Buttonwood Tree Value Partners, LP v. R.L. Polk & Co., Inc. ( 2022 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BUTTONWOOD TREE VALUE )
PARTNERS, L.P., a California Limited )
Partnership, and MITCHELL PARTNERS )
L.P., a California Limited Partnership, on )
behalf of themselves and all others )
similarly situated, )
)
Plaintiffs, )
)
v. ) C.A. No. 9250-VCG
)
R. L. POLK & CO., INC., STEPHEN R. )
POLK (individually and on behalf of a )
Defendant Class of similarly situated )
persons), THE ESTATE OF NANCY K. )
POLK, KATHERINE POLK OSBORNE, )
DAVID COLE, RICK INATOME, )
CHARLES MCCLURE, J. MICHAEL )
MOORE, RLP & C HOLDING, INC., RLP )
MERGER CO., STOUT RISIUS ROSS, )
INC., and HONIGMAN MILLER )
SCHWARTZ AND COHN LLP, )
Defendants. )
)
MEMORANDUM OPINION
Date Submitted: March 17, 2022
Date Decided: June 23, 2022
R. Bruce McNew, of COOCH AND TAYLOR, P.A., Wilmington, Delaware,
Attorney for Plaintiffs.
David A. Dorey, of BLANK ROME LLP, Wilmington, Delaware; OF COUNSEL:
Christopher M. Mason, of NIXON PEABODY LLP, New York, New York, and
Carolyn G. Nussbaum, of NIXON PEABODY LLP, Rochester, New York, Attorneys
for Defendants.
GLASSCOCK, Vice Chancellor
1
This matter alleges that corporate fiduciaries caused a company to do a
self-tender at an inadequate price, based upon misleading disclosures to
stockholders. The Plaintiffs are company stockholders who tendered, or sold into
the market during the tender period. This brief Memorandum Opinion addresses the
Plaintiffs’ request to certify both a Plaintiff class and a Defendant class. The
Defendants have tenaciously opposed certification of a class, invoking presque vu
in this judge.1 For the reasons that follow, the former request is granted, insofar as
the matter addresses breach of duty claims and nominal damages. The latter request
to certify a Defendant class I find unsustainable under Rule 23. Both decisions are
explained below.
I. BACKGROUND
What follows is a brief adumbration of the facts necessary for this
Memorandum Opinion. Curious readers should refer to my opinion resolving a
motion to dismiss in this case, Buttonwood Tree Value Partners, L.P. v. Polk & Co.,
Inc., 2017 WL 3172722 (Del. Ch. July 24, 2017), for a fuller recitation of the
Plaintiffs’ allegations.
1
See, e.g., In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2022 WL 2236192 (Del.
Ch. June 14, 2022).
A. The Relevant Parties and Non-Parties
Former Defendant R.L. Polk and Co., Inc. (“Polk” or the “Company”) is a
Delaware corporation with its headquarters in Michigan.2 Founded in 1870, the
Company has since been majority owned and controlled by members of the Polk
family (the “Polk Family”).3 In March 2011, Polk made a tender offer to all Polk
stockholders to purchase up to 37,037 shares of the Company’s stock at a price of
$810 in cash per share (the “Self-Tender”) between March 31, 2011 and May 16,
2011 (the “Self-Tender Period”). 4 Although the Company was a named defendant
in this action, I dismissed it from this matter at oral argument on May 31, 2017.5
Plaintiff Buttonwood Tree Value Partners, L.P. (“Buttonwood”) was a
California limited partnership and held stock in Defendant Polk at all relevant times.6
Buttonwood tendered 1,048 shares into the Self-Tender. 7 Buttonwood, whose owner
passed away in late 2016,8 filed a certificate of cancellation in October 2020
terminating its existence as a California limited partnership. 9 Buttonwood’s
2
Buttonwood, 2017 WL 3172722, at *1.
3
Id.4
Id. at *4.
5
See Oral Arg. Defs.’ Mots. Dismiss Partial Rulings Ct. at 97:13–14, Dkt. No. 196.
6
Buttonwood, 2017 WL 3172722, at *1.
7
Id.8
Dep. 30(b)(6) Witness Philip Milner, Dkt. No. 307 at 16:23–25 [hereinafter “Milner Dep.”].
9
Decl. David A. Dorey Attaching Ex. Supp. Defs.’ Opp. Pls.’ Mot. Certification Pl. Class Def.
Class, Ex. A, Dkt. No. 308 [hereinafter “Buttonwood Cert. Cancellation”].
2
liquidating partner has appointed Philip Milner, a former Buttonwood employee, to
serve as its representative in connection with this litigation.10
Plaintiff Mitchell Partners L.P. (“Mitchell”) is a California limited partnership
that held stock in Polk at all relevant times. 11 Mitchell sold 700 shares of Polk in a
private transaction during the Self-Tender Period for $811 per share.12
Defendant Stephen Polk was the Company’s President, CEO, and the
chairman of its board of directors (the “Board”) during the relevant period.13
Stephen Polk also controlled the voting power of Polk shares owned by the Polk
family, with the exception of shares owned by two family members. 14 Two other
Polk family members—Katherine Polk Osborne and Nancy Polk—are also members
of the Polk Board and defendants in this litigation (together with Stephen Polk, the
“Polk Family Directors”).15 Stephen Polk serves as a fiduciary for two Polk-related
trusts, the Ralph L. and Winifred E. Polk Foundation and the Jane Polk Read Trust
(the “Polk Trusts”), which together tendered 10,500 shares in the Self-Tender. 16
10
Milner Dep. at 9:3–12, 15:15–16:5.
11
Buttonwood, 2017 WL 3172722, at *1.
12
Id.13
Id. at *2.
14
Decl. McNew Attaching Exs. Supp. Pls.’ Mot. Certification Pl. Class Def. Class, Dkt. No. 295,
Ex. 15.
15
Buttonwood, 2017 WL 3172722, at *2.
16
Second Am. Verified Class Action Compl. ¶¶ 34 n.4, 69 [hereinafter the “SAC”].
3
B. Factual Background
At a high level, the Plaintiffs contend that the Self-Tender significantly
undervalued Polk. The Self-Tender offered to purchase Polk stock at a price of $810
in cash per share, which valued the Company at $434.5 million. 17 But two years
later, in June 2013, the Defendants allegedly conducted a freeze-out of its
stockholders who were not Polk Family members, and sold the Company for $1.341
billion.18 Polk stockholders who tendered in the Self-Tender would have received
$2,675 per share in the 2013 sale—over 300% more than the $810 per share they
received in the Self-Tender. 19 In addition, the former Polk stockholders who
participated in the Self-Tender or sold into the market during the Self-Tender Period
allegedly missed out on several “extraordinary” dividends that Polk issued after the
2011 Self-Tender and before the 2013 sale.20
According to the Plaintiffs, in the years preceding the Self-Tender, Polk had
explored transactions that valued the Company above the Self-Tender valuation, and
that were designed to eliminate non-Polk Family members. For example, in 2008,
Polk allegedly explored a potential self-tender at $850 per share. 21 Likewise, in
2010, the Company explored a potential short-form merger that would have
17
Buttonwood, 2017 WL 3172722, at *4.
18
Id. at *5.
19
Id.
20
Id.
21
Id. at *2.
4
eliminated minority stockholders.22 According to the Plaintiffs, these earlier
explorations indicate that it was the Defendants’ plan all along to eliminate non-Polk
Family members at a depressed valuation before selling the Company for much
more.23
The Plaintiffs contend that the Company’s Offer to Purchase for Cash (the
“Offer To Purchase”), made in connection with the 2011 Self-Tender, was materially
misleading because it failed to disclose certain details relating to the 2008 self-tender
explorations or the 2010 short-form merger explorations. 24 The Plaintiffs contend
that, by omitting these details, the Offer To Purchase misled the Polk stockholders
into believing that the Self-Tender “was a unique and rare opportunity for liquidity
at above market prices,” when in fact the Polk Family planned to sell the Company
at a much greater valuation.25 The Plaintiffs thus seek to hold the Defendants liable
for breaches of their duty of loyalty (or care) in connection with the inadequate
disclosures in way of the Offer To Purchase. 26 They seek, primarily, approximately
$62 million in rescissory damages related to the alleged misleading disclosures. 27
22
Id. at *2–3.
23
Opening Br. Supp. Pls.’ Mot. Certification Pl. Class Def. Class, Dkt. No. 294 at 9–12 [hereinafter
“Pls.’ OB”].
24
Id. at 9–11.
25
Id. at 11–12.
26
SAC ¶¶ 102–18.
27
Pls.’ OB at 12, 22, 34.
5
C. Procedural History
The Plaintiffs filed their Second Amended Complaint on December 19,
2016. 28 On July 24, 2017, I denied motions to dismiss brought by the Polk Family
and the Polk Family Directors because it was reasonably conceivable that they
formed a control group and that the Self-Tender was a self-dealing transaction
subject to entire fairness review.29 I also dismissed claims against the Polk directors
who were not members of the Polk Family and aiding and abetting claims against
Polk’s third-party advisors.30 The parties then proceeded to discovery. 31
On November 11, 2021, the Plaintiffs filed the instant motion for class
certification (the “Motion”), seeking to certify both a plaintiff class and a defendant
class.32 The Defendants opposed class certification on January 11, 2022,33 and the
Plaintiffs filed a reply brief in support of class certification on February 9, 2022. 34 I
held oral argument on March 17, 2022, and I consider the matter fully submitted as
of that date.
28
See generally SAC.
29
Buttonwood, 2017 WL 3172722, at *6–7.
30
Id. at *7–11.
31
See generally, Buttonwood Tree Value Partners, L.P. v. R. L. Polk & Co., 2021 WL 3237114(Del. Ch. July 30, 2021).
32
See Pls.’ Mot. Certification Pl. Class Def. Class., Dkt. No. 294.
33
See Defs.’ Br. Opp. Pls.’ Mot. Certification Pl. Class Def. Class, Dkt. No. 308 [hereinafter
“Defs.’ AB”].
34
See Reply Br. Supp. Pls.’ Mot. Certification Pl. Class Def. Class, Dkt. No. 313 [hereinafter “Pls.’
RB”].
6
II. ANALYSIS
A. Legal Standard
The Motion seeks certification of a plaintiff class and a defendant class in this
litigation. Class certification, which is governed by Court of Chancery Rule 23, is a
two-step process. First, the putative class must meet all four criteria delineated in
Rule 23(a), and second, it must meet one of the criteria within Rule 23(b).35 “When
appropriate[,] [] an action may be brought or maintained as a class action with
respect to particular issues,” or “a class may be divided into subclasses and each
subclass treated as a class.”36
The determination of whether to certify a class is a matter of this Court’s
discretion. 37 This Court must undertake a “rigorous analysis” in certifying a class,
and “make an explicit determination on the record of the propriety of the class action
according to the requisites of Rule 23(a) and (b).” 38 The Plaintiffs have the burden
of satisfying the Rule 23 class certification requirements.39 “Judicial interpretation
of the Federal Rules respecting class actions . . . [is] persuasive authority for the
interpretation of Court of Chancery Rule 23.” 40
35
In re Ebix, Inc. S’holder Litig., 2018 WL 3570126, at *1 (Del. Ch. July 17, 2018).
36
Ct. Ch. R. 23(c)(4).
37
See In re Celera Corp. S’holder Litig., 59 A.3d 418, 428 (Del. 2012) (“We review the Court of
Chancery’s determinations on Rule 23 class certification for abuse of discretion.”).
38
Id. at 432 (quoting Prezant v. De Angelis, 636 A.2d 915, 925 (Del. 1994)).
39
See Dieter v. Prime Comput., Inc., 681 A.2d 1068, 1071 (Del. Ch. 1996).
40
In re Countrywide Corp. S’holders Litig., 2009 WL 846019, at *12 n.84 (Del. Ch. Mar. 31,
2009). It is not, however, controlling. See Straight Path, 2022 WL 2236192, at *5.
7
I turn first to the proposed plaintiff class.
B. The Plaintiff Class
The Plaintiffs seek to certify a plaintiff class that is defined as follows:
all shareholders that tendered (and to the extent they
tendered) shares into the Self-Tender, or who sold their
shares (and to the extent they sold shares) into the market
from the dissemination of the Offer To Purchase on March
31, 2011 until the close of the Self-Tender on May 16,
2011, and who have been harmed by Defendants’
actions . . . . 41
Although the Defendants challenge nearly every element of Rule 23(a)
and (b), one common theme runs throughout their opposition. According to the
Defendants, each member of the plaintiff class will have to prove reliance, causation,
and damages on an individualized basis, and those individualized issues are
purportedly fatal to several requirements of Rule 23. 42 Because the Defendants
assert this argument with respect to several elements of class certification, I address
it at the outset.
The Defendants’ position that each plaintiff class member will have to prove
reliance, causation, and damages has some support in Delaware case law. In Malone
v. Brincat, our Supreme Court held that “[a]n action for a breach of fiduciary duty
arising out of disclosure violations in connection with a request for stockholder
41
Proposed Order, Dkt. No. 294 ¶ 2 [hereinafter the “Proposed Order”].
42
See Defs.’ AB at 21–23, 29–30.
8
action does not include the elements of reliance, causation, and actual quantifiable
monetary damages.”43 Delaware courts have characterized this rule as establishing
“per se” damages for breaches of the duty of disclosure. 44
But in subsequent Supreme Court opinions, culminating in Dohmen v.
Goodman, our Supreme Court has clarified that this “per se damages rule” for
breaches of the duty of disclosure “presumes only nominal damages” and “does not
extend to compensatory damages.”45 “[T]o recover compensatory damages,” the
Dohmen Court explained, “an investor who proves a breach of the fiduciary duty of
disclosure must prove reliance, causation, and damages.”46
The Defendants therefore argue that the Plaintiffs’ duty of disclosure claim
here, which seeks approximately $62 million in damages, 47 will necessarily involve
individual questions of reliance, causation, and damages that are fatal to several class
certification requirements. For example, the Defendants point to evidence that
Mitchell, a proposed class representative, sold only a small portion of its Polk stock
in a private transaction during the Self-Tender Period because of “liquidity
considerations,”48 which could suggest that it did not rely on the allegedly
misleading Offer To Purchase.
43
722 A.2d 5, 12 (Del. 1998).
44
See Dohmen v. Goodman, 234 A.3d 1161, 1168 (Del. 2020).
45
See id. at 1168.
46
Id. at 1175.
47
See Pls.’ OB at 12, 22, 34.
48
Defs.’ AB at 13, 26.
9
The Defendants may ultimately be correct that, to recover rescissory
damages, 49 each plaintiff class member will have to prove reliance, causation, and
damages on an individualized basis.50 But the Plaintiffs’ request for relief here is
broader than just rescissory damages. In particular, the Second Amended Complaint
seeks “damages, including rescissory damages,” and “other and further equitable
relief as this Court may deem just and proper.”51 That is broad enough to include
nominal damages under Malone’s “per se” damages rule for breaches of the duty of
disclosure. 52
Accordingly, even if the Defendants here are correct that this matter will
involve individualized questions relating to reliance, causation, and damages, those
questions would be relevant only to the Plaintiffs’ request for ultranominal53
damages. But they are not relevant to the first order question of whether the
Defendants breached their duty of disclosure—or whether they owe corresponding
nominal damages.
49
The Plaintiffs’ primary request for relief seeks rescissory, not compensatory, damages. See Pls.’
RB at 11, 20, 24–25. Unlike the latter, rescissory damages are the equivalent in restitution of
equitable recission. I make no determination here whether the Dohmen analysis requires
individual proof of entitlement to rescissory damages, which—unless I find liability for breach of
duty—would be advisory at this stage.
50
I note that, although Dohmen requires investors seeking compensatory damages to prove
reliance, causation, and damages in a breach of duty of disclosure claim, it did not consider whether
such proof could, or could not, be established on a class-wide basis.
51
SAC at 67–68.
52
Malone, 722 A.2d at 12.
53
See supra note 49.
10
I therefore consider the Plaintiffs’ request for class certification only with
respect to that first order question at this time. 54 As discussed below, I find that the
Plaintiffs meet the Rule 23 class certification requirements with respect to the issue
of breach. If the Plaintiffs succeed in proving that the Defendants breached their
duty of disclosure, I will revisit class certification with respect to the Plaintiffs’
request for ultranominal damages, and this matter will proceed to a separate damages
trial accordingly.55
1. The Proposed Plaintiff Class Satisfies Rule 23(a)
Under Rule 23(a), four elements must be satisfied: “(1) numerosity;
(2) commonality; (3) typicality; and (4) adequacy of representation.” 56 I address
each in turn.
a. Numerosity
Rule 23(a)(1) requires that the class be “so numerous that joinder of all
members is impracticable.”57 “The test is not whether joinder of all the putative
class members would be impossible, but whether joinder would be practical.”58
54
Ct. Ch. R. 23(c)(4) (“When appropriate[,] [] an action may be brought or maintained as a class
action with respect to particular issues.”).
55
See Ct. Ch. R. 42(b) (“The Court in furtherance of convenience or to avoid prejudice or when
separate trials will be conducive to expedition and economy, may order a separate trial of any
claim, cross-claim, counterclaim or third-party claim, or of any separate issue or of any number of
claims, cross-claims, counterclaims, third-party claims or issues.”).
56
CME Grp., Inc. v. Chicago Bd. Options Exch., Inc., 2009 WL 1547510, at *4 (Del. Ch. June 3,
2009).
57
Ct. Ch. R. 23(a)(1).
58
Marie Raymond Revocable Tr. v. MAT Five LLC, 980 A.2d 388, 400 (Del. Ch. 2008), aff’d sub
nom. Whitson v. Marie Raymond Revocable Tr., 976 A.2d 172 (Del. 2009).
11
“A showing of ‘strong litigational inconvenience’ in the prosecution of claims by
the proposed class members is sufficient.”59 In evaluating the numerosity
requirement, the Court “is not controlled by strict numerical guidelines.”60 “Rather,
the Court may consider a number of factors, including the geographical diversity of
the members of the proposed class and the size of each claim.”61
The Plaintiffs here assert that the proposed plaintiff class is composed of
between 58 and 64 members who owned 36,349 Polk shares. 62 Those members
include 57 Polk stockholders who tendered their shares in the Self-Tender, and
between one and seven Polk stockholders who sold stock in private transactions
during the Self-Tender Period. 63 The Defendants do not dispute that the proposed
class definition encompasses between 58 and 64 people, but they seek to subtract
certain stockholders who they contend are situated differently.
First, the Defendants contend that the class should exclude members of the
Polk Family who tendered their shares, because, according to the Defendants, those
family members “would also be in the proposed defendant class.” 64 As discussed
below, however, I decline to certify a defendant class in this matter. 65 But in any
59
Id. (citation omitted).
60
Marhart, Inc. v. CalMat Co., 1992 WL 82365, at *4 (Del. Ch. Apr. 22, 1992).
61
Id.62
Pls.’ OB at 22–23.
63
Id. at 14–15.
64
Defs.’ AB at 17.
65
See infra § II.C.
12
event, the Plaintiffs specifically excluded stock tendered by Polk Family members
from their proposed defendant class.66 The Defendants are therefore wrong to
suggest that including those Polk Family members in the plaintiff class would
“[c]ount[] them on both sides.”67
Second, the Defendants contend that the class should exclude, or separate into
a subclass, the stockholders who sold their stock in private transactions during the
Self-Tender Period instead of participating in the Self-Tender.68 According to the
Plaintiffs, between one and seven members of the proposed class fall into this
category.69 The Defendants contend that these stockholders should be excluded
from the class, because their claims are purportedly subject to unique “elements and
defenses”—in particular, related to reliance, causation, and damages.70 But as I
explained above, any unique reliance, causation, and damages arguments are
relevant only to the Plaintiffs’ request for ultranominal damages; they are not
relevant to the issue of whether the Defendants breached their duty of disclosure.
Because this Memorandum Opinion addresses class certification only with respect
to the issue of breach, I find no reason to exclude those seven stockholders from the
proposed class at this time.
66
Pls.’ OB at 17 (“Shares of Polk owned by [the Polk Trusts] that were tendered into the
Self-Tender are included in the Plaintiff Class and are not included in the Defendant Class.”).
67
See Defs.’ AB at 17.
68
See id. at 17–18.
69
Pls.’ OB at 14–15.
70
Defs.’ AB at 17–18.
13
I therefore accept the Plaintiffs’ assertion that the proposed plaintiff class is
composed of between 58 and 64 stockholders. “Numbers in a proposed class in
excess of forty have sustained the numerosity requirement, and classes with a[s] few
as twenty-three members have been upheld.”71 This Court “is reluctant to deny
certification on grounds of numerosity where the plaintiff class is within the size
typically certified by our courts.”72 Moreover, when the putative class is composed
of stockholders, “it is reasonably inferable that not all of them own sufficient stock
to make an individual action economically viable.”73 I am satisfied that the proposed
plaintiff class of between 58 and 64 stockholders meets Rule 23(a)(1)’s numerosity
requirement.
b. Commonality
Rule 23(a)(2) requires that “there are questions of law or fact common to the
class.”74 The commonality requirement is met “where the question of law linking
the class members is substantially related to the resolution of the litigation even
though the individuals are not identically situated.” 75 Commonality is not defeated
merely because “the class members may have ‘different interests and views,’” “so
71
Dubroff v. Wren Holdings, LLC, 2010 WL 3294219, at *5 (Del. Ch. Aug. 20, 2010).
72
Id.73
Marhart, 1992 WL 82365, at *4 (class of “more than 25” stockholders satisfied numerosity
requirement).
74
Ct. Ch. R. 23(a)(2).
75
Marie Raymond, 980 A.2d at 400 (quoting Leon N. Weiner & Assocs., Inc. v. Krapf, 584 A.2d
1220, 1225 (Del. 1991)).
14
long as the common legal questions are not dependent on divergent facts and
significant factual diversity does not exist among individual class members.”76
The Plaintiffs here allege that the Defendants breached their duty of disclosure
to Polk stockholders in connection with the Self-Tender. 77 Indeed, the Defendants
concede in their Opposition that “there is a common question of whether there was
a material omission from the Offer [T]o Purchase.” 78 The Defendants nonetheless
contend that the Plaintiffs fail to establish commonality because each class member
supposedly “must individually prove reliance, causation, and damages.”79
The Defendants are correct that this Court has found a lack of common
questions in duty of disclosure cases where “reliance, causation, and damages will
need to be individually established.”80 But as I have explained above, those
questions are relevant only to a request for ultranominal damages,81 and I am
considering class certification only with respect to the issue of breach and
corresponding nominal damages at this time. With respect to the issue of breach,
the Defendants “either did or did not breach their fiduciary duty of disclosure to all
76
In re Philadelphia Stock Exch., Inc., 945 A.2d 1123, 1141 (Del. 2008) (citation omitted).
77
SAC ¶¶ 102–18.
78
Defs.’ AB at 20.
79
Id. at 21.
80
Dubroff, 2010 WL 3294219, at *6.
81
See supra note 49.
15
or none of the [Polk] stockholders in the Proposed Class.” 82 That is sufficient to
satisfy Rule 23(a)(2)’s commonality requirement.
c. Typicality
Rule 23(a)(3) requires that “the claims and defenses of the representative
parties are typical of the claims or defenses of the class.” 83 “The test of typicality is
that the legal and factual position of the class representative must not be markedly
different from that of the members of the class.” 84 That is, if “the proposed class
representative’s claims require more or less proof than would be required by the
claims of other members of the class, class certification is unavailable.”85
“Typicality is generally deemed satisfied if the representative’s claim or defense
‘arises from the same event or course of conduct that gives rise to the claims [or
defenses] of other class members and is based on the same legal theory.’”86 But “a
proposed class representative may not be typical if he is potentially subject to unique
defenses not applicable to other class members,” or “if a conflict or a potential
conflict exists between the legal and factual positions of the proposed class
representative and class members.”87
82
See Turner v. Bernstein, 768 A.2d 24, 31 (Del. Ch. 2000).
83
Ct. Ch. R. 23(a)(3).
84
New Jersey Carpenters Pension Fund v. infoGROUP, Inc., 2013 WL 610143, at *3 (Del. Ch.
Feb. 13, 2013) (quoting Weiner, 584 A.2d at 1225).
85
Id. (quoting Paine Webber R&D Partners v. Centocor, Inc., 1997 WL 719096, at *5 (Del. Super.
Ct. Oct. 9, 1997)).
86
Id. (quoting In re Best Lock Corp. S’holder Litig., 845 A.2d 1057, 1092 (Del. Ch. 2001)).
87
Id.16
The Plaintiffs here propose two representative plaintiffs: Buttonwood and
Mitchell. 88 The Defendants first contend that both Buttonwood’s and Mitchell’s
claims are subject to unique elements and defenses that render them atypical—
namely, they purportedly must prove reliance, causation, and damages
individually.89 Relatedly, the Defendants contend that Mitchell’s claim is atypical
because it sold “only a small potion of its holdings” for “liquidity considerations,”
in contrast to class members who tendered all their shares.90 At the damages phase,
these arguments may prove prescient. But they are not relevant to the issue of
whether the Defendants breached their duty of disclosure and owe corresponding
“per se” nominal damages—the subject of this Memorandum Opinion. I therefore
decline to find a lack of typicality based on potential individualized questions of
reliance, causation, and damages.
The Defendants next argue that Buttonwood is subject to atypical defenses
because it supposedly “no longer exists.” 91 Specifically, Buttonwood was a
California limited partnership that filed a “certificate of cancellation” with the
California Secretary of State in October 2020. 92 The parties disagree regarding
whether Buttonwood may still pursue this litigation, for the purpose of winding up,
88
Pls.’ OB at 12–13.
89
Defs.’ AB at 22–23.
90
Id. at 25–26.
91
Id. at 3, 23–25.
92
See supra note 9 and accompanying text.
17
after cancelling its existence. As discussed below, I find that Buttonwood may still
pursue this litigation as part of its winding up process, despite having filed a
certificate of cancellation.
The California Corporations Code (the “Code”), which governs corporations,
limited liability companies (“LLCs”), and limited partnerships, does not specify
whether limited partnerships may pursue litigation for the purpose of winding up
after cancellation. The Code provides that a limited partnership “is dissolved, and
its activities must be wound up” “after the dissociation of a person as a general
partner” “if the limited partnership does not have a remaining general partner,”
subject to certain exceptions.93 The parties do not dispute that Buttonwood was
dissolved after the passing of its founder in late 2016.
After dissolution, the Code provides that “[a] limited partnership
continues . . . only for the purpose of winding up its activities.”94 The Code provides
the following list of activities in which a limited partnership may engage during the
winding up process:
(b) In winding up its activities, the limited partnership:
(1) may amend its certificate of limited partnership
to state that the limited partnership is dissolved,
preserve the limited partnership business or
property as a going concern for a reasonable time,
prosecute and defend actions and proceedings,
93
CAL. CORP. CODE § 15908.01(c)(2).
94
Id. § 15908.03(a).
18
whether civil, criminal, or administrative, transfer
the limited partnership’s property, settle disputes by
mediation or arbitration, file a certificate of
cancellation as provided in Section 15902.03, and
perform other necessary acts; and
(2) shall discharge the limited partnership’s
liabilities, settle and close the limited partnership’s
activities, and marshal and distribute the assets of
the partnership.95
Contending that the winding up process ends with the certificate of cancellation, the
Defendants insert the phrase “and then” in brackets in front of “file a certificate of
cancellation,” and replace with ellipses all the activities that the Code lists after “file
a certificate of cancellation”:
The California Corporation Code . . . provides that, after a
limited partnership dissolves, it may wind up its activities
and, in doing so, may ‘prosecute and defend actions and
proceedings, whether civil, criminal, or administrative . . .
[and then] file a certificate of cancellation as provided in
Section 15902.03 . . . .’” 96
The Defendants thus seek to add a temporal qualifier—“and then”—to the
filing of the certificate of cancellation that is not present in the statute. That is not
how I read the statute. Instead, it merely lists the activities that are included in the
winding up process; it does not mandate the order in which those activities must be
undertaken.
95
Id. § 15908.03(b).
96
Defs.’ AB at 24 (quoting CAL. CORP. CODE § 15908.03(b)(1)).
19
The Defendants also point to the section of the Code that describes how
certificates of cancellation must be filed as evidence that cancellation terminates the
winding up process. That section of the Code provides as follows: “A dissolved
limited partnership that has completed winding up shall deliver to and on a form
prescribed by the Secretary of State for filing a certificate of cancellation.”97
According to the Defendants, the phrase “that has completed winding up” suggests
that cancellation can only occur after winding up. I disagree. It is true that the Code
requires “a limited partnership that has completed winding up” to file a certificate of
cancellation. But nowhere does the Code prohibit the filing of a certificate of
cancelation earlier, before winding up is complete. I do not read this section of the
Code as prohibiting a limited partnership from continuing to undertake winding up
activities, including prosecuting litigation, after filing its certificate of cancellation.
Finally, the Defendants note that the certificate of cancellation filed by
Buttonwood states that upon cancellation, “its powers, rights and privileges will
cease in California.” 98 This phrase is consistent with the form certificate of
cancellation provided by the California Secretary of State, which includes the
following statement: “Upon the effective date of this Certificate of Cancellation, the
97
CAL. CORP. CODE § 15902.03.
98
See Buttonwood Cert. Cancellation at 1.
20
Limited Partnership’s registration is cancelled and its powers, rights and privileges
will cease in California.”99
I note that the Code does not require the certificate of cancellation to include
this language. To the contrary, the Code merely requires the certificate of
cancellation to include “the name of the limited partnership and the Secretary of
State’s file number,” “the date of filing of its initial certificate of limited
partnership,” and “any other information as determined by the general partners.”100
Nevertheless, the Code does require the certificate of cancellation to be “on a form
prescribed by the Secretary of State,”101 and the Secretary of State has prescribed a
form stating that upon cancellation, “the Limited Partnership’s . . . powers, rights
and privileges will cease in California.”102
The inclusion of this language on Buttonwood’s certificate of cancellation
does not end my analysis, however. Although the Code is silent with respect to the
powers of limited partnerships after cancellation, it is not silent with respect to
California corporations and LLCs. The Code requires California LLCs to file a
certificate of cancellation stating that upon cancellation, the “limited liability
company shall be cancelled and its powers, rights, and privileges shall cease.”103
99
SEC’Y OF STATE BUS. PROGRAMS DIV., CERTIFICATE OF CANCELLATION LTD. P’SHIP (LP) LP-4/7
(Mar. 2022), https://bpd.cdn.sos.ca.gov/lp/forms/lp-4-7.pdf.
100
CAL. CORP. CODE § 15902.03.
101
Id.
102
See supra note 99 and accompanying text.
103
CAL. CORP. CODE § 17707.02(c).
21
Likewise, the Code requires California corporations to file a certificate of dissolution
stating that upon dissolution, “the corporate powers, rights, and privileges of the
corporation shall cease.” 104
Even though the Code provides that the “powers, rights, and privileges” of
LLCs and corporations cease upon cancellation or dissolution, the Code carves out
exceptions for the prosecution of litigation. Specifically, the Code provides that “[a]
limited liability company that has filed a certificate of cancellation nevertheless
continues to exist for the purpose of,” among other things, “prosecuting and
defending actions by or against it in order to collect and discharge obligations.”105
The Code features a similar carveout for corporations: “A corporation which is
dissolved nevertheless continues to exist for the purpose of,” among other things,
“prosecuting and defending actions by or against it and enabling it to collect and
discharge obligations.” 106
By analogy, I conclude that California limited partnerships such as
Buttonwood are subject to a similar carveout that allows them to continue to exist
after cancellation for the purpose of “prosecuting and defending actions by or against
it in order to collect and discharge obligations,”107 notwithstanding the language in
104
Id. § 1905(b).
105
Id. § 17707.06(a).
106
Id. § 2010(a).
107
See id. § 17707.06(a).
22
the limited partnership cancellation form stating that their “powers, rights and
privileges will cease in California.” 108 Although there appears to be no case law
squarely addressing whether a California limited partnership continues to exist for
the purposes of pursuing litigation after filing a certificate of cancellation, my
conclusion is buttressed by language from Ose Properties, Inc. v. Priest, in which
the California Court of Appeals opined that a certificate of cancellation does not
“deprive [a limited partnership] or its successor in interest from collecting on the
judgment which is part of winding up the affairs of the partnership.” 109
Accordingly, I conclude that Buttonwood continues to exist for the purpose
of pursuing this litigation, and it is thus not subject to an atypical defense regarding
its existence. The Plaintiffs have satisfied the typicality requirement of Rule
23(a)(3).
d. Adequacy
Under Rule 23(a)(4), I must determine that the proposed plaintiff class
representatives and their counsel “will fairly and adequately protect the interests of
the class.” 110 The adequacy requirement “attempts to ensure that the class
representative has proper incentives to advance the interests of the class,” and
108
See supra note 99 and accompanying text.
109
2017 WL 4294069, at *6 (Cal. Ct. App. Sept. 28, 2017).
110
Ct. Ch. R. 23(a)(4).
23
“speaks to alignment of interests” among the named and unnamed class members.111
The class representative need not be “the best of all representatives, but [rather] one
who will pursue a resolution of the controversy in the interests of the class.” 112
Delaware courts have articulated a three-part test to establish the adequacy of
the class representatives. First, the representative’s interests must not be
“antagonistic to the class.”113 Second, the plaintiffs must retain “competent and
experienced counsel to act on behalf of the class.” 114 Finally, the class
representatives must “possess a basic familiarity with the facts and issues involved
in the lawsuit.” 115 Delaware courts “generally accord the greatest weight to the
presence or absence of conflicts of interest or economic antagonism when evaluating
a lead plaintiff’s adequacy.”116 “[P]urely hypothetical, potential, or remote conflicts
of interest,” however, “never disable the individual plaintiff.” 117
The Defendants do not challenge the adequacy of the Plaintiffs’ counsel, who
I find manifestly adequate. The Defendants contend, however, that Buttonwood and
Mitchell are both inadequate class representatives.
111
In re Celera Corp. S’holder Litig., 2012 WL 1020471, at *14 (Del. Ch. Mar. 23, 2012), aff’d
in relevant part, rev’d in part, 59 A.3d 418 (Del. 2012).
112
Price v. Wilmington Tr. Co., 730 A.2d 1236, 1238 (Del. Ch. 1997) (quoting Ross v. A.H. Robins
Co., 100 F.R.D. 5, 6 (S.D.N.Y. 1982)).
113
In re Fuqua Indus., Inc. S’holder Litig., 752 A.2d 126, 127 (Del. Ch. 1999).
114
Id.115
Id.116
Celera, 2012 WL 1020471, at *14.
117
Id. (quoting Youngman v. Tahmoush, 457 A.2d 376, 380 (Del. Ch. 1983)).
24
First, the Defendants contend that because Mitchell sold only a small portion
of its shares in a private transaction during the Self-Tender Period, it is an inadequate
representative of the class members who tendered their stock.118 As I explained
above, however, this factual distinction between Mitchell and members of the
plaintiff class who tendered their shares is only relevant to the issues of reliance,
causation, and damages, on which I have reserved judgment. With respect to the
issue of breach, and corresponding nominal damages, Mitchell is situated identically
to all members of the class who received the allegedly misleading Offer To Purchase.
Moreover, with respect to those shares it sold, its incentives are aligned with the
class. I therefore find that, at least with respect to the issue of whether the
Defendants breached their duty of disclosure, Mitchell is an adequate class
representative.
Second, the Defendants argue that Buttonwood is an inadequate class
representative, both because it supposedly “no longer exists,” and also because
Buttonwood’s representative, Philip Milner, purportedly “lacks even the most basic
familiarity with the facts of the case and Buttonwood’s investment in the
Company.”119 I have already held above that Buttonwood does exist for the purposes
of pursuing this litigation.120
118
Defs.’ AB at 28.
119
Id. at 27–28.
120
See supra § II.B.1.c.
25
With respect to Milner’s familiarity with this case, “[i]t is a well-settled legal
principle that class representatives are not required to fully understand the nuances
of the legal theories underlying each of their claims.”121 The adequacy element
requires nothing more than “a rudimentary understanding of the claims, facts, and
issues.”122 According to the Defendants, Milner has minimal knowledge of the
Self-Tender, Buttonwood’s relevant transactions in Polk stock, or its
communications with the Company regarding the Self-Tender.123 The Defendants
also contend that Milner only became familiar with the litigation a few months
before being deposed in this matter in connection with class certification, and that
he conducted no “independent investigation of the facts or claims” and did not know
“what would be involved if Buttonwood were designated as a class
representative.” 124
A review of Milner’s deposition transcript reveals, however, that the
Defendants’ position is entirely misplaced; Milner has the requisite understanding
of this action, and of Buttonwood’s role as a class representative. Milner testified
that he has communicated on a periodic basis with Plaintiffs’ counsel “over the
course of years that this action was pending.” 125 The liquidating partner then
121
O’Malley v. Boris, 2001 WL 50204, at *5 (Del. Ch. Jan. 11, 2001).
122
Id.123
Defs.’ AB at 27–28.
124
Id.125
Milner Dep. at 65:12–66:14; see also id. at 195:3–5, 208:14–209:19.
26
formally asked Milner to serve as Buttonwood’s representative in this litigation after
Buttonwood was required to make a Rule 30(b)(6) witness available to the
Defendants. 126 Milner thereafter worked with the Plaintiffs’ counsel to review the
filings, including the operative complaint, and familiarize himself with the facts and
theory of this case.127 At his deposition, Milner cogently articulated the Plaintiffs’
theory of this case.128 Milner also testified to a general understanding of
Buttonwood’s role and responsibilities as a class representative.129 This Court has
previously found class representatives to be adequate despite having little to no
knowledge of the facts of the case at the outset of the litigation.130 I find Milner’s
familiarity with this action sufficient to satisfy Rule 23(a)(4)’s adequacy
requirement.
Accordingly, the Plaintiffs have met their burden of establishing that Mitchell
and Buttonwood are adequate class representatives. Having determined that the
proposed Plaintiff class meets the criteria of Rule 23(a), I turn to Rule 23(b).
126
Id. at 15:22–16:5, 52:14–56:6, 57:17–58:6, 204:12–205:1.
127
Id. at 34:23–35:6, 61:16–62:4, 85:12–86:5, 92:10–15.
128
Id. at 92:16–23; see also id. at 67:9–68:8, 74:24–75:16, 80:6–81:1, 169:10–170:17, 176:11–24,
179:13–180:12, 182:3–12.
129
See id. at 197:6–16.
130
See Kahn v. Household Acquisition Corp, 1982 WL 8778, at *3–6 (Del. Ch. Jan. 19, 1982); see
also Fuqua, 752 A.2d at 134–37.
27
2. The Proposed Plaintiff Class Satisfies Rule 23(b)
Court of Chancery Rule 23(b) “divides class actions into three categories.”131
Subdivision (b)(1) “applies to class actions that are necessary to protect the party
opposing the class or members of the class from inconsistent adjudications in
separate actions.”132 Subdivision (b)(2) “applies to class actions for class-wide
injunctive or declaratory relief.”133 Subdivision (b)(3) “applies when common
questions of law or fact predominate and a class action would be superior to other
means of adjudication.” 134
The Plaintiffs here seek to certify the plaintiff class pursuant to Rule 23(b)(1)
and Rule 23(b)(2).135 Rule 23(b)(1) is satisfied if:
(1) The prosecution of separate actions by or against
individual members of the class would create a risk of:
(A) Inconsistent or varying adjudications with
respect to individual members of the class which
would establish incompatible standards of conduct
for the party opposing the class, or
(B) Adjudications with respect to individual
members of the class which would as a practical
matter be dispositive of the interests of the other
members not parties to the adjudications or
substantially impair or impede their ability to
protect their interests[.] 136
131
Nottingham Partners v. Dana, 564 A.2d 1089, 1095 (Del. 1989).
132
Celera, 59 A.3d at 432 (quoting Nottingham, 564 A.2d at 1095).
133
Id. (quoting Nottingham, 564 A.2d at 1095).
134
Id. (quoting Nottingham, 564 A.2d at 1095).
135
Pls.’ OB at 28–31.
136
Ct. Ch. R. 23(b)(1).
28
Rule 23(b)(2) is satisfied if:
The party opposing the class has acted or refused to act on
grounds generally applicable to the class, thereby making
appropriate final injunctive relief or corresponding
declaratory relief with respect to the class as a whole[.] 137
As our Supreme Court has recognized, Delaware courts “repeatedly have held
that actions challenging the propriety of director conduct in carrying out corporate
transactions are properly certifiable under both subdivisions (b)(1) and (b)(2).”138
This is true with respect to duty of disclosure claims, including duty of disclosure
claims that seek damages. 139 Indeed, in Turner v. Bernstein, this Court certified a
plaintiff class that sought rescissory damages under Rule 23(b)(1)(A) and (B).140
The Court held that the requirements of Rule 23(b)(1) are satisfied where the case
involves “one set of actions by defendants creating a uniform type of impact upon
the class of stockholders.” 141 The Court found that standard was applicable in the
duty of disclosure context because
(1) the defendant-directors either did or did not breach
their fiduciary duty of disclosure to all or none of the . . .
stockholders in the Proposed Class; (2) if the
defendant-directors did commit such a breach (as I have
held), there is no requirement that any member of the
Proposed Class have actually relied upon such breach in
137
Ct. Ch. R. 23(b)(2).
138
Celera, 59 A.3d at 432–33 (quoting In re Cox Radio, Inc. S’holders Litig., 2010 WL 1806616,
at *8 (Del. Ch. May 6, 2010), aff’d, 9 A.3d 475 (Del. 2010)).
139
Turner, 768 A.2d at 30–37.
140
Id.141
Id. at 31 (quoting In re Mobile Commc’ns Corp. of Am., Inc., Consol. Litig., 1991 WL 1392, at
*16 (Del. Ch. Jan. 7, 1991), aff’d, 608 A.2d 729 (Del. 1992)).
29
order to benefit from a remedy; and (3) thus any monetary
remedy due to the Proposed Class will be calculated on a
per share, rather than per shareholder, basis. 142
The Turner Court relied on Malone for the proposition that the plaintiffs did
not need to prove reliance to receive damages.143 As discussed above, the holding
in Malone that stockholders are entitled to “per se” damages for breaches of the duty
of disclosure has since been narrowed by the Supreme Court, in Dohmen, to apply
to nominal damages. 144 Accordingly, the Turner Court’s conclusion that “there is
no requirement that any member of the Proposed Class have actually relied upon
such breach” may prove inapposite at the ultranominal damages phase of this
litigation. 145 As explained above, however, I have reserved judgment regarding class
certification on the issue of ultranominal damages.
With respect to class certification for the issue of breach and corresponding
“per se” nominal damages, the Turner Court’s reasoning remains compelling. As in
Turner, the Defendants here either did or did not breach their duty of disclosure, and
if they did, they owe “per se” nominal damages to the plaintiff class under Malone
and Dohmen, without having to prove reliance or causation. Whether the Defendants
breached their duty of disclosure and owe corresponding nominal damages thus
142
Id.143
Id. (citing Malone, 722 A.2d at 12).
144
See supra notes 43–46 and accompanying text.
145
See supra note 49.
30
involves “one set of actions by defendants creating a uniform type of impact upon
the class of stockholders.”146
Accordingly, I find that the proposed plaintiff class meets the requirements
for certification under of Rule 23(b)(1), at least with respect to the issue of breach
and nominal damages. Because I certify the plaintiff class under Rule 23(b)(1), I
need not consider whether the class separately meets the criteria of Rule 23(b)(2). I
therefore turn to the proposed defendant class.
C. The Defendant Class
The Plaintiffs seek to certify a defendant class defined as follows:
all Polk Family members to the extent [Polk shares] owned
directly or beneficially by them were: (a) controlled by a
Polk Director, (b) were part of the control block of Polk
shares directed by a Polk Director, (c) supported the
actions of the Polk Directors or (d) benefitted from the
actions of the Polk Directors challenged herein. 147
The Plaintiffs have excluded from the proposed defendant class Polk stock “owned
by the [Polk Trusts] that were tendered into the Self-Tender.”148 The Plaintiffs seek
to name Stephen Polk as the class representative for the defendant class. 149
146
Turner, 768 A.2d at 31 (quoting Mobile, 1991 WL 1392, at *16).
147
Proposed Order ¶ 5.
148
Id.149
Id.31
A party seeking to certify a defendant class must meet the same requirements
of Rule 23(a) and (b) that are required of a plaintiff class. 150 But “the creation of
defendant classes raises due process concerns not encountered when the designation
of a plaintiff class is sought.”151 “The crux of the distinction is[ that] the unnamed
plaintiff stands to gain while the unnamed defendant stands to lose.” 152 Therefore,
“[b]efore certifying a defendant class, the court must carefully examine the impact
of such certification on the rights of unnamed class members.”153 Courts are
reluctant to certify a defendant class absent a “sufficient showing of necessity.”154
The Plaintiffs have failed to demonstrate that the proposed defendant class
meets the requirements of Rule 23(a). First, the Plaintiffs have failed to demonstrate
that Stephen Polk is an adequate class representative. As I discussed above, Rule
150
See Ct. Ch. R. 23 (“[o]ne or more members of a class may sue or be sued as representative
parties on behalf of all only if” the elements of Rule 23(a) and (b) are satisfied) (emphasis added));
see also Weiner, 584 A.2d at 1223 (examining certification of a defendant class by reference to
Rule 23(a) and (b) criteria).
151
Follette v. Vitanza, 658 F. Supp. 492, 507 (N.D.N.Y. 1987) (“The reluctance of many courts to
certify defendant classes is rooted in the fact that the creation of defendant classes raises due
process concerns not encountered when the designation of a plaintiff class is sought.”), modified
sub nom. Follette v. Cooper, 658 F. Supp. 514 (N.D.N.Y. 1987), order vacated in part on other
grounds, 671 F. Supp. 1362 (N.D.N.Y. 1987); see also Funliner of Ala., L.L.C. v. Pickard, 873 So.
2d 198, 212 (Ala. 2003) (“Courts have recognized that certification of defendant class actions give
rise to certain due-process concerns not found in plaintiff class actions.”); In re Gap Stores Sec.
Litig., 79 F.R.D. 283, 292 (N.D. Cal. 1978) (“defendant class actions seem to demand greater
attention to the due process rights of absent class members” and “are seldom certified”); Akerman
v. Oryx Commc’ns, Inc., 609 F. Supp. 363, 374 (S.D.N.Y. 1984) (“[C]ertification of defendant
classes is relatively rare. The creation of defendant classes raises due process issues not
encountered in the context of plaintiff classes.”), aff’d, 810 F.2d 336 (2d Cir. 1987).
152
Thillens, Inc. v. Cmty. Currency Exch. Ass’n of Ill., Inc., 97 F.R.D. 668, 674 (N.D. Ill. 1983).
153
Akerman, 609 F. Supp. at 375.
154
Flying Tiger Line, Inc. v. Cent. States, Sw. & Se. Areas Pension Fund, 1986 WL 13366, at *4
(D. Del. Nov. 20, 1986).
32
23(a)(4)’s adequacy requirement mandates that the representative’s interests must
not be antagonistic to the class. 155 As a class representative, Stephen Polk would
serve as a fiduciary to the unnamed defendant class members.156 But Stephen Polk
is also a fiduciary of the Polk Trusts, both of which participated in the Self-Tender
and are included in the plaintiff class. 157 If appointed as the defendant class
representative, Stephen Polk would therefore serve as a fiduciary of the defendant
class while at the same time serving as a fiduciary via the Polk Trusts of certain
plaintiff class members. That conflict renders him inadequate to serve as a class
representative, particularly given the heightened due process concerns pertaining to
defendant classes.
Second, the defendant class members each have individualized defenses that
are fatal to class certification here. The Plaintiffs’ theory is that the defendant class
members, who were Polk stockholders and members of the Polk Family, formed a
controlling stockholder group and breached their duty of disclosure in connection
with the Offer To Purchase.158 But to establish a control group, the Plaintiffs must
155
Fuqua, 752 A.2d at 127.
156
See Steinhardt v. Howard-Anderson, 2012 WL 29340, at *8 (Del. Ch. Jan. 6, 2012) (“class
representatives ‘act[ ] as fiduciaries on behalf of others’” (citation omitted)); In re M & F
Worldwide Corp. S’holders Litig., 799 A.2d 1164, 1174 n.34 (Del. Ch. 2002) (“[B]y asserting a
representative role on behalf of a proposed class, representative plaintiffs and their counsel
voluntarily accept a fiduciary obligation towards members of the putative class.”).
157
See supra note 16 and accompanying text.
158
See Pls.’ OB at 19–20 (“The members of the Polk Family Class through their de facto and/or
de jure representative Stephen Polk (working with the other Polk family Directors) have acted in
33
show an “actual agreement” among the Defendant class members. 159 And to prevail
on a claim for damages for a breach of the duty of disclosure, the Plaintiffs similarly
must prove “a culpable state of mind or non-exculpated gross negligence” as to each
defendant.160 Indeed, in asserting that Stephen Polk’s claims are typical of the
unnamed class members, the Plaintiffs repeatedly assert that the defendant class
members “agreed” to act as a control group and were uniformly “aware” of the
breaches of fiduciary duty. 161
As discussed above, I held at the motion to dismiss stage that it was reasonably
conceivable that the “Polk Family . . . acted as a controlling stockholder.” 162 I noted,
however, that “given the Complaint’s failure to break down the ownership structure
of the ‘Polk Family,’ it is far from clear that all stockholders who are also relatives
of the founder are members of a control block; nothing in this [motion to dismiss
opinion] should be read to the contrary.”163 Therefore, despite my holding that it
was “reasonably conceivable” that the “Polk Family” formed a control group, each
concert and agreed to control and dominate the affairs of Polk as a controlling shareholder block”
and “knowingly supported and enabled the breaches of fiduciary duty alleged herein”).
159
Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 252 (Del. 2019).
160
In re Wayport, Inc. Litig., 76 A.3d 296, 315 (Del. Ch. 2013).
161
See Pls.’ OB at 19 (“Polk Family Class . . . have acted in concert and agreed to control and
dominate the affairs of Polk as a controller shareholder block”); id. (“Polk Family Class” “were
aware that disclosures to the Polk shareholders have referred to their group as the ‘Polk family
shareholders,’ the ‘Polk family’ and the ‘Family Investors’”); id. at 20 (“Polk Family Class” shared
“goal of freezing out minority shareholders”); id. (“Polk Family Class” “knowingly supported and
enabled the breaches of fiduciary duty alleged herein”).
162
Buttonwood, 2017 WL 3172722, at *6–7.
163
Id. at *6.
34
stockholder who is also a relative of the Polk founder will have the opportunity at
trial to demand that the Plaintiffs prove that he or she entered an “actual agreement”
to form a control group. The claims against the putative defendant class are thus
subject to individualized knowledge defenses with respect to each class member’s
participation in the alleged control group and each class member’s “culpable state
of mind” or “non-exculpated gross negligence” regarding the alleged disclosure
violations.
At a minimum, these individualized defenses are fatal to Rule 23(a)(3)’s
requirement that “the claims or defenses of” Stephen Polk as “the representative
part[y] are typical of the claims or defenses of the [defendant] class.” 164 As
discussed above, “a proposed class representative may not be typical if he is
potentially subject to unique defenses not applicable to other class members.”165
Although the Court articulated this rule statement in the context of plaintiff class
representatives, the same principle is true with respect to defendant class
representatives. In assessing typicality in the context of a defendant class, the court
must “examine the status of the proposed class representative as compared to the
nature of the class and the issues to be resolved.”166
164
Ct. Ch. R. 23(a)(3).
165
infoGROUP, 2013 WL 610143, at *3.
166
United States v. Loc. 1804-1, Int’l Longshoremen’s Ass’n, 1993 WL 439109, at *1 (S.D.N.Y.
Oct. 27, 1993) (discussing typicality under Fed. R. Civ. P. 23(a)(3)).
35
As the President, CEO and Chairman of Polk, Stephen Polk’s liability for any
breach of his duties of loyalty or care in connection with the allegedly misleading
disclosures is presumably not dependent on finding that a control group existed and
that it included every stockholder that is related to Polk’s founder. The claims
against the unnamed defendant class members who are alleged to have formed a
“Polk Family” control group are therefore “subject to unique defenses” not
applicable to the claims against Stephen Polk—namely, whether they reached an
“actual agreement” to participate in the alleged control group and whether they
possessed the requisite state of mind with respect to the misleading nature of the
Offer To Purchase.167 Given the heightened due process concerns regarding
defendant classes, I find these individualized questions sufficient to defeat typicality.
Accordingly, I find that Stephen Polk is not an adequate or typical
representative for the proposed defendant class. I therefore decline to certify the
defendant class. Although I need not consider whether the proposed defendant class
satisfies the other requirements of Rule 23, I note that the individualized knowledge
issues pertinent to each member of the putative defendant class may doom class
certification under Rules 23(b)(1) and (b)(2) as well.168
167
See Real Est. All., Ltd. v. Sarkisian, 2007 WL 2814591, at *3 (E.D. Pa. Sept. 24, 2007) (no
typicality under Fed. R. Civ. P. 23(a)(3) where proposed defendant class representative’s
“knowledge . . . would not encompass the knowledge of the [other] proposed class members”).
168
See Countrywide, 2009 WL 846019, at *11 (certification under Rule 23(b)(1)(A) “requires a
‘total absence of individual issues.’” (citation omitted)); id. (“‘[C]lass actions usually meet both
subparts of subsection (b)(1) of Rule 23 or neither of them,’ as each focuses on the individuality
36
III. CONCLUSION
For the foregoing reasons, the Plaintiffs’ Motion is GRANTED in part and
DENIED in part. The parties should confer and submit a form of order consistent
with this Memorandum Opinion.
of the actions belonging to the class members.” (citation omitted)); Clark v. McDonald’s Corp.,
213 F.R.D. 198, 220–21 (D.N.J. 2003) (“[I]f [Fed. R. Civ. P.] Rule 23(b)(2) ever permits
[defendant class] certifications, then they are confined at least to those situations . . . in which
individual members of the defendant class are all acting in furtherance of, or pursuant to, some
uniform practice or policy or where the applicable theory of law otherwise renders individualized
questions irrelevant to the determination of class-wide injunctive liability.” (citations omitted)).
37