Michael Blue v. Dan Fireman ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
MICHAEL BLUE, CHRISTIAN GROH, )
and LING YIM, )
)
Plaintiffs, )
)
v. ) C.A. No. 2021-0268-MTZ
)
DAN FIREMAN, CHRISTOPHER )
AKELMAN, OCTAVIO )
BOCCALANDRO, FIREMAN )
CAPITAL PARTNERS LLC, FIREMAN )
CAPITAL PARTNERS III, L.P., )
CROCKET RESOURCES S.A., and )
BASSLER CO CORP., )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 9, 2021
Date Decided: February 28, 2022
Marcus E. Montejo and John G. Day, PRICKETT, JONES & ELLIOT, P.A.,
Wilmington, Delaware, Attorneys for Plaintiffs Michael Blue, Christian Groh, and
Ling Yim.
Matthew D. Stachel, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP,
Wilmington, Delaware; Audra J. Soloway, Jaren Janghorbani, and Maia Usui,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New
York, Attorneys for Defendants Dan Fireman, Christopher Akelman, Octavio
Boccalandro, Fireman Capital Partners LLC, and Fireman Capital Partners III,
L.P.
ZURN, Vice Chancellor.
In the fall of 2020, the board of a cannabis company worked to finalize its
pending merger with a special purpose acquisition company (“SPAC”). Just as the
deal was nearly complete, the target company’s largest creditor stepped forward and
demanded a series of favorable amendments to debt and warrant agreements, of
which the creditor was the primary beneficiary. Armed with an irrevocable proxy
that controlled 83% of the target’s voting power, the creditor threatened to block the
pending merger unless the board acceded to its demands. The company’s five board
members included two creditor partners and one creditor appointee. Two days later,
the board approved the creditor’s demanded amendments and announced the merger.
The amendments diverted approximately $40 million of would-be merger
consideration out of the stockholders’ pockets and into the creditor’s. The plaintiffs,
former target stockholders and optionholders, assert claims for breaches of fiduciary
duty, tortious interference, and civil conspiracy.
At the motion to dismiss stage, the defendants’ primary argument is that the
stockholders’ claims are derivative, such that plaintiffs’ standing was extinguished
by the merger. This decision rejects that argument. Under longstanding Delaware
Supreme Court precedent, the plaintiffs’ fiduciary duty claim is direct because it
alleges the merger was unfair due to the improper, material diversion of merger
proceeds from the stockholders to the creditor. The defendants also challenge the
merits of the stockholders’ claims. This decision largely rejects those arguments as
1
well. As to the breach of fiduciary duty claim, I conclude the creditor was the
target’s controller by virtue of its voting power, and, therefore, owed the target’s
stockholders a duty of loyalty. The creditor breached that duty by holding the merger
hostage to secure its demanded amendments. But I dismiss the optionholders’
tortious interference claim because it fails to plead a bona fide business expectancy.
The pending motions to dismiss are therefore granted in part and denied in part.
I. BACKGROUND1
The Verified Complaint (the “Complaint”) in this action asserts putative class
action claims relating to the January 2021 merger (the “Merger”) between Left Coast
1
I draw the following facts from the Verified Complaint, available at Docket Item
(“D.I.”) 1 [hereinafter “Compl.”], as well as the documents attached and integral to it. See,
e.g., Himawan v. Cephalon, Inc., 2018 WL 6822708, at *2 (Del. Ch. Dec. 28, 2018); In re
Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014).
Citations in the form of “Stachel Decl. ––” refer to the exhibits attached to Transmittal
Declaration Pursuant To 10 Del. C. § 3927 of Matthew D. Stachel in Support of
Defendants’ Brief in Support of Their Motions to Dismiss the Verified Complaint,
available at D.I. 19. Citations in the form of “OB ––” refer to Defendants’ Brief in Support
of Their Motions to Dismiss the Verified Complaint, also available at D.I. 19. Citations in
the form “AB ––” refer to Plaintiffs’ Answering Brief in Opposition to Defendants’
Motions to Dismiss, available at D.I. 26. Citations in the form “RB ––” refer to
Defendants’ Reply Brief in Support of Their Motions to Dismiss the Verified Complaint,
available at D.I. 30.
Defendants attached excerpts of several documents to their motions to dismiss. In
some cases, they are properly incorporated by reference and are useful in illuminating the
Complaint’s allegations. In others, the moving defendants have used those exhibits to
construct a counternarrative. See OB 8–14. Insofar as the moving defendants seek to
“rewrite Plaintiffs’ well-pleaded complaint in favor of their own version of events,” “that
is not how our Chancery Rule 12(b)(6) works.” In re CBS Corp. S’holder Class Action &
Deriv. Litig., 2021 WL 268779, at *18 (Del. Ch. Jan. 27, 2021) (alterations and internal
quotation marks omitted) (quoting In re Clovis Oncology, Inc. Deriv. Litig., 2019 WL
4850188, at *13 n. 216 (Del. Ch. Oct. 1, 2019)). Plaintiffs urge me to convert the motion
2
Ventures, Inc. (“Left Coast” or the “Company”) and TPCO Holding Corp.
(“TPCO”). Plaintiffs Michael Blue, Christian Groh, and Ling Yim (together,
“Plaintiffs”) are former Left Coast stockholders. Their core allegation challenges a
side transaction benefitting the Company’s controller, which they argue rendered the
Merger unfair.
A. Plaintiffs Form Their Business, Spin Off Left Coast, And
Secure Financing.
In 2010, Blue and Groh, along with nonparty Brendan Kennedy, formed
Privateer Holdings, Inc. (“Privateer”), an investment firm in the cannabis space. As
of 2019, Privateer had four operating subsidiaries, including Left Coast. In February
2019, Privateer spun off Left Coast to its stockholders. Left Coast is a leading
cannabis operator in California.
Left Coast has two classes of common stock: Class A stock, entitled to one
vote per share, and high-vote Class B stock, entitled to ten votes per share. Because
of this structure, the Class B stockholders control approximately 83% of the
Company’s outstanding voting power. The Class B shares were owned by
Privateer’s founders: Blue, Groh, and Kennedy. The Class A shares were more
widely dispersed: many of the Company’s employees, including plaintiff Yim
to dismiss into one for summary judgment and summarily deny it. See AB 13–16. I do
not believe conversion is necessary here. Instead, after due consideration, I have ignored
extraneous references offered to rewrite the Complaint. See Ct. Ch. R. 12(b).
3
(Privateer’s Chief Accounting Officer), received Class A stock options in their
compensation packages.
After the spinoff, Left Coast began to consider strategic financing options. In
2019 and early 2020, the Company raised approximately $25 million by issuing a
series of convertible notes (the “2019 Notes”). The 2019 Notes were set to mature
on March 28, 2021. The 2019 Notes would automatically convert into Company
stock upon a “Qualified Financing,” defined as the sale or issuance of at least $25
million in preferred stock.
Defendant Fireman Capital Partners, LLC (“Fireman Capital”) and its
affiliate, Fireman Capital Partners III, L.P. (“Fireman Capital III,” and together with
Fireman Capital, the “Fireman Entities”) invested $10 million through 2019 Notes.2
It appears defendants Bassler Co Corp. (“Bassler”) and Crocket Resources S.A.
(“Crocket”) also loaned the Company money through the 2019 Notes.
B. Left Coast Explores The Merger And Borrows More Money
From Fireman Capital.
By the spring of 2020, the Company was actively engaged in talks with a
potential buyer, Subversive Capital. Subversive Capital had already raised $575
million through a SPAC. Subversive Capital’s affiliated SPAC entity would later
become TPCO, the acquirer in the Merger. Subversive Capital planned to use the
2
Stachel Decl. Ex. 2 at 1; see Compl. ¶ 24.
4
Merger to combine Left Coast and another cannabis company under the TPCO
umbrella as one integrated business. Meanwhile, Subversive Capital was also
negotiating a brand strategy agreement with Roc Nation, LLC, and its founder,
Shawn C. Carter (professionally known as JAY-Z). Under that agreement, the new
entity would become Roc Nation’s “Official Cannabis Partner.”3
The complexity of the transactions and the COVID-19 pandemic delayed the
Merger. Left Coast needed additional cash to fund its operations in the meantime.
Once again, it turned to Fireman Capital. In July 2020, Fireman Capital offered the
Company $10 million in bridge financing (the “July 2020 Financing”). After
securing the terms of the July 2020 Financing, Fireman Capital solicited other
holders of 2019 Notes to participate. Ultimately, 88% of the 2020 money came from
the Fireman Entities, Crocket, and Bassler.
This lifeline would help keep the Company afloat while the Merger was being
negotiated, but it had a cost. Fireman Capital required (1) improvements on the 2019
Notes’ terms, (2) a new note to secure the new loan, (3) new warrants to purchase
Class A shares, (4) additional board representation, and (5) an irrevocable proxy to
vote the founders’ Class B common stock, which represented 83% of the Company’s
outstanding voting power. After negotiations, the Company agreed to these terms.
3
Compl. ¶ 2.
5
First, the 2019 Notes were amended to favor the lenders, including Fireman
Capital. These changes lowered the “Qualified Financing” threshold from $25
million to $7 million, and added additional automatic conversion events, including
a SPAC transaction and an IPO.4 The parties also extended the 2019 Notes’ maturity
date to July 31, 2021; the 2019 Notes would convert automatically upon maturity.
Finally, the valuation cap used to determine the number of shares issuable upon
conversion was dropped from $1 billion to $175 million, subject to adjustments.
The Company also issued a new promissory note (the “2020 Note”) and
warrants (the “2020 Warrants”). The 2020 Note was not convertible; instead, it
carried a simple interest rate of 12% per year. The 2020 Warrants gave their holders
the right to purchase Class A shares at a $0.01 per share strike price.
Both the 2020 Note and the 2020 Warrants provided their holders with
downside protection in the event a “Qualifying Transaction,” including a de-SPAC
transaction like the Merger, was not completed by November 30, 2020.5 If a
Qualifying Transaction occurred before November 30, the Company owed 150% of
the outstanding 2020 Note principle plus interest; if it did not, the 150% would
balloon to 200%. The amount of shares the holder could buy under the 2020
4
Id. ¶ 26.
5
See id. ¶¶ 27–28, 30; Stachel Decl. Ex. 6 § 2(b)(vii) (defining a “Qualifying Transaction”);
Stachel Decl. Ex. 3 § 2(b)(iii) (same); see also Stachel Decl. Ex. 4 at 1 (referencing a
“Qualifying Transaction”).
6
Warrants similarly varied based on the timing of a “Qualifying Transaction.” If a
“Qualifying Transaction” was timely completed, the holder could purchase an
amount of shares worth $10 million, multiplied by 150%, divided by the applicable
share price. But if a Qualifying Transaction did not occur before November 30, the
multiplier was doubled to 300%.
Finally, Fireman Capital gained two important governance levers. The first
was additional representation on the Company’s five-person board of directors (the
“Board”). Fireman Capital appointed three members: its founder, defendant Dan
Fireman; a partner, defendant Christopher Akelman; and Bassler’s founder and
principal Octavio Boccalandro (together, the “Director Defendants”). The other
Board members were Brett Cummings, Left Coast’s CEO; and Adam Dawson,
elected by the Company’s founders as Class B shareholders. Second, the founders,
executed an irrevocable proxy to give Fireman Capital the power to vote their Class
B shares (the “Class B Proxy”). By virtue of the Class B Proxy, Fireman Capital
controlled 83% of the Company’s voting power.
Plaintiffs allege the purpose of this structure was clear: Fireman Capital
funded Left Coast’s continued operations so that it could survive until the Merger,
was rewarded handsomely, and gained the power to steer the Company through a
successful transaction. Left Coast had a powerful incentive to close the Merger by
November 30, 2020. If it did not, Fireman Capital would make money anyway, as
7
its stake in the 2020 Note and the 2020 Warrants would become more valuable. And
in any case, Fireman Capital had voting control over the Company and thus
controlled the outcome.
C. On The Eve Of The Merger, Fireman Capital Demands
Favorable Amendments To The 2019 Notes And 2020
Warrants.
By August 2020, the Company and Subversive Capital were negotiating the
key terms of the Merger, including Fireman Capital’s participation in a private
placement to help fund it. Those negotiations were nearing the finish line in October
2020. Around that time, Fireman Capital began to clamor for more consideration.
It complained the treatment of the Merger in the 2019 Notes and the 2020 Warrants
did not reflect the minimum premium it expected to receive. Just as negotiations on
the Merger were winding down, Fireman Capital demanded favorable amendments
to the 2019 Notes and the 2020 Warrants (the “Amendments”). Among the
Amendments was a substantial reduction in the 2020 Warrants’ exercise price: from
$0.01 per share to less than $0.0001 per share. The Complaint describes this
reduction as one “[a]mong other changes,” but does not detail any other
Amendments.6 Fireman Capital continued to push its demanded Amendments while
the Board finalized the Merger documents.
6
Compl. ¶ 36.
8
On November 22, the Board unanimously approved the Merger documents.
But Fireman Capital declared it would not vote its Class B Proxy in favor of the
Merger unless its demands to amend the 2019 Notes and the 2020 Warrants were
met. Cummings and Dawson, the two Board members not appointed by Fireman
Capital, determined the Merger’s closing would be compromised unless the Board
agreed. On November 24, the Board approved the Amendments; Plaintiffs assert
the Board was conflicted and controlled.
Plaintiffs allege that as a result of the Amendments, $40 million in Merger
consideration was diverted from the Company’s common stockholders to the
Defendants. Plaintiffs also plead the Amendments diverted value from the
Company’s optionholders to Defendants: the Amendments reduced the value
received by optionholders in the Merger, and caused many of the Class A options
held by Yim and others to be “underwater” and worthless. The Complaint does not
detail how these outcomes were effectuated.
Also on November 24, Subversive Capital announced it had entered into
definitive transaction agreements to effectuate the Merger. The Merger closed on
January 15, 2021.7
7
See Stachel Decl. Ex. 10 at 1.
9
D. Plaintiffs File This Action.
Plaintiffs filed their Complaint on March 30.8 The Complaint asserts four
counts, all styled as class action claims on behalf of all the Company’s former
stockholders. Count I claims Fireman Capital “and its affiliates,” as controllers, and
the Director Defendants breached their fiduciary duties by approving the
Amendments.9 Count II claims Defendants tortiously interfered with the
optionholders’ expectancies in their options by approving the Amendments and
causing those options to become worthless.10 Count III claims Fireman Capital,
Crocket, and Bassler conspired in connection with the breaches of fiduciary duty
alleged in Count I.11 Count IV claims Fireman Capital, Crocket, and Bassler
conspired in connection with the tortious interference alleged in Count II.12
The Fireman Entities and Director Defendants (together, the “Moving
Defendants”) filed the pending motions to dismiss (the “Motions”) on April 21 and
April 27, respectively.13 Crocket and Bassler have not yet appeared and did not join
the Motions. It appears this is because service on them is not yet complete.14 The
8
See generally Compl.
9
Id. ¶¶ 47–55.
10
Id. ¶¶ 56–60.
11
Id. ¶¶ 61–67.
12
Id. ¶¶ 68–75.
13
D.I. 9; D.I. 12.
14
See D.I. 2; D.I. 4.
10
Motions argue Plaintiffs’ claims are all derivative claims that Plaintiffs lack standing
to assert after the Merger. The Motions also argue, in the alternative, that all four
counts fail to state claims upon which relief can be granted. The parties briefed the
Motions and the Court heard oral argument on November 9.15
II. ANALYSIS
The standards governing a motion to dismiss under Court of Chancery
Rule 12(b)(6) for failure to state a claim for relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible to proof.”16
Thus, the touchstone “to survive a motion to dismiss is reasonable
‘conceivability.’”17 This standard is “minimal”18 and “plaintiff-friendly.”19 “Indeed,
it may, as a factual matter, ultimately prove impossible for the plaintiff to prove his
15
D.I. 36; D.I. 37 [hereinafter “Hr’g Tr.”].
16
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations omitted).
17
Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011).
18
Id. at 536 (citing Savor, 812 A.2d at 896).
19
See, e.g., Clouser v. Doherty, 175 A.3d 86 (Del. 2017) (TABLE); In re Trados Inc.
S’holder Litig., 2009 WL 2225958, at *9 (Del. Ch. July 24, 2009).
11
claims at a later stage of a proceeding, but that is not the test to survive a motion to
dismiss.”20
A. Plaintiffs’ Claims Are Direct Under Tooley v.
Donaldson, Lufkin & Jenrette, Inc.21 And Parnes v. Bally
Entertainment Corp.22
The Motions present an important gating issue: whether Plaintiffs’ claims are
direct or derivative. The Moving Defendants argue Plaintiffs’ claims are derivative
so they must be dismissed because the Merger extinguished Plaintiffs’ derivative
standing. Standing is a threshold question, so I address it first.23
“A derivative suit enables a stockholder to bring a suit on behalf of the
corporation for harm done to the corporation.”24 By 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.”25 In distinguishing between the two, the
Court looks at “the nature of the wrong alleged, not merely at the form of words used
in the complaint.”26 “Classification of a particular claim as derivative or direct can
20
Cent. Mortg., 27 A.3d at 536.
21
845 A.2d 1031 (Del. 2004).
22
722 A.2d 1243 (Del. 1999).
23
See Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251, 1262 (Del. 2021).
24
Id. (citing Tooley, 845 A.2d at 1036).
25
Id. at 1263.
26
Brokerage Jamie Goldenberg Komen Rev Tru U/A 06/10/08 Jamie L Komen Tr. for
Komen v. Breyer, 2020 WL 3484956, at *7 (Del. Ch. June 26, 2020) (internal quotation
12
be difficult,”27 and the line “is often a narrow one.”28 “Application of these
principles assumes heightened significance in the post-merger context because
stockholders typically lose standing to pursue derivative claims when a merger
extinguishes their status as stockholders under the continuous ownership rule.”29
Because of this rule, the distinction between direct and derivative claims “is
essentially outcome-determinative of any breach of fiduciary duty claims that can be
asserted in connection with the merger by the target company stockholders.”30
marks omitted) (quoting In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808,
817 (Del. Ch. 2005), aff’d, 906 A.2d 766 (Del. 2006)).
27
Brookfield, 261 A.3d at 1263 (citing Agostino v. Hicks, 845 A.2d 1110, 1116–17 (Del.
Ch. 2004)).
28
Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 352 (Del. 1988) (internal quotation marks
omitted) (quoting Abelow v. Symonds, 156 A.2d 416, 420 (Del. Ch. 1959)).
29
Komen, 2020 WL 3484956, at *7 (Del. Ch. June 26, 2020) (internal quotation marks
omitted) (quoting In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL
3120804, at *10–12 (Del. Ch. June 25, 2018), aff’d sub nom. IDT Corp. v. JDS1, LLC, 206
A.3d 260 (Del. 2019) (TABLE)). Though this opinion references other opinions from the
Straight Path case, I refer to the aforementioned opinion throughout as “Straight Path.”
30
Golaine v. Edwards, 1999 WL 1271882, at *4 (Del. Ch. Dec. 21, 1999). Then-Vice
Chancellor Strine went on:
Put another way, the individual-derivative distinction comes as close as
possible to being a determination of the merits of a claim. By denominating
a claim as derivative in this context, the court comes very near to immunizing
the defendants from any culpability for the conduct complained of. While
the courts may indulge the notion that the claims still “survive” as waste,
mismanagement, or unfairness claims for dimunition [sic] of the value of the
target, they usually die as a matter of fact.
...
13
So too here: if Plaintiffs’ claims are derivative, then the Merger extinguished
their standing to sue and I must dismiss them.31 But in my view, Plaintiffs’ claims
are direct.
1. Distinguishing Between Direct And Derivative
Claims
The Delaware Supreme Court recently reaffirmed Tooley as the operative test
for whether a claim is direct or derivative.32 Under Tooley, that inquiry must turn
solely on the following questions:
(1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and
(2) who would receive the benefit of any recovery or other remedy (the
corporation or the stockholders, individually)?33
“Where all of a corporation’s stockholders are harmed and would recover pro rata
in proportion with their ownership of the corporation’s stock solely because they are
stockholders, then the claim is derivative in nature.”34 By contrast, a stockholder
Thus cloaked within the application of the individual-derivative distinction
to post-merger claims is the actual reality of the situation. If the harm alleged
is seen as a derivative one, it is nearly certain to be non-compensable. But if
the harm alleged is seen as individual, it may be compensable.
Id. at *5.
31
See, e.g., In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 476 (Del. Ch. 2013) (citing,
inter alia, Lewis v. Anderson, 477 A.2d 1040, 1050 n.19 (Del. 1984), and 8 Del. C.
§ 259(a)).
32
See Brookfield, 261 A.3d at 1263.
33
Tooley, 845 A.2d at 1033.
34
Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).
14
pleads a direct claim if he “demonstrate[s] that the duty breached was owed to the
stockholder and that he or she can prevail without showing an injury to the
corporation.”35
Plaintiffs invoke Parnes v. Bally Entertainment Corp. to argue that their
breach of fiduciary duty claims are direct, rather than derivative, because their attack
on the Amendments is at bottom an attack on the Merger and its fairness.36 Here,
like the cases that have gone before, it is “difficult to determine whether a
stockholder is challenging the merger itself, or alleged wrongs associated with the
merger.”37 And so, like the cases that have gone before, I offer my view of the
evolution of Parnes and its progeny.38
Delaware law permits a former target stockholder to challenge a merger’s
fairness or validity through a direct claim, even after that merger extinguished the
stockholder’s derivative standing. In Cede & Co. v. Technicolor, Inc.,39 our
Supreme Court considered a stockholder’s standing to bring a direct claim for
35
Tooley, 845 A.2d at 1039.
36
See AB 22–30 (discussing Parnes and its progeny).
37
Parnes, 722 A.2d at 1245; see also Turner v. Bernstein, 1999 WL 66532, at *10 (Del.
Ch. Feb. 9, 1999) (“As our Supreme Court recently recognized in [Parnes], a thin grey line
often marks the difference between derivative and individual claims that arise in the merger
context.”).
38
E.g., Komen, 2020 WL 3484956, at *8; Golaine, 1999 WL 1271882, at *4–8; Straight
Path, 2018 WL 3120804, at *10–12.
39
542 A.2d 1182 (Del. 1988).
15
rescissory damages based on fraud in the merger, where that stockholder had first
filed a statutory appraisal action.40 The Court held the stockholder’s original election
of an appraisal action did not deprive it of the right to file a direct claim for “fraud
in the merger.”41 Kramer v. Western Pacific Industries,42 decided two months later,
explained Cede as properly focused on challenges to a merger’s fairness:
As recognized by this Court in [Cede], direct attacks against a given
corporate transaction (attacks involving fair dealing or fair price) give
complaining shareholders standing to pursue individual actions even
after they are cashed-out through the effectuation of a merger.
Specifically, this Court stated that “no one would assert that a former
owner suing for loss of property through deception or fraud has lost
standing to right the wrong that arguably caused the owner to relinquish
ownership or possession of the property.”43
Kramer offered a counterpoint. The Kramer plaintiff argued that his claim
the defendants “divert[ed] to themselves” merger consideration through golden
parachutes and stock options at the expense of minority stockholders was direct, not
40
Id. at 1186.
41
Id. 1188.
42
546 A.2d 348.
43
Id. at 354 (alterations omitted) (quoting Cede, 542 A.2d at 1188). Kramer also noted the
two exceptions articulated in Lewis v. Anderson:
This Court, in Lewis, set forth two exceptions in the merger context to its
holding that only a current shareholder has standing to maintain an action
that is derivative in nature: (i) if the merger itself is the subject of a claim of
fraud, being perpetrated merely to deprive shareholders of the standing to
bring a derivative action; or (ii) if the merger is in reality merely a
reorganization which does not affect plaintiff's ownership in the business
enterprise.
Id. (citing Lewis, 477 A.2d at 1046 n.10).
16
derivative.44 He did not challenge “the fairness of the price offered in the merger or
the manner in which the merger agreement was negotiated,” or “allege that the
merger price was unfair or that the merger was obtained through unfair dealing.”45
Rather:
His principal contention for sustaining an individual, as distinguished
from a derivative, claim is that the effect of the defendants’ acts of
waste was to reduce the common shareholders’ net distributive share of
an otherwise adequate tender offer price paid by [the acquirer] for
taking [the target] private.46
Our Supreme Court characterized that claim as one of “mismanagement resulting in
corporate waste,” which, “if proven, represents a direct wrong to the corporation,”
felt only indirectly by its stockholders.47 On that basis, Kramer concluded such a
claim was derivative and dismissed it because after the merger, the plaintiff lacked
standing.
A decade later in Parnes, our Supreme Court preserved direct standing for
former target stockholders attacking the fairness of a merger by attacking a side
transaction.48 To state such a direct claim, “a stockholder must challenge the validity
44
Id. at 350.
45
Parnes, 722 A.2d at 1245 (discussing Kramer); see also Kramer, 546 A.2d at 350 n.2,
354.
46
Kramer, 546 A.2d at 350 n.2.
47
Id. at 353.
48
722 A.2d at 1245–6.
Parnes was decided before Tooley and its elimination of the special injury test. But
the Tooley Court viewed Parnes favorably, noting “[t]he proper analysis has been and
17
of the merger itself, usually by charging the directors with breaches of fiduciary duty
resulting in unfair dealing and/or unfair price.”49 Parnes relied on Kramer to
distinguish a “derivative claim for mismanagement related to a merger” from a
“direct claim for unfairness in the merger terms.”50 The Parnes plaintiff claimed the
target company’s chairman, who controlled the merger negotiations, insisted on a
series of side payments in exchange for his support of any potential merger
transaction.51 He made his demands known to all potential acquirers, potentially
driving away superior bids.52 The Court reasoned the plaintiff adequately alleged
that (1) the chairman “breached his fiduciary duty of loyalty by preferring himself
over [the target company] and its stockholders,” and (2) the other directors breached
should remain that stated in [Grimes v. Donald,] Kramer and Parnes. That is, a court
should look to the nature of the wrong and to whom the relief should go.” Tooley, 845
A.2d at 1039. The Delaware Supreme Court’s most recent decision on this subject,
Brookfield Asset Management, Inc. v. Rosson, which overruled Gentile v. Rossette, twice
quoted this excerpt from Tooley and left Parnes in place. See Brookfield, 261 A.3d at 1264
n.48, 1273 (quoting Tooley, 845 A.2d at 1039); see also El Paso Pipeline GP Co., L.L.C.
v. Brinckerhoff, 152 A.3d 1248, 1251 (Del. 2016) (“Under our law, equity holders
confronted by a merger in which derivative claims will pass to the buyer have the right to
challenge the merger itself as a breach of the duties they are owed.” (citing Parnes, 722
A.2d at 1245)).
49
Parnes, 722 A.2d at 1245 (citing Kramer, 546 A.2d at 354, and Weinberger v. UOP,
Inc., 457 A.2d 701 (Del. 1983)); see also Feldman, 951 A.2d at 734–35 (“In Kramer, our
analysis recognized that claims of mismanagement resulting in a decrease in the value of
corporate stock are derivative in nature, while ‘attacks involving fair dealing or fair price’
in a corporate transaction are direct in nature.” (quoting Kramer, 546 A.2d at 354)).
50
Parnes, 722 A.2d at 1245 (citing Kramer, 546 A.2d at 351–54).
51
See id. at 1245–46.
52
See id.18
their duties of loyalty by “acquiescing in [the chairman’s] self-interested
negotiations and by approving a merger at an unfair price.”53 On that basis, Parnes
concluded the plaintiff challenged the fairness of the merger’s process and price, and
so stated a direct claim.54 Our Supreme Court recently discussed the difference
between Parnes and Kramer:
Although the [Kramer] plaintiff alleged that wrongful transactions
associated with the merger reduced the amount paid to the target’s
stockholders, “it did not allege that the merger price was unfair or that
the merger was obtained through unfair dealing.” That “such a claim
is asserted in the context of a merger does not change its fundamental
nature.” Thus, in Kramer what the plaintiff failed to plead was a
challenge to the merger itself rather than attack the side benefits secured
by some merger participants.55
In short, the Parnes plaintiff succeeded where the Kramer plaintiff did not because
the Parnes claim attacked both the side benefits and the fairness of the merger itself.
I review Parnes and its progeny for guidance in identifying direct attacks on
a merger through side transactions, recognizing that “Delaware Courts have
53
Id. at 1246.
54
See id. at 1245–46; see also Brookfield, 261 A.3d at 1272 (“Then came our decision in
[Parnes], where the plaintiff alleged that the Chairman and CEO of Bally wrongfully
required that corporate assets be transferred to him in order to obtain his consent in
proceeding with a merger. This Court concluded that such allegations directly challenged
the fairness of the process and the price in the merger.” (footnotes omitted) (citing Parnes,
722 A.2d at 1245)).
55
Morris v. Spectra Energy P’rs (DE) GP, LP, 246 A.3d 121, 132 (Del. 2021) (footnotes
omitted) (quoting Parnes, 722 A.2d at 1245).
19
interpreted the Parnes exception very narrowly.”56 First, shortly after Parnes, then-
Vice Chancellor Strine offered guidance on the distinction between an attack on
merger fairness and a peripheral attack in Golaine v. Edwards.57 The Golaine
plaintiff challenged a $20 million fee payment to KKR, a major target company
stockholder.58 The Court made three critical factual observations as to why this
payment did not affect the merger’s fairness, which support three gating principles
for direct attacks on side transactions.59
First, the $20 million payment was immaterial in the context of the $8.3 billion
merger; even if that payment was wrongfully directed to KKR, its absence did not
56
In re NYMEX S’holder Litig., 2009 WL 3206051, at *10 (Del. Ch. Sept. 30, 2009).
57
1999 WL 1271882, at *4 (noting that “side transactions” with large stockholders are
common in the merger context).
58
Id. at *1.
59
See Golaine, 1999 WL 1271882, at *78; see also Carsanaro v. Bloodhound Techs., Inc.,
65 A.3d 618, 662 (Del. Ch. 2013) (“[In Golaine,] Chancellor Strine held that under Kramer
and Parnes, a plaintiff only can state an individual claim if the complaint pleads that the
side payments gave rise to a pleadings stage inference that the merger consideration was
unfair.”), abrogated on other grounds by El Paso, 152 A.3d at 1264.
20
affect the merger price’s fairness.60 A claim for diverted merger consideration must
challenge a material amount to be direct.61
Second, the payment to KKR did not come out of stockholders’ pockets, but
rather increased the acquiror’s total acquisition costs.62 “[I]f plaintiffs fail to allege
facts that convince the court that the side transactions rendered the underlying
[merger] unfair to the target’s stockholders and instead simply allege that the
acquiror’s cost of acquisition was made higher, the plaintiffs fail to state an
individual claim.”63
60
See Golaine, 1999 WL 1271882, at *7–8 (“Distilled to its essence, the complaint alleges
that KKR received additional merger consideration of $20 million that should have been
shared with [target’s] other stockholders. If the $20 million had been shared in this fashion,
[target] shareholders would have received [0].906179, rather than [0].904, of a[n]
[acquiror’s] share, for each of their [target] shares . . . This equals 2/10 of 1% of the total
merger consideration received by the non-KKR stockholders of [target]. At the outset,
therefore, let me express my doubt that the $20 million fee wagged the $8.3 billion merger
dog. The $20 million seems quite immaterial in the scheme of things. The allegations of
the complaint do little to persuade me otherwise.”).
61
E.g., id.; Dieterich v. Harrer, 857 A.2d 1017, 1027 (Del. Ch. 2004) (“Further, as Vice
Chancellor Strine noted in [Golaine], Parnes simply means that a shareholder makes a
direct claim by alleging that director conduct in a transaction that eliminates shareholders
is so egregious as to materially affect the price paid in that transaction.” (footnote omitted)).
62
Golaine, 1999 WL 1271882, at *9 (“Under the facts pled in the complaint, the only party
that seems to have been adversely affected by the deal in real terms is [the acquiror]. Under
our case law, the claim is therefore at best a derivative one alleging that [the target] became
$20 million less valuable upon the payment to KKR, a claim that no one likely has standing
to raise.”).
63
Id. at *5.
21
Third, consideration-diminishing side payments must be “improper” to be
actionable in a direct claim.64 But distinguishing side payments that “improperly”
divert merger proceeds and thus taint the merger’s fairness from “proper” diversions
of merger proceeds is a strange exercise. Surely every plaintiff would contend that
any diversion of merger consideration to an insider is improper. Golaine offered an
illustration that bears repeating:
It cannot be that the mere fact that an insider (or the affiliate of an
insider) received a payment in connection with the merger in itself
provides a sufficient basis for a target stockholder plaintiff to state an
individual claim based on the simple syllogism that:
1. the payment was part of the total consideration the
acquiror was willing to pay;
2. the target board had a duty to ensure that the payment’s
worth was spread equally to all the stockholders; and
3. the target board’s failure to do so therefore constituted
unfair dealing tainting the merger.
This syllogism is nearly identical to the principal argument advanced
by the plaintiff in Kramer. . . . The Court emphatically rejected this
argument, which was premised in part on the payment of eighteen
million dollars of allegedly excessive or unnecessary merger fees and
expenses.
Under Parnes and Kramer, the target stockholder plaintiff must, at the
very least, allege facts showing that the side payment improperly
diverted proceeds that would have, if the defendant directors had
acted properly, ended up in the consideration paid to the target
stockholders.65
64
Id. at *7, *9; see also NYMEX, 2009 WL 3206051, at *10 (discussing Parnes).
65
Golaine, 1999 WL 1271882, at *9 (footnotes and alterations omitted) (emphasis added);
accord Houseman v. Sagerman, 2014 WL 1600724, at *13 (Del. Ch. Apr. 16, 2014) (“To
22
Golaine observed that this distinction turns, in large part, on the merits of a
plaintiff’s underlying breach of fiduciary duty claim: “The analysis of whether such
side transactions tainted the fairness of the transaction to the target stockholders
becomes in large measure a judgment about whether it was appropriate or not for
those side transactions to occur.”66 Thus, “Parnes can be straightforwardly read as
stating the following basic proposition: a target company stockholder cannot state a
claim for breach of fiduciary duty in the merger context unless he adequately pleads
that the merger terms were tainted by unfair dealing.”67
I read Golaine to offer three ways in which a side transaction must differ from
its syllogism in order for an attack on the transaction to constitute a direct attack on
the merger’s fairness.68 The side transaction must divert assets stockholders were
survive a motion for judgment on the pleadings, the plaintiff must plead facts supporting
an inference that the side payment represented an improper diversion and that, absent the
impropriety, the consideration would have gone to the stockholders: such a pleading states
a direct claim against the defendant directors.”).
66
Golaine, 1999 WL 1271882, at *6.
67
Id. at *7.
68
See id. at *6–9; see also Straight Path, 2018 WL 3120804, at *10 (“The difficulty lies
in distinguishing between challenges to the merger itself and challenges to mere wrongs
associated with the merger. The former state direct claims; the latter, if sufficiently remote
from the merger itself, give rise to derivative claims, which target stockholders typically
cannot pursue post-merger.” (footnotes and internal quotation marks omitted) (quoting
Parnes, 722 A.2d at 1245)).
23
otherwise going to receive.69 The side transaction’s effect on the merger’s price or
process70 must be material, so as to have affected the merger’s fairness.71 And the
diversion must be “improper,” as gauged under essentially a merits inquiry, turning
on whether the side transaction was a product of misconduct like a breach of
fiduciary duty.72 Merely “mentioning a merger in the complaint does not
talismanically create a direct action. Instead, there must be a causal link between
the breach complained of and the ultimate unfairness of the merger.”73
Three recent cases applied Golaine’s indicia of an attack on merger fairness
via a side transaction, searching for a material, improper diversion of merger
69
See, e.g., Golaine, 1999 WL 1271882, at *9 (noting that the alleged side transaction did
not “[take] anything off the table that would have otherwise gone to all the [target]
stockholders.”).
70
After Parnes and Golaine, this Court wondered aloud “whether an individual claim could
exist only if the process were so unfair as to have resulted in an unfair price,” or whether
an unfair process (resulting in a sub-market but perhaps still fair price) could support a
direct claim under Parnes. In re Ply Gem Indus., Inc. S’holders Litig., 2001 WL 755133,
at *5 (Del. Ch. June 26, 2001); see also Carsanaro, 65 A.3d at 663 (discussing Golaine
and Ply Gem). Noting that Parnes discussed “unfair price and/or unfair process,” the Court
in Ply Gem suggested unfair process alone was enough. See Ply Gem, 2001 WL 755133,
at *5 (citing Parnes, 722 A.2d at 1245). “I need not attempt to resolve this dispute because
under Golaine’s more restrictive view, the [Amendments] diverted a sufficient quantum of
merger proceeds to support an inference that the consideration was unfair to the holders of
common stock.” Carsanaro, 65 A.3d at 663.
71
See, e.g., Golaine, 1999 WL 1271882, at *8.
72
See id. at *6–7 (discussing Parnes); see also Houseman, 2014 WL 1600724, at *13.
73
NYMEX, 2009 WL 3206051, at *10 (footnotes, alterations, and internal quotation marks
omitted) (quoting Dieterich, 857 A.2d at 1027).
24
consideration from target stockholders. In Houseman v. Sagerman74 and In re
Straight Path Communications Inc. Consolidated Stockholder Litigation,75 the
plaintiff successfully stated a direct claim. Brokerage Jamie Goldenberg Komen
Rev Tru U/A 06/10/08 Jamie L Komen Trustee for the Benefit of Komen v. Breyer
dismissed the plaintiff’s claim as derivative.76
In Houseman, the challenged side transaction was the target board’s
amendment of its stock option plan “to treat stock options as common stock upon a
change in control, and to vest warrants which would otherwise have lapsed.” 77 In
doing so, the target’s board “divert[ed] to directors over $300,000 (and perhaps
significantly more) of the previously-negotiated merger consideration.”78 The board
decided to enter into the allegedly self-dealing side transaction after the merger price
had been fixed, so “the extracted payments necessarily came at the expense of other
[target] stockholders,” calling the fairness of the merger consideration into
question.79 Both the underlying warrants and their renegotiation “arose in a context
74
2014 WL 1600724.
75
2018 WL 3120804.
76
2020 WL 3484956.
77
2014 WL 1600724, at *13.
78
Id.79
Komen, 2020 WL 3484956, at *12 (discussing Houseman); see also Houseman, 2014
WL 1600724, at *13 (“The facts pled include the facts that, after negotiating the sale price,
the Board amended the 2008 Equity Incentive Plan to treat stock options as common stock
upon a change in control, and to vest warrants which would otherwise have lapsed,
diverting to directors over $300,000 (and perhaps significantly more) of the previously-
25
which constituted self-dealing,” thus “conferring a benefit on the directors not shared
by the stockholders.”80 And the diversion, constituting at least $300,000 in value,
was material in the context of a small merger where the target board could not justify
spending $250,000 on a fairness opinion.81 Therefore, the claim was direct.82
Years later in Straight Path, this Court considered a claim that the target’s
controller used his leverage to extract a nonratable benefit in a side transaction. The
controller threatened to block the pending merger unless the target agreed to settle
indemnification claims against one of his affiliates for pennies on the dollar.83 If
successfully pursued, those indemnification claims would have made up for a
penalty of twenty percent of the merger consideration owed to regulators.84 The
controller also bought some of the company’s assets for approximately one-tenth of
their value, preventing that value from being realized in an arm’s-length merger.85
The Court found the controller “manipulated the sales process” and “improperly
negotiated merger consideration, in the context of total merger consideration so small that
the Board concluded that a fairness opinion costing $250,000 could not be justified.”
(footnote omitted)). The improper side transaction’s timing vis-à-vis the merger has been
a consideration in other Parnes cases. See, e.g., NYMEX, 2009 WL 3206051, at *10–11
(citing Dieterich, 857 A.2d at 1029).
80
Houseman, 2014 WL 1600724, at *13.
81
Id.82
Id.83
Straight Path, 2018 WL 3120804, at *12.
84
Id. at *13.
85
Id. at *7.
26
diverted merger consideration that otherwise would have gone to the stockholders”
to the controller, effectively depriving the company’s stockholders of half a billion
dollars of merger consideration in a $3.1 billion merger.86 The Court concluded
plaintiffs stated a direct claim.87 Vice Chancellor Glasscock certified his conclusion
for interlocutory appeal, noting the plaintiff’s claim challenged the total merger
consideration target stockholders received, but not the sufficiency of the merger
86
Id. at *13.
87
Id. at *12–13; see also id. at *1 (“Here, the indemnification right did not fully ripen until
the sale, and the leverage used by the controller included a threat to nix the transaction
unless corporate assets were first transferred to his affiliates for a manifestly unfair price,
but for which the consideration received by the stockholders upon sale would have included
both the price paid by the purchaser and the beneficial ownership of the litigation trust. I
find the transfer of the indemnification claim to the controller here to be sufficiently
intertwined with the sale of the company and the assets received by stockholders therefrom
to state a claim that the sales transaction was unfair. That claim is direct and may
proceed.”).
27
price itself.88 Despite this distinction, the Delaware Supreme Court summarily
affirmed his decision.89
Houseman and Straight Path stand in contrast to this Court’s recent decision
in Komen. There, the challenged side transaction was the target board’s
compensation committee’s decision to issue “performance awards” and restricted
stock units to several insiders, including top executives.90 The plaintiff alleged that
transaction swamped existing stockholders and their right to merger consideration.91
88
In re Straight Path Commc’ns Inc. Consol. S’holder Litig. (Straight Path II), 2018 WL
3599809, at *2 (Del. Ch. July 26, 2018). Specifically:
The question presented . . . involves whether a challenge to a sale of
corporate assets to a controller for an unfair price, upon which the controller
conditions consent to a merger, states a direct claim under [Parnes] and its
progeny. Under Parnes, a stockholder who directly attacks the fairness or
validity of a merger alleges an injury to the stockholders, not the corporation,
and may pursue such a claim even after the merger at issue has been
consummated. Unlike in Parnes itself, however, here there was no challenge
to the merger price as such; the challenged sale upon which the merger was
conditioned removed corporate assets that would otherwise have been
withheld from the merger sale and transferred to a trust for the benefit of the
stockholders. As a result, the total consideration received by the
stockholders post-merger was decreased by the challenged sale, but the
merger price itself was not affected, and was not challenged by the
Plaintiffs. This precise question has not been directly addressed by prior
case law.
Id. (footnotes, alterations, and internal quotation marks omitted) (emphasis added) (quoting
Parnes, 722 A.2d at 1245).
89
See IDT, 206 A.3d at 260 (TABLE).
90
Komen, 2020 WL 3484956, at *10 (internal quotation marks omitted).
91
See id. (“According to Plaintiff, if the [controller] did not extract this benefit for
themselves, the consideration paid by [buyer] would have been shared by fewer Old Fox
28
The Komen Court concluded the plaintiff’s claim “basically boils down to the
[Golaine] syllogism,” and that it was derivative for want of its impact on the
merger’s fairness.92 Its “critical deficiency” was “the lack of any factual allegations
suggesting a causal link between the [executives’] receipt of the challenged
compensation awards and any unfair dealing in negotiating the terms of the
[merger].”93 Unlike Straight Path (or Parnes), Komen presented no allegation that
the executives “refused to negotiate or impeded the negotiation of a transaction
unless and/or until they received the challenged stock awards.”94 Though the Komen
plaintiff criticized the process leading up to the compensation committee’s decision,
it did not challenge the merger negotiations or allege that the side transaction
impacted those talks.95
The Komen plaintiff’s claim was also derivative because the awards were
immaterial, as in Golaine but in contrast to Straight Path, Parnes, and Houseman.96
The challenged compensation awards were worth $82.4 million—approximately
shares and the ownership of New Fox would have been split fewer ways.” (alterations and
internal quotation marks omitted)).
92
Id. at *11–12.
93
Id. at *11.
94
Id. at *12.
95
See id. at *11–12 (citing Golaine, 1999 WL 1271882, at *9).
96
Id. *12.
29
one-tenth of one percent of the total merger consideration.97 Concluding that the
side transaction did not “support the notion that Defendants tainted the sale process
or the negotiations of the [merger] such that they caused anything to be taken off the
table that otherwise would have gone to all of [the target’s] stockholders,” the Komen
Court held the plaintiff’s claims were derivative.98
***
In sum, the rule statement from Parnes remains perhaps the rule’s best
formulation: a target stockholder retains direct standing after a merger has closed to
challenge the fairness or validity of the merger itself. Where a stockholder
challenges a merger by attacking a side transaction, the Court remains focused on
merger fairness. The Court must distinguish between direct challenges to a merger’s
fairness and derivative challenges to wrongs merely associated with the merger.
Golaine, as applied in Houseman, Straight Path, and Komen, instructs that 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.
97
Id.
98
Id. at *13.
30
2. Count I’s Breach Of Fiduciary Duty Claim Is
Direct.
With this rule in mind, I consider whether Plaintiffs’ breach of fiduciary duty
claim is direct or derivative. In my judgment, it is direct.
“[A]lthough not a model of clarity”99 on all the details, Plaintiffs’ allegations
challenge the Merger’s fairness, following the trail blazed in Golaine as applied in
Houseman and Straight Path. Plaintiffs allege the Board’s decision to approve the
Amendments diverted merger proceeds to a controller in a way that tainted the
merger’s fairness and materially reduced the merger consideration for Left Coast’s
other stockholders. The Complaint explains that after Merger negotiations were
substantially complete, Fireman Capital threatened to derail the deal and withhold
its approval unless the Board agreed to its demanded Amendments.100 Those threats
had teeth: the Class B Proxy gave Fireman Capital enough voting power to block
the Merger.101 And if the Merger did not happen by November 30, the Company
would owe Fireman Capital substantially more cash and stock under the 2020 Note
and the 2020 Warrants.102 To close the Merger and enjoy more palatable repayment
99
Parnes, 722 A.2d at 1245.
100
See Compl. ¶ 37.
101
See id. ¶ 7; see also id. ¶¶ 17, 24, 37.
102
See id. ¶¶ 27–31.
31
terms, the Company had to agree to Fireman Capital’s demands.103 The Board gave
in, diverting approximately $40 million in Merger consideration to Fireman Capital
and the other Defendants.104 These allegations allege improper diversion of material
merger consideration that stockholders would otherwise enjoy, and so, challenge the
Merger’s fairness and allege a direct claim.
First, the parties do not seriously dispute that Fireman Capital’s alleged
leveraging of its power to block the Merger to extract a unique benefit, or the Board’s
accession to those demands, was improper. As alleged, Fireman Capital, the
proverbial “800-pound gorilla,”105 hijacked Merger negotiations and threatened to
block the Merger unless the Board approved its favorable Amendments.106 In other
words, Fireman Capital was able to wield its influence to extract a benefit for itself
103
See id. ¶¶ 38–39.
104
Id. ¶ 40. It is not entirely clear to me how this diversion occurred. But I accept
Plaintiffs’ allegation as true, as I must at this early stage.
105
See In re Pure Res., S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002). Plaintiffs have
adequately alleged Fireman Capital is a controller. See infra Section II.B.
106
See Compl. ¶¶ 34–41.
Fueled entirely by documents outside the Complaint, the Moving Defendants spilled
substantial ink arguing the purpose of the Amendments was to “remedy certain
inconsistencies in the documentation of the [July 2020 Financing].” See OB 12. Plaintiffs
have alleged otherwise. At this procedural stage, I cannot weigh evidence to choose
between Plaintiffs’ well-pleaded allegations and the Moving Defendants’ alternative
explanation for the Amendments. See, e.g., CBS, 2021 WL 268779, at *18 (quoting Voigt
v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb. 10, 2020)). The Moving Defendants’
argument that the Amendments were nothing more than “a good faith effort to remedy
inconsistencies in the July 2020 instruments” is for another day. RB 11 n.4.
32
at the expense of Left Coast’s stockholders.107 That Fireman Capital did not actually
use its Class B Proxy to block the Merger does not mean its threats to do so are not
improper. Straight Path recognized “that a controller’s right to refuse to support a
transaction does not imply a right to exploit minority stockholders” and that a
controller’s threats to block a merger unless it received a special benefit are
actionable as breaches of fiduciary duty.108 Plaintiffs also allege a majority of the
Board was aligned with Fireman, and that the minority independent directors could
not say “no.”109
This misconduct surrounding the Amendments was intertwined with the
Merger: Fireman Capital threatened to withhold its proxy, effectively derailing the
deal, unless and until the Company acceded to its demands. These threats are
reminiscent of those in Parnes and Straight Path, in which threatening the merger
process linked the side transaction with the merger transaction.
Next, the parties do not dispute that the diversion via the Amendments was
material.110 Plaintiffs repeatedly allege the Amendments diverted $40 million in
107
See Compl. ¶¶ 34–41.
108
2018 WL 3120804, at *16 (discussing In re Delphi Fin. Gp. S’holder Litig., 2012 WL
729232 (Del. Ch. Mar. 6, 2012)).
109
Compl. ¶¶ 38–39.
110
See generally OB; RB.
33
Merger consideration from the stockholders’ pockets and into Fireman Capital’s.111
The parties appear to agree the Merger consideration’s value was in the range of
$120 million to $130 million.112 Subversive Capital’s prospectus offered consistent
numbers.113 A $40 million diversion is material to a transaction of that size.114 This
material diversion stands in stark contrast to the immaterial side transactions in
Golaine and Komen, both of which represented less than one percent of the overall
merger consideration.115 “The [P]laintiffs are entitled to an inference that the
111
Compl. ¶¶ 1, 3, 40.
112
Compare AB 29–30 (stating the $40 million diversion accounted for one-third of the
Merger’s consideration), and Hr’g Tr. 58–59 (same), with D.I. OB 12 (suggesting Merger
consideration could reach as high as $130.9 million, subject to certain adjustments).
113
That prospectus describes the aggregate consideration going to Left Coast as follows:
[(1)] a number of Common Shares . . . equal to (i) $142,138,712 (subject to
certain adjustments and holdbacks) less the amount of the SISU
Consideration (defined below) divided by (ii) $10.00; and
[(2)] a contingent right for up to an additional 3,856,955 Common Shares
(the “LCV Trading Price Consideration Shares”) of which: (i) one-third (1/3)
will be payable if the 20-Day VWAP is equal to or exceeds $13.00, (ii) an
additional one-third (1/3) will be payable if the 20-Day VWAP is equal to or
exceeds $17.00 and (iii) an additional one-third (1/3) will be payable if the
20-Day VWAP is equal to or exceeds $21.00, in each case during the three-
year period after Closing.
Stachel Decl. Ex. 1 at 38–39. The “SISU Consideration” is later defined as $76,246,594,
also “subject to certain adjustments and holdbacks.” Id. at 40.
114
See Straight Path, 2018 WL 3120804, at *12, 15 (noting the effect of selling the
indemnification claim had “the effect of depriving stockholders of one-fifth of the merger
consideration,” and that this amount was material).
115
Golaine, 1999 WL 1271882, at *8 (“At the outset, therefore, let me express my doubt
that the $20 million fee wagged the $8.3 billion merger dog. The $20 million seems quite
immaterial in the scheme of things.”); Komen, 2020 WL 3484956, at *12 (“According to
the Complaint, the challenged compensation awards were worth $82.4 million to the
34
[Amendments] diverted a material amount of consideration, giving them standing to
sue individually.”116
Finally, the Amendments’ timing vis-à-vis the Merger negotiations indicates
the diverted consideration would have otherwise gone into stockholders’ pockets,
calling the Merger’s fairness into question.117 Thus, unlike in Golaine, the
Complaint does not “simply allege that the acquiror’s cost of acquisition was made
higher,” but instead conceivably asserts that the Amendments “rendered the
underlying [Merger] unfair to [Left Coast’s] stockholders.”118 This is so even
without a facial challenge to the overall Merger price, as clarified in Straight Path.119
The Moving Defendants attempt to avoid these indicia of a direct attack on
merger fairness by pointing to irrelevant factual similarities with Komen, and
distinctions from Straight Path and Houseman.120 These efforts are unavailing.
First, in Komen, the Court noted that the challenged transaction did not solely benefit
the executive recipients, distinguishing it from other Parnes cases where all the side
[executives]. That is a whole lot of money to just about anybody, but it represents just
about 1/10th of 1 percent of the $71.3 billion of consideration the [target] stockholders
received in the Disney Merger.” (footnote omitted)).
116
Carsanaro, 65 A.3d at 665.
117
See Houseman, 2014 WL 1600724, at *13; Komen, 2020 WL 3484956, at *12.
118
See 1999 WL 1271882, at *5.
119
See 2018 WL 3120804, *13 n.187.
120
See RB 9–12.
35
transaction’s benefit went to the defendants.121 In Komen, this fact suggested the
challenged compensation changes were innocuous and simply “among those
‘countless issues’ that legitimately would need ‘to be figured out’ during a sale
process.”122 In an attempt to paint the Amendments as similarly innocuous, the
Moving Defendants point out the Amendments benefited all the creditors holding
2019 Notes and 2020 Warrants, not just Fireman Capital.123 This fact does no work
here. While the Amendments benefited all those holders, they overwhelmingly
benefited Fireman Capital. It appears the Fireman Entities’ interest accounted for
approximately 62% of the July 2020 Financing.124 Most of the other money in the
July 2020 Financing came from defendants Bassler and Crocket.125 This stands in
contrast to Komen, where the alleged controller executives received only 26% of the
challenged side transaction’s benefit.126
The Moving Defendants also seize on the Komen complaint’s “critical
deficiency”: the lack of a causal link between the challenged awards and any unfair
121
Komen, 2020 WL 3484956, at *11.
122
Id. (quoting Golaine, 1999 WL 1271882, at *9).
123
See RB 9–10.
124
See Stachel Decl. Ex. 6 at 1 (noting the Fireman Entities loaned Left Coast
$6,170,671.06 of the $10,000,000 it raised in the July 2020 Financing).
125
See Compl. ¶ 33.
126
2020 WL 3484956, at *11.
36
dealing in the merger itself.127 The Komen plaintiffs did not challenge the bona fides
of the sales process leading up to the merger.128 The Moving Defendants point out
that Plaintiffs also do not challenge the process by which the Company selected and
negotiated with Subversive Capital.129 But this case has the same links to the Merger
process Komen noted were absent there but present in Parnes, Straight Path, and
Houseman. As in Parnes and Straight Path, Plaintiffs offer “facts to support a
reasonable inference that the [controller] refused to negotiate or impeded the
negotiation of a transaction unless and/or until they received the challenged
[benefits].”130 And as in Houseman, “the directors engaged in self-dealing to extract
additional payments after the merger consideration had been fixed such that the
extracted payments necessarily came at the expense of other stockholders.”131
Fireman Capital threatened to derail the Merger at the eleventh hour unless its
demands were satisfied.132 And this threat came after the Board approved the Merger
documents and the consideration had already been fixed.
127
Id.128
Id.129
See RB 10.
130
Komen, 2020 WL 3484956, at *12 (distinguishing Parnes and Straight Path).
131
Id. (distinguishing Houseman).
132
See Compl. ¶¶ 35–39. The Moving Defendants argue Fireman Capital’s interference
with the merger process was less concerning and less intrusive than the interference in
Straight Path. See RB 11. This may be so, but Straight Path does not set the floor for a
nexus with the merger. Both Fireman Capital and the Straight Path controller explicitly
“conditioned [their] support for the merger on receiving unique . . . benefits at the expense
37
Finally, the Moving Defendants try to distinguish Houseman, noting that in
that case, both the original issuance of the warrants and their post-merger
amendments arose from self-dealing.133 The Moving Defendants see less
impropriety here, where the original issuances of the 2019 Note and 2020 Warrants
were in the ordinary course.134 Again, this minor factual distinction is irrelevant.
Houseman does not stand for the proposition that direct claims may only be stated
against repeat or systematic offenders. Houseman focused on the merger-related
transaction, noting that it was the second transaction that “conferr[ed] a benefit on
the directors not shared by the stockholders.”135 That the self-dealing in Houseman
also predated the merger only buttressed the conclusion that the side transaction
there was improper.
In sum, Count I satisfies the Parnes exception for a post-merger direct claim
by a former target stockholder. Plaintiffs have successfully alleged an improper side
transaction intertwined with the Merger rendered the Merger itself unfair by
diverting material consideration that would have otherwise gone to Left Coast’s
of the company’s minority stockholders.” See 2018 WL 3120804, at *16. In my view, this
is sufficient at this stage.
133
See RB 12 (citing Houseman, 2014 WL 1600724, at *13).
134
See id.135
Houseman, 2014 WL 1600724, at *13.
38
stockholders. Because that claim calls the Merger’s fairness into question, it is
direct.
3. Count II’s Tortious Interference Claim Is
Direct.
Evaluating the nature of Plaintiffs’ tortious interference claim is a bit easier.
Though the Moving Defendants sought to dismiss the entire Complaint as deficient
under Parnes,136 Plaintiffs’ tortious interference claim is not implicated by that line
of cases. Rather, it calls for a straightforward application of Tooley. To repeat, the
direct/derivative inquiry under Tooley turns solely on the following two questions:
(1) who suffered the alleged harm (the corporation or the suing
stockholders, individually); and
(2) who would receive the benefit of any recovery or other remedy (the
corporation or the stockholders, individually)?137
Under Tooley, “a court should look to the nature of the wrong and to whom the relief
should go.”138
The harm complained of in Count II was suffered by the Plaintiffs as
optionholders. To show an individual harm, a plaintiff “must demonstrate that the
duty breached was owed to the stockholder and that he or she can prevail without
showing an injury to the corporation. In other words, the stockholder’s claimed
136
See OB 17; RB 7.
137
Tooley, 845 A.2d at 1033.
138
Id. at 1039.
39
direct injury must be independent of any alleged injury to the corporation.”139 Here,
Plaintiffs’ claim for tortious interference implicates an individual harm, separate
from any injury to the Company itself. In fact, it is separate from any injury they
would suffer as stockholders. The gravamen of Count II is that Defendants’
malfeasance rendered options held by Yim and other optionholders worthless.140
Defendants’ actions may have harmed the Company as well. But the opportunity to
profit from the options belonged to the optionholders, not the Company. Interfering
with that opportunity thus harmed the optionholders independently of any injury to
the Company. Similarly, the benefit of any recovery from Count II would run to the
optionholders as individuals. Plaintiffs seek an award of money damages to remedy
the alleged tortious interference.141 “They, rather than the Company, would receive
the benefit of that recovery.”142 Thus, Plaintiffs’ tortious interference claim in Count
II states a direct, rather than derivative, claim.143
139
In re MultiPlan Corp. S’holders Litig., 2022 WL 24060, at *9 (Del. Ch. Jan. 3, 2022)
(alterations and internal quotation marks omitted) (quoting Tooley, 845 A.2d at 1039).
140
See Compl. ¶ 59.
141
See id.. at 22.
142
MultiPlan, 2022 WL 24060, at *9.
143
Indeed, the Moving Defendants seem to acknowledge Count II states a direct claim. See
OB at 33 (describing Count II as a “defective attempt to turn purported derivative claims
for breaches of fiduciary duty . . . into a direct tortious interference claim”).
40
4. The Conspiracy Claims In Counts III And IV
Are Direct.
Because Counts I and II are direct, Plaintiffs’ civil conspiracy claims in Count
III and Count IV are also direct. “Civil conspiracy is not an independent cause of
action; it must be predicated on an underlying wrong.”144 Here, the wrongs
underlying the conspiracy claims in Counts III and IV are direct. Count III alleges
Fireman Capital, Crocket, and Bassler conspired to commit the breaches of fiduciary
duty complained of in Count I. Because our law casts those breaches as causing a
direct harm to the Plaintiffs, a claim that other defendants participated in a
conspiracy to commit them is also direct.145 Similarly, Count IV alleges a civil
conspiracy to commit the tortious interference alleged in Count II. Since the
underlying harm there was to optionholders, not the Company, it follows that a
conspiracy to commit that harm should also be treated as a direct claim. That
Plaintiffs added additional defendants as co-conspirators does not transform an
otherwise direct claim into a derivative claim.
144
Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 892 (Del. Ch. 2009) (citing Ramunno v.
Cawley, 705 A.2d 1029, 1039 (Del. 1998)).
145
See CMS Inv. Hldgs., LLC v. Castle, 2015 WL 3894021, at *8 (Del. Ch. June 23, 2015)
(treating a civil conspiracy claim relating to an alleged breach of fiduciary duty as direct
where the underlying breach of fiduciary duty claim was direct).
41
B. Plaintiffs Pled Fireman Capital Is A Controller.
Having concluded the Complaint pleads direct claims, I move next to its
merits. Count I alleges that “each of the Defendants”146 owed fiduciary duties to the
Company’s common stockholders: Plaintiffs contend Fireman Capital “and its
affiliates” were the Company’s controllers, owing fiduciary duties.147 The Moving
Defendants counter this claim by arguing both that Fireman Capital was not a
controller and that the Fireman Entities, Crocket, and Bassler did not combine to
form a control group.148 Plaintiffs’ answering brief did not pursue a control group
theory and instead, solely argued Fireman Capital was a controller.149 I consider
only whether Plaintiffs pled that Fireman Capital, standing alone, is a controller
against whom a breach of fiduciary duty claim will lie.150 They have.
“Delaware law imposes fiduciary duties on those who effectively control a
corporation.”151 The premise for contending that a controller owes fiduciary duties
146
Compl. ¶ 48.
147
Id. ¶ 49.
148
See OB 26–28.
149
See AB 18–21.
150
Because of this crystallization over the course of briefing, and because Crocket and
Bassler have not yet appeared to challenge the claims against them, this opinion does not
consider the merits of any claims against Crocket and Bassler.
151
Voigt, 2020 WL 614999, at *11 (internal quotation marks omitted) (quoting Quadrant
Structured Prods. Co. Ltd. v. Vertin, 102 A.3d 155, 183–84 (Del. Ch. 2014), and citing S.
Pac. Co. v. Bogert, 250 U.S. 483, 487–88 (1919)).
42
“is that the controller exerts its will over the enterprise in the manner of the board
itself.”152 The controller analysis “must take into account whether the stockholder,
as a practical matter, possesses a combination of stock voting power and managerial
authority that enables him to control the corporation, if he so wishes.”153 This
exercise regards substance over form; it does not matter whether control is exercised
directly or indirectly.154 “The question whether a shareholder is a controlling one is
highly contextualized and is difficult to resolve based solely on the complaint.”155
“[T]here is no magic formula to find control; rather, it is a highly fact specific
inquiry.”156
“One method of pleading control sufficient to impose fiduciary duties is to
allege that a defendant has the ability to exercise a majority of the corporation’s
152
Abraham v. Emerson Radio Corp., 901 A.2d 751, 759 (Del. Ch. 2006).
153
In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003).
See In re Pattern Energy Gp. Inc. S’holders Litig., 2021 WL 1812674, at *40 (Del. Ch.
154
May 6, 2021) (quoting In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL
301245, at *9–10 (Del. Ch. Jan. 25, 2016)).
155
Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June 5, 2006)
(citing Cysive, 836 A.2d at 550–51); accord In re Tesla Motors, Inc. S’holder Litig., 2018
WL 1560293, at *13 (Del. Ch. Mar. 28, 2018) (“Whether a large blockholder is so
powerful as to have obtained the status of a ‘controlling stockholder’ is intensely factual
and it is a difficult question to resolve on the pleadings.” (alterations and internal quotation
marks omitted) (quoting Cysive, 836 A.2d at 550–51)).
156
Calesa Assocs., L.P. v. Am. Cap., Ltd., 2016 WL 770251, at *11 (Del. Ch.
Feb. 29, 2016) (citing In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *10
(Del. Ch. Oct. 24, 2014)).
43
voting power.”157 Delaware law is well-settled that a stockholder who can exercise
more than 50% of a company’s voting power is a controller.158 A majority
stockholder’s control flows principally from its voting power, which translates into
the power to “alter materially the nature of the corporation and the public
stockholders’ interests.”159
Plaintiffs argue Fireman Capital is a controller because the Class B Proxy
allows it to exercise 83% of the Company’s outstanding voting power.160 The
Moving Defendants concede that if Fireman Capital owned the stock associated with
the Class B Proxy, it would be a controlling stockholder.161 The Moving Defendants
try to cast Fireman Capital more as a creditor than as a stockholder. They cite
Hamilton Partners, L.P. v. Highland Capital Management, L.P.162 for the
proposition that “[i]n contrast to a controlling stockholder, a corporation’s creditor—
even one that owns a majority of the corporation’s debt—does not owe fiduciary
duties to stockholders.”163 But Fireman Capital holds both debt and the Class B
157
Voigt, 2020 WL 614999, at *11 (compiling sources).
158
See id.; see also In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 991 (Del.
Ch. 2014), aff’d sub nom. Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
159
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43 (Del. 1994).
AB 19–20. Two Fireman Capital partners also sat on the Company’s Board. See
160
Compl. ¶¶ 8, 9, 32.
161
See Hr’g Tr. 37.
162
2014 WL 1813340 (Del. Ch. May 7, 2014).
163
Id. at *13; see OB 24.
44
Proxy. The fact that it secured that voting power via its creditor-debtor relationship
with the Company is inconsequential. Fireman Capital has control because it can
vote most of the Company’s stock, not because it holds most of the Company’s debt.
The Moving Defendants also contend Fireman Capital cannot be a controller
because it is not a stockholder.164 As an initial matter, Plaintiffs point to two
allegations in the Complaint that describe Fireman Capital as the Company’s
“controlling stockholder.”165 This allegation is plainly conclusory as to the
“controlling” description, and Plaintiffs could have pled facts supporting Fireman
Capital’s status as a stockholder. But at bottom, I take Plaintiffs’ allegation that
Fireman Capital is a stockholder as true for purposes of this opinion.
And whether Fireman Capital owns any or all of the stock it can vote is of no
moment. It is true that stock ownership is the traditional vehicle through which
outsiders gain voting power.166 But holding stock is not a prerequisite to exercising
voting control that carries the weight of fiduciary duties. The United States Supreme
Court has recognized that a nonstockholder which exercises control over a
164
See OB 24–25.
165
See AB 19 (citing Compl. ¶¶ 1, 7). Plaintiffs also attach an information statement
describing the Merger that indicates Fireman Capital “holds 2,803,809 [Company] Class
A Shares” through an affiliate called “Red Barn Holdco LLC.” See AB 20 n. 73 (quoting
AB Ex. A at A-27). This document was not incorporated by reference by the Complaint,
but Plaintiffs urge me to take judicial notice of it anyway. See id. I do not need to reach
that issue here.
166
See, e.g., Pattern Energy, 2021 WL 1812674, at *37.
45
corporation through a subsidiary that controls the majority of the corporation’s
voting power is itself a controller.167 Fireman Capital’s Class B Proxy gives it the
“ability to exercise a majority of the corporation’s voting power.”168 Based on that
fact alone, Fireman Capital is a controller. To hold otherwise would elevate form
over substance.169 And so, Plaintiffs have pled Fireman Capital is a controller owing
fiduciary duties alongside the Director Defendants.
The next step is to consider whether Plaintiffs have pled the Company’s
fiduciaries breached their duties.170 The Moving Defendants have not meaningfully
167
See S. Pac. Co., 250 U.S. at 491–92 (noting the control doctrine “does not rest upon
such technical distinctions”).
168
See Voigt, 2020 WL 614999, at *11.
169
The Moving Defendants rightly equate control of the Class B shares to control of the
Company: they asserted the Company’s founders, Groh, Blue, and Kennedy,
“unquestionably controlled the company” before issuing the Class B Proxy because “[t]hey
owned all of Left Coast’s high vote Class B shares.” Hr’g Tr. 7–8. It stretches reason to
argue that Fireman Capital, which holds the same power to vote the founders’ controlling
voting interest, is not a controller simply because it owns less stock or none at all.
Indeed, the Moving Defendants’ logic acknowledges that voting control does not
always track stock ownership. Despite controlling most of the Company’s voting power,
the founders do not own most of the Company’s shares. See Compl. ¶ 16. Suppose one
entity owned Left Coast’s Class A shares, and another owned its Class B shares. The Class
B entity would “unquestionably” control the Company because it controlled 83% of the
voting power, despite holding only 32.99% of the shares. But the Class A entity, despite
owning the vast majority of the Company’s shares, could hardly be said to control it. Our
law rightfully regards voting power, not economic ownership, as the meaningful source of
control.
170
In view of Plaintiffs’ theory of the case, I pause to note this is a different exercise than
setting the standard of review.
46
disputed that they have.171 “A controlling stockholder owes fiduciary duties to the
corporation and its minority stockholders, and it is prohibited from exercising
corporate power (either formally as directors or officers or informally through
control over officers and directors) so as to advantage itself while disadvantaging
the corporation.”172 “The purpose of controlling stockholder liability is to make sure
that controlling stockholders do not use their control to reap improper gains through
unfair self dealing or other disloyal acts.”173 Plaintiffs have pled breaches in the
Director Defendants’ decision to approve the Amendments and in Fireman Capital’s
When determining whether corporate fiduciaries have breached their duties,
Delaware corporate law distinguishes between the standard of conduct and
the standard of review. The standard of conduct describes what directors are
expected to do and is defined by the content of the duties of loyalty and care.
The standard of review is the test that a court applies when evaluating
whether directors have met the standard of conduct.
Chen v. Howard-Anderson, 87 A.3d 648, 666 (Del. Ch. 2014) (footnotes and internal
quotation marks omitted) (compiling academic sources, then quoting In re Trados Inc.
S'holder Litig., 73 A.3d 17, 35–36 (Del. Ch. 2013)).
171
Compare OB 31–32 (“Plaintiffs’ breach of fiduciary duty claim (Count I) further fails
as to the Fireman Entities because Plaintiffs fail to allege they were controlling
stockholders or members of a control group.”), with RB 13–17 (arguing “Count I fails to
state a claim for breach of fiduciary duty as to the Fireman Entities”). “Normally, this
court does not entertain arguments raised for the first time in a reply brief.” Pryor v.
IAC/InterActiveCorp., 2012 WL 2046827, at *6 n.71 (Del. Ch. June 7, 2012).
172
Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *22 (Del. Ch. Mar. 26, 2018)
(alterations, emphasis, and internal quotation marks omitted) (quoting Thorpe v. Cerbco,
Inc., 1995 WL 478954, at *8 (Del. Ch. Aug. 9, 1995), aff’d in part, rev’d in part 676 A.2d
436 (Del. 1996)).
173
Shandler v. DLJ Merch. Banking, Inc., 2010 WL 2929654, at *16 (Del. Ch.
July 26, 2010).
47
role in causing the Amendments to be approved, as I explained above in finding
these actions to be improper for purposes of Parnes.174
Fireman Capital’s procurement of the Amendments triggers entire fairness
review. The business judgment rule’s protection is rebutted when a controller
engages in a conflicted transaction.
Conflicted transactions include those in which the controller stands on
both sides of the deal (for example, when a parent acquires its
subsidiary), as well as those in which the controller stands on only one
side of the deal but competes with the common stockholders for
consideration. In either circumstance, entire fairness review will apply
ab initio.175
This Court has identified three examples of conflicted transactions where the
controller competes with common stockholders for consideration:
(1) where the controller receives greater monetary consideration for its
shares than the minority stockholders; (2) where the controller takes a
different form of consideration than the minority stockholders; and (3)
where the controller gets a unique benefit by extracting something
uniquely valuable to the controller, even if the controller nominally
receives the same consideration as all other stockholders. 176
Here, as in Straight Path, Fireman Capital competed with Left Coast’s common
stockholders by extracting a different benefit (the Amendments) out of the Merger
174
See supra Section II.A.2.
175
Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25, 2016) (footnotes and
internal quotation marks omitted) (quoting Crimson Expl., 2014 WL 5449419, at *12).
176
Straight Path, 2018 WL 3120804, at *15 (quoting IRA Tr. FBO Bobbie Ahmed v. Crane,
2017 WL 7053964, at *6 (Del. Ch. Dec. 11, 2017)).
48
consideration. As in Straight Path, entire fairness applies.177 Whether entire fairness
should apply to the Merger or only the Amendments is not entirely clear to me from
our existing case law.178 The answer to this question may inform the scope of
discovery. In order to begin as we mean to go on, I ask the parties to confer on a
stipulated supplemental briefing schedule to address the scope of Fireman Capital’s
burden under entire fairness. The Motions are denied with respect to Count I.
C. Count II Fails To State A Claim For Tortious Interference.
In Count II, Plaintiffs allege all Defendants tortiously interfered with the
Class A optionholders’ “reasonable probability of receiving positive value for their
177
Id. at *16 (noting “entire fairness review is particularly appropriate here, where a
controller who stood to earn different consideration or some unique benefit flexed his
control to secure a self-interested deal to the detriment of minority stockholders.”
(alterations and internal quotation marks omitted) (quoting Larkin, 2016 WL 4485447, at
*9)).
178
Houseman and Parnes do not address entire fairness at all. See generally Houseman,
2014 WL 1600724; Parnes, 722 A.2d at 1243. In my view, there are conflicting principles
at play. On the one hand, the thrust of Parnes and its progeny is that direct standing remains
when a side transaction renders the merger itself unfair such that a challenge to it is
effectively a challenge to the merger itself. But on the other hand, the source of Fireman
Capital’s conflict is the Amendments, not the Merger; requiring Fireman Capital to prove
the Merger’s fairness is especially strange since it is not a party to the Merger. Straight
Path did discuss entire fairness, holding that the allegations there were “sufficient to
subject the Verizon merger to entire fairness review.” 2018 WL 3120804, at *16; see also
id. at *17 n.229, *18. The recent Straight Path decision denying defendants’ motion for
summary judgment did not address entire fairness. See generally In re Straight Path
Commc’ns Inc. Consol. S’holder Litig. (Straight Path III), 2022 WL 484420 (Del. Ch.
Feb. 17, 2022). My review of the briefs and hearing transcript on that motion suggests to
me that perhaps the scope of entire fairness remains an open question.
49
options from the Company.”179 The Complaint casts this claim as simply “tortious
interference”; briefing revealed Count II asserts tortious interference with a
prospective economic relationship.180 The parties agree that “to state a claim for
tortious interference with a prospective business opportunity, a plaintiff must allege:
1) the reasonable probability of a business opportunity; 2) the intentional
interference by defendant with that opportunity; 3) proximate causation; and 4)
damages.”181 These elements must be considered “in light of a defendant’s privilege
to compete or protect his business interests in a fair and lawful manner.”182 Among
other arguments, the Moving Defendants argue Plaintiffs have not established the
first element, the reasonable probability of a business opportunity. I agree.
In order to adequately plead the first element, a claimant must allege “a bona
fide expectancy.”183 This element is sometimes framed as requiring “a plaintiff [to]
identify a specific party who was prepared to enter into a business relationship but
179
Compl. ¶ 58.
180
See AB 30.
181
Agilent Techs., Inc. v. Kirkland, 2009 WL 119865, at *5 (Del. Ch. Jan. 20, 2009) (citing
DeBonaventura v. Nationwide Mut. Ins. Co., 419 A.2d 942, 947 (Del. Ch. 1980), aff’d, 428
A.2d 1151 (Del. 1981)); accord Beard Rsch., Inc. v. Kates, 8 A.3d 573, 608 (Del. Ch.
2010), aff’d sub nom. ASDI, Inc. v. Beard Rsch., Inc., 11 A.3d 749 (Del. 2010); Empire
Fin. Servs., Inc. v. Bank of N.Y. (Del.), 900 A.2d 92, 98 n.19 (Del. 2006).
182
DeBonaventura, 428 A.2d at 947.
183
World Energy Ventures, LLC v. Northwind Gulf Coast, 2015 WL 6772638, at *7 (Del.
Ch. Nov. 2, 2015) (quoting Lipson v. Anesthesia Servs., P.A., 790 A.2d 1261, 1285 (Del.
Ch. 2001)).
50
was dissuaded from doing so by the defendant.”184 For a business opportunity to be
“reasonably probable,” it “must be something more than a mere hope or the innate
optimism of the salesman or a mere perception of a prospective business
relationship.”185 The claim will be dismissed for failure to establish a reasonable
probability of a business opportunity if the opportunity is too speculative 186 and a
plaintiff “cannot rely on generalized allegations of harm.”187 The probability of a
business opportunity “must be assessed at the time of the alleged interference.”188
Plaintiffs’ identified business opportunity is their hoped-for upside on their
option contracts.189 The Moving Defendants argue that because options are
contracts, Plaintiffs’ claim sounds in tortious interference with a contract, which the
Moving Defendants argue Plainitffs cannot successfully plead.190 Plaintiffs argue
their expectancy exists just beyond the option contract: Count II does not claim the
184
Soterion Corp. v. Soteria Mezzanine Corp., 2012 WL 5378251, at *13 (Del. Ch.
Oct. 31, 2012) (internal quotation marks omitted) (quoting Agilent Techs., 2009 WL
119865, at *7).
185
Id. (internal quotation marks omitted) (quoting Agilent Techs., 2009 WL 119865, at *7);
accord Carney v. B & B Serv. Co., 2019 WL 5579490, at *2 (Del. Ch. Oct. 29, 2019).
186
See Preston Hollow Cap. LLC v. Nuveen LLC, 2020 WL 1814756, at *12–13 (Del. Ch.
Apr. 9, 2020).
187
Soterion Corp., 2012 WL 5378251, at *13 (internal quotation marks omitted) (quoting
Agilent Techs., 2009 WL 119865, at *7).
188
Malpiede v. Townson, 780 A.2d 1075, 1099 (Del. 2001).
189
See Compl. ¶ 58.
190
See OB 34–36.
51
Amendments breached their contracts’ terms, but instead claims the Amendments
frustrated those contracts’ purposes by depriving optionholders of value.191
Even if one can hold an actionable expectancy over and above one’s
contractual expectations,192 Plaintiffs have not sufficiently pled an actionable
expectancy. Plaintiffs rely exclusively on the conclusory allegation that they had a
“reasonable probability of receiving positive value for their options from the
Company.”193 This bare statement is insufficient to establish a bona fide expectancy.
Plaintiffs plead no facts to quantify that expectancy, to support its existence, or to
explain why it was reasonable to hold it. Rather, it appears their expectancy is based
on a “mere hope” that their options would be in the money.194 Options, like other
derivative securities, inherently involve risk. Plaintiffs’ speculation or hope that
they picked the right side of their bet is not, standing alone, sufficient to establish a
reasonable probability of a business relationship. The Motions are granted with
respect to Count II.
191
See AB 34–35 & n.135.
192
See Fox v. CDX Hldgs., Inc., 2015 WL 4571398, at *35 (Del. Ch. July 28, 2015) (“The
rights and obligations of the parties to the option are governed by the terms of their
contract.”), aff’d, 141 A.3d 1037 (Del. 2016). Options present sources of value that are
both within and beyond the contractual terms: they hold intrinsic value from their contract
terms and the stock’s market value, but also hold time value derived from the possibility
of their appreciation. See AT&T Corp. v. Lillis, 953 A.2d 241, 243 n.2 (Del. 2008).
193
Compl. ¶ 58; see AB 31 (citing Compl. ¶ 58).
194
See Soterion Corp., 2012 WL 5378251, at *13 (internal quotation marks omitted)
(quoting Agilent Techs, 2009 WL 119865, at *7).
52
D. The Motions Do Not Establish A Basis To Dismiss Count III.
Count III asserts that Fireman Capital, Crocket, and Bassler conspired to
commit the breaches of fiduciary duty underlying Count I.195 Plaintiffs must plead
three elements to state a claim for civil conspiracy: “(1) a confederation or
combination of two or more persons; (2) an unlawful act done in furtherance of the
conspiracy; and (3) actual damage.”196 The Moving Defendants seek to dismiss
Count III because it fails to allege knowing participation by Fireman Capital.197
While knowing participation is an element of the closely related tort of aiding and
abetting,198 it is not an element of civil conspiracy.199 Reading the Motions
charitably, I take the Moving Defendants to argue that Fireman Capital did not take
195
See Compl. ¶¶ 61–67.
196
AeroGlobal Cap. Mgmt., LLC v. Cirrus Indus., Inc., 871 A.2d 428, 437 n.8 (Del. 2005)
(citing Nicolet, Inc. v. Nutt, 525 A.2d 146, 149 (Del. 1987)).
See OB 43–44. The Moving Defendants reference the “Fireman Entities,” but Fireman
197
Capital III is not a defendant to Count III.
198
See, e.g., Allied Cap. Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038–39 (Del. Ch.
2006) (“Like the test for civil conspiracy, the test for stating an aiding and abetting claim
is a stringent one, turning on proof of scienter—a plaintiff must prove: (1) the existence
of a fiduciary relationship, (2) a breach of the fiduciary’s duty and (3) knowing
participation in that breach by the non-fiduciary.” (citing In re Santa Fe Pac. Corp.
S’holder Litig., 669 A.2d 59, 72 (Del. 1995))).
199
I acknowledge that in the fiduciary duty context, aiding and abetting claims are often
treated as conterminous with civil conspiracy. See OptimisCorp v. Waite, 2015 WL
5147038, at *57 (Del. Ch. Aug. 26, 2015), aff’d, 137 A.3d 970 (Del. 2016). This overlap
notwithstanding, Count III appears to allege a fiduciary (Fireman Capital) conspired with
non-fiduciaries (Crocket and Bassler) to breach its duty of loyalty, not that non-fiduciaries
aided a fiduciary in its breach.
53
an unlawful act in furtherance of the conspiracy. For the reasons outlined in my
discussion of Count I, I disagree. The Moving Defendants offer no other basis to
dismiss Count III. The Motions are denied with respect to Count III.
E. Count IV Fails To State A Claim For Civil Conspiracy.
Count IV asserts that Fireman Capital, Crocket, and Bassler conspired to
commit the tortious interference underlying Count II. Plaintiffs cannot establish
such a claim. The second element makes clear that “[c]ivil conspiracy is not an
independent cause of action; it must be predicated on an underlying wrong.”200
Lacking a well-pled underlying claim for tortious interference, Count IV cannot state
a claim.201 The Motions are granted with respect to Count IV.
III. CONCLUSION
For the foregoing reasons, the Motions are GRANTED in part and DENIED
in part. The Motions are GRANTED with respect to Counts II and IV. The Motions
are DENIED with respect to Counts I and III. The parties shall submit a stipulated
implementing order within twenty days of this decision. They shall also submit a
stipulated briefing schedule on the scope of Fireman Capital’s entire fairness burden.
200
Kuroda, 971 A.2d at 892.
201
E.g., id. at 892–93.
54