Voigt v. Metcalf ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GARY D. VOIGT, Individually and on Behalf )
of All Others Similarly Situated and )
Derivatively on Behalf of Nominal Defendant )
NCI BUILDING SYSTEMS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2018-0828-JTL
)
JAMES S. METCALF, DONALD R. RILEY, )
NATHAN K. SLEEPER, WILLIAM R. )
VANARSDALE, JONATHAN L. ZREBIEC, )
KATHLEEN J. AFFELDT, JAMES G. )
BERGES, LAWRENCE J. KREMER, )
GEORGE MARTINEZ, GEORGE L. BALL, )
GARY L. FORBES, JOHN J. HOLLAND, )
CLAYTON, DUBILIER & RICE FUND VIII, )
L.P., and CLAYTON, DUBILIER & RICE, )
LLC, )
)
Defendants, )
)
and )
)
NCI BUILDING SYSTEMS, INC., a Delaware )
corporation, )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: November 12, 2019
Date Decided: February 10, 2020
Peter B. Andrews, Craig J. Springer, David M. Sborz, ANDREWS & SPRINGER LLC,
Wilmington, Delaware; Jeremy S. Friedman, David F.E. Tejtel, FRIEDMAN OSTER &
TEJTEL PLLC, Bedford Hills, New York; D. Seamus Kaskela, KASKELA LAW LLC,
Newtown Square, Pennsylvania; Counsel for Plaintiff.
Gregory P. Williams, Brock E. Czeschin, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware; Rachelle Silverberg, Caitlin A. Donovan, Drew C. Harris,
WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Counsel for
Defendants James S. Metcalf, Donald R. Riley, Kathleen J. Affeldt, Lawrence J. Kremer,
George Martinez, George L. Ball, Gary L. Forbes, and John J. Holland and Nominal
Defendant NCI Building Systems, Inc.
David J. Teklits, Thomas P. Will, MORRIS, NICHOLS, ARSHT & TUNNELL, LLP,
Wilmington, Delaware; Shannon Rose Selden, Susan R. Gittes, Zachary H. Saltzman,
DEBEVOISE & PLIMPTON LLP, New York, New York; Counsel for Defendants
Clayton, Dubilier & Rice, Fund VIII, L.P., Clayton, Dubilier & Rice, LLC, Nathan K.
Sleeper, William R. VanArsdale, Jonathan L. Zrebiec, and James G. Berges.
LASTER, V.C.
The plaintiff owns common stock in NCI Building Systems, Inc. (the “Company”),
a publicly traded Delaware corporation. The plaintiff alleges that the private equity firm
known as Clayton, Dubilier & Rice (“CD&R”) controls the Company, citing indicia that
include CD&R’s control over 34.8% of its voting power, the presence of four CD&R
insiders on the Company’s twelve-member board of directors (the “Board”), relationships
of varying significance with another four directors, and a stockholders agreement that gives
CD&R contractual veto rights over a wide range of actions that the Board could otherwise
take unilaterally.
In July 2018, the Company acquired Ply Gem Parent, LLC (“New Ply Gem”). The
acquisition was structured as a direct merger of New Ply Gem with and into the Company.
As a result of the merger, the equity interests in New Ply Gem were converted into
sufficient shares to result in the Company’s post-transaction equity being split equally
between the former owners of the two pre-transaction entities. This merger is the
transaction that the plaintiff challenges in this litigation (the “Challenged Transaction”).
Just three months before the Challenged Transaction, CD&R created New Ply Gem
by completing a leveraged buyout of its publicly traded predecessor, Ply Gem Holdings,
Inc. (“Old Ply Gem”), then combining Old Ply Gem with a portfolio company owned by
Golden Gate Capital (the “Precedent Transaction”). After the Precedent Transaction,
CD&R owned 70% of New Ply Gem and had the right to appoint a majority of its directors.
In Counts I and II of the currently operative complaint, the plaintiff asserts that
CD&R and the members of the Board breached their fiduciary duties in connection with
the Challenged Transaction. The plaintiff maintains that because CD&R controlled both
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the Company and New Ply Gem, the defendants must establish that the Challenged
Transaction was entirely fair. According to the plaintiff, it is reasonably conceivable that
the Challenged Transaction was not entirely fair, because when negotiating the deal,
CD&R insisted on terms that valued the equity of New Ply Gem at nearly $1.236 billion.
Yet just three months earlier, when completing the Precedent Transaction, CD&R and
Golden Gate agreed that the value of New Ply Gem’s equity was $638 million. As the
plaintiff sees it, the Company paid CD&R and Golden Gate a 94% premium, amounting to
a $600 million windfall, for their three-month investment. The plaintiff contends that the
Challenged Transaction also benefitted CD&R because New Ply Gem was highly
leveraged, and through the Challenged Transaction, the Company took on New Ply Gem’s
debt. In Count III of the complaint, the plaintiff contends that CD&R was unjustly enriched
by the Challenged Transaction.
The defendants moved to dismiss the complaint for failing to state a claim on which
relief can be granted. They maintain that the plaintiff has not plead facts sufficient to
support a reasonable inference that CD&R controlled the Company. As a result, they
contend that either the traditional business judgment rule applies or, under Corwin v. KKR
Financial Holdings LLC, 125 A.3d 304 (Del. 2014), an irrebutable version of the business
judgment rule governs. Either would result in dismissal. Seven of the individual defendants
argue that even if the transaction is subject to review for entire fairness, they should be
dismissed because they have been granted exculpation. Four argue that they should be
dismissed because they abstained from voting on the Challenged Transaction. The
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defendants further argue that Count III of the complaint fails to state a claim for unjust
enrichment.
This decision largely denies the motions to dismiss. At the pleading stage, it is
reasonably conceivable that CD&R controlled the Company, subjecting the Challenged
Transaction to review under the entire fairness standard. The valuation gap between the
Challenged Transaction and the Precedent Transaction is sufficiently large, and the
temporal gap sufficiently short, to support a pleading-stage inference of unfairness. Counts
I and II therefore state claims for breach of fiduciary duty.
Four of the seven individual defendants who rely on exculpation are entitled to
dismissal. As to the other three, it is reasonably conceivable that they may have acted to
serve CD&R’s interests, giving rise to a non-exculpable claim. The four individual
defendants who rely on abstention are not entitled to dismissal at this stage.
The motion to dismiss Count III is also denied. Although the claim for unjust
enrichment is likely duplicative, the plaintiff is entitled to plead in the alternative.
I. FACTUAL BACKGROUND
The facts are drawn from the currently operative complaint and, by agreement of
the parties, documents that the plaintiff obtained using Section 220 of the Delaware
General Corporation Law, 8 Del. C. § 220. Citations in the form “Ex. — at — ” refer to
these documents, which the defendants attached as exhibits to their briefs. See Dkts. 48–
56, 69. At this stage of the proceedings, the complaint’s allegations are assumed to be true,
and the plaintiff receives the benefit of all reasonable inferences, including inferences
drawn from documents.
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A. CD&R Acquires Control Of The Company.
The Company manufactures metal products for the North American commercial
building industry. During the Great Recession, the Company became financially distressed.
In October 2009, CD&R acquired control of the Company by causing Clayton,
Dubilier & Rice Fund VIII, L.P. (“Fund VIII”) to purchase 250,000 shares of a newly
created series of convertible preferred stock. Among other rights, the shares carried 68.4%
of the Company’s voting power.1
As part of the October 2009 transaction, all but three of the incumbent members of
the Board resigned. The three incumbent directors who remained were Norman C.
Chambers, the Company’s CEO, and Gary L. Forbes and George Martinez, both outside
directors. As part of the transaction, the incumbent directors appointed to the Board three
individuals designated by CD&R: Nathan K. Sleeper and James G. Berges, both CD&R
partners, and Lawrence J. Kremer, an individual with longstanding ties to CD&R.
Later that month, the Board appointed two additional directors designated by
CD&R: Jonathan Zrebiec, another CD&R partner, and Kathleen Affeldt, another
individual with longstanding ties to CD&R. In an information statement dated October 30,
2009, the Company disclosed that with CD&R’s five designees on the Board, “the CD&R
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Clayton, Dubilier & Rice LLC (the “CD&R Investment Advisor”) acts as the
investment advisor for Fund VIII. It is reasonable to infer at this stage that within the
CD&R private equity complex, Fund VIII and the CD&R Investment Advisor are, at a
minimum, affiliates and under the common control of CD&R’s principals. For simplicity,
this decision refers generally to CD&R.
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Funds will have the ability, subject to the fiduciary duties of the individual directors, to
control the decisions of the Board.” Ex. 2 at 3. The Company thus regarded Affeldt and
Kremer as directors who, subject to their fiduciary duties, were subject to CD&R’s control.
All five of the original CD&R designees continued to serve on the Board throughout the
events giving rise to this litigation.
In connection with the October 2009 investment, CD&R and its affiliates entered
into a stockholders agreement with the Company. See Ex. 4 (“Stockholders Agreement” or
“SA”). The information statement described it as giving CD&R “substantial governance
rights.” Ex. 2 at 3.
Among other things, the Stockholders Agreement gave CD&R certain ongoing
rights with respect to the composition of the Board:
 As long as CD&R held 10% or more of the Company’s voting power, CD&R
could designate a number of “Investor Directors” proportionate to its voting
interest, rounded to the nearest whole number. SA § 3.1(b)(i).
 As long as CD&R held 20% or more of the Company’s voting power, CD&R
could designate one of the Investor Directors as either the Board’s “Lead
Director” or the Chairman of the Executive Committee. Id. § 3.1(b)(v).
 CD&R was entitled to representation on committees proportionate to its
voting interest, including having at least one CD&R designee on each
committee on the Board, except if CD&R or the designee would be in a
conflict position on a special committee. Id. § 3.1(d).
The Stockholders Agreement also granted CD&R contractual consent rights over a
wide range of significant corporate and finance matters, including decisions that the Board
otherwise would be able to take without needing any stockholder-level approvals. The
decisions included:
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 Acquiring or divesting assets worth more than 10% of the Company’s total
asset value. Id. §§ 6.1(a)(i) & (ii).
 Granting stock options exceeding $5 million in a single year. Id. §
6.1(a)(iii).
 Redeeming more than $10 million in stock. Id. § 6.1(a)(iv).
 Declaring dividends. Id. § 6.1(a)(v).
 Guaranteeing debt exceeding $35 million. Id. § 6.1(a)(vi).
 Engaging in a material new business. Id. § 6.1(a)(vii).
 Adopting a plan of complete or partial liquidation. Id. § 6.1(a)(viii).
 Increasing the number of directors on the Board. Id. § 6.1(a)(ix).
 Amending the bylaws. Id. § 6.1(a)(x).
 Issuing additional stock. Id. § 6.1(b).
CD&R retains its veto over issuances of additional stock as long as it owns shares carrying
20% or more of the Company’s voting power. Id. CD&R retains the other rights as long as
it owns shares carrying 25% or more of the Company’s voting power. Id. § 6.1(a).
The Stockholders Agreement also contained counterbalancing provisions. As long
as stockholders unaffiliated with CD&R held at least 5% of the Company’s outstanding
voting power, then the Stockholders Agreement designated at least three seats on the Board
for individuals who were not Investor Directors. One seat was reserved for the Company’s
CEO. The other two seats were reserved for “Unaffiliated Shareholder Directors.” See id.
§ 3.1(c)(i). Without CD&R’s consent, there could not be more than two Unaffiliated
Shareholder Directors on the Board. See id.
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The Unaffiliated Shareholder Directors had to be “Independent Directors,” defined
in simplified terms as an individual who would qualify as independent under the New York
Stock Exchange rules without giving consideration to the individual’s service on any board
of a CD&R portfolio company. See id. at 8-9. They also had to be “Independent Non-
Investor Directors,” i.e. Independent Directors whom CD&R had not designated. Id. §
3.1(c)(i); see id. at 9. If CD&R designated any Independent Directors, then they were
defined as “Investor Independent Directors.” See id. at 9.
Initially, Forbes and Martinez were the Unaffiliated Shareholder Directors. The
Stockholders Agreement called for the Unaffiliated Shareholder Directors to nominate
their successors and fill any vacancies in their seats. See id. §§ 3.1(c)(ii) & (iii). In any
election for Unaffiliated Shareholder Directors, CD&R committed to vote its shares for the
Unaffiliated Shareholder Directors proportionately with the votes of the unaffiliated shares.
See id. § 3.1(c)(iv). CD&R also committed that no Unaffiliated Shareholder Director would
be removed except by the affirmative vote of unaffiliated shareholders holding 80% of the
unaffiliated voting power. To implement this protection, CD&R committed to vote against
removal unless holders of unaffiliated shares representing 80% of the unaffiliated voting
power voted in favor of removal, in which case CD&R would vote its shares
proportionately with the unaffiliated holders. See id. § 3.1(c)(v). In the Stockholders
Agreement, the parties agreed that each committee of the Board would have at least one
Unaffiliated Shareholder Director as a member. See id. § 3.1(d).
If CD&R’s ownership stake fell below 50%, then CD&R undertook additional
voting commitments:
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 CD&R would cause its shares to be present in person or by proxy at all
meetings of stockholders for purposes of establishing a quorum.
 CD&R would vote in favor of all candidates nominated by the Board.
 CD&R would vote as recommended by the Board on any proposals relating
to compensation or equity incentives for directors, officers, or employees,
subject to CD&R’s ability to exercise its contractual consent rights as
applicable.
 On any issue where CD&R had a contractual consent right, CD&R would
vote its shares as recommended by the Board only if the recommendation
was consistent with CD&R’s exercise of its consent right. In other words,
CD&R could vote its shares as it wished.
See id. § 3.2.
The Stockholders Agreement contained a standstill agreement limiting CD&R’s
ability to buy additional shares of the Company, but it expired in 2012. From that point on,
the Stockholders Agreement did not impose any limitations on CD&R’s ability to purchase
shares. See id. § 3.3.
B. The Expanded Board
After CD&R’s investment, additional directors joined the Board. In November
2009, John J. Holland joined as an Independent Non-Investor Director. In February 2014,
George Ball joined as an Independent Non-Investor Director. The five original CD&R
appointees (Sleeper, Berges, Zrebiec, Affeldt, and Kremer) and the two original
Unaffiliated Shareholder Directors (Forbes and Martinez) continued to serve.
In 2016, CD&R started reducing its holdings in the Company. By the end of 2016,
its equity stake stood at 42%.
During 2017, there were additional changes in the Board. In April 2017, CD&R
added William VanArsdale, an operating advisor who provides consulting services to
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CD&R and its funds, as an Investor Director. In May 2017, James Metcalf joined as an
Independent Non-Investor Director.
The seat on the Board reserved for the CEO passed to Donald Riley. The Company
hired Riley as a senior executive in December 2014, while CD&R held an outright majority
interest in the Company. In July 2017, the Board named Riley as CEO, appointed him to
the Board, and made him a member of the Executive Committee.
In December 2017, CD&R again sold shares in a secondary offering. By the end of
the year, its stake had declined to 34.7%.
In late 2016, after CD&R’s holdings dropped below 50%, the Board began to
consider strategic alternatives. During 2017, the Company contacted several potential
transaction partners, but received only one indication of interest. The valuation was not
attractive, and the process ended.
C. Old Ply Gem And Atrium Conduct Sale Process.
Meanwhile, during late 2016, Old Ply Gem had started exploring strategic
alternatives as well. Old Ply Gem was a leading North American manufacturer of products
for the residential building industry whose shares traded on the New York Stock Exchange.
Throughout 2017, Old Ply Gem fielded numerous inquiries, including from CD&R.
Old Ply Gem conducted a competitive process, and CD&R’s bid prevailed. On January 31,
2018, CD&R and Old Ply Gem announced that CD&R would pay $21.64 per share to
acquire Old Ply Gem in a leveraged buyout. The merger consideration reflected a premium
of approximately 20% over Old Ply Gem’s closing stock price on the day before the
announcement. To fund the acquisition, Clayton, Dubilier & Rice Fund X, L.P. (“Fund X”)
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contributed equity of $425.2 million, and Old Ply Gem borrowed approximately $2,453.7
million in debt.2
On the same day that it announced its acquisition of Old Ply Gem, CD&R also
announced that it had entered into an agreement to combine Old Ply Gem with Atrium
Windows & Doors, Inc. (“Atrium”), a portfolio company owned by Golden Gate Capital.
New Ply Gem would emerge as the surviving company.
On April 12, 2018, CD&R both acquired Old Ply Gem and combined it with Atrium
to form New Ply Gem, thereby completing the Precedent Transaction. When negotiating
the Precedent Transaction, CD&R and Golden Gate agreed to value Old Ply Gem’s equity
at $425.2 million and Atrium’s equity at $212.8 million, resulting in an agreed-upon equity
value for New Ply Gem of $638 million. After the Precedent Transaction, CD&R owned
70% of New Ply Gem’s equity and had the right to appoint a majority of its directors.
New Ply Gem assumed Atrium’s debt of $610.6 million. When combined with Old
Ply Gem’s existing borrowings, New Ply Gem carried approximately $3 billion in debt.
D. The Company Expresses Interest In New Ply Gem.
On January 1, 2018, Metcalf took over as Chairman of the Board. On February 27,
Metcalf and Riley told their fellow directors that a merger between the Company and New
2
The CD&R Investment Advisor is the investment advisor for Fund X. It is
reasonable to infer at this stage that within the CD&R private equity complex, Fund VIII,
Fund X, and the CD&R Investment Advisor are, at a minimum, affiliates and under the
common control of CD&R’s principals. For simplicity, this decision continues to refer
generally to CD&R.
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Ply Gem—i.e., the Challenged Transaction—was the Company’s “most promising
potential opportunity.” Ex. 1 at 48. Metcalf and Riley made this statement just one month
after CD&R had announced its intent to complete the Precedent Transaction.
On April 24, 2018, less than two weeks after the Precedent Transaction closed,
Metcalf and Riley met with CD&R to discuss a merger between the Company and New
Ply Gem. The CD&R delegation included Sleeper, Berges, and Zrebiec, the three CD&R
partners who served on the Board. During the meeting, Metcalf and Riley gave a
presentation about a business combination between the Company and New Ply Gem and
told CD&R that the Company was hiring a financial advisor to explore a potential deal.
See Compl. ¶ 73.
E. The Committee
During a meeting of the Board on May 1, 2018, the directors discussed a potential
combination between the Company and New Ply Gem. The four CD&R representatives on
the Board participated in the discussion. VanArsdale remained present for the entire
meeting. Sleeper, Zrebiec, and Berges remained present for the majority of the meeting.
The Board reached a “consensus . . . that a merger with Ply Gem was the most promising
potential opportunity” for the Company. Ex. 8 at 2.
During the May 1 meeting, the Board created a special committee (the
“Committee”) to review and evaluate the Challenged Transaction. The Board did not
empower the Committee to look at other possible transactions. The Board did give the
Committee the power to veto the Challenged Transaction, resolving that the Board “will
not recommend, authorize, approve or otherwise endorse, effect or cause or allow to be
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effected a Potential Transaction unless such transaction has been recommended to the
Board by the Special Committee.” Ex. 8 at 4.
The Committee had five members: Ball, Forbes, Holland, Martinez, and Metcalf.
The resolutions gave the Committee the power to retain financial and legal advisors, but
Metcalf and Company management had gotten out in front of the Committee on that issue.
During the May 1 meeting, the Company’s Chief Financial Officer, Mark E. Johnson,
reported that at Metcalf’s request, he had already contacted Evercore Inc. about acting as
the Committee’s financial advisor. He explained that he had also discussed with Evercore
the personnel who would lead the engagement. Johnson represented that Evercore had no
conflicts of interest vis-à-vis CD&R or New Ply Gem. Ex. 8 at 2. At the time, Evercore
was working as a restructuring advisor for another CD&R portfolio company.
On May 3, 2018, the Committee convened for the first time. The Committee
resolved to retain Evercore as its financial advisor. The Committee also chose to use the
Company’s existing outside counsel, Wachtell, Lipton, Rosen & Katz, as its legal advisor.
F. Evercore’s Initial Valuation
On May 10, 2018, Evercore contacted CD&R to obtain information about New Ply
Gem. During a meeting on May 14, Evercore gave the Committee its initial impressions.
Evercore recommended using Company common stock as an acquisition currency and
advised that the Company’s stockholders should end up owning approximately two-thirds
of the combined entity, with New Ply Gem’s stockholders owning the rest. This outcome
would be achieved by exchanging New Ply Gem’s equity for Company shares worth
approximately $638 million.
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In reaching these recommendations, Evercore valued New Ply Gem’s equity using
the amounts that CD&R and Golden Gate had negotiated when agreeing to the Precedent
Transaction. Evercore observed that the relative valuations for the Precedent Transaction
were struck at multiples in line with public peers, and Evercore used the same approach
when analyzing the Challenged Transaction. Evercore explained that this approach was
arguably generous to New Ply Gem, because its peer company multiples had declined since
the announcement of the Precedent Transaction, and there was likely not another strategic
buyer for New Ply Gem. Evercore also noted that combining the Company with New Ply
Gem would benefit CD&R and Golden Gate by de-leveraging New Ply Gem’s post-buyout
capital structure. Under Evercore’s analysis, CD&R and Golden Gate would not receive a
premium for immediately flipping New Ply Gem to another CD&R portfolio company.
G. The Negotiations
The Committee instructed Evercore to engage in valuation discussions with CD&R.
On May 17, 2018, Evercore met with Sleeper and Zrebiec. They pushed Evercore to value
New Ply Gem’s equity at $1.26 billion, a 97.5% premium to the value established by the
Precedent Transaction.
On May 21, 2018, the Committee met to decide whether it should proceed with
negotiations. Evercore reported that CD&R had proposed a valuation for New Ply Gem
that was approximately “$600mm higher than the combined transaction value” from the
Precedent Transaction. Ex. 16 at 18. Evercore then presented a wide range of possible ways
to look at the possible combination and the relative contributions of the two companies.
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See id. at 19–33. Riley provided the Committee with a management presentation that
supported the Challenged Transaction. Compl. ¶ 85.
The next day, the full Board met. Sleeper gave a presentation in which he argued
that the equity of the combined company should be allocated so that the Company’s
stockholders received 49% to 50% and New Ply Gem’s stockholders received 50% to 52%.
To justify this split, Sleeper cited:
[New] Ply Gem’s improved operating outlook and 2019 projected
performance as well as the value that was expected to be created from
synergies that were being generated from the [Precedent Transaction]; the
value created by the flexible, attractive long-term capital structure that
CD&R implemented at [New] Ply Gem in connection with [the Precedent
Transaction] which could remain in place on favorable terms following a
transaction with the Company; the likelihood that the greater scale, scope and
growth prospects of [New] Ply Gem, given the [Precedent Transaction],
would have the potential to increase the combined company’s cash-earnings-
per share multiple; that the combined company would be an industry leader,
and a better platform for growth, including inorganic growth through mergers
and acquisitions.
Ex. 18 at 7–8. Sleeper asserted that the Challenged Transaction was also good for the
Company’s stockholders because it was “highly unlikely” that the Company could “find
another well-positioned business of scale” and that “[t]his is realistically the only window
for [the Company] and [New Ply Gem] to come together.” Compl. ¶ 88.
After the Board adjourned, the Committee met, and its members decided to engage
in negotiations with CD&R. The Committee also discussed that “should the proposed
merger be . . . completed, . . . Metcalf should serve as the chief executive officer of the
combined company,” an issue discussed at the earlier Board meeting. Compl. ¶ 87 (internal
quotation marks omitted); see Ex. 13 at 3.
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By May 31, 2018, the Committee and CD&R had agreed to an ownership split in
which the Company’s stockholders would receive 53% of the post-transaction equity and
New Ply Gem’s stockholders would receive 47%. The split valued New Ply Gem’s equity
at $1.154 billion, an 81% premium over the value established by the Precedent Transaction.
Over the next two weeks, the Committee and CD&R devoted significant resources
to negotiating a new stockholders agreement that would impose “voting and transfer
restrictions and limitations[] intended to restrict the ability of [CD&R] to control [the
Company]” after the Challenged Transaction. Ex. 1 at 49; accord Ex. 1 at 52. The new
stockholders’ agreement preserves CD&R’s consent rights but prevents CD&R from
acquiring a majority of the Company’s equity or from electing more directors than one less
than half the Board. See Ex. 31 §§ 3.3(a)(i), 6.1.
H. Approval Of The Challenged Transaction
Towards the end of the negotiations, the Committee asked CD&R to condition the
Challenged Transaction on a majority-of-the-minority vote. CD&R rejected that term.
During a meeting on July 17, 2018, Evercore opined that terms of the Challenged
Transaction were fair from a financial point of view to the Company and its stockholders.
At that point, the negotiated equity split implicitly valued New Ply Gem’s equity at $1.236
billion, a 94% premium over the value established by the Precedent Transaction just three
months before. The Committee resolved to recommend the transaction to the Board. Later
that day, the Board approved it. Ex. 30.
The Company announced the Challenged Transaction and noted that Metcalf would
become Chairman and CEO of the combined entity. After the announcement, the
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Company’s stock price plummeted. By July 24, 2018, it had fallen 24% to $15.75 per share.
On January 10, it closed at $7.80 per share, a 62% decline. Analysts questioned the
valuation and the strategic rationale. See Compl. ¶¶ 106–07.
The Company’s stockholders approved the Challenged Transaction during a
meeting on November 15, 2018. In advance of the meeting, the Company disseminated a
proxy statement in which the Board recommended that stockholders vote in favor of the
Challenged Transaction. Ex. 1 (the “Proxy Statement”).
On the record date for the meeting, there were 66,203,841 shares of Company
common stock that were issued and outstanding. Of those shares, 64.6% (or 42,747,820
shares) were held by stockholders unaffiliated with CD&R or the Company’s officers and
directors. Of the unaffiliated shares, 55% (or 23,662,900 shares) voted in favor of the
Challenged Transaction. On November 16, 2018, the Challenged Transaction closed.
I. This Litigation
On November 14, 2018, the plaintiff filed this lawsuit. Before filing suit, the
plaintiff used Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, to
obtain books and records. The books and records appear to have consisted of the formal
Board and Committee-level documents relating to the Challenged Transaction, such as the
minutes of meetings, agendas for meetings, and presentations made during meetings. The
plaintiff does not appear to have had access to internal communications or documents from
CD&R.
The currently operative Complaint spans seventy-two pages and contains 162
numbered paragraphs. It contains three counts:
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 Count I asserts a claim for breach of fiduciary duty against CD&R in its
capacity as the Company’s controlling stockholder. The specific CD&R
parties named as defendants for purposes of this claim are Fund VIII and the
CD&R Investment Advisor. The count is plead both as a direct claim and as
a derivative claim.
 Count II asserts a claim for breach of fiduciary duty against the “Director
Defendants.” The complaint elsewhere defines this term to include Metcalf,
Riley, Sleeper, VanArsdale, Zrebiec, Affeldt, Berges, Kremer, Martinez,
Ball, Forbes, and Holland. This count is plead both as a direct claim and as a
derivative claim.
 Count III asserts a claim for unjust enrichment against CD&R. This count is
plead in the alternative as a means of reaching Fund VIII and the CD&R
Investment Advisor in the event Count I falls short.
The defendants moved to dismiss the Complaint. For purposes of briefing their
motions, the defendants organized themselves differently. Fund VIII, the CD&R
Investment Advisor, Sleeper, Berges, Zrebiec, and VanArsdale (collectively, the “CD&R
Defendants”) filed one set of briefs. The other directors (collectively, the “Company
Defendants”) filed a second set of briefs.
II. LEGAL ANALYSIS
The defendants have moved to dismiss the complaint under Rule 12(b)(6) for failing
to state a claim on which relief can be granted. When considering such a motion the court
(i) accepts as true all well-pleaded factual allegations in the complaint, (ii) credits vague
allegations if they give the opposing party notice of the claim, and (iii) draws all reasonable
inferences in favor of the plaintiffs. Central Mortg. Co. v. Morgan Stanley Mortg. Capital
Hldgs. LLC, 27 A.3d 531, 535 (Del. 2011). When applying this standard, dismissal is
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inappropriate “unless the plaintiff would not be entitled to recover under any reasonably
conceivable set of circumstances.” Id.3
When briefing the motions to dismiss, the defendants attached and relied on sixty-
three exhibits. Many were materials that the Company produced in response to the Section
220 demand, which the parties agreed would be incorporated by reference in any eventual
complaint. See Ex. 36 ¶ 14. Relying on these documents, the defendants asked the court to
draw inferences in their favor, treating the motion to dismiss as if the court could weigh
evidence and make findings of fact. Examples include the following:
 “The pleadings and documents before this Court on a motion to dismiss
confirm that the [Challenged] Transaction was the culmination of a
thoughtful and proper process . . . .” Dkt. 45 at 2.
 “After careful investigation during 2017 and early 2018, [the directors]
identified a new possibility: the combination with [New] Ply Gem that
Plaintiff now seeks to challenge.” Id. at 3.
3
The defendants also moved to dismiss the complaint pursuant to Rule 23.1 for
failing to make demand or plead demand futility, but they invested so little in those
arguments that they can be regarded as waived. The Company Defendants simply said that
“[f]or the same reasons set forth above in Point I.C, plaintiff has failed to” show demand
futility. Dkt. 47 at 59. The CD&R Defendants devoted two sentences to their Rule 23.1
argument. Dkt. 45 at 51–52. For their demand futility argument, they relied on the
Company Defendants’ brief. See id. at 48-49 (“All of the derivative claims fail for the
reasons set forth in detail in the [Company] brief – beginning with the threshold failure to
properly plead that demand was excused as futile such that Plaintiff has standing to assert
these claims.”). Because the defendants did not meaningfully argue demand futility, this
decision does not reach the parties’ debate over whether the claims are derivative, direct,
or dual-natured. Assuming for the sake of argument that the claims are derivative, the
plaintiffs can assert them because the defendants have not made meaningful arguments
under Rule 23.1.
18
 “The Board and [Company] management carefully examined the Company’s
strategic options, including but not limited to a potential [t]ransaction with
[New] Ply Gem, with the assistance of Bain Consulting.” Id.
 “Once it became clear that the analysis supported pursuing the [Challenged]
Transaction with [New] Ply Gem, the NCI Board – with the endorsement of
CD&R and CD&R-affiliated directors – immediately implemented the
processes required by Delaware law so that the Board could evaluate the
potential [t]ransaction free from the influence of CD&R.” Id. at 4.
 “The Special Committee drove a hard bargain.” Id.
 The Committee’s initial discussions “elicited a favorable offer from [New]
Ply Gem under which each company would contribute 50% of the equity,
that is, a 50/50% sharing ratio.” Id. at 5.
 “After robust negotiations, the parties ultimately agreed on a 53/47% sharing
ratio.” Id.
Assertions that the process was “thoughtful and proper,” the investigation and examination
“careful,” the transaction “free of influence,” and the negotiations “robust” are
characterizations that would require drawing inferences in favor of the defendants.
The incorporation-by-reference doctrine does not enable a court to weigh evidence
on a motion to dismiss. It permits a court to review the actual documents to ensure that the
plaintiff has not misrepresented their contents and that any inference the plaintiff seeks to
have drawn is a reasonable one.4 The doctrine limits the ability of a plaintiff to take
language out of context, because the defendants can point the court to the entire document.
But the doctrine does not change the pleading standard that governs a motion to dismiss.
4
See In re General Motors (Hughes) S’holder Litig., 897 A.2d 162, 169–70 (Del.
2006); In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 70 (Del. 1995); In re
Gardner Denver, Inc., 2014 WL 715705, at *2 & n.17 (Del. Ch. Feb. 21, 2014).
19
If there are factual conflicts in the documents or the circumstances support competing
interpretations, and if the plaintiff had made a well-pled factual allegation, then the
allegation will be credited. See Savor, Inc. v. FMR Corp., 812 A.2d 894, 896 (Del. 2002).
The plaintiff also remains entitled to “all reasonable inferences.” Id. at 897. Consequently,
if a document supports more than one possible inference, and if the inference that the
plaintiff seeks is reasonable, then the plaintiff receives the inference. Id.
A. CD&R’s Status As A Controller
The headline issue for purposes of the motions to dismiss is whether the plaintiff
has pled facts that make it reasonably conceivable that CD&R controlled the Company.
The outcome of this issue ripples through the analysis of the breach of fiduciary duty claims
asserted in Counts I and II.
For purposes of the claim against CD&R in Count I, CD&R’s status as a controller
is potentially dispositive. A stockholder that does not control the corporation is not a
fiduciary and cannot be held liable for breaching non-existent duties. Basho Techs. Holdco
B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *25 (Del. Ch. July 6,
2018), aff’d sub nom. Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100 (Del. 2019)
(TABLE). If it is not reasonably conceivable that CD&R was a controller, then Count I
must be dismissed.
For purposes of both Counts I and II, CD&R’s status as a controller affects the
standard of review. “When a transaction involving self-dealing by a controlling shareholder
is challenged, the applicable standard of judicial review is entire fairness, with the
defendants having the burden of persuasion.” Ams. Mining Corp. v. Theriault, 51 A.3d
20
1213, 1239 (Del. 2012). The defendants did not follow the MFW blueprint by conditioning
the Challenged Transaction upfront on both the approval of a committee and a favorable
vote by a majority of the unaffiliated shares. See Kahn v. M&F Worldwide Corp., 88 A.3d
635 (Del. 2013), overruled on other grounds by Flood v. Synutra, Int’l, Inc., 195 A.3d 754
(Del. 2018). Consequently, if it is reasonably conceivable that CD&R is a controller, then
entire fairness provides the operative standard of review for purposes of the motion to
dismiss. See Tornetta v. Musk, 2019 WL 4566943, at *4, *8–12 (Del. Ch. Sept. 20, 2019).
By contrast, if it is not reasonably conceivable that CD&R controlled the Company,
then under Corwin, an irrebutable version of the business judgment rule will govern unless
the plaintiff can plead a reasonably conceivable breach of the duty of disclosure. See In re
Volcano Corp. S’holder Litig., 143 A.3d 727, 746 (Del. Ch. 2016), aff’d, 145 A.3d 697
(Del. 2017) (TABLE). If Corwin applies, then the only remaining basis to contest the
Challenged Transaction would be waste, a claim that the complaint does not assert and
which is available only in theory, because the fact of stockholder approval indicates that
the Challenged Transaction was on terms that persons of ordinary, sound judgment could
accept. See Singh v. Attenborough, 137 A.3d 151, 152 & n.3 (Del. 2016) (ORDER).
Moreover, if it is not reasonably conceivable that CD&R controlled the Company
and Corwin is not available because of a well-pled disclosure claim, then the traditional
rebuttable version of the business judgment rule will govern unless it is reasonably
conceivable that when approving the Challenged Transaction, the Board lacked a
disinterested and independent majority. And even if the Board did lack a disinterested and
independent majority, then the business judgment rule would still apply if the Board relied
21
on the Committee’s recommendation, unless the Committee itself lacked a disinterested
and independent majority. See In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 24–
29 (Del. Ch. 2014).
The Committee had five members, and the Complaint only challenges the
independence of Metcalf. Consequently, if it is not reasonably conceivable that CD&R
controlled the Company, then the business judgment rule will apply, resulting in the
dismissal of the claims for breach of fiduciary duty asserted in Counts I and II.
1. The Test For Controlling Stockholder Status
“Delaware law imposes fiduciary duties on those who effectively control a
corporation.” Quadrant Structured Prods. Co. Ltd. v. Vertin, 102 A.3d 155, 183–84 (Del.
Ch. 2014); see S. Pac. Co. v. Bogert, 250 U.S. 483, 487–88 (1919). One method of pleading
control sufficient to impose fiduciary duties is to allege that a defendant has the ability to
exercise a majority of the corporation’s voting power.5 At the time of the Challenged
5
See Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994)
(observing that a stockholder becomes a fiduciary if it “owns a majority interest in . . . the
corporation” (internal quotation marks omitted)); In re PNB Hldg. Co. S’holders Litig.,
2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (“Under our law, a controlling
stockholder exists when a stockholder . . . owns more than 50% of the voting power of a
corporation . . . .”); Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *4 (Del. Ch.
June 5, 2006) (“A shareholder is a ‘controlling’ one if she owns more than 50% of the
voting power in a corporation . . . .”).
22
Transaction, CD&R controlled 34.8% of the Company’s voting power, so the Complaint
does not support an inference of control under that standard.6
Another means of pleading control is to allege facts that support a reasonable
inference that the defendant in fact “exercise[d] control over the business affairs of the
corporation.” Lynch, 638 A.2d at 1113 (internal quotation marks omitted). A plaintiff can
plead that a defendant had the ability to exercise actual control by alleging facts that support
a reasonable inference of either (i) control over the corporation’s business and affairs in
general or (ii) control over the corporation specifically for purposes of the challenged
transaction.7
To plead that the requisite degree of control exists generally, a plaintiff may allege
facts supporting a reasonable inference that a defendant or group of defendants exercised
6
Fund VIII owned shares comprising 34.4% of the Company’s voting power.
Sleeper, Zrebiec, and Berges each held 34,630 shares, bringing the total to 34.6%. The
CD&R Investment Advisor owned another 101,251 shares, 2,637 unvested restricted
shares, and 16,738 unvested restricted stock units, bringing the total to 34.8%.
7
See Basho, 2018 WL 3326693, at *25 (“The requisite degree of control can be
shown to exist generally or with regard to the particular transaction that is being
challenged.” (internal quotation marks omitted)); In re Primedia Inc. Deriv. Litig., 910
A.2d 248, 257 (Del. Ch. 2006) (“[T]he plaintiffs need not demonstrate that KKR oversaw
the day-to-day operations of Primedia. Allegations of control over the particular transaction
at issue are enough.”); Williamson, 2006 WL 1586375, at *4 (“Plaintiff can survive the
motion to dismiss by alleging actual control with regard to the particular transaction that is
being challenged.”). See generally Am. L. Inst., Principles of Corporate Governance:
Analysis and Recommendations § 1.10(a) (1994) (defining controlling stockholder as a
person who has the power to vote more than 50% of the voting equity or “[o]therwise
exercises a controlling influence over the management or policies of the corporation or the
transaction or conduct in question” (emphasis added)).
23
sufficient influence “that they, as a practical matter, are no differently situated than if they
had majority voting control.” PNB Hldg., 2006 WL 2403999, at *9. One means of doing
so is to plead that the defendant, “as a practical matter, possesses a combination of stock
voting power and managerial authority that enables him to control the corporation, if he so
wishes.” In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 553 (Del. Ch. 2003).
To plead that the requisite degree of control existed for purposes of a particular
transaction or decision, a plaintiff does not have make such a pervasive showing. See
Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch.
Aug. 25, 2006) (“[P]ervasive control over the corporation’s actions is not required.”).
Rather, the plaintiff must plead facts supporting a reasonable inference that the defendant
in fact exercised actual control “with regard to the particular transaction that is being
challenged.” Id. See generally 1 Stephen A. Radin, The Business Judgment Rule 1129 (6th
ed. 2009).
“The question whether a shareholder is a controlling one is highly contextualized
and is difficult to resolve based solely on the complaint.”8 “[T]here is no magic formula to
8
Williamson, 2006 WL 1586375, at *6; accord In re Tesla Motors, Inc. S’holder
Litig., 2018 WL 1560293, at *13 (Del. Ch. Mar. 28, 2018) (“Whether a large blockholder
is so powerful as to have obtained the status of a ‘controlling stockholder’ is intensely
factual and it is a difficult question to resolve on the pleadings” (internal quotation marks
and alterations omitted)), appeal refused sub nom. Musk v. Arkansas Teacher Ret. Sys.,
184 A.3d 1292 (Del. 2018) (TABLE); In re Cysive, Inc. S’holders Litig., 836 A.2d 531,
550–51 (Del. Ch. 2003) (same); see In re Zhongpin Inc. S’holders Litig., 2014 WL
6735457, at *9 n.33 (Del. Ch. Nov. 26, 2014) (“Whether or not a particular CEO and
sizeable stockholder holds more practical power than is typical should not be decided at
the motion to dismiss stage if a plaintiff pleads facts sufficient to raise the inference of
24
find control; rather, it is a highly fact specific inquiry.”9
2. Potential Sources Of Control
It is impossible to identify or foresee all of the possible sources of influence that
could contribute to a finding of actual control. See Basho, 2018 WL 3326693, at *26.
Examples include, but are not limited to, (i) relationships with particular directors, (ii)
relationships with key managers or advisors, (iii) the exercise of contractual rights to
channel the corporation into a particular outcome, and (iv) the existence of commercial
relationships that provide the defendant with leverage over the corporation, such as status
as a key customer or supplier. See id. (collecting authorities).
Broader indicia of effective control also play a role. Id. at *27. Examples include,
but are not limited to, ownership of a significant equity stake (albeit less than a majority),
the right to designate directors (albeit less than a majority), decisional rules in governing
documents that enhance the power of a minority stockholder or board-level positon, and
the ability to exercise outsized influence in the board room or on committees, such as
through high-status roles like CEO, Chairman, or founder. See id. (collecting authorities).
control.”), rev’d on other grounds sub nom. In re Cornerstone Therapeutics Inc, S’holder
Litig., 115 A.3d 1173 (Del. 2015).
9
Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 WL 770251, at *11 (Del. Ch. Feb.
29, 2016) (citing In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *10 (Del.
Ch. Oct. 24, 2014)); Zhongpin, 2014 WL 6735457, at *6–7 (noting the inquiry of “whether
or not a stockholder’s voting power and managerial authority, when combined, enable him
to control the corporation . . . is not a formulaic endeavor and depends on the particular
circumstances of a given case”).
25
“Invariably, the facts and circumstances surrounding the particular transaction will
loom large.” Id. at *28. A plaintiff may allege facts indicating that a defendant insisted on
a particular course of action even though other fiduciaries or advisors resisted or had
second thoughts. Or a plaintiff may allege that the defendant engaged in pressure tactics
that went beyond ordinary advocacy to encompass aggressive, threatening, disruptive, or
punitive behavior.
“Rarely (if ever) will any one source of influence or indication of control, standing
alone, be sufficient to make the necessary showing. . . . [A] reasonable inference of control
at the pleading stage[] typically results when a confluence of multiple sources combines in
a fact-specific manner to produce a particular result.” Id. Sources of influence and authority
must be evaluated holistically, because they can be additive. Different sources of influence
that would not support an inference of control if held in isolation may, in the aggregate,
support an inference of control.10
10
The Federal Reserve’s recently adopted regulations on when a rebuttable
presumption of control arises for a bank holding company provide a helpful illustration of
how different sources of influence can interact. The regulations consider holistically factors
such as the potential controller’s level of stock ownership, the number of its representatives
who serve on the board, whether a representative serves as board chair, the potential
controller’s level of representation on board committees, the number of its representatives
who serve in senior management positions, whether a representative serves as CEO, the
existence of any significant business or commercial relationships, and the existence of any
significant contractual rights, such as veto rights that limit board discretion. See Fed.
Reserve Sys., Control and Divestiture Proceedings, No. R-1662, at 16–56 (Jan. 30, 2020)
(effective April 1, 2020) (to be codified at 12 C.F.R. pts. 225 &
238), https://www.federalreserve.gov/aboutthefed/boardmeetings/files/control-rule-fr-
notice-20200130.pdf.
26
3. The Complaint’s Allegations Regarding CD&R
The Complaint’s allegations support a reasonable pleading-stage inference that
CD&R exercised control over the Company. No one source of influence is dispositive.
Collectively, they support a reasonable pleading-stage inference of control.
a. Board Composition
An obvious source of influence that can lead to an inference of actual control is
existence of relationships between the alleged controller and members of a company’s
board of directors.11 In this case, the nature of the relationships between CD&R and a
majority of the directors contributes to a reasonable inference of control.
As a threshold matter, the ability of an alleged controller to designate directors
(albeit less than a majority) is an indication of control.12 Under the Stockholders
11
See, e.g., Tesla., 2018 WL 1560293, at *17 (considering defendant’s relationships
with directors as factor supporting reasonable inference of control); Calesa, 2016 WL
770251, at *11 (Del. Ch. Feb. 29, 2016) (finding allegations supported inference defendant
was a controlling stockholder where it was reasonably conceivable “to infer that a majority
of the Board was not independent or disinterested, but rather was under the influence of,
or shared a special interest with,” the defendant); Thermopylae Capital P’rs, L.P. v. Simbol,
Inc., 2016 WL 368170, at *14 (Del. Ch. Jan. 29, 2016) (recognizing defendant can exercise
control over a decision if defendant “had achieved control or influence over a majority of
directors through non-contractual means, such as affiliation or aligned self-interest”); N.J.
Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888, at *11 (Del. Ch. Oct.
6, 2011) (drawing inference of control where defendant dominated majority of directors);
Williamson, 2006 WL 1586375, at *4 (“The fact that an allegedly controlling shareholder
appointed its affiliates to the board of directors is one of many factors Delaware courts
have considered in analyzing whether a shareholder is controlling.”).
12
See, e.g., Lynch, 638 A2d at 1112, 1114–15 (considering right of Alcatel U.S.A.
Corporation to designate five of eleven directors of Lynch Communications Systems, Inc.
during course of affirming trial court’s finding of actual control); In re Loral Space &
27
Agreement, as long as CD&R controlled at least 10% of the Company’s voting power, then
CD&R could nominate a proportionate number of directors to the Board, rounded to the
nearest whole number. See SA § 3.1(b)(i). From December 2017 through the Challenged
Transaction, this provision gave CD&R the right to nominate four of the Board’s twelve
directors, comprising one-third of the seats. CD&R filled those seats with four individuals
that it controlled.
In addition to the directors it controlled, CD&R had longstanding ties with Affeldt
and Kremer. Delaware courts have recognized that past relationships and payments can
support “a reasonable inference of ‘owningness’ sufficient to create a reasonable doubt”
about a director’s ability to act independently.13 “Although mere recitation of the fact of
Commc’ns Inc., 2008 WL 4293781, at *20 (Del. Ch. Sept. 19, 2008) (applying entire
fairness where stockholder controlling 36% of voting power appointed three of eight
directors and had relationships with two others); Williamson, 2006 WL 1586375, at *4
(considering that stockholders collectively holding a 17.1% interest could nominate two of
five directors when drawing an inference of control); Friedman v. Beningson, 1995 WL
716762, at *5 (Del. Ch. Dec. 4, 1995) (considering Chairman, CEO, and President who
held 36% of voting power in public company and could influence a second director;
observing that “[f]rom a practical perspective, this confluence of voting control with
directoral and official decision making authority . . . is . . . itself quite consistent with
control of the board”). Cf. Donnelly v. Keryx Biopharm., Inc., 2019 WL 5446015, at *5
(Del. Ch. Oct. 24, 2019) (finding for purposes of Section 220 inspection that there was a
credible basis to infer that the beneficial owner of approximately 39% of a company’s
common stock with a contractual right to appoint one director and one observer to a seven-
director board was a de facto controller); Kosinski v. GGP Inc., 214 A.3d 944, 953 (Del.
Ch. 2019) (finding for purposes of Section 220 inspection that there was a credible basis
to infer that stockholder with a 34% interest and power to replace one-third of the board
of directors “was a de facto controller”).
13
In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *42
(Del. Ch. Jan. 25, 2016); see Sandys v. Pincus, 152 A.3d 124, 134 (Del. 2016) (inferring
28
past business or personal relationships will not make the Court automatically question the
independence of a challenged director, it may be possible to plead additional facts
that two directors were not independent of a controller for purposes of Rule 23.1 where
they had “a mutually beneficial network of ongoing business relations” based on past
investments and service on company boards); Primedia, 910 A.2d at 261 n. 45 (holding on
motion to dismiss that directors who had “substantial past or current relationships, both of
a business and of a personal nature, with [a controller]” were not independent); In re
Freeport-McMoran Sulphur, Inc. S’holder Litig., 2005 WL 1653923, at *12 (Del. Ch. June
30, 2005) (“Latiolais had worked for the Common Directors for almost twenty years and
had become a wealthy individual in their employ. To argue that Latiolais was independent
of the Common Directors because he formally severed ties with some Freeport entities
does not take into account the nature and extent of his overwhelming, career-long
involvement with Freeport entities, including the entire span of MOXY’s life. Delaware
law recognizes that such extensive ties can operate as an exception to the general rule that
past relationships do not call into question a director’s independence.”); Emerald P’rs v.
Berlin, 2003 WL 21003437, at *3 (Del. Ch. Apr. 28, 2003) (holding in post-trial opinion
that director who had been an employee of controller for more than ten years was not
disinterested and independent in decision to evaluate controller’s proposed merger), aff’d,
840 A.2d 641 (Del. 2003) (TABLE); In re The Ltd., Inc., 2002 WL 537692, at *7 (Del. Ch.
Mar. 27, 2002) (“One may feel ‘beholden’ to someone for past acts as well. It may
reasonably be inferred that Mr. Wexner’s gift of $25 million to Ohio State was, even for a
school of that size, a significant gift. While the gift was not to Gee personally, it was a
positive reflection on him and his fundraising efforts as university president to have
successfully solicited such a gift. In this context, even though there can be no ‘bright line’
test, a gift of that magnitude can reasonably be considered as instilling in Gee a sense of
‘owingness’ to Mr. Wexner.” (footnote omitted)); In re Ply Gem Indus., Inc. S’holders
Litig., 2001 WL 1192206, at *1 (Del. Ch. Sept. 28, 2001) (recognizing that “past benefits
conferred by [the allegedly dominating director], or conferred as the result of [that
director’s] position with Ply Gem, may establish an obligation or debt (a sense of
‘owingness’) upon which a reasonable doubt as to a director’s loyalty to a corporation may
be premised”); In re New Valley Corp. Deriv. Litig., 2001 WL 50212, at *8 (Del. Ch. Jan.
11, 2001) (observing when considering allegations of interest and lack of independence
that “[t]he facts alleged in the complaint show that all the members of the current Board
have current or past business, personal, and employment relationships with each other and
the entities involved”); Int’l Equity Capital Growth Fund, L.P. v. Clegg, 1997 WL 208955,
at *5–7 (Del. Ch. Apr. 22, 1997) (holding on a motion to dismiss that directors were not
independent based on history of dealing and overlapping governance relationships).
29
concerning the length, nature or extent of those previous relationships that would put in
issue that director’s ability to objectively consider the challenged transaction.” Orman v.
Cullman, 794 A.2d 5, 27 n.55 (Del. Ch. 2002). In other words, “the plaintiff cannot just
assert that a close relationship exists, but when the plaintiff pleads specific facts about the
relationship—such as the length of the relationship or details about the closeness of the
relationship—then [the trial court] is charged with making all reasonable inferences from
those facts in the plaintiff’s favor.” Marchand v. Barnhill, 212 A.3d 805, 818 (Del. 2019)
(discussing more onerous pleading standard under Rule 23.1).
The Company’s own disclosures recognized CD&R’s influence over Affeldt and
Kremer. When CD&R initially invested in the Company, it bargained for the right to place
three directors immediately on the Board and named Sleeper, Berges, and Kremer. Shortly
after the transaction closed, CD&R exercised its right to add two more directors and named
Zrebiec and Affeldt. Although Kremer and Affeldt were nominally independent, the
Company disclosed that with the appointment of the two additional directors, “[t]he CD&R
Funds will have the ability, subject to the fiduciary duties of the individual directors, to
control the decisions of the Board.” Ex. 2 at 3. The disclosure thus described Kremer and
Affeldt as directors who, subject to their fiduciary duties, were subject to CD&R’s control
for purposes of Board-level decisions. The defendants argue that this description merely
recognized CD&R’s ownership at the time of a mathematical majority of the Company’s
voting power, and that is one possible reading, but the description focuses on Board-level
decisions and Board-level control. At the pleading stage, the plaintiff is entitled to the
benefit of the inference that the disclosure meant what it said by describing CD&R as
30
exercising control at the Board level through the five directors it had appointed, including
Affeldt and Kremer.
In addition to this description, the Complaint pleads other facts that contribute to a
reasonable pleading-stage inference that Affeldt was subject to CD&R’s influence and
control. Affeldt has worked for CD&R portfolio companies or served on their boards for
twenty-seven years. In 1991, CD&R hired Affeldt to work at Lexmark, one of its portfolio
companies, in the human resources department. In 1996, Affeldt was promoted to head that
department. Since leaving Lexmark in 2003, Affeldt has predominantly worked as a CD&R
director appointee at CD&R portfolio companies, for which she has received at least $2.45
million. In addition to the Company, CD&R appointed Affeldt to serve on the boards of
SIRVA, Inc., Sally Beauty Holdings, and HD Supply Holdings, all of which were CD&R-
portfolio companies when CD&R placed Affeldt on the board.
At the pleading stage, the extent of Affeldt’s relationship with CD&R is sufficient
to support an inference of beholden-ness. The defendants argue that some of the
relationships between CD&R and Affeldt are stale. To the contrary, the history of
connections between CD&R and Affeldt suggests a persistent and ongoing relationship.
The defendants also argue that the plaintiff has not pled sufficient facts to support an
inference that Affeldt’s remuneration from positions which inferably flowed from her
relationship with CD&R is material to her. Specific information about the wealth of
particular individuals is not generally available and is also not something that can usually
be obtained using Section 220, so the plaintiffs have not been able to frame their allegations
about Affeldt’s financial circumstances using dollars and cents. Nevertheless, the
31
magnitude of the remuneration she has received is sufficiently large to support an inference
of materiality at the pleading stage, particularly given the allegation in the complaint that
most, if not all, of Affeldt’s income has come from entities affiliated with CD&R since her
retirement from Lexmark in 2003.14
14
See Del. Cty. Empls. Ret. Fund v. Sanchez, 124 A.3d 1017, 1020–21 (Del. 2015)
(inferring at pleading stage that director fees of $165,000 were material where they
allegedly constituted 30% to 40% of defendant’s total annual income); Kahn v. Tremont
Corp., 694 A.2d 422, 430 (Del. 1997) (finding after trial that director was beholden to
interested party because of prior one-year consultancy during which he received $10,000
per month and more than $325,000 in bonuses); Rales v. Blasband, 634 A.2d 927, 937
(Del. 1993) (inferring at pleading stage that compensation of $300,000 was material); In
re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *17 (Del. Ch. Mar. 19, 2018)
(inferring at pleading stage that director fees of $468,645 were material); Cumming ex rel.
New Senior Inv. Gp., Inc. v. Edens, 2018 WL 992877, at *17 (Del. Ch. Feb. 20, 2018)
(inferring at pleading stage that fees constituting 60% of director’s identifiable income
were material); Kahn v. Portnoy, 2008 WL 5197164, at *8–9 (Del. Ch. Dec. 11, 2008)
(inferring at pleading stage that director fees of $160,000 were material); In re Emerging
Commc’ns, Inc. S’holders Litig., 2004 WL 1305745, at *34 (Del. Ch. May 3, 2004, revised
June 4, 2004) (finding after trial that consulting and director fees totaling $150,000 in one
year and $170,000 in another were material); In re eBay, Inc. S’holders Litig., 2004 WL
253521, at *2–3 (Del. Ch. Jan. 23, 2004) (inferring at pleading stage that option awards
worth “potentially millions of dollars” dependent on whether defendant “retains his
position as a director” were material); The Ltd., 2002 WL 537692, at *4 (inferring at
pleading stage that consulting fees of $150,000 were material to a university administrator);
Orman, 794 A.2d at 30 (inferring at pleading stage that consulting fees of $75,000 were
material); In re Ply Gem, 2001 WL 755133, at *8–9 (inferring at pleading stage that
consulting fees of $91,000 were material); Beningson, 1995 WL 716762, at *5 (inferring
at pleading stage that consulting fees of $48,000 were material); In re MAXXAM,
Inc./Federated Dev. S’holders Litig., 659 A.3d 760, 774 (Del. Ch. 1995) (declining to
approve settlement and noting that consulting fees of $250,00 were likely material to a
defendant who “recently emerged from personal bankruptcy”); see also Shaev v. Saper,
320 F.3d 373, 378 (3d Cir. 2003) (inferring at pleading stage that consulting fees of
$135,500 plus a discretionary bonus of $25,000 were material); cf. Kahn v. Dairy Mart
Convenience Stores, Inc., 1996 WL 159628, at *6 (Del. Ch. Mar. 29, 1996) (denying
summary judgment based on dispute of fact as to whether consulting fees were material);
In re NVF Co. Litig., 1989 WL 146237, at *4 (Del. Ch. Nov. 22, 1989) (inferring at
32
For similar reasons, the Complaint pleads facts sufficient to support a reasonable
pleading-stage inference that Kremer was subject to CD&R’s influence and control. In
addition to the Company’s description of Kremer to that effect, Kremer worked for years
at Emerson Electric Co., where Berges was President and Vice Chairman. Since retiring
from Emerson in 2007, Kremer’s only employment has been as a director, and the
Company is the only public company where Kremer has served. From 2009 through the
Challenged Transaction, Kremer received approximately $1 million from his directorship.
At the pleading stage, it is reasonable to infer that this remuneration constituted a material
portion of Kremer’s income as a retiree.
The Complaint’s allegations about Metcalf also contribute to a reasonable pleading-
stage inference of control, even though they reduce to just one potentially compromising
relationship. Early on during the negotiations surrounding the Challenged Transaction,
Metcalf understood that he would become Chairman and CEO of the combined company.
It is reasonable to infer at the pleading stage that the prospect of serving as Chairman and
CEO of the combined company induced Metcalf to favor the Challenged Transaction. See
Caspian Select Credit Master Fund Ltd. v. Gohl, 2015 WL 5718592, at *7 (Del. Ch. Sept.
28, 2015) (considering fact that interested party had nominated directors to current board
and other boards and inferring that the directors could “expect to be considered for
directorships in companies the [interest party] acquire[s] in the future”). The defendants
pleading stage that director fees received other companies controlled by interested party
were sufficient to establish a lack of independence).
33
argue that the decision to appoint Metcalf to this position was made too late in the process
to have influenced any of his actions, but it is reasonable to infer at the pleading stage that
the prospect of the appointment was discussed or foreseeable during earlier phases.
The parties have debated Riley’s independence. At the time of the Challenged
Transaction, Riley was the Company’s CEO. He was hired as a senior executive at the
Company in December 2014 when CD&R owned 57% of the Company’s stock and
controlled a majority of its Board seats. In July 2017, Riley was named CEO and appointed
to the Board and to the Executive Committee. For the years 2015, 2016 and 2017, Riley
received total compensation of $2,153,961, $2,299,276 and $2,511,814, respectively—
amounts that can reasonably be inferred to have comprised the bulk of his income.
From these facts, it is reasonable to infer at the pleading stage that Riley would feel
a sense of owing-ness to CD&R. Moreover, if other factors point in favor of a reasonable
inference that CD&R is a controller, then Riley’s presence on the Board will reinforce that
inference rather than undermine it. Under the great weight of Delaware precedent, senior
corporate officers generally lack independence for purposes of evaluating matters that
implicate the interests of a controller.15 In those circumstances, a reasonable doubt exists
15
Rales, 634 A.2d at 937 (holding that President and CEO of corporation could not
impartially consider a litigation demand which, if granted, would have resulted in a suit
adverse to significant stockholders); In re The Student Loan Corp. Deriv. Litig., 2002 WL
75479, at *3 (Del. Ch. Jan. 8, 2002) (“In the case of [the CEO], to accept such a [litigation]
demand would require him to decide to have Student Loan sue Citigroup, an act that would
displease a majority stockholder in a position to displace him from his lucrative CEO
position.”); Mizel v. Connelly, 1999 WL 550369, at *3 (Del. Ch. July 22, 1999) (observing
that President and CEO of corporation whose position constituted his principal
34
as to whether the officer “can impartially consider a demand” that would involve taking
action “materially adverse to [the controller’s] interests.” Mizel, 1999 WL 550369, at *3.
When officers “derive their principal income from their employment,” that fact
“powerfully strengthens the inference” that the officers could not consider a demand on the
merits, because “it is doubtful that they can consider the demand . . . without also pondering
whether an affirmative vote would endanger their continued employment.” Id. If the other
dimensions of the multi-factor analysis support an inference that CD&R is a controller,
then Riley is not independent.
At the other end of the spectrum, the Complaint does not identify any compromising
relationships or sources of influence between CD&R and Martinez, Ball, Forbes, and
Holland. These directors are independent and disinterested for pleading-stage purposes.
employment was not independent for demand-futility purposes where underlying
transaction was between corporation and its controller); Steiner v. Meyerson, 1995 WL
441999, at *10 (Del. Ch. July 19, 1995) (“The facts alleged appear to raise a reasonable
doubt that Wipff, as president, chief operating officer, and chief financial officer, would be
unaffected by [the CEO and significant stockholder’s interest] in the transaction that the
plaintiff attacks.”); see Bakerman v. Sidney Frank Importing Co., 2006 WL 3927242, at *9
(Del. Ch. Oct. 10, 2006, revised Oct. 16, 2006) (holding that reasonable doubt existed as
to ability of insider managers of LLC to address a litigation demand focusing on the entity’s
controllers); see also MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *20 (Del. Ch.
May 5, 2010) (“There may be a reasonable doubt about a director’s independence if his or
her continued employment and compensation can be affected by the directors who received
the challenged benefit.”); In re Cooper Cos., Inc. S’holders Deriv. Litig., 2000 WL
1664167, at *6–7 (Del. Ch. Oct. 31, 2000) (finding reasonable doubt existed as to ability
of two directors to consider litigation demand addressing alleged misconduct by other
directors where both reported to board as officers, one as CFO and Treasurer and the other
as Vice President and General Counsel).
35
CD&R’s control over four directors and its relationships with four others contribute
to a reasonable inference that CD&R exercised actual control over the Company. This
decision need not and does not hold that the relationships standing alone would support a
reasonable inference of control. In conjunction with other indicators of control, however,
the relationships support the necessary pleading-stage inference.
b. Block Size
Another obvious factor that can contribute to an inference of actual control is the
size of the equity stake that the alleged controller holds. The search for guidance on this
issue can be unsatisfying, because the interaction of block size with other factors prevents
clear patterns from emerging. After reviewing a non-exhaustive list of ten significant cases,
a prior decision failed to reveal “any sort of linear, sliding scale approach where by a larger
share percentage makes it substantially more likely that the court will find the stockholder
was a controlling stockholder.” Crimson Expl., 2014 WL 5449419, at *10. Illustrating the
point, the decision noted that “[i]n Cysive, Chief Justice Strine, writing as a Vice
Chancellor, found a 35% stockholder controlled the corporation, while, in Western
National, Chancellor Chandler held that a 46% stockholder was not a controller.” Id. The
decision concluded that “the scatter-plot nature of the holdings highlight[ed] the
importance and fact-intensive nature” of the analysis. Id. It is often the case that “the level
of stock ownership is not the predominant factor.”16
16
FrontFour Capital Gp. LLC v. Taube, 2019 WL 1313408, at *21 (Del. Ch. Mar.
11, 2019); see Tesla, 2018 WL 1560293, at *14 (“[T]here is no absolute percentage of
36
All else equal, a relatively larger block size should make an inference of actual
control more likely, even though the interplay with factors makes the correspondence
difficult to perceive. The relationship derives from simple mathematics. A stockholder who
owns a mathematical majority of the corporation’s voting power has the ability to exercise
affirmative control. As a result, “[i]n the absence of devices protecting the minority
stockholders, stockholder votes are likely to become mere formalities where there is a
majority stockholder.” Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 42
(Del. 1994). Under the Delaware General Corporation Law, the most fundamental changes
can be effectuated only if approved by a majority of the outstanding voting power. See 8
Del. C. § 242(b)(1) (charter amendment); id. § 251(c) (merger); id. § 275(b) (dissolution).
A stockholder with mathematical-majority control can deliver that vote. The stockholder
can also take action by written consent, which functionally converts votes that otherwise
would require a lesser level of voting power into votes that require a majority of the
outstanding voting power. See id. § 228(a) (requiring a consent “signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted”). A stockholder with mathematical-majority control can
act by consent to remove directors and fill the resulting vacancies with new ones. See id.
§§ 141(k), 211(b), 216(2).
voting power that is required in order for there to be a finding that a controlling stockholder
exists.” (quoting PNB Hldg., 2006 WL 2403999, at *9).
37
Once the stockholder’s holdings dip below a majority, the stockholder needs the
votes of other investors to take action by written consent or to obtain a vote that requires a
majority of the outstanding shares. But a large stockholder with less than a majority of the
voting power retains considerable flexibility to take action at a meeting. In that context,
once a quorum is present, the general standard for taking action is the affirmative vote of a
majority of the shares present and entitled to vote. See id. § 216(2). For the election of
directors, the general standard is a plurality of the shares present and entitled to vote. See
id. § 216(3). Meetings typically attract participation from just under 80% of the outstanding
shares.17 At that level, the holder of a 40% block can deliver the vote needed to prevail at
a meeting.
The power conferred by a large block extends further because stockholders who
oppose the blockholder’s position can only prevail by polling votes at supermajority rates.
See Mizel, 1999 WL 550369, at *3 n.1. The following table shows the effect that illustrative
17
See Kobi Kastiel & Yaron Nili, In Search of the “Absent” Shareholders: A New
Solution to Retail Investors’ Apathy, 41 Del. J. Corp. L. 55, 61 (2016) (finding that overall
“the total percentage of shares that were not voted in each of the matters standing for a vote
at S&P 500 companies” in 2015 was 21.7%); Simon Lesmeister, Peter Limbach, & Marc
Goergen, Trust and Shareholder Voting 31, 53 (July 22, 2018, revised Sept. 14, 2019)
(European Corporate Governance Institute (ECGI) – Finance Working Paper No.
569/2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3216765 (finding that
average voter participation at annual meetings for U.S. Russell 3000 firms from 2003 to
2015 was 79%); Dragana Cvijanović, Moqu Groen-Xu, & Konstantinos E. Zachariadis,
Free-riders and Underdogs: Participation in Corporate Voting 4, 11 (May 2019)
(Working Paper), http://abfer.org/media/abfer-events-2019/annual-conference/corporate-
finance/AC19P2056_Free-riders_and_Underdogs.pdf (finding that average total voter
participation for Russell 3000 firms from 2003 to 2013 was 77%).
38
levels of block ownership have on voting outcomes, assuming a meeting where holders
with 80% of the voting power turn out, and the standard is a majority of the shares present
and entitled to vote.18 Under these assumptions, anything over 40% of the voting power is
sufficient to prevail.
Block Unaffiliated % of Unaffiliated % of Unaffiliated Vote for Blockholder If
Size Shares That Blockholder That Opponents Unaffiliated Splits
Present Needs To Win Need To Win 50/50
35 45 13% 91% 72%
30 50 22% 82% 69%
25 55 29% 75% 66%
20 60 35% 68% 63%
10 70 44% 58% 56%
In other words, if the holder of a 35% block favors a particular outcome at a meeting,
then the blockholder will win as long as holders of 1-in-7 shares vote the same way. The
opponents must garner over 90% of the unaffiliated shares to win.19 This court has
18
For simplicity, the calculations assume a company with one class of common
stock and 100 shares outstanding. The blockholder owns the designated number of shares
with unaffiliated holders owning the rest. The assumption of 80% turnout means that 80
shares are present and entitled to vote at the meeting and the affirmative vote of 41 shares
is required to prevail.
19
It is likely that turnout would rise if the opponents of a measure ran a proxy
contest. See, e.g., Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1382–83 (Del. 1995)
(assuming a 90% turnout in a contested election involving a high concentration of
institutional investors); Chesapeake Corp. v. Shore, 771 A.2d 293, 340 (Del. Ch. 2000)
(finding that a turnout of 90% in a contested solicitation at a public company would be
realistic); Robert M. Bass Gp., Inc. v. Evans, 552 A.2d 1227, 1244 (Del. Ch. 1988)
(crediting testimony that 80–83% of eligible shares tend to vote in contested matters). The
larger number of unaffiliated shares present at the meeting increases the absolute number
of votes needed to win. At the same time, the larger number of unaffiliated shares in the
denominator affects the percentages needed to win. The change does not significantly
undermine the blockholder’s advantage. For example, with a 35% blockholder and 90%
39
described disinterested majorities of 60% and 66 2/3% as “more commonly associated with
sham elections in dictatorships than contested elections in genuine republics.” Chesapeake,
771 A.2d at 342; see Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48, 117 (Del. Ch.
2011) (noting that no insurgent had ever achieved a 67% vote and that polling votes at this
level was not realistically attainable).
Based on the math alone, large blocks at levels of 35% and below carry significant
influence. A large block also gives its owner additional rhetorical cards to play in the
boardroom, particularly if the owner can claim to have the most at stake. Taking into
account the influence that a large block carries, the pled fact of CD&R’s 34.8% contributes
to a reasonably conceivable inference that CD&R exercised actual control over the
Company at the time of the Challenged Transaction.20
turnout, the number of votes needed to win rises to 46, the percentage of the unaffiliated
that the blockholder needs to win rises to 20% (11/55), and the percentage of the
unaffiliated that the opponents need to win falls to 84% (46/55). At the other end of the
spectrum, with a 10% blockholder and 90% turnout, the number of votes needed to win
remains 46, the percentage of the unaffiliated that the blockholder needs creeps up to 45%
(36/80), and the percentage of the unaffiliated that the opponents need to win creeps down
to 57.5% (46/80).
20
See Robbins & Co. v. A.C. Israel Enters., Inc., 1985 WL 149627, at *5 (Del. Ch.
Oct. 2, 1985) (recognizing that “[t]his Court and others have recognized that substantial
minority interests ranging from 20% to 40% often provide the holder with working control”
and collecting authorities); see also 8 Del. C. § 203(c)(4) (“A person who is the owner of
20% or more of the outstanding voting stock of any corporation, partnership,
unincorporated association or other entity shall be presumed to have control of such entity,
in the absence of proof by a preponderance of the evidence to the contrary”); Am. L. Inst.,
Principles of Corporate Governance: Analysis and Recommendations § 1.10(b) (1994)
40
c. The Voting Rights And Restrictions In The Stockholders
Agreement
In this case, CD&R’s ownership of 34.8% of the equity and its ability to exercise
those rights as a stockholder must be evaluated in conjunction with the rights and
restrictions that appear in the Stockholders Agreement. The provisions in that agreement
cut in both directions. Some of the provisions give CD&R greater rights than a stockholder
that controlled a majority of the outstanding voting power would possess. Other provisions
limited CD&R’s ability to exercise its voting power for purposes of electing directors.
As discussed in the Factual Background, the Stockholders Agreement granted
CD&R a lengthy list of consent rights that enabled CD&R to block actions that the Board
otherwise would have the ability to take unilaterally, without stockholder approval. The
consent rights encompassed both significant corporate and financing transactions, as well
as more basic corporate governance issues like increasing the size of the Board or
amending the bylaws. These blocking rights weigh in favor of an inference that CD&R
exercised control over the Company generally by giving CD&R power over the Company
beyond what the holder of a mathematical majority of the voting power ordinarily could
wield. The holder of a majority of the outstanding voting power could vote against
transactions that required stockholder approval, but it could not exercise a stockholder level
veto over actions that the board of directors could take unilaterally. To intervene on those
(recommending a rebuttable presumption of control when a person directs more than 25%
of a corporation’s voting power).
41
issues, the holder of a mathematical majority of the voting power would need to act through
director representatives on the board who would be clearly acting as fiduciaries when
making decisions. The blocking rights in the Stockholders Agreement empowered CD&R
to limit a range of board actions at the stockholder level and to do so by exercising contract
rights that CD&R could argue did not implicate fiduciary duties. See Odyssey P’rs, L.P. v.
Fleming Cos., Inc., 735 A.2d 386, 415 (Del. Ch. 1999).
Contractual rights that do not amount to a significant source of general control can,
depending on the circumstances, give rise to an inference of transaction-specific control,
because the holder of the contract rights can use them to channel a corporation into a
particular outcome by blocking other paths.21 Although a blocking right standing alone is
unlikely to support a reasonable inference of control,22 in the context of a particular factual
21
See Williamson, 2006 WL 1586375, at *4 (noting that “board veto power in and
of itself” does not give rise to control but that defendants’ “veto power is significant for
analysis of the control issue” because it indicated that defendants “had the ability to shut
down the effective operation of the At Home board of directors by vetoing board actions”);
Joseph W. Bartlett & Kevin R. Garlitz, Fiduciary Duties in Burnout/Cramdown
Financings, 20 J. Corp. L. 593, 601 (1995) (discussing role of blocking rights as source of
control for venture capital funds over portfolio companies).
22
See Thermopylae Capital, 2016 WL 368170, at *13 (“Under Delaware law,
however, contractual rights held by a non-majority stockholder do not equate to control,
even where the contractual rights allegedly are exercised by the minority stockholder to
further its own goals.”); see also id. at *14 (“[A] stockholder who—via majority stock
ownership or through control of the board—operates the decision-making machinery of the
corporation, is a classic fiduciary; in controlling the company he controls the property of
others—he controls the property of the non-controlling stockholders. Conversely, an
individual who owns a contractual right, and who exploits that right—even in a way that
forces a reaction by a corporation—is simply exercising his own property rights, not that
of others, and is no fiduciary.”). Compare Superior Vision, 2006 WL 2521426, at *5 (“In
42
scenario, it can be a highly effective form of control. The paradigmatic example involves
a cash-burning, asset-light company that does not yet generate sufficient revenue to finance
its business plan and has reached the point where it requires external financing. See Basho,
2018 WL 3326693, at *29. Under those circumstances, a party that has a veto right over
the company’s access to financing can “sit on the company’s lifeline, with the ability to
turn it on or off.”23 When cash is like oxygen, the ability to choke off the air supply is a
strong indicator of control, particularly if there are factual allegations (and later evidence)
that the party holding the veto right used it to force the company into a vulnerable position.
Basho, 2018 WL 3326683, at *29–31.
In this case, the Complaint does not plead that CD&R used blocking rights to cut
off other alternatives or that CD&R threatened to do so. Nor does the pleading suggest that
sum, a significant shareholder, who exercises a duly-obtained contractual right that
somehow limits or restricts the actions that a corporation otherwise would take, does not
become, without more, a ‘controlling shareholder’ for that particular purpose.”) with id.
(“There may be circumstances where the holding of contractual rights, coupled with a
significant equity position and other factors, will support the finding that a particular
shareholder is, indeed, a ‘controlling shareholder,’ especially if those contractual rights are
used to induce or to coerce the board of directors to approve (or refrain from approving)
certain actions.”).
23
Bartlett & Garlitz, supra, at 601; see Manuel A. Utset, Reciprocal Fairness,
Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms,
2002 Wis. L. Rev. 45, 66 (“A venture capitalist’s leverage is further strengthened by
contract provisions giving it a monopoly over future financing.”). There is extensive
literature that discusses the use of staged financing as a control device. See, e.g., Darian M.
Ibrahim, The (Not So) Puzzling Behavior of Angel Investors, 61 Vand. L. Rev. 1405, 1413
(2008) (summarizing role of staged financing); Paul A. Gompers & Josh Lerner, The
Venture Capital Cycle 139 (2000) (describing staged financing as “the most potent control
mechanism a venture capitalist can employ”).
43
the shadow of the blocking rights led the directors to act differently than they would have.
CD&R’s blocking rights instead weigh in favor of an inference that CD&R exercised
control over the Company generally by giving CD&R power over the Company beyond
what the holder of a mathematical majority of the voting power ordinarily would possess.
See Loral, 2008 WL 4293781, at *21 (weighing large stockholder’s “blocking power”
when making post-trial finding of control).
Importantly, the Stockholders Agreement also contained counter-balancing
provisions. As long as stockholders unaffiliated with CD&R held at least 5% of the
outstanding voting power, then the Stockholders Agreement required that there be two
Unaffiliated Shareholder Directors on the Board. See SA § 3.1(c)(i). The Stockholders
Agreement granted the Unaffiliated Shareholder Directors the power to nominate their
successors, required CD&R to vote for them, and prevented CD&R from acting to remove
them unless holders of 80% of the unaffiliated shares wanted them removed. See id. §
3.1(c)(v). Once CD&R’s ownership fell below 50%, the Stockholders Agreement obligated
CD&R to cause its shares to be present at stockholder meetings and vote them in favor of
the Board’s nominees. Id. § 3.2. CD&R also was obligated to vote its shares as
recommended by the Board on all proposals relating to compensation or incentives for
directors, officers, or employees of the Company, unless the vote involved an issue where
CD&R had a contractual consent right. See id.
CD&R’s contractual obligations to keep the Unaffiliated Shareholder Directors on
the Board and, once CD&R’s ownership stake CD&R’s ownership fell below 50%, its
obligation to support the candidates nominated by the Board limited CD&R’s ability to
44
retaliate against non-Investor Directors by voting against their re-election or measures that
would affect their compensation. These restrictions mitigated the threat of the most blatant
form of controller influence, namely a controller’s ability to take retributive action against
outside directors if they do not support the controller’s preferred course of action.24
These restrictions do not foreclose a pleading-stage inference of control given the
multiple sources of influence at issue in the case. First, CD&R did not give up its ability to
vote its shares on issues other than the re-election of directors or matters relating to director,
officer, and employee compensation. As to all other issues, CD&R could vote as it wished.
CD&R could also vote as it wished on compensation issues if the matter implicated one of
CD&R’s contractual consent rights.
Second CD&R did not give up its contractual rights. Through these rights, CD&R
enjoyed more stockholder-level authority than a controller that held a majority of the
outstanding voting power would possess.
Third, under Delaware Supreme Court precedent, the protection given to the non-
Investor Directors does not materially change the calculus. The Delaware Supreme Court
has made clear that controlling stockholder status does not, standing alone, give rise to
pleading-stage concern about the independence or disinterestedness of outside directors.
24
See, e.g., Tremont, 694 A.2d at 428 (describing the inherent coercion present
when a controlling stockholder is on the other side of a transaction as involving the “risk .
. . that those who pass upon the propriety of the transaction might perceive that disapproval
may result in retaliation by the controlling shareholder”); In re Cox Commc’ns, Inc.
S’holders Litig., 879 A.2d 604, 617–19 (Del. Ch. 2005) (describing case law); In re Pure
Res., Inc., S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002) (same).
45
See Cornerstone, 115 A.3d at 1183. In other words, the fact that a controller has sufficient
voting power to remove a director or effectively block the director’s re-election is not
sufficient by itself to call into question the outside directors’ independence. The court does
not assume that the controller would take punitive action against an outside director that
acted contrary to the controller’s wishes or interests, just as the court similarly does not
assume that the outside directors harbor concern about potentially losing their directorships
to a degree that would influence their decision making. See Aronson v. Lewis, 473 A.2d
805, 815–16 (Del. 1984) (subsequent history omitted).
Given these legal principles, the voting restrictions in the Stockholders Agreement
do not neutralize an otherwise operative assumption that the controller would engage in
retribution. They instead are consistent with the baseline expectation that the controller will
not engage in retribution. The plaintiff does not allege that CD&R actually made retributive
threats against the directors, which could make the voting restrictions more relevant. The
plaintiff instead asserts that CD&R exercised Board-level influence through its
relationships with directors and by rewarding them.
The voting rights and restrictions in the Stockholders Agreement thus do not
undermine the other factors that support a pleading-stage inference of control. It remains
reasonably conceivable at the pleading stage that CD&R controlled the Company through
a combination of levers.
d. Other Sources Of Board-Level Influence
Another source of influence that can lead to an inference of actual control is the
roles that an alleged controller or its representatives play in the boardroom. In this case,
46
CD&R possessed additional sources of Board-level influence that contribute to a
reasonable inference that CD&R exercised actual control over the Company.
In addition to the contractual right to proportionate representation on the Board, the
Stockholders Agreement gave CD&R the right to proportionate representation on each
committee of the Board, except when service by a CD&R appointee would result in a
conflict. SA § 3.1(d)(i). Through this right, CD&R was assured of proportionate
representation on key committees, such as the Executive Committee and the Nominating
and Corporate Governance Committee (the “Nominating Committee”). The Stockholders
Agreement notably gave CD&R the right to select the Chairman of the Executive
Committee or the Board’s “Lead Director.” Id. § 3.1(b)(v). CD&R had the power to
exercise these rights as long as it held a voting interest of 20% of more. Id.
Here again, the Stockholders Agreement contained counter-balancing provisions.
As long as stockholders unaffiliated with CD&R held at least 5% of the outstanding voting
power, the Stockholders Agreement required that there be at least two Unaffiliated
Shareholder Directors on the Board and that every committee contain at least one
Unaffiliated Shareholder Director. See id. §§ 3.1(c)(i) & 3.1(d). The requirement to have
an Unaffiliated Shareholder Director on each committee mitigated somewhat CD&R’s
right to proportionate representation on committees.
On balance, CD&R’s right to proportionate representation combined with its
connections with Kremer and Affeldt support a pleading-stage inference of significant
influence. For example, through its right to proportionate representation on committees,
CD&R had the power to designate two of the six members of the Nominating Committee,
47
and it filled those seats with Berges and VanArsdale. In addition to the CD&R executives.
Kremer served on the Nominating Committee, and Kremer had a longstanding relationship
with CD&R. Berges served as Chair of the Nominating Committee.
“As the nominating process circumscribes the range of choice to be made, it is a
fundamental and outcome-determinative step in the election of officeholders.” Harrah’s
Entm’t, Inc. v. JCC Hldg. Co., 802 A.2d 294, 311 (Del. Ch. 2002) (internal quotation marks
omitted) (quoting Durkin v. Nat’l Bank of Olyphant, 772 F.2d 55, 59 (3d Cir. 1985)). As
Boss Tweed famously said, “I don’t care who does the electing, so long as I get to do the
nominating.” Lawrence A. Hamermesh, Director Nominations, 39 Del. J. Corp. L. 117,
117 (2014) (internal quotation marks omitted). The composition of the Nominating
Committee meant that CD&R could determine its agenda and count on three of six votes.
It is therefore reasonable to infer that that the Nominating Committee would not nominate
anyone whom CD&R opposed and would support anyone that CD&R supported. It is
reasonable to infer that CD&R’s influence over the Nominating Committee gave CD&R
significant influence over the composition of the Board.
CD&R’s Board-level rights contribute to a reasonable inference that CD&R
exercised actual control over the Company. This decision does not consider whether these
rights, standing alone, would support a reasonable inference of control. In conjunction with
other indicators of control, however, they support the necessary pleading-stage inference.
e. Relationships With Key Executives And Advisors
Another source of influence that can lead to an inference of actual control is the
existence of relationships between the alleged controller and the key managers or advisors
48
who play a critical role in providing directors with alternatives, providing information
about the available options, and making recommendations as to what course to follow.25 In
this case, the plead relationships are relatively weak, but they add to the overall picture.
This decision has already discussed CD&R’s relationship with Riley. He and
Metcalf proposed pursuing the Challenged Transaction, and Riley and his management
team gave presentations that advocated for the deal. In the abstract, of course, there is
nothing wrong with that. Indeed, management presentations about a deal are invariably
part of the process, and it would be surprising not to have them. But for purposes of
evaluating whether CD&R had the ability to exercise influence and control over the deal
process, CD&R’s relationship with Riley is a factor.
CD&R also had an existing relationship with Evercore, the Committee’s banker.
The Committee did not interview bankers and select its own. Instead, the Company’s CFO
contacted Evercore and vetted the individuals who would lead the engagement. The
Company’s CFO represented that Evercore had no conflicts of interest vis-à-vis CD&R or
New Ply Gem, but at the time, Evercore was working as a restructuring advisor for another
CD&R portfolio company. The Committee also did not interview and hire its own law firm,
opting to hire the Company’s existing counsel.
25
See OTK Assocs., LLC v. Friedman, 85 A.3d 696, 706–07 (Del. Ch. 2014)
(considering defendant’s relationship with management, including tips received by
defendant from company’s officers that provided negotiating leverage, as supporting
reasonable inference of control); see also Hollinger Int’l, Inc. v. Black, 844 A.2d 1022,
1061 (Del. Ch. 2004) (discussing interactions between board chairman and banker).
49
CD&R’s relationships with management and the Company’s advisors contribute to
a reasonable inference that CD&R exercised actual control at the time of the Challenged
Transaction. Standing alone, these relationships would not support a reasonable inference
of control. In conjunction with other indicators of control, however, they support the
necessary pleading-stage inference.
f. The Pleading-Stage Conclusion
Based on the foregoing factors, considered in the aggregate, the Complaint alleges
facts sufficient to support a reasonable inference that CD&R controlled the Company.
Whether a constellation of facts supports an inference of control is a fact-specific inquiry,
and different constellations of facts can lead to different outcomes. See, e.g., In re Rouse
Props., Inc., Fiduciary Litig., 2018 WL 1226015, at *11–20 (Del. Ch. Mar. 9, 2018);
Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *16–20 (Del. Ch. May
31, 2017). This also is a pleading-stage inference, where the plaintiff receives the benefit
of the doubt in a close case. The evidence at a later stage may prove that the inference is
unwarranted. See Dole, 2015 WL 5052214, at *16 (“Before trial, Conrad’s role as Chair
was not a reassuring fact. . . . But after hearing Conrad testify and interacting with him in
person at trial, I am convinced that he was independent in fact.”).
B. Count I: Breach Of Fiduciary Duty Against CD&R
Count I asserts a claim for breach of fiduciary duty against CD&R in it capacity as
the Company’s controlling stockholder. Because CD&R also controlled New Ply Gem, it
stood on both sides of the Challenged Transaction and must establish that the Challenged
Transaction was entirely fair. See Ams. Mining, 51 A.3d at 1239. To survive a pleading-
50
stage motion to dismiss, a plaintiff must plead facts from which it is reasonably conceivable
that the Challenged Transaction was not entirely fair.
When entire fairness applies, the defendants must establish “to the court’s
satisfaction that the transaction was the product of both fair dealing and fair price.”
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995). “Not even an honest
belief that the transaction was entirely fair will be sufficient to establish entire fairness.
Rather, the transaction itself must be objectively fair, independent of the board’s beliefs.”
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145 (Del. Ch. 2006).
“The concept of fairness has two basic aspects: fair dealing and fair price.”
Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). Fair dealing “embraces
questions of when the transaction was timed, how it was initiated, structured, negotiated,
disclosed to the directors, and how the approvals of the directors and the stockholders were
obtained.” Id. Fair price “relates to the economic and financial considerations of the
proposed merger, including all relevant factors: assets, market value, earnings, future
prospects, and any other elements that affect the intrinsic or inherent value of a company’s
stock.” Id. Although the two aspects may be examined separately, “the test for fairness is
not a bifurcated one as between fair dealing and price. All aspects of the issue must be
examined as a whole since the question is one of entire fairness.” Id.
At the pleading stage, the Complaint’s allegations call into question the Challenged
Transaction for purposes of the fair price aspect of the entire fairness test. A large valuation
gap exists between the agreed-upon equity value of New Ply Gem that CD&R and Golden
Gate established for purposes of the Precedent Transaction and the value implied by the
51
equity split that CD&R obtained in the Challenged Transaction. That gap is sufficient to
support a pleading-stage inference of financial unfairness.
At the pleading stage, the Complaint’s allegations also call into question the
Challenged Transaction for purposes of the fair process aspect of the entire fairness test.
The Committee opted to rely on Evercore, even though it is reasonable to infer for pleading
purposes that management selected the bank and picked the personnel who would work on
the deal. Management represented that Evercore did not have any conflicts of interest, yet
Evercore was advising another CD&R portfolio company while working for the
Committee. Evercore initially analyzed the combination using the agreed-upon equity
value from the Precedent Transaction as the equity value for New Ply Gem, which
supported a post-transaction ownership structure in which the Company’s former
stockholders would own two-thirds of the equity. After meeting with CD&R, however,
Evercore revised its valuation methodologies and provided analyses that justified a less
favorable split. The defendants have offered reasons why Evercore’s actions were
reasonable and proper, but the court cannot make the necessary determinations on a motion
to dismiss.
The plaintiffs have also pointed to disclosure issues. In Weinberger, the Delaware
Supreme Court held that the entire fairness standard requires compliance with the duty of
disclosure and incorporated this principle into the fair dealing aspect of the test. See id. at
52
710.26 On the facts of the case, the Weinberger court held that “[m]aterial information,
necessary to acquaint [the minority] shareholders with the bargaining positions of [the
majority stockholder], was withheld under circumstances amounting to a breach of
fiduciary duty.” 457 A.2d at 703. The Delaware Supreme Court “therefore conclude[d] that
this merger does not meet the test of fairness.” Id. at 703; accord Rabkin v. Philip A. Hunt
Chem. Corp., 498 A.2d 1099, 1104 (Del. 1985) (“[The] duty of fairness certainly
incorporates the principle that a cash-out merger must be free of fraud or
misrepresentation.”).
The Proxy Statement failed to disclose adequately that when CD&R purchased New
Ply Gem only months previously, CD&R and Golden Gate valued New Ply Gem’s equity
at $638 million. This information was material because it directly addressed the fairness of
the Challenged Transaction. See, e.g., Gilmartin v. Adobe Res. Corp., 1992 WL 71510, at
*10 (Del. Ch. Apr. 6, 1992) (“It is axiomatic that [disclosure concerning the] fairness of
the consideration offered in a merger . . . is material . . . .”). This information should have
appeared “in plain English” in the section on the “Background of the Merger” and the
26
The Weinberger decision referred to the duty of disclosure as the “duty of
candor.” Id. at 711. The Delaware Supreme Court coined this phrase in Lynch v. Vickers
Energy Corp. (Vickers I), 383 A.2d 278, 279, 281 (Del. 1977). Delaware decisions used it
consistently until Stroud v. Grace, 606 A.2d 75 (Del. 1992), when the Delaware Supreme
Court criticized the term as potentially misleading. The Stroud court clarified that the duty
of candor “represents nothing more than the well-recognized proposition that directors of
Delaware corporations are under a fiduciary duty to disclose fully and fairly all material
information within the board’s control when it seeks shareholder action.” Id. at 84. After
Stroud, the prevailing Delaware terminology shifted from the “duty of candor” to the “duty
of disclosure.”
53
discussion of the Challenged Transaction’s financial fairness. See Vento v. Curry, 2017
WL 1076725, at *3 (Del. Ch. Mar. 22, 2017).
The defendants point out that the inputs for calculating the $638 million valuation
appear in the Proxy Statement, but they are buried in note 7 to the allocation of the purchase
price, where the Proxy Statement refers on page 120 to “equity contribution of $425.2
million by Sponsor Fund X Investor” and on page 121 to “$212.8 million of non-cash
consideration in the form of an equity rollover by Golden Gate Capital.” Ex. 1 at 120–21.
When summed, these figures produce the equity valuation of $638 million. The Proxy
Statement also discloses the precise figure of $637,911,000, without context, on page 111
as “Additional Paid-In Capital” on the Company’s pro forma balance sheet. Id. at 111.
Delaware law requires that plainly material information be disclosed in a “clear and
transparent manner.” Vento, 2017 WL 1076725, at *4. “A stockholder should not have to
go on a scavenger hunt,” then “piece together the answer from information buried” in a
lengthy proxy statement. Id. at *3–4. At the pleading stage, under the “buried facts”
doctrine, it is reasonable to infer that the agreed-upon valuation for New Ply Gem was not
adequately disclosed.
It is thus reasonably conceivable that the Challenged Transaction was not entirely
fair because of shortcomings in both price and process. Count I therefore states a claim on
which relief can be granted.
C. Count II: Breach Of Fiduciary Duty Against The Director Defendants
Count II asserts a claim for breach of fiduciary duty against the director defendants
for approving the Challenged Transaction. Absent additional pleading-stage obstacles, this
54
count would state a claim against the director defendants for the same reasons that it states
a claim against CD&R. But the director defendants invoke two doctrines that CD&R does
not have available: exculpation and abstention.
1. Exculpation
Affeldt, Kremer, Ball, Forbes, Holland, Martinez, and Riley argue that any claim
against them should be dismissed because the Company’s certificate of incorporation
contains a provision that exculpates directors to the fullest extent permitted by Delaware
law. Section 102(b)(7) of the Delaware General Corporation Law authorizes the certificate
of incorporation to contain a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the liability
of a director: (i) For any breach of the director’s duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
under § 174 of this title; or (iv) for any transaction from which the director
derived an improper personal benefit.
8 Del. C. § 102(b)(7). An exculpatory provision shields the directors from personal liability
for monetary damages for a breach of fiduciary duty, except liability for the four identified
categories. “The totality of these limitations or exceptions . . . is to . . . eliminate . . . director
liability only for ‘duty of care’ violations. With respect to other culpable directorial actions,
the conventional liability of directors for wrongful conduct remains intact.” 1 David A.
Drexler et al., Delaware Corporation Law and Practice, § 6.02[7], at 6-18 (2013 & Supp.
Dec. 2019). An exculpatory provision therefore “will not place challenged conduct beyond
judicial review.” Id. at 6-19.
55
When a corporation’s charter contains an exculpatory provision,
[a] plaintiff seeking only monetary damages must plead non-exculpated
claims against a director who is protected by an exculpatory charter provision
to survive a motion to dismiss, regardless of the underlying standard of
review for the board’s conduct—be it Revlon, Unocal, the entire fairness
standard or the business judgment rule.
Cornerstone, 115 A.3d at 1175–76 (footnotes omitted). To state a claim against each
individual director, the Complaint must “plead[] facts supporting a rational inference that
the director harbored self-interest adverse to the stockholders’ interest, acted to advance
the self-interest of an interested party from whom they could not be presumed to act
independently, or acted in bad faith.” Id. at 1179–80. “[E]ach director has a right to be
considered individually,” and “the mere fact that a director serves on the board of a
corporation with a controlling stockholder does not automatically make that director not
independent.” Id. at 1182–83.
“[T]o plead a claim that [the defendant] did not act in good faith, [the plaintiff] must
plead facts supporting an inference that [the defendant] did not reasonably believe that the
. . . transaction was in the best interests of the [Company].” Brinckerhoff v. Enbridge
Energy Co., 159 A.3d 242, 260 (Del. 2017). An all-too-human trial judge lacks the ability
to read a defendant’s mind and discern the defendant’s true intentions. As the Delaware
Supreme Court trenchantly observed, “the members of the Court of Chancery cannot peer
into the hearts and souls of directors.” Allen v. Encore Energy P’rs, L.P., 72 A.3d 93, 106
(Del. 2013) (footnote and internal quotation marks omitted). Even after discovery and a
trial, a judge may need to make a credibility determination about a defendant’s state of
mind, drawing on a combination of direct evidence, indirect evidence, and circumstantial
56
evidence. See id.; cf. State v. Anderson, 74 A. 1097, 1099 (Del. 1910) (recognizing that
intent “may be found by direct evidence, such as the admissions or declarations of the
accused, or by indirect evidence; that is by the rational inferences to be drawn from what
the accused is proven to have done or said, and from all the facts and circumstances
involved in the transaction”).
At the pleading stage, the trial court must draw reasonably conceivable inferences
in favor of the plaintiff based on what the allegations of the complaint suggest, recognizing
that “it may be virtually impossible for a . . . plaintiff to sufficiently and adequately describe
the defendant’s state of mind at the pleadings stage.” See Desert Equities, Inc. v. Morgan
Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1208 (Del. 1993). Because “any
attempt to require specificity in pleading a condition of mind would be unworkable and
undesirable,” a defendant’s state of mind and knowledge may be averred generally. Id. A
court can therefore consider “relevant circumstantial facts that bear on scienter, which
include the substance and effects of the defendants’ conduct.” Prod. Res. Gp. L.L.C. v.
NCT Gp., Inc., 863 A.2d 772, 800 n.85 (Del. Ch. 2004). The facts alleged need only support
a litigable inference of disloyalty or bad faith. See Gelfman v. Weeden Inv’rs, L.P., 792
A.2d 997, 989–90 (Del. Ch. 2001). The inference need not be the only possible inference,
nor even the most likely inference. The inference need only be reasonably conceivable.
The plaintiff alleges that the directors approved purchasing a company from a
controlling stockholder at a 94% premium to the arms’-length price from three months
earlier. They allege that the resulting valuation gap is sufficiently large, and the temporal
57
gap sufficiently short, to support a litigable inference that the directors may have acted to
benefit the controller, rather than the Company and its stockholders.27
The defendants contend that the valuation gap was justified by synergies, both those
created in the creation of New Ply Gem and those that would be generated through the
Challenged Transaction. Disagreeing with the Complaint’s allegation that New Ply Gem’s
high levels of debt were a problem for CD&R and Golden Gate, the defendants maintain
that the debt’s terms were so loose as to provide an advantageous capital structure for the
combined entity. The defendants also cite amendments to the Stockholders Agreement,
which they say conferred value on the Company. They even point to a decline in the
Company’s stock price after the Challenged Transaction was announced, which in turn
reduced the value of the shares that the Company issued as consideration. Assessing these
justifications would require factual assessments that the court cannot make at the pleading
stage. Crediting the defendants’ arguments would require drawing inferences in favor of
the defendants, rather than the plaintiff.
27
See Morris v. Spectra Energy P’rs (DE) GP, LP, 2017 WL 2774559, at *14 (Del.
Ch. June 27, 2017) (explaining that “[q]uibbles with a valuation methodology, alone, are
not sufficient” for “pleading subjective bad faith,” but “when the well pled allegations . . .
show that an asset’s market value is $1.5 billion, specific allegations demonstrate that the
[controller] knew of that implied value, and the Complaint alleges that the asset was
surrendered for less than $1 billion in consideration, subjective bad faith can be inferred at
the pleading stage”); see also Encore Energy, 72 A.3d at 107 (“It may also be reasonable
to infer subjective bad faith in less egregious transactions when a plaintiff alleges objective
facts indicating that a transaction was not in the best interests of the [company] and the
directors knew of those facts.”).
58
The Complaint does not identify any compromising relationships or sources of
influence between CD&R and Martinez, Ball, Forbes, and Holland. Other than their
decision to approve the Challenged Transaction on terms that the Complaint depicts as
overly generous to CD&R, there is not any plead basis to infer that these defendants acted
disloyally or in bad faith. Given the pled facts, it is not reasonably conceivable that they
could be held liable. These defendants are entitled to dismissal under Section 102(b)(7).
Kremer and Affeldt have longstanding ties to CD&R. The combination of their
connection to CD&R and the large valuation gap supports a pleading-stage inference that
they potentially acted to serve CD&R’s interest. This is only a pleading-stage inference.
Other inferences are possible, but at the pleading stage, the plaintiff receives the benefit of
any reasonable inferences that favor the plaintiffs’ claim.
Riley cannot obtain dismissal because he may have acted out of loyalty to CD&R
and because it is possible that he could have breached his duties in his capacity as an officer.
Section 102(b)(7) does not authorize exculpation for officers. See Gantler v. Stephens, 965
A.2d 695, 709 n.37 (Del. 2009) (“Although legislatively possible, there currently is no
statutory provision authorizing comparable exculpation of corporate officers.”). The
Complaint contains allegations that could support potential misconduct by Riley in his
capacity as an officer, such as when providing his assessment of the Challenged
Transaction to the Board and advocating in favor of the deal. It is therefore reasonably
conceivable that Riley acted in his capacity as CEO and cannot rely on the protection of
Section 102(b)(7).
59
2. Abstention
Sleeper, Berges, Zrebiec, and VanArsdale argue that they cannot be liable because
they recused themselves from participating as directors in the discussion of the Challenged
Transaction. They also abstained from voting on the deal. Although this defense may
ultimately prevail, it would be premature to rule on it at the pleading stage.
“A director can avoid liability for an interested transaction by totally abstaining
from any participation in the transaction.”28 “Delaware law clearly prescribes that a director
who plays no role in the process of deciding whether to approve a challenged transaction
cannot be held liable on a claim that the board’s decision to approve that transaction was
wrongful.” In re Tri-Star Pictures, Inc., Litig., 1995 WL 106520, at *2 (Del. Ch. Mar. 9,
1995). But this is “not an invariable rule.”29
28
In re Pilgrim’s Pride Corp. Deriv. Litig., 2019 WL 1224556, at *15 (Del. Ch.
Mar. 15, 2019); see Weinberger, 457 A.2d at 710–11 (“[I]ndividuals who act in a dual
capacity as directors of two corporations, one of whom is parent and the other subsidiary,
owe the same duty of good management to both corporations, and in the absence of . . . the
directors’ total abstention from any participation in the matter, this duty is to be exercised
in light of what is best for both companies.” (emphasis added)); see also Propp v. Sadacca,
175 A.2d 33, 39 (Del. Ch. 1961) (concluding that a conflicted director was not legally
responsible for unfair aspects of the transaction where he “abstained from voting in good
faith because he honestly believed that if he were to become involved in consideration of
[the transactions], his duties as a director would somehow come in conflict with his own
self-interest” because it was not “the type of corporate act for which a director may clearly
be held liable . . . ”), aff’d in part and rev’d in part on other grounds sub nom. Bennett v.
Propp, 187 A.2d 405 (Del. 1962).
29
Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 753 (Del. Ch. 2007); see Tri-Star
Pictures, 1995 WL 106520, at *3 (“[N]o per se rule unqualifiedly and categorically relieves
a director from liability solely because that director refrains from voting on the challenged
transaction.”); Dairy Mart, 1999 WL 350473, at *1 n.2 (explaining that “mere abstinence
60
One might, for example, imagine a scenario in which certain members of the
board of directors conspire with others to formulate a transaction that is later
claimed to be wrongful. As part of the conspiracy, those directors then
deliberately absent themselves from the directors’ meeting at which the
proposal is to be voted upon, specifically to shield themselves from any
exposure to liability. In such circumstances it is highly unlikely that those
directors’ “nonvote” would be accorded exculpatory significance.
Tri-Star Pictures, 1995 WL 106520, at *3. “Similarly, an absent director . . . who
knowingly accepts a personal benefit flowing from a self-interested transaction and refuses
to return it upon demand, can be thought to have ratified the action taken by the board in
his absence and, thus, share in the full liability of his fellow directors.” Valeant, 921 A.2d
at 753–54; see also Oracle, 2018 WL 1381331, at *21. Or a court might hold a director
liable, even if the director abstained from the formal vote to approve the transaction, if the
director was “closely involved with the challenged [transaction] from the very beginning”
and the transaction was rendered unfair “based, in large part,” on the director’s
involvement. Gesoff, 902 A.2d at 1166 n.202. More generally, this court may hold an
absent director liable if the director “play[ed] a role in the negotiation, structuring, or
from a vote does not, in the ordinary course, shield or absolve directors from liability”
because “[i]t would hardly seem appropriate for directors, by their own choosing, to decide
to abdicate [their affirmative fiduciary] duties by not forming an opinion about a board
decision”); 1 R. Franklin Balotti & Jesse A. Finkelstein, Delaware Law of Corporations
and Business Organizations, § 4.16[A], at 4-150 (3d ed. 1998 & Supp. 2019) (“Typically,
directors who did not attend or participate in the board’s deliberations on, or approval of,
a transaction will not be held liable for that transaction. But an absent director ‘who
knowingly accepts a personal benefit flowing from a self-interested transaction and refuses
to return it upon demand, can be thought to have ratified the action taken by the board in
his absence and, thus, share in the full liability of his fellow directors.’” (footnote omitted)
(quoting Valeant, 921 A.2d at 753–54)).
61
approval of the proposal.”30 “Given the factual nuances underlying this rule, it is no surprise
that the leading cases have not addressed the issue at the pleadings stage, but rather in post-
trial rulings or on a motion for summary judgment.”31
Sleeper, Berges, Zrebiec, and VanArsdale recused themselves from the Board’s
final vote on the Challenged Transaction, but that cookie-cutter step is not sufficient to
establish a successful abstention defense. The CD&R representatives did not absent
themselves from the process entirely. In April 2018, Riley and Metcalf discussed a
potential merger with a CD&R team that included Sleeper, Berges, and Zrebiec. On May
1, Sleeper, Berges, Zrebiec, and VanArsdale participated in the discussions that led to the
Board reaching a consensus that a merger with New Ply Gem was the Company’s most
promising business opportunity. After the Board established the Committee, Sleeper and
Zrebiec met with Evercore, and Sleeper presented the Board with CD&R’s views on the
valuation and argued for an equity split that favored CD&R.
30
Valeant, 921 A.2d at 753; see In re Ebix, Inc. S’holder Litig., 2018 WL 3545046,
at *12 (Del. Ch. Jul. 17, 2018); Frederick Hsu Living Tr. v. ODN Hldg. Corp., 2017 WL
1437308, at *38 (Del. Ch. Apr. 14, 2017, revised Apr. 24, 2017); see also Cambridge Ret.
Sys. v. DeCarlo, C.A. No. 10879-CB, at 44–48 (Del. Ch. June 16, 2016) (TRANSCRIPT)
(explaining that plaintiffs alleged sufficient participation by a conflicted director where
complaint stated the director attended a meeting where the board of directors failed to fully
consider a decision and another meeting where the special committee approved an
apparently “prebaked” deal).
31
Pilgrim’s Pride, 2019 WL 1224556, at *17; see Weinberger, 457 A.2d at 710–11
(post-trial); Emerald P’rs v. Berlin, 2001 WL 115340, at *19–20 (Del. Ch. Feb. 7, 2001)
(post-trial), rev’d on other grounds, 787 A.2d 85 (Del. 2001); Tri-Star, 1995 WL 106520,
at *1 (summary judgment); Citron v. E.I. Du Pont de Nemours & Co., 584 A.2d 490, 492
(Del. Ch. 1990) (post-trial).
62
Sleeper, Berges, Zrebiec, and VanArsdale contend that their participation as
representatives of CD&R should not count for purposes of the abstention analysis. It is not
clear at this stage precisely when the CD&R directors were participating solely as
representatives of CD&R. For some of the interactions, the answer seems straightforward,
but making the capacity determination that the CD&R directors request would require
drawing inferences in favor of the defendants, rather than the plaintiff.
The analysis is also complicated because of the pleading-stage inference that CD&R
controlled the Company. Once in that framework, CD&R would need to have implemented
both of MFW’s protective mechanisms to obtain a pleading-stage determination that it did
not stand on both sides of the transaction and influence its terms. In this case, CD&R did
not follow MFW. As a result, it is reasonably inferable that CD&R owed duties to the
Company and its stockholders throughout the transaction process and that entire fairness
provides the operative standard of review. As dual fiduciaries for both the Company and
CD&R, the CD&R directors likewise continued to owe duties to the Company and its
stockholders throughout the transaction process. Given this legal framework, it seems
unlikely that the CD&R directors could have participated in the process on behalf of CD&R
and yet obtain pleading-stage dismissal under an abstention theory. Whether the CD&R
directors complied with their fiduciary duties instead requires fact-specific analyses that
cannot be conducted on a motion to dismiss.
D. Count III: Unjust Enrichment
Count III of the Complaint asserts that the Challenged Transaction resulted in
CD&R being unjustly enriched. The elements of unjust enrichment are: (1) an enrichment,
63
(2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) the
absence of justification, and (5) the absence of a remedy provided by law. Nemec v.
Shrader, 991 A.2d 1120, 1130 (Del. 2010).
The unjust enrichment claim is predominantly a fallback claim. If the plaintiff were
able to prove that one or more of the directors breached their fiduciary duties under Count
II, but somehow were not able to prove that CD&R breached its fiduciary duties under
Count I, then CD&R could have been unjustly enriched to the extent it received benefits
from the Challenged Transaction that flowed from a breach of duty. If so, then the
Company would have suffered an impoverishment that corresponded to CD&R’s
enrichment. Because of the breach of duty by the directors, the enrichment would not be
justified, but because of the lack of a viable claim for breach of fiduciary duty against
CD&R, there would not be an adequate remedy at law. Under those circumstances, it is
possible that the unjust enrichment claim could provide a viable means of relief. See Hsu
Living Tr., 2017 WL 1437308, at *43.
It seems unlikely that this set of circumstances would come to pass. If CD&R is not
found to be a controller, then the business judgment rule is likely to protect the Challenged
Transaction, removing the predicate breach of duty necessary for the enrichment to be
unjust. The only doctrinal path that seems viable for the plaintiff is to establish that CD&R
controlled the Company, in which case the claim for unjust enrichment becomes redundant
and superfluous.
Although Count III is likely duplicative of Count I, “Delaware law does not appear
to bar bringing both claims.” Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175, at *11 (Del.
64
Ch. Oct. 28, 2011). While there ultimately will be only one recovery, at the pleading stage
it is possible that “factual circumstances [might exist] in which the proofs for a breach of
fiduciary duty claim and an unjust enrichment claim are not identical.” MCG Capital, 2010
WL 1782271, at *25 n.147; accord Tornetta, 2019 WL 4566943, at *15. The motion to
dismiss Count III is therefore denied.
III. CONCLUSION
The motions to dismiss Counts I and Count III are denied. The motion to dismiss
Count II is granted as to defendants Martinez, Ball, Forbes, and Holland. Otherwise, the
motion to dismiss Count II is denied.
65