Kerbawy v. McDonnell ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
KYLE C. KERBAWY, SR., )
)
Plaintiff/Counterclaim-Defendant, )
)
v. ) C.A. No. 10769-VCP
)
JOHN MCDONNELL, MAGNUS )
MOLITEUS, MARTIN PFINSGRAFF, )
JAMES D‟ORTA, STEVEN P. )
MULLINS, and JON T. TREMMEL, )
)
Defendants/Counterclaim-Plaintiffs. )
)
JOHN MCDONNELL, MAGNUS )
MOLITEUS, MARTIN PFINSGRAFF, )
JAMES D‟ORTA, STEVEN P. )
MULLINS, and JON T. TREMMEL, )
)
Third-Party Plaintiffs, )
)
v. )
)
JAMES DEFRANCESCO, )
Third-Party Defendant. )
)
MEMORANDUM OPINION
Date Submitted: June 18, 2015
Date Decided: August 18, 2015
Eric D. Selden, Esq., David E. Ross, Esq., Nicholas D. Mozal, Esq., ROSS ARONSTAM
& MORITZ LLP, Wilmington, Delaware; Attorneys for Plaintiff/Counterclaim
Defendant.
Kevin R. Shannon, Esq., Matthew F. Davis, Esq., Jaclyn C. Levy, Esq., Matthew A.
Golden, Esq., POTTER ANDERSON & CORROON LLP, Wilmington, Delaware;
Attorneys for Third-Party Defendant.
Kenneth J. Nachbar, Esq., Leslie A. Polizoti, Esq., John P. DiTomo, Esq., Matthew R.
Clark, Esq., Christopher P. Quinn, Esq., Jason Tyler, Esq., Zi-Xiang Shen, Esq., Thomas
P. Will, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware;
Attorneys for Defendants/Counterclaim-Plaintiffs/Third-Party Plaintiffs.
Rudolf Koch, Esq., Susan M. Hannigan, Esq., Sarah A. Clark, Esq., RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Attorneys for Intervenor ACell, Inc.
PARSONS, Vice Chancellor.
In this action under 8 Del. C. § 225, I am asked to determine whether written
consents delivered by the holders of a majority of a company‟s stock should be set aside
on equitable grounds. The plaintiff, a stockholder who solicited the consents, was
assisted in his endeavor by a sitting director who controls about twenty-four percent of
the company‟s stock, and a former officer. The defendant incumbent board of directors
of this privately held company was tipped off that a consent solicitation was underway.
The defendant directors immediately went into a forceful defensive effort that ultimately
was unsuccessful. The plaintiff stockholder delivered consents purporting to represent
about 53% of the outstanding stock.
The incumbent directors refused to recognize the consents as valid or effective.
The plaintiff then commenced this action seeking a declaratory judgment that his new
director nominees, including himself, were validly elected as the company‟s board. The
incumbent directors counterclaimed against the plaintiff and brought third-party claims
against the director-stockholder who assisted in the solicitation. In support of those
claims, and in defense against the plaintiff‟s assertion that his new board validly was
elected, the incumbent directors contend that the consent solicitation was tainted by
inequitable conduct and must be set aside. In particular, the incumbent directors: (1)
challenge certain disclosures that the plaintiff made to other stockholders as materially
misleading; (2) allege that the plaintiff and third-party defendant tortiously interfered
with the former officer‟s separation agreement, which barred him from assisting any
consent solicitation; and (3) allege that the third-party defendant improperly provided
company information to the plaintiff in connection with the solicitation effort.
1
I presided over a two-day trial. This memorandum opinion contains my post-trial
findings of fact and conclusions of law as to the plaintiff‟s Section 225 claim and the
various counterclaims and third-party claims that conceivably might affect that claim.
For the reasons stated herein, I conclude that none of the grounds advanced by the
defendant directors provides a sufficient justification for me to set aside the stockholders‟
consents. Thus, the plaintiff and the other members of his new board slate validly were
elected as the company‟s directors, and he is entitled to the declaratory relief he seeks.
I. BACKGROUND1
A. Parties
Non-party ACell, Inc. (“ACell” or the “Company”) is a Delaware corporation
headquartered in Maryland. It was founded in 1999 and remains privately held, with
roughly 150 stockholders. Together with family members and affiliated entities, Plaintiff
Kyle C. Kerbawy, Sr. has invested over $1.1 million in ACell and holds about five
percent of the Company‟s outstanding stock.2
Third-party Defendant James R. DeFrancesco began working at ACell in 2002.
Since that time, DeFrancesco has been a member of ACell‟s board of directors; until
October 2014, he also was the Company‟s CEO. His investment in the Company exceeds
$3 million, and together with family members he controls about twenty-four percent of
1
Few of the facts in this case are disputed. To the extent any facts are in dispute, I
have used a preponderance of the evidence standard to make the findings
contained herein. Citations to the trial transcript are in the form “Tr. # (X),” with
the testifying witness “X” identified if not apparent from the text.
2
Tr. 11-12, 64 (Kerbawy); JX 714.
2
ACell‟s stock, making him its largest stockholder.3 For purposes of this case, Kerbawy
and DeFrancesco are aligned with non-party Rodney Bosley, who was the Company‟s
COO until he was terminated at the same time as DeFrancesco in October 2014. Bosley
owns about three percent of ACell‟s stock.
Kerbawy brought this action against six of the Company‟s seven incumbent
directors: Dr. James D‟Orta, John J. McDonnell, Jr., Magnus Moliteus, Steven P.
Mullins, Martin Pfinsgraff, and Jon Tremmel (“Defendants,” or the “Board”).
McDonnell, the Chairman of the Board, is one of ACell‟s largest stockholders, owning
over six percent of the Company‟s stock.4 D‟Orta became CEO in late 2014, after
DeFrancesco‟s removal.
Non-parties David Anderson, Louis “Skip” Baldino, James Osborne, and Claude
Pering (collectively the “Director Nominees,” and together with Kerbawy, the “New
Board”) are the individuals Kerbawy seeks to have seated on ACell‟s board of directors.
B. Facts
1. The DOJ Investigation dashes ACell’s hopes for an IPO
ACell develops, manufactures, and markets regenerative medical products. After
years of growth, the Company began realizing profits in 2012, and during 2013 it made
preparations for an initial public offering (“IPO”). The board of directors, which had
included only DeFrancesco, McDonnell, Pfinsgraff, and Moliteus, was expanded with the
addition of Mullins, a former public company CFO, and D‟Orta and Tremmel, who had
3
Tr. 266 (DeFrancesco).
4
JX 714.
3
experience in the medical device industry.5 On January 31, 2014, the Company
submitted a preliminary registration statement (the “Draft S-1”) for review by the U.S.
Securities and Exchange Commission (the “SEC”). ACell‟s lead underwriter indicated a
value for the Company in the $400 to $500 million range.6
The Company‟s prospects took a blow in February 2014 when the Board was
informed that the U.S. Department of Justice (“DOJ”) had served a subpoena requesting
information about ACell‟s regulatory compliance, including alleged improper marketing
of ACell‟s products for non-approved or “off-label” uses (the “DOJ Investigation”). The
DOJ Investigation had two major consequences. First, it derailed the IPO, which fell
apart when the Company‟s underwriters could not formulate a satisfactory risk factor for
inclusion in the registration statement.7 Later in 2014, when the Board and its bankers
canvassed over thirty potential buyers regarding interest in a private transaction, ACell
received bids in the $250 million range.8 Even those significantly reduced numbers were
contingent on further developments with the DOJ Investigation, and no serious offers
materialized.
The second consequence of the DOJ Investigation was that it divided DeFrancesco
and Bosley from the other members of the Board. As discussed in more detail infra, the
ongoing dispute over the DOJ Investigation—who was to blame for its occurrence, what
5
JX 700.
6
Tr. 143 (Pfinsgraff).
7
E.g., Tr. 460 (McDonnell).
8
Tr. 143-44 (Pfinsgraff).
4
the Company‟s strategy should be in light of it, and its impact on the validity of the
consent solicitation at issue here—colors nearly every aspect of this case.
After receiving the DOJ subpoena, the Board made changes to the Company‟s
compliance procedures, some of which already had been under consideration in
preparation for the IPO.9 Instead of having compliance report to Bosley, then COO,
Pfinsgraff, Tremmel, and others on the Board wanted to have compliance report through
the legal department and directly to a compliance committee of the Board, which was
chaired by D‟Orta.10 DeFrancesco and Bosley unsuccessfully resisted such a change. By
mid- to late-summer of 2014, the escalating tension resulted in arguments between
DeFrancesco and Bosley, on one hand, and D‟Orta and Miles Grody, ACell‟s in-house
counsel, on the other hand, which required the Board to intervene regularly in day-to-day
management issues.11
ACell responded to the DOJ Investigation by hiring Williams & Connolly LLP.
After a preliminary internal investigation, Williams & Connolly made an initial
presentation to the Board in April 2014. A consensus emerged among the board
members that DeFrancesco and Bosley needed to be terminated.12 CEO McDonnell,
however, persuaded the Board to wait for a more thorough investigation to conclude, and
to continue efforts to sell the Company in the meantime. According to DeFrancesco, the
9
Id. at 134-38.
10
Id.
11
Id.
12
Id. at 464-66 (McDonnell).
5
Board misleadingly reassured him and Bosley, but in reality was planning to offer them
up as scapegoats.13 Defendants asserted that DeFrancesco “was incensed that Williams
& Connolly would implicate him and Bosley in potential wrongdoing, and his immediate
reaction was to fight.”14 I do not consider it relevant to any material issue in this case,
however, to decide which of those characterizations is more accurate, because
DeFrancesco and Bosley were never involved in managing the DOJ Investigation.15 In
any event, DeFrancesco and Bosley‟s disagreements with D‟Orta and Grody continued to
mount as the summer progressed.
The DOJ Investigation was not a subject confined to the boardroom. Stockholders
were advised of the Investigation in May 2014 at the annual stockholders‟ meeting,
which, for ACell, apparently involved actual in-person attendance by a number of its 150
or so stockholders.16
2. DeFrancesco and Bosley unsuccessfully try to remove the board
In September 2014, the DOJ became “very upset” at the level of cooperation it
was receiving from ACell.17 For McDonnell, that was a turning point. The Board
“decided that we had to get the DOJ behind us.”18 The Company‟s first in-person
13
E.g., DeFrancesco Opening Br. 10-16; Tr. 316-18.
14
Defs.‟ Opening Br. 12.
15
Tr. 229-30 (Pfinsgraff).
16
E.g., JX 15; Tr. 174-79 (Pfinsgraff); id. at 273-74 (DeFrancesco).
17
Tr. 473 (McDonnell).
18
Id. at 474.
6
meeting with the DOJ was scheduled for late October. On October 15, a week before that
meeting, the Board met and voted, over DeFrancesco‟s objection, to request that
DeFrancesco and Bosley resign before October 20 or be terminated for cause. 19 The
Board also voted to appoint D‟Orta as interim CEO.
Rather than go quietly, DeFrancesco and Bosley emailed a group of ACell
stockholders on October 19, and asked them to execute written consents removing the
Defendants (the “DeFrancesco Solicitation”).20 McDonnell responded immediately with
an email of his own, stating that DeFrancesco and Bosley‟s email “contain[ed] a number
of errors and material misstatements and omissions,” and that the Board had been
“presented with evidence that caused it to believe that there was a reasonable—if not a
strong—basis to conclude that Jim [DeFrancesco] and Rodney [Bosley] may have
violated certain federal criminal statutes.”21 Once the Board learned of the DeFrancesco
Solicitation, the offer for DeFrancesco and Bosley to resign was revoked and they each
19
Id. at 478-81; JX 42; JX 707. DeFrancesco suggests the Board‟s action in this
regard was in violation of ACell‟s charter and bylaws, because the decision to
terminate an executive was not one that a Board committee could make, and
because DeFrancesco was excluded from the meetings and discussions in mid-
October that led to his termination. DeFrancesco Opening Br. 12-16. I do not
consider that issue relevant to the question of whether the New Board was validly
elected, which is the Court‟s inquiry in this action.
20
JX 37.
21
JX 42. On October 17, two days after the Board meeting, DeFrancesco met with
McDonnell and D‟Orta. While some aspects of what was said at that meeting are
disputed, McDonnell admits telling DeFrancesco that he thought DeFrancesco had
done nothing wrong in connection with the DOJ Investigation. Tr. 480
(McDonnell).
7
were terminated “for cause.”22 DeFrancesco and Bosley then halted their solicitation
effort, but not before receiving written consents from the holders of 49.6% of ACell‟s
common stock.23
One supporter of DeFrancesco and Bosley was Kerbawy. Defendants emphasize
that Kerbawy, a former distributor of ACell‟s products, believed as of October 2014 that
the Board‟s approach to the DOJ Investigation was “stupidity” and “tantamount to
admitting guilt.”24 As discussed in more detail infra, Defendants believe that
DeFrancesco and Bosley found a sympathetic ear in Kerbawy in part because Kerbawy
feared the DOJ Investigation potentially could sweep wide enough to bring distributors
like him under scrutiny. Kerbawy testified, however, that he supported DeFrancesco and
Bosley because they had been good leaders of the Company and he thought it was wrong
to fire them.25 In any event, Kerbawy actively supported the DeFrancesco Solicitation
by, for example, editing messages for DeFrancesco before he sent them out.26 But, after
it became clear DeFrancesco and Bosley would not prevail, Kerbawy believed they
needed to stand down and give the Board time to resolve the DOJ Investigation and get
22
Tr. 150 (Pfinsgraff).
23
Id. at 65 (Kerbawy).
24
JX 31.
25
Tr. 14-15.
26
JX 33, 40.
8
the business back on track. He advised another stockholder to that effect on November 1
or 2, 2014.27
The Company offered both DeFrancesco and Bosley separation agreements.28
DeFrancesco did not execute such an agreement, but Bosley did (the “Separation
Agreement”).29 Pursuant to that Agreement, Bosley retained the right to exercise his
outstanding stock options, which were numerous, and ACell agreed to forego any
clawback of either the options or Bosley‟s issued and outstanding shares. In exchange,
Bosley accepted a “Standstill Provision” barring him from directly or indirectly soliciting
consents, or directly or indirectly becoming a “participant” in such a solicitation, or
assisting any other person in such a solicitation.30 The Separation Agreement also
contained a “Confidentiality Provision” forbidding Bosley from misusing the Company‟s
confidential information.31
Although McDonnell and the Board reached a détente with DeFrancesco and
Bosley, it was clear that “two camps” remained, with each thinking the other was
harming the Company.32 Anne Graham, another significant stockholder, said she felt
“[misled] by the board” and was “in a state of shock” due to DeFrancesco and Bosley‟s
27
JX 125.
28
JX 92 (DeFrancesco‟s draft agreement)
29
JX 149 (the Separation Agreement).
30
Separation Agreement § 4.
31
Id. § 5. As discussed infra, Bosley later breached both of those provisions.
32
JX 158.
9
removal.33 In addition, at least some stockholders who had not supported the October
2014 consent solicitation, such as Joanne Watson, the widow of ACell‟s founder,
nevertheless were “seriously thinking of continuing to make some changes in the
board.”34
3. Kerbawy prepares for a new consent solicitation
a. Kerbawy decides to replace the Board
Through November 2014, Kerbawy was having daily conversations with other
ACell stockholders, and “hearing wildly divergent things about what was going on at the
company,” but he “had no idea who was right.”35 With “little formal info coming out of
the company,”36 Kerbawy demanded books and records under 8 Del. C. § 220, on the
advice of his son-in-law, Jon Steiger, an attorney who also owns ACell stock. In early
January 2015, Kerbawy reached out directly to McDonnell for help in this regard, and
McDonnell appeared to agree that Kerbawy should get the requested information without
any “legal BS.”37
33
JX 127.
34
Tr. 651 (Watson).
35
Id. at 17-18 (Kerbawy).
36
JX 158.
37
JX 183. Kerbawy received ACell‟s capitalization table and contact information
for stockholders on February 9, 2015. JX 276.
10
Kerbawy testified that he was troubled by departures of key employees and low
morale at the Company during January 2015.38 McDonnell emailed Kerbawy on January
16 to share bad news from a series of strategic meetings at which McDonnell and others
were trying to gauge interest in a possible sale of ACell. When McDonnell indicated that
“no one was viewing ACell as a Strategic Acquisition,” Kerbawy decided it was time to
change the Company‟s management.39 He was even more upset to learn a week later that
the Board had decided to make D‟Orta the permanent CEO without conducting a search
process. Thus, Kerbawy determined that changes were needed as soon as possible.
Other stockholders with whom he had been talking agreed. For example, Watson told
Kerbawy that she would support a change if it involved a “clean slate” of all new
directors.40
Kerbawy prepared for a new solicitation of written consents (the “Kerbawy
Solicitation”) by reaching out to “everyone [he] could think of” who was knowledgeable
about ACell and the medical device manufacturing industry, including DeFrancesco,
Bosley, an ACell sales executive named Tres Riley, and others.41 Kerbawy also relied
heavily on the assistance of his son-in-law Steiger, and together they formed a “Project
Timeline” for running a successful solicitation.42
38
Tr. 24-26.
39
JX 199.
40
Watson Dep. 55.
41
Tr. 20-28.
42
JX 310.
11
b. Bosley and DeFrancesco participate
The contemporaneous documents demonstrate that both DeFrancesco and Bosley
participated in, or at least substantially assisted with, the Kerbawy Solicitation. On
January 14, 2015, DeFrancesco sent a text message to Kerbawy and Steiger, forwarding
contact information for his attorney, Brett Antonides, and stating that Antonides is “more
than willing to[] assist and work with us in the proper manner.” 43 Kerbawy, Steiger,
DeFrancesco, and Antonides communicated regularly via text, email, and phone during
February and March 2015.44 Kerbawy shared his and Steiger‟s Project Timeline with
DeFrancesco on February 18, and encouraged him to “review and share as appropriate.”45
One particular way DeFrancesco provided assistance was to help Kerbawy analyze
the stockholder base and estimate the percentage of shares likely to be in favor of the
Kerbawy Solicitation. On February 2, DeFrancesco sent a detailed analysis in that regard
to Kerbawy, Antonides, and Steiger, and the four apparently set up a phone call to discuss
it.46 In that vein, DeFrancesco also enlisted employees of ACell still loyal to him to
determine the level of support Kerbawy could expect from employee-stockholders.47
43
JX 193.
44
E.g., JX 307.
45
JX 310.
46
JX 568, 247, 248, 253.
47
JX 228.
12
DeFrancesco also helped with director nominee recruitment by, for example, speaking
with potential candidates Baldino and Anderson at length on the phone.48
Based on the evidence, I found Bosley‟s assistance to be more limited than
DeFrancesco‟s. He mainly focused on helping Kerbawy identify strong candidates for
his new director slate. For example, Bosley and Kerbawy conferred by email on
February 4 about Baldino, and also about what the compensation package should be for
independent directors.49 Bosley also corresponded with Anderson about his interest in
joining ACell‟s Board.50 Similarly, Bosley forwarded resumes and bios for several other
candidates that Kerbawy ultimately did not include on his slate.51
c. Kerbawy utilizes inside information
The evidence showed that DeFrancesco and Bosley provided Kerbawy with some
internal ACell documents for use in helping recruit the Director Nominees and otherwise
furthering the Kerbawy Solicitation. To that end, DeFrancesco used Antonides as a go-
between for exchanging documents with Kerbawy and others.52 On January 21, Steiger
wrote to Kerbawy that Antonides “sent me a large packet of corporate documents I have
48
JX 177, 294.
49
JX 255.
50
JX 222.
51
JX 256, 272.
52
For example, on February 19, Kerbawy asked Steiger to “send my timeline to
Brett [Antonides] as Jim [DeFrancesco] will ask him for it. JX 191. See also JX
249 (email from DeFrancesco to Antonides dated February 20, 2015, forwarding a
September 2014 email from Grody that has as an attachment a generic “Senior
Executive Employment Agreement”).
13
been reviewing.”53 DeFrancesco himself sent Kerbawy a Company stock ledger effective
as of June 2014,54 and a series of documents relating to ACell‟s director and officer
insurance policies.55 On February 11, 2015, he also sent Kerbawy a strategic planning
document that D‟Orta and senior management had circulated to the Board (including
DeFrancesco) in anticipation of an upcoming Board meeting.56 Kerbawy forwarded the
D&O policy documents to at least Anderson and Baldino, neither of whom worked for
ACell.57 Indeed, DeFrancesco apparently sent “an entire series of documents” to
Kerbawy via FedEx with the intention that Kerbawy would relay them to Baldino.58 On
February 18, Kerbawy also sent to the Director Nominees the Draft S-1 from the failed
IPO effort in 2014.59
Bosley provided substantially less information to Kerbawy, but it seems that he
did provide at least some information, including minutes from ACell board meetings.60
53
JX 191.
54
JX 209.
55
JX 305.
56
JX 286.
57
JX 306, 312.
58
JX 313, 317.
59
JX 308, 309.
60
JX 191. In one message dated January 22, 2015, Kerbawy wrote that he had
talked to Bosley, apparently about ACell board resolutions of some kind, and
Bosley said that certain of them “definitely did not pass,” but that Bosley would
send Steiger the meeting minutes. Id. On February 6, Kerbawy asked whether
Steiger had received anything from Bosley about a potential director nominee that
14
In total, the evidence supports a finding that through DeFrancesco (and to a lesser extent,
Bosley), Kerbawy had access to: (1) ACell‟s bylaws; (2) a Company stock ledger; (3) the
Company‟s D&O policies and related documents; (3) the Draft S-1; (4) unidentified
meeting minutes from ACell Board meetings; and (5) a Company strategic planning
document. Kerbawy also had the charter, which is a public document in any event.61
The record further shows, and Defendants do not dispute, that Kerbawy used that
information to inform his Director Nominees about the Company and otherwise bolster
his plan to solicit consents to remove the Board.
d. Kerbawy finalizes his plan
One set of issues that the parties vigorously dispute is whether, and to what extent,
Kerbawy‟s plan for ACell included returning DeFrancesco and Bosley to their director or
officer positions. Defendants assert that Kerbawy had a concrete plan to restore Bosley
as a high-level consultant, and insinuate that Kerbawy and the New Board might appoint
DeFrancesco to a vacant Board seat.62 This contention fits within Defendants‟ narrative
that Kerbawy dishonestly advertised that he was proposing a “fresh start” with an
independent board, but in fact planned to return ACell to DeFrancesco and Bosley‟s
control and force the Company to “fight the DOJ.” Based on all the evidence, I find that
Kerbawy did expect Bosley to have a role as a consultant, but the evidence does not bear
Kerbawy was planning to speak with. Id. Steiger replied that he had forwarded
everything in his email account from Bosley, but Kerbawy told him to “forget
about [Bosley‟s] stuff,” because “[h]e will send [it to me] this afternoon.” Id.
61
JX 207.
62
E.g., Defs.‟ Opening Br. 3-5, 23-25, 36-37; Defs.‟ Reply Br. 3-4, 10-12, 36-37.
15
out Defendants‟ assertions relating to DeFrancesco specifically, or the “fight the DOJ”
narrative generally.
With regard to Bosley, I find that while he might have envisioned himself
returning to the CEO post, Kerbawy‟s plan was for the New Board to consider bringing
Bosley back, if at all, as an interim consultant. On February 11, 2015, Bosley emailed
Kerbawy a draft announcement that is written as if it would be delivered to ACell
employees after the New Board took control.63 The draft describes the New Board‟s
initial actions as if they had just occurred: i.e., D‟Orta “was removed from his position as
CEO”; Miles Grody “was removed from his position as General Counsel”; Bosley “was
hired as a consultant and will hold the position as Acting CEO”; Terry Hill “was
reinstated as VP of Quality”; and Bill Knape “was reinstated as VP of Regulatory and
Clinical Affairs.”64 In a March 2 email responding to Steiger‟s questions about who
Kerbawy wanted to assist the new management, Kerbawy replied, among multiple
thoughts, that he would have Bosley “at my shoulder.”65
But those documents are undermined by other contemporaneous communications
Kerbawy had. As early into his planning process as January 13, 2015, Kerbawy indicated
that he planned to talk to DeFrancesco and Bosely to persuade them it would be “easier to
63
JX 289.
64
Id.
65
JX 331.
16
get vote [sic] on board proposing all new mgmt with them interim only.”66 Similarly, on
February 28, Kerbawy sent a comprehensive email to his Director Nominees, to which he
attached a “New Board Agenda” outlining some of the first steps he believed the New
Board should take.67 That document, rather than presenting any decisions regarding
Bosley as a fait accompli, indicates that the New Board would engage in “discussion” of
various items, including the “proposed” hiring of Bosley as a consultant.68 And, with
respect to the specific items relating to Compliance (i.e., Grody) and reinstating Hill and
Knape, at least several individuals were supposed to address and advise the Board,
including D‟Orta. Those facts, together with the undisputed fact that all of the Director
Nominees are independent of both Kerbawy and DeFrancesco, lead me to conclude that,
in crafting his New Board Agenda, Kerbawy envisioned actual discussion rather than
“rubber stamp[ing].”69
66
JX 191. Defendants highlight this statement of Kerbawy‟s as evidencing his intent
to mislead the stockholders into thinking that DeFrancesco and Bosley were not
really going to have a role with the New Board, when in fact they were. The
weight of the evidence does not support that characterization. Rather, it seems
that nearly two months before beginning to solicit consents, Kerbawy was
formulating his plan and it included telling DeFrancesco and Bosley that his plan
involved “all new” management, and that the only role they would have, if any,
would be to assist in the interim. I find this to support, rather than undermine,
Kerbawy‟s general narrative, which is that he intended to put into place a new,
independent management team.
67
JX 327.
68
Id.
69
Defs.‟ Opening Br. 39
17
That conclusion also is supported by statements Kerbawy made during the
Solicitation. For example, in a March 9 email, Kerbawy updated the Director Nominees
as to the progress of the Solicitation, and requested that they each execute a written
consent taking their first actions as the New Board. 70 The topics addressed by the
resolutions included: terminating D‟Orta and Grody; appointing Kerbawy as Chairman of
the New Board, President, and CEO; and appointing Steiger as General Counsel and
Secretary. Absent from these proposed first steps was any mention of reinstating Bosley.
On March 11, Kerbawy exchanged emails with Daniel Toohey, an ACell stockholder
who responded to a Solicitation email by stating to Kerbawy that he would not support
the Solicitation if it meant removing McDonnell, who was Toohey‟s close friend.71 The
communications were amicable, but reflected “an honest disagreement” that Kerbawy
attributed mainly to McDonnell‟s “adamancy on retaining D‟Orta,” which was
incompatible with Kerbawy‟s belief that D‟Orta had to go.72
70
JX 604.
71
JX 476.
72
Id. Kerbawy stated, in part:
You probably know that [McDonnell] and I spoke yesterday
. . . . The number of issues that separate us is small in
number. Like you, I like and respect [McDonnell] and
considered up to the very end retaining him on the slate for
the new board. [McDonnell‟s] adamancy on retaining D‟Orta
plus the politics of getting a strong majority ruled against
retaining him. The politics behind me, D‟Orta is the issue
. . . . I can give you valuable employees and former
employees who have convinced me that D‟Orta . . . is
harming morale, and diminishing expertise in the company.
18
Those contemporaneous documents comport with Kerbawy‟s testimony, which I
found credible. In particular, Kerbawy testified that as his Solicitation plan became more
concrete, he determined that Bosley would have only a temporary role, and that Kerbawy
would be the acting CEO only until he could find a more experienced CEO.73 Kerbawy
also considered having D‟Orta and Tremmel as consultants in the interim, not just
Bosley.74 Kerbawy further testified that his immediate goal for the New Board would be
Id. Defendants cite this email exchange as support for the assertion that Kerbawy
was misrepresenting the gravity of the DOJ Investigation to lull more stockholders
into supporting his Solicitation. E.g., Defs.‟ Opening Br. 38. That assertion is not
supported by JX 476 or the other exhibits cited. Toohey expressed concern about
the Company‟s compliance issues, and Kerbawy‟s response appears to be
balanced and a good faith attempt to share what information he had. He wrote, in
part:
I am eager to learn first hand from Williams & Connolly the
status of the DOJ investigation. So far, everything is second-
hand, and some of the information from the company
conflicts with what I have heard and is self-serving to the
status quo. From the research that I‟ve done, what I believe
to be the issues are not uncommon for companies such as
ACell and a seasoned medical device professional such as we
seek will be well versed in them, certainly better than a
physician such as Dr D‟Orta. I know when my group sold
MatriStem, we had strong direction on avoiding off-label
promotion. So that you are aware, several sources have
reported that the DOJ has no criminal case under
consideration for anyone at ACell (now or in the past). I
might also mention that Skip Baldino, one of the new board
members, has gone through a DOJ situation such as ours, a
situation that resolved well for the company, and will provide
valuable insight into working our way through this.
JX 476.
73
Tr. 32-33, 94-95.
74
Id.
19
to conduct a national search for a permanent CEO. That testimony is consistent with his
explanation of why he concluded it was necessary to remove the Board in January 2015,
after D‟Orta was made the CEO without any such search.75 As to the possibility of
DeFrancesco and Bosley reassuming active roles in the Company, Kerbawy testified that
“unless and until they get a clean bill of health after the [DOJ Investigation] resolves
itself[,] they should have no director or officer role.”76
4. Kerbawy solicits the Consents, and the Board reacts defensively
As noted above, Kerbawy‟s Director Nominees were himself, Anderson, Baldino,
Osborne, and Pering. Anderson, Baldino, and Pering have significant experience in the
medical device industry, and none of the parties dispute that they are independent of
Kerbawy, DeFrancesco, and Bosley. Several stockholders told Kerbawy that he also
should be on the New Board.77 Because he envisioned the Company remaining private
and attempting to rebuild its business rather than seeking a sale in the short term,
Kerbawy favored having five directors on the board as opposed to seven.78 He
“struggled” with deciding who to ask for the fifth spot on his slate, considering
DeFrancesco, Bosley, and McDonnell, among others.79 After considering the issue and
75
Id. at 34.
76
Id. at 29.
77
E.g., JX 327.
78
Tr. 26-28 (Kerbawy).
79
For example, in an email to Anderson dated February 9, Kerbawy referred to
DeFrancesco as “a current board member who also will sit on the new board.” JX
275, 294.
20
discussing it with stockholders, employees, and others, Kerbawy decided that neither
DeFrancesco nor Bosley was the right choice, for two reasons: (1) he “wanted to signal
that we were moving forward rather than going back”; and (2) it was inappropriate for
them to be on the New Board in light of the Company‟s October 2014 statement that
DeFrancesco and Bosley might have violated federal criminal statutes.80
Kerbawy‟s Solicitation launched on March 2 when he emailed a group of ACell
stockholders to inform them that, on March 5, he would be sending them a written
consent form for the purpose of replacing the Board with his Director Nominees.81 He
attached summary bios and described the qualifications of the Nominees, writing that,
“[a] number of people helped in vetting the candidates. In the end, the sole consideration
in selecting these individuals as candidates for our board was who can contribute the
most to strengthening the company, improving management, and maximizing the
potential of the technology we own.”82
80
Tr. 29 (Kerbawy).
81
JX 330.
82
Id. Defendants contend that this statement “intentionally concealed the fact that
DeFrancesco and Bosley were active participants in the solicitation and that
several of the candidates were identified, vetted and educated by Bosley and
DeFrancesco. . . . [and] left the false impression that the slate was chosen through
an independent process consistent with a „fresh start‟ platform.” Defs.‟ Opening
Br. 32. It is true that Kerbawy did not state affirmatively that DeFrancesco and
Bosley assisted him in the Solicitation, as I discuss in more depth infra. But, the
totality of the evidence shows that the Director Nominees were chosen through an
independent process consistent with a “fresh start” platform.
21
On March 5, Kerbawy emailed the consent forms to the first group of
stockholders, consisting of those he was targeting as highly likely to support the
Solicitation.83 By the end of March 5, he had obtained written consents representing
about 43% of ACell‟s outstanding stock. The Board found out about the solicitation that
day, when a stockholder who received the March 5 email forwarded it to McDonnell.
The contemporaneous documents and trial testimony demonstrate that upon
learning about the Kerbawy Solicitation, the Board‟s immediate, almost reflexive
reaction was to assume a defensive position and dig in to defeat the effort. McDonnell
circulated the email to the rest of the Board (excluding DeFrancesco, who was then still a
Director), D‟Orta, and Grody, writing that “it has come to our attention that Kyle
Kerbawy is leading an action to replace all of the current directors of ACell,” and
requesting that they schedule a conference call.84 Over the next week, the Board held a
83
E.g., JX 348. Defendants at one point assert that Kerbawy‟s March 5 email
misleadingly suggested that stockholders had only 48 hours to submit their
consents, because he “sought to ram the consents through so as to stifle any
chance for debate.” Defs.‟ Opening Br. 32-33. The cited email, JX 348, does not
support that assertion. It states, “[p]lease complete and send your consent form
within 48 hours. Consents received after midnight EST on March 13, 2015 [i.e.,
eight days later] may not be counted. If you have questions, please email . . . or
call me . . . .” Id.
84
JX 376. I infer from McDonnell‟s decision on March 5 to exclude DeFrancesco
from the Board‟s written communications and calls regarding Kerbawy‟s
Solicitation that he knew or had inferred that DeFrancesco was aligned with
Kerbawy. This fact undermines Defendants‟ argument that other ACell
stockholders would not have known that fact without being told about it by
Kerbawy. As described below, Kerbawy first sent a communication to that effect
on March 6, 2015.
22
series of such calls, each time excluding DeFrancesco, whom McDonnell now considered
“an adversary” who had “effectively forfeited his rights as a member of the board.”85
The Board began communicating furiously with ACell‟s stockholders, attempting
to persuade them against executing consents in Kerbawy‟s favor. McDonnell wrote on
March 6 that, “[w]e are reaching out to everyone we know on the list of people who
received Kyle‟s emails. . . . There is a BOD call over the weekend to discuss potential
legal action as well.”86 The outreach effort included McDonnell, Pfinsgraff, D‟Orta, and
Grody calling stockholders,87 and McDonnell offering to travel several hours to meet in
person with several large stockholders.88 McDonnell and Pfinsgraff also emailed
stockholders, advising them that if they were “even thinking about” supporting the
Kerbawy Solicitation, “please do not do so without talking to myself or [stockholder]
Steve Graham first.”89
On March 6, Kerbawy emailed a group of ACell stockholders, stating that the
Solicitation was off to a “good start,” and that:
Among the consents that we received were those of former
CEO Jim DeFrancesco who also owns the largest number of
ACell shares. Jim earlier wrote to a fellow shareholder “I
agree with Kyle and his rational[e] that the company would
85
Tr. 517-20 (McDonnell).
86
JX 376.
87
Tr. 484-86 (McDonnell); JX 387, 399, 384, 401.
88
JX 419. That meeting did not occur.
89
JX 373, 399, 384, 375, 419.
23
be better served with a more experienced Board of Directors.
I will be voting my shares according to his directive.”90
The next day, Kerbawy sent an email to a different group of ACell stockholders,
including several current employees (the “March 7 Email”).91 The March 7 Email, which
Defendants attack on various grounds, stated in relevant part:
A majority of ACell shareholders have voted to replace the
current Board of Directors with the experienced medical
device professionals recommended in our consent effort.
Somewhat disturbing, however, is a report that the current
board is attempting to increase the number of outstanding
shares by rushing through option exercises. We also have
heard that shareholders who have not yet consented are being
told that we intend to return Jim DeFrancesco to an officer
position, which is not true.
ACell needs leadership from medical device professionals
who will bring experience, maturity, and a fresh perspective
to our company. We want to move forward, not backwards.
We are still looking to add shares to our total in order to
provide a cushion on the assumption that directors and
officers are issuing new shares.92
90
JX 377.
91
JX 389, 404 (the March 7 Email).
92
Id. The “report” Kerbawy referred to in the March 7 Email was from Tres Riley,
then ACell‟s Vice President of Sales. Riley was acting as Kerbawy‟s “eyes and
ears” inside the Company, and the two exchanged numerous text messages
between March 6 and 16, 2015, that depict themselves as brothers-in-arms. JX
370; Tr. 107-09 (Kerbawy). Riley told Kerbawy that, while listening through a
wall at ACell‟s office, he had heard that the Board was attempting to increase the
number of outstanding shares by exercising options. Tr. 109-10 (Kerbawy). As
discussed below, Defendants characterize this aspect of the March 7 Email as
misleading because they deny there was any such attempt on the Board‟s part. Tr.
632-33 (McDonnell).
24
Kerbawy testified that he refrained from sending the Solicitation materials to employees
before he was sure that he had a majority, so that “it would be safe for them” to execute
consents. He reasoned that if a stockholder-employee supported him and he lost, “their
jobs would be at risk,” and said that he knew of several employees who had been
threatened in this regard in the October 2014 DeFrancesco Solicitation.93 Defendants, not
implausibly, characterize the outreach to stockholders (and especially stockholder-
employees) as designed to coerce them into supporting the Kerbawy Solicitation out of
fear that if they did not get on the winning side, they might be at risk.94
One of the Board‟s main responses was to send a letter via email to all of ACell‟s
stockholders on March 8 (the “March Board Letter”).95 In that Letter, the Board sought
to correct what it perceived as misinformation that the stockholders might be relying on
in supporting the Kerbawy Solicitation. Among other things, the Board stated that “Mr.
Kerbawy‟s actions are motivated by a lack of information and understanding on his part
regarding the Company‟s operations and its posture in connection with the [DOJ
Investigation].”96 The Letter stated that the Kerbawy Solicitation posed the risk of
undoing the Company‟s efforts to resolve its compliance problems, and that the “Board
93
Tr. 36-37.
94
E.g., Defs.‟ Opening Br. 34. Defendants‟ effort to claim the high ground on this
issue lost nearly all credibility, however, after they fired several employees upon
finding out that they executed Consents in favor of Kerbawy.
95
JX 411 (the March Board Letter).
96
Id.
25
of Directors and senior management of the Company are, thus, vehemently opposed to
Mr. Kerbawy‟s actions.” In the next paragraph, the Letter sought to bolster the
stockholders‟ confidence in the Board, stating:
Moreover, contrary to Mr. Kerbawy‟s claim, the Company‟s
current Board of Directors and senior management consist of
highly qualified, experienced, and sophisticated individuals
who are fully committed to the Company, its stockholders,
and maximizing stockholder value. For your convenience, at
the end of this letter we have included bios for these
individuals[,] excluding Jim DeFrancesco, with whom most if
not all of you are already very familiar and who remains on
the Board of Directors.97
The Letter strongly urged stockholders not to give Kerbawy their consents, and included
a form for stockholders to revoke consents already executed.
I find the March Board Letter to be misleading, in that it would give a reasonable
stockholder the impression that DeFrancesco was aligned with McDonnell and the
incumbent Board. Nowhere in the Letter, which went through multiple drafts and was
reviewed by every Board member (except DeFrancesco) as well as counsel, did the Board
mention that it suspected that DeFrancesco and Bosley might be assisting in the Kerbawy
Solicitation. It did not inform stockholders that the Board was excluding DeFrancesco
from Board meetings and treating him as an adversary, even though McDonnell and the
other Directors took that stance at least three days earlier. Indeed, the Letter states
unequivocally that “the Board of Directors are . . . vehemently opposed to Mr. Kerbawy‟s
actions,” while in the next lines falsely implies that DeFrancesco, “with whom most if not
97
Id. (emphasis added).
26
all of you are already very familiar and who remains on the Board of Directors,” was part
of the “Board of Directors” opposing the Kerbawy Solicitation.
These statements cannot be explained away as the product of mere carelessness or
rushed drafting in the heat of a hostile consent solicitation. 98 A central tenet of
Defendants‟ ultimate argument as to why Kerbawy‟s Solicitation needed to be defeated—
and why this Court should now set aside the Consents on equitable grounds—was that
Kerbawy was misleading stockholders into supporting him without adequately disclosing
that he had DeFrancesco and Bosley on his side. If as of March 8 the Board truly
believed that, it is inexplicable why the Letter was written the way it was. Because the
Board began excluding DeFrancesco on March 5, I infer that they believed then that he
was backing Kerbawy. Yet, the March Board Letter did not disclose that. I find that the
most reasonable inference from the evidence presented is that the reason for the omission
is that the Board wished to muddy the waters by implying that DeFrancesco, who was
admittedly popular with many stockholders, remained in their camp. Because the March
Board Letter went through several drafts that were reviewed by the Board and its counsel,
98
McDonnell‟s testimony in this regard, Tr. 553-69, does not change my view of the
March Board Letter. Although McDonnell refused to concede that the Letter was
misleading, he admitted that at the time the March Board Letter went out, the
Board considered DeFrancesco an adversary and was excluding him from Board
communications regarding the consents. Id. at 562-67. Nor were the misleading
statements cured by the purportedly remedial letter sent by the Board on March
11, JX 474, by which time the Board had received and rejected the written
consents, and filed this action.
27
I do not find credible McDonnell‟s suggestion that the attorneys mistakenly caused the
confusion regarding DeFrancesco.99
On March 10, 2015, Kerbawy delivered written consents representing 24,147,798
shares of ACell voting stock, or roughly 53.3% of the 45,304,546 issued and outstanding
shares of voting stock (the “Consents”).100
Before the Consents were even delivered, the Board had determined that it was not
going to accept them as valid, and would not vacate their board seats until ordered to do
so.101 Upon review of the Consents, Pfinsgraff learned that at least two current
employees, Tres Riley and a regional sales manager, Kay Lay, had supported Kerbawy.
That night, in an email to D‟Orta, Pfinsgraff recommended that Riley and Lay be fired.102
Just two weeks earlier, Pfinsgraff had supported increasing Riley‟s bonus compensation
structure, and McDonnell testified that Riley was an excellent salesman, “one of the best”
99
Tr. 563-67.
100
Kerbawy actually delivered consents that, on their face, added up to 23,948,944.
JX 600 ¶ 41; JX 714. The larger figure includes 198,854 shares that were not
initially accounted for because two stockholders mistakenly wrote in the wrong
number of shares on their consents. The 24,147,798 share total excludes 21,000
shares that Plaintiff agrees were erroneously included on two stockholders‟
consents due to scriveners‟ errors. Defendants do not dispute that those shares
should be included, nor do they raise any technical or numerical arguments as to
whether the Kerbawy Solicitation achieved a majority. The only other numerical
issue, as I note infra, relates to whether I should set aside Bosley‟s shares.
101
Tr. 573 (McDonnell).
102
JX 462.
28
in the Company.103 After learning that they had supported Kerbawy, however, Pfinsgraff
concluded that Riley and Lay “now were being extraordinarily disloyal.”104
Those actions, in addition to the Board‟s immediate determination to refuse to
recognize the Consents regardless of the outcome, reflect the tenacity with which the
Board sought to defeat the Kerbawy Solicitation. When asked if he believed it was
appropriate for him to “work to defeat stockholder intent,” McDonnell responded
unequivocally that it was.105 He viewed himself as being “at war” with Kerbawy,
DeFrancesco, and Bosley ever since learning of the Kerbawy Solicitation, and was
“prepared to do whatever it takes to win this war.”106
C. Procedural History
Kerbawy filed this action the same day he delivered the Consents, March 10,
2015. He seeks a declaratory judgment pursuant to 8 Del. C. § 225 that Defendants,
McDonnell, Moliteus, Pfinsgraff, D‟Orta, Mullins, and Tremmel, validly were removed
by a majority of ACell stockholders acting by written consent, and that the New Board
validly was elected to replace them.
Defendants counterclaimed against Kerbawy and filed third-party claims against
DeFrancesco. As amended, Defendants‟ Counterclaims and Third-party Complaint
charge Kerbawy with making misleading disclosures in connection with his Solicitation,
103
Tr. 614-15.
104
Id. at 245.
105
Id. at 489-90.
106
Id. at 488.
29
and accuse DeFrancesco of breaching his fiduciary duties by facilitating Kerbawy‟s
actions in that regard. Defendants also allege that Kerbawy and DeFrancesco tortiously
interfered with Bosley‟s Separation Agreement, which they claim Bosley breached by
participating in the Solicitation.
I presided over a two-day trial on May 13 and 14, 2015. Thereafter, the parties
submitted expedited briefing and I heard argument June 26. This Memorandum Opinion
contains my post-trial findings of fact and conclusions of law.
D. Parties’ Contentions
Defendants contend that this Court is empowered to determine whether the
Kerbawy Solicitation was fair, and to invalidate the results of that Solicitation if it was
procured through breaches of fiduciary duty, misleading disclosures, or breaches of
contract. They argue that the evidence proves that the consent solicitation was not fair,
and that the ACell stockholders‟ decisions to execute consents were not informed, and
thus the only equitable result is to set aside those Consents.
Kerbawy and DeFrancesco assert that Defendants have misconstrued the relevant
standard in this regard, and that they essentially seek to have the Court enforce a
purported right to engage in a full policy debate, which is not required under the consent
statute or equity. Kerbawy argues that, in any event, none of the equitable grounds
Defendants advance are supported by the factual record or equitable considerations.
II. LEGAL STANDARD
Under Section 228(a) of the Delaware General Corporation Law (“DGCL”),
unless otherwise provided in the certificate of incorporation, stockholders may act by
30
written consent upon any action that may be taken at any annual or special meeting of
stockholders, “without a meeting, without prior notice and without a vote.”107 Written
consents delivered pursuant to Section 228 are required to bear the date of signature of
each stockholder who signs the consent.108 Action by written consent is effective under
the statute only if a number of consents sufficient to take the action are delivered to the
corporation within sixty days of the earliest dated consent.109
In an action such as this one under Section 225, “[u]pon application of any
stockholder,” the Court of Chancery “may hear and determine the validity of any
election.”110 “One of the most frequent theories under which stockholders have asked
this Court to find an election invalid is a breach of fiduciary theory—in particular, a
claim that the company and the board of directors made material misstatements or
omissions” during the solicitation process.111 A challenge under Section 225 also might
allege that a director or board “does not validly hold corporate office because that
director obtained the office through fraud, deceit, or breach of contract.”112 As relevant
107
8 Del. C. § 228(a).
108
Id. § 228(c). The date-of-signature requirement in Section 228(c) has been
construed strictly. See H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 151-52
(Del. Ch. 2003).
109
Id.
110
8 Del. C. § 225.
111
Red Oak Fund, L.P. v. Digirad Corp., 2013 WL 5740103, at *10 (Del. Ch. Oct.
23, 2013).
112
Genger v. TR Invs., LLC, 26 A.3d 180, 200 (Del. 2011).
31
here, if a fiduciary breaches his or her disclosure obligations in connection with soliciting
stockholders‟ votes or consents, and the Court finds that such breaches “inequitably
tainted the election process,” that could be grounds for setting aside otherwise valid votes
or consents.113
Regardless of the theory under which the removal or election of a director is
challenged, “[t]he burden of proving that a director‟s removal or election is invalid rests
with the party challenging its validity.”114 In a case like this one, where a majority of
stockholders have executed written consents removing the Board and the Board asks this
Court to set aside the consents on equitable grounds, that burden is a heavy one. This is
particularly true in light of the importance Delaware law places on protecting the
stockholder franchise, which “has been characterized as the „ideological underpinning‟
upon which the legitimacy of the directors managerial power rests.”115
III. ANALYSIS
ACell‟s certificate of incorporation does not eliminate or limit stockholder action
by written consent.116 Aside from the issues noted supra in Section I.B.4, the parties do
not dispute the validity of the Consents on any technical grounds. I therefore conclude
that the Consents are presumptively valid and binding upon ACell and its Board.
113
Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 72 (Del. Ch. 2008).
114
Unanue v. Unanue, 2004 WL 5383942, at *10 (Del. Ch. Nov. 9, 2004).
115
MM Cos., Inc. v. Liquid Audio, Inc., 813 A.2d 1118, 1126 (Del. 2003) (quoting
Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 659 (Del. Ch. 1988)).
116
JX 2.
32
Defendants assert that the Court should set aside the otherwise valid Consents on
equitable grounds, contending that they were procured by: (1) Kerbawy‟s allegedly
misleading disclosures, in violation of his purported duty of disclosure; (2)
DeFrancesco‟s misuse of Company confidential information, in violation of his fiduciary
duties; and (3) Kerbawy and DeFrancesco‟s tortious interference with Bosley‟s
Separation Agreement. For the reasons stated herein, I conclude that none of
Defendants‟ equitable arguments are sufficient to justify setting aside the Consents
executed by a majority of ACell‟s stockholders.
A. Alleged Disclosure Violations
1. Was Kerbawy under a duty of disclosure?
Defendants argue that Kerbawy had a duty of disclosure in connection with the
Consent Solicitation, because Kerbawy was working with DeFrancesco, who as a
Director owed fiduciary duties to ACell and its stockholders. Thus, Defendants urge the
Court to hold Kerbawy to the same disclosure requirements as would have applied to the
directors pursuant to their fiduciary duties. Defendants also advance the more general
proposition that “a duty of disclosure applies to the solicitation of consents,” and that this
Court can and must intervene because Kerbawy failed to fully disclose all material facts
underlying his Solicitation.117
Although I ultimately need not decide the issue, I would reject Defendants‟
argument that, regardless of the fact that he is only a minority stockholder and not a
117
E.g., Defs.‟ Reply Br. 26-32.
33
director or officer, Kerbawy is subject to a duty of disclosure in connection with his effort
to solicit written consents. Most of the cases on which Defendants rely in this regard
stand for the proposition that, “[d]irectors of Delaware corporations are under a fiduciary
duty to disclose fully and fairly all material information within the board‟s control when
it seeks shareholder action.”118 Those cases stand for the unremarkable proposition that
the director‟s fiduciary duties encompass the so-called duty of disclosure, which “is not
an independent duty, but derives from the duties of care and loyalty.”119
Kerbawy, however, is not a director, officer, controlling stockholder, or member
of a control group. Defendants do not cite any case holding that such a minority
stockholder generally owes any fiduciary duties, or a duty of disclosure specifically.120
118
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992); see also, e.g., Arnold v. Soc’y for
Sav. Bancorp, Inc., 678 A.2d 533, 537 (Del. 1996); Arnold v. Soc’y for Sav.
Bancorp, Inc., 650 A.2d 1270, 1276-77 (Del. 1994); Kurz v. Holbrook, 989 A.2d
140, 183 (Del. Ch.) (“The duty of disclosure applies to directors who solicit
written consents.”) aff’d in part, rev’d in part sub nom. Crown EMAK P’rs, LLC v.
Kurz, 992 A.2d 377 (Del. 2010); Zaucha v. Brody, 1997 WL 305841, at *4 (Del.
Ch. June 3, 1997) (“[E]quitable relief may be granted for a fiduciary‟s non-
fraudulent failure to disclose material facts in soliciting consents.”), aff’d, 697
A.2d 749 (Del. 1997).
119
Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009).
120
In the one case Defendants cited as support for “a duty of disclosure [that] derives
from the common law standard that applies when soliciting consents,” Defs.‟
Reply Br. 28, the individuals whose allegedly misleading disclosures the Court
enjoined were the President and Secretary of the corporation, who had solicited
proxies from the stockholders under the guise of board-approved authority, when
in fact they had none. Empire S. Gas Co. v. Gray, 46 A.2d 741, 745-46 (Del. Ch.
1946). Because the individuals whose actions the Court scrutinized there were
officers and would have owed fiduciary duties on that basis, that case is different
from the situation here.
34
Indeed, to the contrary, non-controlling stockholders generally do not owe fiduciary
duties, even if they are attempting to become directors.121 “Just as Delaware law does not
require directors-to-be to comply with their fiduciary duties, former directors owe no
fiduciary duties.”122 Defendants have not even attempted to prove that Kerbawy qualifies
as a fiduciary on grounds of being a controlling stockholder, director, or officer. Thus,
because the disclosure obligations flow from the traditional fiduciary duties of care and
loyalty, which Kerbawy does not owe, Defendants‟ argument is analytically flawed. The
risk of attributing to stockholders a duty that our law does not clearly impose on them,
together with the reality that this Court “„must act with caution and restraint when
ignoring the clear language of the [DGCL] in favor of other legal or equitable
principles,‟”123 leads me to conclude that Kerbawy, on his own, would not owe a
fiduciary duty of disclosure in connection with his Solicitation. Thus, I reject
Defendants‟ suggestion that I should impose such a duty on him.124
121
E.g., In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 995 (Del. Ch.
2014) (“[I]n deciding whether a stockholder owes a fiduciary obligation to the
other stockholders of a corporation in which it owns only a minority interest, the
focus of the inquiry is on whether the stockholder can exercise actual control over
the corporation‟s board.”).
122
In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 758 (Del. Ch. 2005), aff’d, 906
A.2d 27 (Del. 2006).
123
Unanue v. Unanue, 2004 WL 2521292, at *9 (Del. Ch. Nov. 3, 2004) (quoting
Stroud, 606 A.2d at 87).
124
This does not mean that Kerbawy or any other stockholder has license to mislead a
fellow stockholder in soliciting written consents. A stockholder clearly could
challenge the results of an election or bring a claim against another stockholder (or
any person, for that matter) who convinced the stockholder to vote or execute a
35
In the alternative, Defendants contend that Kerbawy should be held to a duty of
disclosure because DeFrancesco, who was at all relevant times a director and fiduciary of
ACell, participated in the Kerbawy Solicitation. As discussed above, the evidence
supports a finding that Kerbawy, DeFrancesco, and Bosley worked together in
furtherance of the Kerbawy Solicitation. Furthermore, DeFrancesco‟s involvement was
not merely in his capacity as a stockholder. For example, he allowed Kerbawy and
Steiger to use documents and information that he had obtained due to his current role as a
Director and previous role as CEO of ACell. He also allowed Kerbawy to use his name
and forward a quote from him in a show of support for Kerbawy‟s Solicitation, a move
clearly designed to persuade other stockholders that the Solicitation should be viewed as
having legitimacy, because it was supported by a major stockholder and sitting director.
In this respect, I note that, “even acting in their individual capacities, directors owe a duty
of candor to the stockholders of the corporation for which they serve.”125 Thus, I agree
that DeFrancesco himself would be held to a duty of disclosure in this situation.
All of the challenged disclosures, however, were Kerbawy‟s, not DeFrancesco‟s.
Defendants therefore ask me to hold that DeFrancesco‟s duties are imputed to Kerbawy
or Kerbawy is transformed into a fiduciary of ACell, because DeFrancesco helped him in
consent on false pretenses or by fraud. That defrauded stockholder would have a
claim cognizable either under Section 225 or in a plenary action. But, the record
in this case contains no indication of any stockholder alleging that he or she was
defrauded by Kerbawy.
125
Flaa v. Montano, 2014 WL 2212019, at *9 (Del. Ch. May 29, 2014); see also
Zaucha, 1997 WL 305841, at *4.
36
his Solicitation effort in the relatively limited way reflected by the facts of this case. The
only case Defendants cite as support for this theory is Kurz v. Holbrook,126 but it does not
really address the issue. Therefore, I am reluctant to hold that Kerbawy is subject to
fiduciary duties, including the duty of disclosure, in the circumstances of this case.127
Ultimately, however, I need not make that decision because, as I next discuss, even if
Kerbawy did owe a duty of disclosure, the disclosure violations that Defendants identify
in support of setting aside the Consents on equitable grounds are not sufficient to justify
doing so.
2. Should the Consents be set aside on grounds of any challenged disclosure?
I consider the merits of Defendants‟ disclosure challenges with a view toward
determining whether any alleged breach of the duty of disclosure “inequitably tainted the
126
989 A.2d 140 (Del. Ch. 2010), aff’d in part, rev’d in part sub nom. Crown EMAK
P’rs, LLC v. Kurz, 992 A.2d 377 (Del. 2010). In Kurz, the consents that were
challenged on disclosure grounds had been solicited by an LLC, one member of
which was a sitting director. Id. at 144-45. The Court considered whether certain
of the LLC‟s statements in connection with the solicitation were materially
misleading, and concluded they were not. The issue posed here—whether a
person who otherwise would not owe fiduciary duties should be subject to a duty
of disclosure on the basis that he was assisted by a sitting director—was neither
discussed nor explicitly decided in Kurz. Id. at 183-84.
127
The duty of disclosure, like all fiduciary duties, derives from “the principle . . .
stated most generally, [that] one who controls property of another may not,
without implied or express agreement, intentionally use that property in a way that
benefits the holder of the control to the detriment of the property or its beneficial
owner.” In re USACafes, L.P. Litig., 600 A.2d 43, 48 (Del. Ch. 1991). In this
case, I am not convinced that Kerbawy, directly or indirectly, comes within that
principle.
37
election process” and would be grounds for setting aside the Consents.128 In this regard,
if a majority of stockholder consents were procured at least in part by materially
misleading disclosures, that could support such a finding of inequity that would warrant
the Court‟s intervention. A statement, omission, or partial disclosure is considered
material “if there is a substantial likelihood that a reasonable shareholder would consider
it important in deciding how to vote,” or if, “under all the circumstances, the omitted fact
would have assumed actual significance in the deliberations of the reasonable
shareholder[,] . . . [or] would have been viewed by the reasonable investor as having
significantly altered the „total mix‟ of information made available.”129 In assessing
materiality, this Court considers all the relevant circumstances, including “the nature of
the corporation and its business, the information already available to stockholders, the
other information being provided in the solicitation, and the type of action being
solicited.”130
a. The role of Bosley and DeFrancesco in the Kerbawy Solicitation
Defendants contend the record shows that DeFrancesco and Bosley not only voted
in favor of Kerbawy‟s plan, but were “equal participants in designing” that plan and
active participants in each step of its execution.131 They assert that stockholders were
128
Portnoy v. Cryo-Cell Int’l, Inc., 940 A.2d 43, 72 (Del. Ch. 2008).
129
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
130
Kurz, 989 A.2d at 183.
131
Defs.‟ Reply Br. 34.
38
entitled to know about the extent of that participation, because DeFrancesco and Bosley‟s
involvement “makes it likely that DeFrancesco and Bosley would have a material role in
shaping the corporate policy that the new board would implement—which is exactly what
occurred.”132 This aspect of Defendants‟ disclosure claim is without merit for several
reasons.
First, the facts do not support Defendants‟ assertion in this regard. The totality of
the evidence convinces me that, while Kerbawy involved DeFrancesco and Bosley in his
Solicitation and made use of the information and assistance they provided, it was
Kerbawy who made the critical decisions as to: whether to run the Solicitation; when and
how to go about amassing the Consents; which stockholders to contact, and how to
persuade them to join; what vision for the future of ACell the New Board should espouse;
and who would be the Director Nominees. In short, contrary to many statements made
by Defendants throughout their briefing and argument, it was Kerbawy‟s Solicitation, in
which DeFrancesco and Bosley—along with many other individuals—played supporting
roles. I reject as unconvincing Defendants‟ allegation that it was “just as much
DeFrancesco and Bosley‟s Solicitation as it was Kerbawy‟s.” Thus, I do not consider the
extent of DeFrancesco and Bosley‟s support, such as it was, to have been a material fact
that Kerbawy failed to disclose fully and fairly.133 In fact, one day after formally
132
Id.
133
Defendants heavily rely on Joanne Watson‟s testimony to prove the materiality of
the role DeFrancesco and Bosley played in the Kerbawy Solicitation. Tr. 644-66
(Watson). Although I found Watson‟s testimony credible, it does not change my
view as to this issue. Viewed in isolation, Watson‟s statements would support a
39
launching his Solicitation, Kerbawy publicly signaled that DeFrancesco was on his side.
Given the degree of DeFrancesco and Bosley‟s involvement, and the fact that the New
Board is an independent board that will be managing ACell going forward, I find that
Kerbawy satisfied any disclosure obligation he might have had.134
Second, even accepting Defendants‟ premise that Kerbawy should have disclosed
more about Bosley and DeFrancesco‟s role than he did, I do not find this disclosure
deficiency sufficient to justify setting aside the validly executed Consents. Defendants
have a heavy burden in asking the Court potentially to disenfranchise a majority of the
finding that a reasonable stockholder would have found it important to know of
DeFrancesco‟s participation. The primary import of Watson‟s testimony,
however, was that she believed then and believes now that Kerbawy‟s Director
Nominees and platform generally represent a “fresh start,” which is what she was
seeking. In any event, Watson‟s testimony would be insufficient to overcome the
effect of the March Board Letter on this issue, which I address shortly infra.
134
In arguing for a contrary conclusion, Defendants assert that the extent of
DeFrancesco and Bosley‟s involvement should have been disclosed pursuant to
“the broader proposition that stockholders must be able to assess fairly the bona
fides of an insurgent‟s campaign platform, and, thus, it is material to stockholders
to know who all the proponents of the solicitation are.” Defs.‟ Reply Br. 34
(citing Portnoy, 940 A.2d 43; Flaa v. Montano, 2014 WL 2212019; Henwood,
1961 WL 116793). In Portnoy, members of the board conspired with a
stockholder who agreed to help them defeat a consent solicitation if the board
would create a new seat and appoint him to it. The Court found that agreement
material and held that its omission inequitably tainted the election. Flaa similarly
involved an agreement, unknown to the stockholders, to appoint a director that
was found material and inequitable. This case is distinct from those situations.
Additionally, Henwood was decided under the federal securities laws, not
Delaware‟s law of fiduciary duty, and I find it inapposite.
40
stockholders, and a breach of the duty of disclosure (again, assuming such a duty even
applies here) only supports that result if it “inequitably taints the electoral process.”135
The fact of the matter is that Defendants‟ actions with respect to informing the
stockholder base about the role DeFrancesco and Bosley played in the Kerbawy
Solicitation were equally as misleading, if not more so, than anything Kerbawy said or
did not say. While Defendants complain now about how DeFrancesco‟s and Bosley‟s
involvement irredeemably tainted the Kerbawy Solicitation, when the Board had the
chance to alert stockholders to this purportedly material fact, it failed to do so. In fact,
Defendants implied through ambiguous language in the March Board Letter that
DeFrancesco remained on the “Board,” and, as such, was “vehemently” opposed to
Kerbawy‟s Solicitation. In these circumstances, I do not consider it to be equitable to set
aside the Consents on the grounds that Kerbawy did not disclose something that the
Board itself also failed to disclose when it had the time and ability to do so.136 For all of
these reasons, I conclude that Defendants have failed to satisfy their burden of proving
that the Consents should be set aside on equitable grounds due to materially misleading
disclosures about the role of DeFrancesco and Bosley in the Kerbawy Solicitation.
135
Portnoy, 940 A.2d at 72.
136
This Court “refuses to consider requests for equitable relief in circumstances
where the litigant‟s own acts offend the very sense of equity to which he appeals.”
Nakahara v. NS 1991 Am. Trust, 718 A.2d 518, 522 (Del. Ch. 1998). Defendants‟
actions here in regard to the March Board Letter contribute to this Court‟s
consideration of the equities of this case, but I do not consider them dispositive in
the same sense that an unclean hands defense might be.
41
b. The “corporate agenda” of Kerbawy, DeFrancesco, and Bosley
Defendants contend that Kerbawy, DeFrancesco, and Bosley had a definite agenda
as to the first steps the New Board would take, from the hiring and firing of key
employees, to the Company‟s strategy vis-à-vis the DOJ investigation. Because those
plans were “pre-ordained,” according to Defendants, they needed to be disclosed to
stockholders in connection with the Kerbawy Solicitation.
As with the disclosure claim relating to the role of DeFrancesco and Bosley, the
record does not support Defendants‟ claim about Kerbawy‟s purportedly secret plans for
ACell. Concerning the DOJ Investigation, Kerbawy‟s contemporaneous communications
demonstrate that, at the time of the Solicitation, he had an open mind and wanted to learn
more information from Williams & Connolly. More importantly, however, even if he
was determined to “fight the DOJ” as Defendants suggest, Kerbawy was only one of five
directors on the New Board. Based on the record as to the qualifications and
independence of the other Director Nominees, I would have to draw unreasonable
inferences unsupported by the record to conclude that those individuals somehow would
be puppets for Kerbawy (or DeFrancesco or Bosley, for that matter) when it came to the
DOJ Investigation, or any other aspect of the business and affairs of ACell. Thus, I find
Defendants‟ argument that Kerbawy‟s failure to disclose the alleged “fight the DOJ” plan
warrants invalidating the Consents to be misplaced on multiple levels.
As to the firing of D‟Orta, Grody, and possibly other employees, I reach a similar
conclusion. Kerbawy successfully campaigned on a “fresh start” platform, featuring a
slate of Director Nominees with impressive industry experience and no meaningful
42
connections to either side of the old Board versus New Board divide. A reasonable
stockholder would have assumed that some, and perhaps many, employees would be
terminated, as the “fresh start” platform implies. In any event, in contemporaneous
communications with any stockholder who would listen, Kerbawy made no secret of the
fact that he believed D‟Orta needed to be replaced. Thus, the facts do not bear out
Defendants‟ argument that Kerbawy‟s disclosures were misleading or otherwise deficient
due to material omissions.
c. Kerbawy’s March 7 Email
Defendants contend that Kerbawy‟s March 7 Email was materially misleading in
several ways. First, Defendants challenge Kerbawy‟s statement that a majority of the
stockholders had voted to replace the Board, when that was not in fact true at that
moment. Defendants further argue that the March 7 Email was designed to have a
coercive effect on stockholders who also were employees of the Company, because, upon
learning that Kerbawy and his slate were the new Directors, they would feel compelled to
join the winning side. In addition, Defendants assert that the March 7 Email was
misleading based on Kerbawy‟s allusion to a report that the Board was “attempting to
increase the number of outstanding shares by rushing through option exercises.” I
address these issues in turn.
In the specific factual context of this case, I do not consider Kerbawy‟s statement
that a majority of ACell stockholders had voted to replace the Board to be a material
misrepresentation that would justify setting aside the Consents. The main reason is that,
even assuming a reasonable ACell stockholder might have considered Kerbawy‟s
43
prediction of success to be important in deciding whether and how to vote, the impact of
that statement does not cut clearly in one direction or the other. It is plausible, as
Defendants emphasize, that an ACell stockholder who also was employed at the
Company might feel pressured to join the winning side in the Solicitation even though,
all else being equal, they might have preferred to stay with Defendants‟ Board or remain
neutral. It is equally plausible, however, that there were some ACell stockholder-
investors who, all else equal, wanted to join Kerbawy‟s Solicitation but would have
feared doing so if they were not virtually certain his effort would prevail. The record
suggests that there was some evidence of the latter dynamic in connection with the
October 2014 solicitation. Moreover, as to ACell stockholders not employed at the
Company, Kerbawy‟s prediction of victory easily could have resulted in a reasonable
stockholder deciding not to vote on the theory that, if the outcome already was clear, their
consent would not make a difference anyway.
Thus, even if I were to assume that Kerbawy‟s prediction of victory would have
been viewed as material, I am not persuaded that it justifies setting aside the Consents
because it is not clear what effect the statement would have had on the vote. Defendants
suggest that because Kerbawy received consents representing approximately 2.7 million
shares after sending the March 7 Email, the Court should infer that materially misleading
statements in the email caused stockholders to deliver those consents.137 Kerbawy
believed, however, that consents representing a majority of the outstanding shares of
137
E.g., Defs.‟ Opening Br. 57; Defs.‟ Reply Br. 41.
44
ACell already had been executed in support of Kerbawy‟s slate before he sent the March
7 Email.138 In fact, Defendants‟ own Demonstrative Exhibit 1 shows that consents
representing approximately 22,905,456 shares (or 50.6% of shares outstanding)—
including 1.3 million of the 2.7 million shares Defendants argue were received after the
March 7 Email—were executed before Kerbawy sent the email.139 I am not persuaded,
therefore, that the March 7 Email caused stockholders to execute and deliver the consents
necessary to give Kerbawy the majority he needed; without witness testimony or
additional evidence to that effect, reaching such a conclusion would be speculative at
best. As a separate and independent ground for reaching this conclusion, I do not find
this aspect of the March 7 Email to be material. One reason is that the effect on a
reasonable stockholder of the March 7 Email‟s prediction of victory likely would have
been neutralized, one day later, by her receipt of the competing letter from the Board,
which included a form and instructions for revoking consents. Even if a stockholder had
taken Kerbawy‟s assertion at face value, she would have been forced by Defendants‟
letter and revocation form to reconsider whether the contest truly was settled.140
As to Kerbawy‟s statement that he had received a “report that the current board is
attempting to increase the number of outstanding shares by rushing through option
138
Pl.‟s Opening Br. 36; Pl.‟s Reply Br. 13.
139
Pl.‟s Reply Br. Ex. 1.
140
See Red Oak Fund, L.P. v. Digirad Corp., 2013 WL 5740103, at *11-12 (Del. Ch.
Oct. 23, 2013) (declining to set aside the results of a proxy solicitation based on
disclosure challenge relating to the leaking of preliminary election results).
45
exercises,” Kerbawy in fact received such a report from Riley and believed it to be true.
Defendants make much of the fact that Riley acquired the information by eavesdropping
through his office wall that he shared with Miles Grody, the Company‟s General
Counsel, on conversations of ACell‟s officers. That the source of the information
admittedly was ignoble does not necessarily mean that, as Defendants contend,
Kerbawy‟s statement was “reckless[]”141 or “false and misleading.”142 In fact, during
email communications that same day with a sympathetic stockholder, McDonnell advised
that he recently had exercised stock options and that “any options exercised before the
13th will count.”143 Thus, McDonnell essentially was instructing a stockholder to do just
what Kerbawy‟s statement indicated the Board might attempt to do. That fact merely
buttresses Plaintiff‟s convincing showing that Defendants moved immediately and
furiously to defeat the Kerbawy Solicitation, and were willing to do “whatever it took” to
be successful. Against that backdrop, I cannot conclude that Kerbawy‟s statement, which
he had a legitimate basis to believe was true, was so “reckless” or “false and misleading”
as to justify granting Defendants‟ claim to set the Consents aside.
B. Alleged Tortious Interference with Bosley’s Separation Agreement
Defendants contend that both Kerbawy and DeFrancesco knew about Bosley‟s
Separation Agreement and nevertheless asked Bosley to assist in the Kerbawy
Solicitation, thereby causing him to breach the Agreement. Because that alleged
141
Defs.‟ Opening Br. 56-57.
142
Id. at 34, 56; Defs.‟ Reply Br. 41.
143
JX 606.
46
interference with the Separation Agreement was unjustified and caused ACell harm,
Defendants argue, Kerbawy and DeFrancesco are subject to a claim for tortious
interference, and because the Consent Solicitation was furthered by that interference,
Defendants assert that the “only equitable result is for the Court to invalidate the
solicitation.”144 For the following reasons, I disagree.
The preponderance of the evidence supports the conclusion that by assisting
Kerbawy in his Solicitation—i.e., helping Kerbawy formulate a plan for the New Board,
giving him Company information, and recommending and communicating with
individuals who would be qualified to serve on the New Board, Bosley breached the
Standstill and Confidentiality Provisions of the Separation Agreement.145 As discussed
supra, Bosley‟s involvement was somewhat limited and, therefore, I have rejected
Defendants‟ overblown assertion that the Kerbawy Solicitation was “as much Bosley‟s as
it was Kerbawy‟s.” Nevertheless, Bosley breached the Agreement, and neither Plaintiff
nor DeFrancesco seriously contend otherwise.146
Bosley is not a party to this action, however. Hence, the relevant question is
whether the record supports Defendants‟ claim that Kerbawy and DeFrancesco tortiously
144
Defs.‟ Reply Br. 45.
145
The Separation Agreement prevented Bosley from both directly or indirectly
soliciting consents and directly or indirectly becoming a “participant” or assisting
any other person in such a solicitation (the Standstill Provision) and forbid him
from misusing Company confidential information (the Confidentiality Provision).
Standstill Agreement §§ 4-5.
146
E.g., Pl.‟s Reply Br. 22-24; DeFrancesco‟s Reply Br. 19-23.
47
interfered with Bosley‟s Separation Agreement. The elements for proving tortious
interference with contract are: (1) a contract, (2) about which the defendant knew, and (3)
an intentional act by that defendant that is (4) without justification and is (5) a significant
factor causing a breach of the contract and resulting injury.147 I seriously question
whether Kerbawy‟s and DeFrancesco‟s alleged interference with Bosley‟s Separation
Agreement was “without justification” and a significant factor in causing injury to
ACell—which is the party to the Agreement, not Defendants. Defendants contend that
ACell had bargained for the right to be free from Bosley participating in another consent
solicitation, in exchange for which the Company allowed him to retain certain stock
options and other interests as part of an agreed upon separation. The suggestion is that,
absent the Separation Agreement, ACell might have terminated Bosley for cause and
sought to claw back from him the options and other interests he held.
Importantly, the only reason the alleged tortious interference properly is before me
in the context of this Section 225 action is “because [it] bear[s] directly on [the New
Board‟s] entitlement to office,” but “the nature of a § 225 action does limit the scope of
relief [Defendants] can obtain if they are successful on these claims.”148 In this in rem
action, for example, I could not order Bosley to forfeit his stock options or any other
interest he obtained through the Separation Agreement, nor could I award ACell
147
Agranoff v. Miller, 1999 WL 219650, at *21 (Del. Ch. Apr. 12, 1999), aff’d, 737
A.2d 530 (Del. 1999).
148
Id. at *18.
48
compensatory damages for breaches of the agreement.149 Even if I were to enforce the
parties‟ obligations under the Separation Agreement by removing all of Bosley‟s shares
from the total number of shares included in the Consents, however, the result would not
change: the Kerbawy Solicitation still would have a majority, if only barely.150
Defendants‟ strongest response to this point is that the harm to ACell of Bosley‟s
breach goes beyond just the stock he owned, and impacted the validity of the entire
Kerbawy Solicitation. Specifically, Defendants point to Section 14(f) of the Separation
Agreement, in which the parties agreed that any breaches thereof would result in harm
that would be “difficult to measure” and for which money damages would be an
“inadequate remedy.”151 Thus, Defendants contend, “[b]y actively concealing Bosley‟s
breach of the Separation Agreement, DeFrancesco and Kerbawy deprived ACell of its
available injunctive remedy.”152 For the following reasons, I conclude that this argument
does not provide a sufficient basis for setting aside the Consents.
149
Id.; see also, e.g., EDWARD P. WELCH ET AL., FOLK ON THE DELAWARE GENERAL
CORPORATION LAW (6th ed. 2015) [hereinafter “FOLK ON THE DGCL”] §§ 225.03-
225.04. While I may consider claims that the New Board “obtained the office
through fraud, deceit, or breach of contract,” I may do so “only for the limited
purpose of determining the corporation‟s de jure directors and officers.” Genger v.
TR Invs., LLC, 26 A.3d 180, 200 (Del. 2011).
150
Pl.‟s Opening Br. 24-26; Pl.‟s Reply Br. 25. As noted above, Defendants‟ briefing
did not contest the issue of the numerical sufficiency of the Consents, and it was
not addressed at argument.
151
JX 149 § 14(f).
152
Defs.‟ Opening Br. 62; see also Defs.‟ Reply Br. 45.
49
In the hypothetical case Defendants posit—where Bosley participated in a consent
solicitation in breach of the Separation Agreement, and the Company found out and
sought to enjoin him from such breaches before or while they were ongoing (i.e., sought
the “available injunctive remedy” Defendants complain that ACell was deprived of)—the
Court would analyze whether ACell was entitled to preliminary injunctive relief by
assessing whether it had “(1) a reasonable probability of success on the merits at a final
hearing, (2) an imminent threat of irreparable injury, and (3) a balance of the equities that
tips in favor of issuance of the requested relief.”153 In such an analysis, the Court would
have to weigh whether the harm to ACell of not invalidating a consent solicitation that
was being advanced in part by Bosley‟s breach of the Separation Agreement outweighed
the countervailing harm—i.e., the frustration of the intent of stockholders who sought to
replace the board by executing written consents. That is the same equitable balancing I
must conduct here. To my mind, therefore, Defendants‟ argument—that not setting aside
the Consents would be inequitable because ACell was deprived of the chance to seek an
injunction in the hypothetical situation I described—begs the question. Thus, that line of
reasoning on its own does not support taking the extraordinary step of setting aside the
Consents. Instead, I must balance the equities in the face of Bosley‟s breaches based on
the circumstances of this case.
153
Nutzz.com, LLC v. Vertrue, Inc., 2005 WL 1653974, at *6 (Del. Ch. July 6, 2005)
(internal citations omitted); Concord Steel, Inc. v. Wilm. Steel Processing Co.,
2008 WL 902406, at *3 (Del. Ch. Apr. 3, 2008).
50
In conducting that analysis, I have considered carefully the decision in Agranoff v.
Miller,154 the main case upon which Defendants rely. In that case, Chief Justice Strine,
writing as Vice Chancellor, decided a Section 225 action in favor of the parties seeking to
invalidate written consents purporting to remove sitting directors because the stockholder
delivering the consents, “in conspiracy with two faithless fiduciaries,” wrongfully
obtained his shares.155 In particular, the defendant, who had had no stockholdings or
other association with the company, used confidential information provided to him by a
self-interested director to secretly buy up a controlling stake in the closely held company,
in contravention of a stockholders‟ agreement under which the company itself and then
the other stockholders had rights of first refusal as to any sales of company stock. The
Court held that the defendant, in conspiracy with two fiduciaries and a company
consultant, usurped a corporate opportunity by depriving the company of the right to re-
purchase its stock or to facilitate the purchase thereof by existing stockholders, and for
that reason “should not „benefit from [his] wrongful actions‟ by being permitted to vote
those shares.”156
There are several material distinctions between Agranoff and the situation here.
For one thing, the equities in that case cut much more clearly in favor of the challengers
to the consent solicitation. In Agranoff, fiduciaries self-interestedly enabled a stranger to
154
1999 WL 219650 (Del. Ch. Apr. 12, 1999), aff’d, 737 A.2d 530 (Del. 1999).
155
Id. at *1.
156
Id. at *21 (quoting Yiannatsis v. Stephanis, 653 A.2d 275, 279 (Del. 1995)).
51
the corporation to accumulate a controlling stake in secret, in violation of the
corporation‟s and the stockholders‟ rights of first refusal, and apparently without paying a
control premium. Here, one fiduciary (DeFrancesco) and one former fiduciary (Bosley),
who was acting in breach of an agreement with the Company, provided limited assistance
to a stockholder who sought and obtained a majority of consents to replace the Board
with a majority of new, independent directors. The agreement at issue in Agranoff went
to the core of the consent solicitation‟s validity, because, if not for the contractual
breaches, the defendant there would not have owned stock at all, much less the
controlling block he used to replace the board. This case involves a much more
attenuated connection between the Board‟s removal and the alleged breaches of Bosley‟s
Separation Agreement; the factual record suggests that, if Bosley had not helped
Kerbawy at all, the Solicitation still would have succeeded.
More importantly, though, the contractual rights that Defendants seek to vindicate
here are materially different than the rights the Court protected in Agranoff. There,
setting aside the written consents furthered interests of the corporation and all its
stockholders, i.e., the possibility of enjoying a control premium rather than letting an
outsider secretly acquire control, and the benefits of keeping the ownership among the
original group of investors, who viewed themselves as a private partnership. In this case,
the principal benefit that would accrue from setting aside the Consents is that the
incumbent Board would remain in control of ACell. Taking into consideration all the
facts of this case, and with the teachings of cases like Agranoff in mind, I conclude that
the balance of the equities here does not support setting aside the Consents in order to
52
vindicate the Company‟s rights under the Separation Agreement. 157 Granting such relief
would benefit primarily, if not solely, the incumbent Board, as opposed to the Company
and its stockholders at large.
C. Alleged Misuse of Company Information
Defendants also argue that, in violation of his duty of loyalty, DeFrancesco
provided Kerbawy with confidential Company information. As discussed above, there is
no real dispute that at least some documents and information that DeFrancesco and
Bosley provided Kerbawy contained ACell information to which he otherwise would not
have had access. Furthermore, DeFrancesco and Kerbawy probably were negligent, and
arguably might have been grossly negligent, in failing to take basic precautions such as
requiring the recipients of the information to execute non-disclosure agreements.158 That
157
This conclusion finds support in then-Vice Chancellor Strine‟s reasoning in an
earlier opinion in the Agranoff case, where he observed that: “[T]he proper way
ultimately to address this situation may be to analyze whether there exists, on an
objective basis, a valid corporate or shareholder interest that will be served by the
enforcement of the contract. If there is not, then regardless of the subjective good
faith of the plaintiffs, the contract should not serve as a basis for depriving [the
party delivering consents] of control because enforcement of the contract would
not serve any valid interest of the corporation or its stockholders. Such a merits-
based approach has the virtue of enabling directors to assert corporate contractual
rights which might benefit the stockholders while ensuring that directors do not
usurp corporate contractual rights simply to protect their incumbency.” Agranoff,
734 A.2d at 1074.
158
See Tr. 361, 364-66 (DeFrancesco). At least three of the Director Nominees
previously might have been or currently might be affiliated with companies
operating in the same industry as ACell. Id. at 361, 365. It would be difficult on
this record, however, to go further and find that their actions in this regard
constituted bad faith or disloyalty. In any event, based on the rest of my analysis
of this aspect of Defendants‟ argument, I need not delve into that issue.
53
type of carelessness easily could have harmed ACell if sensitive information fell into the
wrong hands, but Defendants presented no evidence that any such harm occurred here.
There are several problems, however, with Defendants‟ argument that I should set
aside the Consents because of DeFrancesco‟s and Bosley‟s willingness to provide certain
documents to Kerbawy in furtherance of his Solicitation. One problem is that, based on
the evidence, the documents and information at issue were fairly unremarkable corporate
documents, many, if not all, of which would have been available to Kerbawy or any other
stockholder by using Section 220. This is not a case in which trade secrets or
commercially valuable proprietary information was put at risk, nor is it like some of the
cases Defendants rely upon that involved disloyal disclosure by fiduciaries of business
opportunities or other highly sensitive information.159 A related problem is that, in the
particular context of this privately held Company, the Board itself often shared with the
stockholders information that it considered confidential or privileged, even during their
efforts to dissuade stockholders from supporting Kerbawy‟s Solicitation.160
Most problematic for Defendants in this regard, however, is that they cannot point
convincingly to any harm to ACell as a result of Kerbawy obtaining the Company
159
See, e.g., Agranoff, 1999 WL 219650, at *8-9, *19-21; Shocking Techs., Inc. v.
Michael, 2012 WL 4482838, at *9 (Del. Ch. Oct. 1, 2012), vacated on other
grounds by Shocking Techs., Inc. v. Michael, 2015 WL 3455210 (Del. Ch. May
29, 2015). The most troubling of the Company information that DeFrancesco
disclosed to Kerbawy was contained in the Draft S-1 and the strategic planning
document (JX 286). Even having considered those documents, however, I do not
find this case to be analogous to either Agranoff or Shocking Technologies in
terms of the confidential information at issue.
160
E.g., Tr. 176-79, 212-16 (Pfinsgraff); id. at 568-70 (McDonnell).
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information and documents he did from DeFrancesco and Bosley. Attempting to
demonstrate such harm, Defendants assert: that this “misuse of confidential information
harmed the Company, as it allowed Kerbawy to keep the solicitation secret”;161 that
DeFrancesco “misappropriated the information, in a manner that deprived the Company
of its ability to enforce its rights under Section 220 and Bosley‟s Separation
Agreement”;162 and that it was wrong for DeFrancesco “to use his office as a director to
facilitate the solicitation in secret for his own personal interest without regard to the
Company‟s interest.”163
Each of these assertions is flawed. The first is the easiest to reject: neither the
Company nor the incumbent Board has any right to prevent a stockholder from engaging
in “secret” solicitation of written consents.164 As to Defendants‟ second assertion, I find
it unpersuasive as to both Section 220 and the Separation Agreement. I already have
discussed the Separation Agreement supra. The suggestion that Kerbawy‟s “secret”
Solicitation violated rights of ACell under Section 220 misconstrues the statute. Section
220 is designed to give stockholders rights to inspect corporate books and records, not to
161
Defs.‟ Reply Br. 23; see also Defs.‟ Opening Br. 42.
162
Defs.‟ Reply Br. 24.
163
Id. at 26.
164
“[Section 228(a)] creates a right in shareholders to act independently of the
directors upon whom they may be dependent to call a meeting. Under Section
228, unless the charter otherwise provides, shareholders may act by written
consent, without notice, a meeting and or a vote.” Prime Computer, Inc. v. Allen,
1988 WL 5277, at *4 (Del. Ch. Jan. 22, 1988), aff’d, 540 A.2d 417 (Del. 1988).
55
serve as a kind of early-warning system for an incumbent Board to gird itself against
consent solicitations.165
Defendants‟ contention that DeFrancesco improperly placed his own interests
above ACell‟s when he provided Kerbawy with inside information comes closest to
providing an equitable ground to find the Consents invalid. As a legal matter, the
proposition Defendants cite in this regard, that “[i]nherent in the duty of loyalty is an
obligation to protect the corporation by maintaining the confidentiality of its sensitive
information,”166 seems indisputable. As a factual matter, however, the record does not
support their assertion that DeFrancesco was favoring his own interests over ACell‟s.
For starters, as ACell‟s largest stockholder, DeFrancesco‟s “interest” is closely
aligned with ACell‟s: if the Company is destroyed or harmed materially by the New
Board‟s approach to the DOJ Investigation, or for some other business reason,
DeFrancesco stands to lose his more than $3 million investment. He is more motivated
than any other individual to see that the Company succeeds with an IPO in the $500
million range or greater. Furthermore, in the immediate context of the Kerbawy
165
See 8 Del. C. 220(b) (“Any stockholder, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose, and to make
copies and extracts from: (1) The corporation‟s stock ledger, a list of its
stockholders, and its other books and records . . . .”) (emphasis added).
Defendants cite no authority for the proposition that ACell might have rights under
Section 220 in this situation.
166
J. Travis Laster & John Mark Zeberkiewicz, The Rights and Duties of Blockholder
Directors, 70 BUS. LAW 33, 52 (2015); see also Shocking Techs., Inc., 2012 WL
4482838, at *9.
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Solicitation, DeFrancesco stands to lose his current Board seat, not gain more control.
Defendants insinuate at various points in their argument that DeFrancesco will benefit if
the New Board determines to grant him advancement of the legal costs he personally is
incurring or is likely to incur in connection with the DOJ Investigation. If a company has
a permissive advancement regime, as ACell does here,167 there conceivably will be
situations where the board has to decide whether to advance funds. But, that is an issue
for another day.
D. The Fairness of the Kerbawy Solicitation Generally
In sum, the facts of this case do not provide sufficient justification for this Court to
take the extraordinary step of setting aside the written consents executed by a majority of
ACell‟s stockholders. In addition to the contentions I have addressed supra, a persistent
theme running through Defendants‟ argument was that the Kerbawy Solicitation was not
fundamentally fair. In particular, Defendants fall back on the argument that they possess
superior knowledge related to the DOJ Investigation and believe themselves to be
pursuing the course of action that will lead to the best resolution of that issue for ACell
and its stockholders. They also complain that the Kerbawy Solicitation was sprung on
the Board without giving it enough time to respond and give stockholders its side of the
argument. On that basis, Defendants contend that I should set aside the Consents and
167
JX 1 art. V, § 5.
57
allow for a new vote—which Defendants suggest would come soon in the form of the
Company‟s annual meeting—that can be based on “full and fair information.”168
Based on the record, and as already discussed, I do not doubt the Incumbent Board
believed that they would manage the Company better than the New Board. But in the
context of a consent solicitation under Section 228, the Board is not entitled to a full and
fair debate. The DGCL and ACell‟s charter clearly enable ACell‟s stockholders to act by
written consent, without notice. Section 228 “creates a right in shareholders to act
independently of the directors upon whom they may be dependent to call a meeting.”169
Adopting the rule Defendants urge in this regard threatens to impinge upon that right.
My inquiry in this case must be and was limited to ensuring the fairness of the consent
solicitation not in the sense that Defendants use it here—i.e., that both sides fairly were
able to present their views to the ACell stockholders—but in the sense that there was not
a breach of fiduciary duty, breach of contract, fraud, or other wrongdoing that so
“inequitably tainted the election” that the Court must intervene.170 For the reasons I have
discussed, I conclude that Defendants failed to carry their burden of showing such an
inequitable circumstance in the facts of this case. I decline to go beyond that and delve
into the merits of the decisions that Delaware law allocates to ACell‟s stockholders to
make.
168
Defs.‟ Reply Br. 5. See also id. at 46-49; Defs.‟ Opening Br. 5, 62-65.
169
Prime Computer, Inc. v. Allen, 1988 WL 5277, at *4 (Del. Ch. Jan. 22, 1988),
aff’d, 540 A.2d 417 (Del. 1988).
170
Portnoy, 940 A.2d at 72.
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IV. CONCLUSION
For the foregoing reasons, Plaintiff is entitled to a declaratory judgment as to his
claim under Section 225 that the New Board validly was elected as of March 10, 2015.
The Defendants‟ counterclaims and third-party claims against Kerbawy and DeFrancesco
are dismissed. An implementing order accompanies this Opinion.
59