Jacob Kasher Hindlin v. Lukasz Gottwald, Lawrence J. Spielman and Renee Karalian ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JACOB KASHER HINDLIN, )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0586-JRS
)
LUKASZ GOTTWALD, LAWRENCE J. )
SPIELMAN and RENEE KARALIAN, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: May 7, 2020
Date Decided: July 22, 2020
Brian E. Farnan, Esquire and Michael J. Farnan, Esquire of Farnan LLP,
Wilmington, Delaware and Andrew J. Goodman, Esquire and Diana Breaux, Esquire
of Foster Garvey P.C., New York, New York, Attorneys for Plaintiff Jacob Kasher
Hindlin.
Chad M. Shandler, Esquire, Katharine L. Mowery, Esquire and Angela Lam, Esquire
of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for
Defendants Lukasz Gottwald and Renee Karalian.
Dawn C. Doherty, Esquire and Marc Sposato, Esquire of Marks, O’Neill, O’Brien,
Doherty & Kelly, Wilmington, Delaware, Attorneys for Defendant Lawrence J.
Spielman.
SLIGHTS, Vice Chancellor
Plaintiff, Jacob Kasher Hindlin (“Hindlin”), was encouraged by his business
manager, Defendant, Lawrence Spielman (“Spielman), to invest in Core
Nutrition LLC (“Core”) in February 2015. In connection with this investment,
Hindlin signed a Joinder Agreement and Signature Page to the Limited Liability
Company Agreement of Core Nutrition, LLC (the “LLC Agreement”). Hindlin
acquired additional Core units, again at Spielman’s urging, in early 2017. More than
a year later, Core was acquired by Keurig Dr. Pepper Inc. (“KDP”) for an aggregate
transaction value of $449 million. Based on his 0.6% ownership stake in Core as of
the end of 2017, Hindlin believed he was entitled to $2.75 million for his units. Core
maintained he was owed only $393,582.89.
Hindlin brings this action to recover what he believes he is owed by Core
against three former members of Core’s Board of Managers (the “Board”).
He alleges Defendants, Spielman, Lukasz Gottwald (“Gottwald”) and Renee
Karalian (“Karalian”), improperly diluted Core’s minority shareholders in breach of
their fiduciary duties and the covenant of good faith and fair dealing implied within
the LLC Agreement. Defendants have moved to dismiss the Complaint under Court
of Chancery Rule 12(b)(6) for failure to state a claim, Rule 23.1 for failure
adequately to plead demand futility and 6 Del. C. §§ 18-1001–1003 for lack of
standing (the “Motion”).
1
After carefully reviewing the Complaint and the parties’ arguments in
connection with the Motion, I am satisfied the Complaint must be dismissed. As an
initial matter, the Complaint is devoid of well-pled factual allegations that any of the
named Defendants did anything actionably wrong. Beyond the factual deficiencies
in the pleading, the Complaint also fails as a matter of law. Hindlin has not
adequately alleged a gap in the LLC Agreement that the implied covenant may be
invoked to fill. And, because Hindlin’s dilution claim is derivative in nature and
Hindlin is no longer a Core unitholder, he lacks standing to bring a breach of
fiduciary duty claim. My reasoning follows.
I. BACKGROUND
I have drawn the facts from the well-pled allegations in the Complaint,1
documents incorporated by reference or integral to the Complaint and those matters
of which I may take judicial notice.2
1
Citations to the Complaint are to “Compl. ¶ __.”
2
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (noting that on
a motion to dismiss, the Court may consider documents that are “incorporated by
reference” or “integral” to the complaint); In re Gen. Motors (Hughes) S’holder Litig., 897
A.2d 162, 170 (Del. 2006) (holding this Court may, when considering a motion to dismiss,
take judicial notice of documents not subject to reasonable dispute).
2
A. The Parties
Plaintiff, Jacob Hindlin, is a “highly successful” writer and producer of pop
music. 3 He first invested in Core in 2015.4
Defendant, Lukasz Gottwald, is a “highly successful” music industry
publisher and producer. 5 Gottwald was a co-founder and the Chief Cultural Officer
of Core, and served on the Board at all relevant times. 6 Gottwald promoted Core as
an investment opportunity to his peers in the music industry. 7
Defendant, Lawrence Spielman, is a certified public accountant who served
as Hindlin’s business manager from November 2010 until July 2018. 8 Spielman
encouraged Hindlin to invest in Core, and was on the Board at all relevant times. 9
3
Compl. ¶ 2. Hindlin is known professionally as Jacob Kasher.
4
Compl. ¶ 10.
5
Compl. ¶ 3. Gottwald is known professionally as Dr. Luke.
6
Compl. ¶ 7. Defendants note that Gottwald resigned from the Board in 2016.
See Opening Br. in Supp. of Defs.’ Mot. to Dismiss (“OB”), Ex. G. As the document relied
upon by Defendants to demonstrate Gottwald’s resignation was not attached to or
incorporated by reference in the Complaint, I cannot consider it on a motion to dismiss.
See Wal-Mart Stores, 860 A.2d at 320. Regardless, Gottwald’s Board status does not
ultimately impact my analysis.
7
Compl. ¶¶ 3, 5.
8
Compl. ¶ 4.
9
Compl. ¶¶ 5, 7.
3
Defendant, Renee Karalian, is a lawyer who provides various legal services
to Gottwald. 10 She was a member of the Board at all relevant times. 11
B. Hindlin’s Investment in Core and the Subsequent Sale to KDP
Spielman pitched an investment in Core to Hindlin in February 2015.12
Hindlin acquired 2,000 Core units for $12,000 soon after.13 In connection with this
initial investment, Hindlin signed a joinder binding him to the LLC Agreement. 14 In
early 2017, Gottwald directed Core’s President to send Hindlin a Private Placement
Memorandum in hopes that Hindlin would participate in Core’s latest fundraising
round.15 Again following Spielman’s recommendation, Hindlin acquired an
additional 2,000 Core units, this time for $120,000. 16
On October 1, 2018, Hindlin was informed that Core was being acquired by
KDP for an enterprise value of $525 million (the “Acquisition”). 17 The Acquisition
10
Compl. ¶ 6.
11
Compl. ¶ 7.
12
Compl. ¶ 10.
13
Id.
14
Compl. ¶ 11.
15
Compl. ¶ 13.
16
Compl. ¶ 14.
17
Compl. ¶ 16.
4
closed in November 2018 for an adjusted price of $449,462,907, and Hindlin did not
challenge the Acquisition’s terms or fairness.18 According to his 2017 Core K-1,
Hindlin owned about .613% of Core’s equity at year-end 2017. 19 Based on this
stake, Hindlin believes he should have received $2,755,207 for his units following
the Acquisition. 20 Instead, Hindlin was offered consideration totaling
$393,582.89. 21
C. The Alleged Dilution of Plaintiff’s Shares
Hindlin alleges the discrepancy between what he is owed and what he was
offered is the result of the Core Board’s improper dilution of the Company’s
minority unitholders.22 While the Complaint is frustratingly vague, Hindlin appears
to offer three bases to infer dilution. First, he alleges the Company issued some
number of so-called “Incentive Units” prior to the KDP transaction.23 These
Incentive Units allegedly constituted approximately 18% of the Core units
exchanged for KDP shares in the Acquisition, and Hindlin alleges Core’s refusal to
18
Compl. ¶ 17.
19
Compl. ¶ 18.
20
Id.
21
Compl. ¶ 19.
22
Compl. ¶ 22.
23
See Compl. ¶ 22; OB Ex. A, (the “LLC Agreement”) §§ 5.1(b), (c)(iii).
5
identify to whom these units were allotted suggests their purpose was to dilute
minority shareholders. 24 As Spielman individually received merger consideration
exceeding $76 million, Hindlin believes many of these Incentive Units were granted
to Spielman, which he argues further supports an inference of improper dilution. 25
Next, Hindlin identifies changes in Core’s 2017 capital accounts as evidence
of dilution. 26 Core issued 271,829 units that year. 27 If these units had been issued
at the same price Hindlin paid for his units in 2017, these sales should have raised
$16.3 million and the Company’s year-end capital should have totaled
$24.6 million.28 Instead, the Company recorded a year-end capital balance of
$1.4 million. 29 Core’s capital losses that year were $18.37 million, $4.85 million
less than the year-end capital total suggests.30 Hindlin argues this discrepancy can
only be explained by the issuance of dilutive units. 31
24
Compl. ¶ 22.
25
Compl. ¶ 23.
26
Compl. ¶ 26.
27
Id.
28
Id.
29
Id.
30
Id.
31
Id.
6
Last, Hindlin notes that a shift in the proportion of his membership interest to
capital interest allows an inference of dilution.32 In 2015 and 2016, Hindlin’s
membership interest was three to four times greater than his capital interest.33 By the
end of 2017, however, his membership interest was only about 15% of his capital
interest, and he alleges this must be the result of dilution.34
D. Procedural History
Hindlin first filed suit in New York state court in early 2019. In light of the
LLC Agreement’s mandatory Delaware forum selection provision, Hindlin
voluntarily dismissed the New York action and filed his Complaint in this Court on
July, 30 2019. 35 Count I alleges a breach of the implied covenant of good faith and
fair dealing against each Defendant for diluting Core’s minority members. 36
Count II alleges a breach of fiduciary duty against each Defendant for the same
32
Compl. ¶¶ 27–28.
33
Compl. ¶ 28.
34
Id.
35
Hindlin has separately filed suit to compel an accounting in New York. That proceeding
is ongoing. Compl. ¶ 24.
36
Compl. ¶¶ 31–34.
7
alleged dilution. 37 Hindlin seeks compensatory and punitive damages and attorneys’
fees.38
Defendants moved to dismiss the Complaint on September 27, 2019, under
Court of Chancery Rule 12(b)(6) for failure to state a claim, Rule 23.1 for failure to
plead demand futility and 6 Del. C. §§ 18-1001–1003 for lack of standing. The
matter was submitted for decision on May 7, 2020.
II. ANALYSIS
The standards by which this court reviews a motion to dismiss for failure to
state a claim are well-settled. Under Chancery Rule 12(b)(6), the court will dismiss
a complaint only if the plaintiff would be unable to recover under “any reasonably
conceivable set of circumstances susceptible of proof” based on the facts pled in the
complaint.39 “All well-pleaded factual allegations are accepted as true[,]” and “the
Court must draw all reasonable inferences in favor of the non-moving party. . . .”40
37
Compl. ¶¶ 35–38.
38
Compl. ¶ 39. Plaintiff did not address Defendants’ Motion to the extent it sought
dismissal of his request for punitive damages either in his Answering Brief or at oral
argument, apparently recognizing that this court of equity has no jurisdiction to award
exemplary damages. See Beals v. Washington Int’l, Inc., 386 A.3d 1156, 1159 (Del. Ch.
1978).
39
Gen. Motors, 897 A.2d at 168.
40
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (citations omitted).
8
“[The Court] do[es] not, however, blindly accept conclusory allegations unsupported
by specific facts . . . .” 41
A. Plaintiff’s Complaint Lacks Sufficient Pled Facts To Put Defendants on
Notice of the Claims Against Them
All complaints in this court, at a minimum, must satisfy Chancery Rule 8(a)
to survive dismissal. 42 While “Rule 8(a) does not demand [] that plaintiffs present a
paragon of the well-organized complaint,” it does require that a complaint at least
“give general notice of the claim asserted . . . .” 43 This so-called “notice pleading”
standard sets a low bar. 44 And yet, this Complaint does not clear it.
41
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010).
42
See Ct. Ch. R. 8(a) (“A pleading which sets forth a claim for relief . . . shall contain []
a short and plain statement of the claim showing that the pleader is entitled to relief . . . .”).
43
In re Infousa, Inc., 2007 WL 3325921, at *26 (Del. Ch. Aug. 13, 2007); Rabkin v.
Philip A. Hunt Chem. Corp., 498 A.2d 1099, 1104 (Del. 1985). See also In re Coca-Cola
Enters., Inc. S’holder Litig., 2007 WL 3122370, at *4 n.28 (Del. Ch. Oct. 17, 2007)
(“[P]laintiffs must allege facts sufficient to show that the legal elements of a claim have
been satisfied.”), aff’d sub nom., Int’l Bhd. of Teamsters v. Coca-Cola Co., 954 A.2d 910
(Del. 2008).
44
See generally, Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000) (describing notice
pleading standards as “permissive”); VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d
606, 611 (Del. 2003) (“under Delaware’s judicial system of notice pleading, a plaintiff
need not plead evidence.”).
9
Dilution, of course, is not per se wrongful.45 As a matter of basic arithmetic,
shareholders are diluted every time a company issues new equity. To survive
dismissal on a wrongful dilution claim, therefore, a plaintiff must plead not only that
he was diluted, but also that the defendants did something wrongful that caused him
to be improperly diluted. 46 On this front, the Complaint falls short.
Stated simply, the Complaint is devoid of any allegations that any Defendant
did anything wrong. Spielman is alleged to have received a “large allocation of
acquisition consideration[,]” worth $76,095,630.47 He is also alleged to have
ignored Hindlin’s requests for information about the Acquisition. 48 Beyond that, the
Complaint says nothing of how Spielman breached fiduciary duties or violated the
implied covenant of good faith and fair dealing. It appears, instead, that Hindlin
would have the Court draw an inference of wrongdoing from the fact that Spielman
received more from the Acquisition than he did. Without more, that inference is not
reasonable.
45
See Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 188 (Del. Ch. 2005)
(“Therefore, Benihana had legitimate reasons for considering a stock issuance that might
have the effect of diluting the BOT shares.”).
46
Id.
47
Compl. ¶ 23.
48
Compl. ¶ 24.
10
The allegations against the other Defendants fare no better. Hindlin accuses
“the Board”—of which Defendants were only a subset—and “Core” of issuing
dilutive Incentive Units to divert consideration from minority shareholders to
insiders, but then pleads no facts whatsoever to back that conclusory allegation.49
Hindlin’s pleading strategy, instead, is to complain about a lack of information—
not as an independent claim—but as an excuse for his failure to plead facts to support
the claims actually asserted.50 To be sure, Hindlin has asked for information and
Core’s Board, allegedly, has refused to provide it.51 But that fact does not relieve
Hindlin of his burden to plead sufficient facts to place Defendants on notice of his
claims. 52
49
Compl. ¶¶ 31–38. Indeed, Gottwald is not specifically alleged to have done anything
beyond serving as a member of Core’s Board, recommending that Hindlin invest in Core
and then receiving some unspecified amount of consideration from the Acquisition.
Compl. ¶¶ 7, 13, 33. Karalian is named as a party, and then never mentioned again in the
Complaint. Compl. ¶¶ 6–7.
50
Compl. ¶¶ 22, 24, 29.
51
Id.; see also D.I. 28 Oral Arg. on Defs.’ Mot. to Dismiss (“OA”) 31–32 (describing
hostile responses to Plaintiff’s information requests). For reasons unclear, Hindlin did not
pursue a claim for breach of the LLC Agreement's "Books and Records" provision
(Section 15) either before the close of the Acquisition or at the time his requests for
information were denied (assuming valid demands for inspection were made). Nor is it
clear why he did not wait to file in Delaware until after he obtained the fruits of his
accounting action in New York. Compl. ¶ 24.
52
Ct. Ch. R. 8(a); In re Coca-Cola Enters., 2007 WL 3122370, at *4 n.28.
11
As best I can tell, Hindlin appears to be invoking a form of res ipsa loquitur,
whereby the Court would infer wrongdoing because: (i) Hindlin believed his stake
in Core was worth more than he was offered following the KDP Acquisition;
(ii) Defendants received significant consideration from that transaction; and
(iii) Defendants (and others) have refused Hindlin’s requests for details of the
payouts to insiders following the Acquisition.53 The fact that Hindlin cannot well
plead that any Defendant did anything wrong is, under this theory, of no
consequence.
Hindlin points to no authority—and this Court is aware of none—that would
allow the Court to draw res ipsa-like inferences of wrongdoing in the context of
claims against corporate fiduciaries. This, of course, is not surprising. Presumptive
inferences of wrongdoing cannot be squared with Delaware’s business judgment
rule, which presumes corporate fiduciaries have acted in good faith and with due
care. 54 In the absence of pled facts, the Court cannot presume wrongdoing.
53
Compl. ¶¶16–29. See Gen. Motors Corp. v. Dillon, 367 A.2d 1020, 1023 (Del. 1976)
(“While negligence is never presumed from the mere fact of an injury, if the particular
manner in which the plaintiff shows the injury to have occurred is so unaccountable that
the only fair inference of the cause was the negligence of the defendant, or, stated another
way, if the manner in which the injury occurred would lead reasonable persons to conclude
that it would not have happened in the absence of some negligence on the part of the
defendant, then the doctrine of Res ipsa loquitur is properly applicable to establish the
negligence of the defendant.”).
54
See In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 52 (Del. 2006) (“Our law presumes
that ‘in making a business decision the directors of a corporation acted on an informed
basis, in good faith, and in the honest belief that the action taken was in the best interests
12
B. Plaintiff Has Not Stated a Claim for Breach of the Implied Covenant of
Good Faith and Fair Dealing
Assuming, arguendo, that the Complaint adequately puts Defendants on
notice of the claims against them, Hindlin still fails to state a claim for breach of the
implied covenant of good faith and fair dealing as a matter of law. Hindlin has
alleged that Defendants breached the implied covenant by approving the issuance of
dilutive units.55 Defendants respond that the implied covenant is not implicated by
those pled facts because the LLC Agreement explicitly addresses the issuance of
potentially dilutive shares.56 With contractual language directly on point,
Defendants argue, there is no “gap” for the implied covenant to fill. 57
of the company.’” (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)); Corwin v.
KKR Fin. Hldgs. LLC, 125 A.3d 304, 312–13 (Del. 2015) (holding business judgment rule
applies to fiduciaries of a limited liability company); Brinckerhoff v. Enbridge Energy Co.,
Inc., 159 A.3d 242, 260 (Del. 2017) (holding that fiduciaries in a limited partnership were
entitled to an inference of good faith absent contrary language in the limited partnership
agreement); Binks v. DSL.net, Inc., 2010 WL 1713629, at *5 (Del. Ch. Apr. 29, 2010)
(“Under Delaware law, courts apply a presumption that directors of corporations act
independently, with due care, in good faith and in the honest belief that their actions were
in the stockholders’ best interests. This presumption, the ‘business judgment rule,’ is at
the foundation and at the core of Delaware corporate law.” (quotations omitted)).
55
Compl. ¶¶ 31–34.
56
OB 10–12. See LLC Agreement §§ 5.1(b), (c)(iii).
57
OB 10–12. See Oxbow Carbon & Minerals Hldgs., Inc. v. Crestview-Oxbow Acq., LLC,
202 A.3d 482, 507 (Del. 2019) (observing that the implied covenant “fills gaps in the
contract’s provisions”).
13
The implied covenant of good faith and fair dealing “attaches to every
contract.”58 Our Supreme Court, however, has recently emphasized that “the
implied covenant is a cautious enterprise.” 59 It may only be invoked “when the
contract is truly silent concerning the matter at hand.”60 And, even when a contract
is indeed “truly silent” on a matter, the court should still “be most chary about
implying a contractual protection when the contract could easily have been drafted
to expressly provide for it.”61
Hindlin has not adequately alleged the existence of a contractual gap to justify
his reliance upon the implied covenant. As Defendants correctly observe, the LLC
Agreement addresses the issuance of both Incentive Units specifically, and the
issuance of units generally. 62 At Section 5.1(b), the LLC Agreement authorizes the
Company’s Board of Managers to “cause the Company to offer to the Members or
other Persons additional Units or other securities of the Company on such terms and
58
Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005).
59
Oxbow Carbon & Minerals Hldgs., 202 A.3d at 506–07 (emphasizing that the implied
covenant should be viewed as providing “a limited and extraordinary legal remedy”).
60
Id. at 507 (quoting Allied Capital Corp. v. GC–Sun Hldgs., L.P., 910 A.2d 1020, 1033
(Del. Ch. 2006)).
61
Id. (quotation omitted).
62
LLC Agreement § 5.1.
14
at prices as the Board of Managers shall determine in its discretion.”63
At Section 5.1(c)(iii), the Board is empowered to issue Incentive Units under the
Company’s equity incentive plan.64
Notwithstanding these clear contractual allowances, Hindlin would have the
Court invoke Delaware authority holding that “a claim for violation of the implied
covenant of good faith and fair dealing can survive if, notwithstanding contractual
language on point, the defendant failed to uphold the plaintiff’s reasonable
expectations under that provision.”65 That general and important proposition of law
is, of course, valid, but it is not as sweeping as Hindlin suggests. As our Supreme
Court has recently emphasized, “the implied covenant of good faith and fair dealing
cannot be employed to impose new contract terms that could have been bargained
for but were not[.]” 66 There is nothing unforeseeable about dilution; for this reason,
anti-dilution clauses are common contractual provisions within the governing
documents of closely held business organizations. 67 Hindlin either could have
63
LLC Agreement § 5.1(b).
64
LLC Agreement § 5.1(c)(iii).
65
Pl.’s Answering Br. in Opp’n to Defs.’ Mot. to Dismiss (“AB”) 8 (quoting Renco Gp.,
Inc. v. MacAndrews AMG Hldgs. LLC, 2015 WL 394011, at *6 (Del. Ch. Jan. 29, 2015)).
66
Oxbow Caron & Minerals Hldgs., 202 A.3d at 503 (quoting Blaustein v. Lord Baltimore
Capital Corp., 84 A.3d 954, 959 (Del. 2014)).
67
See generally Almond for Almond Family 2001 Trust v. Glenhill Advisors LLC, 2018
WL 3954733, at *11 (Del. Ch. Aug. 17, 2018) (discussing anti-dilution provisions);
15
attempted to bargain for anti-dilution protection, or he could have chosen not to
invest in Core in the absence of this protection. For whatever reason, he did neither.
Under these circumstances, Hindlin’s attempt to invoke the implied covenant rings
hollow. 68 Count I of the Complaint must be dismissed.
C. Plaintiff’s Breach of Fiduciary Duty Claim Must Be Dismissed
Count II of the Complaint pleads a breach of fiduciary duty claim against
Defendants arising from the same allegedly dilutive issuance of Core units.69
Defendants argue the dilution claim is “classically derivative,” and Hindlin’s
standing to prosecute the claim was extinguished upon completion of the KDP
Acquisition. 70 Hindlin responds that he is asserting a “dual-natured claim” as
described by Gentile v. Rossette,71 and therefore his direct claim has survived the
Acquisition. 72
For purposes of this analysis, I again assume that Hindlin has pled sufficient
facts to put Defendants on notice of the breach of fiduciary duty claim. Even so, as
Amazon.com, Inc. v. Hoffman, 2009 WL 2031789, at *1 (Del. Ch. June 30, 2009) (same);
Robotti & Co., LLC v. Liddell, 2010 WL 157474, at *2 (Del. Ch. Jan. 14, 2010) (same).
68
Oxbow Carbon & Minerals Hldgs., 202 A.3d at 507.
69
Compl. ¶¶ 35–39.
70
OB 15.
71
906 A.2d 91 (Del. 2006).
72
AB 13.
16
explained below, I agree with Defendants that Count II asserts a purely derivative
claim that Hindlin no longer has standing to prosecute.
This court addresses whether a party has standing as a threshold issue in order
to “ensure that the litigation before the tribunal is a ‘case or controversy’ that is
appropriate for the exercise of the court’s judicial powers.”73 Derivative standing is
“a creature of equity,” whereby a stockholder plaintiff is permitted to assert an action
on behalf of a corporation “solely to prevent an otherwise complete failure of
justice.”74 When an action is derivative in nature, “[the] loss of a plaintiff’s status
as a shareholder generally extinguishes the plaintiff’s standing.”75 “In the context
of a merger transaction, the derivative-individual distinction is essentially outcome-
determinative of any breach of fiduciary duty claims that can be asserted in
connection with the merger by the target company stockholders.” 76
This court applies a two-part test to determine whether a claim is direct or
derivative: “(1) who suffered the alleged harm (the corporation or the suing
73
Dover Historical Soc’y v. City of Dover Planning Comm’n, 838 A.2d 1103, 1110
(Del. 2003). The Court’s analysis of the grounds for dismissal of Count II begins and ends
with the threshold issue of standing. If the Court were to proceed from there, the failure
even to attempt to plead demand futility or a non-exculpated claim of breach of fiduciary
duty (see LLC Agreement § 8.3) would likewise justify dismissal.
74
Schoon v. Smith, 953 A.2d 196, 202 (Del. 2008).
75
El Paso Pipeline GP Co. L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1256 (Del. 2016).
76
Golaine v. Edwards, 1999 WL 1271882, at *4 (Del. Ch. Dec. 21, 1999).
17
stockholders, individually); and (2) who would receive the benefit of any recovery
or other remedy (the corporation or the stockholders, individually)?” 77 “Where all
of a corporation’s stockholders are harmed and would recover pro rata in proportion
with their ownership of the corporation’s stock solely because they are stockholders,
then the claim is derivative in nature.”78 Under this paradigm, the “traditional rule
[is] that dilution claims are classically derivative.” 79
There is, however, a narrow exception to the general characterization of
dilution claims as derivative. In Gentile, our Supreme Court held that a shareholder
dilution claim is both derivative and direct when:
(1) a stockholder having majority or effective control causes the
corporation to issue ‘excessive’ shares of its stock in exchange for
assets of the controlling stockholder that have lesser value; and (2) the
exchange causes an increase in the percentage of the outstanding shares
owned by the controlling stockholder, and a corresponding decrease in
the share percentage owned by the public (minority) shareholders. 80
77
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
78
Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008).
79
El Paso Pipeline GP Co., 152 A.3d at 1251.
80
Gentile, 906 A.2d at 101.
18
The Supreme Court clarified Gentile in El Paso Pipeline GP Co. by holding that
dilution claims are only dual-natured when there is some expropriation of control,
in addition to economic value, from minority stockholders.81
No such expropriation of control is alleged here. More importantly, even
assuming such an allegation could be mined from the Complaint, Hindlin does not
well-plead the existence of a controller or control group.82 To state a dual-natured
claim, “a plaintiff must plead facts from which the Court can reasonably infer an
agreement or arrangement among the alleged [control] group members. A complaint
fails to meet this standard if all it alleges is that a group of shareholders have ‘parallel
interests.’” 83 The Complaint is devoid of allegations that Defendants had any such
agreement, much less that a control group existed.
Because Hindlin has failed adequately to plead that his breach of fiduciary
duty claim is dual-natured under Gentile, it is proper to characterize the claim as
“classically derivative.” Accordingly, Hindlin lost his standing to prosecute his
dilution-based breach of fiduciary claims upon consummation of the Acquisition,
and for that reason, Count II must be dismissed.84
81
El Paso Pipeline GP Co., 152 A.3d at 1264.
82
Gentile, 906 A.2d at 101.
83
Silverberg v. Padda, 2019 WL 4566909, at *6 (Del. Ch. Sept. 19, 2019).
84
El Paso Pipeline GP Co., 152 A.3d at 1256.
19
III. CONCLUSION
Based on the foregoing, Defendants’ Motion to Dismiss must be GRANTED.
IT IS SO ORDERED.
20