD., DAVID MOXAM, )
JOHN LAL PEARCE, and JIM )
RITTENBURG, )
)
Plaintiffs, )
)
v. ) C.A. No. 2020-0657-SG
)
THE CARLYLE GROUP INC., )
CARLYLE U.S. GROWTH FUND III, )
L.P., CARLYLE U.S. GROWTH FUND )
III AUTHENTIX HOLDINGS, L.P., )
CARLYLE INVESTMENT )
MANAGEMENT L.L.C., TCG )
VENTURES III, L.P., BERNARD C. )
BAILEY, STEPHEN W. BAILEY, and )
MICHAEL G. GOZYCKI, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: February 18, 2022
Date Decided: June 3, 2022
Rolin P. Bissell, Paul J. Loughman, and Alberto E. Chávez, of YOUNG CONAWAY
STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: D. Patrick
Long, Jonathan R. Mureen, and John Tancabel, of SQUIRE PATTON BOGGS (US)
LLP, Dallas, Texas, Attorneys for Plaintiffs.
Albert H. Manwaring IV and Kirsten Zeberkiewicz, of MORRIS JAMES LLP,
Wilmington, Delaware; OF COUNSEL: Robert A. Van Kirk, Sarah F. Kirkpatrick,
and Lauren Uhlig, of WILLIAMS & CONNOLLY LLP, Washington, DC, Attorneys
for Defendants.
GLASSCOCK, Vice Chancellor
2
This is the latest scene in a long stage-play involving the sale of a Delaware
corporation, Authentix Acquisition Company, Inc. (“Authentix”). As with a
Broadway musical, the orchestra has played me many a tune, but a single melodic
line tends to run throughout. Here, it was a stockholders agreement, entered by all
stockholders to encourage investment by an entity that became a controller thereby;
a subsidiary of The Carlyle Group, Inc.
The stockholders agreement required all stockholders to not oppose any sale
of Authentix approved by the company board and by a majority of the outstanding
shares—that is, by Carlyle. In 2017, Carlyle and the board approved a sale of
Authentix to Blue Water Energy. The terms of the sale together with the
stockholders agreement meant that holders of preferred equity—notably, Carlyle—
would recoup their investment, but that common stockholders—including the
Plaintiffs here—would receive little or nothing for their stock. Much litigation has
ensued.1
Briefly, this action alleges that Carlyle and the directors breached fiduciary
duties to the stockholders of Authentix in approving the sale to Blue Water Energy.
I have found that the terms of the stockholders agreement did not preclude the
Plaintiffs from bringing this action.2 Remaining before me is the Defendants’
1
E.g., Manti Holdings, LLC v. Authentix Acquisition Co., Inc., 261 A.3d 1199 (Del. 2021).
2
See generally Manti Holdings, LLC v. Carlyle Grp. Inc., 2022 WL 444272 (Del. Ch. Feb. 14,
2022).
motion to dismiss under Rule 12(b)(6). While I agree with the Defendants that
certain ancillary claims must be dismissed, I find that the gravamen of the Plaintiffs’
complaint—its allegations that the Defendants breached fiduciary duties regarding
the sale—does state claims upon which relief can be granted. My reasoning is
below.
I. BACKGROUND 3
A. Parties and Relevant Non-Parties
Non-party Authentix is a Delaware corporation.4 On September 12, 2017, the
Authentix board of directors (the “Board”) voted 4–1 to sell Authentix to Blue Water
Energy for a combination of guaranteed and contingent cash consideration (the
“Sale”). 5 At the time of the Sale, Authentix’s capital structure featured common
stock and three series of preferred stock. 6 The preferred stockholders were entitled
to be paid the first $70 million of any sale consideration, and the common
stockholders were only entitled to receive distributions above the first $70 million. 7
3
Unless otherwise noted, the facts referenced in this Memorandum Opinion are drawn from the
Verified Amended Complaint, Dkt. No. 38 [hereinafter “Am. Compl.”] and the documents
incorporated therein. Citations in the form of “Lintner Aff.” refer to the Affidavit of Matthew F.
Lintner in Support of Defendants’ Opening Brief in Support of Motion to Dismiss the Verified
Amended Complaint, Dkt. No. 39. Citations in the form of “Lintner Aff. Ex. –” refer to exhibits
attached to the Lintner Aff.
4
Am. Compl. ¶ 14.
5
Id. ¶¶ 1, 100–03.
6
Id. ¶ 40.
7
Id. ¶¶ 40–41.
2
The Plaintiffs are individual and entity stockholders of Authentix, each of
whom held Authenix stock at the time of the Sale. 8 One of the Plaintiffs, Manti
Holdings, LLC (“Manti”), had a representative on the Authentix Board, Lee
Barberito.9
Defendant Carlyle U.S. Growth Fund III Authentix Holdings, L.P. (“Carlyle
Holdings”) is a Delaware limited partnership with its principal place of business in
Washington, D.C. 10 Carlyle Holdings was the record holder of a majority of
Authentix’s common and preferred stock at the time of the Sale. 11
Defendant Carlyle U.S. Growth Fund III, L.P. (“Carlyle Growth”) is a
Delaware limited partnership with its principal place of business in
Washington, D.C. 12 Carlyle Growth is the direct parent of Carlyle Holdings.13
Defendant TCG Ventures III, L.P. (“TCG”) is a Delaware limited partnership
with its principal place of business in Washington, D.C. 14 TCG is the general partner
of and manages Carlyle Growth.15 TCG also had a “management agreement” with
Authentix.16
8
Id. ¶¶ 15–25.
9
Id. ¶¶ 2, 37, 44.
10
Id. ¶ 28.
11
See id. ¶¶ 28, 39.
12
Id. ¶ 27.
13
Id.
14
Id. ¶ 30.
15
Id.
16
Id.
3
Defendant Carlyle Investment Management, LLC (“Carlyle Investment”) is a
Delaware limited liability company with its principal place of business in
Washington, D.C. 17 Carlyle Investment is the “primary SEC registered investment
advisor” for Carlyle Growth, TCG, and “related entities.”18
Defendant The Carlyle Group, Inc. (“Carlyle Group”) is a publicly traded
Delaware limited partnership, with its principal place of business in
Washington, D.C. 19 Carlyle Group is the “ultimate parent” of Carlyle Holdings,
Carlyle Growth, TCG, and Carlyle Investment.20
Defendant Steve Bailey was an Authentix director at the time of the Sale.21
He is also a managing director of Carlyle Group and Carlyle Growth, and an officer
of TCG.22 In addition, Bailey is an officer of Carlyle U.S. Growth Fund III
Authentix Holdings GP, L.L.C., which has “full authority” to act on behalf of and
Carlyle Holdings. 23
17
Id. ¶ 29.
18
Id.
19
Id. ¶ 26.
20
Id.
21
Id. ¶¶ 32, 103.
22
Id. ¶ 32.
23
Id.
4
Defendant Michael Gozycki was an Authentix director at the time of the
Sale,24 and a managing director of Carlyle Group. 25 Gozycki is also an officer of
TCG, and he is vested with “full authority” to act on behalf of Carlyle Growth.26
Defendant Bernard Bailey was a director and the CEO of Authentix at the
time of the Sale. 27
Non-party J.H. Whitney & Company (“Whitney”) was the second largest
Authentix preferred and common stockholder.28 Whitney nominated one Authentix
director, non-party Paul Vigano, who served on the Board at the time of the Sale. 29
I refer to Defendants Carlyle Holdings, Carlyle Growth, TCG, Carlyle
Investments, and Carlyle Group collectively as “Carlyle.” I refer to Gozycki, Steve
Bailey, and Bernard Bailey collectively as the “Director Defendants.”
B. Factual Background
In October 2015, Authenix began exploring a potential sale. 30 For the
duration of the sale process, the Authentix Board was composed of Defendant
Bernard Bailey; Defendants Steve Bailey and Gozycki, as representatives of Carlyle;
24
Id. ¶¶ 33, 103.
25
Id. ¶ 33.
26
Id.
27
Id. ¶¶ 31, 43, 103.
28
Id. ¶ 2.
29
See id. ¶¶ 2, 42, 44, 102–03.
30
See id. ¶ 47.
5
Barberito, as a representative of Manti; and Vignano, as a representative of
Whitney.31
At the outset, five investment banks met with Authentix to pitch their services
in connection with a potential sale. 32 After reviewing Authentix’s financials, each
of the banks represented that they believed they could achieve a sale at or above
$200 million.33 Authentix selected Baird, which had stated that it believed it could
achieve a sale “in excess of $200 million,” to serve as its banker. 34
In assessing Authentix’s financials, one of the risks that the investment banks
identified was its “customer concentration.” 35 This “customer concentration” risk
manifested early in the sale process, when a key Authentix customer, Saudi Aramco,
announced that it was reconsidering whether to renew its contract with Authentix,
which was set to expire in May 2016. 36 Authentix therefore delayed the start of its
sale process to the summer of 2016. 37 In the meantime, Saudi Aramco agreed to
several short-term extensions of its contract with Authentix.38 Authentix also faced
31
Id. ¶¶ 44, 102–03.
32
Id. ¶ 47.
33
Id. ¶¶ 47–52.
34
Id. ¶¶ 49, 53.
35
Id. ¶ 54.
36
Id. ¶¶ 54–55.
37
Id. ¶ 55.
38
Id. ¶ 55–56, 67.
6
uncertainty regarding the renewal of contracts with the governments of Ghana and
Cameroon.39
In mid-October 2016, while the Saudi Aramco contract remained in place
under short-term extensions, Baird solicited bids for a sale of Authentix from 127
potential buyers, setting a deadline to respond of December 22, 2016. 40 Of the 127
potential buyers that Baird approached, four responded with what the Amended
Complaint characterizes as “bids.”41
Baird presented those “bids” to the Authentix Board on December 22, 2016,42
though it described them as “indications of interest,” not “bids.” 43 Two of the
indications of interest featured “holdbacks,” the payment of which were contingent
on the renewal of contracts with Saudi Aramco, Ghana and Cameroon.44 For
example, Innospec Inc. submitted a $177 million indication of interest, $100 million
of which was designated as “holdbacks” for Saudi Aramco, Ghana and Cameroon.45
OpSec Security similarly provided an indication of interest for $145 million, of
which $45 million was contingent on the renewal of the Saudi Aramco contract.46
The other two indications of interest featured no holdbacks: Intertek Group plc
39
Id. ¶ 60.
40
Id. ¶ 59.
41
Id.
42
Id. ¶ 60.
43
Lintner Aff. Ex. C at 1–2, Ex. D at 1.
44
Am. Compl. ¶¶ 63–64.
45
Id. ¶ 63.
46
Id. ¶ 64.
7
provided an indication of interest of $120 million with no contingency holdbacks,
and TBG provided an indication of interest with a range of $207 million to $248
million. 47 In its December 22, 2016 presentation, Baird also informed the Board that
“[s]everal buyers declined at this point but would be open to participating in a
process next year,” i.e. 2017. 48
The four potential bidders then completed due diligence, after which OpSec
withdrew its interest, and the remaining three provided revised bids.49 Baird
presented those revised bids to the Authentix Board on March 2, 2017.50 Innospec
confirmed its bid of $177 million, $77 million of which was guaranteed, and $100
million of which was contingent on the renewal of contracts with Saudi Aramco,
Ghana and Cameroon. 51 Intertek increased its bid to $140 million, $85 million of
which was guaranteed, and $55 million of which was contingent on the renewal of
the Saudi Aramco and Ghana contracts.52 TBG reiterated its interest in the range of
$207 million and $248 million, but it stated that it was in the midst of a “very large”
transaction that was expected to close in April 2017.53 TBG therefore requested a
47
Id. ¶¶ 65–66.
48
Id. ¶ 61.
49
Id. ¶ 68–69.
50
Id. ¶ 68.
51
Id. ¶ 70.
52
Id. ¶ 71.
53
Id. ¶ 72.
8
two-month delay to complete the other transaction before “turning to Authentix.”54
OpSec withdrew its indication of interest, citing the contractual renewal risk. 55
Of the two bids from Innospec and Intertek that were active, the Board voted
to grant exclusivity to Intertek, which offered the higher guaranteed amount at
$85 million, but the lower total amount at $140 million.56 Of the five Board
members, only Manti’s representative, Barberito, voted against granting Intertek
exclusivity.57 He proposed instead that the Board wait “until the Saudi Aramco and
Ghana contracts were renewed.” 58 Shortly thereafter, the Board learned that
Authentix had won a “technical trial competition” for Saudi Aramco, which
allegedly “put[] it in prime position to win contract renewal.”59
Believing that the Intertek bid was insufficient, Barberito requested
permission to solicit third parties to make an independent bid. 60 Barberito received
permission, although Steve Bailey, one of Carlyle’s Board representatives, imposed
a one-week deadline to submit a bid. 61 Steve Bailey later explained to Barberito that
he “was under pressure to sell Authentix because it was one of the last investments
54
Id.
55
Id. ¶ 69.
56
Id. ¶ 74.
57
Id. ¶ 76.
58
Id.
59
Id. ¶ 77.
60
Id. ¶ 78.
61
Id. ¶ 79.
9
still open in the applicable fund, and it was time for Carlyle to monetize and close
that fund so the money could be returned to investors.”62
Despite the tight deadline, Manti procured a private equity firm, White Deer,
which submitted a timely bid with Manti of $105 million, with no contingency
holdbacks. 63 In an email to White Deer, Steve Bailey expressed his appreciation for
the bid and asked White Deer to meet with Baird to discuss further, expressing that
“[t]ime is very important”:
We very much appreciate this indication. And your speed! We
obviously think super highly of Lee. I think the right next step
please would be for you all to talk to our advisors from Baird
who are copied here (Trish and David) today please if at all
possible given the urgency. Baird has some clarifying
questions please. We are reconvening tomorrow mid morning
with Baird to discuss and decide a plan. Time is very important
please know if you can please chat with Baird today as we plan
to decide tomorrow morning. Thank you very much.64
After two days of negotiation, Manti and White Deer increased their bid to
$107 million. 65 Manti and White Deer then visited Authentix on March 22, 2017 to
meet with Bernard Bailey and conduct “confirmatory due diligence.”66 According
to the Amended Complaint, at that meeting, Bernard Bailey perceived that Manti
and White Deer planned to bring back Authentix’s former CEO, and therefore spent
62
Id. ¶ 57.
63
Id. ¶ 80.
64
Id. ¶ 81.
65
Id. ¶ 82.
66
Id. ¶ 84.
10
much of the meeting “promoting himself” and “disparaging Authentix’s former
management.”67 The Amended Complaint alleges that Bernard Bailey also stated
repeatedly during the meeting that he “worked for Carlyle” and that “he had been
told to sell the company.”68
Following the meeting, White Deer withdrew from the Sale process, though
it recommended a replacement bidder, Blue Water Energy.69 The Board permitted
Blue Water Energy to conduct due diligence but stopped short of granting it
exclusivity.70 According to the Amended Complaint, after conducting due diligence,
Blue Water Energy indicated that it “liked the opportunity very much.”71
Blue Water Energy and Manti met with Bernard Bailey on April 12, 2017.72
Again, the Amended Complaint alleges that during this meeting, Bernard Bailey
“disparaged” Authentix’s former management, “took all credit for Authentix’s
financial success,” and “threatened to quit and take all of the top managers with him
if Manti purchased the company and brought” back Authentix’s former CEO.73
After the meeting, Blue Water Energy told Manti that it was concerned about doing
67
Id. ¶¶ 84–85.
68
Id. ¶ 85.
69
Id. ¶¶ 86–87.
70
Id. ¶ 88.
71
Id. ¶ 89.
72
Id.
73
Id.
11
a deal that involved Authentix’s former management. 74 Manti therefore “bowed
out” of the bidding process.75
Around this time, TBG, which had submitted an indication of interest ranging
from $207 million to $248 million, but requested a delay to complete another large
transaction, announced a $900 million acquisition.76 The Amended Complaint does
not allege that TBG subsequently sought to reengage with Authentix.
On April 15, 2017, the Authentix Board voted, over Barberito’s objection, to
proceed with a sale to Intertek, which had submitted a revised “verbal offer” of $115
million without contingencies.77 The sale to Intertek was scheduled to be completed
by September 2017. 78 Meanwhile, Blue Water Energy continued to conduct due
diligence on Authentix. 79
By June 2017, Intertek began to miss milestones that, according to the
Amended Complaint, “would have ensured a sale by September 2017.”80 Intertek
also lowered its offer to $85 million, with an additional $30 million contingent on
Authentix meeting certain post-closing financial metrics. 81
74
Id.
75
Id.
76
Id. ¶ 90.
77
Id. ¶ 91.
78
Id.
79
Id. ¶ 92.
80
Id. ¶ 93.
81
Id.
12
The Board met on June 12, 2017, during which Barberito proposed putting
the sale process on hold. 82 Instead, the Board voted, over Barberito’s objection, to
proceed with a sale to Blue Water Energy, which had agreed to submit a revised bit
without Manti or other common stockholder involvement, in exchange for
exclusivity.83
Blue Water Energy submitted its revised bid on July 22, 2017.84 This time,
Blue Water Energy offered $77.5 million guaranteed, plus an additional $27.5
million in contingent consideration.85 The $27.5 million holdback was composed of
$10 million to be paid if a receivable from Ghana was paid, and $17.5 million to be
paid if Authentix achieved certain financial metrics in 2018.86
Barberito urged the Board to withdraw from the sale process rather than sell
at that price.87 The other Authentix directors thereafter stopped providing him with
updates on the process. 88
In mid-August 2017, Saudi Aramco renewed its contract with Authentix.89
Around the same time, Ghana renewed its contract with Authentix, Cameroon
“extended” its contract, and Authentix earned a new contract with the United States
82
Id. ¶ 94.
83
Id.
84
Id. ¶ 95.
85
Id.
86
Id.
87
Id.
88
Id. ¶ 96.
89
Id. ¶ 97.
13
Federal Reserve Bank. 90 Despite this change in circumstances, the Board proceeded
with the Blue Water Energy transaction as proposed. On September 11, 2017, Steve
Bailey and Bernard Bailey circulated to the Board the fully negotiated transaction
documents to sell Authentix to Blue Water Energy for $77.5 million guaranteed,
with an additional 27.5 million if a Ghana receivable was paid and certain financial
metrics were met in 2018.91
Barberito wrote a letter to the Board urging it to put the Sale on hold.92
Instead, he proposed that the Board postpone any sale for a year “and go back to the
market with a revised story that reflected Authentix’s current condition.”93 He also
warned the Board that under the Blue Water Energy’s offer, the “common
stockholder’s equity is wiped out completely.”94
The next day, on September 12, 2017, the Board met and voted, over
Barberito’s objection, to consummate the Sale to Blue Water Energy. 95 Before the
vote, Vigano explained to Barberito in an allegedly “apologetic telephone
conversation” that he was “under orders from Whitney to vote to approve the sale
because of its business relationship with Carlyle.”96
90
Id. ¶ 98.
91
Id. ¶ 101.
92
Id. ¶ 102.
93
Id.
94
Id.
95
Id. ¶ 103.
96
Id. ¶ 102.
14
The Sale was not put to a stockholder vote. 97 That is because the Authentix
stockholders, including the Plaintiffs here, were parties to a stockholders agreement
that contained drag-along rights applicable to a sale approved by a majority of
Authentix stock (the “Stockholders Agreement”).98 Specifically, Section 3(e) of the
Stockholders Agreement provided as follows:
In the event that . . . a Company Sale is approved by the Board
and . . . the holders of at least fifty percent (50%) of the
then-outstanding Shares . . . , each Other Holder shall consent
to and raise no objections against such transaction . . . . 99
This obligation to “consent to and raise no objections against” the Sale required
Other Holders to “vote the shares of Common Stock held by such Other Holder in
favor of such transaction”; “refrain from the exercise of appraisal rights with respect
to such transaction”; and “execute any purchase agreement, merger agreement or
other agreement . . . in connection with such transaction setting forth terms and
conditions of such transaction and any ancillary agreement with respect thereto.” 100
On September 13, 2017, the stockholders were notified that the Board had
voted to close the Sale. 101 Carlyle, as the majority Authentix stockholder, executed
97
Manti, 261 A.3d at 1205.
98
Lintner Aff. Ex. A § 3(e).
99
Id.
100
Id.
101
Am. Compl. ¶ 12.
15
a written consent to the Sale.102 The Plaintiffs were thus “bound contractually to
consent and not object to the [S]ale.”103
As discussed above, under Authentix’s capital structure, the Authentix
preferred stockholders were entitled to be paid the first $70 million of Sale
consideration, and the common stockholders were only entitled to receive
distributions above the first $70 million.104 For a sale priced at exactly $70 million,
the preferred stockholders would recover their preferred stock investment and a
profit, while the common stockholders would get nothing. 105 As a result, Carlyle,
which held a majority of Authentix preferred stock, received the bulk of the $77.5
million in guaranteed Sale consideration, resulting in a profit on its preferred stock
investment.106 Likewise, Whitney, the second largest Authentix preferred
stockholder, recovered its entire investment in Authentix through distributions from
the Sale consideration on its preferred stock. 107
Bernard Bailey also received a payment from the Sale. Under his employment
agreement with Authentix, he was set to receive a cash bonus equal to a percentage
of the Sale consideration, for a sale of Authentix between $50 million and
102
Manti, 261 A.3d at 1205.
103
Manti Holdings, LLC v. Authentix Acquisition Co., 2018 WL 4698255, at *4 (Del. Ch. Oct. 1,
2018).
104
Am. Compl. ¶¶ 40–41.
105
Id. ¶ 41.
106
See id. ¶¶ 2, 12, 39, 41, 101, 103. The record does not reflect how much stock Carlyle owned.
107
Id. ¶ 103.
16
$80 million. 108 The maximum bonus, if Authentix was sold for $80 million or
above, was $3 million. 109 The Amended Complaint alleges that no additional bonus
would be paid to Bernard Bailey under his employment agreement for achieving a
sale above $80 million. 110
C. Procedural History
The Plaintiffs initiated this action challenging the Sale on August 7, 2020.111
After the Defendants moved to dismiss the initial complaint on September 3,
2020, 112 the Plaintiffs filed the Amended Complaint on November 3, 2020.113 The
Defendants moved to dismiss the Amended Complaint on November 17, 2020.114
In their briefing, the Defendants argued that the allegations of the Amended
Complaint fail to state claims under the Rule 12(b)(6) standard, 115 and that the
Plaintiffs waived their right to challenge the Sale under the Stockholders
Agreement. 116
108
Id. ¶ 45.
109
Id.
110
Id.
111
Verified Compl., Dkt. No. 1.
112
Defs.’ Mot. Dismiss, Dkt. No. 23.
113
See Am. Compl.
114
See Defs.’ Mot. Dismiss Pls.’ Verified Am. Compl., Dkt. No. 39.
115
See, e.g., Defs.’ Opening Br. Supp. Mot. Dismiss Am. Compl., Dkt. No. 39 §§ II–VI
[hereinafter “Defs.’ OB”].
116
See, e.g., id. § I.
17
On June 4, 2021, after briefing, oral argument, and supplemental briefing,117
I stayed consideration of the Defendants’ motion to dismiss here118 pending an
appeal to the Supreme Court of my decision in a related appraisal action regarding
the Sale, Manti Holdings, LLC v. Authentix Acquisition Co. 119 The Supreme Court
affirmed that opinion on September 13, 2021.120 On November 5, 2021, the parties
submitted supplemental memoranda regarding the Supreme Court decision. 121 I then
issued an opinion on February 14, 2022 holding that the Plaintiffs did not waive their
right to bring this action via the Stockholders Agreement.122 I also invited the parties
to submit supplemental briefing in light of that memorandum opinion. 123 The parties
informed me on February 18, 2022 that they believed no further briefing is
necessary, 124 and I consider the remainder of the motion to dismiss fully submitted
as of that date.
117
See Pls.’ Answering Br. Opp. Defs.’ Mot. Dismiss, Dkt. No. 40 [hereinafter “Pls.’ AB”]; Defs.’
Reply Br. Supp. Mot. Dismiss Am. Compl., Dkt. No. 43 [hereinafter “Defs.’ RB”]; Tr. Oral Arg.
Defs.’ Mot. Dismiss and Mot. Stay Disc. and Ct.’s Ruling Mot. Stay Held Via Zoom, Dkt. No. 56;
Defs.’ Suppl. Br. Supp. Mot. Dismiss Am. Compl., Dkt. No. 57; Pls.’ Suppl. Br. Regarding Defs.’
Mot. Dismiss, Dkt. No. 58; Defs.’ Suppl. Answering Br., Dkt. No. 59; Pls.’ Suppl. Answering Br.
Defs.’ Suppl. Br., Dkt. No. 60.
118
Dkt. No. 62.
119
2018 WL 4698255 (Del. Ch. Oct. 1, 2018).
120
Manti, 261 A.3d 1199 (Del. 2021).
121
See Defs.’ Suppl. Mem. Supp. Their Mot. Dismiss Am. Compl. and Regarding Recent Supreme
Ct. Decision, Manti Holdings, LLC v. Authentix Acquisition Co., Dkt. No. 70; Pls.’ Informal Mem.
Further Opp. Defs.’ Mot. Dismiss, Dkt. No. 71.
122
See Manti, 2022 WL 444272, at *4.
123
Id.124
Dkt. No. 76.
18
II. ANALYSIS
A. The Pleading Standard
The Defendants have moved to dismiss the Amended Complaint pursuant to
Rule 12(b)(6). On a motion to dismiss under Rule 12(b)(6), I must accept all well
pled factual allegations as true, including “vague allegations” that “give the opposing
party notice of the claim,” and “draw all reasonable inferences in favor of the non-
moving party.”125 I may not dismiss the Amended Complaint “unless the plaintiff
would not be entitled to recover under any reasonably conceivable set of
circumstances.”126 Although this pleading standard is plaintiff-friendly, I need not
“accept conclusory allegations unsupported by specific facts” or “draw unreasonable
inferences in favor of the non-moving party.” 127 Nor must I “accept every strained
interpretation of the allegations proposed by the plaintiff[s].”128
B. The Amended Complaint States Breach of Fiduciary Duty Claims Against
Carlyle and the Director Defendants (Counts I and II)
The Amended Complaint brings counts for breach of fiduciary duty against
Carlyle (Count II) and the Director Defendants (Count I).129 “When determining
whether corporate fiduciaries have breached their duties, Delaware corporate law
125
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Holdings LLC, 27 A.3d 531, 535 (Del. 2011).
126
Id.127
Brown v. Ct. Square Cap. Mgmt., L.P., 2022 WL 841138, at *2 (Del. Ch. Mar. 22, 2022).
128
Harcum v. Lovoi, 2022 WL 29695, at *9 (Del. Ch. Jan. 3, 2022) (quoting In re Gen. Motors
(Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006)).
129
Am. Compl. ¶¶ 107–17.
19
distinguishes between the standard of conduct and the standard of review.” 130 The
standard of conduct describes what fiduciaries are “expected to do and is defined by
the content of the duties of loyalty and care.” 131 In contrast, the standard of review
“is the test that a court applies when evaluating whether directors have met the
standard of conduct.”132
Delaware’s default standard of review is the business judgment rule.133 Under
the business judgment rule, “where a director is independent and disinterested, there
can be no liability for corporate loss, unless the facts are such that no person could
possibly authorize such a transaction if he or she were attempting in good faith to
meet their duty.”134 If, however, the plaintiff rebuts the applicability of the business
judgment, the burden shifts to the defendant to prove that the transaction was entirely
fair.135 The entire fairness standard, which is “the highest standard of review in
corporate law,” “involves an inquiry into two interrelated concepts: fair dealing and
fair price.”136 Because the entire fairness inquiry is fact-intensive, a determination
130
Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014).
131
Id. (quoting In re Trados Inc. S’holder Litig., 73 A.3d 17, 35 (Del. Ch. 2013)).
132
Id. (quoting Trados, 73 A.3d at 35).
133
Quadrant Structured Prod. Co. v. Vertin, 102 A.3d 155, 183 (Del. Ch. 2014).
134
In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *9 (Del. Ch. Oct. 24, 2014).
135
Quadrant, 102 A.3d at 183.
136
Crimson, 2014 WL 5449419, at *9 (quoting Kahn v. M & F Worldwide Corp., 88 A.3d 635,
644 (Del. 2014), overruled on other grounds Flood v. Synutra Int’l, Inc., 195 A.3d 754 (Del.
2018)).
20
that the entire fairness standard applies to a transaction “normally will preclude
dismissal of a complaint on a Rule 12(b)(6) motion to dismiss.”137
1. Entire Fairness Applies to the Sale
The Plaintiffs assert that the entire fairness standard of review applies to the
Sale for two independent reasons: first, because the Sale was an alleged conflicted
controller transaction, and second, because the Sale was not approved by an
independent and disinterested Board. 138 As discussed below, I find both reasonably
conceivable, and therefore the entire fairness standard applies to the Sale.
As a threshold issue, the Defendants contend that the Amended Complaint
fails to plead that all five Carlyle defendants were controllers because it
impermissibly groups all five Carlyle defendants together as “Carlyle” without
alleging facts specific to each entity.139 I disagree. Although this Court generally
disfavors group pleading, the Amended Complaint’s use of “Carlyle” here “was
justified [] given the close relationship between these entities,” as pled in the
Amended Complaint. 140
Specifically, the Amended Complaint alleges that Carlyle Holdings was the
record holder of a majority of Authentix’s stock, that Carlyle Growth was the direct
137
Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002).
138
Pls.’ AB § IV.C.
139
Defs.’ OB § II.
140
In re WeWork Litig., 2020 WL 7343021, at *11 (Del. Ch. Dec. 14, 2020) (“[c]omplaint’s use
of the term ‘SoftBank’ to capture both SBG and Vision Fund was justified here given the close
relationship between these entities”).
21
parent of Carlyle Holdings, that TCG was the general partner and manager of Carlyle
Growth and had a “management agreement” with Authentix, that Carlyle Investment
was the “SEC registered investment advisor” for Carlyle Growth and TCG, and that
Carlyle Group was the ultimate parent of Carlyle Holdings, Carlyle Growth, TCG,
and Carlyle Investment.141 The Amended Complaint further alleges that two
Authentix directors—Gozycki and Steve Bailey—held positions at Carlyle Group,
Carlyle Growth and TCG, and that Steve Bailey was an officer of Carlyle U.S.
Growth Fund III Authentix Holdings GP, L.L.C., which has “full authority” to act
on behalf of and Carlyle Holdings. 142 Based on these allegations, it is reasonably
conceivable that all five of the Carlyle defendants exercised control over Authentix.
I therefore turn to whether Carlyle was conflicted with respect to the Sale.
Delaware courts have identified two categories of conflicted controller
transactions that implicate the entire fairness standard: “(a) transactions where the
controller stands on both sides; and (b) transactions where the controller competes
with the common stockholders for consideration.”143 The Plaintiffs here do not
contend that Carlyle stood on both sides of the Sale. Under the second category, a
controller competes with common stockholders for consideration when it
(i) “receives greater monetary consideration for its shares than the minority
141
See supra notes 10–20 and accompanying text.
142
See supra notes 21–26 and accompanying text.
143
Crimson, 2014 WL 5449419, at *12.
22
stockholders,” (ii) “takes a different form of consideration than the minority
stockholders,” or (iii) extracts “‘something uniquely valuable to the controller, even
if the controller nominally receives the same consideration as all other
stockholders.’”144
The Plaintiffs do not dispute that Carlyle received the same consideration for
its common shares as the other common stockholders. Instead, the Plaintiffs contend
that Carlyle received “something uniquely valuable” from the Sale because it had a
unique desire to close its investment in Authentix by September 2017. 145
On these alleged facts, I find it reasonably conceivable that Carlyle received
a unique benefit from closing the Sale by September 2017 that rendered it conflicted.
The Amended Complaint alleges that Steve Bailey emphasized the “urgency” of the
Sale in discussions with White Deer, 146 and that he told Barberito he “was under
pressure to sell Authentix because it was one of the last investments still open in the
applicable fund, and it was time for Carlyle to monetize and close that fund so the
money could be returned to investors.” 147 The Amended Complaint further alleges
that much of the uncertainties impacting the Sale negotiations—the renewal status
of contracts with Saudi Aramco, Cameroon and Ghana—were resolved shortly
144
In re MultiPlan Corp. S’holders Litig., 268 A.3d 784, 810 (Del. Ch. 2022) (quoting IRA Tr.
FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *6 (Del. Ch. Dec. 11, 2017)).
145
Pls.’ AB § IV.C.1.
146
See supra note 64 and accompanying text.
147
See supra note 62 and accompanying text.
23
before the Board approved the Sale, but that neither Carlyle nor the Director
Defendants revisited the terms of the Sale or reengaged with other bidders.148
Significantly, moreover, because Authentix’s preferred stockholders were entitled
to receive the first $70 million in consideration, Carlyle was poised to receive the
bulk of the $77.5 million in guaranteed Sale consideration—a profit on its preferred
stock investment—before common stockholders received anything.149
The Defendants assert that this Court has consistently rejected the theory that
a controller’s unique need for liquidity can constitute a disabling conflict.150
According to the Defendants, Carlyle had every incentive, as Authentix’s largest
common stockholder, to maximize the consideration that common stockholders
received from the Sale. 151
I agree with the Defendants that Delaware law generally presumes that
stockholders “have an incentive to seek the highest price for their shares,” 152 and
that as a result, “liquidity-driven theories of conflicts can be difficult to plead.”153
But as this Court has recognized, “the reality is that rational economic actors
sometimes do place greater value on being able to access their wealth than on
148
See supra notes 89–96 and accompanying text.
149
See supra notes 104–06 and accompanying text.
150
Defs.’ OB § III.A.2.
151
Id. § III.A.1.
152
Crimson, 2014 WL 5449419, at *17.
153
In re Mindbody, Inc., 2020 WL 5870084, at *18 (Del. Ch. Oct. 2, 2020).
24
accumulating their wealth.”154 Steve Bailey’s statement that he was under pressure
from Carlyle to close the Sale quickly so that Carlyle could close its applicable fund,
together with the nonratable benefit Carlyle received from its preferred stock
holdings, and the Director Defendants’ decision to cut the lone dissenting
stockholder, Barberito, out of the deliberations,155 gives rise to a reasonable
inference that Carlyle derived a unique benefit from the timing of the Sale not shared
with other common stockholders, rendering it conflicted.
As a fallback, the Defendants make a perfunctory argument that the Sale was
cleansed under the framework provided in Corwin v. KKR Financial Holdings
LLC, 156 because it was approved by Carlyle, Authentix’s majority stockholder.157
But “Corwin cleansing” does not apply to conflicted controller transactions.158 And
Corwin cleansing relies on a majority of disinterested shares.159 Accordingly, the
Sale was not cleansed under Corwin, and entire fairness applies.
154
Id.155
See supra note 88 and accompanying text.
156
125 A.3d 304, 308–14 (Del. 2015).
157
Defs.’ OB at 40.
158
See Larkin v. Shah, 2016 WL 4485447, at *13 (Del. Ch. Aug. 25, 2016) (“[U]nder
Corwin . . . , the business judgment rule irrebuttably applies if a majority of disinterested,
uncoerced stockholders approve a transaction absent a looming conflicted controller.” (emphasis
in original)).
159
See Lockton v. Rogers, 2022 WL 604011, at *10 (Del. Ch. Mar. 1, 2022).
25
2. The Amended Complaint Pleads That the Sale Was Not Entirely
Fair
Under the entire fairness standard, “the burden of proof shifts to the defendant,
who must either establish the entire fairness of the transaction or show that the
burden of disproving its entire fairness must be shifted to the plaintiff.”160
Determining whether a defendant has met that burden “will normally be impossible
by examining only the documents the Court is free to consider on a motion to
dismiss—the complaint and any documents it incorporates by reference.”161
Because the entire fairness “inquiry is fact intensive, it is rare the court will dismiss
a fiduciary duty claim on a Rule 12(b)(6) motion when entire fairness is the
governing standard of review.”162 The pleading standard here is low—the Plaintiffs
need only plead “some facts” supporting an unfair process or price. 163
The Amended Complaint clears that low burden. The Amended Complaint
alleges that for most of the Sale process, Authentix’s value was depressed because
it faced certain contract renewal uncertainties, but that after the uncertainties had
been largely resolved, the Board approved a Sale at a price that still reflected them.164
The Amended Complaint also alleges that Authentix’s majority stockholder,
Carlyle, expressed a desire to close the Sale quickly in order to close “the applicable
160
Orman, 794 A.2d at 20 n.36.
161
Id.162
Tornetta v. Musk, 250 A.3d 793, 812 (Del. Ch. 2019).
163
Stein v. Blankfein, 2019 WL 2323790, at *8 (Del. Ch. May 31, 2019).
164
See supra notes 89–96 and accompanying text.
26
fund.”165 And, the Sale was never approved by an independent special committee
of the Board or by the Authentix minority stockholders.166 Under these alleges facts,
it is reasonably conceivable that the Sale did not reflect a fair process or a fair price.
3. The Amended Complaint States Claims Against the Director
Defendants
Entire fairness review of the Sale does not automatically doom the three
Director Defendants’ motion to dismiss. Rather, this Court “refuse[s] to presume
that an independent director is not entitled to the protection of the business judgment
rule solely because the controlling stockholder may itself be subject to liability for
breach of the duty of loyalty if the transaction was not entirely fair to the minority
stockholders.”167 As a result, this Court considers each director “individually when
the directors face claims for damages in a suit challenging board action.” 168 That
individualized consideration must begin with the presumption that independent
directors are “motivated to do their duty with fidelity.”169
The Director Defendants here are protected by an exculpatory charter
provision pursuant to 8 Del. C. § 102(b)(7), 170 which insulates them from liability
for duty of care claims. “When the independent directors are protected by an
165
See supra note 62 and accompanying text.
166
See supra notes 97–103 and accompanying text.
167
In re Cornerstone Therapeutics Inc, S’holder Litig., 115 A.3d 1173, 1183 (Del. 2015).
168
Id. at 1182.
169
Id. at 1183 (quoting In re MFW S’holders Litig., 67 A.3d 496, 528 (Del. Ch. 2013), aff’d sub
nom. Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014)).
170
Lintner Aff. Ex. J at 14.
27
exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated
claim against them, those directors are entitled to have the claims against them
dismissed.”171 I must therefore dismiss the Amended Complaint against the Director
Defendants unless it states breach of loyalty claims against them.
Because the Director Defendants are protected by an exculpatory provision,
the Amended Complaint must plead facts “supporting a rational inference that the
director harbored self-interest adverse to the stockholders’ interests, acted to
advance the self-interest of an interested party from whom they could not be
presumed to act independently, or acted in bad faith.” 172 As discussed below, I find
that the Amended Complaint meets that standard with respect to all three Director
Defendants.
4. Defendants Gozycki and Steve Bailey
Defendants Gozycki and Steve Bailey were dual fiduciaries of Carlyle and
Authentix, serving as directors of Authentix and as managing directors and officers
of certain Carlyle defendants. 173 “If the interests of the beneficiaries to whom the
dual fiduciary owes duties are aligned, then there is no conflict. But if the interests
of the beneficiaries diverge, the fiduciary faces an inherent conflict of interest.”174
171
Cornerstone, 115 A.3d at 1176.
172
Id. at 1179–80.
173
See supra notes 21–26 and accompanying text.
174
Firefighters’ Pension Sys. of City of Kansas City, Missouri Tr. v. Presidio, Inc., 251 A.3d 212,
284 (Del. Ch. 2021) (quoting Trados, 73 A.3d at 46–47).
28
I held above that Carlyle’s interests diverged from the common stockholders
with respect to the Sale. 175 As dual fiduciaries, Gozycki and Steve Bailey therefore
faced inherent conflicts of interest. “There is no ‘safe harbor’ for such divided
loyalties in Delaware. When directors of a Delaware corporation are on both sides
of a transaction, they are required to demonstrate their utmost good faith and the
most scrupulous inherent fairness of the bargain.” 176 Despite Gozycki’s and Steve
Bailey’s dual fiduciary status, the Board formed no special committee to insulate the
Sale process from their influence. To the contrary, the Amended Complaint alleges
that Gozycki and Steve Bailey participated in the Sale process throughout, and
ultimately voted to approve the Sale.177 And Steve Bailey allegedly stated that he
was motivated to sell Authentix because “it was time for Carlyle to monetize and
close th[e] fund.” 178 In fact, the Defendant Directors allegedly cut Barberito, who
opposed the quick sale of Authentix, out of the process. 179 The Amended Complaint
therefore supports a reasonable inference that Gozycki and Steve Bailey acted
disloyally in connection with the Sale.180
175
See supra § II.B.1.
176
Berteau v. Glazek, 2021 WL 2711678, at *19 (Del. Ch. June 30, 2021) (quoting Weinberger v.
UOP, Inc., 457 A.2d 701, 710 (Del. 1983)).
177
See, e.g., supra notes 42, 57, 61–62, 64, 77, 82–83, 87–88, 91–96.
178
See supra note 62 and accompanying text.
179
See supra note 88 and accompanying text.
180
Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at *37 (Del. Ch. Apr. 14,
2017) (reasonably inference that directors “acted disloyally” as dual fiduciaries), as corrected
(Apr. 24, 2017); Glazek, 2021 WL 2711678, at *19 (same).
29
5. Defendant Bernard Bailey
It is also reasonably conceivable that Defendant Bernard Bailey lacked
independence from Carlyle. Bernard Bailey served as Authentix’s CEO and was a
member of the Board. 181 “Under the great weight of Delaware precedent, senior
corporate officers generally lack independence for purposes of evaluating matters
that implicate the interests of a controller.” 182 Consistent with that precedent,
Bernard Bailey allegedly stated during Sale negotiations that he “worked for
Carlyle” and “had been told to sell the company.”183 At this pleading stage, I accept
those allegations as true. It is therefore reasonably conceivable that Bernard Bailey
acted disloyally with respect to the Sale.184
C. The Unjust Enrichment Claims (Count V)
The Amended Complaint brings unjust enrichment claims against Carlyle for
the consideration it received from the Sale from its preferred shares, and against
Bernard Bailey for the $3 million bonus he received in connection with the Sale.185
The traditional Delaware formulation of an unjust enrichment claim requires the
Plaintiffs to show “(1) an enrichment, (2) an impoverishment, (3) a relation between
the enrichment and impoverishment, (4) the absence of justification, and (5) the
181
See supra note 27 and accompanying text.
182
Glazek, 2021 WL 2711678, at *20 (quoting In re Ezcorp Inc. Consulting Agreement Deriv.
Litig., 2016 WL 301245, at *35 (Del. Ch. Jan. 25, 2016)).
183
See supra note 68 and accompanying text.
184
See Frederick Hsu, 2017 WL 1437308, at *37.
185
Am. Compl. ¶¶ 131–35.
30
absence of a remedy provided by law.”186 That rubric has recently been criticized
in a scholarly opinion in this Court, Garfield v. Allen, as unduly limited. 187
In particular, the Garfield Court noted that the origins of unjust enrichment
were themselves legal, and accordingly the fifth “element” is applicable for the
limited purpose establishing jurisdiction in the Court of Chancery where no other
grounds to invoke equitable jurisdiction exist. 188 In such a situation, unjust
enrichment is a creature of equity. It permits a court of equity to remedy a wrongful
enrichment by one at the expense of another, even when no tort or contract theory
exists to provide recovery. It allows equity to enforce the maxim, that no wrong
shall be permitted without a remedy, which is the foundation upon which the edifice
of Chancery was constructed.189 But where, as here, Chancery jurisdiction is
otherwise invoked, I conclude no further requirement exists for the demonstration
of lack of a legal remedy, although at the remedy stage legal damages and restitution
or disgorgement may be mutually exclusive.
As I have recently been called upon to explain, unjust enrichment may persist
as an alternative theory of recovery, even though a contract, tort or equitable tort has
186
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
187
2022 WL 1641802, at *35–45 (Del. Ch. May 24, 2022).
188
Id. at 40–45.
189
See William T. Quillen & Michael Hanrahan, A Short History of the Delaware Court of
Chancery, 18 DEL. J. CORP. L. 819, 821 (1993).
31
also been pled against the same defendant in a complaint, and where the “absence of
justification” is alleged to be the tort or contract breach.190
1. Carlyle
With respect to the unjust enrichment claim against Carlyle, the Defendants
argue that the Amended Complaint fails to allege “a relation between the enrichment
and impoverishment.” 191 This element requires the Plaintiffs to allege “some direct
relationship . . . between a defendant’s enrichment and a plaintiff’s
impoverishment.”192 In other words, Plaintiffs must plead an unjustified act resulted
in both the enrichment and the impoverishment.
The Amended Complaint alleges that Carlyle was “enriched by the sale of
Authentix through receiving distributions on its preferred shares.” 193 The Amended
Complaint’s theory is, in my opinion, not elegantly pled. The overarching theory of
the Complaint is that the Sale failed to “maximize Authentix’s sale value and obtain
the highest value reasonably attainable for the stockholders,” 194 as demonstrated by
indications from investment bankers and other potential bidders that Authentix was
190
Id. at *40–45; see also Lockton, 2022 WL 604011, at *16–17; Sorenson Impact Found. v. Cont’l
Stock Transfer & Tr. Co., 2022 WL 986322, at *13 (Del. Ch. Apr. 1, 2022); Knight v. Miller, 2022
WL 1233370, at *13 (Del. Ch. Apr. 27, 2022); Harris v. Junger, 2022 WL 1657551, at *5 (Del.
Ch. May 25, 2022).
191
Nemec, 991 A.2d at 1130.
192
Vichi v. Koninklijke Philips Elecs. N.V., 62 A.3d 26, 59–60 (Del. Ch. 2012) (quoting Anguilla
RE, LLC v. Lubert-Adler Real Est. Fund IV, L.P., 2012 WL 5351229, at *6 (Del. Super. Ct. Oct.
16, 2012)).
193
Am. Compl. ¶ 132.
194
Id. ¶¶ 109, 115.
32
worth more than the Sale consideration. 195 But the Plaintiffs fail to explain how a
Sale at an unfair price enhanced the consideration that Carlyle received for its
preferred stock—that is, per the Defendants, the Complaint does not identify the
enrichment side of the unjust enrichment rubric. Under any sale, the Authentix
preferred stockholders were entitled to be paid first.196 And the Amended Complaint
concedes that the Sale consideration was high enough for Carlyle to maximize its
payout for its preferred stock.197
To be explicit, whether Authentix sold for $70 million or $700 million, the
result to Carlyle with respect to its preferred holdings is the same. Any unfair sale
did not enrich Carlyle—it in fact impoverished Carlyle to the extent it held common
stock. The unjust enrichment claim against Carlyle, the Defendants accordingly
argue, must be dismissed. But I think the Defendants read the Amended Complaint
too narrowly.
The Amended Complaint alleges that, for reasons of its own, Carlyle desired
an immediate sale at an unfair price. This it accomplished. Unless Carlyle suffers
from some financial Munchausen syndrome or from autoschadenfreude, I infer that
the immediate and unfair Sale alleged worked a benefit—an enrichment—on
Carlyle. At this pleading stage, with its Plaintiff-friendly inferences, that is enough
195
See supra notes 32–34, 42–47 and accompanying text.
196
See supra note 7 and accompanying text.
197
See supra note 106 and accompanying text.
33
to satisfy a pleading of an unjustified enrichment. The Complaint, of course, also
alleges that the Plaintiff stockholders were impoverished thereby. I conclude a cause
of action of unjust enrichment has been adequately pled.
2. Bernard Bailey
The parties dispute whether the unjust enrichment claim against Bernard
Bailey is direct or derivative. Derivative suits enable stockholders to sue on behalf
of the corporation to redress harm done to the corporation. 198 As a result, in
derivative suits, “any recovery must go to the corporation.”199 In contrast, “a
stockholder who is directly injured retains the right to bring an individual action for
injuries affecting his or her legal rights as a stockholder.” 200
Accordingly, our Supreme Court has articulated a two-part test to determine
whether a claim is direct or derivative, the so-called Tooley test:
[T]he determination of whether a stockholder’s claim is direct
or derivative ‘must turn solely on the following questions:
(1) who suffered the alleged harm (the corporation or the
stockholders, individually); and (2) who would receive the
benefit of any recovery or other remedy (the corporation or the
stockholders, individually)?201
198
Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1262 (Del. 2021).
199
Id. at 1263.
200
Id.201
Id. (quoting Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004)).
34
If the Plaintiffs’ claim for unjust enrichment against Bernard Bailey belongs to
Authentix, it is derivative, it was extinguished in the Sale, and the Plaintiffs lack
standing to pursue it.202
The unjust enrichment claim seeks to recover the $3 million bonus paid to
Bernard Bailey in connection with the Sale. 203 When a claim challenges a side
transaction related to a merger, “[t]he Court must distinguish between direct
challenges to a merger’s fairness and derivative challenges to wrongs merely
associated with the merger.”204 To be direct, the side transaction must “divert merger
consideration from stockholders, rather than from the acquirer; the diversion must
be ‘improper,’ that is, the product of misconduct by the defendants; and the diversion
must materially affect the merger’s process or price, calling the merger’s fairness or
validity into question.” 205
Bernard Bailey contends that the unjust enrichment claim against him is
derivative because, according to him, the $3 million bonus was paid out of
Authentix’s “general assets.”206 But the Amended Complaint alleges otherwise:
“Bernard Bailey’s $3 million bonus was not paid out of Authentix’s assets but was
instead treated as a transaction expense that directly decreased, dollar for dollar, the
202
See id.203
Am. Compl. ¶¶ 131–35.
204
Blue v. Fireman, 2022 WL 593899, at *11 (Del. Ch. Feb. 28, 2022).
205
Id.206
Defs.’ OB at 56–57.
35
amount of money distributed to Authentix’s stockholders.” 207 This allegation, says
Bernard Bailey, is “baseless[]” and “invented out of whole cloth solely to avoid
dismissal.” 208 Perhaps. He offers evidence that he contends proves the allegation
false: his bonus plan required that “Bonuses will be paid out of the general assets of
the Company or its successor.”209
At this pleading stage, however, I must accept the Amended Complaint’s
allegations as true and may not weigh evidence.210 Bernard Bailey may be able to
demonstrate at a later stage that Authentix complied with the bonus plan’s
requirement that bonuses “be paid out of the general assets of the Company or its
successor,” but I must accept the Amended Complaint’s allegation to the contrary as
true at this stage. Taking as true the allegation that the $3 million bonus was treated
as a transaction expense and paid out of the Sale consideration, it is reasonably
conceivable that the bonus improperly diverted Sale consideration that would have
gone to the common stockholders. Moreover, Bernard Bailey does not dispute that
the $3 million bonus was material in the context of the $77.5 million guaranteed Sale
consideration and $27.5 million contingent Sale consideration, and I find that it was
material. Accordingly, the unjust enrichment claim against Bernard Bailey is direct.
207
Am. Compl. ¶ 103.
208
Defs.’ OB at 56 & n.15.
209
Id. at 56.
210
Burkhart v. Genworth Fin., Inc., 2022 WL 1468769, at *2 (Del. Ch. May 10, 2022); WeWork,
2020 WL 7343021, at *11 (declining to “weigh evidence on a motion to dismiss”).
36
The Defendants do not challenge the merits of the unjust enrichment claim
against Bernard Bailey, contending only that I must dismiss it as duplicative of the
breach of fiduciary duty claims.211 But, again, these claims may be pled in the
alternative, 212 and “when this court ‘does not dismiss a breach of fiduciary duty
claim, it likely does not dismiss a duplicative unjust enrichment claim.’”213
Therefore, although the Defendants may be correct that the unjust enrichment claim
will not provide the Plaintiffs with relief independent of their fiduciary duty claims,
I decline to dismiss the unjust enrichment claim against Carlyle as duplicative.214
D. The Aiding and Abetting and Conspiracy Claims Are Dismissed
(Counts III and IV)
The Amended Complaint brings an aiding and abetting claim against Carlyle,
in the alternative to the breach of fiduciary duty claim against it, and a civil
conspiracy claim against all the Defendants, for their actions in connection with the
Sale.215 “[I]n cases involving the internal affairs of corporations, aiding and abetting
claims represent a context-specific application of civil conspiracy law.” 216 As a
result, when this Court dismisses aiding and abetting claims, it often dismisses civil
211
Defs.’ OB § VI.B; Defs.’ RB § V.B n.12.
212
See Garfield, 2022 WL 1641802, at *49–54.
213
SDF Funding LLC et al. v. Stanley Fry et al., 2022 WL 1511594, at *18 (Del. Ch. May 13,
2022) (quoting Frank v. Elgamal, 2014 WL 957550, at *31 (Del. Ch. Mar. 10, 2014)).
214
See Lockton, 2022 WL 604011, at *17 (declining to dismiss unjust enrichment claim despite
being “entirely coterminous with claims that these Defendants breached fiduciary duties”).
215
Am. Compl. ¶¶ 118–30.
216
Allied Cap. Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1038 (Del. Ch. 2006).
37
conspiracy claims “for identical reasons.”217 The parties here agree that the aiding
and abetting and civil conspiracy claims therefore rise and fall together.218
“The elements of a claim for aiding and abetting a breach of a fiduciary duty
are: (1) the existence of a fiduciary relationship, (2) the fiduciary breached its duty,
(3) a defendant, who is not a fiduciary, knowingly participated in a breach, and
(4) damages to the plaintiff resulted from the concerted action of the fiduciary and
the non-fiduciary.”219 There is no dispute here that Carlyle owed fiduciary duties to
the Authentix minority stockholders because it owned more than 50% of Authentix’s
outstanding stock.220 Nor do the parties dispute that the Director Defendants owed
fiduciary duties. The Amended Complaint therefore fails to establish knowing
participation by a defendant “who is not a fiduciary” or any “concerted action of the
fiduciary and the non-fiduciary.”221 Accordingly, the aiding and abetting and civil
conspiracy claims must be dismissed.
III. CONCLUSION
For the foregoing reasons, the Defendants’ motion to dismiss is GRANTED
with respect to Counts III and IV. The Defendants’ motion to dismiss is DENIED
217
Trenwick Am. Litig. Tr. v. Ernst & Young, L.L.P., 906 A.2d 168, 215 (Del. Ch. 2006), aff’d sub
nom. Trenwick Am. Litig. Tr. v. Billett, 931 A.2d 438 (Del. 2007) (TABLE).
218
See Defs.’ OB § V; Pls.’ AB § IV.F; Defs.’ RB § IV.
219
Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 172 (Del. 2002)
(quoting Fitzgerald v. Cantor, 1999 WL 182573, at *1 (Del. Ch. Mar. 25, 1999)).
220
See Am. Compl. ¶ 2.
221
Gotham, 817 A.2d at 172.
38
with respect to the remaining counts. The parties should confer and submit a form
of order consistent with this memorandum opinion.
39