Kenneth Carr v. New Enterprise Associates, Inc. ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
KENNETH CARR, individually and on )
behalf of all others similarly situated, )
and derivatively on behalf of nominal )
defendant ADVANCED CARDIAC )
THERAPEUTICS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2017-0381-AGB
)
NEW ENTERPRISE ASSOCIATES, )
INC., PETER JUSTIN KLEIN, ROY T. )
TANAKA, DUKE S. ROHLEN, ARIS )
CONSTANTINIDES, WILLIAM )
OLSON, MICHAEL J. PEDERSON, )
NEW ENTERPRISE ASSOCIATES )
14, L.P., NEA PARTNERS 14, )
LIMITED PARTNERSHIP, NEA 14 )
GP, LIMITED PARTNERSHIP, NEA )
VENTURES 2014, LIMITED )
PARTNERSHIP, AND DUKE )
ROHLEN AND KENDALL SIMPSON )
ROHLEN, AS TRUSTEES OR )
SUCCESSOR TRUSTEE, OF THE )
ROHLEN REVOCABLE TRUST )
DATED U/A/D 6/12/98, )
)
Defendants, )
)
and )
)
ADVANCED CARDIAC )
THERAPEUTICS, INC. )
)
Nominal Defendant. )
)
MEMORANDUM OPINION
Date Submitted: December 8, 2017
Date Decided: March 26, 2018
T. Brad Davey and Matthew A. Golden of POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; Barry S. Pollack and Joshua L. Solomon of
POLLACK SOLOMON DUFFY LLP, Boston, Massachusetts; Counsel for
Plaintiff.
Herbert W. Mondros and Krista R. Samis of MARGOLIS EDELSTEIN,
Wilmington, Delaware; Counsel for Defendants Peter Justin Klein, Roy Tanka,
Duke Rohlen, Aris Constantinides, William Olson, Michael Pederson, Duke Rohlen
and Kendall Simpson Rohlen, as Trustees or Successor Trustee of the Rohlen
Revocable Trust Dated U/A/D 6/12/98, and Nominal Defendant Advanced Cardiac
Therapeutics, Inc.
Michael F. Bonkowski and Nicholas J. Brannick of COLE SCHOTZ P.C.,
Wilmington, Delaware; Roger A. Lane, Courtney Worcester, and Jasmine D. Coo
of FOLEY & LARDNER LLP, Boston, Massachusetts; Angelica Boutwell of
FOLEY & LARDNER LLP, Miami, Florida; Counsel for Defendants New
Enterprise Associates, Inc., New Enterprise Associates 14, L.P., NEA Partners 14,
Limited Partnership, NEA 14 GP, Limited Partnership, NEA Ventures 2014 Limited
Partnership.
BOUCHARD, C.
This action involves a dispute between Kenneth Carr, a co-founder of
Advanced Cardiac Therapeutics, Inc. (“ACT” or the “Company”), and its controlling
stockholder, New Enterprise Associates, Inc. (“NEA”). ACT is a pre-commercial
medical device company. NEA holds itself out as one of the largest venture capital
firms in the world and has investments in a large portfolio of companies.
In April 2014, NEA became ACT’s controlling stockholder as a result of the
sale of Series A-2 preferred stock that was offered to a select group of investors.
Carr was not among them. The Series A-2 offering implied a value for ACT of
approximately $15 million. In October 2014, ACT sold a warrant to Abbott
Laboratories (“Abbott”) for $25 million, giving it the option to purchase all of ACT’s
equity for a 30-month period for up to $185 million. In the interim between the
Series A-2 offering and the warrant sale to Abbott, another medical device company
made a proposal to acquire ACT for up to $300 million, but that overture was not
pursued. In 2016, ACT repurchased the warrant from Abbott for $25 million in cash
and a note as part of a “settlement agreement.”
Critical to this case, the 2014 warrant transaction with Abbott was conditioned
on Abbott acquiring another company, Topera, in which NEA was the largest
institutional investor. NEA also was the largest institutional investor in VytronUS,
a company for which Abbott provided funding simultaneously with the warrant
transaction. The gravamen of Carr’s complaint is twofold: (1) that the Series A-2
offering that allowed NEA to become ACT’s controlling stockholder was approved
by a conflicted board and severely undervalued ACT; and (2) that NEA orchestrated
the potential sale of ACT to Abbott on the cheap as part of a strategy to optimize the
value of its portfolio by inducing Abbott to acquire Topera and invest in VytronUS.
Carr’s complaint asserts various claims on behalf of a putative class of
stockholders (and, alternatively, derivatively) for breach of fiduciary duty and/or
aiding and abetting against ACT’s directors at the time of the challenged transactions
and NEA. Defendants have moved to dismiss. For the reasons explained below, the
motion is denied in large part, although certain claims and parties will be dismissed
because of various pleading deficiencies.
I. BACKGROUND
Unless noted otherwise, the facts in this decision are drawn from the Verified
Class Action and Derivative Complaint (the “Complaint”) and documents
incorporated therein,1 which include documents produced to plaintiff in response to
a books and record demand made under 8 Del. C. § 220.2 Any additional facts are
either not subject to reasonable dispute or subject to judicial notice.
1
See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (citations omitted)
(“[P]laintiff may not reference certain documents outside the complaint and at the same
time prevent the court from considering those documents’ actual terms” in connection with
a motion to dismiss).
2
Compl. (Dkt. 1). Some of the Section 220 documents were filed with the court via the
Transmittal Affidavit of Sarah M. Ennis (“Ennis Aff.”) (Dkt. 34) and the Transmittal
Affidavit of Matthew A. Golden (“Golden Aff.”) (Dkt. 40). The parties have a qualified
2
A. The Parties and Relevant Non-Parties
Plaintiff Kenneth Carr is an inventor in the area of microwave radiometry
technology and ablation catheter devices. In or about 2007, he co-founded nominal
defendant Advanced Cardiac Therapeutics, Inc. At all relevant times, Carr held
approximately 960,000 shares of ACT common stock. When the Company was
founded, Carr held an approximately 30% interest in ACT. Subsequent rounds of
financing have diluted that interest.
The Company is a Delaware, pre-commercial, medical device company that
designs and manufactures a catheter-based system for the treatment of patients with
atrial fibrillation, commonly known as AFIB, which is characterized by an irregular,
often rapid heart rate. ACT collaborates with and licenses technology from Meridian
Medical Systems, another company that Carr founded.
Defendant NEA is a Delaware corporation that holds itself out as the world’s
largest venture capital fund with more than $17 billion in committed capital across
fifteen funds. Defendants New Enterprise Associates 14, L.P., NEA Partners 14,
Limited Partnership, NEA 14 GP, Limited Partnership, and NEA Ventures 2014,
agreement that, if a Section 220 document is relied upon in a later complaint, all documents
produced in response to that category of documents shall be incorporated by reference in
the complaint. Golden Aff. Ex. H ¶ 8. The agreement, however, does not specifically
address whether the court may assume the truth of information in the documents in that
circumstance. Accordingly, while I consider the actual terms of these documents, I do not
assume their truth.
3
Limited Partnership are limited partnerships controlled by NEA. I refer to these
entities hereafter, collectively, as “NEA” and, at times, to one or more of them as an
“NEA entity” or “NEA entities.”
NEA holds interests in numerous “portfolio companies” in addition to ACT.
Relevant to this action, in or about April 2013, NEA and an affiliate of Abbott co-
invested in Topera, a cardiac arrhythmia mapping company that specializes in
mapping electrical signals of the heart. Another NEA portfolio company relevant to
this action is known as VytronUS, which describes itself as having been “formed in
2006 to harness the imaging and therapeutic capabilities of ultrasound energy to treat
cardiac arrhythmias, starting with atrial fibrillation.”3 ACT’s outside counsel
regularly represents and advises NEA.
NEA became ACT’s controlling stockholder in April 2014 as a result of its
purchase of Series A-2 preferred stock, defined below as the “Series A-2 Financing.”
Carr contends that, even before the Series A-2 Financing, NEA and defendants Duke
S. Rohlen and Kendell Simpson Rohlen, as Trustees or Successor Trustee, of the
Rohlen Revocable Trust Dated U/A/D 6/12/98 (the “Trust”), together constituted the
controlling stockholder of ACT.4
3
About Us: Company, VYTRONUS, http://www.vytronus.com/company.html (last visited
Mar. 23, 2018).
4
See infra. III.C.1.
4
The Complaint names as defendants the following six individuals who
constituted the six members of ACT’s board of directors (the “Board”) at the time
of the challenged transactions (i.e., the Series A-2 Financing and, as defined below,
the Warrant Transaction): Peter Justin Klein, Roy T. Tanaka, Duke S. Rohlen, Aris
Constantinides, William Olson, and Michael J. Pederson (collectively, the “Director
Defendants”). Three of these individuals (Klein, Tanaka, and Rohlen) remained on
the Board when this action was filed, while the other three (Constantinides, Olson,
and Pederson) had left the Board by that date. At the time the Complaint was filed,
the Board consisted of Klein, Tanaka, Rohlen, and non-party Ryan Drant.
The Complaint describes a variety of affiliations between and among the
Director Defendants and NEA apart from their service as directors of the Company,
including the following:
 Peter Justin Klein is a partner on NEA’s healthcare team who has served at
various times on the boards of numerous NEA portfolio companies, including
Topera and VytronUS.
 Roy T. Tanaka has served at relevant times on the board of VytronUS.
 Duke S. Rohlen was appointed to serve as the Company’s President and CEO
on March 11, 2014, at which time he was serving as ACT’s Chairman of the
Board. At that time, Rohlen also served as the CEO of Ajax Vascular, another
NEA portfolio company. In addition, Rohlen previously served as CEO of
5
CV Ingenuity and the President of FoxHollow Technologies, two other NEA
portfolio companies. NEA has held Rohlen out as a “serial entrepreneur
within the NEA family.”5
 Aris Constantinides was a venture capital fund partner at an entity known at
the time as NBGI, the private equity arm of the National Bank of Greece.
Constantinides is connected to NEA and Klein through various venture capital
investments in the medical device industry. NEA permitted NBGI to
participate in the Series A-2 Financing.
 William Olson was the Company’s CEO before Rohlen. Olson was removed
as CEO pursuant to a March 2014 Separation Agreement. Olson and ACT
also are parties to a Consulting Agreement.6 Olson served previously as a
Vice President at FoxHollow Technologies.
 Michael J. Pederson served, at relevant times, as the President and CEO of
VytronUS.
5
Compl. ¶ 28.
6
The Consulting Agreement made Olson report to Rohlen and provided compensation to
Olson in the form of a $60,000 lump-sum payment and non-statutory options equal to 2%
of the Company’s fully diluted capitalization subject to approval by the Board. The options
would not vest for five months from the effective date of the Consulting Agreement (March
1, 2014) and would vest only if Olson continued to provide services. Compl. ¶¶ 30, 45.
6
B. NEA’s Early Involvement in ACT
In January 2014, an NEA entity purchased Series A-1 preferred stock from
the Company and entered into an Amended and Restated Voting Agreement (the
“Voting Agreement”).7 The Complaint alleges that, following the Series A-1
transaction, “NEA began causing changes in the Company’s management to further
increase its power over the Company.”8
In March 2014, Olson was removed as CEO and replaced by Rohlen, although
Olson stayed on as a director and consultant. At this time, NEA and the Trust
together held a majority of the Company’s preferred stock, which had the right to
appoint two of the seven director positions on the Board.9 On or about March 17,
2014, an NEA entity and the Trust amended the Voting Agreement to provide that
one of the preferred designees to the Board would be Pederson, and the other director
seat would remain vacant.10
C. The Series A-2 Financing
On April 2, 2014, the Board—composed of the six Director Defendants—
signed a written consent (the “April 2014 Consent”) providing for the issuance of
265,780,730 shares of Series A-2 preferred stock for $0.0301 per share (the “Series
7
See Golden Aff. Ex. C. at ACT_220_000016 (first recital).
8
Compl. ¶ 44.
9
Golden Aff. Ex. C.
10
Golden Aff. Ex. C.
7
A-2 Financing”). This issuance placed a valuation on the Company of
approximately $15 million. NEA obtained nearly 90% of the Series A-2 preferred
stock, which, combined with its other equity holdings, resulted in NEA acquiring
more than 65% of ACT’s stock on an as-converted basis and becoming its
controlling stockholder. The Series A-2 preferred stock was not offered to more
than 30 stockholders who previously invested in Act, including Carr.
The April 2014 Consent expressly acknowledges that four of the six directors
who approved the Series A-2 Financing participated in the transaction personally or
through entities in which they had material financial interests:
It is hereby disclosed or made known to the Board that (i) Aris
Constantinides is a director of the Company and is associated with,
and/or has a material financial interest in NBGI Technology Fund II,
L.P., or its affiliates (“NBGI”); (ii) Justin Klein is a director of the
Company and is associated with, and/or has a material financial interest
in New Enterprise Associates 14, L.P. (“NEA”), (iii) Duke Rohlen is a
director and officer of the Company, and (iv) Michael Pederson is a
director of the Company, such that the Financing is an Interested Party
Transaction since NBGI, NEA, Duke Rohlen and Michael Pederson
will be participating in the Financing.11
On April 3, 2014, the day after the Board approved the Series A-2 Financing,
an NEA entity executed a new Amended and Restated Voting Agreement with
11
Ennis Aff. Ex. 3 at ACT_220_000038 (emphasis in original); Compl. ¶¶ 26, 28, 29, 31,
54. According to defendants, NBGI ultimately did not participate in the Series A-2
Financing. NEA Defs.’ Opening Br. 29 n.15 (Dkt. 35); Ennis Aff. Ex. 11 at
ACT_220_000844-45.
8
certain other ACT stockholders (the “Restated Voting Agreement”), which provides
for the seven positions on the Board to be selected as follows:12
 The Rohlen Designee: Rohlen was entitled to appoint a director as long as
he or his affiliate continued to hold at least 25% of his originally acquired
Series A-1 preferred shares. He appointed himself.
 The NEA Designee: An NEA entity was entitled to appoint a director as long
as it or its affiliate continued to hold at least 25% of its originally acquired
Series A-1 preferred shares. It appointed Klein.
 The Series 1 Designee: The holders of the Series 1 preferred stock were
entitled to appoint a director. NBGI held a majority of these shares and
appointed Constantinides.
 The CEO Designee: The CEO Designee was the then-serving CEO, which
was Olson.
 The Preferred Designees: The holders of the preferred stock were entitled
to appoint two directors. NEA held a majority of the preferred stock and it
appointed Pederson and left one vacancy.
 The Mutual Designee: This director was to be appointed unanimously by
the other directors serving at that time. The other directors appointed Tanaka.
12
Compl. ¶ 52; Golden Aff. Ex. A at ACT_220_000147-50.
9
The Restated Voting Agreement also provided drag-along rights that permitted the
holders of a majority of ACT’s preferred stock on an as-converted basis—at that
time, NEA—to cause other stockholders to vote in favor of a sale of the Company.
After the Series A-2 Financing, the Board granted Rohlen and Pederson
options, 23,256,940 and 13,954,164, respectively, with a retroactive vesting
schedule that started on October 2, 2013. Rohlen exercised his options on or about
July 8, 2014, and Pederson exercised his options on or about June 4, 2014, which,
according to the Complaint, was “contrary” to their vesting schedules.13
D. Abbott and Medtronic Make Proposals to Acquire the Company
On June 30, 2014, Abbott submitted a letter of intent for an option to purchase
ACT. In the letter of intent, Abbott proposed a $25 million purchase price for a
warrant (the “Warrant”) with a $75 million exercise price and up to $85 million in
potential milestone payments, for total consideration up to $185 million.14 The
proposal was conditioned on the completion of Abbott’s purchase of Topera.
The June 30 proposal included an exclusivity period of up to 60 days for
Abbott and ACT to negotiate a transaction, but also recognized that ACT had an
agreement with Medtronic, an Abbott competitor, which required ACT to give
Medtronic notice of certain proposals. Specifically, the June 30 proposal included a
13
Compl. ¶¶ 56-57.
14
Compl. ¶ 59; Ennis Aff. Ex. 4.
10
provision contemplating that ACT would negotiate exclusively with Abbott “except
as may otherwise be required to comply with the terms . . . of that certain Master
Development Agreement, dated July 2013 (as amended to extend its term to July 26,
2015), between ACT and Medtronic, Inc.”15
On July 12, 2014, Abbott submitted an updated letter of intent proposing the
same high-level economic terms, i.e., a $25 million purchase price for a warrant with
a $75 million exercise price and up to $85 million in potential milestone payments,
for total consideration up to $185 million.16 The July 12 proposal also was
conditioned on the completion of Abbott’s proposed purchase of Topera and
contained the same exclusivity language as the June 30 proposal.17
Later on July 12, 2014, the Board met telephonically and discussed Abbott’s
July 12 letter of intent and the timing of Medtronic’s right to receive notice under
the Company’s agreement with Medtronic. Five of the six ACT directors
participated in the meeting; Tanaka was not present.18 The Board approved the July
12 letter of intent at the July 12 meeting before giving notice to Medtronic.
On or about July 25, 2014, after ACT gave Medtronic the required notice and
during Abbott’s 60-day exclusivity period, Medtronic submitted its own letter of
15
Ennis Aff. Ex. 4 § 8.
16
Compl. ¶ 60; Ennis Aff. Ex. 5.
17
Compl. ¶ 60; Ennis Aff. Ex. 5 § 8.
18
Ennis Aff. Ex. 6.
11
intent for an option to buy the Company. The Medtronic letter of intent proposed a
$30 million payment for an option with a $100 million exercise price, and milestone
payments that could bring the total payments up to $300 million.19 Medtronic’s
proposal was not conditioned on Medtronic’s purchase of any other entity.
E. NEA Executes Three Simultaneous Transactions with Abbott
On October 14, 2014, the Board met and discussed a series of transactions in
which Abbott would purchase the Warrant (the “Warrant Transaction”), acquire
Topera, and invest in VytronUS. The Warrant Transaction was conditioned
expressly on the sale of Topera to Abbott.20 At the time, NEA was the largest and
only institutional investor in Topera alongside Abbott.
During the October 14 Board meeting, Pederson formally disclosed that he
was the President and CEO of VytronUS and was discussing potential employment
with Abbott.21 Klein disclosed that he, as a NEA partner, had a material interest in
the Topera and VytronUS portions of the deal. The Board then voted to approve the
Warrant Transaction but did not submit it to a full stockholder vote.
19
Compl. ¶ 61; Ennis Aff. Ex. 7 §§ 1, 3.
20
Compl. ¶ 66.
21
Compl. ¶ 66. After the Warrant Transaction, Pederson began to work for Abbott while
also sitting on the Board. Compl. ¶¶ 31, 71, 74.
12
The Warrant, dated October 27, 2014,22 locked up ACT for a potential
purchase by Abbott until March 2017. It also included terms that would have
allowed for a distribution by ACT of up to $12.5 million of the $25 million payment
by Abbott, although no distribution is alleged to have occurred.23
NEA issued a public announcement concerning the Warrant Transaction and
the transactions involving Topera and VytronUS, which stated:
With NEA as the largest institutional investor in each of these
companies—and the only investor to be involved in all three—we are
proud to share some insight into this seemingly unprecedented suite of
transactions that, for the first time in the medical device sector’s history,
feature a large corporate acquirer partnering with multiple portfolio
companies in a single VC’s portfolio to establish a path to building a
market leader in a major diagnostic and therapeutic category.24
The announcement also lauded “NEA’s internal legal and accounting teams and the
outside firms who advised each company involved in these transactions.”25 The
Complaint alleges that, “[a]s a result of NEA’s three-headed deal with Abbott, NEA
and its affiliates enjoyed a $250 million payment from Abbott for Topera,” and that
VytronUS “received $31.5 million in funding from Abbott’s investment arm, Abbott
Ventures.”26
22
Ennis Aff. Ex. 9 at ACT_220_000270.
23
Compl. ¶ 75.
24
Compl. ¶ 70.
25
Compl. ¶ 70.
26
Compl. ¶¶ 13, 84.
13
The mechanics of how an exercise of the Warrant would allow Abbott to gain
100% control of ACT’s equity are not clear from the pleadings, but the terms of the
Warrant agreement provide that a group of “Key Stockholders,”27 collectively
holding not less than 89% of outstanding Company common stock on an as-
converted basis, would sign a stockholders agreement with Abbott.28 ACT also
agreed that “[t]he Company shall have taken all actions necessary to cause each
Equity Participation Right of the Company that is outstanding immediately prior to
the Warrant Exercise Closing and has not been exercised to be cancelled, terminated
and no longer outstanding.”29 Thus, the terms of the Warrant indicate, consistent
with the Complaint, that Abbott’s exercise of the Warrant would result in Abbott
acquiring complete control of ACT.
F. ACT Repurchases the Warrant
In 2016, Abbott acquired St. Jude Medical, which also had an ablation catheter
business. The Federal Trade Commission “took issue with Abbott’s plan to purchase
27
“Key Stockholders” is defined to include an NEA entity, NBGI, Rohlen, the Trust,
Olson, Pederson, and Tanaka. Ennis Aff. Ex. 9 at ACT_220_000284.
28
Id. at ACT_220_000301 (Art. 2.1(f)).
29
Id. at ACT_220_000308 (Art. 2.3(b)(xi)). “Equity Participations” is defined to mean
“any . . . share, security, equity participation right and any other present or future right
entitling the holder, absolutely or contingently . . . , to participate in the equity ownership,
dividends or equity appreciation” of ACT. Id. at ACT_220_000280.
14
St. Jude Medical, finding that, in light of Abbott’s right to purchase ACT’s business,
the acquisition of St. Jude Medical would substantially lessen competition.”30
In October 2016, ACT and Abbott entered into a “settlement agreement” in
which ACT agreed to repurchase the Warrant, paying Abbott $6 million in cash and
$19 million via a secured promissory note—the same total amount as the original
purchase price of the Warrant.31 On or about December 27, 2016, Abbott reached
an agreement with the FTC that allowed its proposed acquisition of St. Jude Medical
to proceed, with Abbott agreeing not to purchase any product line from ACT without
giving prior notice to the FTC.
II. PROCEDURAL HISTORY
On May 18, 2017, Carr filed the Complaint, asserting six claims, all of which
are premised on the same theory: that the Series A-2 Financing impermissibly
diluted ACT stockholders and allowed NEA to gain control of the Company for less
than fair value, and that NEA used its control to sell the Warrant to Abbott at an
unreasonably low price in order to facilitate the Topera and VytronUS transactions
for NEA’s benefit.32 Carr views the Series A-2 Financing and the Warrant
30
Compl. ¶ 79.
31
Compl. ¶ 81.
32
Compl. ¶¶ 1, 105.
15
Transaction as part of a “unitary plan” that he challenges together in six claims, pled
directly and, in the alternative, derivatively.
Counts I and IV assert directly and derivatively, respectively, that NEA
breached its fiduciary duty as the controlling stockholder of the Company.33 Counts
II and V assert, directly and derivatively, respectively, that the Director Defendants
breached their fiduciary duties.34 Counts III and VI assert, directly and derivatively,
that NEA aided and abetted the Board’s breach of its fiduciary duty. 35 Carr did not
make a demand on the Board with respect to any putative derivative claims, arguing
that such a demand would have been futile.36
On July 25, 2017, the Director Defendants filed a motion to dismiss under
Court of Chancery Rules 12(b)(6) and 23.1 for failure to state a claim and failure to
make a demand on the Board.37 On July 26, 2017, NEA filed an analogous motion.38
The court heard argument on the motions on November 7, 2017, during which the
33
Compl. ¶¶ 108-11, 120-23.
34
Compl. ¶¶ 112-14, 124-26.
35
Compl. ¶¶ 115-19, 127-31.
36
Compl. ¶¶ 100-07.
37
Dkt. 33.
38
Dkt. 35.
16
court requested supplemental briefing on whether Revlon duties apply to the Warrant
Transaction.39 The supplemental submissions were filed on December 8, 2017.40
III. ANALYSIS
A threshold issue to analyzing the six claims in the Complaint is whether the
Series A-2 Financing and Warrant Transaction should be analyzed together as part
of a unitary plan, as Carr proposes, or as separate transactions, as defendants argue.
I address this issue first.
A. The Series A-2 Financing and the Warrant Transaction Shall Be
Treated as Separate Transactions
Delaware courts sometimes will view multiple transactions as part of a unitary
plan under the step-transaction doctrine, which “treats the ‘steps’ in a series of
formally separate but related transactions involving the transfer of property as a
single transaction, if all the steps are substantially linked. Rather than viewing each
step as an isolated incident, the steps are viewed together as components of an overall
plan.”41 This doctrine applies if the transactions at issue meet one of three tests:
First, under the end result test, the doctrine will be invoked if it appears
that a series of separate transactions were prearranged parts of what was
a single transaction, cast from the outset to achieve the ultimate result.
Second, under the interdependence test, separate transactions will be
39
Dkt. 53. See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.
1986).
40
Dkts. 60-61.
Noddings Inv. Grp., Inc. v. Capstar Commc’ns, Inc., 1999 WL 182568, at *6 (Del. Ch.
41
Mar. 24, 1999) (citation and internal quotation marks omitted).
17
treated as one if the steps are so interdependent that the legal relations
created by one transaction would have been fruitless without a
completion of the series. The third and most restrictive alternative is
the binding-commitment test under which a series of transactions are
combined only if, at the time the first step is entered into, there was a
binding commitment to undertake the later steps.42
I decline to view the Series A-2 Financing and the Warrant Transaction as a
single transaction because, under the facts alleged, none of the three tests has been
met. The binding commitment test does not apply because Carr has not alleged that
there was a contractual tie between the two transactions. The interdependency test
does not compel aggregation because the Series A-2 Financing and the Warrant
Transaction were executed about seven months apart and each transaction had its
own standalone strategic business rationale.43 Finally, the end result test has not
been met because Carr’s allegations that the two transactions were part of a unitary
plan “cast from the outset to achieve the ultimate result” are wholly conclusory.44
42
Bank of New York Mellon Tr. Co., N.A. v. Liberty Media Corp., 29 A.3d 225, 240 (Del.
2011) (citations and internal quotation marks omitted).
43
See Liberty Media Corp. v. Bank of New York Mellon Tr. Co., N.A., 2011 WL 1632333,
at *16 (Del. Ch. Apr. 29, 2011) (“Each of the transactions was a distinct corporate event
separated from the others by a matter of years. . . . Each of the transactions stood on its
own merits. None was so interdependent on another that it would have been fruitless in
isolation.”).
44
Bank of New York Mellon v. Liberty Media, 29 A.3d at 240 (emphasis added). See In re
Nat’l Auto Credit, Inc. S’holders Litig., 2003 WL 139768, at *9 (Del. Ch. Jan. 10, 2003)
(citations omitted) (“In deciding whether to consider a sequence of transactions separately
or collectively, the Court reviews the circumstances surrounding the challenged
transaction, as alleged by the particularized facts of the complaint, to decide whether it can
be reasonably inferred that those transactions constituted a single, self-interested scheme.
The timing of the transactions factors significantly into the Court’s decision.”).
18
Carr simply has not alleged a reasonably conceivable set of facts supporting an
inference that NEA and the Director Defendants concocted a scheme as of April
2014 to: (1) allow NEA to gain control of ACT while diluting the other stockholders;
and (2) use NEA’s control of the Company as a bargaining chip with Abbott almost
seven months later to facilitate Abbott’s transactions with two other NEA portfolio
companies.45 Accordingly, the ensuing analysis focuses on each of the transactions
individually.46
B. The Warrant Transaction Claims are not Moot
Viewing the transactions separately, defendants assert that the claims
regarding the Warrant Transaction are moot because Abbott never exercised the
Warrant, which ACT repurchased in 2016. I disagree.
“Under Delaware law, a plaintiff’s cause of action accrues at the moment of
the wrongful act—not when the harmful effects of the act are felt—even if the
45
Cf. Nat’l Auto, 2003 WL 139768, at *9 & n.58 (finding a single plan where “the
resolutions were adopted at the same meeting, within minutes of each other . . . as a quid
pro quo, and, as they amount to a single plan furthering the individual interests of the
Defendant Directors, they are to be considered together for purposes of deciding demand
futility”).
46
Carr argues that “[a]t the very least, discovery should be allowed into the relationship
between NEA and Abbott at Topera before foreclosing the conceivability that the NEA-
Abbott relationship had been developing . . . by the time of the time of the A-2 dilution.”
Pl.’s Answering Br. 47 (Dkt. 40). Because Carr has stated claims challenging the Series
A-2 Financing and the Warrant Transaction separately, discovery into both transactions
will proceed and the court may revisit later whether a factual basis exists to view both
transactions as part of a unitary plan.
19
plaintiff is unaware of the wrong.”47 Any challenge to the Warrant Transaction thus
accrued upon the execution of the underlying transaction, and not upon a later
exercise of the Warrant. Accordingly, even if the Warrant was never exercised, any
claims relating to its issuance would not be rendered moot. The court’s reasoning
in In re Sirius XM Shareholder Litigation is instructive on this point.48
In that case, Sirius XM Radio Inc. negotiated an Investment Agreement in
2009 whereby Liberty Media received preferred stock in Sirius that was convertible
into a 40% common equity interest.49 Sirius also negotiated contractual provisions
limiting Liberty Media’s ability to take control of Sirius for three years, but once
that standstill period expired, the Investment Agreement prohibited Sirius from
using a poison pill or any other charter or bylaw provision to interfere with Liberty
Media’s ability to purchase additional Sirius stock.50 In 2012, after the standstill
period expired, Liberty Media announced its intention to acquire majority control of
Sirius.51
After this announcement, Sirius stockholders filed suit, complaining that the
Sirius board had breached its fiduciary duty by adhering to the contract with Liberty
47
In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *5 (Del. Ch. Oct. 17, 2007).
48
2013 WL 5411268 (Del. Ch. Sept. 27, 2013) (Strine, C.).
49
Id. at *1.
50
Id.
51
Id.
20
Media and not blocking its takeover attempt.52 Chief Justice Strine, writing as
Chancellor, held that plaintiffs’ claims for breach of fiduciary duty were time-barred
because they had accrued over three years earlier in 2009 when Sirius and Liberty
Media entered into the Investment Agreement:
Here, the board made the decision to take Liberty Media’s capital in
2009, and, in an arm’s-length transaction, agreed that in exchange they
would not adopt a poison pill or any other anti-takeover measures
against Liberty Media after the standstill period expired. The terms of
that deal were fully disclosed in 2009. The board’s actions in 2012
were anticipated by and, in fact, required under the Investment
Agreement. Therefore, the board’s inability to block Liberty Media’s
so-called “creeping takeover” was merely the manifestation of the
bargain struck between Sirius and Liberty Media in 2009. If the
plaintiffs ever had a meritorious claim that the Anti-Takeover
Provisions in the Investment Agreement were enforceable . . . then they
had it in 2009.53
Applying the logic of the Sirius court here, an exercise of the Warrant by
Abbott merely would have been a product of the bargain it struck with ACT in
October 2014. Any potential breach of fiduciary duty with respect to the Warrant
Transaction thus occurred then, irrespective of whether Abbott actually exercised
the Warrant at some later time. To be sure, quantifying the damages resulting from
entering into the Warrant Transaction may be a difficult task, but that does not mean
that a breach of fiduciary duty claim challenging the transaction becomes moot just
52
Id.
53
Id. at *5.
21
because the Warrant was never exercised. Accordingly, I decline to dismiss the
claims challenging the Warrant Transaction on mootness grounds.
I turn next to considering whether the claims challenging the Series A-2
Financing and the Warrant Transaction are direct or derivative.
C. The Series A-2 Financing Claims are Derivative and the Warrant
Transaction Claims are Direct
“In every case the court must determine from the complaint whether the
claims are direct or derivative.”54 Whether a claim is direct or derivative “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)?”55
“[A] court should look to the nature of the wrong and to whom the relief should go.
The stockholder’s claimed direct injury must be independent of any alleged injury
to the corporation. The stockholder 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.”56 For the reasons explained below, I conclude that Carr’s claims
54
Anglo Am. Sec. Fund, L.P. v. S.R. Glob. Int’l Fund, L.P., 829 A.2d 143, 150 (Del. Ch.
2003).
55
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
56
Id. at 1039.
22
with respect to the Series A-2 Financing are derivative and his claims with respect
to the Warrant Transaction are direct.
1. The Series A-2 Financing
Carr contends that defendants executed the Series A-2 Financing to dilute
unfairly certain other ACT stockholders, including himself.57 A claim for improper
dilution is “a quintessential example of a derivative claim.”58 In Gentile v. Rossette,
however, the Delaware Supreme Court announced “one transactional paradigm”
where an alleged improper dilution could be both direct and derivative in nature.59
This dual status may exist where: “(1) a stockholder having majority or effective
control causes the corporation to issue ‘excessive’ shares of its stock in exchange
for assets of the controlling stockholder that have a lesser value; and (2) the exchange
causes an increase in the percentage of the outstanding shares owned by the
controlling stockholder, and a corresponding decrease in the share percentage owned
by the public (minority) stockholders.”60 In other words, as the emphasized language
57
Compl. ¶ 58.
58
El Paso Pipeline GP Co., LLC v. Brinkerhoff, 152 A.3d 1248, 1265 (Del. 2016) (Strine,
C.J., concurring); see also Green v. LocatePlus Holdings, Corp., 2009 WL 1478553, at *2
(Del. Ch. May 15, 2009) (citations omitted) (“Classically, Delaware law has viewed as
derivative claims by shareholders alleging that they have been wrongly diluted by a
corporation’s overpayment of shares.”).
59
906 A.2d 91, 99 (Del. 2006).
60
Id. at 100 (emphasis added and citation omitted).
23
in the preceding quotation makes clear, to invoke the dual dynamic recognized in
Gentile, a controlling stockholder must exist before the challenged transaction.
Here, Carr’s invocation of Gentile to characterize as direct his claims
challenging the Series A-2 Financing fails because the Complaint is devoid of any
well-pled facts supporting the assertion that there was a controlling stockholder at
the time of that transaction. The Complaint does not allege that NEA was a
controlling stockholder before the Series A-2 Financing but rather that the Series A-
2 Financing “resulted in NEA gaining ownership of more than 65% of ACT’s stock
an as-converted basis.”61 Carr also has failed to plead facts supporting his assertion
that NEA and the Trust together constituted a controlling stockholder group before
the Series A-2 Financing.
To adequately plead the existence of a control group, a plaintiff must allege
that its members:
[B]e connected in some legally significant way—such as by contract,
common ownership, agreement, or other arrangement—to work
together toward a shared goal. The law does not require a formal
written agreement, but there must be some indication of an actual
agreement. Plaintiffs must allege more than mere concurrence of self-
61
Compl. ¶ 51 (emphasis added). NEA concedes it became ACT’s controlling stockholder
as a result of the Series A-2 Financing. See NEA Defs.’ Opening Br. 22 n.12 (“As a result
of the Series A-2 Financing, NEA owned 65% of ACT’s issued and outstanding stock on
an as-converted basis, and thus would be considered a controlling stockholder after that
point in time.”).
24
interest among certain stockholders to state a claim based on the
existence of a control group.62
Carr contends that “[b]y March 17, 2014, shortly in advance of a refinancing led by
NEA, the Defendants amended ACT’s Amended and Restated Voting Agreement in
a manner that changed the structure of the board of directors and, as a contractual
matter, gave NEA complete control of [sic] over the board and reduced voting power
from other stockholders.”63 But this allegation mischaracterizes the plain terms of
the March 17 amendment of the Voting Agreement.64
The March 17 amendment merely provides that NEA and the Trust agree that
the “Preferred Designees” “shall be elected by the holders of a majority of the
outstanding Preferred Stock of the Company” and that the initial “Preferred
Designees” would be Pederson and one vacancy.65 Thus, the March 17 amendment
only concerned two of the seven authorized slots on ACT’s Board and plainly did
not afford NEA and the Trust complete control over the Board. Nothing else in the
62
In re Crimson Expl. Inc. Stockholder Litig., 2014 WL 5449419, at *15 (Del. Ch. Oct. 24,
2014) (citations and internal quotation marks omitted); see also In re PNB Holding Co.
S’holders Litig., 2006 WL 2403999, at *10 (Del. Ch. Aug. 18, 2006) (Strine, V.C.)
(“Glomming share-owning directors together into one undifferentiated mass with a single
hypothetical brain would result in an unprincipled Frankensteinian version of the already
debatable 800-pound gorilla theory of the controlling stockholder.”).
63
Compl. ¶ 47.
64
Ennis Aff. Ex. 12.
65
Id.25
March 17 amendment, moreover, otherwise could be said to constitute a pact for
NEA and the Trust to work together to dilute unfairly ACT’s other stockholders.
In sum, because Carr has not adequately pled that there was a controller at the
time of the Series A-2 Financing, the transaction does not meet the paradigm
described in Gentile, and his claims for improper dilution resulting from the Series
A-2 Financing are derivative. Parenthetically, because the Complaint’s allegations
that the Trust was part of a control group with NEA are not well-plead, the Trust
will be dismissed from this case because the only claims asserted against the Trust
flow from this unsubstantiated premise.66
2. The Warrant Transaction
Carr argues that the sale of the “[W]arrant and the process (or lack of process)
underlying it were the equivalent of an end-stage transaction in which a plaintiff
alleges that breaches of fiduciary duty resulted in a change-of-control despite
inadequate merger consideration and without adequate protections for individual
stockholders who thus may bring claims directly.” 67 Carr is correct that claims
challenging the validity of a merger, usually by alleging breach of fiduciary duty,
give rise to a direct claim.68 The transaction here, however, is different from the
66
See Compl. ¶¶ 109 (Count I), 121 (Count IV).
67
Pl.’s Answering Br. 79.
68
See Parnes v. Bally Entm’t Corp., 722 A.2d 1243, 1245 (Del. 1999) (“A stockholder who
directly attacks the fairness or validity of a merger alleges an injury to stockholders, not
the corporation, and may pursue such a claim even after the merger at issue has been
26
“fairly standard” ones “wherein the stockholders of one corporation (the ‘target’)
receive consideration for agreeing to give up their shares in a merger with another
corporation (the ‘acquiror’).”69
Here, in exchange for $25 million, Abbott purchased the right to buy ACT for
a period of time for an up-front payment of $75 million plus potential milestone
payments capped at total consideration of $185 million. Thus, the operative question
is whether Carr “suffered harm independent of any injury to the corporation that
would entitle him to an individualized recovery” due to the Warrant Transaction.70
In my view, he has, so his claim is direct.71
If Carr was merely challenging the fairness of the $25 million purchase price
of the Warrant, then his claims would fit the classic derivative mold of a company
selling an asset too cheaply, because that consideration flowed directly to the
Company, not the ACT stockholders.72 The Warrant transaction was more
consummated. . . . In order to state a direct claim with respect to a merger, a stockholder
must challenge the validity of the merger itself, usually by charging the directors with
breaches of fiduciary duty resulting in unfair dealing and/or unfair price.”).
69
Golaine v. Edwards, 1999 WL 1271882, at *4 (Del. Ch. Dec. 21, 1999) (Strine, V.C.).
70
Feldman v. Cutaia, 951 A.2d 727, 732 (Del. 2008).
71
See id. at 733 (“In order to state a direct claim, the plaintiff must have suffered some
individualized harm not suffered by all of the stockholders at large.”).
72
See id. (citation omitted) (“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.”); Cf. Metro
Commc’ns Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 168 (Del. Ch.
2004) (Strine, V.C.) (citing Tooley, 845 A.2d 1031) (“Metro’s complaint seeks damages
27
complicated than that, however, with the Board locking in an exercise price and
milestone payments and providing Abbott the exclusive ability to buy the Company
for approximately 30 months. Thus, the Warrant Transaction established the
maximum price that the ACT stockholders might receive in an end-game transaction.
To repeat, quantifying the alleged damages from approving the Warrant Transaction
might be difficult, but Carr’s underlying breach of fiduciary duty claims concerning
the Warrant Transaction are akin to challenging the outcome of a merger and thus
are direct.
*****
As noted above, all six claims in the Complaint challenge the Series A-2
Financing and the Warrant Transaction together, with Counts I-III pled as direct
claims and Counts IV-VI pled, in the alternative, as derivative claims. Each group
of three claims also pleads claims in the alternative against NEA: Counts I and IV
(breach of fiduciary duty) flow from the premise that NEA is a controlling
stockholder of ACT and thus owes a fiduciary duty as a controller, while Counts III
and VI (aiding and abetting) flow from the premise that it is not.
for lost profits because the bribery scheme deprived Fidelity Brazil of the possibility of
going public. Distilled down, its theory is that the bribery scheme destroyed the economic
value of Fidelity Brazil, preventing it from being a viable enough company to go public.
Thus, the injury that Metro alleges, is, in the first instance, an injury to Fidelity Brazil itself
and is therefore derivative in nature.”).
28
Based on the conclusions I have reached so far, many of the claims in the
Complaint can be disposed of in whole or in part. First, given my conclusion that
the transactions must be analyzed separately and that the claims challenging the
Series A-2 Financing are derivative while the claims challenging the Warrant
Transaction are direct, Counts I-III must be dismissed insofar as they challenge the
Series A-2 Financing and Counts IV-VI must be dismissed insofar as they challenge
the Warrant Transaction. Second, given my conclusion that NEA was not a
controlling stockholder at the time of the Series A-2 Financing, Count IV fails to
state a claim for breach of fiduciary duty against NEA with respect to that transaction
and thus Count IV must be dismissed in its entirety.73 Third, given my conclusion
that NEA was a controlling stockholder at the time of the Warrant Transaction,
Count III fails to state a claim for aiding and abetting a breach of fiduciary duty
against NEA with respect to that transaction and thus Count III must be dismissed
its entirety.74
This leaves parts of four claims to be analyzed, specifically Counts V and VI
with respect to the Series A-2 Financing, which occurred first in time, and Counts I
73
See Ivanhoe Partners v. Newmont Min. Corp., 535 A.2d 1334, 1344 (Del. 1987)
(citations omitted) (“Under Delaware law a shareholder owes a fiduciary duty only if it
owns a majority interest in or exercises control over the business affairs of the
corporation.”).
74
See Quadrant Structured Prods. Co., Ltd. v. Vertin, 102 A.3d 155, 204 (Del. Ch. 2014)
(“If a defendant has acted in a fiduciary capacity, then that defendant is liable as a fiduciary
and not for aiding and abetting.”).
29
and II with respect to the Warrant Transaction. The viability of those claims is
addressed in that order in Sections C and D below.
D. Counts V and VI of the Complaint State Viable Claims for Relief
Concerning the Series A-2 Financing
Because the claims challenging the Series A-2 Financing are derivative, I
address first whether Carr’s failure to make a demand on the Board is excused for
those claims. After finding for the reasons stated below that demand is excused, I
address whether Counts V and VI state claims for relief under Court of Chancery
Rule 12(b)(6) for breach of fiduciary duty and aiding and abetting, respectively, with
respect to the Series A-2 Financing.
1. Demand Is Excused for the Series A-2 Financing Claims
“A cardinal precept of the General Corporation Law of the State of Delaware
is that directors, rather than stockholders, manage the business and affairs of the
corporation.”75 Accordingly, stockholders may not prosecute a claim derivatively
on behalf of a corporation unless they: “(1) make a pre-suit demand by presenting
the allegations to the corporation’s directors, requesting that they bring suit, and
showing that they wrongfully refused to do so, or (2) plead facts showing that
demand upon the board would have been futile.”76 Making a pre-suit demand is
75
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984).
76
In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. Feb. 24,
2009) (citing Stone v. Ritter, 911 A.2d 362, 366-67) (Del. 2006)).
30
futile when the directors upon whom the demand would be made “are incapable of
making an impartial decision regarding such litigation.”77
Because Carr did not make a demand on the Board before initiating this action,
he must allege with particularity that his failure to do so with respect to the Series
A-2 Financing should be excused.78 In this analysis, I accept as true Carr’s
particularized allegations of fact and draw all reasonable inferences that logically
flow from those allegations in Carr’s favor.79
Under Delaware law, depending on the factual scenario, there are two tests
for determining whether demand may be excused: the Aronson test and the Rales
test.80 The test articulated in Aronson v. Lewis81 applies when “a decision of the
board of directors is being challenged in the derivative suit.”82 The test set forth in
Rales v. Blasband, on the other hand, governs when “the board that would be
77
Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993).
78
Ct. Ch. R. 23.1; Compl. ¶¶ 100-07.
79
White v. Panic, 783 A.2d 543, 549 (Del. 2001).
80
This court has noted in the past that, although “the Rales test looks somewhat different
from Aronson, in that [it] involves a singular inquiry[,] . . . that singular inquiry makes
germane all of the concerns relevant to both the first and second prongs of Aronson.”
Guttman v. Huang, 823 A.2d 492, 501(Del. Ch. 2003) (Strine, V.C.).
81
473 A.2d 805.
82
Rales, 634 A.2d at 933 (emphasis in original).
31
considering the demand did not make a business decision which is being challenged
in the derivative suit.”83 This situation arises “in three principle scenarios”:
(1) where a business decision was made by the board of a company, but
a majority of the directors making the decision have been replaced; (2)
where the subject of the derivative suit is not a business decision of the
board; and (3) where . . . the decision being challenged was made by
the board of a different corporation.84
Taking into account changes in board composition is critical to a demand futility
analysis because “[w]hat, in the end, is relevant is not whether the board that
approved the challenged transaction was or was not interested in that transaction but
whether the present board is or is not disabled from exercising its right and duty to
control corporate litigation.”85
Here, the Board experienced turnover between its approval of the Series A-2
Financing and when Carr filed suit over three years later. On April 2, 2014, when
the Series A-2 Financing was approved, the Board consisted of six members: Klein,
Rohlen, Tanaka, Olson, Pederson, and Constantinides.86 On May 18, 2017, when
Carr filed the Complaint, the Board consisted of four members: Klein, Rohlen,
Tanaka, and Drant. Thus, between these two events, three of six members (Olson,
Pederson, and Constantinides) left the Board and a new director (Drant) was added.
83
Id. at 933-34.
84
Id. at 934 (citations omitted).
85
Harris v. Carter, 582 A.2d 222, 230 (Del. Ch. 1990) (Allen, C.).
86
Compl. ¶ 50.
32
Because there was turnover of less than a majority of the directors on the Board
between the Series A-2 Financing and when the Complaint was filed, the Aronson
test applies for claims concerning that transaction.87
To survive a motion to dismiss under the Aronson test, a plaintiff must plead
facts that “raise a reasonable doubt as to (i) director disinterest or independence or
(ii) whether the directors exercised proper business judgment in approving the
challenged transaction.”88 The demand futility analysis “is conducted on a claim-
by-claim basis” under Delaware law.89 Thus, the court must consider whether the
Board, at the time of the Complaint, could have impartially considered bringing
actions against those Director Defendants who were on the Board when the Series
A-2 Financing was approved (Count V) and against NEA (Count VI).
With respect to the claim against the Director Defendants, Carr has adequately
pled that a majority of the four directors on the Board when he filed his Complaint
was not disinterested or independent with respect to the Series A-2 Financing.90 The
87
Rales, 634 A.2d at 933-34.
88
Grobow v. Perot, 539 A.2d 180, 186 (Del. 1998), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000).
89
Cambridge Ret. Sys. v. Bosnjak, 2014 WL 2930869, at *4 (Del. Ch. June 26, 2014) (citing
Beam ex rel. Martha Stewart Omnimedia, Inc. v. Stewart, 833 A.2d 961, 977 n.48 (Del.
Ch. 2003) aff’d, 845 A.2d 1040 (Del. 2004)).
90
See Beam v. Stewart, 845 A.2d at 1046 n.8 (“If three directors of a six person board are
not independent and three directors are independent, there is not a majority of independent
directors and demand would be futile.”) (citing Beneville v. York, 769 A.2d 80, 85-86 (Del.
Ch. 2000) (Strine, V.C.)); In re the Limited, Inc. S’holders Litig., 2002 WL 537692, at *7
33
Complaint alleges, and defendants concede, that the April 2014 Consent approving
the Series A-2 Financing expressly acknowledges that two of the directors on the
Board when the Complaint was filed (Klein and Rohlen) were interested for
purposes of the Series A-2 Financing, because Klein was “associated with and/or
had a material financial interest in [NEA]” and Rohlen personally participated in the
transaction.91 Thus, demand is excused as to Count V for breach of fiduciary duty
against the Director Defendants.
With respect to the claim against NEA, although the demand futility analysis
typically is performed on a “claim-by-claim basis” as noted above, I do not believe
that Klein and Rohlen could impartially decide whether to press an aiding and
abetting claim against NEA when the predicate for such a claim is a breach of
fiduciary duty by the Director Defendants (i.e., a claim for which Klein and Rohlen
are disabled from exercising disinterested and independent judgment on behalf of
the Company for the reasons stated above). In any event, defendants concede that
Klein would not be independent for purposes of evaluating a demand,92 and Rohlen’s
(Del. Ch. Mar. 27, 2002) (citation omitted) (“[W]here the challenged actions are those of
a board consisting of an even number of directors, plaintiffs meet their burden of
demonstrating the futility of making demand on the board by showing that half of the board
was either interested or not independent.”).
91
Ennis Aff. Ex. 3 at ACT_220_000038 (April 2014 Consent); Compl. ¶ 54 (citing April
2014 Consent); NEA Defs.’ Opening Br. 14 (same).
92
See Director Defs.’ Opening Br. 32-42 (Dkt. 33); Director Defs.’ Reply Br. 10-17 (Dkt.
43). This concession is not surprising given that Klein was a partner on NEA’s healthcare
34
status as the CEO of NEA-controlled ACT, in addition to his service on other NEA
portfolio companies, creates a reasonable doubt about his independence from NEA.93
Accordingly, demand is excused as to Count VI for aiding and abetting against NEA.
2. Count V States a Claim for Breach of Fiduciary Duty Against
the Director Defendants Regarding the Series A-2 Financing
The standards governing a motion to dismiss for failure to state a claim for
relief under Court of Chancery Rule 12(b)(6) 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 of proof.”94
The standards are minimal, but the Court “will not credit conclusory allegations or
draw unreasonable inferences in favor of the Plaintiffs.”95
Carr alleges in the Complaint, and defendants concede, that the April 2014
Consent acknowledges that a majority of the Board (four out of six) who approved
team who served at various times on the boards of many NEA portfolio companies,
including VytronUS and Topera. Compl. ¶ 26.
93
See Sandys v. Pincus, 152 A.3d 124, 128 (Del. 2016) (Strine, C.J.) (“Mattrick is Zynga’s
CEO. Zynga’s controlling stockholder, Pincus, is interested in the transaction under attack,
and therefore, Mattrick cannot be considered independent.”).
94
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations omitted).
95
In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *5 (Del. Ch. Jan.
31, 2013) (citation omitted).
35
the Series A-2 Financing was deemed interested in that transaction.96 As such, entire
fairness is the appropriate standard of review for analyzing this transaction.97
Defendants do not contend otherwise.98
“Entire fairness, Delaware’s most onerous standard, applies when the board
labors under actual conflicts of interest. Once entire fairness applies, the defendants
must establish ‘to the court’s satisfaction that the transaction was the product of both
fair dealing and fair price.’”99 Our Supreme Court explained the test in Weinberger
v. UOP, Inc., as follows:
The concept of fairness has two basic aspects: fair dealing and fair
price. The former embraces questions of when the transaction was
timed, how it was initiated, structured, negotiated, disclosed to the
directors, and how the approvals of the directors and stockholders were
96
Compl. ¶ 54; NEA Defs.’ Opening Br. 14; Tr. 33 (Nov. 7, 2017).
97
See In re Trados Inc. S’holder Litig., 73 A.3d 17, 43 (Del. Ch. 2013) (“[T]he Board
lacked a majority of disinterested and independent directors, making entire fairness the
applicable standard.”).
98
Citing the April 2014 Consent, NEA asserts that the “Series A-2 Financing was
considered and approved by directors Olson and Tanaka, neither of whom participated in
the financing and both of whom were independent of NEA at the time of the financing,
before it was submitted to the full ACT Board for approval.” NEA Defs.’ Opening Br. 29.
The April 2014 Consent states that the Board decided that Olson and Tanaka should
approve the Series A-2 Financing “to meet the requirement of a disinterested director
approval for purposes of compliance with Section 144 of the Delaware General
Corporation Law.” Ennis Aff. Ex. 3 at ACT_220_000038. Defendants presented no
argument in their briefs, however, concerning the potential legal impact of such an
approval, and the Complaint makes no reference to a separate vote by Olson and Tanaka.
Thus, I decline to consider this issue for purposes of deciding the pending motions to
dismiss. See Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not
briefed are deemed waived.”).
99
In re Trados, 73 A.3d at 44 (emphasis in original) (quoting Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995)).
36
obtained. The latter aspect of fairness relates to the economic and
financial considerations of the proposed [transaction], including all
relevant factors . . . However, the test for fairness is not a bifurcated one
as between fair dealing and price. All aspects of the issue must be
examined as a whole since the question is one of entire fairness.100
“Not even an honest belief that the transaction was entirely fair will be sufficient to
establish entire fairness. Rather, the transaction itself must be objectively fair,
independent of the board’s beliefs.”101
Application of the entire fairness standard “does not mean that the . . .
directors necessarily breached their fiduciary duties, only that entire fairness is the
lens through which the court evaluates their actions.”102 Nevertheless, “as a practical
matter,” application of the entire fairness standard typically precludes dismissal
under Rule 12(b)(6), because “[a] determination of whether the 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.”103
100
457 A.2d 701, 711 (Del. 1983) (citations omitted).
101
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).
102
In re Trados, 73 A.3d at 45.
103
Orman v. Cullman, 794 A.2d 5, 21 n.36 (Del. Ch. 2002).
37
In my opinion, Carr has alleged sufficient specific facts that call into question
the fairness of both the process and the price of the Series A-2 Financing.104 With
respect to process, the Series A-2 Financing was approved by a compromised Board
without the benefit of a financial advisor or a fairness opinion.105 It involved the
issuance of preferred stock to a select group of investors, including four of the
directors and/or their affiliates, and it allowed NEA to become ACT’s controlling
stockholder.106 The fact that NEA was permitted to obtain nearly 90% of the Series
A-2 preferred stock, increasing its stake in ACT to more than 65% on an as-
converted basis, segues into Carr’s allegation that the Series A-2 stock was offered
at an unfairly low price.107
Control of a corporation has unique value, and one would expect an acquirer
to pay a premium for that control.108 Here, it is alleged that the Series A-2 Financing
placed an approximately $15 million valuation on ACT,109 yet the Warrant exercise
price ($75 million) proposed less than three months later in Abbott’s June 30, 2014
104
See In re Boston Celtics Ltd. Partnership S’holders Litig., 1999 WL 641902, at *4 (Del.
Ch. Aug. 6, 1999) (citation omitted) (“[I]t . . . is necessary for the plaintiff to allege specific
items of misconduct that demonstrate unfairness, in order to survive a motion to dismiss.”).
105
Tr. 33-34 (Nov. 7, 2017).
106
Compl. ¶¶ 65, 77, 85; Tr. 34 (Nov. 7, 2017).
107
Compl. ¶¶ 51, 73.
108
See IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *7 n.54 (Del. Ch.
Dec. 11, 2017) (“That control of a corporation has value is well-accepted.”).
109
Compl. ¶ 51.
38
LOI was five-times that amount.110 Such a gap in value in the span of just a few
months, without any allegations about intervening events that increased ACT’s value
meaningfully, supports an inference that NEA was able to gain control on the cheap
through the Series A-2 Financing.
Given the specific facts pled in the Complaint about the process and price of
the Series A-2 Financing, it is certainly reasonably conceivable that the Series A-2
Financing was not entirely fair. Accordingly, Count V states a claim for breach of
fiduciary duty against the Director Defendants with respect to their approval of the
Series A-2 Financing.111
3. Count VI States a Claim for Aiding and Abetting Against
NEA Regarding the Series A-2 Financing
In Count VI of his Complaint, Carr alleges that NEA aided and abetted the
Board’s breach of its fiduciary duty by approving the Series A-2 Financing. “A third
party may be liable for aiding and abetting a breach of a corporate fiduciary’s duty
to the stockholders if the third party knowingly participates in the breach. To survive
a motion to dismiss, the complaint must allege facts that satisfy the four elements of
an aiding and abetting claim: (1) the existence of a fiduciary relationship, (2) a
110
Compl. ¶¶ 50, 59.
111
I consider in Section F below whether certain Director Defendants who approved the
Series A-2 Financing may be dismissed for failure to plead a non-exculpated claim against
them.
39
breach of the fiduciary’s duty, (3) knowing participation in that breach by the
defendants, and (4) damages proximately caused by the breach.”112
For the reasons explained above, Carr has pled adequately that the Board
owed a fiduciary duty to ACT, which it breached in approving the Series A-2
Financing. Carr also has alleged that this transaction unfairly and cheaply diluted
him and other minority stockholders.113 Accordingly, the key question is whether
Carr has pled facts such that it is reasonably conceivable that NEA knowingly
participated in the Board’s alleged breach of fiduciary duty.
In Malpiede v. Townson, our Supreme Court explained the meaning of
“knowing participation” in the context of a claim for aiding and abetting a breach of
fiduciary duty:
Knowing participation in a board’s fiduciary breach requires that the
third party act with knowledge that the conduct advocated or assisted
constitutes such a breach. Under this standard, a bidder’s attempts to
reduce the sale price through arm’s-length negotiations cannot give rise
to liability for aiding and abetting, whereas a bidder may be liable to
the target’s stockholders if the bidder attempts to create or exploit
conflicts of interest in the board.114
“A claim of knowing participation need not be pled with particularity.
However, there must be factual allegations in the complaint from which knowing
112
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (citations, internal quotations,
and alterations in original omitted).
113
Compl. ¶¶ 1, 4.
114
780 A.2d at 1097 (citations omitted).
40
participation can be reasonably inferred.”115 A director’s knowledge and
participation in a breach may be imputed to a non-fiduciary entity for which that
director also serves in a fiduciary capacity.116
Viewing the facts alleged in the light most favorable to Carr, as I must at this
stage of the proceedings, I find that Carr has adequately pled that NEA knowingly
participated in the Board’s breach. Klein served as both an ACT director and an
NEA partner, so his alleged knowing participation in the Board’s breach of its
fiduciary duty with respect to the Series A-2 Financing may be imputed to NEA.
The Complaint alleges that both NEA and Klein had a financial incentive to dilute
cheaply ACT stockholders to gain control of the Company at an unfairly low price,
and that NEA exploited conflicts of interest on the Board by deploying Klein to
facilitate a transaction purportedly unfair to the existing ACT stockholders.117 These
interactions between ACT and NEA, which acquired 90% of the Series A-2
Preferred Stock, “amount to more than simple arm’s-length negotiations,”118 since
Klein’s venture capital firm, where he is a partner, wanted NEA to acquire the
115
In re Gen. Motors (Hughes) S’holder Litig., 2005 WL 1089021, at *24 (Del. Ch. May
4, 2005) (citation and internal quotation marks omitted).
116
See, e.g., Carlson v. Hallinan, 925 A.2d 506, 542 (Del. Ch. 2006); Khanna v. McMinn,
2006 WL 1388744, at *27 (Del. Ch. May 9, 2006).
117
Compl. ¶¶ 4, 26, 49, 51, 54.
118
In re USACafes, L.P. Litig., 600 A.2d 43, 56 (Del. Ch. 1991) (Allen, C.); see id. (finding
that plaintiff stated a claim for aiding and abetting breach of fiduciary duty).
41
preferred stock at the lowest possible valuation. Accordingly, I find it reasonably
conceivable that NEA aided and abetted the Board’s breach of fiduciary duty.
*****
In sum, with respect to Carr’s allegations regarding the Series A-2 Financing,
I find that demand is excused with respect to these claims, and that the Complaint
states claims of breach of fiduciary duty against the Director Defendants and aiding
and abetting a breach of fiduciary duty against NEA. Thus, defendants’ motion to
dismiss Counts V and VI is denied insofar as those claims concern the Series A-2
Financing.
E. Counts I and II of the Complaint State Viable Claims for Relief
Concerning the Warrant Transaction
In this section I consider whether Carr has stated a direct claim for breach of
fiduciary duty under Counts I and II of the Complaint with respect to the Warrant
Transaction. I begin with analyzing the claim against the Director Defendants
(Count II) and then turn to the claim against NEA (Count I) as the Company’s
controlling stockholder.
1. Count II States a Claim for Breach of Fiduciary Duty Against
the Director Defendants Regarding the Warrant Transaction
“Delaware has three tiers of review for evaluating director decision-making:
the business judgment rule, enhanced scrutiny, and entire fairness.”119 Revlon and
119
Reis v. Hazelett Strip-Casting Corp., 28 A.3d 443, 457 (Del. Ch. 2011).
42
its progeny teach that enhanced scrutiny applies to transactions that effect a change
of corporate control.120 This case, however, presents an unusual fact pattern for
determining whether Revlon should apply to evaluate Carr’s challenge to the
Director Defendants’ decision to approve the Warrant Transaction.
Two attributes of the Warrant Transaction complicate the inquiry. First, the
transaction involved the potential sale of a corporation (ACT) to a third-party
(Abbott) with the blessing of a controlling stockholder (NEA), where the Company’s
directors realistically had little—if any—ability to seek alternatives to maximize
value for the minority stockholders beyond what the controller was willing to accept.
Second, the potential sale of ACT was just that—potential. The Warrant Transaction
afforded Abbott an option to acquire ACT for a 30-month period to the exclusion of
other bidders for specified economic terms, meaning that the transaction might or
might not ultimately result in a sale of the corporation and the elimination of the
minority stockholders’ interests in the Company.
No authority has been brought to the court’s attention addressing a scenario
where both of these features were present, although there are cases that have
addressed the application of Revlon duties in circumstances implicating one feature
or the other. I consider these two lines of cases next.
120
Paramount Commc’ns Inc. v. QVC Network, Inc., 637 A.2d 34, 36 (Del. 1994);
Paramount Comm’cns, Inc. v. Time Inc., 571 A.2d 1140, 1150-51 (Del. 1989); Revlon, 506
A.2d at 182.
43
The first line comes from our Supreme Court’s decision in McMullin v. Beran,
which considered what duty a board of directors owes to minority stockholders when
evaluating a proposal for a sale of the entire corporation to a third party at the behest
of a controller.121 There, ARCO owned approximately 80% of the common stock of
Chemical, and Lyondell reached out to ARCO about acquiring all of Chemical.122
With the Chemical board’s blessing, ARCO negotiated a two-step merger with
Lyondell.123 When considering the obligations the Chemical board owed to its
minority stockholders in the context of a third-party sale, the Supreme Court held
that “the ultimate focus on maximization is the same as if the board itself had decided
to sell the corporation to a third party.”124 The Court explained:
When the entire sale to a third-party is proposed, negotiated and timed
by a majority shareholder . . . the board cannot realistically seek any
alternative because the majority shareholder has the right to vote its
shares in favor of the third-party transaction it proposed for the board’s
consideration. Nevertheless, in such situations, the directors are
obliged to make an informed and deliberate judgment, in good faith,
about whether the sale to a third party that is being proposed by the
majority shareholder will result in a maximization of value for the
minority shareholders.125
121
765 A.2d 910, 918-19 (Del. 2000).
122
Id. at 915.
123
Id. at 915-16.
124
Id. at 919 (citing Mendel v. Carroll, 651 A.2d 297, 305 (Del. 1994)).
125
Id. (emphasis in original and citations omitted).
44
Thus, as the Supreme Court further explained, although the Chemical board
“did not have the ability to act on an informed basis to secure the best value
reasonably available for all shareholders in any alternative” transaction, the
Chemical board had “the duty to act on an informed basis to independently ascertain
how the merger consideration being offered in the third party Transaction with
Lyondell compared to Chemical’s value as a going concern.”126 This duty emanates
from the directors’ “ultimate statutory duties under Section 251 and attendant
fiduciary obligations,”127 and directors have “a duty to fulfill this obligation
faithfully and with due care so that the minority shareholders would be able to make
an informed decision about whether to accept the Lyondell Transaction tender offer
price or to seek appraisal of their shares.”128
Noting that the transaction at issue involved “the entire sale of Chemical to
Lyondell” rather than the sale only of ARCO’s own 80% interest in Chemical, the
Supreme Court agreed with plaintiff’s contention that the transaction “implicated the
126
Id. (emphasis in original); see id. at 920 (citations omitted) (“When a majority of a
corporation’s voting shares are owned by a single entity, there is a significant diminution
in the voting power of the minority stockholders. Consequently, minority stockholders
must rely for protection on the fiduciary duties owed to them by the board of directors.”).
127
Id. at 920; see also id. at 917 (citing Smith v. Van Gorkom, 488 A.2d 858, 873 (Del.
1985); Sinclair Oil Corp. v. Levien, 280 A.2d 717, 721-22 (Del. 1971)) (describing 8 Del.
C. § 251 as imposing a duty “to act in an informed and deliberate manner in determining
whether to approve an agreement of merger before submitting the proposal to the
stockholders”).
128
Id. at 920.
45
directors’ ultimate fiduciary duty that was described in Revlon and its progeny—to
focus on whether shareholder value has been maximized.”129 Nevertheless, the
Supreme Court did not place the burden on the directors to show that they had acted
reasonably in approving a transaction that maximized value for all stockholders, as
Revlon would require, but held instead that plaintiff’s complaint “would withstand a
motion to dismiss if it successfully alleged facts that, if true, would rebut the
procedural protections of the business judgment rule.”130 The Supreme Court then
reviewed the allegations of plaintiff’s complaint within the business judgment rule
framework and found them sufficient to state claims for breach of the duties of care
and loyalty.131
The second line of cases emanates from Chancellor Allen’s decision in
Equity-Linked Investors, L.P. v. Adams.132 There, the court faced a conflict between
holders of convertible preferred stock with a liquidation preference and common
stock.133 The subject company, Genta, was a bio-pharmaceutical company on the
cusp of insolvency but which had several promising technologies.134 Genta secured
129
Id. (citation omitted).
130
Id.
131
Id. at 921-25.
132
705 A.2d 1040 (Del. Ch. 1997).
133
Id. at 1042.
134
Id. at 1041.
46
third-party financing from Aries in exchange for a note, warrants exercisable into
half of Genta’s outstanding stock, and other consideration including the right to
designate a majority of the board of directors.135 Plaintiff, a lead holder of preferred
stock with a small common stock position,136 challenged the transaction based on a
Revlon theory:
The claim now is that the board “transferred control” of the company
and that in such a transaction it is necessary that the board act
reasonably to get the highest price, which this board did not do.
Plaintiff urges that the special duty recognized in Revlon, Inc. v.
MacAndrews & Forbes Holdings, Inc. arose here because (1) Aries has
a contract right to designate a majority of the Genta board and (2) Aries
acquired warrants that if exercised would give it the power to control
any election of the Genta board.137
Chancellor Allen “assume[d] for purposes of deciding this case, without
deciding, that the granting of immediately exercisable warrants, which, if exercised,
would give the holder voting control of the corporation, is a transaction of the type
that warrants the imposition of the special duties and special review standard of
Paramount,”138 i.e., Revlon duties.139 He described these duties as follows:
(1) where a transaction constituted a “change in corporate control,”
such that the shareholders would thereafter lose a further opportunity
to participate in a change of control premium, (2) the board’s duty of
135
Id. at 1041-42.
136
Id. at 1042.
137
Id. at 1053.
138
Paramount Commc’ns v. QVC, 637 A.2d 34.
139
Equity-Linked Inv'rs, 705 A.2d at 1055.
47
loyalty requires it to try in good faith to get the best price reasonably
available (which specifically means the board must at least discuss an
interest expressed by any financially capable buyer), and (3) in such
context courts will employ an (objective) “reasonableness” standard
(both to the process and the result!) to evaluate whether the directors
have complied with their fundamental duties of care and good faith
(loyalty).140
Applying this Revlon lens to the challenged financing after trial, Chancellor Allen
found that the board met its “special duties,”141 but he did not provide any further
commentary on whether or when a warrant sale resulting in a potential transfer of
control triggers Revlon duties.
Thirteen years after Equity-Linked, this court confronted a similar situation in
Binks v. DSL.net, Inc.142 There, DSL was experiencing dire financial stress, and its
board decided to secure financing from MegaPath in the form of convertible notes
rather than filing for bankruptcy.143 By exercising its conversion rights under the
notes over the course of a few months, MegaPath obtained more than 90% of DSL’s
common stock and then eliminated the minority stockholders via a short-form
merger.144 Plaintiff brought an action pro se alleging that DSL’s board breached its
fiduciary duty by failing to obtain the best price reasonably available for
140
Id. at 1054-55.
141
Id. at 1053, 1059.
142
2010 WL 1713629 (Del. Ch. Apr. 29, 2010).
143
Id. at *1.
144
Id.
48
stockholders in the context of a change of control transaction, as required under
Revlon.145 When considering the appropriate standard of review, the court
commented:
It is, perhaps, easy to doubt the assumption that the MegaPath
Financing Transaction—a debt placement that occurred more than six
months before the short-form Merger and which was entered into
without any express guarantee that the Merger would occur—should be
assessed under any special standard. Yet, the Court is mindful that it is
reviewing the efforts of a self-represented plaintiff, and it is not
unreasonable to review the Amended Complaint as alleging that the
short-form Merger was an inevitable and foreseeable consequence of
the MegaPath Financing Transaction. As the Supreme Court in QVC
pointed out, in determining whether the transaction constitutes a
“change in control” for Revlon purposes, “the answer must be sought
in the specific circumstances surrounding the transaction.”146
Based on the “specific circumstances” surrounding the transaction, the court
assumed, without deciding, that the financing was subject to review under the Revlon
standard, citing Equity-Linked Investors approvingly.147 Applying this standard, the
court still granted defendants’ motion to dismiss plaintiff’s Revlon claim, because
“the Board was independent and disinterested with respect to the MegaPath
145
Id. at *1, 5.
146
Id. at *6 (citing Paramount Commc’ns v. QVC, 637 A.2d at 46).
147
Id. at *6-7; see also id. at *7 (“Evaluating the MegaPath Financing Transaction under
the Revlon standard also has the advantage of giving Binks the most favorable analytical
framework for assessment of his claims. It additionally would make the fiduciary duty
claims that compromise the core of the Amended Complaint at least arguably direct. If the
MegaPath Financing Transaction were evaluated outside the context of the short-form
Merger, the Board’s failures, assuming that there were any, might well be viewed as giving
rise only to derivative claims.”).
49
Financing Transaction, was well informed by independent advisors of the available
alternatives to the Company besides its ultimate sale to MegaPath, and acted in good
faith in arranging and committing the Company to that transaction, especially in light
of the circumstances and the paucity of other options available to DSL.”148
Equity-Link and Binks support the proposition that it would be appropriate to
apply the intermediate scrutiny of Revlon, at least in certain circumstances, to
evaluate a board’s decision to grant a third-party an option to acquire control of a
corporation, as opposed to a decision to sell the corporation outright. Indeed, if that
were not the case, a party could seek to evade the special protections Revlon affords
stockholders through creative structuring of a transaction (e.g., an unconditional,
immediately exercisable option to purchase the entire company) that in substance is
equivalent to an outright sale of the corporation. That would be an absurd result.
On the other hand, the application of Revlon to an option transaction likely
would turn on the conditionality and other specific features of the option in question.
Here, for example, defendants argue that Revlon should not apply because “Abbott’s
exercise of the Warrant option to purchase ACT was contingent on the occurrence
of material contingencies that neither ACT nor Abbot controlled, and that were far
from inevitable,” including the need for regulatory approval and ACT’s delivery to
148
Id. at *7.
50
Abbott of “specified human clinical trial data relating to” a “specific ablation
catheter product.”149
*****
These two lines of cases, taken together, suggest that the board of directors of
a controlled company may have Revlon-like duties when deciding to approve the
sale of an option to a third party to purchase the entire company. Here, however, I
do not need to determine whether the Board’s approval of the Warrant Transaction
is subject to a form of enhanced scrutiny, because even under the business judgment
rule—the most defendant-friendly standard of review—Carr has stated a claim for
relief against the Director Defendants in my opinion.
The business judgment rule provides a presumption that the board made such
a decision “on an informed basis, in good faith and in the honest belief that the action
taken was in the best interests of the company.”150 A complaint can survive a motion
to dismiss if a plaintiff has adequately pled that the directors breached their duty of
care or loyalty in coming to that determination. Here, Carr has pled facts such that
it is reasonably conceivable that the Director Defendants breached both of these
duties in connection with their approval of the Warrant Transaction so as to rebut
the business judgment rule.
149
Letter from Defs. (Dec. 8, 2017) 4 (Dkt. 61).
150
Aronson, 473 A.2d at 812 (citation omitted).
51
With respect to the duty of care, Carr has pled that Medtronic’s letter of intent
was objectively superior to Abbott’s proposal, yet the Board did not pursue a
transaction with Medtronic or use Medtronic’s proposal to attempt to extract a higher
price from Abbott before approving the Warrant Transaction several months later,
after Abbott’s letter of intent’s 60-day exclusivity period had expired.151
Additionally, as pled and reflected in its minutes, the Board did not implement any
formal process in selling the Warrant, nor did it even engage a financial advisor.152
These factors, taken together, suggest that the Board may have been grossly
negligent in executing the potentially game-ending Warrant Transaction.153
With respect to the duty of loyalty, Carr has rebutted the business judgment
rule because he has pled facts showing that at least half of the six-person board that
approved the Warrant Transaction was not disinterested or independent.154 At the
151
Compl. ¶ 68.
152
Compl. ¶¶ 59-77; Tr. (Nov. 7, 2017) 33-34; Ennis Aff. Exs. 6, 8.
153
See McMullin, 765 A.2d at 921 (citation and internal quotation marks omitted)
(“Director liability for breaching the duty of care is predicated upon concepts of gross
negligence.”); see also id. at 921-22 (finding that plaintiff adequately pleaded a claim for
breach of the duty of care when, inter alia, there was a lack of procedural safeguards to
protect the interests of the minority stockholders, the board only met one time to consider
the transaction, and the sale process was rushed).
154
See Beam v. Stewart, 845 A.2d at 1046 n.8 (citing Beneville, 769 A.2d at 85-86) (“If
three directors of a six person board are not independent and three directors are
independent, there is not a majority of independent directors and demand would be futile”);
In re the Limited, 2002 WL 537692, at *7 (citation omitted) (“[W]here the challenged
actions are those of a board consisting of an even number of directors, plaintiffs meet their
52
time of the transaction, ACT itself represented that both Klein and Pederson were
tainted, because Klein was an NEA partner and Pederson was the President and CEO
of VytronUS and was discussing potential employment with Abbott.155 Rohlen also
was not independent and disinterested in my view, because he was the CEO of the
NEA-controlled Company.156 The director’s conflicts arising from their
relationships with NEA are salient because, as discussed below, NEA itself allegedly
was motivated to accept less than fair value for its shares of ACT in order to benefit
from Abbott’s acquisition of Topera and investment in VytronUS. Thus, the
directors’ conflicts of interest provide a sufficient and independent basis for Carr’s
claims against the Director Defendants regarding the Warrant Transaction to survive
a motion to dismiss.157
burden of demonstrating the futility of making demand on the board by showing that half
of the board was wither interested or not independent.”).
155
Compl. ¶¶ 66-67.
156
See Sandys, 152 A.3d at 128 (“Mattrick is Zynga’s CEO. Zynga’s controlling
stockholder, Pincus, is interested in the transaction under attack, and therefore, Mattrick
cannot be considered independent.”).
157
Defendants argue that the business judgment rule should apply because a group of four
“Disinterested Directors”—Rohlen, Constantinides, Olson, and Tanaka—approved the
Warrant Transaction before the transaction was submitted to the Board. NEA Defs.’
Opening Br. 40; Ennis Aff. Ex. 8 at ACT_220_000177. This fact is not pled in the
Complaint. In any event, I disagree with defendants’ contention that Rohlen was
independent and disinterested for the reasons explained above.
53
2. Count I States a Claim for Breach of Fiduciary Duty Against
NEA as a Controlling Stockholder Regarding the Warrant
Transaction
In Count I of the Complaint, Carr asserts that NEA breached its fiduciary duty
as the controlling stockholder of ACT with respect to the Warrant Transaction.
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.”158 A
controlling stockholder has the right to act in its own self-interest when it is acting
solely in its capacity as a stockholder.159 This right must yield, however, when a
corporate decision implicates a controller’s duty of loyalty.160
158
Thorpe v. CERBCO, Inc., 1995 WL 478954, at *8 (Del. Ch. Aug. 9, 1995) (Allen, C.)
(emphasis in original), aff’d in part, rev’d in part, 676 A.2d 436 (Del. 1996).
159
Thorpe v. CERBCO, Inc., 676 A.2d 436, 440-41, 443-44 (Del. 1996); see In re
CompuCom Sys., Inc. S’holders Litig., 2005 WL 2481325, at *6 (Del. Ch. Sept. 29, 2005)
(citation omitted) (“Generally speaking, a controlling shareholder has the right to sell his
control share without regard to the interests of any minority shareholder, so long as the
transaction is undertaken in good faith.”).
160
Thorpe v. CERBCO, 676 A.2d at 442; see also Abraham v. Emerson Radio Corp., 901
A.2d 751, 759 (Del. Ch. 2006) (Strine, V.C.) (“I am dubious that our common law of
corporations should recognize a duty of care-based claim against a controlling stockholder
for failing to (in a court's judgment) examine the bona fides of a buyer, at least when the
corporate charter contains an exculpatory provision authorized by 8 Del. C. § 102(b)(7).
After all, the premise for contending that the controlling stockholder owes fiduciary duties
in its capacity as a stockholder is that the controller exerts its will over the enterprise in the
manner of the board itself. When the board itself is exempt from liability for violations of
the duty of care, by what logic does the judiciary extend liability to a controller exercising
its ordinarily unfettered right to sell its shares?”).
54
This court’s decision in In re BHC Communications, Inc. Shareholder
Litigation161 is instructive to my analysis here. There, plaintiffs challenged a series
of mergers between an unrelated acquirer—News Corporation—and three
corporations that together comprised a “family” of entities.162 That family consisted
of Chris-Craft, a holding company, which owned a majority stake in BHC, which,
in turn, owned a majority stake in UTV.163 The gravamen of plaintiffs’ theory was
that Chris-Craft, as a controller, breached its fiduciary duty by using “its dominant
position to exert exclusive control over the negotiations with News Corporation and
used that control to unfairly allocate ‘the aggregate consideration News Corporation
was willing to pay for [all three] companies . . . [to] favor its own shareholders at the
expense of BHC’s [and UTV’s] minority shareholders.’”164 The court held “there is
little doubt that” if such a theory was adequately pled, it “should deny the motions
to dismiss.”165
161
789 A.2d 1 (Del. Ch. 2001).
162
Id. at 4.
163
Id. at 5.
164
Id. at 7-8 (alterations in original); see id. at 12 (“To support their claim of self-dealing,
plaintiffs argue that, since the total amount News Corporation was willing to pay ‘was not
unlimited,’ ‘the more Chris-Craft shareholders would receive necessarily and adversely
impacted on the consideration News was willing to pay to [the] minority shareholders.’”).
165
Id. at 12.
55
The thrust of Carr’s theory here is analogous to plaintiffs’ theory in BHC.
Carr alleges that NEA breached its fiduciary duty as a controller by taking advantage
of its dominant position and engaging in self-dealing. Specifically, the Complaint
alleges that NEA engaged in a form of portfolio optimization by selling the Warrant
to acquire ACT on the cheap to Abbott in order to incentivize Abbott to undertake
transactions favorable to NEA with respect to two of its other portfolio companies;
namely for Abbott to acquire Topera and invest in VytronUS. Carr alleges, in
essence, that NEA prioritized its fund’s overall rate of return over maximizing value
for ACT’s stockholders. This is precisely the kind of behavior that controllers may
not engage in under Delaware law. Accordingly, Count I of the Complaint states a
claim that NEA breached its fiduciary duty as a controller with respect to the Warrant
Transaction.
*****
In sum, with respect to Carr’s allegation regarding the Warrant Transaction, I
find that the Complaint has stated claims of breach of fiduciary duty against the
Director Defendants and NEA as ACT’s controlling stockholder. Thus, defendants’
motion to dismiss Counts I and II is denied.
F. The Complaint Fails to Plead Non-Exculpated Claims Against
Certain Director Defendants
In its Cornerstone decision, our Supreme Court made clear that a “plaintiff
seeking only monetary damages must plead non-exculpated claims against a director
56
who is protected by an exculpatory charter provision to survive a motion to dismiss,
regardless of the underlying standard of review for the board’s conduct—be it
Revlon, Unocal, the entire fairness standard, or the business judgment rule.”166 The
Supreme Court further explained what is entailed in making this showing:
When a director is protected by an exculpatory charter provision, a
plaintiff can survive a motion to dismiss by that director defendant by
pleading 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.167
ACT’s certificate of incorporation exculpates its directors for breaches of their
duty of care.168 Based on this provision, defendants argue that certain Director
Defendants must be dismissed under Cornerstone because the Complaint fails to
plead facts supporting a non-exculpated claim against them with respect to the Series
A-2 Financing (Tanaka and Olson) and/or the Warrant Transaction (Tanaka, Olson,
Constantinides, and Rohlen). Carr makes no argument that any of these individuals
acted in bad faith with respect to either transaction but argues that they should not
be dismissed because each of them “was either interested in the transactions at issue
166
In re Cornerstone Therapeutics Inc., Stockholder Litig., 115 A.3d 1173, 1175-76 (Del.
2015) (Strine, C.J.) (citations omitted).
167
Id. at 1179-80 (citation omitted).
168
Ennis Aff. Ex. 10 Art. VIII.
57
or beholden to an interested party.”169 I consider these contentions for each director
below.
1. Tanaka and Olson
For purposes of both the Series A-2 Financing and the Warrant Transaction,
Carr argues that Tanaka and Olson were beholden to NEA because they both were
“economically dependent on NEA.”170 Specifically, Carr points to the fact that
Tanaka was “a director of multiple NEA-portfolio companies, including
Vytron[US],” and, with respect to Olson, that the vesting of stock options governed
by his Consulting Agreement with ACT was conditioned on his continued service
as a consultant which, in turn, was subject to the approval of a board that would be
under NEA control after the Series A-2 Financing.171
Importantly, however, “[c]onsistent with the overarching requirement that any
disqualifying tie be material, the simple fact that there are some financial ties
between the interested party and the director is not disqualifying. Rather, the
question is whether those ties are material, in the sense that the alleged ties could
have affected the impartiality of the director.”172 Here, Carr has not pled facts such
169
Pl’s Answering Br. 82.
170
Pl.’s Answering Br. 18.
171
Pl.’s Answering Br. 18.
172
In re MFW S’holders Litig., 67 A.3d 496, 509-10 (Del. Ch. 2013) (Strine, C.) (emphasis
in original and citation omitted).
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that it would be reasonable to infer that Tanaka’s compensation as a VytronUS
director or Olson’s stock options in ACT were material to them so as to taint their
decision-making. Thus, Tanaka and Olson will be dismissed from this action
because of the Complaint’s failure to plead a non-exculpated claim against them
with respect to either the Series A-2 Financing or the Warrant Transaction.
2. Constantinides and Rohlen
Carr contends that Constantinides was tainted with respect to the Warrant
Transaction because of “a series of events involving economic dependency between
NEA and Constantinides’s employer at the time, NBGI, as well as the structure of
their plan that contemplated distributions to both of them out of the warrant purchase
money from Abbott.”173 This argument fails because Carr does not plead sufficient
facts permitting an inference that the ties between NEA and NBGI reach the
threshold required for materiality as to Constantinides. Carr has adequately pled,
however, that Rohlen was not independent with respect to the Warrant Transaction
since he was the CEO of NEA-controlled ACT at the time174 and, for reasons
explained above, the Complaint states a claim against NEA for breach of its fiduciary
duty as a controller in connection with the Warrant Transaction.
173
Pl.’s Answering Br. 38.
174
See Sandys, 152 A.3d at 128 (“Mattrick is Zynga’s CEO. Zynga’s controlling
stockholder, Pincus, is interested in the transaction under attack, and therefore, Mattrick
cannot be considered independent.”).
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To summarize, the Complaint fails to plead a non-exculpated claim against
Constantinides with respect to the Warrant Transaction but does so with respect to
Rohlen. Notwithstanding this conclusion insofar as Constantinides is concerned, he
will not be dismissed from this action because no argument has been made that the
Complaint fails to plead a non-exculpated claim against him with respect to the
Series A-2 Financing.
IV. CONCLUSION
For the reasons explained above, defendants’ motion to dismiss is GRANTED
as to Counts III and IV and DENIED as to Counts I, II, V, and VI, which shall
proceed in the manner described above. The Trust, Kendall Simpson Rohlen (who
was sued solely as a trustee of the Trust), Tanaka, and Olson are dismissed from this
action.
IT IS SO ORDERED.
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