Buckley Family Trust v. Charles Patrick McCleary ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
BUCKLEY FAMILY TRUST, )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0903-AGB
)
CHARLES PATRICK MCCLEARY, )
JAMES MCCLEARY, JOHN )
MCCLEARY, MARGARET )
MCCLEARY STURGES, and SARAH )
MCCLEARY STOVER, )
)
Defendants, )
)
and )
)
MCCLEARY, INC., a Delaware )
Corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: December 2, 2019
Date Decided: March 31, 2020
Peter J. Walsh, Jr. and Jacqueline A. Rogers, POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; Attorneys for Plaintiff Buckley Family Trust.
Daniel A. Dreisbach, Richard P. Rollo, and Angela Lam, RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; Attorneys for Defendants Charles Patrick
McCleary, James McCleary, John McCleary, Margaret McCleary Sturges, and
Sarah McCleary Stover, and Nominal Defendant McCleary, Inc.
BOUCHARD, C.
The Buckley Family Trust is one of seven stockholders of McCleary, Inc., a
small privately held snack food company. Five of the other stockholders are
descendants of the company’s founder who comprise its board of directors.
Frustrated with the lack of return it has received on its shares, the Trust sought books
and records from the company and then filed this action against its board members.
The Trust’s complaint contains two claims. The first claim seeks to compel
the company to pay a dividend. The second claim asserts, in the main, that the
directors breached their fiduciary duty of care concerning various decisions they
made and various matters they allegedly failed to manage or address properly.
Unlike in most cases this court sees, McCleary, Inc. does not have a provision in its
certificate of incorporation exculpating its directors for monetary damages for
breaches of the duty of care. Defendants have moved to dismiss both claims for
failure to state a claim for relief. Defendants also have moved to dismiss the second
claim, which the Trust brings derivatively on behalf of the company, for failure to
make a demand on the company’s board before filing suit.
For the reasons explained below, the court grants the motion to dismiss as to
both claims. As to the first claim, the Trust has failed to allege facts that would
warrant second-guessing the directors’ business judgment in declining to declare
more dividends than they have in the past. As to the second claim, the Trust has
1
failed to plead with particularity facts creating a reasonable doubt about the
directors’ ability to consider a demand impartially.
I. BACKGROUND
The facts recited in this opinion come from the Verified Amended Complaint
(the “Complaint”) and documents incorporated therein, which include meeting
minutes, financial statements, and other internal documents of McCleary, Inc. that
were produced to plaintiff in response to a demand under 8 Del. C. § 220.1 Plaintiff
agrees that the court may consider these documents in its disposition of this motion.2
A. The Players
In 1960, Eugene “Mac” McCleary founded the predecessor of McCleary, Inc.
(“McCleary” or the “Company”), a Delaware corporation with its principal place of
business in South Beloit, Illinois.3 The Company manufactures and distributes snack
food products through its wholly owned subsidiary, Axium Foods, Inc. (“Axium”).4
Jerry Stokely was President of Axium during the period relevant to the Complaint.5
In 1986, the Company was reorganized as an “S” corporation.6 At the time of the
1
Verified Am. Compl. (“Compl.”) (Dkt. 19).
2
Tr. 80 (Dkt. 42).
3
Compl. ¶¶ 5, 12, 17.
4
Id. ¶ 5.
5
Id. Ex. B at M1392.
6
Compl. ¶ 17.
2
reorganization, Grace Knoll, who made a capital investment when the Company was
founded, received non-voting common stock in the Company. 7
Defendants Charles Patrick McCleary (“Pat McCleary”), James McCleary,
John McCleary, Margaret McCleary Sturges, and Sarah McCleary Stover
(collectively, “Defendants” or the “McCleary Family Defendants”) are all
descendants of Mac McCleary.8 They each hold 12,829 shares of voting common
stock of the Company and serve on the Company’s board of directors (the “Board”).9
The McCleary Family Defendants hold all of the Company’s outstanding voting
common stock and approximately 83.6% of the Company’s 76,534 shares of
outstanding voting and non-voting common stock.10 Pat McCleary is the Company’s
Chief Executive Officer.11
Plaintiff Buckley Family Trust (“Plaintiff” or the “Trust”) has held 6,291
shares of non-voting common stock of the Company since 2006.12 The Company
has one other stockholder, the John S. Haine Trust, which holds a similar number of
shares of non-voting common stock.13 Knoll, who died in 2001, originally held the
7
Id. ¶¶ 16-17.
8
Id. ¶¶ 6-10.
9
Id.
10
Id. ¶ 60; see also Tr. 5, 44.
11
Compl. ¶ 62.
12
Id. ¶ 4.
13
Id. ¶¶ 24-26; Tr. 5, 43-44.
3
shares now held by the Trust and the Haine Trust, which together hold approximately
16.4% of the Company’s outstanding common stock.
B. The Common Stock Purchase and Restriction Agreement
In 1993, Knoll and the other McCleary stockholders executed a Common
Stock Purchase and Restriction Agreement (the “Purchase and Restriction
Agreement”), a copy of which is attached to the Complaint.14 The Purchase and
Restriction Agreement recites that the Company “elected to be treated as an S
Corporation and the Shareholders desire to continue the election and to impose
certain restrictions to insure that neither the Corporation nor any Shareholder shall
take any action to jeopardize the election.”15 More specifically, the Purchase and
Restriction Agreement restricts stockholders of the Company from selling or
transferring any of their shares “for any reason” without first offering to sell them to
the Company and, if the Company does not elect to purchase the shares, to the other
stockholders of the Company.16
14
Compl. ¶ 18; see also id. Ex. A (“Purchase and Restriction Agreement”) at 1 (reciting
that the Restriction Agreement is “made and entered into . . . by and between all of the
Shareholders of McCLEARY, Inc.”).
15
Purchase and Restriction Agreement at 1.
16
Compl. ¶ 18; Purchase and Restriction Agreement §§ 1, 3.
4
Under the Purchase and Restriction Agreement, the purchase price for the
non-voting shares is set at the greater of the book value of the shares or their
appraised value, less a 30% discount for “lack of marketability and control”:
In the event any Shareholder desires to sell or transfer for any
reason his or her shares of the Corporation, that person shall deliver
written notice to the Corporation specifying that he or she desires to sell
or transfer his or her shares, to whom the transfer will be made and all
of the terms of the sale or transfer.
On receipt of such notice, the Corporation shall have the
exclusive option for a period of ninety (90) days after receipt of such
notice in which to purchase the shares desired to be sold or transferred.
The purchase price for said shares shall be the book value of the shares
as computed by a certified public accountant designated by the
Corporation using the most recent corporate year end income tax return
or the most recent appraised value of the Corporation, divided by the
number of shares outstanding (both voting and non-voting), whichever
is greater, less the discount described hereafter. Any appraisal shall be
an appraisal commissioned for examination by any Shareholder, less a
discount of thirty (30%) percent applicable to all non-voting shares for
lack of marketability and control.
In the event the Corporation does not exercise its option to
purchase, Shareholders shall have the exclusive option for a period of
thirty (30) days next succeeding the expiration of the first option period,
to purchase the shares so proposed to be sold or transferred at the price
available to the Corporation.17
If the Company and the remaining stockholders do not elect to exercise their options
under the provision quoted above, the selling stockholder may sell its shares to a
third party subject to that person (i) “qualify[ing] as a Sub[chapter] S stockholder”
17
Purchase and Restriction Agreement § 3.
5
and (ii) “execut[ing] . . . a stock restriction agreement approved by the
Corporation.”18
C. Challenged Actions Approved by the Board
In December 2015, the Board authorized the Company to spend
approximately $100,000 to improve its production facilities in order to do business
with a competitor, Shearer’s, for an expected “nine month commitment.”19 At the
time, Shearer’s was unable to meet its production needs.20 Under the arrangement,
the Company would use some of its production facility to package products for
Shearer’s.21 Shearer’s withdrew from the arrangement in early 2016, which was
“sooner than the Board expected.”22
In early 2016, the Company authorized the construction of a new warehouse
in South Beloit, Illinois, where the Company is headquartered.23 The purpose of the
warehouse was to store Axium products and allow the Company to move away from
relying on expensive offsite storage facilities.24 In approving the project, the Board
hoped to obtain local government assistance, and subsequently engaged in
18
Id.
19
Compl. ¶ 48; id. Ex. D at M1404, 1407.
20
Compl. ¶ 48.
21
Id.
22
Id.
23
Id. ¶ 49; see id. Ex. I at M0043.
24
Compl. ¶ 49.
6
negotiations to receive a tax abatement.25 In May 2016, after the city council
requested that the Company provide lifetime maintenance of the roads in the
industrial park in which the warehouse would be located, the Board abandoned the
project, at a loss of approximately $131,000.26
In April 2016, the Board decided to transition away from one of its customers,
Aldi, which accounted for the largest component of the Company’s sales, and to
focus on a new customer, Truco.27 When the Board made this decision, Axium’s
President advised the Board that “the Company would be placed in a ‘downward
spiral’ if it matched the lower prices of competitors as needed to retain Aldi.”28
The relationship with Truco “quickly soured.”29 The contract with Truco was
“dropped” because Truco was “micro-managing” and “very painful and instructive
to deal with.”30 Less than one year after transitioning away from Aldi, the Company
lowered its prices to reclaim Aldi as a customer.31 The decision to transition away
25
See id. Ex. B at M1394; id. Ex. C at M1398.
26
Compl. ¶ 49; see id. Ex. E at M1418.
27
Compl. ¶ 46; see id. Ex. C at M1397.
28
Compl. ¶ 46; see id. Ex. D at M1405.
29
Compl. ¶ 47.
30
Id.; see id. Ex. E at M1417-18.
31
Compl. ¶ 47.
7
from, and eventually back to, Aldi resulted in approximately $10 million in lost sales
as of January 2017.32
D. Challenged Actions Not Approved by the Board
In addition to challenging the three actions discussed above that the Board
approved, the Trust challenges three alleged failures of the Board concerning
(i) needed improvements to the Company’s production facilities, (ii) managing the
Company’s tax obligations, and (iii) observing corporate formalities. The facts
relevant to these three subjects are discussed below in Part III.B.
II. PROCEDURAL HISTORY
On March 22, 2019, the Trust filed its Complaint, which contains two claims.
Count I asserts that Defendants committed an “oppressive abuse of discretion” by
failing to declare a dividend.33 Count II asserts, in the main, that Defendants
“breached their fiduciary duties by failing to manage the Company’s affairs with due
care and in an informed manner” in various respects discussed below.34
On April 5, 2019, Defendants moved to dismiss both claims under Court of
Chancery Rule 12(b)(6) for failure to state a claim for relief, and to dismiss Count II
under Rule 23.1 for failing to make a demand on the Board before initiating
32
Id.; see id. Ex. E at M1419.
33
Compl. at 26.
34
Id. ¶ 75.
8
derivative litigation.35 The matter was fully submitted on December 2, 2019, after
oral argument and the receipt of supplemental submissions.
III. ANALYSIS
The standards governing a motion to dismiss under Court of Chancery Rule
12(b)(6) for failure to state a claim for relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and ([iv]) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible to proof.”36
Under Court of Chancery Rule 23.1, the court will grant a motion to dismiss
if the putative derivative plaintiff has failed to make a pre-suit demand on a
company’s board or failed to plead facts showing that demand upon the board would
have been futile.37
A. Count I: Oppressive Abuse of Discretion
Count I of the Complaint is styled as a claim for “oppressive abuse of
discretion.”38 It asserts that Defendants’ “refusal to declare dividends for no
legitimate business reason and despite substantial cash reserves constitutes
35
Defs.’ Opening Br. 15 (Dkt. 24); see Dkt. 21.
36
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted).
37
MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *4 (Del. Ch. May 5, 2010)
(applying Ch. Ct. R. 23.1(a)).
38
Compl. at 26.
9
oppressive misconduct and an abuse of discretion, designed to deny Plaintiff a return
on its long-term investment in the Company and thereby coerce Plaintiff into selling
its shares of stock to the McCleary Family Defendants for a substantial discount.”39
With respect to the Company’s finances, the Trust alleges that the Company
had a surplus from which it could pay dividends of approximately $18.2 million as
of October 2018,40 and that the Company has retained unnecessarily high amounts
of “surplus income” since the Trust became a stockholder in 2006.41 The Complaint
further alleges that the Board has not considered whether to declare a meaningful
dividend since 2012 and has refused to do so “to coerce Plaintiff into selling its
stock” to the McCleary Family Defendants “for a “substantial (30%) discount” under
the terms of the Purchase and Restriction Agreement.42
Defendants counter that the decision whether or not to pay a dividend is
subject to the business judgment rule and that the Complaint is devoid of facts
establishing an oppressive or fraudulent abuse of discretion in failing to pay more
dividends than it has in the past. Defendants further contend that Plaintiff’s focus
on the Company’s “surplus” paints a misleading picture of its ability to issue
39
Id. ¶ 70.
40
See 8 Del. C. § 170(a)(1) (“every corporation, subject to any restrictions contained in its
certificate of incorporation, may declare and pay dividends upon the shares of its capital
stock . . . [o]ut of its surplus . . . .”).
41
Compl. ¶¶ 59-60.
42
Id. ¶¶ 62-63.
10
dividends. Defendants point out, for example, that the Company’s financial
statements as of December 26, 2015 show that it had approximately $19.4 million
in cumulative retained earnings but only approximately $7.3 million in liquid
assets—consisting of approximately $2.3 million in cash and cash equivalents and
approximately $5 million of investments in trading securities.43 Put differently,
according to Defendants, the Company’s “surplus” on which the Trust focuses its
attention “largely took the form of buildings, machinery, inventory, and equipment”
that do not provide a liquid source of funds from which dividends could be paid.44
Section 170 of the Delaware General Corporation Law authorizes directors of
a Delaware corporation to pay dividends, subject to certain limitations, out of the
corporation’s surplus or net profits:
The directors of every corporation, subject to any restrictions contained
in its certificate of incorporation, may declare and pay dividends upon
the shares of its capital stock either:
(1) Out of its surplus, as defined in and computed in accordance with
§§ 154 and 244 of this title; or
(2) In case there shall be no such surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding
fiscal year.45
43
See id. Ex. I at M0029-30. The Company’s audited 2015 financial statements, which are
attached to the Complaint, are the most recent ones in the record.
44
Tr. 17.
45
8 Del. C. § 170(a).
11
In 1937, in a seminal decision, Chancellor Wolcott explained in Eshleman v.
Keenan that although courts have the power to compel the declaration of a dividend,
courts will do so only when the withholding of a dividend “is explicable only on
theory of an oppressive or fraudulent abuse of discretion:”
That courts have the power in proper cases to compel the directors to
declare a dividend, is sustained by respectable authorities. But that they
should do so on a mere showing that an asset exists from which a
dividend may be declared, has never, I dare say, been asserted
anywhere. In such a case the court acts only after a demonstration that
the corporation’s affairs are in a condition justifying the declaration of
the dividend as a matter of prudent business management and that the
withholding of it is explicable only on the theory of an oppressive or
fraudulent abuse of discretion.46
Our Supreme Court has endorsed this statement of the law,47 including in Gabelli &
Co., Inc. v. Liggett Group, Inc., where the high court summarized Delaware law
concerning the payment of dividends as follows:
It is settled law in this State that the declaration and payment of a
dividend rests in the discretion of the corporation’s board of directors
in the exercise of its business judgment; that, before the courts will
interfere with the judgment of the board of directors in such matter,
fraud or gross abuse of discretion must be shown. Moskowitz v.
Bantrell, Del. Supr., 190 A.2d 749 (1963). There, this Court quoted
with approval the time-honored statement of Chancellor Wolcott . . .
that courts act to compel the declaration of a dividend only upon a
demonstration “that the withholding of it is explicable only on the
theory of an oppressive or fraudulent abuse of discretion.”48
46
194 A. 40, 43 (Del. Ch. 1937) (emphasis added), aff’d, 2 A.2d 904, (Del. 1938).
47
See Moskowitz v. Bantrell, 190 A.2d 749, 750 (Del. 1963).
48
479 A.2d 276, 280 (Del. 1984) (quoting Eshleman 194 A. at 43); see also Baron v. Allied
Artists Pictures Corp., 337 A.2d 653, 659 (Del. Ch. 1975) (“Before a court will interfere
12
In support of its contention that the Company’s refusal to issue additional
dividends “is explained only by an oppressive abuse of discretion,”49 the Trust relies
on Rubin v. Great Western United Corporation50 and Litle v. Waters,51 where this
court declined to dismiss claims challenging a board’s failure to pay dividends. Both
of these decisions, however, involved allegations of director self-interest that are
readily distinguishable from the facts plead here.52
In Rubin, a holder of preferred stock alleged that the corporation’s directors
willfully refused “to make timely payment of dividends on such preferred stock”
even though the corporation had “a surplus fund far in excess of the needs for this
purpose, . . . by denominating the existing surplus and all future additions to it as a
‘Special Purpose Reserve.’”53 The Special Purpose Reserve allegedly was used to
retain funds in the corporation in order “to improve the value and earnings of the
with the judgment of a board of directors in refusing to declare dividends, fraud or gross
abuse of discretion must be shown.”).
49
Pl.’s Opp’n Br. 26 (Dkt. 27).
50
1975 WL 1261 (Del. Ch. Apr. 29, 1975).
51
1992 WL 25758 (Del. Ch. Feb. 11, 1992).
52
In a footnote, the Trust also cites Garza v. TV Answer, Inc., 1993 WL 77186 (Del. Ch.
Mar. 15, 1993). That case did not concern the failure to pay dividends. The essence of the
complaint in Garza was “that the individual defendants intentionally issued water-down
stock to themselves for the purpose of enriching themselves at the expense of the
corporation” and the plaintiffs. Id. at *5.
53
1975 WL 1261, at *1.
13
common stock of which the defendant-directors owned 32 per cent.”54 In other
words, the director defendants allegedly were motivated to divert value from the
preferred stockholders to benefit themselves as common stockholders. The court
found that these allegations, “[w]hile perhaps weak,” were sufficient to withstand a
motion to dismiss.55
Unlike in Rubin, the Trust is not a preferred stockholder with a contractual
entitlement to receive dividends.56 Rather, the Trust holds common stock and would
share equally with the McCleary Family Defendants on a pro rata basis in any
dividend that the Company issues since they each own only common stock of the
Company.
In Litle, a holder of approximately 32% of the common stock of DMGT Corp.
(Thomas Litle) asserted claims for breach of fiduciary and “gross and oppressive
abuse of discretion” against the corporation’s two directors, one of which (James
Waters) held approximately 65% of DMGT’s common stock.57 According to Litle,
54
Id. (internal quotations omitted).
55
Id. at *2.
56
See In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *7 (Del. Ch. July 24, 2009)
(“the rights and preferences of preferred stock are contractual in nature”); see also
Rothschild Int’l Corp. v. Liggett Gp., Inc., 474 A.2d 133, 136 (Del. 1984) (“[P]referential
rights are contractual in nature and therefore are governed by the express provisions of a
company’s certificate of incorporation.”).
57
1992 WL 25758 at *1, 6 (internal quotations omitted).
14
DMGT, an S corporation,58 had achieved significant earnings for several years but
the directors refused to issue any dividends in order to pressure Litle to sell “on the
cheap” while using the corporation’s profits to pay down debt it owed to Waters.59
In denying defendants’ motion to dismiss, the Litle court explained that
“Waters served his own personal financial interests in making his decision to have
DMGT not declare dividends” in two ways, i.e., (i) “to ensure that he would receive
a greater share of the cash available for corporate distributions via loan repayments”
and (ii) “to put pressure on Litle to sell his shares to him at a discount since the
shares are and were only a liability on Litle.”60 As to the latter point, the court
elaborated that Litle’s allegations “set forth a classic squeeze out situation” where
the “failure to pay dividends” was “especially devastating . . . since the corporation
passes its income through to its shareholders,” creating a tax liability for the plaintiff,
“even though the corporation has not made any distributions to the shareholders.”61
In contrast to Litle, the Complaint here acknowledges that, “in years when the
Company was profitable, the Company issued a dividend equal to the amount
58
Electing “to qualify as a Subchapter S corporation under the Internal Revenue Code . . .
meant that the federal government would not tax the income of the entity on the entity
level, rather, [the entity] would pass the income to its shareholders in a fashion similar to
that of a partnership, notwithstanding whether or not the entity made cash distributions to
its shareholders.” Id. at *1.
59
Id. at *1-2 (internal quotations omitted).
60
Id. at *4.
61
Id. at *8.
15
necessary for stockholders to pay their related tax obligations” and, beyond that, the
Company declared a special dividend to all common stockholders totaling $3 million
in 2012.62 Thus, this case does not have the coercive dynamic of the “squeeze out
situation” in Litle, where the plaintiff had to go out-of-pocket to pay taxes just to
hold his shares.
Recognizing as much, the Trust argues that “the combined pressures of the
lack of any meaningful dividends and no liquidity under the Purchase and Restriction
Agreement” amounts to coercion, “forcing Plaintiff” to sell its shares at a “steep
[30%] discount.”63 The problem with this argument is that contractually agreed upon
restrictions on the sale or transfer of stock are permissible under Delaware law.64
And in this case, the Trust obtained its McCleary shares subject to the terms and
conditions of the Purchase and Restriction Agreement to which the donor of those
shares (Grace Knoll) specifically agreed, including a “discount of thirty (30%)
percent applicable to all non-voting shares for lack of marketability and control.”65
In my view, it is not coercion for the Trust—which has been under no compulsion
62
Compl. ¶ 61.
63
Pl.’s Opp’n Br. 30.
64
8 Del. C. § 202(b) (“A restriction on the transfer . . . of securities of a corporation, . . .
may be imposed by . . . an agreement among any number of security holders or among such
holders and the corporation.”).
65
Purchase and Restriction Agreement § 3.
16
to pay a tax liability in order to keep its shares—to honor this contractual obligation
if it wishes to sell any of its shares of the Company.
Apart from the failure of the Complaint to state a cognizable theory of
coercion, the Complaint fails—unlike in Rubin and Litle—to allege facts
demonstrating that the McCleary Family Defendants’ failure to authorize dividends
was motivated by self-interest. The closest the Trust comes on this score is its
assertion that the “McCleary Defendants presumably receive annual compensation
from the Company for their roles as directors and/or officers while they hold off on
declaring dividends.”66 The implication of this statement is that, instead of issuing
dividends, the McCleary Family Defendants improperly diverted profits to
themselves through excess compensation. But the Complaint does not provide any
compensation figures or other facts to support this contention.
After this issue arose at oral argument, Defendants submitted compensation
information to the court that had been produced to the Trust in response to its Section
220 demand before it filed suit but which was omitted from its Complaint. That
information shows that (i) the Company’s directors—which currently consist of five
members—collectively received between $76,000 and $84,000 in fees annually from
2013 to 2017 and (ii) Pat McCleary received between $145,718 and $167,328 of
66
Pl.’s Opp’n Br. 28.
17
compensation as CEO of the Company from 2013 to 2016.67 These figures hardly
seem excessive for a Company with revenues ranging between $45 million and $50
million during this period.68 Indeed, in its response to Defendants’ supplemental
submission, the Trust did not take issue with the level of these payments or otherwise
contend that Defendants received excessive compensation as directors and/or
officers of the Company.69
As noted above, Count I of the Complaint is styled as a claim for “oppressive
abuse of discretion.”70 One decision of this court has remarked that such a claim is
not an “independent cause of action . . . distinct from a cause of action based on a
breach of fiduciary duty.”71 This comment makes evident sense, although phrases
like “fraud or gross abuse of discretion” and “oppressive or fraudulent abuse of
discretion” persist in our case law governing the failure to declare a dividend.72 To
my mind, these phrases describe in a situationally specific way the test to overcome
business judgment review when a stockholder seeks to compel the declaration of a
67
Dkt. 40 at 1-5.
68
See Compl. Ex. H at M0009 (net sales figures for 2013-14); id. Ex. I at M0031 (net sales
figures for 2014-15).
69
See Dkt. 41.
70
Compl. at 26.
71
Garza, 1993 WL 77186, at *7.
72
See, e.g., Gabelli, 479 A.2d at 280; Moskowitz, 190 A.2d at 750; Eshleman, 194 A. at
43.
18
dividend. Most famously, as discussed above, Chancellor Wolcott long ago
articulated the key inquiry to determine when the court will compel the declaration
of a dividend: when “the withholding of it is explicable only on the theory of an
oppressive or fraudulent abuse of discretion.”73
In my opinion, it is not reasonably conceivable that the Trust can demonstrate
that the Board’s failure to declare an additional dividend during the period in
question is explicable only as an oppressive abuse of discretion given the Trust’s
failure to allege facts to support any cognizable theory of coercion or any disabling
self-interest in making those decisions. What is left is a debate between the parties
about whether the directors have allowed the Company to accumulate too large a
surplus or excess cash reserves: the Trust asserts that the Company has ample
resources to declare more dividends; the Defendants, who are charged with
managing the Company’s business and affairs, have a more conservative view. This
is a quintessential matter of business judgment for which the Complaint offers no
reasonably conceivable set of facts to warrant second-guessing the directors’
decision-making under the operative legal standard. Accordingly, Count I fails to
state a claim for relief.
73
Eshleman, 194 A. at 43 (emphasis added).
19
B. Count II: Breach of Fiduciary Duties
The gravamen of Count II of the Complaint is that the McCleary Family
Defendants, “as directors and/or officers of the Company, . . . breached their
fiduciary duties by failing to manage the Company’s affairs with due care and in an
informed manner.”74 The Trust challenges Defendants’ due care concerning six
subjects: (i) the decision to transition away from a key customer, Aldi; (ii) the failure
to improve the Company’s food production facilities; (iii) the decision to authorize
building a new warehouse; (iv) the decision to improve the Company’s packaging
capabilities to accommodate another customer, Shearer’s; (v) the failure to manage
the Company’s tax obligations; and (vi) the failure to observe corporate
formalities.75
Count II also asserts a loyalty claim on the theory that the “McCleary Family
Defendants refuse[d] to declare warranted dividends in order to coerce Plaintiff into
selling it shares of stock to the McCleary Family Defendants for a substantial
74
Compl. ¶¶ 74-75.
75
Count II also questions Defendants’ due care for allegedly failing “to even consider on
an informed basis why the Company should maintain a large cash stockpile rather than
declaring dividends.” Id. ¶ 75. This issue is waived because the Trust did not challenge in
its brief Defendants’ failure to issue dividends as a breach of the duty of care. See Emerald
P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (issues not briefed are deemed waived).
Rather, as discussed above, the Trust’s brief attacked Defendants’ failure to declare
additional dividends as an oppressive abuse of discretion and breach of the duty of loyalty.
20
discount.”76 As the Trust acknowledges, this aspect of Count II is a reiteration of
Count I,77 which fails to state a claim for relief for the reasons explained in Part III.A.
The due care aspects of Count II are asserted derivatively on behalf of the
Company but the Trust did not make a demand on the Board before filing this action.
The court thus turns first to analyze whether it would have been futile for the Trust
to make such a demand.
1. Demand Futility Standards
“A basic principle of the General Corporation Law of the State of Delaware
is that directors, rather than shareholders, manage the business and affairs of the
corporation.”78 For this reason, the decision to bring or refrain from bringing a
derivative claim on behalf of the corporation is the responsibility of the board of
directors in the first instance.79 This approach “is designed to give a corporation, on
whose behalf a derivative suit is brought, the opportunity to rectify the alleged wrong
without suit or to control any litigation brought for its benefit.”80
76
Compl. ¶ 76.
77
See Pl.’s Opp’n Br. 47 n.18 (“Plaintiff views claims related [to] the Board’s failure to
declare dividends out of the Company’s ample surplus to be direct in nature, as pled in
Count I, but pled a parallel derivative claim in Count II in the alternative.”).
78
Spiegel v. Buntrock, 571 A.2d 767, 772-73 (Del. 1990).
79
Id.
80
Lewis v. Aronson, 466 A.2d 375, 380 (Del. Ch. 1983), rev’d on other grounds, 473 A.2d
805 (Del. 1984).
21
Under Court of Chancery Rule 23.1, a stockholder who wishes to assert a
derivative claim on behalf of a corporation must “allege with particularity the efforts,
if any, made by the plaintiff to obtain the action the plaintiff desires from the
directors or comparable authority and the reasons for the plaintiff’s failure to obtain
the action or for not making the effort.”81 Under the heightened pleading
requirements of Rule 23.1, conclusory “allegations of fact or law not supported by
the allegations of specific fact may not be taken as true.”82
There are two tests under Delaware law for determining whether making a
demand on the corporation’s board of directors to pursue a claim may be excused as
futile: the Aronson test and the Rales test. The court applies the first test, from
Aronson v. Lewis, when “a decision of the board of directors is being challenged in
the derivative suit.”83 The second test, from Rales v. Blasband, governs when “the
board that would be considering the demand did not make a business decision which
is being challenged in the derivative suit,” such as “where directors are sued
derivatively because they have failed to do something.”84
81
Ch. Ct. R. 23.1.
82
Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000).
83
Feuer ex rel. CBS Corp. v. Redstone, 2018 WL 1870074, at *8 (Del. Ch. Apr. 19, 2018)
(citations and internal quotations omitted).
84
Id. (citations and internal quotations omitted).
22
Under Aronson, demand is futile if, “under the particularized facts alleged, a
reasonable doubt is created that: (1) the directors are disinterested and independent
[or] (2) the challenged transaction was otherwise the product of a valid exercise of
business judgment.”85 Under Rales, demand is futile if the “factual allegations of a
derivative stockholder complaint create a reasonable doubt that, as of the time the
complaint is filed, the board of directors could have properly exercised its
independent and disinterested business judgment in responding to demand.”86
Both Plaintiff and Defendants used the Aronson test to analyze each of the six
issues listed above underlying the due care aspect of Count II. This is curious since
three of these six issues involve alleged inactions of the Board (i.e., alleged failures
concerning food production facilities, managing tax obligations, and observing
corporate formalities) to which the Rales test logically would apply.
This court has commented on many occasions that the Aronson and Rales tests
look different but they essentially cover the same ground.87 Their common ground
85
Aronson, 473 A.2d at 814.
86
Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).
87
See, e.g., Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) (Strine, V.C.) (“At first
blush, the Rales test looks somewhat different from Aronson, in that [it] involves a singular
inquiry[.] . . . Upon closer examination, however, that singular inquiry makes germane all
of the concerns relevant to both the first and second prongs of Aronson.”); David B. Shaev
Profit Sharing Account v. Armstrong, 2006 WL 391931, at *4 (Del. Ch. Feb. 13, 2006)
(Lamb, V.C.) (“[T]he Rales test, in reality, folds the two-pronged Aronson test into one
broader examination.”), aff’d, 911 A.2d 802 (Del. 2006) (TABLE).
23
includes evaluating whether there is reason to doubt the impartiality of a majority of
the directors to decide whether the corporation should pursue litigation because they
(i) have a personal interest in the challenged transaction(s), (ii) lack independence
from one who has such a personal interest, and/or (iii) are interested because they
are exposed to a substantial likelihood of liability with respect to the underlying
claim(s). Here, the Trust does not contend that any member of the Board has a
personal financial interest in an underlying transaction, does not challenge the
independence of any Board member, and focuses instead only on the third inquiry.88
Thus, the sole inquiry relevant to this case is whether the Trust has pled with
particularity that the McCleary Family Defendants face a substantial likelihood of
liability with respect to any of the six issues identified above.89 The court undertakes
that inquiry next.
88
Tr. 73; see also Pl.’s Opp’n Br. 35 (“Here, the Complaint alleges facts that all six
directors . . . face substantial likelihood of personal liability in connection with the acts
challenged in the Complaint.”).
89
Deciding whether Defendants face a substantial likelihood of liability resolves both
prongs of the Aronson test in my view. Plaintiff acknowledges as much. With respect to
the three issues involving Board decisions for which the Aronson test would apply (i.e., the
decisions to (i) transition away from Aldi, (ii) authorize building a new warehouse, and
(iii) improve the Company’s packaging capabilities), the Trust’s discussion of the second
prong of Aronson refers back to its analysis under the first prong concerning whether
Defendants face a substantial likelihood of liability. See Pl.’s Opp’n Br. 49-50.
24
2. Do Defendants Face a Substantial Likelihood of Liability?
As noted above, the gravamen of Court II is that the McCleary Family
Defendants should be held personally liable to the Company for various breaches of
their duty of care. Insofar as Count II focuses on Defendants’ actions as directors,
this is the unusual case where such a theory is viable because the Company’s
certificate of incorporation does not include a provision under 8 Del. C. § 102(b)(7)
exculpating its directors for monetary damages for breaches of the duty of care.90
Under Delaware law, the standard of care applicable to the fiduciary duty of
care of a director or officer is gross negligence.91 This court has defined gross
negligence as “conduct that constitutes reckless indifference or actions that are
without the bounds of reason.”92 “While the inquiry of whether the claims amount
to gross negligence is necessarily fact-specific, the burden to plead gross negligence
is a difficult one.”93 With these standards in mind, the court turns next to consider
90
Compl. ¶ 39.
91
Aronson, 473 A.2d at 812; Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985). The
“fiduciary duties of officers are the same as those of directors.” Gantler v. Stephens, 965
A.2d 695, 708-09 (Del. 2009).
92
McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008); see also In re Walt Disney
Co. Deriv. Litig., 907 A.2d 693, 750 (Del. Ch. 2005) (“In the duty of care context with
respect to corporate fiduciaries, gross negligence has been defined as a ‘reckless
indifference to or a deliberate disregard of the whole body of stockholders' or actions which
are ‘without the bounds of reason.’”), aff’d, 906 A.2d 27 (Del. 2006); In re TIBCO Software
Inc. S’holders Litig., 2015 WL 6155894, at *23 (Del. Ch. Oct. 20, 2015).
93
Zucker v. Hassell, 2016 WL 7011351, at *7 (Del. Ch. Nov. 30, 2016) (internal quotations
and alterations omitted).
25
the Trust’s six due care theories, beginning with the three that the Trust contends are
its strongest.94 The consistent theme of this analysis is that when the allegations of
the Complaint and the documents incorporated therein are viewed in their totality,95
the Trust has failed to demonstrate that the Board’s actions or inactions were
recklessly indifferent or without the bounds of reason such that the directors would
face a substantial likelihood of liability.
a. Aldi
In April 2016, the Company decided to transition away from its largest
customer, Aldi, and to focus instead on a new customer, Truco.96 The Trust contends
that Defendants “decided to move away from . . . Aldi . . . without considering any
analysis or information about the financial impact of the decision on the Company”
and that the “Board instead relied only on the ‘strong belief’ of management that
moving away from Aldi was the right move.”97
Defendants counter that “the Board had been discussing and receiving reports
from management regarding the Aldi relationship for at least [one] year.”98 The
94
See Tr. 75-77.
95
As noted at the outset of this decision, the Trust does not dispute that the court may
consider on this motion the documents attached to the Complaint that the Trust received
under 8 Del. C. § 220 and references throughout its pleading.
96
Compl. ¶ 46.
97
Pl.’s Opp’n Br. 37-38.
98
Defs.’ Reply Br. 25 (Dkt. 30).
26
Company’s internal documents confirm this. The January 2015 Board minutes show
that Stokely, Axium’s then-President, expressed concern about “the percentage of
company business with Aldi” and “needing to get other business” during a
discussion about Axium having to reduce prices to keep Aldi’s business.99 Stokely
also prepared an eleven page executive summary for the Board’s 2015 year end
meeting (the “2015 Year End Report”).100 In it, Stokely provided margin and sales
data for Aldi and explained his reasoning for “remain[ing] firm on . . . pricing” and
the implications if “Aldi moves the business to our competitors.”101 Stokely also
expressed his opinion “that the company cannot continue to sell high volume – low
margin private label business and remain viable in the long term” and that “[i]f the
company were to acquiesce to Aldi’s demands for lower price, it would place the
company in a downward spiral.”102
Insofar as the directors’ reliance on Stokely is concerned, the amount and type
of information a board considers is itself a matter of business judgment that is
99
Compl. Ex. B. at M1394 (“Aldi had done a review of pricing available to them and the
Axium pricing was higher than they could obtain. So Axium re-calculated and adjusted
pricing. This allowed Axium to retain 9 distribution centers where they previously
supplied 12.”).
100
Id. Ex. D.
101
Id. at M1403-4.
102
Id. at M1405; see also id. Ex. F at M1415 (“We do still make product for Aldi in lesser
volume. But one positive from January 2016 was that we needed to eventually replace
Aldi anyway due to the single customer liability issue.”) (August 27, 2016 Board minutes).
27
generally left to the directors’ discretion.103 Indeed, Delaware law protects directors
who rely “in good faith . . . upon such information, opinions, reports or statements
presented to the corporation by any of the corporation’s officers or employees.”104
In sum, the Trust has failed to allege facts suggesting that the directors relied
on management’s opinions or reports in bad faith and the internal documents
attached to the Complaint, viewed in their totality, do not demonstrate that the
directors failed to be informed about moving away from Aldi such that they could
be said to have acted with reckless indifference or without the bounds of reason in
making the decision. Accordingly, Defendants do not face a substantial risk of
personal liability with respect to this issue.
b. Food Production Facilities
The Trust asserts that Defendants “face a substantial likelihood of financial
liability related to their failure to take sufficient steps to remedy known problems
with the Company’s food production facilities.”105 For support, the Trust quotes, in
part, from the following paragraph of the Board’s minutes for its June 26, 2015
meeting:
103
See In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *19 (Del. Ch. Jan. 31,
1989) (Allen, C.) (“[T]he amount of information that it is prudent to have before a decision
is made is itself a business judgment . . . .”).
104
8 Del. C. § 141(e).
105
Pl.’s Opp’n Br. 42.
28
Our building is outdated – everything. There are new rules and
regulations for food plants since the building was originally built. Food
buildings have to be “clean”, and it takes a great deal of effort to keep
our building certified for food production. We lose business because
our plant is not up to date.106
Significantly, the same Board minutes quoted above also state that the Board
agreed to move “forward with a list to renovate . . . [and] what needs to be done,”
and directed Stokely to “give us [budget] numbers by the end of August.”107 In his
2015 Year End Report, Stokely states, in a section covering “near term improvement
plans,” that the Company “needs to embark on a systematic face lift” that “needs to
focus on reconditioning ceilings, walls, floors and lighting” at an estimated cost of
$500,000, and opines that the initiative is not optional “[g]iven the current industry
situation.”108 The Board’s August 2016 minutes report that this expenditure was
incurred.109 These documents reflect that Defendants reacted in a meaningful way
to a problem that management identified and plainly did not act with reckless
106
Compl. Ex. G at M1396; see Compl. ¶ 52.
107
Compl. Ex. G at M1396.
108
Id. Ex. D at M1407. The Trust disparages the proposed initiative based on the use of
term “face lift” in the 2015 Year End Report. What is more important than this label is the
description of the work involved and the amount contemplated to pay for the
improvements, which does not seem inconsequential for a company of this size.
109
Id. Ex. F at M1415 (“It should be added that the Board had previously authorized a
$500,000 plant improvement initiative and those funds were spent but it is not clear if they
are fully reflected in the finances YTD.”).
29
indifference or without the bounds of reason such that they would face a substantial
risk of personal liability.
c. New Warehouse
The Trust argues that the Board “acted without consideration of all material
information in connection with its decision to develop a new warehouse to store
product” in South Beloit, Illinois, the Company’s principal place of business.110 The
Complaint asserts that the warehouse was “premised on the unfounded assumption
that the local city council would support this initiative and provide favorable
incentives.”111 The project was canceled, at a cost of approximately $131,000,112
after the city council requested that the Company provide “lifetime maintenance of
the roads” in the industrial park “where the warehouse would be located.”113
Citing the Trust’s own allegations, Defendants counter that the “Board
determined to develop a new warehouse to store product because the Company
incurred high costs to rent other offsite storage facilities”114 and not based on a
mistaken assumption about obtaining government assistance. Board minutes of a
110
Pl.’s Opp’n Br. 40.
111
Compl. ¶ 49.
112
Id. Ex. E at M1418 (noting $161,000 of “development and engineering costs for the
warehouse project . . . that was canceled,” of which $30,000 “was for steel supports that
can be re-used elsewhere”) (January 21, 2017 Board minutes).
113
Id. Ex. F at M1415.
114
Compl. ¶ 49.
30
January 2015 meeting also reflect that the Board consulted with an outside advisor
(Rockford Consulting), which had “done a detailed study of the Axium options” and
“summarized all possible options that could be taken by the company.”115 The
consultant specifically discussed “benefits coming from Government sources to
keep the company where it is.”116 To that end, Board minutes of an April 2016
meeting reflect that “tax abatement” discussions were far along before discussions
with the city council fell apart.117
In my view, the Trust has failed to plead with particularity that Defendants
face a substantial likelihood of personal liability with respect to the aborted
warehouse project. The Complaint itself recognizes that there was a compelling
business reason to construct a new warehouse (to reduce the cost of renting offsite
storage), the Board received outside advice before beginning the project, and it was
hardly uninformed for the Board to believe it might receive government incentives
from the community where it is headquartered—indeed the minutes reflect that
significant tax abatement discussions occurred. Viewing these facts in their totality,
the Board cannot be said to have acted with reckless indifference or without the
bounds of reason in authorizing the development of a new warehouse.
115
Id. Ex. B at M1394.
116
Id.
117
Id. Ex. C at M1398 (“A tax abatement is 2/3 of the way in process for the warehouse
project.”) (April 8, 2016 Board minutes).
31
d. Shearer’s
In 2015, the Board authorized the Company to renovate its production
facilities to package products for Shearer’s, an Axium competitor.118 The 2015 Year
End Report states that “[t]he company will need to invest approximately $100,000
to implement this process.”119
The Trust contends that the Board’s approval of this project was “uninformed
and a breach of the McCleary Defendants’ duty of care.”120 More specifically, the
Trust alleges that “the Board’s only discussion on the subject was speculation about
what Shearer’s inability to pack its own product meant about [Shearer’s] business,”
citing to the 2015 Year End Report.121 That report states that “[Shearer’s] decision
to outsource these products [indicates] that the Shearer’s sales team sold products to
customers that their production group is either unwilling or unable to make” and
“signals that [Shearer’s does] not have the productive capacity to manufacture the
product.”122
118
Compl. ¶ 48.
119
Id. Ex. D at M1407.
120
Pl.’s Opp’n Br. 39.
121
Id. (citing Compl. ¶ 48). The relevant part of paragraph 48 in turn cites to the 2015 Year
End Report. See Compl. ¶ 48 (citing Compl. Ex. D at M1404).
122
Compl. Ex. D at M1404.
32
Citing to the same report, Defendants respond that developing a relationship
with Shearer’s had the benefit “of being an audition for a potential sale partner.”123
To that end, the 2015 Year End Report states that Shearer’s “is currently capacity
constrained and has acquired several competitors in their quest to own the private
label snack food manufacturing business,” and that if “Axium Foods successfully
meets Shearer’s needs, then a logical conclusion would be to offer the company to
Shearer’s at a price that meets both party’s needs.”124 The 2015 Year End Report
further states that the short-term engagement with Shearer’s had “strategic
importance” for placing Axium into Shearer’s supply chain.125
Having carefully reviewed the 2015 Year End Report on which both sides
primarily rely, it is apparent that the Board was made aware of the estimated cost of
renovating its production facilities to package products for Shearer’s and that the
Board authorized this proposal, at least in part, to develop a relationship with
Shearer’s to potentially sell Axium to it.126 Given this, even though Shearer’s ended
the arrangement with Axium sooner than the Company had expected,127 the Trust
123
Defs.’ Opening Br. 41.
124
Compl. Ex. D at M1409.
125
Id. at M1404.
126
According to the minutes of the Board’s January 2017 meeting, the door was “still open”
with Shearer’s at that time. Id. Ex. E at M1417.
127
Id. Ex. F at M1414.
33
has failed to demonstrate that the Board acted with reckless indifference or without
the bounds of reason in deciding to undertake the packaging venture with Shearer’s.
Accordingly, Defendants do not face a substantial risk of personal liability with
respect to this issue.
e. Tax Issues
The Trust argues that Defendants “have acted without the requisite level of
care by consistently failing to appropriately manage the Company’s tax obligations,”
citing two incidents.128 First, the Trust alleges that, “[i]n 2016, the Company’s
certified public accountant advised management that the Company had been
improperly calculating the distribution of profits to stockholders,” which allegedly
“threatened the Company’s status as an S-corporation.”129 Second, the Trust alleges
that “the Board failed to take adequate steps to address the impact of the 2017 Tax
Cuts and Jobs Act on the Company’s tax obligations.”130
The cited paragraphs of the Complaint negate the notion that Defendants
would face a substantial likelihood of personal liability with respect to either
incident. As to the first incident, which concerned a technical issue about treating
“Illinois residents and non-residents differently,” the Complaint acknowledges that
128
Pl.’s Opp’n Br. 43.
129
Id. (citing Compl. ¶ 51).
130
Id. (citing Compl. ¶ 50).
34
the Company’s certified public accountant caught the error—demonstrating that
systems were in place to oversee the Company’s tax reporting functions—and it is
not alleged that the Company suffered any harm as a result of the error.131 As to the
second incident, the Complaint acknowledges that McCleary sought an extension to
file its tax return to address the issue.132 As such, Defendants cannot be said to have
acted with reckless indifference or without the bounds of reason.133
f. Corporate Formalities
The Trust argues that Defendants face a substantial likelihood of personal
liability for breaching their duty of care on the theory that they “have consistently
failed to manage the Company so as to observe certain corporate formalities.”134 The
Trust’s brief focuses specifically on the Company’s alleged “failure to properly
notice stockholder meetings,” which it contends “calls into question the validity of
all actions taken at those meetings.”135 Although the Trust sought documents under
131
Compl. ¶ 51.
132
Id. ¶ 50.
133
Defendants argue that “the duty to manage the Company's tax obligations falls within
the auspices of the Company's CFO and accounting department, not the Board.” Defs.’
Opening Br. 35 n.15. This seems perfectly logical, but the court need not address the issue.
134
Pl.’s Opp’n Br. 35.
135
Id. The Complaint challenges the Company’s compliance with corporate formalities in
three other respects, i.e., (i) “lack of proper notice for Board meetings,” (ii) that “Board
and stockholder meetings are often held simultaneously and without any clear delineation
between actions taken by the Board and actions taken by the stockholders,” and (iii) that
“the minutes for . . . Board and stockholder meetings are poorly drafted.” Compl. ¶¶ 41-
44, 53, 55. The Trust did not present any argument in its brief that Defendants faced a
35
8 Del. C. § 220, it does not challenge the validity of any specific action taken at a
stockholder meeting where notice was not provided as required under Delaware
law.136
Our Supreme Court has delineated the “requirements for standing to sue in
Delaware courts,” as follows:
(1) the plaintiff must have suffered an injury in fact—an invasion of a
legally protected interest which is (a) concrete and particularized and
(b) actual or imminent, not conjectural or hypothetical; (2) there must
be a causal connection between the injury and the conduct complained
of—the injury has to be fairly traceable to the challenged action of the
defendant and not the result of the independent action of some third
party not before the court; and (3) it must be likely, as opposed to
merely speculative, that the injury will be redressed by a favorable
decision.137
Given its failure to identify any specific action taken at a stockholder meeting of the
Company where notice was not provided, any harm to the Company is purely
substantial likelihood of personal liability with respect to these alleged deficiencies and
thus waived those issues. See Emerald P’rs, 726 A.2d at 1224 (issues not briefed are
deemed waived). That said, although McCleary is a small company and may have limited
resources, it would behoove the Company to prepare minutes that are clearer and more
precise than the ones attached to the Complaint.
136
The general notice requirement for stockholder meetings applies only to “each
stockholder entitled to vote at such meeting.” 8 Del. C. § 222(b). Other provisions of the
Delaware General Corporation Law provide that notice must be provided to both “voting
or nonvoting” stockholders in advance of stockholder meetings for certain specific
purposes. See 8 Del C. §§ 204(d) (ratification of defective corporate acts), 251(c) (approval
of merger or consolidation agreements). See also R. Franklin Balotti & Jesse A.
Finkelstein, Meeting of Stockholders § 8.3 (3d ed. Supp. 2020) (“[O]nly those who have
the right to vote at the meeting have an enforceable right to attend the meeting.”).
137
In re Celera Corp. S’holders Litig., 59 A.3d 418, 423 (Del. 2012) (citing Dover
Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110 (Del. 2003)).
36
conjectural and speculative. The Trust thus lacks standing with respect to
McCleary’s alleged lack of compliance with corporate formalities and, even if it did
not, the alleged harm is so conjectural and hypothetical that the Defendants would
not face a substantial risk of liability with respect to this issue in any event.
*****
For the reasons explained above, the Trust has failed to demonstrate that
making a demand on the Board before filing suit would have been futile.
Accordingly, the court will dismiss Count II under Rule 23.1 and does not need to
address Defendants’ motion to dismiss Count II under Rule 12(b)(6).
IV. CONCLUSION
For the foregoing reasons, Defendants’ motion to dismiss the Complaint in its
entirety is GRANTED.
IT IS SO ORDERED.
37