In Re Zale Corporation Stockholders Litigation ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ZALE CORPORATION ) Consolidated
STOCKHOLDERS LITIGATION ) C.A. No. 9388-VCP
MEMORANDUM OPINION
Date Submitted: May 28, 2015
Date Decided: October 1, 2015
Seth D. Rigrodsky, Esq., Brian D. Long, Esq., Gina M. Serra, Esq., Jeremy J. Riley, Esq.,
RIGRODSKY & LONG, P.A., Wilmington, Delaware; Carl L. Stine, Esq., WOLF
POPPER LLP, New York, New York; Liaison Counsel for Plaintiffs and Member of
Plaintiffs’ Executive Committee.
Gregory P. Williams, Esq., J. Scott Pritchard, Esq., RICHARDS, LAYTON & FINGER,
PA, Wilmington, Delaware; Sandra C. Goldstein, Esq., CRAVATH, SWAINE &
MOORE LLP, New York, New York; Attorneys for Defendants Neale Attenborough,
Yuval Braverman, Terry Burman, David F. Dyer, Kenneth B. Gilman, Theo Killion, John
B. Lowe, Jr., Joshua Olshansky, and Beth M. Pritchard.
Bradley R. Aronstam, Esq., S. Michael Sirkin, Esq., ROSS ARONSTAM & MORITZ
LLP, Wilmington, Delaware; Joseph S. Allerhand, Esq., Stacy Nettleton, Esq., David P.
Byeff, Esq., Robert S. Ruff, III, Esq., WEIL, GOTSHAL & MANGES LLP, New York,
New York; Attorneys for Defendant Signet Jewelers Limited.
Michael J. Maimone, Esq., Gregory E. Stuhlman, Esq., GREENBERG TRAURIG LLP,
Wilmington, Delaware; Alan S. Goudiss, Esq., Paula H. Anderson, Esq., Dennis D. Kitt,
Esq., SHEARMAN & STERLING LLP, New York, New York; Attorneys for Defendant
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
PARSONS, Vice Chancellor.
This is a stockholder challenge to the now-completed merger between Zale
Corporation and Signet Jewelers Limited. The plaintiffs, who owned Zale Corporation
common stock before the merger, charge members of the Zale Corporation board of
directors with breaching their fiduciary duties of loyalty and care. The plaintiffs also
charge Signet Jewelers Limited and Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Zale Corporation‘s financial advisor, with aiding and abetting those fiduciary duty
breaches.
Before me are motions by the three groups of defendants to dismiss the plaintiffs‘
consolidated second amended complaint under Court of Chancery Rule 12(b)(6). I have
considered the parties‘ briefing and arguments and the relevant documents as to those
motions. For the reasons stated in this Memorandum Opinion, I grant the motions as to
Zale Corporation‘s board of directors and Signet Jewelers Limited, but deny them as to
Merrill Lynch.
I. BACKGROUND1
A. Parties
Plaintiffs, Andrew Beyer, Marc Stein, Ravinder Singh, Mary Smart, and David
Pill (―Plaintiffs‖), were common stockholders of Zale Corporation (―Zale‖ or the
―Company‖) at all relevant times.
1
The facts are drawn from the well-pled allegations of Plaintiffs‘ Verified
Consolidated Second Amended Class Action Complaint (the ―Complaint‖). Those
allegations and facts drawn from documents integral to the Complaint are assumed
true for purposes of the defendants‘ motions to dismiss. Notably, the documents
integral to the Complaint include Zale‘s Definitive Schedule 14A filed with the
Securities and Exchange Commission (the ―SEC‖) on May 1, 2014 (the ―Proxy‖).
1
The Complaint named three groups of defendants. The first, comprised of
Defendants Neale Attenborough, Yuval Braverman, Terry Burman, David F. Dyer,
Kenneth B. Gilman, Theo Killion, John B. Lowe, Jr., Joshua Olshansky, and Beth M.
Pritchard (together, the ―Board‖ or the ―Director Defendants‖), constituted the board of
directors of Zale. Killion was also Zale‘s CEO and the only Zale insider on the Board.
Burman was the Chairman of the Board. Before serving as Chairman, Burman was CEO
of Defendant Signet Jewelers Limited (―Signet‖) until 2011. Attenborough and
Olshansky were both high-level employees at Golden Gate Capital (―Golden Gate‖)—a
private equity firm that was Zale‘s largest stockholder, with an approximately 23.3%
stake—and Golden Gate‘s appointees on the Board. Golden Gate, which was not named
as a defendant, also had a $150 million loan outstanding to Zale through which it
received warrants for 25% of the Company‘s common stock. Burman, Olshansky, Dyer,
and Gilman served on the Board‘s Negotiation Committee (the ―Negotiation
Committee‖).
Second, Defendant Signet is a Bermuda corporation headquartered in Hamilton,
Bermuda. It is the largest specialty retail jeweler in the United States and the United
Kingdom and was Zale‘s largest competitor, operating over 1,400 retail stores in the U.S.
alone as of February 2013. Signet‘s common stock trades on the New York Stock
Exchange (the ―NYSE‖) under the symbol SIG.
Third, Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated (―Merrill
Lynch‖) is the corporate and investment banking division of Bank of America. Merrill
Lynch was engaged by both the Board and Golden Gate, as described herein. The
2
Director Defendants, Signet, and Merrill Lynch are referred to, collectively, as
―Defendants.‖
Zale was a named defendant in the first consolidated amended complaint, but it
was dismissed voluntarily after the Court denied Plaintiffs‘ motion for a preliminary
injunction.2 Zale was a Delaware corporation headquartered in Irving, Texas and a
leading retailer of fine jewelry in North America. As of July 2013, Zale operated over
1,000 retail stores and 600 kiosks, mostly in shopping malls, in the U.S., Canada, and
Puerto Rico through its brands Zales Jewelers, Zales Outlet, Gordon‘s Jewelers, Peoples
Jewellers, Mappins Jewellers, and Piercing Pagoda. Before the events described herein,
Zales traded on the NYSE under the symbol ZLC.
B. Facts
1. The impact of the 2008 financial crisis on Zale’s business, and Zale’s
turnaround program
Zale was severely impacted by the 2008 financial crisis and suffered declining
sales that forced a number of its retail stores to close. To remedy these financial
difficulties, Zale launched a long-term turnaround program in 2010 designed to improve
profitability. This program included: (1) rebuilding its core merchandise assortment; (2)
refining its marketing message; (3) investing in jewelry consultants; (4) improving retail
productivity; (5) upgrading its executive, corporate, and field teams; and (6) improving
2
Another defendant named in the first consolidated amended complaint, Carat
Merger Sub, Inc. (―Merger Sub‖), also was dismissed voluntarily. Merger Sub, a
Delaware corporation and a wholly owned subsidiary of Signet, was created for
the sole purpose of effectuating a merger with Zale.
3
its internal training programs. In addition, as part of the turnaround program, the Board,
in July 2013, reviewed and approved a three-year business plan prepared by Zale‘s
management that incorporated projections of management‘s expectations as to Zale‘s
future financial performance (the ―Business Plan Case Projections‖). The turnaround
efforts succeeded. In 2013, Zale returned to profitability for the first time since 2008,
reporting net earnings of $10M on August 28, 2013.
2. Golden Gate proposes a secondary offering
In September 2013, Golden Gate notified Zale that it intended to sell its shares
into the public markets in an IPO-like secondary offering (the ―Secondary Offering‖). To
effectuate this offering, Golden Gate and Zale engaged Merrill Lynch as lead underwriter
and filed a preliminary registration statement on Form S-3 on October 2, 2013 (the
―Preliminary Registration Statement‖) with the SEC, proposing an offering price of
$15.035 per share.3 The Complaint alleges that prior to the Secondary Offering, and as a
3
In their briefs, Plaintiffs and Defendants dispute the significance of this price.
According to Plaintiffs, $15.035 represented the maximum per share offering price
in the Secondary Offering. Compl. ¶ 3; Pls.‘ Answer Br. 10. Defendants disagree,
arguing that this price was only an estimated price for purposes of the eventual fee
to be paid for the definitive registration statement, calculated by averaging the
high and low prices of Zale‘s common stock on September 30, 2013. Signet and
Zale Defs.‘ Opening Br. 7. The Preliminary Registration Statement itself, which is
incorporated by reference in the Complaint, comports with Defendants‘
description of the price. It states that the ―Proposed Maximum Offering Price Per
Share‖ of $15.035 is ―[e]stimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based on the average of the high and low prices of the common stock on
the New York Stock Exchange on September 30, 2013.‖ Aronstam Aff., supra
note 3, Ex. B, at 2 n.(2). Because this statement is consistent with Rule 457(c), the
pertinent part of which states that ―the registration fee is to be calculated upon the
4
result of the turnaround program, Zale‘s share price steadily had been rising and that the
upward trend was halted and capped by the price quoted in the Preliminary Registration
Statement. On October 6, 2013,4 Signet reached out to Olshansky to discuss a possible
acquisition of Zale.
3. The Board receives acquisition proposals from Signet
In 2006, before the events described above, Burman, then-CEO of Signet,
contacted Richard Marcus, then-Chairman of Zale, to discuss a possible strategic
acquisition. These negotiations progressed to some degree, but did not result in a
definitive agreement. In 2011, Burman left his post as Signet‘s CEO and was replaced by
Michael Barnes. In 2013, Attenborough and Olshansky approached Burman about
joining Zale‘s Board as Chairman. He assumed that role in May 2013.
It was Barnes who approached Olshansky in October 2013 to discuss a potential
merger between the companies. Olshansky indicated that any proposal should be
communicated to Burman. On November 6, 2013, Barnes responded by contacting
Olshansky again to tell him that Signet was finalizing a proposal for the Board. The next
day, the Board received an offer from Signet to purchase all of Zale‘s outstanding
common stock for $19 per share in an all cash deal. The proposal also stated that Signet
basis of the price of securities of the same class, as . . . the average of the high and
low prices reported in the consolidated reporting system []for exchange traded
securities,‖ 17 C.F.R. § 230.457(c) (2011), of which I take judicial notice, I
accept Defendants‘ explanation as the correct one.
4
The Complaint alternatively describes this date as October 6, 2013 and October 6,
2014. See Compl. ¶¶ 4, 51, 54. Based on the context provided in the Complaint, I
assume the correct year is 2013.
5
would require Golden Gate to enter into a voting agreement (the ―Voting Agreement‖).
Golden Gate responded to this offer by cancelling its secondary offering, but, as Plaintiffs
emphasize, neither Golden Gate nor the Board disclosed this cancellation to the public.
4. The Board forms the Negotiation Committee and engages Merrill Lynch as
financial advisor
On November 8, 2013, the Board met to consider Signet‘s proposal. At that
meeting, the Board retained Cravath, Swaine & Moore LLP (―Cravath‖) as its legal
advisor and approved the formation of the Negotiation Committee to consider possible
financial advisor candidates. The Board agreed that Merrill Lynch should be considered,
based on their historical relationship with Zale and their involvement with the Secondary
Offering, ―unless a conflict or other consideration affected representation.‖ 5 The
Negotiation Committee then met with Merrill Lynch on November 11.
At the November 11 meeting, Merrill Lynch made a presentation to the
Negotiation Committee describing its history with Zale and good working relationship
with Zale‘s management. Merrill Lynch also represented that it did not expect its
previous relationship with Golden Gate, through the Secondary Offering, to impact its
ability to advise the Board and that it had ―limited prior relationships and no conflicts
with Signet.‖6 In fact, Merrill Lynch received approximately $2 million in fees from
Signet from 2012 to 2013. More significantly, Merrill Lynch had, on October 7, 2013—
one day after Barnes initially indicated to Olshansky that Signet was interested in a
5
Id. ¶ 62.
6
Id. ¶ 78.
6
transaction with Zale and while Merrill Lynch was working on the Secondary Offering—
made a presentation to Barnes and Signet‘s CFO regarding a possible acquisition of Zale.
This presentation was aimed at soliciting business from Signet and proposed an
acquisition of Zale at a value of between $17 and $21 per share. Jeffrey Rose, a
managing director at Merrill Lynch, was a senior member of both the team that made the
presentation to Signet and the team that eventually was engaged to advise the Zale Board
during the merger process. Neither Rose nor Merrill Lynch disclosed to the Board that
they made this presentation to Signet until March 23, 2014, which was after the merger
agreement was signed, in connection with the preparation of the Proxy.
The Negotiation Committee, without interviewing any other candidates,
recommended that the Board engage Merrill Lynch as financial advisor. The Board
adopted this recommendation on November 18, 2013 and structured its engagement such
that most of Merrill Lynch‘s fee was contingent upon the consummation of a merger.7
5. The Board considers the Signet proposal and other strategic alternatives
On November 18, 2013, the Board met again to discuss the potential sale of the
Company. The Board first addressed potential conflicts among the Director Defendants,
including: (1) the fact that Burman was formerly the CEO of Signet and still held 1,850
shares of Signet common stock; (2) Attenborough and Olshansky‘s roles as employees of
Golden Gate, who had an outstanding loan to Zale that would earn a prepayment fee upon
7
According to the Complaint, Merrill Lynch stood to earn $2 million if the Board
decided not to enter into a merger and $12 million if a merger was consummated
at a price of $21 per share. Id. ¶ 82.
7
a change of control; and (3) Killion‘s and Burman‘s compensation arrangements that
would allow certain of their restricted Zale common shares to vest early upon a change of
control. After considering each of those issues in turn, the Board determined that none of
these conflicts were material and that each Director Defendant‘s interests were aligned
with the other Zale stockholders.
Merrill Lynch then made a presentation to the Board that included a ―Summary
Valuation of Strategic Alternatives‖ in which Merrill Lynch ―projected the share price of
Zale under different alternative scenarios [including five standalone options and a
leveraged buyout option] and then calculated the present value of that future stock
price.‖8 Merrill Lynch evaluated each of these different strategic alternatives using
―upside case‖ projections (based on management‘s Business Plan Case Projections) and
―base case‖ projections (based on Merrill Lynch‘s less optimistic projections) and
presented the following share price valuation ranges for each strategic alternative under
each of the two sets of projections:
Sale of
Status Leveraged Sale of Sale of Leveraged
Projections Pagoda &
Quo Recapitalization Pagoda Canada Buyout
Canada
Base Case
$15.25 $15.70 $14.45 $15.30 $15.70 $11.80
(i.e.,
- - - - - -
Alternative
$19.70 $20.10 $18.60 $19.15 $19.05 $16.40
Case)
Upside
$19.55 $20.00 $18.55 $19.55 $19.75 $14.86
Case (i.e.,
- - - - - -
Business
$25.25 $25.60 $23.90 $24.65 $24.25 $20.25
Plan Case)
8
Id. ¶ 64.
8
After considering each strategic alternative, the Board decided to pursue a merger with
Signet.
At that same November 18, 2013 meeting, the Board also asked Merrill Lynch to
consider the potential for transactions with other strategic buyers. The Board decided,
however, to ―defer any decisions regarding the nature of the market check to be
undertaken until a later time after further discussion.‖9
6. The Board’s merger negotiations with Signet
On December 3, 2013, the Board received a second letter from Signet indicating
that it would increase its offer price to $19 per share in cash plus $1.50 in Signet common
stock. The Board met two days later, on December 5, and decided to enter into a
confidentiality agreement with Signet and to allow Signet to perform due diligence on
Zale.
The Board also returned to the topic of a transaction with other strategic buyers.
According to the Complaint, Merrill Lynch consistently advised the Board throughout the
merger process that a transaction with another strategic buyer was unlikely. The only
indication of interest came on January 10, 2014, when a financial advisory firm
representing Gitanjali, an Indian jewelry retailer and manufacturer, contacted Olshansky
regarding a potential transaction. The Board responded to this overture by stating that
they would not permit Gitanjali to perform due diligence without at least an initial
indication of price and availability of financing. Gitanjali never replied.
9
Id. ¶ 68.
9
As the merger negotiations continued through January 2014, the deal‘s contours
began to take shape. On January 16, 2014, Barnes informed Killion that Signet planned,
post-merger, to keep Zale as a separate division within Signet, and it wanted Killion to
continue to lead that division from its headquarters in Texas. Killion also allegedly stood
to earn nearly twice as much as the head of a division within Signet as he was earning as
Zale‘s CEO. On both January 27 and February 6, the Board met to discuss the
announcement by Corvex Management, a New York-based hedge fund, of its acquisition
of a substantial ownership stake in Signet. After considering this development, the Board
concluded that Corvex‘s announcement likely had prompted Signet‘s desire to proceed
more quickly with a potential transaction with Zale and was a favorable development for
the Company.
On February 10, Signet again contacted the Board to inform them that the offer of
$20.50 per share would be all cash rather than a mixture of cash and Signet common
stock. The Board countered this offer by notifying Signet that they would be willing to
proceed with a transaction if Signet increased the price to $21 per share in cash. The next
day, Signet increased its offer to $21 in cash. On February 15, as part of their ongoing
negotiations over the Voting Agreement, Golden Gate requested assurances that ―it
[would] be compensated by Signet in the event that Golden Gate‘s exercise of its
warrants prior to the record date would result in effective proceeds to Golden Gate of less
than the $21.00 per share deal price.‖10 Finally, on February 18, Merrill Lynch reviewed
10
Id. ¶ 77 n.2.
10
its financial analysis of Signet‘s proposal and delivered its opinion to the Board that the
merger would be fair to Zale from a financial perspective.
7. The merger announcement and the merger agreement
On February 19, 2014, Zale and Signet issued a joint press release announcing a
$690 million deal, under which Signet would acquire all of Zale‘s outstanding common
stock at a price of $21 per share (the ―Merger Price‖) and Zale would merge with Merger
Sub and become a wholly owned subsidiary of Signet (the ―Merger‖). That same day,
Zale filed the definitive merger agreement (the ―Merger Agreement‖) with the SEC. In
addition to describing the Merger‘s consideration ($21 dollars per share in cash) and
structure (Zale would merge with Merger Sub and become a wholly owned subsidiary of
Signet), the Merger Agreement provided for certain deal protection devices. Those
devices included: (1) a ―No-Solicitation‖ provision prohibiting Zale from soliciting
superior offers from other buyers, subject to a ―Fiduciary Out‖; (2) a ―Matching Right‖
granted to Signet for any ―Superior Offer‖ submitted to Zale; and (3) a ―Termination
Fee‖ of $26.7 million, payable to Signet if the Board terminated the Merger Agreement
pursuant to the fiduciary out. In addition, separately from the Merger Agreement, Golden
Gate and Signet entered into the Voting Agreement, which required Golden Gate to vote
their shares in favor of the Merger.
8. The reaction of Zale’s stockholders to the Merger’s announcement
After the Proxy was filed on May 1, 2014, several large Zale stockholders spoke
out against the Merger. In particular, on May 9, 2014, TIG Advisors, LLC (―TIG‖),
which then owned approximately 9.5% of Zale‘s outstanding shares, filed materials with
11
the SEC urging Zale‘s stockholders to vote against the Merger. In those materials, TIG
stated that ―shareholders are not being paid a fair value for the margin expansion
opportunity they already own, much less a fair premium‖ and that the ―sales process
[was] replete with numerous conflicts of interest, particularly relating to Golden Gate
Capital‘s involvement as well as that of [Merrill Lynch], doom[ing] shareholders [sic]
chances for a fair outcome.‖11 TIG also opposed the Merger on the grounds that: (1) the
participation of Golden Gate‘s representatives in the Negotiation Committee created a
conflict of interest between a stockholder looking to sell its stake—i.e., Golden Gate—
and the Board‘s obligation to maximize stockholder value; (2) Merrill Lynch‘s prior
involvement with Signet tainted the entire sales process; (3) the financial projections
relied on by the Board and Merrill Lynch in assessing the sale were stale and included ―a
lower alternative case‖ created by the Board ―to justify the deal price‖; (4) Signet‘s
indication to Killion that it preferred that he remain as Zale‘s CEO post-Merger created a
conflict of interest; (5) Zale‘s standalone prospects were more compelling than a Merger,
given the success of their turnaround efforts; and (6) the synergies provided to Signet by
the Merger were not being allocated equitably among the stockholders.12
On May 13, 2014, the Board responded to TIG‘s criticism by filing an investor
presentation with the SEC. In that presentation, the Board urged stockholders to support
the Merger by pointing out it represented ―compelling and immediate value for
11
Id. ¶ 87.
12
Id.12
shareholders.‖13 The Board also stated that: (i) they had ―evaluated the offer price
relative to the risks, uncertainties and challenges in connection with executing the
Company‘s three-year plan [which corresponded to the Business Plan Case Projections]‖;
(ii) achievement of the three-year plan would be ―challenging‖ and entail ―significant
execution risk‖; (iii) the ―three-year plan was designed to challenge management and was
aligned accordingly with the Company‘s board-approved long-term incentive plan‖; and
(iv) the Merger provided ―certainty of value and eliminate[d] the risks of achieving the
Company‘s three-year plan.‖14
Between May 15 and May 20, 2014, Zale and TIG publicly debated the merits of
the Merger, largely reasserting their relative justifications and objections. During that
period, GAMCO Investors, Inc. (―GAMCO‖), an investment fund that, at the time,
owned 7.42% of Zale‘s outstanding shares, announced that it also was considering voting
against the Merger on the same bases as TIG and had ―commenced the process to be able
to assert appraisal rights.‖15 In addition, Institutional Shareholder Services, Inc. (―ISS‖)
and Glass, Lewis & Co., LLC (―Glass Lewis‖), two proxy advisory services, entered the
fray regarding the Merger on opposing sides. ISS aligned itself with the Board,
recommending that all Zale stockholders vote in favor of the deal on the same bases
asserted by the Board. Glass Lewis, on the other hand, agreed with TIG and
13
Id. ¶ 88.
14
Id.15
Id. ¶ 90.
13
recommended that all Zale stockholders vote against the Merger ―in favor of a more
robust strategic review and – in the absence of a compelling alternative – the continued
pursuit of Zale‘s stand-alone operating plan.‖16
9. Zale’s stockholders vote to consummate the Merger
On May 29, 2014, the stockholder vote on the Merger took place, with 53.1% of
Zale‘s stockholders approving the Merger. The next day, Zale announced completion of
the Merger. Thereafter, a number of stockholders filed petitions seeking appraisal of
their Zale shares in this Court under Section 262 of the Delaware General Corporation
Law (the ―DGCL‖).17 On June 30, 2014, Zale filed a verified list of individuals and
entities that purported to demand payment for their Zale shares pursuant to Section 262 of
the DGCL and with whom no agreements as to the value of their shares had been
reached. The list of 62 names included TIG and GAMCO.
C. Procedural History
Shortly after the February 19, 2014 announcement of the Merger, each of the five
Plaintiffs filed complaints seeking to enjoin the Merger. On March 25, 2014, those
actions were consolidated, and on April 23, 2014, Plaintiffs filed a consolidated amended
complaint along with motions for a preliminary injunction to enjoin consummation of the
Merger and for expedited proceedings. The parties then engaged in expedited discovery,
during which Zale produced board minutes and materials and Plaintiffs deposed Burman
16
Id. ¶ 98.
17
8 Del. C. § 262.
14
and Rose. On May 23, 2014, after the parties had briefed the motion for preliminary
injunction, I heard argument on that motion and delivered an oral ruling denying the
preliminary injunction.
On September 30, 2014, four months after the Merger was consummated,
Plaintiffs filed the Complaint, which they had amended to include a claim against Merrill
Lynch for aiding and abetting the Director Defendants‘ breaches of fiduciary duties as
well as additional allegations based on discovery taken during the preliminary injunction
stage. Soon after Plaintiffs filed the Complaint, each of the three groups of Defendants
separately moved to dismiss under Rule 12(b)(6) based on Plaintiffs‘ alleged failure to
state a claim upon which relief could be granted. The parties then briefed those motions,
and I heard argument on May 20, 2015. This Memorandum Opinion contains my rulings
on Defendants‘ motions to dismiss.
D. Parties’ Contentions
Count I of the Complaint alleges that the Director Defendants breached their
fiduciary duties of loyalty and care to Plaintiffs. Specifically, Plaintiffs allege that the
Director Defendants acted to ―put their personal interests ahead of [Zale and its
stockholders]‖ and ―failed to act reasonably in good faith and on a fully informed basis,‖
depriving Plaintiffs of the ability to obtain the true value of their investment in Zale. 18
Defendants counter that Plaintiffs‘ claims fail because: (1) Zale has an exculpation
provision in its charter that requires Plaintiffs‘ duty of care claims be dismissed; (2) no
18
Compl. ¶¶ 125-126.
15
duty of loyalty violation is alleged because Plaintiffs only claim that up to four of the
nine Director Defendants were conflicted as to the Merger, meaning that a majority were
independent and disinterested; and (3) none of the alleged ―flaws‖ in the sale process rise
to the level of bad faith.
Count II charges Signet with aiding and abetting the Director Defendants‘
breaches of fiduciary duties on the grounds that ―Signet was an active and knowing
participant in the Individual [Directors‘] breaches of fiduciary duties.‖19 Plaintiffs also
claim that Signet, with the knowledge that the Director Defendants were failing to seek
the best price for Zale‘s stockholders, offered an inadequate price for their own benefit.
Defendants respond by reiterating that Plaintiffs failed to allege any cognizable claims
against the Director Defendants and, therefore, there were no underlying fiduciary duty
breaches for Signet to aid and abet. Defendants also argue that, even if the Director
Defendants did breach their fiduciary duties, Plaintiffs‘ aiding and abetting claims are
meritless because none of the facts alleged support a reasonable inference that Signet
―knowingly participated‖ in any such breaches.
Finally, in Count III, Plaintiffs allege that Merrill Lynch also aided and abetted the
Director Defendants‘ breaches of fiduciary duties. According to the Complaint, ―Merrill
Lynch, for improper motives of its own, intentionally created an unreasonable sale
process.‖20 In particular, the Complaint alleges that Merrill Lynch undermined the
19
Id. ¶ 133.
20
Id. ¶ 141.
16
Board‘s ability to maximize stockholder value in the Merger by making a presentation to
Signet ―with an illustrative price analysis of Zale‖ at a time when Merrill Lynch had
access to Zale‘s non-public information.21 Defendants oppose these claims on numerous
grounds, emphasizing that Plaintiffs failed to allege both underlying fiduciary duty
breaches by the Director Defendants and, if there were underlying breaches, that Merrill
Lynch was a knowing participant in those breaches. Further, Defendants argue that
Merrill Lynch‘s presentation to Signet: (1) was in the ordinary course of business; (2)
created no conflicts of interest between Merrill Lynch and Zale‘s stockholders; (3) did
not involve any of Zale‘s non-public information; and (4) was disclosed to the Board and
Zale‘s stockholders before the Merger was consummated.
I consider each of these Counts separately below, after first describing the
standard of review I must apply on a motion to dismiss under Rule 12(b)(6).
II. ANALYSIS
A. Standard of Review
Pursuant to Court of Chancery Rule 12(b)(6), this Court may grant a motion to
dismiss for failure to state a claim if a complaint does not assert sufficient facts that, if
proven, would entitle the plaintiff to relief. ―[T]he governing pleading standard in
Delaware to survive a motion to dismiss is reasonable ‗conceivability.‘‖ 22 That is, when
considering such a motion, a court must ―accept all well-pleaded factual allegations in the
21
Id.
22
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 537
(Del. 2011) (footnote omitted).
17
Complaint as true . . . , draw all reasonable inferences in favor of the plaintiff, and deny
the motion unless the plaintiff could not recover under any reasonably conceivable set of
circumstances susceptible of proof.‖23 This reasonable ―conceivability‖ standard asks
whether there is a ―possibility‖ of recovery.24 The court, however, need not ―accept
conclusory allegations unsupported by specific facts or . . . draw unreasonable inferences
in favor of the non-moving party.‖25 Moreover, failure to plead an element of a claim
precludes entitlement to relief, and, therefore, is grounds to dismiss that claim.26
Generally, the court will consider only the pleadings on a motion to dismiss under
Rule 12(b)(6). ―A judge may consider documents outside of the pleadings only when: (1)
the document is integral to a plaintiff‘s claim and incorporated in the complaint or (2) the
document is not being relied upon to prove the truth of its contents.‖27
B. Count I – Breach of Fiduciary Duties Against the Director Defendants
1. Plaintiffs’ Revlon claims against the Director Defendants
The Complaint alleges that the Director Defendants breached their fiduciary duties
because: (1) the Board was not disinterested or independent as to the Merger; (2) the
Board‘s actions during the Merger process constituted bad faith; and (3) even if the
23
Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002)).
24
Id. at 537 & n.13.
25
Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing
Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)).
26
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 972 (Del. Ch. 2000) (Steele,
V.C., by designation).
27
Allen v. Encore Energy P’rs, 72 A.3d 93, 96 n.2 (Del. 2013).
18
Board‘s actions during the Merger process did not rise to the level of bad faith, they still
constituted breaches of the duty of care.
In terms of the legal standard under which I should review Plaintiffs‘ claims,
Defendants argue that the business judgment rule, rather than Revlon enhanced scrutiny,
applies in this case. According to Defendants, I should extend the reasoning in In re KKR
Financial Holdings LLC Shareholder Litigation28 and hold that ―[t]he business judgment
standard of review applies to mergers ‗approved by a majority of the shares held by
disinterested stockholders . . . in a vote that was fully informed.‘‖29 In KKR, Chancellor
Bouchard held that although the entire fairness standard of review generally would apply
to a merger where a majority of the corporation‘s directors were not independent, the
business judgment rule applies, instead, when the merger is approved by a majority vote
of disinterested, fully informed stockholders, even if that vote is statutorily required as
opposed to voluntarily sought by the directors.30 Chancellor Bouchard also addressed the
potential conflict between his decision and the Supreme Court‘s decision in Gantler v.
Stephens31:
In light of the Delaware Supreme Court‘s 2009 decision
in Gantler v. Stephens, there has been some debate as to
whether the standard [that a fully informed vote by
disinterested shareholders changes the standard of review
28
101 A.3d 980 (Del. Ch. 2014), appeal pending, No. 629, 2014.
29
Signet and Zale Defs.‘ Opening Br. 32 (quoting KKR, 101 A.3d at 1003).
30
KKR, 101 A.3d at 1001.
31
965 A.2d 695 (Del. 2009).
19
from entire fairness to business judgment rule] articulated
in Wheelabrator, Harbor Finance and other decisions
remains good law when the stockholder vote is statutorily
required as opposed to a purely voluntary stockholder vote.
. . . I do not read Gantler to have altered the legal effect of a
stockholder vote when it is statutorily required. Instead, I read
it simply to clarify the meaning of the term ―ratification.‖
. . . Justice Jacobs, writing for the Court, quoted at length
from his Court of Chancery decision in Wheelabrator to
explain that the ―scope and effect of the common law doctrine
of shareholder ratification is unclear.‖ He then wrote that,
―[t]o restore coherence and clarity to this area of our law, we
hold that the scope of the shareholder ratification doctrine
must be limited to its so-called ‗classic‘ form; that is, to
circumstances where a fully informed shareholder vote
approves director action that does not legally require
shareholder approval in order to become legally
effective.‖ The Court further explained that ―the only director
action or conduct that can be ratified is that which the
shareholders are specifically asked to approve.‖
The Supreme Court in Gantler did not expressly address the
legal effect of a fully informed stockholder vote when the
vote is statutorily required. Having determined that the proxy
disclosures were materially misleading, the Supreme Court
did not need to reach that question.
. . . I read the Supreme Court‘s discussion of the doctrine of
ratification in Gantler to have been intended simply to clarify
that the term ―ratification‖ applies only to a voluntary
stockholder vote.32
Vice Chancellor Laster has advocated the same position as was adopted in KKR, using
similar reasoning, in the context of cases involving enhanced scrutiny, including Revlon
32
KKR, 101 A.3d at 1001-03.
20
cases.33 The KKR decision has been appealed, and the Supreme Court heard argument on
September 16.
a. Was there a majority disinterested and fully informed vote of stockholders in
this case?
In order for the standard of review in this case to be shifted from enhanced
scrutiny to the business judgment rule under KKR, the Merger must have been approved
by a disinterested majority of Zale‘s stockholders in a fully informed vote.
i. A disinterested majority of Zale’s stockholders approved the Merger
In assessing whether a majority of Zale‘s stockholders were disinterested, I note
that Golden Gate—the owner of 23.3% of Zale‘s common stock—is the only significant
stockholder as to whom the Complaint alleges any conflict. Plaintiffs dedicate
considerable attention to their argument that Golden Gate received unique, material
benefits in the form of liquidity. They also point to the loan prepayment fee as a source
of conflict. Neither alleged conflict is controversial, from my perspective.
Although Plaintiffs allege that Golden Gate stood to earn $3.2 million on the
prepayment fee on their $150 million loan to Zale,34 they fail to make any allegations as
to whether $3.2 million is material to Golden Gate.35 That conclusion is not obvious in
the case of a private equity firm like Golden Gate, especially when its 23.3% ownership
33
J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40
WM. MITCHELL L. REV. 1443 (2014).
34
Compl. ¶ 48 n.1.
35
See infra note 68 and accompanying text.
21
stake in Zale had a value of approximately $225 million at the Merger Price of $21 per
share. Further, to the extent that Plaintiffs are asserting that Golden Gate had a unique
need for liquidity such that it would benefit from receiving the Merger consideration
differently than Zale‘s other stockholders, I do not find that argument persuasive. The
Complaint only makes conclusory allegations regarding Golden Gate‘s desire to exit its
position in Zale, relying primarily on the Secondary Offering as evidence of such.
Plaintiffs never allege why Golden Gate needed to liquidate its shares or that it had an
exigent need for liquidity.
Although there are cases in which a plaintiff‘s allegations of a large stockholder‘s
need for liquidity have been sufficient to defeat a motion to dismiss, the plaintiffs in those
cases alleged much more specific liquidity needs than a simple desire to ―sell quickly.‖36
Those cases are further distinguishable because the stockholder allegedly in need of
liquidity here, Golden Gate, had another avenue, aside from the Merger, to satisfy that
36
See McMullin v. Beran, 765 A.2d 910, 921 (Del. 2000) (―[Plaintiff‘s complaint]
alleges that [the controlling stockholder] initiated and timed the Transaction to
benefit itself because [the controlling stockholder] needed cash to fund [a] $3.3
billion cash acquisition.‖); In re Answers Corp. S’holder Litig., 2012 WL
1253072, at *4 (Del. Ch. Apr. 11, 2012) (―[A]ccording to the Plaintiffs . . . the
only way that [the stockholder seeking liquidity could monetize its investment]
was if [the company] engaged in a change of control transaction; [the company‘s]
common stock was so thinly traded that [the stockholder] could not sell its entire
30% equity interest in the public market.‖); N.J. Carpenters Pension Fund v.
infoGROUP, Inc., 2011 WL 4825888, at *9 (Del. Ch. Oct. 6, 2011) (―As alleged
by the Plaintiff, [the interested stockholder‘s] need for liquidity arose from a
confluence of factors‖ including a need for ―$12 million under the SEC and
derivative settlements, and over $13 million related to loans used to
buy [company] shares.‖).
22
need: the Secondary Offering. Because the Complaint fails to allege that Golden Gate or
any other significant stockholder was interested as to the Merger, I conclude that a
disinterested majority of Zale‘s stockholders—53.1%—approved the Merger.
ii. The vote on the Merger was fully informed
Regarding whether the vote on the Merger was fully informed, Plaintiffs allege
that the Director Defendants omitted material information from the Proxy. In particular,
Plaintiffs argue that the Director Defendants ―breached their duty to disclose: (i) that the
Board‘s own financial advisor determined that the Company was more valuable as a
standalone entity; and (ii) material information concerning the Company‘s financial
projections.‖37 Plaintiffs‘ first argument refers to the fact that the Summary Valuation of
Strategic Alternatives that Merrill Lynch presented to the Board on November 18, 2013
was not included in the Proxy. Their second argument pertains to the allegations in the
Complaint that the Board mischaracterized Zale‘s management‘s Business Plan Case
Projections in the Proxy.
I first address Defendants‘ argument that Plaintiffs‘ duty of disclosure claims fail
as a matter of law. Defendants assert that because ―Plaintiffs have rehashed their prior
allegations‖ made on their motion for a preliminary injunction and because I rejected
those allegations when I denied the preliminary injunction, Plaintiffs are barred from
prosecuting those claims further at this stage of the litigation.38 I disagree. Because
37
Pls.‘ Answer Br. 49-50.
38
Signet and Zale Defs.‘ Opening Br. 27-29.
23
―[t]he pleadings stage test standard is lower than the merits-focused element of the
preliminary injunction standard,‖39 Plaintiffs are not barred as a matter of law from
pursuing claims now that failed at the preliminary injunction stage. That said, I conclude
that Plaintiffs still have not pled successfully any of their duty of disclosure claims such
that I could conclude reasonably that the stockholder vote on the Merger was not fully
informed.
Although those claims are not barred as a matter of law by my ruling at the
preliminary injunction stage, I conclude, using the same reasoning I did at that stage and
considering both the Complaint and the Proxy, that Plaintiffs fail to allege adequately that
the exclusion of the Summary Valuation of Strategic Alternatives from the Proxy and the
Board‘s alleged mischaracterizations of the Business Plan Case Projections were
material. In both cases, significant information was disclosed in the Proxy. Thus, I do
not find it reasonably conceivable that the Proxy was materially deficient or that Zale‘s
stockholder vote was not fully informed.
b. Effect of KKR
Under KKR, the legal effect of a fully informed vote by a majority of Zale‘s
disinterested stockholders is that the ―the business judgment rule applies and insulates the
[Merger] from all attacks other than on the grounds of waste.‖ In this case, for reasons
explained below, I would follow the reasoning articulated in KKR if it permitted a review
39
OTK Assocs., LLC v. Friedman, 85 A.3d 696, 725 (Del. Ch. 2014).
24
of the Merger under the business judgment rule that included an analysis of whether the
Director Defendants breached their duty of care by committing gross negligence.
For purposes of Defendants‘ motion to dismiss, I would reach the same conclusion
as to all Defendants, except Merrill Lynch, whether I followed the holding in KKR and
held that the fully informed vote of a disinterested majority of the Zale stockholders in
favor of the Merger had the effect of subjecting Plaintiffs‘ claims to business judgment
rule review or determined that Gantler required continued use of enhanced scrutiny in
these circumstances. In the latter case, however, where no cleansing effect is given to the
stockholder vote, I would find that Plaintiffs conceivably could prove their claim that
Merrill Lynch is liable for aiding and abetting a breach of the Director Defendants‘ duty
of care.
There appear to be good arguments both for and against the approach adopted in
KKR. As I pointed out above, Chancellor Bouchard and Vice Chancellor Laster make a
strong case for interpreting Gantler simply as clarifying the definition of ―ratification.‖
On the other hand, opponents of that view contend that ―[p]ermitting the vote of a
majority of stockholders on a merger to remove from judicial scrutiny unilateral Board
action in a contest for corporate control would frustrate the purposes
underlying Revlon”40 and would disturb the settled understanding of the Supreme Court‘s
40
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 68 (Del. 1995). But see In
re Lukens Inc. S’holders Litig., 757 A.2d 720, 736-38 (Del. Ch. 1999) (holding
that business judgment rule applies rather than Revlon enhanced scrutiny when a
merger is approved by a fully informed majority of disinterested stockholders),
aff’d sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000).
25
decision in Gantler.41 Because this area of Delaware law is unsettled, I will conduct my
analysis under a more strict reading of Gantler. Until the Supreme Court signals
otherwise, I interpret Gantler as holding that an enhanced standard of review cannot be
pared down to the business judgment rule as a result of a statutorily required stockholder
vote, even one rendered by a fully informed, disinterested majority of stockholders. As a
result, I conclude that where, as here, the merger consideration paid to the target
company‘s stockholders is cash, Revlon enhanced scrutiny applies, even after the merger
has been approved by a fully informed, disinterested majority of stockholders. 42 Thus,
after describing the legal standard applicable in a Revlon case, I effectively apply that
standard to each of Plaintiffs‘ claims against the Director Defendants in the context of
concluding that each claim must be dismissed under Rule 12(b)(6).
c. Revlon standard of review
Corporate directors have ―an unyielding fiduciary duty to protect the interests of
the corporation and to act in the best interests of its shareholders.‖ 43 When directors have
commenced a transaction process that will result in a change of control, a reviewing court
will examine whether the board has reasonably performed its fiduciary duties ―in the
41
See, e.g., Calma on Behalf of Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 586
(Del. Ch. 2015); Gentili v. L.O.M. Med. Int’l, Inc., 2012 WL 3552685, at *3 (Del.
Ch. Aug. 17, 2012); see also Santa Fe, 669 A.2d at 68.
42
See TW Servs., Inc. v. SWT Acq. Corp., 1989 WL 20290, at *7 (Del. Ch.
1989) (Allen, C.).
43
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 360 (Del. 1993) (citations
omitted).
26
service of a specific objective: maximizing the sale price of the enterprise.‖44 So-called
Revlon duties are only specific applications of directors‘ traditional fiduciary duties of
care and loyalty in the context of control transactions.45
While the intermediate level of Revlon enhanced scrutiny is ―more exacting than
the deferential rationality standard applicable to run-of-the-mill decisions governed by
the business judgment rule, at bottom Revlon is a test of reasonableness; directors are
generally free to select the path to value maximization, so long as they choose a
reasonable route to get there.‖46 In that regard, the questions before me are: (1) whether
the decision making process employed by the Director Defendants, including the
information on which they based their decisions, was adequate; and (2) whether the
Director Defendants‘ actions were reasonable in light of the circumstances then
existing.47 Thus, enhanced scrutiny under Revlon has both subjective and objective
components. Even though there is an objective reasonableness evaluation, however,
44
Malpiede v. Townson, 780 A.2d 1075, 1083 (Del. 2001) (citing, among other
cases, Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173, 182–83
(Del. 1986)).
45
Wayne Cty. Empls.’ Ret. Sys. v. Corti, 2009 WL 2219260, at *10 (Del. Ch. July
24, 2009) (citing McMillan v. Intercargo Corp., 768 A.2d 492, 502 (Del. Ch.
2000)), aff’d, 966 A.2d 795 (Del. 2010) (TABLE).
46
In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 595-96 (Del. Ch. 2010).
47
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 45 (Del. 1994).
27
Revlon ―is not a license for law-trained courts to second-guess reasonable, but debatable,
tactical choices that directors have made in good faith.‖48
d. Plaintiffs’ Revlon claims
At a practical level in the circumstances of this case, there is a great deal of
overlap between the analysis of the Director Defendants‘ conduct in terms, first, of their
Revlon duties and, second, of their potential rights to exculpation from a damages claim
under Zale‘s charter. Even assuming that there was a problem with the Board‘s Merger
process or actions under the Revlon standard of review, because Zale‘s charter contains
an exculpatory provision pursuant to 8 Del. C. § 102(b)(7) (a ―102(b)(7) provision‖),
there would be no basis to find the Director Defendants personally liable here absent a
viable claim that they breached their duty of loyalty. In evaluating whether such a claim
exists in determining the applicability of Zale‘s 102(b)(7) provision, however, I must
consider many of the same facts that would be relevant in a reasonableness review under
Revlon. Accordingly, I effectively assume the existence of a potential problem under
Revlon and otherwise confine my analysis of the facts relevant to that issue to the
discussion below regarding the applicability of Zale‘s 102(b)(7) provision.
e. The legal effect of Zale’s 102(b)(7) provision
If a corporation‘s charter contains a 102(b)(7) provision barring claims for
monetary liability against directors for breaches of the duty of care, the complaint must
48
See In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813, 830 (Del. Ch. 2011).
28
state a nonexculpated claim—i.e., a claim predicated on a breach of the directors‘ duty of
loyalty, including bad faith conduct.49
A factual showing that, for example, a majority of the board of directors was not
both disinterested and independent would provide sufficient support for a claim for
breach of the duty of loyalty to survive a motion to dismiss.50 ―A director is considered
interested where he or she will receive a personal financial benefit from a transaction that
is not equally shared by the stockholders.‖51 ―Independence means that a director‘s
decision is based on the corporate merits of the subject before the board rather than
extraneous considerations or influences,‖52 such as where one director effectively
controls another.53 Moreover, as to any Director Defendant, the disqualifying self-
interest or lack of independence must be material, i.e., ―reasonably likely to affect the
decision-making process of a reasonable person . . . .‖54
49
See Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239–40 (Del. 2009); Corti, 2009
WL 2219260, at *10.
50
In re NYMEX S’holder Litig., 2009 WL 3206051, at *6 (Del. Ch. Sept. 30, 2009)
(citing In re Lukens S’holders Litig., 757 A .2d 720, 728 (Del. Ch. 1999)).
51
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993) (citing Aronson v. Lewis, 473
A.2d 805, 812 (Del. 1984)).
52
Aronson, 473 A.2d at 816.
53
Orman v. Cullman, 794 A.2d 5, 24 (Del. Ch. 2002).
54
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993).
29
Well-pled allegations that the board did not act in good faith also would state a
claim for breach of the duty of loyalty sufficient to survive a motion to dismiss. 55 In
general, ―bad faith will be found if a ‗fiduciary intentionally fails to act in the face of a
known duty to act, demonstrating a conscious disregard for his duties.‘‖56 Alternatively,
notwithstanding approval by a majority of disinterested and independent directors, a
claim for breach of duty may exist ―where the decision under attack is so far beyond the
bounds of reasonable judgment that it seems essentially inexplicable on any ground other
than bad faith.‖57
Because Zale adopted a 102(b)(7) provision,58 Plaintiffs‘ monetary claims for
breach of the duty of care against the Director Defendants must be dismissed. Plaintiffs‘
fiduciary duty claims against the Director Defendants can only circumvent Zale‘s
102(b)(7) provision and survive a motion to dismiss if the Complaint alleges facts
sufficient to support a reasonable inference of a breach of the duty of loyalty, including
that the Director Defendants acted in bad faith. I still will analyze whether the Director
Defendants breached their duty of care, however, because such a breach could serve as a
55
In re NYMEX S’holder Litig., 2009 WL 3206051, at *6 (footnote omitted).
56
Lyondell Chem. Co., 970 A.2d at 243 (quoting In re Walt Disney Co. Deriv. Litig.,
906 A.2d 27, 67 (Del. 2006)).
57
Crescent/Mach I P’rs, L.P., 846 A.2d at 981 (quoting Parnes v. Bally Entm’t
Corp., 722 A.2d 1243, 1247 (Del. 1999)).
58
Aronstam Aff., supra note 3, Ex. D, art. Seventh, subsec. a.
30
predicate for liability under the aiding and abetting claims against Signet and Merrill
Lynch.
f. Plaintiffs fail to allege that the Board was conflicted regarding the Merger
As an initial matter, Plaintiffs‘ failure to allege any facts from which I reasonably
could infer that a majority of the Board was either conflicted regarding the Merger or
dominated by other, conflicted directors severely undermines Plaintiffs‘ claims that the
Director Defendants breached their duty of loyalty.59 Although the Complaint alleges
that Attenborough, Olshansky, Killion, and Burman were conflicted, it is silent as to the
other five directors. As stated supra, a director is conflicted regarding a transaction
―where he or she will receive a personal financial benefit from a transaction that is not
equally shared by the stockholders.‖60 According to Plaintiffs, Golden Gate stood to
receive material benefits from the Merger, in the form of needed liquidity and a loan
prepayment fee, that the other stockholders would not receive. Burman and Killion both
had restricted stock rights that would vest early as a result of the Merger. Killion, the
only Zale employee on the Board, was promised future employment by Signet. Yet, even
assuming that those are all unique, material benefits such that I can conclude that those
four directors are conflicted, the Complaint does not allege anything regarding
interestedness or lack of independence on the part of Defendants Braverman, Dyer,
59
Absent sufficient allegations regarding the Board‘s disinterestedness and
independence, Plaintiffs can only plead a breach of the duty of loyalty by
successfully alleging that the Director Defendants acted in bad faith. I take up
those claims in Section II.B.1.g. infra.
60
Rales, 634 A.2d at 936.
31
Gilman, Lowe, or Pritchard. Thus, I find that a majority of the Board was independent
and disinterested.
The Complaint also fails to present any facts that would support a reasonable
inference that one or more of the four allegedly conflicted directors dominated the other
five directors.61 At most, Plaintiffs contend that the conflicted directors controlled the
sale process because: (1) Attenborough and Olshansky recruited Burman to serve as
Zale‘s chairman; (2) Signet initially approached Zale about a merger through Olshansky;
and (3) Olshansky and Burman served on the Negotiating Committee. As stated in In re
OPENLANE, Inc. Shareholder Litigation, however, even if a conflicted director
participates in a sale process, that process is not tainted if the Board is aware of such a
conflict and ―fully committed to the [sale] process.‖62 Plaintiffs do not allege that the
Board ever delegated any of its ultimate authority to the Negotiating Committee, but they
do admit that the Board knew about all of the relevant conflicts, as they were discussed
openly during the Board‘s meeting on November 18, 2013. Thus, I find that the majority
independent, disinterested Board was fully informed and retained final say on all major
aspects of the sale process despite the participation of potentially conflicted directors.
Finally, I am skeptical as to whether any of the conflicts that Plaintiffs allege
tainted Attenborough, Olshansky, and Burman even rise to such a level that they should
61
See In re Alloy, Inc. S’holder Litig., 2011 WL 4863716, at *8-9 (Del. Ch. Oct. 13,
2011) (―Absent specific allegations of actual control, the facts Plaintiffs allege
cannot support a reasonable inference that [the Company‘s] seven outside
directors lacked independence.‖).
62
2011 WL 4599662, at *5 (Del. Ch. Sept. 30, 2011).
32
be considered interested or not independent under Delaware law.63 As I concluded supra,
the Complaint fails to allege adequately that Golden Gate was interested as to the Merger.
Thus, even assuming that Attenborough and Olshansky were beholden to Golden Gate, as
its employees and representatives on the Board, rather than to Zale‘s stockholders as a
whole, Plaintiffs have not alleged sufficient facts regarding Golden Gate‘s conflict to
support a reasonable inference that Attenborough and Olshansky are not disinterested and
independent. On the contrary, because of its significant stake in Zale, Golden Gate likely
had as much of an incentive to maximize the value of its investment as any stockholder,
rather than take a price cut for the sake of liquidity.64
Regarding the early vesting of Burman‘s restricted common stock, I note that, in a
related context, this Court has observed that ―the accelerating of stock options is a routine
aspect of merger agreements.‖65 Although Plaintiffs argue that ―the accelerated vesting
63
Given the Complaint‘s allegation that Killion stood to earn nearly twice as much
as the head of the Zale division within Signet as he did as Zale‘s CEO, Compl.
¶ 11, I conclude that it is reasonably conceivable that he was interested regarding
the Merger. Even though the Complaint does not specifically allege that this
additional salary was material to Killion, I find it at least conceivable that the
doubling of an individual‘s salary is ―reasonably likely to affect the decision-
making process of a reasonable person.‖ In re Alloy, Inc. S’holder Litig., 2011
WL 4863716, at *7 (quoting Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363
(Del. 1993).
64
See C & J Energy Servs. Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’
Ret. Trust, 107 A.3d 1049, 1069 n.92 (Del. 2014) (quoting Iroquois Master Fund
Ltd. v. Answers Corp., 2014 WL 7010777, at *1 n.1 (Del. Dec. 4, 2014)
(ORDER)); In re Morton’s Rest., Inc. S’holders Litig., 74 A.3d 656, 666-69 (Del.
Ch. 2013).
65
OPENLANE, 2011 WL 4599662, at *5.
33
of options and restricted stock [can create] a clear conflict‖66 between directors and
stockholders who are opposed to a merger, the case they cite for that proposition, Globis
Partners, L.P. v. Plumtree Software, Inc., also states that ―[t]he accelerated vesting of
options does not create a conflict of interest because the interests of the shareholders and
directors are aligned in obtaining the highest price.‖67 As Globis Partners and other
relevant cases establish, an essential consideration in any conflict inquiry is the relative
materiality of the alleged conflict.68 And, as to each of Defendants Attenborough,
Olshansky, and Burman‘s, the Complaint contains no allegations regarding the relative
materiality of those unique benefits to those Director Defendants. As such, I have no
reference point by which to measure each conflict‘s comparative impact on the Director
Defendants‘ impartiality.
In sum, Plaintiffs do not allege any conflicts whatsoever regarding five of the nine
Director Defendants. Plaintiffs do not allege facts that would allow me to infer that any
of the four allegedly conflicted Director Defendants dominated the other five. And, with
66
Pls.‘ Answer Br. 42.
67
2007 WL 4292024, at *8 (Del. Ch. Nov. 30, 2007).
68
See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 650 (Del. 2014) (―[T]he
plaintiffs have ignored a key teaching of our Supreme Court, requiring a showing
that a specific director‘s independence is compromised by factors material to her.
As to each of the specific directors the plaintiffs challenge, the plaintiffs fail to
proffer any real evidence of their economic circumstances.‖ (quoting In re MFW
S’holders Litig., 67 A.3d 496 (Del. Ch. 2013))); Cede & Co., 634 A.2d at 362-63(affirming that a stockholder must demonstrate the materiality of a self-interest to
a director‘s independence); Globis P’rs, 2007 WL 4292024, at *9 (noting that the
plaintiff‘s claim that a director acted out of self-interest must fail because no facts
regarding the relative materiality of the conflict were pled).
34
the possible exception of Killion, I am skeptical whether Plaintiffs have demonstrated
that the four Director Defendants that Plaintiffs claim are not disinterested and
independent have conflicts rising to a level that would disqualify them under Delaware
law. Because the Complaint does not allege sufficient facts for me to infer that a
majority of the Director Defendants were not disinterested and independent or were
dominated by conflicted Director Defendants, I conclude that Plaintiffs have failed to
state a claim for breach of the duty of loyalty,69 unless they have alleged sufficiently that
the Director Defendants acted in bad faith.
g. Plaintiffs fail to allege that the Director Defendants acted in bad faith during
the Merger process
In addition to attacking the disinterestedness and independence of the Director
Defendants, Plaintiffs assert a variety of Revlon claims targeted at the allegedly flawed
sale process. To prevail on those claims for damages against the Director Defendants,
however, Plaintiffs must demonstrate not just that the Director Defendants breached their
duty of care, but that their actions rose to the level of bad faith. In the Revlon context, as
stated above, bad faith can be demonstrated by a director‘s ―conscious disregard for his
duties‖70 or a decision by a majority disinterested, independent board that ―is so far
beyond the bounds of reasonable judgment that it seems essentially inexplicable on any
69
NYMEX, 2009 WL 3206051, at *6 (―In order to state a claim for breach of the duty
of loyalty, the Plaintiffs must plead facts from which this Court can reasonably
infer that either: ‗a majority of the Director Defendants either stood on both sides
of the merger or were dominated and controlled by someone who did . . . .‘‖).
70
Lyondell Chem. Co., 970 A.2d at 243.
35
ground other than bad faith.‖71 I address next Plaintiffs‘ primary criticisms of the Merger
and conclude that none of the alleged actions taken by the Director Defendants are
sufficient to support a claim of bad faith.
i. The Board undervalued Zale’s stock
Plaintiffs‘ first contention is that ―Zale was undervalued at the time the Merger
was announced due to the overhang created by the [Preliminary] Registration
Statement.‖72 Because this claim is inextricably linked to Plaintiffs‘ argument regarding
Golden Gate‘s desire for liquidity, I largely will address it in that context infra. I pause
here briefly to comment on Plaintiffs‘ assertion that the Director Defendants, armed with
the knowledge that Zale was undervalued due to the Preliminary Registration Statement,
―received three offers from Signet, but did not counter a single one.‖ 73 That statement is
puzzling because, in the next sentence of their brief, Plaintiffs admit that ―the Board
determined after the second offer [of $20.50 per share, partly in Signet stock] that it
would allow Signet to engage in due diligence and then determined to close the
negotiations if Signet would increase its offer to $21.00.‖74 Because the Board countered
one of Signet‘s offers by requesting an additional $0.50 per share in consideration, I find
71
Crescent/Mach I P’rs, L.P, 846 A.2d at 981.
72
Pls.‘ Answer Br. 37.
73
Id. at 38.
74
Id.
36
unpersuasive Plaintiffs‘ contention that the Director Defendants acted in bad faith in this
regard.
ii. The Board favored Signet in the Merger process
Next, Plaintiffs argue that ―the Individual [Directors] catered the process to Signet
to ensure that they received significant personal benefits.‖75 In particular, Plaintiffs point
out that the Board never performed a market check, did not adequately consider strategic
alternatives, and rebuffed an unsolicited indication of interest from Gitanjali. Plaintiffs
contend that the Board avoided a market check in favor of a deal that would result in
―significant personal benefits.‖ But, the Complaint‘s allegations do not support this
theory because the only Signet-specific benefit that Plaintiffs claim the Director
Defendants received was Killion‘s promise of future employment. Other than that, every
benefit that Plaintiffs allege the Director Defendants were seeking would have accrued in
the event of any merger, not just a merger with Signet.
Further, because Plaintiffs‘ allegations of self-interested motivations fail, they
must allege that the Director Defendants consciously disregarded their duties by not
conducting a market check.76 That was not the case here. Over the course of at least
75
Id. at 44.
76
As Defendants point out in their brief, Plaintiffs incorrectly quote this Court‘s
opinion in Ryan v. Lyondell Chem. Co., 2008 WL 2923427, at *19 (Del. Ch. July
29, 2008), rev’d, 970 A.2d 235 (Del. 2009), for the proposition that directors
―must confirm that they have obtained the best available price either by
conducting an auction, by conducting a market check, or by demonstrating an
impeccable knowledge of the market.‖ Pls.‘ Answer Br. 44. In fact, that portion
of Lyondell was overruled by the Delaware Supreme Court, which clarified that
37
three meetings, the Board discussed the possibility of performing a market check.77 After
considering this possibility, the Board decided, in consultation with Merrill Lynch and
Cravath on February 6, 2014, not to perform a market check due to the risk of leaks
regarding their negotiations with Signet. The Board weighed the risks that such leaks
would compromise their deal with Signet against the improbability of a more favorable
offer arising.78 Because the Board specifically considered pursuing a market check and
rejected that option based on their assessment of likely alternative opportunities, it cannot
be said that they acted in bad faith.
In addition to arguing that the Board inadequately considered transactions with
other potential buyers, Plaintiffs also claim that the Board improperly was committed to
engaging in a merger rather than having Zale continue as a standalone company. This
argument appears to rest on the merger-related benefits that Plaintiffs allege the
purportedly interested and non-independent Director Defendants sought. Even if I had
not already concluded that the majority of the Director Defendants‘ interests were aligned
with the rest of Zale‘s stockholders, Plaintiffs‘ claims that the Director Defendants acted
in bad faith in this regard still would fail. As admitted in the Complaint, Merrill Lynch
bad faith only can be found in the Revlon context if disinterested, independent
―directors utterly failed to attempt to obtain the best sale price.‖ Lyondell, 970
A.2d at 244.
77
According to the Proxy, the Board discussed the possibility of alternative
transactions with other strategic buyers during meetings on December 5, 2013,
January 23, 2014, and February 6, 2014. See Aronstam Aff., supra note 3, Ex. A
[hereinafter Proxy], at 26-28.
78
See Proxy, supra note 77, at 28.
38
presented the Summary Valuation of Strategic Alternatives to the Board on November
18, 2013.79 This presentation included six different alternatives, including maintaining
the status quo—i.e., remaining a standalone company rather than entering into a
merger—as well as Zale‘s projected valuation ranges under both a base case and an
upside case for each alternative. Thus, Plaintiffs‘ claim that the Director Defendants
acted in bad faith by failing to consider adequately non-merger strategic alternatives is
contradicted by their own Complaint.
Regarding the indication of interest from Gitanjali, the Complaint itself states that
the Board, rather than ―rebuffing‖ the indication as Plaintiffs have asserted throughout
their brief,80 simply ―determined that it would not allow Gitanjali to proceed with
exploratory due diligence without an initial indication of price and an indication of
available financing.‖81 This does not support Plaintiffs‘ charge that the Board ―tilted the
process in favor of Signet.‖ Rather, because the Board had received an initial price, as
well as a second revised price, from Signet before it allowed them to conduct due
diligence, Plaintiffs allegations suggest no more than that the Board required a
comparable indication of interest from Gitanjali.
79
Compl. ¶¶ 63-64.
80
Pls.‘ Answer Br. 18, 26, 43, 44.
81
Compl. ¶ 71.
39
iii. The Board agreed to an unreasonable Merger Price
Plaintiffs expend much energy attacking the reasonableness of the Merger Price.
For this challenge to support a claim that the Director Defendants acted in bad faith,
however, Plaintiffs must demonstrate that the Merger Price ―is so far beyond the bounds
of reasonable judgment that it seems essentially inexplicable on any ground other than
bad faith.‖82 Plaintiffs rely on a number of their allegations to support this argument,
including: (1) TIG‘s, GAMCO‘s, and Glass Lewis‘s oppositions to the Merger; (2) the
valuation ranges in Merrill Lynch‘s Summary Valuation of Strategic Alternatives; (3) and
Zale‘s management‘s Business Plan Case Projections. None of Plaintiffs‘ arguments are
convincing.
First, to the extent that TIG‘s, GAMCO‘s, and Glass Lewis‘s oppositions to the
Merger are evidence that the Merger Price was inadequate, Golden Gate‘s and ISS‘s
support for the Merger are evidence of the Merger‘s fairness. Although I must draw all
inferences in favor of Plaintiffs on Defendants‘ motion to dismiss, those inferences still
must be reasonable. Because a large stockholder and an independent proxy advisory firm
supported the Merger Price, I do not consider it reasonably conceivable that the
opposition of the firms on which Plaintiffs rely would make that price ―essentially
inexplicable on any ground other than bad faith.‖83
82
Crescent/Mach I P’rs, L.P., 846 A.2d at 981 (quoting Parnes, 722 A.2d at 1247).
83
Id.40
Second, although Plaintiffs point out that each of the six alternatives in the
Summary Valuation of Strategic Alternatives had a maximum valuation, in the upside
case scenario, that exceeded the Merger Price, they ignore the fact that $21 per share
Merger Price is still within the valuation range for each of those alternatives. In addition,
$21 per share is higher than the maximum valuation for each of the six strategic
alternatives under the base case scenario. Thus, the Summary Valuation of Strategic
Alternatives that Plaintiffs emphasize indicates that the Merger Price can be explained on
grounds other than bad faith.
Finally, the Complaint alleges that the ―day before the Merger Agreement was
announced . . . Zale was trading at an EV/EBITDA of 9.1x‖ and that ―with the Business
Plan Case Projections for fiscal year 2016 implies a $31.00 per share price.‖ 84 As
pointed out in the Complaint, the Board disputed the reliability of these projections
during their debate with TIG regarding the Merger.85 Because I must draw all reasonable
inferences in Plaintiffs‘ favor, however, I infer that the Board originally did consider the
projections to be reliable. That said, Plaintiffs do not dispute Defendants‘ argument that
all projections inherently contain execution risk. Further, the Business Plan Case
Projections on which Plaintiffs rely for the $31 implied price also formed the basis of the
84
Comp. ¶ 107.
85
The Complaint alleges that, during their debate with TIG, the Director Defendants
attempted to recast the Business Plan Case Projections as ―aggressive‖ and
―stretch projections‖ that were meant to ―challenge management,‖ while they
originally had described them as their ―best estimates as to the future financial
performance of Zale.‖ Id. ¶ 111.
41
upside case valuation ranges in the Summary Valuation of Strategic Alternatives within
which, as stated earlier, the Merger Price fell. Thus, despite Plaintiffs‘ numerous
allegations regarding the inadequacy of the Merger Price, I conclude that those
allegations are not sufficient to support an inference that it is so unreasonable as to
warrant a finding of bad faith.
iv. The Board agreed to unreasonable deal protections
Plaintiffs further contend that the Board agreed to impermissible deal protections
in bad faith. Specifically, Plaintiffs challenge the Board‘s decision to include ―a no
solicitation provision, matching rights, and a termination fee of $26.7 million‖86 and
point out that Golden Gate, a 23.3% stockholder of Zale, signed an agreement binding it
to vote in favor of the Merger. Hence, less than 27% of Zale‘s remaining stockholders
needed to vote in favor of the Merger for it to be approved. Based on the deal protections
and the voting agreement together, Plaintiffs assert that they ―have more than adequately
pleaded that the Board agreed to lock up the Merger on terms favorable to Signet that all
but guaranteed Zale‘s stockholders would not receive the best price possible for their
shares.‖87 As I concluded supra, however, Plaintiffs have not adequately pled that
Golden Gate was conflicted regarding the Merger.88 Therefore, Golden Gate‘s interests
presumably were aligned with all of the other Zale stockholders. As a result, I do not
86
Pls.‘ Answer Br. 47.
87
Id. at 48.
88
See supra text accompanying notes 34-36.
42
consider Golden Gate‘s voting agreement with Signet material for purposes of evaluating
the deal protections. That leaves the no-solicitation provision, the matching rights, and
the termination fee of $26.7 million, or approximately 2.75% of Zale‘s equity value.89 A
number of Delaware cases, however, have rejected similar, and even more stringent,
collections of deal protection measures as a basis for a breach of fiduciary duty claim.90
Although Plaintiffs attempt to distinguish these cases on the grounds that they involved
target companies that were ―in play for several months,‖91 they ignore the fact that the
Zale Board was open to external offers prior to entering into the Merger Agreement as
well, as demonstrated by their preliminary discussions with Gitanjali in January 2014.
Further, the Board‘s successful inclusion of both a fiduciary out provision and a reverse
termination fee twice as large as the termination fee92—as well as a three-month period
between signing and closing during which time alternative buyers could have come
89
Proxy, supra note 77, at 32.
90
See, e.g., Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *8-9 (Del. Ch. June
30, 2014) (holding that the target board did not act in bad faith by agreeing to ―(1)
a no-solicitation provision; (2) a standstill provision; (3) a change in
recommendation provision; (4) information rights for Cypress; and (5) a $5
million termination fee [that equaled 4.5% of the company‘s equity value‖); In re
BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *13 (Del. Ch. Jan.
31, 2013) (holding that the target board did not act in bad faith by agreeing to ―a
‗no-shop‘ provision, matching and information rights, a termination fee
representing 3.1% of the deal value, and a ‗force-the-vote‘ provision‖).
91
Compl. ¶ 48 n.22.
92
Proxy, supra note 77, at 32.
43
forward—are indicative of good faith negotiating on behalf of Zale‘s stockholders rather
than bad faith.93
v. The Board relied on a conflicted financial advisor
As to Merrill Lynch, Plaintiffs argue that the Board acted in bad faith by relying
on a conflicted financial advisor‘s fairness opinion. The main source of Plaintiffs‘
criticism is Rose‘s involvement as a senior member of both the team that pitched a Zale
merger to Signet in October 2013 and the team that later advised Zale on the Merger.
According to Plaintiffs, because Merrill Lynch advised Signet‘s management that they
should purchase Zale at a price between $17 and $21 per share, Merrill Lynch could not
credibly have asked Signet to pay more than $21, which, coincidentally, ended up being
the Merger Price. Although they admit that the Director Defendants did not learn of
Merrill Lynch‘s conflict until after the Merger was announced, Plaintiffs contend that the
Director Defendants acted in bad faith by not ―seek[ing] the opinion of a non-conflicted
financial advisor or to reduce Merrill Lynch‘s fees‖ once they found out about the
conflict.94 While the Director Defendants‘ response to Merrill Lynch‘s conflict, as well
as their failure to detect the conflict sooner, might constitute a breach of the duty of
care,95 I conclude that Plaintiffs have not adequately pled that the Director Defendants
93
C & J Energy Servs. Inc., 107 A.3d at 1066 (―Revlon requires us to examine
whether a board‘s overall course of action was reasonable as a good faith attempt
to secure the highest value reasonably attainable.‖).
94
Pls.‘ Answer Br. 47.
95
I consider this issue in Section II.B.1.h infra.
44
acted in bad faith. Initially, the Board determined to consider engaging Merrill Lynch as
a financial advisor ―unless a conflict or other consideration affected the representation.‖96
The Board also relied on Merrill Lynch‘s representation that it had ―limited prior
relationships and no conflicts‖ when they decided to hire them. Upon learning of Merrill
Lynch‘s earlier presentation to Signet, the Board held three meetings, on March 25,
March 30, and April 2, 2014, to review the situation and ultimately decided that ―Merrill
Lynch‘s presentation to Signet did not impact the Board‘s determination and
recommendation regarding the merger, the merger agreement and the transactions
contemplated thereby.‖97 Making an inquiry initially to discover a financial advisor‘s
conflicts, and later, upon being advised of a possible conflict, considering the
implications of and remedies for that conflict as the Director Defendants did here, hardly
constitutes the conscious disregard of the directors‘ duties required to demonstrate bad
faith in the Revlon context.
vi. The Board catered to Golden Gate’s need for liquidity
Finally, I address Plaintiffs‘ somewhat speculative ―liquidity‖ theory. First, they
contend that Golden Gate was in need of liquidity. Next, rather than simply selling its
shares in the Secondary Offering, as Golden Gate indicated was its intention via the
Preliminary Registration Statement, Plaintiffs appear to hypothesize that Olshansky and
Attenborough recruited Burman, Signet‘s former CEO, to join Zale in May 2013 for the
96
Compl. ¶ 62.
97
Proxy, supra note 77, at 30.
45
purpose of eventually effectuating a sale of Zale to Signet. In or around September 2013,
Merrill Lynch was hired as lead underwriter for the Secondary Offering of Golden Gate‘s
Zale stock. The related Preliminary Registration Statement was filed October 2. As
Plaintiffs tell it, the purpose of the Secondary Offering was not to create an avenue by
which Golden Gate could sell its 23.3% stake in Zale, but instead was to cap Zale‘s share
price at an artificially low number around $15 per share in order to create the illusion of a
premium upon Signet‘s offer. In other words, according to Plaintiffs, Golden Gate was
worried that if Zale‘s stock price continued on its upward trend, it might make the
Company too expensive for Signet to afford. Plaintiffs also suggest that this explains
why Golden Gate never disclosed publicly its decision to withdraw the Secondary
Offering, because if the public became aware that the Secondary Offering had been
cancelled, Zale‘s stock price would have risen too high. And, in support of this theory,
Plaintiffs cite to McMullin v. Beran,98 In re Answers Corp. Shareholder Litigation,99 and
N.J. Carpenters Pension Fund v. InfoGROUP, Inc.100 to demonstrate that Delaware
courts have found allegations of similar schemes adequate to defeat a motion to dismiss.
I am convinced, however, that a number of crucial points underlying Plaintiffs‘
theory are not supported by specific allegations and that accepting their theory would
require me to draw unreasonable inferences in Plaintiffs‘ favor. First, as stated supra,
98
765 A.2d 910 (Del. 2000).
99
2012 WL 1253072 (Del. Ch. Apr. 11, 2012).
100
2011 WL 4825888 (Del. Ch. Oct. 6, 2011).
46
Plaintiffs have not sufficiently alleged circumstances explaining why Golden Gate
needed liquidity so severely that obtaining it would constitute a unique benefit to Golden
Gate not shared by other Zale stockholders. This is especially true when compared to the
facts alleged by the plaintiffs in McMullin, In re Answers, and N.J. Carpenters that
enabled them to avoid a motion to dismiss.101 In fact, based on the Complaint, it appears
that if Golden Gate was parched for liquidity, it could have proceeded with the Secondary
Offering that it already had initiated rather than undergoing a lengthy merger process. If,
on the other hand, Golden Gate was seeking a higher price for its shares than it could
attain through the Secondary Offering, then, presumably, it would want the highest
possible price. In that case, Golden Gate‘s interests would be aligned with Zale‘s other
stockholders and there would be no reason for it to attempt to depress Zale‘s stock price.
I also determined supra that Plaintiffs‘ characterization of the $15.035 price referenced in
the Preliminary Registration Statement as a ―cap‖ was inaccurate.102 Rather than
constituting a maximum offering price that would result in a cap on Zale‘s share price,
that price simply reflects the average of the high and low prices of Zale‘s common stock
on September 30, 2013, calculated, as statutorily required, to estimate the eventual
registration fee to be paid.103 As a result, because Plaintiffs‘ own Complaint and the
documents incorporated therein do not support their liquidity theory regarding Golden
101
See supra text accompanying note 36.
102
See supra note 3.
103
See supra note 3.
47
Gate, I find that it is not reasonably conceivable that Plaintiffs could use that theory to
demonstrate that the Director Defendants acted in bad faith.
h. Plaintiffs adequately have alleged that the Director Defendants breached
their duty of care during the Merger process
As stated above, because of Zale‘s 102(b)(7) provision, deciding whether the
Director Defendants could have breached their duty of care is only relevant for purposes
of determining whether Signet or Merrill Lynch could be liable for aiding and abetting
those breaches. With that in mind, I have considered all of the deficiencies in the merger
process Plaintiffs have alleged to determine which one or more of them might support a
duty of care breach allegedly aided and abetted by Signet or Merrill Lynch. I find that
the only deficiency that conceivably could constitute a breach of the duty of care is
Plaintiffs‘ allegation that Rose was a senior member of both the Merrill Lynch team that
made a presentation to Signet regarding a possible acquisition of Zale and the team that
advised the Board in the Merger, but the Director Defendants did not realize that until
after the Merger Agreement was signed. I conclude that Plaintiffs conceivably could
show that the Director Defendants breached their duty of care as to this aspect of the sale
process.
Although I already concluded supra that the Board did not act in bad faith during
the Merger process, the standard for finding bad faith is more stringent than the standard
for finding a duty of care violation. My analysis in this case, under the Revlon standard,
focuses on whether the Director Defendants‘ actions fall within a range of reasonableness
with the ultimate goal of maximizing the Company‘s sale price in mind. And, as the
48
Delaware Supreme Court held in a recent decision, ―[w]hen a board exercises its
judgment in good faith, tests the transaction through a viable passive market check, and
gives its stockholders a fully informed, uncoerced opportunity to vote to accept the deal,
[courts] cannot conclude that the board likely violated its Revlon duties.‖104
Based on the allegations in the Complaint, it appears that, for the most part, the
Board has satisfied its duty of care by acting in an informed manner and reasonably
exercising its business judgment. The Board met frequently throughout the Merger
process, both before the Merger Agreement was finalized between Zale and Signet and
afterwards, prior to the stockholder vote. The Board reasonably was apprised of Zale‘s
value, having reviewed both management‘s projections and Merrill Lynch‘s Summary
Valuation of Strategic Alternatives. In negotiating the Merger Agreement itself, the
Board secured a fiduciary out and a reverse termination fee, while agreeing only to deal
protections that consistently have been considered reasonable under Delaware law, and
allowed for a passive market check via a three-month period between the signing of the
Merger Agreement and the closing of the Merger. Even the final price itself cannot be
said ―to be so grossly off-the-mark as to amount to reckless indifference,‖ given the
support it garnered from Golden Gate and ISS and the fact that it fell within the valuation
ranges relied on by Plaintiffs.
As to Merrill Lynch‘s belatedly disclosed presentation to Signet, however, I
conclude that it is reasonably conceivable that the Director Defendants did not act in an
104
C & J Energy Servs. Inc., 107 A.3d at 1053.
49
informed manner. The Complaint acknowledges that the Board at least generally
considered Merrill Lynch‘s potential conflicts in deciding whether to engage them and
also relied on Merrill Lynch‘s representations that there were no such material conflicts.
But, those facts alone are insufficient, on a motion to dismiss, for me to conclude that
Plaintiffs could not conceivably prove that the Director Defendants breached their duty of
care. As Vice Chancellor Laster observed in In re Rural Metro Corp.:
[P]art of providing active and direct oversight is acting
reasonably to learn about actual and potential conflicts faced
by directors, management, and their advisors. . . . Because of
the central role played by investment banks in the evaluation,
exploration, selection, and implementation of strategic
alternatives, directors must act reasonably to identify and
consider the implications of the investment banker‘s
compensation structure, relationships, and potential
conflicts.105
In the context of detecting a preexisting conflict when engaging a financial advisor, this
oversight duty could include negotiating for representations and warranties in the
engagement letter as well as asking probing questions to determine what sorts of past
interactions the advisor has had with known potential buyers, such as Signet here. In this
case, it might have included a question as to whether the potential financial advisor had
made any presentations regarding Zale to prospective buyers within, e.g., the last six
months or since Merrill Lynch had undertaken to represent Zale in the Secondary
Offering. I also note that the Complaint alleges that the Negotiation Committee and the
Board rather quickly decided to use Merrill Lynch, the only candidate they considered.
105
88 A.3d 54, 90 (Del. Ch. 2014).
50
In these circumstances, I consider it reasonably conceivable that the Board‘s measures—
which, as described in the Complaint, consisted simply of discussing the possibility that
Merrill Lynch would be conflicted and apparently relying without question on Merrill
Lynch‘s representation that it had ―limited prior relationships [with Signet] and no
conflicts‖—could constitute a breach of their duty of care in this Revlon context where
Merrill Lynch failed to disclose in a timely manner the Signet presentation or Rose‘s
involvement in it.106
106
The threshold for finding a breach of the duty of care in the Revlon reasonableness
context is lower than in the business judgment rule context. In re Netsmart Techs.,
Inc. S’holders Litig., 924 A.2d 171, 192 (Del. Ch. 2007) (―What is important and
different about the Revlon standard is the intensity of judicial review that is
applied to the directors‘ conduct. Unlike the bare rationality standard applicable to
garden-variety decisions subject to the business judgment rule,
the Revlon standard contemplates a judicial examination of the reasonableness of
the board‘s decision-making process. Although linguistically not obvious, this
reasonableness review is more searching than rationality review, and there is less
tolerance for slack by the directors.‖). Director liability for breaching the duty of
care outside of the enhanced scrutiny context is predicated upon concepts of gross
negligence. McMullin v. Beran, 765 A.2d 910, 921 (Del. 2000) (citing Aronson v.
Lewis, 473 A.2d 805, 812 (Del. 1984)). Delaware law instructs that the core
inquiry in this regard is whether there was a real effort to be informed and exercise
judgment. In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 968 (Del. Ch.
1996) (―Where a director in fact exercises a good faith effort to be informed and to
exercise appropriate judgment, he or she should be deemed to satisfy fully the duty
of attention.‖). To support an inference of gross negligence, ―the decision has to
be so grossly off-the-mark as to amount to reckless indifference or a gross abuse
of discretion.‖ Solash v. Telex Corp., 1988 WL 3587, at *9 (Del. Ch. 1988)
(internal citations omitted). Arguably, the Board‘s actions as to Merrill Lynch in
this case constitute a breach of the duty of care under a gross negligence standard
as well. I would reach that issue, however, only if I: (1) gave effect to the
stockholder vote in accordance with the KKR decision; and (2) departed from KKR
in the sense of considering the possibility not only of waste, but also of a breach of
the duty of care based on gross negligence.
51
I also find it reasonably conceivable that Plaintiffs suffered damages as a result of
this alleged breach. In a Revlon case, the Director Defendants‘ duty of care must be
tailored toward the specific objective of maximizing the sale price of the enterprise. I
agree with Plaintiffs that it is reasonably conceivable that Rose‘s presence on both the
team that presented to Signet and the team that advised the Board would have
undermined both his and Zale‘s credibility if they attempted to negotiate with Signet a
price higher than $21. I recognize that Rose and Merrill Lynch may have maintained the
ability to negotiate for a price higher than $21 per share after having told Signet, in a
prior meeting, that they thought $17 to $21 per share to be a reasonable range for such an
acquisition. But, drawing all reasonable inferences in Plaintiffs‘ favor, as I must, and
considering the fact that the final price ended up being $21 per share, I find it reasonably
conceivable that this undisclosed conflict hampered the ability of Merrill Lynch and,
consequently, the Board to seek a higher price for Zale‘s stockholders.
Finally, I am not persuaded that the Board‘s three meetings after the Merger
Agreement was signed and Merrill Lynch disclosed its presentation to Signet and their
subsequent decision to proceed with the Merger cleansed the conflict. As an initial
matter, I note that some of a board‘s financial advisor‘s conflicts arguably cannot be
consented to in the proper discharge of a director‘s fiduciary duties.107 Although I do not
purport to decide, on this preliminary record, whether Merrill Lynch‘s actions constituted
107
See William W. Bratton & Michael L. Wachter, Bankers and Chancellors, 93
TEX. L. REV. 1, 44, 56-61 (2014)
52
a ―nonconsentable‖ conflict, I understand that the Board‘s post hoc meetings alone do not
foreclose the possibility of a duty of care breach. In addition, even though the Board was
aware of the conflict before they submitted the Merger for a stockholder vote, and thus
retained the ability, via their fiduciary out in the Merger Agreement, to back out of the
deal if they determined that the conflict resulted in an inadequate price, it is at least
conceivable that some damage to stockholders already may have occurred. The Board
engaged Merrill Lynch on November 18, 2013 and did not discover the conflict until
March 23, 2014.108 The Merger Agreement reflecting the $21 per share Merger Price
was signed on February 19, 2014. It is reasonable to infer that the time and money
expended by the Board negotiating the Merger with an arguably conflicted financial
advisor during those four months constituted actual damage to Zale and its stockholders.
In addition, if the Board did decide to execute its fiduciary out, it would have had to pay
Signet the $26.7 million termination fee. Alternatively, if the Board chose to get a
second financial advisor‘s opinion, it would have had to pay a fee to both Merrill Lynch
and the advisor. Thus, I conclude that it is reasonably conceivable that even if the Board
decided that they left some money on the table as a result of Merrill Lynch‘s conflict,
they may have found that the additional costs required to remedy that conflict—i.e.,
backing out of the Merger or seeking a second fairness opinion—outweighed any such
benefits. Either way, it is possible that Zale‘s stockholders would have been harmed by
the breach.
108
Compl. ¶ 61.
53
Thus, although the Director Defendants are shielded from monetary liability under
the 102(b)(7) provision, I conclude that Plaintiffs adequately have alleged that they
breached their duty of care.
C. Counts II & III – Aiding and Abetting the Director Defendants’ Breaches of
Fiduciary Duties By Signet and Merrill Lynch
Finally, Counts II and III of the Complaint claim that Signet and Merrill Lynch
aided and abetted the Director Defendants‘ alleged duty of loyalty and duty of care
breaches by knowingly participating in such breaches. I address those claims below, and
conclude that Count II should be dismissed under Rule 12(b)(6) for failure to state a
claim, but that Count III should not be dismissed.
1. Legal standard
To state a claim for aiding and abetting, a plaintiff must allege: (1) the existence of
a fiduciary relationship; (2) a breach of the fiduciary‘s duty; (3) knowing participation in
that breach by the defendants; and (4) damages proximately caused by the breach. 109 The
key inquiry on the aiding and abetting claim is whether a plaintiff has pled adequately the
third element, knowing participation. Although there is no requirement that a plaintiff
plead knowing participation with particularity, a plaintiff must allege facts from which
knowing participation may be inferred to survive a motion to dismiss.110 Significantly,
however, ―[t]his Court has consistently held that evidence of arm‘s-length negotiation
109
Malpiede, 780 A.2d at 1096.
110
In re Telecomms., Inc., 2003 WL 21543427, at *2 (Del. Ch. July 7, 2003).
54
with fiduciaries negates a claim of aiding and abetting, because such evidence precludes a
showing that the defendants knowingly participated in the breach by the fiduciaries.‖111
Because an underlying fiduciary duty breach is needed in order for an aider and
abettor to be found liable, and because the only alleged breach Plaintiffs have adequately
pled is the Director Defendants‘ breach of their duty of care, I analyze next whether it is
conceivable from the facts alleged in the Complaint that either Signet or Merrill Lynch
―knowingly participated‖ in that breach.
2. Plaintiffs fail to allege that Signet aided and abetted the Director Defendants’
duty of care breach
Plaintiffs argue that ―Signet was aware that Zale was using a conflicted advisor,
having been pitched by Merrill Lynch as to why it would be a good idea for Signet to
acquire Zale.‖112 According to Plaintiffs, Barnes knew that Rose was a part of both the
team that made the presentation to Signet and the team that was advising Zale. As a
result, Plaintiffs claim that Signet knowingly participated in the Director Defendants‘
breach of the duty of care in that Barnes knew that Merrill Lynch could not request
credibly a price above $21 per share and that he used that handicap to his advantage
during negotiations. This argument, however, misidentifies the essence of the Board‘s
duty of care breach that I found the Complaint adequately pled.
111
In re Frederick’s of Hollywood, Inc., 1998 WL 398244, at *3 n.8 (Del. Ch. July 9,
1998). See also In re Gen. Motors S’holder Litig., 2005 WL 1089021, at *26
(Del. Ch. May 4, 2005).
112
Pls.‘ Answer Br. 59.
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Because the Board‘s duty of care breach was predicated on Merrill Lynch‘s non-
disclosure of the presentation to Signet to Zale‘s Board, rather than the presentation itself,
Signet could not have participated knowingly unless it was aware of such non-disclosure.
The Complaint does not allege, however, that Barnes or anyone else at Signet knew that
Merrill Lynch had not informed the Board of their previous presentation to Signet.
Hence, it is reasonable to infer that Barnes believed that Merrill Lynch already had
disclosed the presentation to the Board either before it was engaged as its financial
advisor or, at least, before the final Merger Price was negotiated. I do not consider it
reasonable to infer that Signet would have understood otherwise based on the facts
alleged in the Complaint.
Further, as Zale‘s counterparty in the Merger‘s negotiations, Signet was under no
obligation to reveal Merrill Lynch‘s presentation. ―[T]his Court has consistently held
that evidence of arm‘s-length negotiation with fiduciaries negates a claim of aiding and
abetting, because such evidence precludes a showing that the defendants knowingly
participated in the breach by the fiduciaries.‖113 Thus, because there are no allegations in
the Complaint that would support an inference that Signet knowingly participated in the
Board‘s duty of care breach, I conclude that Count II must be dismissed.
113
Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *17 (Del. Ch. June 30, 2014)
(citation omitted).
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3. Plaintiffs successfully allege that Merrill Lynch aided and abetted the
Director Defendants’ duty of care breach
Plaintiffs also argue that Merrill Lynch knowingly participated in the Board‘s duty
of care breach because ―[a]fter making its presentation to Signet, Merrill Lynch and Rose
failed to inform the Board that Merrill Lynch had sought to represent Signet in an
acquisition of Zale.‖114 Unlike their argument as to Signet, Plaintiffs‘ contentions as to
Merrill Lynch‘s alleged aiding and abetting directly relate to the Board‘s alleged duty of
care breach and demonstrate knowing participation. In their Opening and Reply Briefs,
Merrill Lynch mostly concentrates on arguing that: (1) Plaintiffs do not allege any
damages resulting from Merrill Lynch‘s presentation to Signet; and (2) any taint from the
alleged conflict was cleansed as a result of their disclosure to the Board and the approval
by the fully informed vote of a majority of disinterested stockholders.115 For the reasons
stated in the discussions of these issues supra, I do not find either of these arguments
persuasive.
More relevantly, Merrill Lynch also contends that they did not knowingly
participate in any fiduciary duty breach because the Complaint does not allege that they
―conspired with anyone.‖116 A conspiracy, however, is only one way in which knowing
participation can be found; Plaintiffs can also make ―factual allegations from which
114
Pls.‘ Answer Br. 57.
115
Merrill Lynch‘s Opening Br. 17-24; Merrill Lynch‘s Reply Br. 3-10.
116
Merrill Lynch‘s Opening Br. 16 (quoting McGowan v. Ferro, 2002 WL 77712, at
*2 (Del. Ch. Jan. 11, 2002)).
57
knowing participation can be inferred.‖117 In this case, Plaintiffs have made such
allegations. They allege that Rose was a member of both the team that presented to
Signet and the team that advised the Board, which satisfies the ―knowledge‖ component
of the inquiry. Further, the Complaint alleges that Rose made the conscious decision not
to disclose this conflict to the Board. Although Rose purportedly relied on advice from
Merrill Lynch‘s conflict clearance department in not disclosing his conflict to the Board,
Merrill Lynch is not absolved of liability as a result of such reliance. It is also reasonably
conceivable that Rose, as Plaintiffs allege, purposefully avoided disclosure because he
hoped to generate fees for Merrill Lynch and a larger bonus for himself. As to the
―participation‖ prong of the inquiry, it was Merrill Lynch‘s decision to delay disclosure
of the conflict until March 23, 2014 that caused me to find that the Director Defendants‘
breach of their duty of care conceivably damaged stockholders. Had Merrill Lynch
disclosed the conflict before being engaged by the Board, it would have mooted any
claim that the Board breached their duty of care by not taking further steps to discover or
remedy such a conflict. On the truncated record before me on Defendants‘ motions to
dismiss, I can only speculate as to why the topic of Merrill Lynch and Rose‘s prior
presentation to Signet apparently did not come up in connection with the decision of the
Board to make a counter offer of $21 per share as opposed to something higher, in
response to Signet‘s all cash offer of $20.50 per share. As a result, I conclude that
117
McGowan, 2002 WL 77712, at *2 (quoting Malpiede, 780 A.2d at 1097-98).
58
Plaintiffs adequately have alleged that Merrill Lynch knowingly participated in, and
therefore aided and abetted, the Director Defendants‘ duty of care breach.
III. CONCLUSION
For the foregoing reasons, Defendants‘ motions to dismiss are granted in part and
denied in part. Specifically, Counts I and II are dismissed with prejudice. I deny the
motions as to Count III.
IT IS SO ORDERED.
59