Charles Almond v. Glenhill Advisors LLC

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CHARLES ALMOND AS TRUSTEE )
FOR THE ALMOND FAMILY 2001 )
TRUST, ALMOND INVESTMENT )
FUND LLC, CHARLES ALMOND, and )
ANDREW FRANKLIN, )
)
Plaintiffs, )
v. ) C.A. No. 10477-CB
)
GLENHILL ADVISORS LLC,
)
GLENHILL CAPITAL LP, GLENHILL
)
CAPITAL MANAGEMENT LLC,
)
GLENHILL CONCENTRATED LONG
)
MASTER FUND LLC, GLENHILL
)
SPECIAL OPPORTUNITIES MASTER
)
FUND LLC, JOHN EDELMAN,
)
GLENN KREVLIN, JOHN MCPHEE,
)
WILLIAM SWEEDLER,WINDSONG
)
DB DWR II, LLC, WINDSONG DWR,
)
LLC, WINDSONG BRANDS, LLC,
)
HERMAN MILLER, INC. and HM
)
CATALYST, INC.,
)
Defendants, )
)
and )
)
DESIGN WITHIN REACH, INC., )
)
Intervenor and )
Counterclaim-Petitioner. )
MEMORANDUM OPINION
Date Submitted: May 31, 2018
Date Decided: August 17, 2018
Peter B. Ladig of BAYARD, P.A., Wilmington, Delaware; David H. Wollmuth and
Michael C. Ledley of WOLLMUTH MAHER & DEUTSCH LLP, New York, New
York. Attorneys for Plaintiffs Charles Almond as Trustee for the Almond Family
2001 Trust, Almond Investment Fund LLC, and Charles Almond.
Norman M. Monhait and P. Bradford deLeeuw of ROSENTHAL MONHAIT &
GODDESS, P.A., Wilmington, Delaware; Scott J. Watnik of WILK AUSLANDER
LLP, New York, New York; Thomas A. Brown of MOREA SCHWARTZ
BRADHAM FRIEDMAN & BROWN LLP, New York, New York. Attorneys for
Plaintiff Andrew Franklin.
Andrew D. Cordo and F. Troupe Mickler IV of ASHBY & GEDDES, Wilmington,
Delaware; Adrienne M. Ward and Brian Katz of OLSHAN FROME WOLOSKY
LLP, New York, New York; John B. Horgan of ELLENOFF GROSSMAN &
SCHOLE LLP, New York, New York. Attorneys for Glenhill Advisors LLC,
Glenhill Capital LP, Glenhill Capital Management LLC, Glenhill Concentrated
Long Master Fund LLC, Glenhill Special Opportunities Master Fund LLC, Glenn
Krevlin, William Sweedler, Windsong DB DWR II, LLC, and Windsong DWR LLC.
Douglas D. Herrmann of PEPPER HAMILTON LLP, Wilmington, Delaware; Paul
B. Carberry, Joshua Weedman, and Erin Smith of WHITE & CASE LLP, New York,
New York. Attorneys for John Edelman and John McPhee.
Frederick B. Rosner, Scott J. Leonhardt, and Jason A. Gibson of THE ROSNER
LAW GROUP LLC, Wilmington, Delaware; S. Preston Ricardo of Golenbock
Eiseman Assor Bell & Peskoe LLP, New York, New York. Attorneys for Windsong
Brands, LLC.
John D. Hendershot, Susan M. Hannigan, and Brian F. Morris of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Bryan B. House of FOLEY &
LARDNER LLP, Milwaukee, Wisconsin. Attorneys for Defendants, Counterclaim
Petitioners Herman Miller Inc. and HM Catalyst, and Intervenor and Counterclaim
Petitioner Design Within Reach, Inc.
BOUCHARD, C.
In July 2014, Herman Miller, Inc. acquired Design Within Reach, Inc.
(“DWR” or the “Company”), a retailer of modern furniture, for approximately $170
million in a third-party merger transaction. The merger was the culmination of a
dramatic turnaround of the Company that began in August 2009, when a group of
funds known as Glenhill invested $15 million in the Company and became its
controlling stockholder, holding a 92.8% equity interest. A new management team
was put in place later that year, and the Company’s fortunes improved steadily over
the next few years.
After the merger closed, two former stockholders filed suit against Glenhill
and the Company’s directors who oversaw its turnaround. Plaintiffs have never
challenged the fairness of the merger consideration, which by all accounts was an
outstanding result. Instead, plaintiffs’ core strategy has been to secure a larger
portion of the merger consideration for themselves by challenging transactions that
occurred before the merger.
In this post-trial decision, the court enters judgment in defendants’ favor on
all of plaintiffs’ twelve claims for relief. Two rulings concerning two different
categories of claims largely drive this result.
The first category consists of claims relating to a 50-to-1 reverse stock split
that the Company implemented in 2010 on both its common stock and its Series A
preferred stock, which Glenhill had purchased in 2009. Unknown to anyone at the
1
time, the reverse stock splits were implemented in a defective manner that had the
effect of diluting the number of shares of common stock into which the Series A
preferred stock could be converted by a factor of 2500-to-1, instead of the intended
result of a 50-to-1 adjustment. This defect remained unknown in 2013, when the
Series A preferred stock was converted into common stock, and in 2014, when the
merger occurred.
Over one year after the merger closed, plaintiffs amended their complaint after
discovering the defect, adding Herman Miller as a party and asserting that the merger
was void. This action prompted Herman Miller to ratify certain defective corporate
acts under 8 Del. C. § 204 relating to the implementation of the reverse stock splits
and the subsequent conversion of the Series A preferred stock, and to file a
counterclaim asking the court to validate those acts under 8 Del. C. § 205. For the
reasons explained below, all of the equitable considerations identified in Section 205
overwhelmingly favor judicial validation, which the court grants.
The second category consists of claims challenging various transactions
through which some or all of the Company’s board members or their affiliates
received additional equity in the Company before the merger. All of these claims
are concededly derivative in nature and, thus, a threshold issue is whether plaintiffs’
standing to maintain these claims was extinguished as a result of the merger.
2
Plaintiffs advance a novel “control group” argument in an effort to fit these
claims into the transactional paradigm our Supreme Court recognized in Gentile v.
Rosette for “a species of corporate overpayment claim” that can be both derivative
and direct when a transaction results in an improper transfer of economic value and
voting power from the minority stockholders to the controlling stockholder. 1 That
argument fails, however, because it is clear from the record that Glenhill was DWR’s
controlling stockholder by itself (and not as part of the group plaintiffs suggest) at
all relevant times and that each of the challenged transactions did not increase—but
actually reduced—its economic stake and voting power in the Company.
Based on these two rulings, and for other reasons explained below with
respect to plaintiffs’ remaining claims, judgment will be entered in defendants’ favor
and against plaintiffs on all claims.
I. BACKGROUND
The facts recited in this opinion are my findings based on the testimony and
documentary evidence submitted during a five-day trial held in November 2017.
The record includes stipulations of fact in the Pre-Trial Stipulation and Order
(“PTO”), over 500 trial exhibits, nine depositions, and the live testimony of eight
fact and two expert witnesses.
1
906 A.2d 91, 99 (Del. 2006).
3
A. The Parties and Relevant Non-Parties
Design Within Reach, Inc. is a Delaware corporation with its principal place
of business in Stamford, Connecticut. It is in the business of selling modern design
furnishings and accessories.2 DWR was the surviving corporation of a merger with
defendant HM Catalyst, Inc., a wholly-owned indirect subsidiary of defendant
Herman Miller, Inc., that closed on July 28, 2014 (the “Merger”).3 Herman Miller
is a Delaware corporation with its principal place of business in Zeeland, Michigan
that produces office furniture, equipment, and home furnishings.4
Plaintiffs were stockholders of DWR at the time of the Merger. Plaintiff
Charles Almond, individually or through the Almond Investment Fund, LLC and the
Almond Family 2001 Trust, owned approximately 9.6% of DWR common stock in
August 2009, and continued to acquire additional DWR shares until July 2014.5 The
Almond plaintiffs tendered their shares for the Merger consideration on August 21,
2014.6 Plaintiff Andrew Franklin owned DWR common stock in 2009 and sold
2
PTO ¶ 1.
3
PTO ¶¶ 3, 63.
4
PTO ¶ 2.
5
PTO ¶ 11.
6
PTO ¶ 11.
4
approximately 25% of his shares after the Merger was consummated.7 On August
25, 2014, Franklin tendered his remaining shares for the Merger consideration.8
Defendants Glenhill Advisors, LLC, Glenhill Capital, L.P., Glenhill Capital
Management, LLC, Glenhill Concentrated Long Master Fund, LLC (the “Glenhill
Long Fund”), and Glenhill Special Opportunities Master Fund LLC (collectively,
the “Glenhill Defendants”) are part of a fund complex managed by defendant Glenn
Krevlin.9 Non-party Glenhill Capital Overseas Master Fund, L.P. (the “Glenhill
Overseas Fund”) is a limited partnership that primarily invests in equity markets and
has an investor base of institutional investors, pension plans, foundations,
individuals, and family offices.10 The Glenhill Defendants and the Glenhill Overseas
Fund are referred to collectively as “Glenhill.”
At all relevant times, Krevlin had sole investment and voting power over all
DWR shares held by Glenhill.11 Krevlin also was the largest investor in and the sole
portfolio decision maker at all relevant times for the Glenhill Long Fund, which was
an investment vehicle primarily for individuals.12
7
PTO ¶ 12.
8
PTO ¶ 12.
9
PTO ¶ 4; Tr. 9 (Krevlin).
10
Tr. 8 (Krevlin); Dkt. 377.
11
PTO ¶ 6.
12
Tr. 9, 104-106 (Krevlin).
5
Defendant Windsong Brands, LLC (“Windsong Brands”) is an investment
and restructuring company.13 Defendant William Sweedler was the managing
member of Windsong Brands at all relevant times.
The individual defendants are Krevlin, Sweedler, John Edelman, and John
McPhee. From January 2010 until the Merger, the period relevant to plaintiffs’
claims, the Company’s board of directors (the “Board”) consisted of these four
individuals (collectively, the “Director Defendants”), with Krevlin serving as
Chairman of the Board.14 Krevlin and Sweedler joined the Board in 2009.15
Edelman and McPhee joined the Board in January 2010, when they were hired to
serve as the Company’s CEO and COO, respectively.16
Defendants Windsong DWR, LLC (“Windsong I”) and Windsong DB DWR
II, LLC (“Windsong II”) are special purpose vehicles that were formed in May 2010
and July 2012, respectively, for the purpose of investing in DWR.17
13
PTO ¶ 7.
14
PTO ¶ 10.
15
PTO ¶ 18.
16
PTO ¶ 9.
17
PTO ¶ 8.
6
B. Events Preceding the 2009 Transaction
In 2004, DWR went public and listed its common stock on NASDAQ.18 From
2005 to 2007, the Company’s revenues grew, but it continued to operate at a loss.19
On February 2, 2007, the Company entered into a Loan Guaranty and Security
Agreement with Wells Fargo Retail Finance, LLC that provided the Company with
a revolving credit line that was secured by substantially all of the Company’s assets,
except for certain intellectual property.20 In 2008, with the collapse of the housing
market, DWR’s revenues dropped by $15 million, and the Company incurred $14.6
million in losses.21
In May 2009, Wells Fargo informed the Company that it needed to make a
capital infusion of $10 million to $15 million to maintain its line of credit.22 On May
29, 2009, DWR sought a financial viability exception from NASDAQ to allow a
contemplated transaction to close without stockholder approval.23 After NASDAQ
denied that request, DWR delisted its stock from NASDAQ effective July 16,
2009.24 It is in this context that a special committee of the Board pursued a private
18
PTO ¶ 1.
19
PTO ¶ 1.
20
PTO ¶ 21; JX 2 at 2.
21
PTO ¶ 1.
22
JX 10; JX 529 at 40.
23
PTO ¶ 14.
24
PTO ¶¶ 14-15.
7
placement with Glenhill, which held approximately 2.5 million shares or 17.2% of
the Company’s common stock and had no Board representation at the time.25
C. The 2009 Transaction
On July 20, 2009, DWR and Glenhill entered into a Securities Purchase
Agreement pursuant to which Glenhill26 acquired a 91.33% ownership stake in DWR
for $15 million in the form of 15.4 million shares of DWR common stock for $0.15
per share and 1 million shares of Series A 9% Convertible Preferred Stock (the
“Series A Preferred”) for $12.69 per share (the “2009 Transaction”).27 The 2009
Transaction closed on August 3, 2009, at which point Glenhill became the
Company’s majority stockholder with a total equity ownership interest of 92.8%,
including the shares it held before the 2009 Transaction.28 The 2009 Transaction is
not the subject of any challenge in this action.
25
PTO ¶ 4.
26
Glenhill Special Opportunities Master Fund LLC was the counterparty to the Securities
Purchase Agreement, but the purchased shares were issued to the Glenhill Long Fund
(8.34%), Glenhill Capital LP (51.33%), and the Glenhill Overseas Fund (40.33%), which
were the three owners of the Glenhill Special Opportunities Master Fund LLC. Dkt. 377;
JX 22 at GH/WS 0000204.
27
PTO ¶¶ 16, 18; JX 22 at GH/WS 0000038-74; JX 111 at DWR_EM_0000481. The Pre-
Trial Order states that the Series A Preferred was issued at $12.89 per share (PTO ¶ 18),
but this appears to be a typographical error. The Securities Purchase Agreement states that
the Series A Preferred was issued at $12.69 per share, which is its “Stated Value.” JX 22
at GH/WS 0000038; JX 23 § 2.
28
PTO ¶ 5; JX 111 at DWR_EM_0000455; JX 513 ¶ 24.
8
The terms of the Series A Preferred were governed by the Certificate of
Designation of Preferences, Rights and Limitations of Series A 9% Convertible
Preferred Stock of Design Within Reach, Inc. (the “Series A COD”).29 Four features
of the Series A Preferred relevant to this case are its (i) voting rights; (ii) paid-in-
kind dividend; (iii) conversion formula; and (iv) adjustment provision.
Voting Rights. The Series A Preferred shares (i) had voting rights equal to
the number of shares of common stock into which the Series A Preferred could
convert, on an “as-converted” basis; and (ii) voted together with the common stock
as one class on all matters.30
PIK Dividend. Series A Preferred holders had the right to receive cumulative
dividends at the rate of 9% per year, compounding annually to be paid-in-kind in the
form of additional shares of Series A Preferred (the “PIK Dividend”), with the option
to let the PIK Dividend (i) accrue to the next “Dividend Payment Date” or (ii) to
accrete to and increase the Stated Value:
Holders shall be entitled to receive, and the Corporation shall pay,
cumulative dividends at the rate per share (as a percentage of the Stated
Value per share) of 9.0% per annum (compounding annually . . .),
payable annually in arrears, beginning on the first such date after the
Original Issue Date and on each Conversion Date . . . in duly authorized,
validly issued, fully paid and non-assessable shares of Preferred Stock
(the “Dividend Share Amount”). At the option of the Holder, such
29
PTO ¶ 18; JX 23.
30
JX 23 § 4.
9
dividends shall accrue to the next Dividend Payment Date or shall be
accreted to, and increase, the outstanding Stated Value.31
Conversion Formula. Series A Preferred holders had the right to convert
their shares into shares of common stock in certain specified circumstances. Upon
conversion, the holder was entitled to receive a number of common shares
determined by multiplying the number of Series A Preferred shares to be converted
by a “Stated Value” and then dividing by a “Conversion Price” (the “Conversion
Formula”).32 The initial Stated Value was $12.69, and the Conversion Price was
$0.09235.33 To “effect conversions,” a Series A Preferred holder had to provide the
Company with a completed “Notice of Conversion” in the form attached as “Annex
A” to the Series A COD.34
Adjustment Provision. Section 7 of the Series A COD contains a number of
terms to adjust the Conversion Formula for the Series A Preferred in the event of
certain types of transactions, such as stock dividends, stock splits, and subsequent
equity sales of common stock.35 Relevant here, Section 7(a) adjusted the Conversion
31
JX 23 § 3(a); see also JX 14 at GH/WS 0000103.
32
JX 23 § 6(a).
33
JX 23 §§ 2, 6(b).
34
JX 23 § 6(a).
35
JX 23 § 7.
10
Price of the Series A Preferred in the event of a reverse split of the common stock as
follows:
If the Corporation, at any time while this Preferred Stock is outstanding:
. . . (iii) combines (including by way of a reverse stock split)
outstanding shares of Common Stock into a smaller number of shares
. . . then the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock . . .
outstanding immediately before such event, and of which the
denominator shall be the number of shares of Common Stock
outstanding immediately after such event.36
In simple terms, under Section 7(a), a reverse split of the common stock would
increase the Conversion Price of the Series A Preferred, which, in turn, would
decrease in a proportional manner the number of common shares into which a share
of Series A Preferred was convertible through operation of the Conversion Formula.
As such, the provision was intended to operate so that, all else being equal, a Series
A Preferred holder would receive the equivalent economic benefit upon a conversion
of the Series A Preferred after a reverse split of common stock as it would have
received upon a conversion before the split.
To be clear, the preceding discussion concerns how a reverse split of the
common stock affects the Series A Preferred. As becomes important in this case, the
Series A COD did not provide for any adjustment to the Conversion Formula for the
Series A Preferred in the event of a reverse split of the Series A Preferred itself.
36
JX 23 § 7(a).
11
D. The Brands Grant
As part of the 2009 Transaction, the Company agreed that Glenhill would
have three Board designees. Glenhill initially designated Krevlin, Sweedler, and
David Rockwell, who joined then-CEO Ray Brunner and Peter Lynch.37
The new Board met on August 20, 2009.38 After the meeting, DWR’s CFO
Ted Upland raised concerns that the business plan Brunner introduced did not
include “the real numbers.”39 According to Stuart Jamieson of Windsong Brands,
the projections were “really unrealistic.”40 At the Board’s request, Windsong Brands
put together a team to investigate, sending Jamieson, Ken Ragland, and Sweedler to
DWR’s headquarters in San Francisco.41 In late August 2009, after discovering that
Brunner had engaged in misconduct, Jamieson and Ragland “walked [Brunner] out
of the building” and “took over” the Company, with Jamieson as acting CEO.42 On
October 16, 2009, the Board terminated Brunner from his CEO position for cause
based on various alleged acts of misconduct.43
37
PTO ¶ 18; JX 27 at 1.
38
JX 27 at 1.
39
Tr. 25-26 (Krevlin).
40
Tr. 688-89 (Jamieson).
41
Tr. 689-90 (Jamieson).
42
Tr. 692-93 (Jamieson).
43
See JX 47 at GH_WS0045704-5.
12
From late August 2009 until early 2010, Windsong Brands acted as interim
management, performing a top-to-bottom review of DWR’s business and evaluating
how to “cut the costs as much as possible,” given that the Company was losing $1
million to $2 million per month.44 Windsong Brands oversaw a reduction of 20% to
30% of DWR’s staff and the implementation of other cost-cutting measures to
“stop[] the bleeding,” including changing the Company’s medical plan for
employees and shutting down the development of new products.45 On October 16,
2009, the Company terminated the registration of its common stock to save the
expense of maintaining public company filings.46 By the end of 2009, Windsong
Brands had reduced the Company’s expense structure by 20% or approximately
$11.4 million,47 but the Company’s pre-tax losses still increased to $24.9 million.48
At some point after Brunner was terminated as CEO in October 2009, the Board
considered filing for bankruptcy.49
Before performing its restructuring and consulting work, Windsong Brands
did not reach an agreement with the Company on compensation.50 In early 2010,
44
Tr. 691-96 (Jamieson); Tr. 919-20 (Sweedler); see also JX 28.
45
Tr. 693-95 (Jamieson).
46
PTO ¶ 19; Tr. 31 (Krevlin).
47
JX 99 at GH_WS0040041-42.
48
JX 99 at GH_WS0040038.
49
Tr. 113 (Krevlin); see also Tr. 576-78 (McPhee); Tr. 873-74 (Sweedler).
50
Tr. 29-30 (Krevlin); Tr. 865-66 (Sweedler).
13
Sweedler began compensation negotiations with Krevlin, seeking a 10% equity
interest in the Company, which he believed was “commonplace” for this type of
work.51 After a “long, drawn-out negotiation,” Sweedler ultimately agreed to accept
a 1.5% interest in the Company.52
On September 28, 2011, the Company granted 54,796 shares of restricted
stock to Windsong Brands that would vest only if a change of control occurred
before March 22, 2016 (the “Brands Grant”).53 The stock grant provided that
“Windsong shall have all rights of a stockholder (including, without limitation, the
right to receive all dividends and distributions and voting rights) with respect to the
shares of Common Stock comprising the Award.”54 The stock grant did not state
that Windsong Brands would receive anti-dilution protection.
E. DWR Hires Edelman and McPhee
In the fall of 2009, Sweedler introduced Krevlin to Edelman and McPhee, who
had recently sold their business to one of DWR’s competitors.55 Edelman and
McPhee had worked together successfully in other ventures and were “a package
51
Tr. 866-69 (Sweedler); Tr. 698-99 (Jamieson).
52
Tr. 866-68 (Sweedler); JX 79; JX 89.
53
JX 180 at GH_WS0013913.
54
JX 180 at GH_WS0013913.
55
Tr. 33 (Krevlin); Tr. 443-44 (Edelman).
14
deal,” with McPhee focused on operations and Edelman focused on sales and
design.56
On December 14, 2009, the Company entered into employment agreements
with Edelman and McPhee, hiring them to serve as CEO and COO, respectively,
beginning in January 2010.57 Those agreements provided Edelman and McPhee
options to purchase 4% and 3% of the Company’s equity, respectively.58 The
agreements did not state that Edelman or McPhee would receive anti-dilution
protection. In January 2010, Edelman and McPhee joined Krevlin and Sweedler on
the Company’s Board.59 These four individuals comprised DWR’s entire Board
from this point in time until the Merger.
F. The Windsong Note
In 2010, DWR was “continuing to not do well.”60 By the end of the first
quarter of 2010, net product revenues were down 23.6% from the year before, first
56
Tr. 34 (Krevlin).
57
PTO ¶¶ 9, 20.
58
JX 49 at DWR_EM_0001471 (Edelman), 85 (McPhee).
59
PTO ¶ 9. By this date, Brunner, Rockwell, and Lynch all had left the Board. See Tr. 32-
33 (Krevlin).
60
Tr. 44 (Krevlin).
15
quarter income was negative, and EBITDA was lower than the year before.61 The
Company was “losing about [$]1 to $2 million a month, and [was] out of money.”62
Shortly after McPhee and Edelman joined the Company in January 2010, the
Board began to consider a capital raise.63 On February 12, 2010, Krevlin emailed
Edelman: “Would be great to raise only 5mil[.] Sounds like we can round that up
[b]etween you john and friends.”64 That month, Edelman contacted four potential
investors: “one of [his] relationships,” his co-investor in another project, his brother,
and another contact, but “didn’t really go through [the investment with them] at
length.”65 Sweedler testified that he had discussions with a potential Canadian
investor (Knightsbridge Capital), but it wanted terms that were more dilutive than
the 2009 Transaction and a higher interest rate.66
On March 11, 2010, Seth Shapiro, a senior analyst at Glenhill,67 emailed
Krevlin that the Company was “[n]ot in a real rush” to raise capital, “given [Edelman
and McPhee] cant close until early April and we don’t have cash need before then.”68
61
Tr. 192-94 (Shapiro); JX 95; see also JX 556 at 9.
62
Tr. 44 (Krevlin).
63
Tr. 117-18 (Krevlin).
64
JX 63.
65
Tr. 465-67 (Edelman); JX 64 at GH_WS0038397.
66
Tr. 876 (Sweedler).
67
Tr. 186 (Shapiro).
68
JX 78 at GH_WS0038948.
16
According to Krevlin, the Board did not seek funding from other potential investors
because “it would be extremely difficult to get anyone comfortable with [the
Company’s] precarious situation,”69 given the “significant unknown liabilities” in
buying out leases for closed and underperforming stores70 and a potential multi-
million-dollar liability arising from “wage and hour” claims regarding the
classification of sales associates as exempt employees to avoid paying overtime
wages.71
The capital raise ultimately took the form of a $5 million loan referred to
herein as the “Windsong Note.” The terms of the Windsong Note were the product
of a conflicted and deficient process. Shapiro was charged with “negotiating” the
transaction on behalf of the Company even though his employer (Glenhill) was to
own part of the Windsong Note.72 Across from Shapiro sat Sweedler, who
69
Tr. 46-47 (Krevlin).
70
See JX 99 at GH_WS0040046 (noting that twenty-three studios were deemed impaired
“due to the inability of those studios to demonstrate that they could generate future cash
flows in excess of operating expenses”); Tr. 573-74, 578-79 (McPhee).
71
See Tr. 44 (Krevlin); Tr. 582-85 (McPhee); see also JX 512 ¶ 53. By April 1, 2010, the
Company resolved the wage and hour problem by changing its compensation plan, but it
still was exposed to possible litigation given that employees could pursue claims that had
statutes of limitations ranging from three to six years. Tr. 583-84 (McPhee).
71
Tr. 576-78 (McPhee); see also Tr. 873-74 (Sweedler).
72
Tr. 199 (Shapiro); see JX 109 (May 18, 2010 email from Sweedler to Krevlin, among
others, stating “Glenn, you should know that [Shapiro] fought for EVERY little point for
Glenhill!! He did his job AND MORE!!”).
17
negotiated on behalf of himself, Jamieson, McPhee, Edelman, and (purportedly) the
Glenhill Long Fund.73 The Board did not consult with an outside financial advisor.74
Sweedler dictated the terms of the transaction. The loan was secured by a first
lien on the Company’s intellectual property, which was the usual structure Windsong
Brands used to make investments,75 and his lawyers (White & Case) papered the
transaction.76 Ellenoff Grossman & Schole LLP, the law firm that represented
Glenhill and the Company, did not participate in any discussions about the legal or
economic terms of the Windsong Note.77 Joshua Englard, an Ellenoff Grossman
partner, testified that he played no role in negotiating the terms of the Windsong
Note, and that the transaction documents were presented to him as a “done
document.”78
There were no real price negotiations. The Windsong Note was priced “at the
same price as the previous round,” i.e., on the same terms as Glenhill’s initial
investment.79 That is, the Windsong Note “was convertible into common stock at
the same exchange ratio as the [2009 Transaction] ($4.57 per share on a split-
73
Tr. 199, 292-93 (Shapiro).
74
Tr. 287 (Shapiro).
75
Tr. 721-22 (Jamieson); PTO ¶ 23.
76
See JX 66; Tr. 114 (Krevlin); see also Tr. 124-25 (Krevlin); Tr. 580 (McPhee).
77
See Tr. 292 (Shapiro).
78
JX 495 60-62 (Englard Dep.).
79
See JX 552 at Defs.’ Demonstrative 1; Tr. 53 (Krevlin).
18
adjusted basis) if converted immediately.”80 As Krevlin testified, “the way this note
was set up is that, basically, the conversion would be always tied to the same price
of the conversion of the original ‘09 security so that they would move in lockstep in
terms of the convertible price.”81
Windsong I, a limited liability company, was formed for the purpose of
making the $5 million loan reflected in the Windsong Note, which paid interest at a
rate of 5% per year, had a maturity date of October 3, 2012, and contained an option
to convert all of the principal and accrued interest into DWR common stock based
on a conversion matrix.82 With respect to the 5% cash coupon, Krevlin testified that
the original ask was closer to 10%, but the record does not contain any documentary
evidence showing that the parties actually negotiated the coupon rate.83
The five members of Windsong I and their capital contributions were as
follows: (i) Edelman—$2 million for 40%; (ii) Windsong DB, LLC (an entity
associated with Sweedler)84—$1.15 million for 23%; (iii) the Glenhill Long Fund—
$1 million for 20%; (iv) McPhee—$750,000 for 15%; and (v) Jamieson Investments,
80
JX 512 ¶ 54.
81
Tr. 53 (Krevlin).
82
JX 105 at SJ_SBPN_0000666; § 5(a). “The conversion matrix resulted in a conversion
price that decreased over time,” but “the longer the Windsong Note was outstanding, the
greater the number of shares into which the Windsong Note would convert.” JX 513 ¶ 32.
83
Tr. 53 (Krevlin).
84
See JX 107 at GH_WS0036454 (reflecting that Sweedler is the authorized signatory of
Windsong DB, LLC).
19
LLC (owned by Jamieson)—$100,000 for 2%.85 The limited liability company
agreement for Windsong I, dated May 18, 2010 (the “LLC Agreement”), provided
that any proceeds from the Windsong Note would be distributed to the members in
proportion to their percentage ownership of Windsong I.86
The Company and Windsong I entered into a Note Purchase and Security
Agreement dated as of May 18, 2010.87 The parties agreed that the Company would
adjust the exercise price of the Windsong Note to account for any reverse stock split:
If the Company, at any time while this Note is outstanding . . . combines
(including by way of a reverse stock split) outstanding shares of
Common Stock into a smaller number of shares . . . then the Conversion
Price shall be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock . . . outstanding immediately
before such event, and of which the denominator shall be the number
of shares of Common Stock outstanding immediately after such event.88
On May 24, 2010, the Company issued a Notice of Annual Meeting of
Stockholders, which disclosed that the Company had entered into the Note Purchase
and Security Agreement and that Sweedler, Krevlin, Edelman, and McPhee were
“affiliated with” Windsong I.89
85
JX 107 at § 3.3, GH_WS0036456.
86
JX 107 §§ 6.1, 6.2.
87
PTO ¶ 22; JX 108.
88
JX 105 at § 6(a); see also JX 108 at GH_WS0036630.
89
PTO ¶ 25; JX 111 at DWR_EM_0000484.
20
G. The Reverse Stock Splits
During the summer of 2010, DWR common stock “became like a penny
stock,” trading intermittently and at widely fluctuating prices.90 To address this
volatility and save costs, the Board decided to implement a 50-to-1 reverse stock
split of both the common stock and the Series A Preferred.91 Specifically, on July
26, 2010, the Board recommended and Glenhill, as the Company’s majority
stockholder, approved (i) a 50-to-1 reverse stock split of the Company’s common
stock; (ii) a 50-to-1 reverse stock split of the Series A Preferred; and (iii) an
amendment to the Company’s certificate of incorporation to reduce the authorized
number of shares of common stock from 30 million to 600,000 and the authorized
number of shares of Series A Preferred from 1.5 million to 30,000 (the “Reverse
Stock Splits”).92 After the Reverse Stock Splits were approved, Krevlin asked
Shapiro to work with the Company’s attorneys to effectuate the transaction.93
On August 23, 2010, the Company filed with the Delaware Secretary of State
an amendment to its certificate of incorporation stating that the Company was
authorized to issue 600,000 shares of common stock and 30,000 shares of preferred
90
Tr. 59-60 (Krevlin); Tr. 586-87 (McPhee).
91
Tr. 59-61 (Krevlin); Tr. 586-87 (McPhee).
92
JX 126; PTO ¶ 28.
93
Tr. 61, 132 (Krevlin); Tr. 211 (Shapiro).
21
stock.94 On or about August 27, 2010, DWR issued a press release announcing the
Reverse Stock Splits, and the Company’s stock transfer agent sent a notice to the
Company’s stockholders of record.95
As discussed later in this opinion, although unknown to anyone at the time,
there were many flaws in the implementation of the Reverse Stock Splits. Most
importantly, instead of reducing by a factor of 50-to-1 the number of shares of
common stock into which the Series A Preferred could convert, the transaction
mistakenly was structured to reduce by a factor of 2500-to-1 the number of shares
of common stock into which the Series A Preferred could convert. I refer to this
defect as the “double dilution” problem.
The prospect of double dilution of the Series A Preferred upon conversion
arose because of the combined effect of two actions: (i) the 50-to-1 reverse split of
the common stock triggered a 50-to-1 reduction in the number of shares of common
stock into which each share of Series A Preferred could convert under the adjustment
provision in Section 7(a) of the Series A COD, described above; and (ii) the 50-to-1
reverse split of the Series A Preferred itself reduced by 98% the number of shares
of Series A Preferred outstanding. With respect to the latter action, as mentioned
previously, the Series A COD did not provide for any adjustment to the Conversion
94
PTO ¶ 29; JX 118 at DWR_EM_0000104-5.
95
PTO ¶ 30.
22
Formula for the Series A Preferred in the event of a reverse split of the Series A
Preferred itself.
H. The 2011 Bridge Loan and Herman Miller’s Indication of Interest
In 2010, DWR closed nineteen stores, negotiated early terminations for five
more leases,96 and reported losses of $15.8 million and EBITDA of negative $3.1
million.97 In 2011, the Company found itself with a large inventory of unsold
outdoor product and needed an additional capital infusion until that excess inventory
could be sold.98 McPhee and Edelman asked Glenhill to make a bridge loan to the
Company “to help [it] get over this problem.”99 On July 21, 2011, the Glenhill Long
Fund loaned the Company $2 million, which was repaid in November 2011.100
In late August 2011, DWR received an inquiry from Herman Miller, its largest
supplier, about a possible acquisition, which indicated a preliminary total enterprise
valuation of the Company in the range of $25 million to $30 million.101 According
96
JX 147 at HMI 0051837.
97
See JX 147 at HMI 0051830; JX 160 at GH_WS0041151.
98
Tr. 65-66 (Krevlin); Tr. 589-92 (McPhee).
99
Tr. 589-90 (McPhee).
100
See JX 167 (July 21, 2011 Board consent granting Glenhill a warrant to purchase 1.5%
of the Company’s outstanding common stock if the loan was not repaid in full by January
1, 2012); JX 189 at HMI 0057912. The repayment of the loan in November 2011 obviated
the need to issue a warrant to Glenhill for making the loan. Tr. 66 (Krevlin), Tr. 591-92
(McPhee).
101
PTO ¶ 31.
23
to Krevlin, the Company was “not excited” about the indication of interest, which
he thought was “too low.”102 Over the following months, Herman Miller signed a
non-disclosure agreement and received access to a due diligence room, but did not
make an offer at that time.103
I. The 2012 Financing
At the end of 2011, “things were starting to turn positive . . . The company
was making money [and] moved from a defensive position to going on offense.”104
Management prepared a budget for 2012 contemplating $3.3 million of capital
expenditures.105 As Shapiro explained, “the [C]ompany was not in the same type of
distress that it was in 2010 and 2009” and was seeking to raise “offensive capital.”106
During the first half of 2012, the Board discussed a private placement to raise
a total of $2.5 million.107 A transaction was consummated on July 19, 2012, when
the Company entered into a series of agreements concerning (i) the sale of stock and
granting of options to raise up to $2.5 million; (ii) modification of the Windsong
Note; and (iii) establishing a date for the conversion of the Series A Preferred.
102
Tr. 150 (Krevlin).
103
PTO ¶ 31.
104
Tr. 594 (McPhee).
105
See JX 188 at GH_WS0010732; Tr. 68-70 (Krevlin).
106
Tr. 230 (Shapiro).
107
PTO ¶ 33; see also JX 186 (November 22, 2011 email from Krevlin to Shapiro stating:
“Edelman called they want to put in up to 2mil . . . And others can do up to 3mil?”).
24
These transactions, which are referred to collectively as the “2012 Financing,”
involved the following components:
 The Company entered into a Securities Purchase Agreement with Edelman,
McPhee, the Glenhill Long Fund, and Windsong II, an entity affiliated with
Sweedler.108 They collectively purchased 401,108 common shares for a total
of $1.8 million, or $4.49 per share (the “2012 Stock Sale”) as follows:
Edelman and McPhee each paid $400,000 for 89,135 shares; and the Glenhill
Long Fund and Windsong II each paid $500,000 for 111,419 shares.109
Edelman and McPhee also each received an option to acquire up to $350,000
worth of additional shares of common stock at the same per share price of
$4.49, which they exercised in December 2012.110
 The Company and Windsong I entered into an agreement by which the parties
amended the Windsong Note to extend its maturity date by one year to
October 3, 2013.111 The PIK Dividend associated with the Series A Preferred
continued to accrue until that date.112
108
See JX 246 at DWR_EM_0002233, 2247 (listing Sweedler as “Managing Member” of
Windsong II).
109
PTO ¶ 36; JX 246 at DWR_EM_0002234-47.
110
PTO ¶¶ 37, 42; JX 246 at DWR_EM_2240 § 4.3.
111
PTO ¶ 39; JX 246 at DWR_EM_0002217-18.
112
JX 512 ¶ 66; Tr. 75 (Krevlin) (“[W]e would stop the PIKing on October [2013]”). The
Letter Agreement does not state that the PIK Dividend will stop accruing before the
conversion date but provides that, upon conversion, “the undersigned shall no longer have
25
 The Company, Windsong I, the Glenhill Long Fund, and the Glenhill
Overseas Fund entered into a Letter Agreement by which the parties agreed
that on October 3, 2013 (i) all outstanding principal of the Windsong Note
would be converted into shares of common stock at a conversion price of
$3.5339; and (ii) the Glenhill Long Fund and the Glenhill Overseas Fund
would convert all of their Series A Preferred shares into common stock (the
“2013 Conversions”).113 The parties also agreed that Windsong I’s “rights to
any interest on the Note are hereby forfeited and that the sole obligation of the
Company with respect to the Note shall be the issuance of the Conversion
Shares.”114
In connection with the 2012 Financing, the Company filed an amendment to its
certificate of incorporation, increasing the number of authorized shares of common
stock from 600,000 to 1.6 million shares.115
Krevlin believed the 2012 Financing was “a home-run transaction.”116 He
explained the rationale for the transaction at trial, as follows:
any rights with respect to [the Windsong Note] (other than the issuance by the Company
of the Conversion Shares).” JX 246 at DWR_EM0002209.
113
PTO ¶ 40; JX 246 at DWR_EM_0002208-2213.
114
JX 246 at DWR_EM_0002209; see also Tr. 74, 166 (Krevlin).
115
PTO ¶ 35; JX 118 at DWR_EM_0000099-100.
116
Tr. 75 (Krevlin).
26
[W]e did a holistic solution here which was a negotiation where every
party gave up something . . . [Windsong Brands] took the 2012 note
and they pushed it out one year to October of 2013 [and] agreed that
they would not take any interest . . . which at that point was $600,000 .
. . And they agreed to convert that security, the $5 million security, at
the PIK preferred conversion price on October of ‘13. [The Glenhill
Overseas Fund said that] we would stop the PIKing on October [2013],
so that that would allow everything to collapse into a simplified
structure. So by us stop[ping] PIKing, you stop the dilution on the
preferred piece. You basically got Windsong to convert their note, give
up interest at exactly the same conversion price as the PIK preferred,
which I believe was $3.25, and the equity investment was made. So we
simplified everything. Windsong gave up a fair amount. We gave up
the PIK, and we were able to get . . . management to invest further in
the equity.117
As with the Windsong Note, the 2012 Financing was the product of a
conflicted and deficient process. There are no minutes reflecting the Board’s
consideration of the 2012 Financing, and it never hired an outside financial
advisor.118 Shapiro again was tasked by Krevlin to negotiate on behalf of the
Company against Sweedler, who represented the Director Defendants, including
Krevlin.119 Shapiro and Sweedler did not negotiate vigorously. There is no
documentary evidence of price negotiations, and Sweedler admitted that he and
Krevlin had “two securities that were bumping up against each other,” i.e. Glenhill’s
117
Tr. 74-75 (Krevlin).
118
Tr. 651 (McPhee).
119
Tr. 78 (Krevlin).
27
Series A Preferred and the Windsong Note, and “were trying to protect each other’s
interest at the end of the day.”120
Krevlin, Shapiro, and Sweedler testified that at least two data points were used
to determine the price of the 2012 Financing, which implied a $27 million valuation
of the Company:121 (i) the indication of interest from Herman Miller at a $25 million
to $30 million enterprise value; and (ii) Glenhill’s internal valuation of the Company
indicating a value of $4.41 per share as of December 31, 2011.122 No documents
confirm that Shapiro and Sweedler actually used those data points to negotiate the
price per share.
J. The Anti-Dilution Grants
On July 17, 2012, when the 2012 Financing was under consideration, the
Company granted an additional 19,654 restricted shares of common stock to
Windsong Brands and awarded Edelman and McPhee 55,459 and 41,594 options to
purchase common stock in the Company (the “Anti-Dilution Grants”).123 The
restricted stock had the same terms as the restricted stock in the Brands Grant.124
120
JX 487 at 176-77 (Sweedler Dep.); Tr. 913-14 (Sweedler).
121
Tr. 160 (Krevlin).
122
JX 203 at GH_WS11399; Tr. 78 (Krevlin); Tr. 893-94 (Sweedler); Tr. 216-17, 337-40
(Shapiro).
123
PTO ¶ 34; JX 239; JX 235.
124
See JX 240 at SJ_SBPN_0001120 (email from Shapiro to counsel).
28
McPhee and Shapiro testified that they believed Edelman and McPhee were
supposed to receive anti-dilution protection for the options they were granted under
their employment agreements,125 but those agreements do not contain that
protection.126 Sweedler similarly testified that anti-dilution protection should have
been included in the documentation for the Brands Grant,127 but it was not.128 The
Anti-Dilution Grants were made to offset the dilution each of them otherwise would
have suffered by the PIK Dividend and other dilutive events since the Brands Grant
and employment agreements were executed.129
K. The 2013 Conversions
On October 8, 2013, Shapiro contacted Englard of Ellenoff Grossman to
complete the paperwork to effectuate the 2013 Conversions.130 On October 22,
2013, Ellenoff Grossman delivered to the Company (i) a notice of conversion, dated
October 16, 2013, purporting to convert the entire amount of the Windsong Note
into 1,414,868 shares of common stock; and (ii) a notice of conversion, dated
125
Tr. 239 (Shapiro); Tr. 560, 599-600 (McPhee); see also Tr. 141 (Krevlin).
126
See JX 49 at DWR_EM_0001471 § 2.3, 001485 § 2.3 (stock option provisions of
McPhee’s and Edelman’s employment agreements).
127
Tr. 869-70 (Sweedler).
128
See JX 180.
129
See Tr. 599-602 (McPhee); JX 237 (email from McPhee stating “DWR will be issuing
additional options to John & me to cover dilution that has occurred since our options were
issued”).
130
Tr. 243-44 (Shapiro); JX 288 at GH_WS0059422.
29
October 3, 2013, purporting to convert 1,432,397 shares of Series A Preferred held
by Glenhill into 3,936,571 shares of common stock.131 The next day, the Company
requested that the transfer agent issue the shares requested in the two notices of
conversion.132
At the time of the 2013 Conversions, the Company was authorized to issue
only 1.6 million shares of common stock,133 but the 2013 Conversions purported to
convert the Series A Preferred and Windsong Note into a total of 5,351,439 shares
of common stock—1,414,868 shares for the Windsong Note, and 3,936,571 shares
for the Series A Preferred.134 On October 28, 2013, after this problem was brought
to his attention, Englard sent the Company’s CFO Lorraine DiSanto and Shapiro
forms of consent for the Board and majority stockholder to increase the number of
authorized shares of common stock to 7.5 million.135
On October 30, 2013, the Company filed with the Delaware Secretary of State
an amendment to the Company’s certificate of incorporation stating that the
Company was authorized to issue 7.5 million shares of common stock and 30,000
131
PTO ¶¶ 44-45, 47; see also JX 301 at DWR_EM_11984-85 (notices of conversion).
132
PTO ¶ 48.
133
See PTO ¶ 35.
134
PTO ¶¶ 44, 47.
135
PTO ¶ 49; JX 305 at GH_WS0059631.
30
shares of preferred stock.136 Although Ellenoff Grossman did not deliver the notices
of conversion to the Company until October 22, 2013,137 the Board’s written consent
approving the 2013 Conversions was dated as of October 3, 2013.138
L. The Merger and the Change of Control Bonuses
In November 2013, the Board retained Financo LLC to provide financial
advisory services in connection with a potential sale of the Company.139 Financo
contacted a number of potential strategic and financial buyers for the Company,
which ultimately led to a transaction with Herman Miller.140
In July 2014, Herman Miller agreed to purchase the Company for an
enterprise value of $183 million or an estimated equity value of approximately
$170.4 million, subject to certain adjustments.141 The transaction contemplated
combining DWR with Herman Miller’s consumer business and involved a number
of steps. In simplified form: (i) Herman Miller purchased approximately 83% of the
Company’s total equity from certain “Selling Stockholders” for $155 million in cash,
136
PTO ¶ 51.
137
PTO ¶¶ 44-45.
138
PTO ¶ 52; see also JX 295 (notice of conversion dated October 3, 2013).
139
PTO ¶ 53; JX 313.
140
See JX 340 at FINANCO0001135.
141
PTO ¶ 60; JX 411 at HMI 0002037.
31
or $23.9311 per share;142 (ii) Edelman and McPhee exchanged some of their DWR
shares (representing approximately 14% of the outstanding shares of the Company)
for an 8% interest in HM Springboard, Inc., a newly formed subsidiary of Herman
Miller that ultimately would own all of the shares of the Company as well as the
shares of a subsidiary of Herman Miller holding its consumer business; and (iii)
DWR ended up as the surviving entity of a short-form merger with HM Catalyst,
Inc., a wholly owned subsidiary of HM Springboard, in which the remaining
stockholders of the Company were cashed out for $23.9311 per share plus a potential
amount for a working capital adjustment.143 The Merger closed on July 28, 2014.144
During due diligence for the Merger, DWR’s counsel discovered that a greater
number of options had been granted to twelve employees, including Edelman and
McPhee, than was authorized under the Company’s 2009 Equity Incentive Award
Plan.145 In response to this problem, the Company’s counsel recommended treating
the options as bonuses, so that the employees would receive the cash equivalent of
142
The Selling Stockholders were the Glenhill Overseas Fund, the Glenhill Long Fund,
Windsong Brands, Windsong DB, LLC, Jamieson Investments, LLC, Edelman, and
McPhee. PTO ¶ 60.
143
JX 421 at AF 000011-12; PTO ¶ 64. As part of the transaction, the Selling Stockholders
agreed to place $18.5 million of their proceeds into escrow to secure certain contingent
liabilities of the Company. No other stockholder contributed to the escrow. PTO ¶ 65.
144
PTO ¶ 63.
145
See JX 363 at Financo_0056244; see also JX 394 at DWR_EM_0006760; JX354, 358,
359, 361.
32
what they would have received had they exercised their options, as they were entitled
to do, upon a change of control (the “Change of Control Bonuses”).146
By letter agreements dated July 21, 2014, the Company agreed to pay the
Change of Control Bonuses in lieu of the options. In exchange, the recipients
provided general releases and relinquished their ability to roll over their shares.147
In total, $3,858,508 in Change of Control Bonuses were paid, with Edelman
receiving $1,143,780, and McPhee receiving $857,819.148
In August 2014, a Notice of Merger and Appraisal Rights (the “Merger
Notice”) was mailed to DWR’s stockholders of record.149 The Merger Notice
provided background information about the Company, described the Merger,
outlined the stockholders’ appraisal rights, and attached copies of three years of the
Company’s financial statements and a fairness opinion from Financo.150
M. The Litigation Begins and Herman Miller Becomes Aware of the
Defects Concerning the Reverse Stock Splits and 2013 Conversions
On December 19, 2014, plaintiffs filed their initial Verified Complaint, which
they amended on March 12, 2015.151 On November 13, 2015, plaintiffs filed their
146
JX 363 at Financo_0056244.
147
PTO ¶ 61; Tr. 620 (McPhee); JX 394 (letter agreements with option holders).
148
PTO ¶ 62. These figures are rounded to the nearest dollar for simplicity.
149
See, e.g. JX 423; JX 424; JX 506.
150
JX 421 at AF000002-20, 26-103.
151
Dkts. 1, 16.
33
Second Amended Complaint, which added Herman Miller as a defendant and
asserted for the first time that the Merger was void. According to plaintiffs, the
Selling Stockholders owned only approximately 60% of the Company’s common
stock as a result of defects concerning the Reverse Stock Splits and 2013
Conversions, meaning that Herman Miller failed to acquire the 90% ownership
interest required to effectuate a short form merger under 8 Del. C. § 253.152
Although Herman Miller, with the assistance of its financial and legal
advisors, conducted extensive due diligence in connection with the Merger, it did
not become aware of any defects associated with the Reverse Stock Splits and 2013
Conversions until after this litigation began.153 The general counsel of Herman
Miller could not explain how his diligence team could have missed those issues.154
N. The Ratification Resolutions
Shortly after Herman Miller was added as a defendant, the Company engaged
Delaware counsel (Richards, Layton & Finger, P.A.) to review its corporate records
152
Dkt. 61 ¶¶ 96-106.
153
Tr. 789 (Lopez); see also Tr. 737, 771, 780-81, 786-91 (Lopez). Plaintiffs suggested
for the first time at post-trial argument that Glenhill recognized the double dilution problem
before the Merger closed based on a memorandum attached to a July 11, 2014 email, which
stated “[w]hat they really care about is the PIPE and not take risk on the conversion and
PIK, etc.” Tr. 185 (May 22, 2018); JX370 at GH_WS0050206. I reject this contention.
The cited document is ambiguous on its face, and plaintiffs made no effort during discovery
to ask questions about it. Tr. 187-88 (May 22, 2018). Based on the preponderance of the
evidence, I find that no one at Glenhill or any of the other defendants was aware of the
double dilution problem before the Merger closed.
154
Tr. 760 (Lopez).
34
“in light of [plaintiffs’] allegations regarding the validity of certain corporate actions
of DWR in the Second Amended Verified Complaint.”155
On February 10, 2016, the Company’s Board (then consisting of Edelman,
McPhee, Krevlin, Brian Walker, Ben Watson, and Steve Gane) approved under 8
Del. C. § 204 a set of resolutions that, among other things, ratified certain defective
corporate acts and putative stock relating to the Reverse Stock Splits and 2013
Conversions (the “Ratification Resolutions”).156 That same day, Herman Miller
Consumer Holdings Inc., as the sole stockholder of DWR, approved the Ratification
Resolutions in all respects.157
On February 11, 2016, the Company filed with the Delaware Secretary of
State four certificates of validation contemplated by the Ratification Resolutions
concerning the ratification of the following defective corporate acts:
 “a 50-to-1 reverse stock split purportedly effected on August 23, 2010
pursuant to which each fifty (50) shares of Common Stock . . . were
reclassified and combined into one (1) share of Common Stock;”
 an amendment to the Company’s certificate of incorporation filed with the
Delaware Secretary of State “on August 23, 2010 in connection with a 50-
to-1 reverse stock split,” which “reduced the number of shares of the
Company’s preferred stock . . . below the number of shares of Preferred
Stock designated as Series A Junior Participating Preferred Stock;”
155
JX 449 at HMI 0081976.
156
PTO ¶¶ 67-68; JX 456 Ex. E.
157
PTO ¶¶ 69; JX 456 Ex. F.
35
 “a 50-to-1 reverse stock split purportedly effected on August 23, 2010
pursuant to which each fifty (50) shares of [Series A Preferred] were
reclassified and combined into one (1) share of Convertible Preferred
Stock;”
 an amendment to the Company’s certificate of incorporation filed with the
Delaware Secretary of State on August 23, 2010, which “reduced the
number of shares of the Company’s preferred stock . . . below the number
of shares of Preferred Stock designated as Convertible Preferred Stock;”
 “the purported issuance of 3,936,571 shares of Common Stock . . . on
October 23, 2013 upon conversion of certain shares of Convertible
Preferred Stock;”
 “the purported issuance of 5,351,439 shares of Common Stock [on October
23, 2013] consisting of 3,936,571 shares of Common Stock issued upon
the purported conversion of certain shares of [Series A Preferred] and
1,414,868 shares of Common Stock issued upon the purported conversion
of certain convertible notes of the Company;” and
 an amendment to the Company’s certificate of incorporation filed with the
Delaware Secretary of State on October 30, 2013 that “increase[d] the
number of authorized shares of Common Stock from 1,600,000 shares of
Common Stock to 7,500,000 shares of Common Stock.”158
The Ratification Resolutions also recite that, on July 19, 2012, the Company
filed an amendment to the Company’s certificate of incorporation that increased the
number of authorized common shares from 600,000 to 1.6 million, but the
amendment “failed to state that it had been approved by the Company’s stockholders
158
PTO ¶ 70; JX 456 Exs. A-D (certificates of validation) & Ex. E (Board resolutions) at
7-8. The Board also ratified the issuance of “20 shares of Common Stock in connection
with the rounding up of fractional shares in the Common Stock Reverse Stock Split.” JX
456 Ex. E at 2-3. The relevant resolution recites that stockholder approval was not required
for this action. Id. at 3.
36
by written consent in lieu of a meeting” and the Company “failed to send the notice
required by Section 228(e).”159 The Board determined that this 2012 amendment
was not a defective corporate act under Section 204 and did not require ratification,
but resolved to file a certificate of correction with respect to the 2012 amendment.160
II. CLAIMS ADJUDICATED AT TRIAL
On August 14, 2017, about three months before trial, plaintiffs filed their
Fourth Amended Complaint (the “Complaint”).161 It asserted the following twelve
claims that were to be presented at trial:
 Count I, asserted against all defendants, seeks rescissory damages in
connection with the Merger;
 Count II, brought against all defendants other than Herman Miller, asserts a
claim for breach of fiduciary duty and “unlawfully benefiting” on the theory
that “defendants received a far greater portion of the sum Herman Miller paid
to acquire DWR than they were entitled to receive;”162
 Count III asserts a conversion claim against all defendants on the theory that
through the Merger, defendants unlawfully exercised control and dominion
over plaintiffs’ shares;
 Count IV, brought against the Director Defendants, asserts a claim for breach
of fiduciary duty and “unlawfully benefitting” from void acts in connection
with the stock sale that occurred as part of the 2012 Financing;
159
JX 456 Ex. E at 6.
160
Id.
161
Dkt. 301.
162
Compl. ¶ 137.
37
 Count V, brought against the Director Defendants, asserts a claim for breach
of fiduciary duty and “unlawfully benefiting” from void acts in connection
with the Series A Preferred conversion in 2013;
 Count VI, brought against the Director Defendants, asserts a claim for breach
of fiduciary duty and “unlawfully benefitting” from void acts in connection
with the Windsong Note, the modification of the Windsong Note as part of
the 2012 Financing, the conversion of the Windsong Note in 2013, the Brands
Grant, and the anti-dilution grant to Windsong Brands;
 Count VII asserts a breach of fiduciary duty claim against the Glenhill
Defendants as controlling stockholders in connection with the Windsong
Note, the 2012 Financing, the 2013 Conversions, the Brands Grant, and the
anti-dilution grant to Windsong Brands;
 Count VIII asserts an unjust enrichment claim against all defendants except
Herman Miller;
 Count IX, brought against the Director Defendants and the Glenhill
Defendants, asserts a breach of the fiduciary duty of disclosure claim based
on the Merger Notice;
 Count X asserts a breach of the fiduciary duty of loyalty claim against the
Director Defendants and the Glenhill Defendants in connection with the
Change of Control Bonuses;
 Count XI asserts an aiding and abetting claim against Herman Miller; and
 Count XII asserts an equitable fraud claim against the Glenhill Defendants,
the Director Defendants, and Herman Miller based on alleged material
misrepresentations and omissions in the Merger Notice.
On May 31, 2018, after post-trial argument, plaintiffs conceded that Count VIII
(Unjust Enrichment) had been waived.163
163
Dtk. 378.
38
In addition to the claims recited above, the trial addressed a counterclaim
filed by Herman Miller, HM Catalyst, Inc., and DWR. The counterclaim asserts a
single claim seeking judicial validation under 8 Del. C. § 205 of the defective
corporate acts identified in the Ratification Resolutions.164
The analysis of the claims that follows is divided into three parts. Section III
analyzes the Section 205 counterclaim and related claims in the Complaint. Section
IV analyzes plaintiffs’ claims challenging the Windsong Note, Brands Grant, 2012
Financing, and Anti-Dilution Grants. Section V analyzes plaintiffs’ remaining
claims, which relate to the Merger.
III. ANALYSIS OF SECTION 205 AND RELATED CLAIMS
Under Section 205 of the Delaware General Corporation Law, this court has
the authority to “[d]etermine the validity and effectiveness of any defective
corporate act ratified pursuant to § 204 of this title;” “[d]etermine the validity and
effectiveness of any defective corporate act not ratified or not ratified effectively
pursuant to § 204 of this title;” and “[d]etermine the validity of any corporate act.”165
“In connection with an action under [Section 205],” the court may, among other
things, “[v]alidate and declare effective any defective corporate act” and “[d]eclare
164
Dkt. 135.
165
8 Del. C. §§ 205(a)(1), (a)(3), (a)(4).
39
that a defective corporate act validated by the Court shall be effective as of the time
of the defective corporate act or at such other time as the Court shall determine.”166
Before deciding whether to exercise its authority under Section 205, “the
Court must first determine whether there was a defective corporate act.”167 The
court then may consider the factors listed in Section 205(d) in deciding whether to
exercise its authority under Section 205 to validate that defective corporate act.
Section 204(h)(1) defines “defective corporate act” as any act or transaction
that is void or voidable due to a failure of authorization:
“Defective corporate act” means an overissue, an election or
appointment of directors that is void or voidable due to a failure of
authorization, or any act or transaction purportedly taken by or on
behalf of the corporation that is, and at the time such act or transaction
was purportedly taken would have been, within the power of a
corporation under subchapter II of this chapter . . . but is void or
voidable due to a failure of authorization.168
Section 204(h)(2) defines “failure of authorization” as a failure to effect an act in
compliance with a company’s certificate of incorporation to the extent the failure
renders the act void or voidable:
“Failure of authorization” means: (i) the failure to authorize or effect
an act or transaction in compliance with (A) the provisions of this title,
(B) the certificate of incorporation or bylaws of the corporation, or (C)
any plan or agreement to which the corporation is a party, if and to the
166
8 Del. C. §§ 205(b)(2), (b)(8).
167
In re Numoda Corp. S’holders Litig., 2015 WL 402265, at *9 n.99 (Del. Ch. Jan. 30,
2015), aff’d sub nom. In re Numoda Corp., 128 A.3d 991 (Del. 2015).
168
8 Del. C. § 204(h)(1).
40
extent such failure would render such act or transaction void or
voidable.169
“Precisely because [Sections 204 and 205] were intended to cure inequities, ‘failure
of authorization’ must be read broadly to allow the Court of Chancery to address any
technical defect that would compromise the validity of a corporate action.”170
A. The Acts the Board Ratified in the Ratification Resolutions
Constitute Defective Corporate Acts
In the counterclaim, Herman Miller, HM Catalyst, and DWR ask the court to
declare under Section 205 that the Merger and the ratification of the seven defective
corporate acts identified in the Ratification Resolutions are valid.171 Plaintiffs do
not oppose judicial validation of five of these defective corporate acts.172 For
example, plaintiffs do not challenge the actions the Company took to remedy the
failure to obtain Board and stockholder approval to combine and reclassify the
common stock and Series A Preferred on a 50-to-1 basis in connection with the
Reverse Stock Splits. Instead, plaintiffs challenge only the Ratification Resolutions
insofar as they seek to remedy the double dilution problem arising from the Reverse
Stock Splits by validating the following two defective corporate acts:
169
8 Del. C. § 204(h)(2).
170
In re Numoda Corp., 128 A.3d 991, 991 (Del. 2015) (TABLE), 2015 WL 6437252, at
*3.
171
Countercl. ¶ 34 (Dkt. 301).
172
Tr. 12-17 (May 1, 2018).
41
 “the purported issuance of 3,936,571 shares of Common Stock . . . on
October 23, 2013 upon conversion of certain shares of Convertible
Preferred Stock;” and
 “the purported issuance of 5,351,439 shares of Common Stock [on October
23, 2013] consisting of 3,936,571 shares of Common Stock issued upon
the purported conversion of certain shares of [Series A Preferred] and
1,414,868 shares of Common Stock issued upon the purported conversion
of certain convertible notes of the Company.”
To repeat, the double dilution problem occurred because, instead of reducing
by a factor of 50-to-1 the number of shares of common stock into which the Series
A Preferred could convert upon a conversion event, the Reverse Stock Splits reduced
by a factor of 2500-to-1 the number of shares of common stock into which the Series
A Preferred could convert. This occurred because of the combined effect of two
actions: (i) the 50-to-1 reverse split of the common stock triggered a 50-to-1
reduction in the number of shares of common stock into which each share of Series
A Preferred could convert under the adjustment provision in Section 7(a) of the
Series A COD; and (ii) the 50-to-1 reverse split of the Series A Preferred itself
reduced by 98% the number of shares of Series A Preferred outstanding without
providing for an adjustment to the Conversion Formula for the Series A Preferred
because the Series A COD did not contain an adjustment provision in the event of a
reverse split of the Series A Preferred itself. There is zero evidence in the record
that anyone involved intended for the Reverse Stock Splits to cause this double
dilution.
42
The flaws in the implementation of the Reverse Stock Splits in 2010 became
a problem in 2013 when the Company purported to convert the Series A Preferred
into 3,936,571 common shares, although no one recognized the problem at the time.
It is undisputed as a mathematical matter that Glenhill was entitled to receive at least
3,936,571 common shares upon the conversion of its shares of Series A Preferred in
October 2013 if the Reverse Stock Splits had been implemented correctly to reduce
by a factor of 50-to-1 (and not by 2500-to-1) the number of shares into which the
Series A Preferred could convert.173 Because of the defects arising from the
implementation of the Reverse Stock Splits, however, the Series A Preferred could
not be converted into 3,936,571 common shares at that time but could only be
converted into about 1/50th of that figure, i.e., approximately 78,731 common shares.
The Ratification Resolutions addressed this plainly unintended consequence by
173
As previously explained, Glenhill had the right under the Series A COD to receive
cumulative dividends at the rate of 9% per year compounding annually to be paid in-kind
in the form of additional shares of Series A Preferred with the option to let the PIK
Dividend (i) accrue to the next “Dividend Payment Date” or (ii) accrete to, and increase,
the Stated Value of the Series A Preferred. JX 23 § 3(a). It is undisputed that PIK
Dividends were not paid to Glenhill at any time before its shares of Series A Preferred were
converted in October 2013. It also has never been disputed as a mathematical matter that,
if the PIK Dividends were deemed to accrete to and increase the Stated Value of the Series
A Preferred, Glenhill would have been entitled to convert its Series A Preferred shares in
October 2013 into approximately 3,956,867 common shares, which is approximately
20,000 more than the number of common shares that Glenhill purportedly received (i.e.,
3,936,571) in connection with the 2013 Conversions. See Dkt. 201 at 21-22 (explaining
that the Stated Value would have increased from $12.69 to approximately $18.27 on
October 23, 2013, the date of conversion, so that 20,000 shares of Series A Preferred would
convert into approximately 3,956,687 common shares (20,000 shares X
[$18.27/0.09235])).
43
amending Section 7(a) of the Series A COD to eliminate one of the two actions that
caused the double dilution by providing “that no adjustment shall be made pursuant
to this Section 7(a) . . . in respect of the 50-to-1 reverse stock split of the Common
Stock effected . . . on August 23, 2010.”174
Plaintiffs’ primary point of contention in opposing the counterclaim concerns
this amendment to Section 7(a). Specifically, plaintiffs argue that the court should
not validate this amendment because defendants “have not identified any [defective
corporate act] that was rendered void or voidable by the failure to amend [Section
7(a)].”175 I disagree.
To begin, the issuance of 3,936,571 common shares to Glenhill upon the
conversion of its Series A Preferred was void because it violated Section 7(a) of the
Series A COD as it existed before that provision was amended as a result of the
Ratification Resolutions. “[U]nder Delaware law, a corporate action is void where
it violates a statute or a governing instrument such as the certificate of incorporation
or the bylaws.”176 The Series A COD was part of the Company’s certificate of
174
See JX 456 Ex. C at 6.
175
Pls.’ Reply Br. at 5-6.
176
Southpaw Credit Opportunity Master Fund, L.P. v. Roma Rest. Hldgs., Inc., 2018 WL
658734, at *5 (Del. Ch. Feb. 1, 2018); see also In re Oxbow Carbon LLC Unitholder Litig.,
2018 WL 818760, at *47 (Del. Ch. Feb. 12, 2018) (“Historically, if a corporation failed to
follow corporate formalities when issuing shares, then a party challenging the issuance had
strong grounds to contend that the issuance was void and could not be validated in equity,
whether through the invocation of equitable defenses or otherwise.”).
44
incorporation,177 and thus a corporate action violating the Series A COD would be a
void act. Here, the Company purported to issue Glenhill 3,936,571 common shares
as part of the 2013 Conversions but, as the parties agree, Glenhill’s Series A
Preferred could not be converted into that many common shares under the original
version of Section 7(a) of the Series A COD.178 In other words, the Company issued
Glenhill more shares in 2013 than it was entitled to under the original Series A COD,
which made that issuance void.
The Company’s failure to amend Section 7(a) is a failure of authorization with
respect to the 2013 Conversions because it rendered the issuance of 3,936,571
common shares to Glenhill void.179 As discussed above, Glenhill suffered the
prospect of double dilution because of the Reverse Stock Splits, which reduced by a
factor of 2500-to-1 the number of common shares into which its Series A Preferred
177
See Elliott Associates, L.P. v. Avatex Corp., 715 A.2d 843, 845, n. 3 (Del. 1998)
(“When certificates of designations become effective, they constitute amendments to
the certificate of incorporation.”).
178
See Herman Miller’s Answering Br. at 16-17 (“[T]he failure to amend the certificate of
designation at the time of the Reverse Stock Splits in 2010 caused the issuance of common
shares to Glenhill upon the Conversion to be a defective corporate act because (assuming
away the effect of ratification) Glenhill received 50 times more common shares than the
certificate of designation entitled it to.”); Pls.’ Reply Br. at 7 (“Glenhill held only 20,000
Series A, which cannot be converted into 3,936,571 common shares under the original
[Series A COD].”).
179
See JX 456 Ex. C at 2 (identifying as a failure of authorization the failure to “include an
exception for the Common Stock Reverse Stock Split Amendment from the provisions that
would otherwise adjust the number of shares of Common Stock into which [the Series A
Preferred] is convertible”).
45
could be converted. Thus, before Section 7(a) was amended, the Series A Preferred
could be converted into only approximately 78,731 common shares. On the other
hand, had the Company amended Section 7(a) immediately before the Reverse Stock
Splits so that its adjustment provision would not apply to the reverse split of common
stock, the Series A Preferred would have been convertible into at least 3,936,571
shares, and the issuance of that amount of shares would not have been void. In sum,
the issuance of 3,936,571 shares of common stock in connection with the 2013
Conversions was a defective corporate act because the issuance of that many
common shares was void due to the Company’s failure to amend Section 7(a) of the
Series A COD before the Reverse Stock Splits in 2010.
Plaintiffs argue, without citing any supporting legal authority, that the
“temporal disconnect” between the failure to amend Section 7(a) in 2010 and the
2013 Conversions “demonstrates that the issuance of shares at the time of the
Conversion cannot be a [defective corporate act] for which the failure to amend 7(a)
is a failure of authorization.”180 I disagree.
The plain language of Section 205 does not contain a temporal limitation on
the court’s power to validate defective corporate acts, nor would such a limitation
make sense where, as here, the effect of a defective corporate act may not manifest
itself until years into the future. As noted previously, our Supreme Court has
180
Pls.’ Reply Br. at 6 (internal quotations omitted).
46
emphasized the need to “read broadly” the term “failure of authorization” to “cure
inequities” and “to address any technical defect that would compromise the validity
of a corporate action.”181 My conclusion that the Company’s failure to amend
Section 7(a) is a failure of authorization with respect to the 2013 Conversions
accords with this approach, particularly given the highly technical nature of the
defect and that the equities overwhelmingly support correcting this obviously
unintended defect, as discussed below.
As a secondary matter, plaintiffs challenge judicial validation of the purported
issuance of 5,351,439 shares of common stock on October 23, 2013, because there
were only 1.6 million shares of common stock authorized at that time.182 This is
because the amendment to the Company’s certificate of incorporation to increase the
authorized number of shares of common stock from 1.6 million to 7.5 million was
not approved until one week later, on October 30, 2013.183 The Ratification
Resolutions purported to fix this problem by changing the effective date of the
amendment to October 22, 2013, before the 2013 Conversions.184
181
In re Numoda Corp., 128 A.3d at 991.
182
See PTO ¶ 35; JX 118 DWR_EM_0000099-100.
183
PTO ¶ 51; JX 308.
184
See JX 456 at Ex. D at 2 (stating that the certificate amendment increasing the number
of authorized common shares to 7.5 million “shall be deemed to have become effective as
of October 22, 2013”).
47
Plaintiffs do not dispute that the purported issuance of 5,351,439 shares of
common stock in connection with the 2013 Conversions was a defective corporate
act.185 Rather, plaintiffs contend that the court “should not permit the Miller Parties
to change the effective date and time to the [certificate of incorporation] amendment
because [the Company] deliberately and improperly backdated the Amendment and
the board resolutions approving it in October 2013,” making it inappropriate for
relief under Section 204.186 This argument fails because, even if this defective
corporate act was “not ratified effectively pursuant to § 204,” the court still may
determine its validity under Section 205187 and, as I discuss below, all of the Section
205(d) factors weigh in favor of judicial validation of this and all of the other
defective corporate acts set forth in the Ratification Resolutions.
B. All of the Section 205(d) Factors Support Validating the Defective
Corporate Acts Identified in the Ratification Resolutions
I turn now to the question of whether the court should ratify under Section
205 the defective corporate acts identified in the Ratification Resolutions. In making
that determination, the court may consider the following factors:
185
See Tr. 55 (May 1, 2018) (“[W]e do not challenge [the certificate amendment increasing
the number of authorized shares to 7.5 million] because we believe that you can’t increase
the number of shares pursuant to the statute under normal circumstances . . . The reason
we challenge that is because they backdated their effort to increase the number of shares,
and even in this 204 notice, they continue the fiction that that was done on October 3.”).
186
Pls.’ Reply at 19-20.
187
8 Del. C. § 205(a)(3).
48
(1) Whether the defective corporate act was originally approved or
effectuated with the belief that the approval or effectuation was
in compliance with the provisions of this title, the certificate of
incorporation or bylaws of the corporation;
(2) Whether the corporation and board of directors has treated the
defective corporate act as a valid act or transaction and whether
any person has acted in reliance on the public record that such
defective corporate act was valid;
(3) Whether any person will be or was harmed by the ratification or
validation of the defective corporate act, excluding any harm that
would have resulted if the defective corporate act had been valid
when approved or effectuated;
(4) Whether any person will be harmed by the failure to ratify or
validate the defective corporate act; and
(5) Any other factors or considerations the Court deems just and
equitable.188
In my opinion, all of the Section 205(d) factors weigh overwhelmingly in favor of
judicial validation of the defective corporate acts identified in the Ratification
Resolutions.
First, the record demonstrates that the Board effectuated the Reverse Stock
Splits and 2013 Conversions with the reasonable belief that those transactions would
be carried out by counsel in compliance with Delaware law and the Company’s
188
8 Del. C. § 205(d); see Cirillo Family Trust v. Moezinia, 2018 WL 3388398, at *8-9
(Del. Ch. July 11, 2018).
49
certificate of incorporation and bylaws.189 The reality is that counsel tasked with
documenting these transactions botched them up unbeknownst to anyone associated
with the transactions until after they had been implemented. There is no credible
evidence to the contrary. Indeed, given that the implementation of the Reverse Stock
Splits, if not corrected, would have gutted the value of Glenhill’s Series A Preferred
upon a conversion, it is inconceivable that Krevlin or anyone associated with
Glenhill knew about the double dilution problem when the Reverse Stock Splits and
the 2013 Conversions were implemented.
Second, the record shows that the Board always treated the defective corporate
acts as if they were valid and effective. The Board disclosed the Reverse Stock
Splits in a press release190 and to FINRA191 and purported to take official action by
signing Board resolutions approving the Reverse Stock Splits and 2013
Conversions192 and by authorizing amendments to the Company’s certificate of
incorporation in connection with both transactions.193 Numerous parties relied on
189
Tr. 61-63, 84-85, 133 (Krevlin); Tr. 476-77 (Edelman); Tr. 587-89, 651-52 (McPhee)
Tr. 889-90 (Sweedler); see also Tr. 299 (Shapiro).
190
JX 130.
191
JX 125.
192
JX 122; JX 285.
193
PTO ¶¶ 29, 51.
50
the public record of validity, including those who traded in DWR stock over a four-
year period (including both plaintiffs) 194 and Herman Miller.195
Third, no one legitimately will or could claim to be harmed by the ratification
of the defective corporate acts. The only conceivable harm is that plaintiffs will lose
a large claim for damages. But that is not a cognizable harm under Section 205(d)(3)
because plaintiffs would not have suffered that harm had the defective corporate acts
been carried out correctly in first instance.196 Indeed, plaintiffs’ selective opposition
to validation of the defective corporate acts in the Ratification Resolutions (i.e., not
opposing validation of the Reverse Stock Splits but opposing validation of the
issuances to preserve the double dilution problem) betrays an intention to obtain a
windfall for themselves in this litigation.
194
See Tr. 1143-47 (Franklin) (discussing how Almond purchased DWR stock between
2009 and the Merger); JX 432 (showing that Franklin bought and sold DWR stock in 2014);
JX 455 (showing that Almond bought DWR stock between 2010 and 2014).
195
See Tr. 734-37 (Lopez) (explaining that “DWR and its advisors would have loaded up
onto a data room all information regarding the shareholdings of the company”); JX 502 at
56-57 (Walker) (testifying that he did not have any concerns about DWR’s capital structure
before the closing). Plaintiffs assert that sufficient information was made available to
Herman Miller during due diligence for it to detect the defective corporate acts. Even if
this is theoretically true, it is of no moment. Herman Miller’s General Counsel, who
oversaw the internal personnel and outside advisors responsible for Herman Miller’s due
diligence, testified credibly that Herman Miller did not actually become aware of these
defects until after the litigation began. Tr. 789 (Lopez).
196
See 8 Del. C. § 205 (d)(3) (excluding from the factors the statute identifies for
consideration “any harm that would have resulted if the defective corporate act had been
valid when approved or effectuated”).
51
Fourth, Glenhill and the individual defendants stand to be harmed by the
defective corporate acts because plaintiffs seek damages from them (e.g., Counts II,
III, and V) for receiving more Merger consideration than they would have received
if the defective corporate acts are not validated. Herman Miller and its stockholders
similarly stand to be harmed if the defective corporate acts are not ratified because
plaintiffs seek damages from them on the theory that “the Merger was void ab initio
because it did not comply with Delaware law.”197
Fifth, ratification is clearly the equitable outcome. Defendants are requesting
that the court restore the Company and its stockholders to the positions they believed
they occupied at all times from the Reverse Stock Splits in 2010 through the Merger
in 2014. This is the “preferred remedy.”198 There is no inequitable motivation
underlying the Company’s failure to implement and document the Reverse Stock
Splits and 2013 Conversions correctly. To the contrary, defendants had nothing to
gain but much to lose by the failures, and Herman Miller took action to fix the
defective corporate acts promptly after they came to its attention. Plaintiffs, on the
197
Compl. ¶ 141.
198
C. Stephen Bigler & John Mark Zeberkiewicz, Restoring Equity: Delaware's
Legislative Cure for Defects in Stock Issuances and Other Corporate Acts, 69 BUS. LAW.
393, 427 (2014) (“The ratification statutes, when effective, will eliminate the uncertainty
faced by counsel and courts confronted with defects in stock issuances and other corporate
acts by providing a practical and certain path to curing those defects that will result in the
corporation and its stockholders being restored to the positions they thought they occupied
and having the interests they thought they had before the defects were discovered. In most
cases, this will be the preferred remedy.”).
52
other hand, seek an inequitable windfall for technical defects that DWR, the Board,
Glenhill, and Herman Miller had no idea occurred until after the Merger.199
*****
For the reasons discussed above, the court grants the request to validate under
Section 205 the defective corporate acts identified in the Ratification Resolutions.
Accordingly, judgment will be entered in favor of the Herman Miller, HM Catalyst,
and DWR and against plaintiffs on the counterclaim.
Counts II, III, and V of the Complaint all appear to proceed from the premise
that one or more of the defendants unlawfully benefited from, or converted to his
own benefit, a greater percentage of the Company’s equity in connection with the
Merger than he would have received if the defective corporate acts had not been
validated.200 Because the defective corporate acts have been validated, these three
199
Plaintiffs argue that the Company’s ratification under Section 204 was approved by a
conflicted Board (consisting of Krevlin, Edelman, McPhee, Walker, Watson, and Gane)
and does not meet the entire fairness test. No statutory support or precedent is cited in
support of this puzzling argument. Putting aside that plaintiffs were not stockholders of
the Company when the Board approved the ratifying actions and thus would have no
standing to assert a breach of fiduciary duty claim relating thereto, all of the considerations
discussed above demonstrating that the Section 205(d) factors overwhelmingly weigh in
favor of judicial validation as the only equitable outcome equally support the conclusion
that the Board’s ratification under Section 204 was entirely fair.
200
See Compl. ¶¶ 136-39 (Count II: claim for breach of fiduciary duty and “unlawfully
benefitting” from “Invalid Transaction”); ¶¶ 140-43 (Count III: conversion claim that “the
Merger was void ab initio because it did not comply with Delaware law”); ¶¶ 155-62
(Count V: claim for breach of fiduciary duty and “unlawfully benefitting” from “Void
Acts”).
53
claims necessarily fail. Accordingly, judgment is entered in favor of the relevant
defendants and against plaintiffs on Counts II, III, and V.
IV. ANALYSIS OF OVERPAYMENT CLAIMS
In this section, the court considers plaintiffs’ claims for breach of fiduciary
duty relating to four transactions: the (i) Windsong Note; (ii) Brands Grant; (iii) 2012
Financing, including the 2012 Stock Sale and the extension of the Windsong Note;
and (iv) Anti-Dilution Grants. I refer to these claims, at times, collectively as the
“Overpayment Claims” because they each concern the authorization of transactions
that allegedly unfairly benefitted some or all of the Director Defendants or their
affiliates through the issuance of additional equity in the Company before or in
connection with the Merger. Specifically, taking the four transactions in
chronological order, plaintiffs contend that:
 All four members of the Board (Krevlin, Sweedler, Edelman, and McPhee)
had a financial interest in and unfairly benefitted from the Windsong Note
issued in May 2010, which was structured as a loan convertible into
common stock.
 Windsong Brands—and thus its principal Sweedler—was overpaid for the
restructuring work it performed in 2009 when the Company granted it
restricted stock, which would vest only upon a change of control, in
September 2011 (i.e., the Brands Grant).
54
 Windsong Brands, Edelman, and McPhee received an unfair benefit in July
2012 when they were awarded restricted stock and stock options (i.e., the
Anti-Dilution Grants) to offset dilution they each would have suffered as
a result of dilutive events that occurred after Windsong Brands received
the Brands Grant and after Edelman and McPhee signed their employment
agreements. To be clear, those agreements did not contain anti-dilution
protection.
 All four members of the Board again had financial interests in and unfairly
benefitted from the 2012 Stock Sale and the extension of the Windsong
Note that were components of the 2012 Financing approved in July 2012.
With respect to each of the Overpayment Claims, a threshold issue is whether
plaintiffs have standing to assert those claims in light of the Merger. It is plaintiffs’
burden to prove they do.201
It is well established under our Supreme Court’s decision in Lewis v. Anderson
and its progeny that, as a general matter, a merger extinguishes a plaintiff’s standing
to maintain a derivative suit.202 This is because “a derivative claim is a property
right owned by the nominal corporate defendant [that] flows to the acquiring
201
El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1260 n. 57 (Del. 2016)
(quoting Dover Historical Soc’y v. City of Dover Planning Comm’n., 838 A.2d 1103, 1109
(Del. 2009)).
202
477 A.2d 1040, 1049 (Del. 1984).
55
corporation by operation of a merger.”203 Delaware law recognizes two
circumstances where a merger would not extinguish a stockholder’s standing to
maintain a derivative claim,204 but neither is present here, as plaintiffs concede.205
To determine whether a claim is direct or derivative, the court must consider
“(1) who suffered the alleged harm (the corporation or the suing stockholders,
individually); and (2) who would receive the benefit of any recovery or other remedy
(the corporation or the stockholders, individually)?”206 “In the typical corporate
overpayment case, a claim against the corporation’s fiduciaries for redress is
regarded as exclusively derivative, irrespective of whether the currency or form of
overpayment is cash or the corporation’s stock.”207 “The reason is that, in the typical
corporate overpayment case, ‘any dilution in value of the corporation’s stock is
merely the unavoidable result (from an accounting standpoint) of the reduction in
203
Feldman v. Cutaia, 951 A.2d 727, 731 (Del. 2008).
204
See Lewis, 477 A.2d at 1047, n.10 (“The two recognized exceptions to the rule are: (1)
where the merger itself is the subject of a claim of fraud; and (2) where the merger is in
reality a reorganization which does not affect plaintiff’s ownership of the business
enterprise.”).
205
Tr. 85 (May 1, 2018).
206
Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
207
Gentile v. Rossette, 906 A.2d at 99.
56
the value of the entire corporate entity, of which each share of equity represents an
equal fraction.’”208
Consistent with these authorities, plaintiffs concede that all of the
Overpayment Claims are derivative claims.209 Plaintiffs nonetheless contend they
have standing to maintain these claims under the “transactional paradigm” our
Supreme Court recognized in Gentile v. Rosette where “a species of corporate
overpayment claim” could be both direct and derivative in nature:
A breach of fiduciary duty claim having this dual character arises
where: (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 a 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.210
Before focusing on plaintiffs’ theory for applying the Gentile framework here, it
bears mentioning that our Supreme Court recently construed the doctrine narrowly
in the context of an alternative entity dispute in El Paso Pipeline GP Co., L.L.C. v.
208
Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *7 (Del. Ch. July 26,
2018) (quoting Gentile, 906 A.2d at 99).
209
Tr. 77 (May 1, 2018).
210
Gentile, 906 A.2d at 99-100.
57
Brinckerhoff, with our Chief Justice even suggesting that Gentile should be
overruled, at least in certain respects.211
In El Paso, a limited partner argued that its claim, which alleged
overpayments by the partnership to the controlling general partner, fell within the
Gentile framework because the overpayments diluted the minority limited partners’
economic interests but concededly were “not coupled with any voting rights
dilution.”212 The Supreme Court refused to apply Gentile to that claim:
Gentile concerned a controlling shareholder and transactions that
resulted in an improper transfer of both economic value and voting
power from the minority stockholders to the controlling stockholder.
[Plaintiff’s] claim does not satisfy the unique circumstances presented
by the Gentile species of corporate overpayment claims.213
The Court further explained, “[w]e decline the invitation to further expand the
universe of claims that can be asserted ‘dually’ to hold here that the extraction of
solely economic value from the minority by a controlling stockholder constitutes
direct injury.”214 To do so, the Court reasoned, “would deviate from the
211
See El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1265–66 (Del.
2016) (Strine, C.J., concurring) (“Gentile cannot be reconciled with the strong weight of
our precedent and it ought to be overruled, to the extent that it allows for a direct claim in
the dilution context when the issuance of stock does not involve subjecting an entity whose
voting power was held by a diversified group of public equity holders to the control of a
particular interest.”).
212
Id. at 1252-53, 1264.
213
Id. at 1263-64 (emphasis in original) (internal quotations and citations omitted).
214
Id. at 1264.
58
Tooley framework and largely swallow the rule that claims of corporate
overpayment are derivative.”215
The consequence of the Supreme Court’s ruling in El Paso was highly
significant. It resulted in the reversal of a $171 million judgment for damages
plaintiff had obtained because plaintiff’s standing to maintain a derivative claim was
extinguished under Lewis v. Anderson and its progeny when the limited partnership
was acquired in a merger “after the trial was completed and before any judicial ruling
on the merits” in what the high court described as a “troubling case.”216
In the wake of El Paso, this court has exercised caution in applying the Gentile
framework, commenting in one case that “[w]hether Gentile is still good law is
debatable”217 and finding in another that “Gentile must be limited to its facts.”218
Whatever the ultimate fate of the Gentile paradigm may be, the current state of the
law for the doctrine to apply is that (i) there must be a controlling stockholder or
control group; and (ii) the challenged transaction must result “in an improper transfer
215
Id. (internal quotations and citations omitted).
216
Id. at 1250-52.
217
ACP Master Ltd. v. Sprint Corp., 2017 WL 3421142, at *26 n.206 (Del. Ch. July 21,
2017, aff’d, 2018 WL 1905256 (Del. Apr. 23, 2018).
218
Liberty Broadband Corp., 2018 WL 3599997, at *10.
59
of both economic value and voting power from the minority stockholders to the
controlling stockholder.”219 I address each requirement, in turn, below.
A. The Windsong Entities, Edelman, and McPhee Were not Part of a
Control Group with Glenhill with Respect to the Overpayment
Claims
Plaintiffs’ theory for invoking Gentile proceeds from a novel premise. It is
stipulated that Glenhill became DWR’s majority stockholder when the 2009
Transaction closed, before any of the transactions underlying the Overpayment
Claims occurred.220 At that point, Glenhill’s equity ownership in DWR was
92.8%.221 It also is stipulated that Krevlin had the sole investment and voting power
over all DWR shares Glenhill held at all relevant times.222 Recognizing the reality
that Glenhill was DWR’s controlling stockholder at all relevant times, plaintiffs
asserted a claim against “the Glenhill Defendants” with respect to some of the
Overpayment Claims for breach of fiduciary duty as the “controlling shareholders
of DWR.”223
219
El Paso, 152 A.3d at 1263–64 (emphasis in original).
220
PTO ¶ 5. Technically, the shares were held by multiple Glenhill funds, but I refer to
“Glenhill” in the singular for simplicity.
221
JX 111 at DWR_EM_0000455; JX 513 ¶ 24.
222
PTO ¶ 6.
223
Compl. ¶¶ 174-75 (asserting that Glenhill breached its fiduciary duty as a controlling
stockholder with respect to the Windsong Note, the extension of the Windsong Note, and
the 2012 Stock Sale).
60
Despite Glenhill’s indisputable status as DWR’s controlling stockholder and
the manner in which plaintiffs plead their controlling stockholder claim for breach
of fiduciary duty, plaintiffs do not—for reasons that will become obvious—invoke
the Gentile framework based on Glenhill’s ownership position alone. Instead,
relying on this court’s decision in In re Nine Systems Corporation Shareholders
Litigation,224 plaintiffs argue that Edelman, McPhee, and the various Windsong
entities (including Sweedler) were part of a control group along with Glenhill.
In Nine Systems, this court found after trial that three stockholders, none of
which individually qualified as a controlling stockholder but the three of which
collectively held approximately 54% of the company’s equity, functioned as a
control group for purposes of Gentile.225 The court framed the analysis to find a
control group, as follows:
A group of stockholders, none of whom individually qualifies as a
controlling stockholder, may collectively be considered a control group
that is analogous, for standard of review purposes, to a controlling
stockholder. A control group is accorded controlling stockholder status
and, therefore, its members owe fiduciary duties to their fellow
shareholders. Proving a control group is not impossible, but it is rarely
a successful endeavor because it is a fact-intensive inquiry that requires
evidence of more than mere parallel interests. A plaintiff must prove
that the group of stockholders was connected in some legally significant
way—e.g., by contract, common ownership, agreement, or other
arrangement—to work together toward a shared goal. The standard
224
2014 WL 4383127 (Del. Ch. Sept. 4, 2014), aff’d sub nom. Fuchs v. Wren Holdings,
LLC, 129 A.3d 882 (Del. 2015).
225
Id. at *2, *24-26.
61
does not necessarily require control over the day-to-day operations of a
corporation; actual control with regard to the particular transaction that
is being challenged may suffice.226
This court has applied this form of analysis to determine whether or not a group of
stockholders, none of whom individually qualified as a controlling stockholder,
constitutes a control group at least one other time for the purpose of determining
whether a direct claim exists under the Gentile paradigm,227 and on many occasions
for other purposes outside of the Gentile context.228
Particularly instructive is this court’s decision in In re PNB Holding Company
Shareholders Litigation, where Chief Justice Strine, writing as a Vice Chancellor,
considered after trial whether a group of individuals holding 33.5% of the company’s
outstanding shares constituted a control group for purposes of deciding whether to
226
Id. at *24 (internal quotations and citations omitted).
227
See, e.g., Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 659-61 (Del. Ch. 2013).
228
See, e.g., In re Hansen Med., Inc. S’holders Litig., 2018 WL 3030808, at *5 (Del. Ch.
June 18, 2018) (finding that “[p]laintiffs have stated a reasonably conceivable claim that
the Merger should be considered under the entire fairness standard of review because it
was a conflicted transaction involving [a control group]”); Frank v. Elgamal, 2014 WL
957550, at *18-19 (Del. Ch. Mar. 10, 2014) (finding that a group of stockholders did not
constitute a control group during the initial part of a sales process but that a genuine issue
of fact existed as to whether they did later in the sales process); Zimmerman v. Crothall,
62 A.3d 676, 700 (Del. Ch. 2013) (finding after trial that two stockholders did not constitute
a control group for purposes of resolving a loyalty claim); Emerson Radio Corp. v. Int’l
Jensen Inc., 1996 WL 483086, at *17 (Del. Ch. Aug. 20, 1996) (finding on a preliminary
injunction record that two stockholders did not constitute a control group for purposes of
determining the probability of success of a fiduciary duty claim).
62
review a merger under the entire fairness standard of review.229 In holding that they
did not, the court emphasized the lack of any voting agreement or other arrangement
impeding each stockholder’s ability to act in his or her own self-interest:
All told, some twenty people (directors, officers, spouses, children, and
parents) comprise the supposed controlling stockholder group. The
record, though, does not support the proposition that these various
director-stockholders and their family members were involved in a
blood pact to act together. To that point, there are no voting agreements
between directors or family member[s]. Rather, it appears that each
had the right to, and every incentive to, act in his or her own self-
interest as a stockholder.230
Here, plaintiffs have identified no case—and the court is aware of none—
where the analysis for determining the existence of a control group has been applied
to glom on to a preexisting controlling stockholder additional stockholders to give
them the status of a “control group” for Gentile purposes or otherwise. Given that
the controller already is the proverbial 800-pound gorilla imbued with fiduciary
obligations to guard against acting “selfishly to the detriment of the corporation’s
minority stockholders,”231 it is not readily apparent why this scenario would arise.
To be sure, one can envision a situation where a controller may have parallel interests
229
2006 WL 2403999, at *9-12 (Del. Ch. Aug. 18, 2006).
230
Id. at *10 (emphasis added).
231
Nine Sys., 2014 WL 4383127, at *24.
63
with other stockholders in a given transaction, but that is insufficient to create a
“control group.”232
In my opinion, in order for a preexisting controlling stockholder to become
part of a “control group” with other stockholders, the preexisting controlling
stockholder would have to agree to share with other stockholders, or to impose
limitations on, its own control power (such as through a voting agreement) for some
perceived advantage as part of a legally significant relationship with the other
stockholders. In other words, the preexisting controlling stockholder would have to
agree to limit its ability to act in its own self-interest as a controller in some material
way; otherwise the preexisting controlling stockholder would retain the ability to
wield control by itself, and the power of control would not reside in the hands of a
“group.” Nothing of this nature exists in the trial record.
With respect to the Brands Grant and the Anti-Dilution Grants, for example,
Glenhill entered no arrangements to share its majority voting control with any
Windsong entity (in the case of the Brands Grant) or Edelman and McPhee (in the
case of the Anti-Dilution Grants), or to otherwise limit its ability to act in its own
self-interest as the Company’s majority stockholder. Indeed, Glenhill received no
equity or other form of payment in connection with either transaction and actually
232
Id. (citing Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *6 (Del. Ch. June
5, 2006)).
64
stood on the opposite side of the negotiating table for both transactions, each of
which diluted its ownership stake in DWR. Indicative of this misalignment of
interest, the record reflects that the negotiations with Windsong Brands over the
Brands Grant were vigorous and protracted, extending over an eighteen-month
period and resulting in a deal in which Windsong Brands received a 1.5% interest in
the Company after initially demanding a 10% interest.
With respect to the Windsong Note, the 2012 Stock Sale, and the extension of
the Windsong Note in 2012, the record shows that Glenhill’s interests were, at most,
parallel to those of Sweedler (the principal behind Windsong Brands), Edelman, and
McPhee. This is because they each held an interest in Windsong I, the entity holding
the Windsong Note, and thus each had an apparent interest in procuring the
Windsong Note (and extending it) on terms favorable to Windsong I. The same
holds true concerning the 2012 Stock Sale, where the purchasers were the Glenhill
Long Fund ($500,000), Windsong II, an entity affiliated with Sweedler ($500,000),
Edelman ($400,000), and McPhee ($400,000). Critically, however, nothing in the
record indicates that Glenhill entered into a voting agreement or any other
arrangement imposing limitations on its control power that would have prevented
Glenhill from acting in its own self-interest as DWR’s controlling stockholder as a
result of any of these transactions.
65
During post-trial argument, plaintiffs cited as evidence of a control group the
fact that Glenhill entered into an LLC Agreement in connection with the Windsong
Note, and a Stockholders Agreement in connection with the 2012 Financing.233 As
an initial matter, plaintiffs never discussed either of these agreements as evidence of
a control group during post-trial briefing, thereby waiving the argument,234 and made
no real effort to explain during post-trial argument why entering into either of these
agreements supports their control group theory. In any event, based on the court’s
own review of the terms of these agreements, neither supports plaintiffs’ position.
Glenhill, Edelman, McPhee, Windsong DB, LLC (an entity affiliated with
Sweedler), and Jamieson Investments, LLC entered into the LLC Agreement in
connection with Windsong I’s issuance of the Windsong Note to DWR.235 From the
court’s review, no provision in that agreement limited in any way Glenhill’s ability
to vote any of its shares in the Company as it saw fit so as to prevent it from acting
unilaterally in its self-interest as DWR’s majority stockholder. Rather, that
agreement appears to address the rights and obligations relating to the members’
233
Tr. 99 (May 1, 2018); Tr. 195-96 (May 22, 2018).
234
See Emerald P'rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are
deemed waived.”).
235
JX 107.
66
respective ownership interests in Windsong I and the terms governing the internal
affairs of that entity.236
Glenhill, Edelman, McPhee, and various Windsong entities entered into the
Stockholders Agreement for the purpose of setting forth “certain terms and
conditions regarding the [2012 Stock Sale] and the ownership of the Equity
Securities held by the Stockholders, including certain restrictions on the transfer of
such shares.”237 As with the LLC Agreement, the court found no provision in that
agreement evidencing that Glenhill limited in any way its ability to vote its shares in
the Company as it saw fit. The Stockholders Agreement does contain a provision
providing that, subject to various exceptions, “no Stockholder shall Transfer,
directly or indirectly, all or any part of its Equity Securities . . . in the Company
without the prior approval of the board of directors of the Company,”238 but that
provision did not limit Glenhill’s ability to vote its shares in the Company and
exercise its majority voting control as it sees fit, including by replacing the members
of the Board, or to otherwise act unilaterally in its self-interest as DWR’s majority
stockholder.
236
See JX 107 at GH_WS0036423.
237
Tr. 195-196 (May 22, 2018); JX 246 at DWR_EM_0002220.
238
JX 246 at DWR_EM_0002222 § 2.1.
67
In sum, based on the preponderance of the evidence, I find that Glenhill alone
was DWR’s controlling stockholder at all times from the 2009 Transaction until the
Merger, and that it did not share or otherwise limit its control power with any
Windsong entity, Edelman, or McPhee in such a manner as to make them part of a
“control group” along with Glenhill for purposes of applying the Gentile framework.
B. The Transactions Underlying the Overpayment Claims Did Not
Result in an Improper Transfer of Either Economic or Voting
Power from the Minority Stockholders to Glenhill
The harm Gentile seeks to remedy arises “when a controlling stockholder,
with sufficient power to manipulate the corporate processes, engineers a dilutive
transaction whereby that stockholder receives an exclusive benefit of increased
equity ownership and voting power for inadequate consideration.”239 As such, a
transaction does not fit within the Gentile paradigm if the controller itself is diluted
by that transaction.240 Having determined that Glenhill alone was DWR’s
controlling stockholder at all relevant times, the next question is whether any of the
challenged transactions resulted “in an improper transfer of both economic
239
Feldman v. Cutaia, 956 A.2d 644, 657 (Del. Ch. 2007), aff’d, 951 A.2d 727 (Del. 2008).
240
See Dubroff v. Wren Holdings, LLC, 2011 WL 5137175, at *9 (Del. Ch. Oct. 28, 2011)
(“[M]inority shareholders may have a direct equity dilution claim when their holdings are
diluted, and those of the corporation’s controller are not. In other words, as long as the
controller’s holdings are not decreased, and the holdings of the minority shareholders are,
the latter may have a direct equity dilution claim.”).
68
value and voting power from the minority stockholders” to Glenhill.241 The answer
is clearly no.
As an initial matter, the parties debate whether the type of securities
underlying most of the Overpayment Claims—i.e., a convertible debt instrument,
stock options, or restricted stock that vests only on a change-of-control—can form
the basis of an improper transfer of economic and voting power under Gentile.242 I
need not resolve these technical issues. Even if one assumes for the sake of argument
that each of these types of securities could satisfy Gentile, which is debatable,243
none of the transactions challenged here resulted in a disproportionate transfer of
economic and voting power to Glenhill.
As a mathematical matter, for a transaction to transfer economic and voting
power to Glenhill disproportionately, Glenhill would need to receive in that
transaction a percentage of the security to be issued that exceeds the percentage of
economic and voting power Glenhill already held in the Company immediately
241
El Paso, 152 A.3d at 1263 (emphasis in original).
242
Glenhill’s Answering Br. at 51-53; Pls’ Reply Br. at 26-27.
243
See, e.g., ACP Master, 2017 WL 3421142, at *26 (concluding that plaintiff did not have
standing to assert a direct dilution claim after a merger because “Sprint’s notes were never
converted and no additional shares were issued”); Caspian Select Credit Master Fund Ltd.
v. Gohl, 2015 WL 5718592, at *5 (Del. Ch. Sept. 28, 2015) (rejecting plaintiffs’ attempt to
characterize a term loan facility, which was “facially a debt instrument,” as an equity
transaction for purposes of Gentile); Harff v. Kerkorian, 324 A.2d 215, 219 (Del. Ch.
1974), rev’d on other grounds, 347 A.2d 133 (Del. 1975) (“The holder of an option to
purchase stock is not an equitable stockholder of the corporation.”).
69
before that transaction. Otherwise, the transaction either would be dilutive to
Glenhill or would maintain its percentage ownership. A simple hypothetical
demonstrates the point.
Assume that Glenhill had a pre-issuance equity stake of 90 of 100 shares
outstanding, that the Windsong entities, Edelman, and McPhee collectively held five
shares, and that the remaining stockholders held five shares. If the Company issued
50 shares in a transaction, Glenhill must receive 90% of those shares to retain its
90% stake in the post-issuance entity:
Now assume that, as part of that 50 share issuance, Glenhill received only ten shares
(20% of the issuance) while the Windsong entities, Edelman, and McPhee together
received the remaining 40 shares (80% of the issuance). In that scenario, Glenhill’s
position would drop below 90%:
70
Glenhill did not receive any securities in connection with either the Brands
Grant or the Anti-Dilution Grants. Thus, by definition, both of these transactions
were dilutive to Glenhill and fail to satisfy the second prong of Gentile.
Although Glenhill received a 20% economic interest in the Windsong Note
and purchased approximately 28% of the shares issued in connection with the 2012
Stock Sale, both of these transactions also were dilutive to Glenhill and fail to satisfy
the second prong of Gentile because Glenhill held at least a majority of the economic
and voting power of the Company at all times from the 2009 Transaction until the
Merger.244 Plaintiffs do not contend otherwise, which explains why they premised
their Gentile argument on a novel “control group” theory instead of focusing on
Glenhill’s own control position.
244
According to plaintiffs’ expert, Glenhill held approximately 85% of the Company on a
fully diluted basis as of May 18, 2010, when the Windsong Note was issued. JX 513 Ex.
E. The math concerning Glenhill’s ownership interest before the 2012 Financing is more
complicated, but it plainly exceeded a majority position. See JX 513 Ex. E (calculating
Glenhill’s position to be approximately 86% as of October 3, 2012); JX 552 at Defs’
Demonstrative 2 (estimating Glenhill’s position to be approximately 87% as of July 2012).
71
*****
For the reasons explained above, the Overpayment Claims (which seem to
include at least Counts IV, VI, and VII) do not fall within the Gentile paradigm and
thus constitute purely derivative claims that were extinguished by the Merger.
Accordingly, judgment is entered in defendants’ favor and against plaintiffs with
respect to each of those claims.
In reaching this conclusion, I recognize that some of the claims that will be
extinguished here involved self-dealing transactions in which all members of the
Board were conflicted (e.g., the Windsong Note and the 2012 Financing) and which
otherwise would be subject to entire fairness review.245 As the El Paso decision
recently reinforced, however, our law only permits purely derivative claims to
survive a merger in certain narrowly prescribed circumstances, which simply do not
exist here.246 And at least in this case, unlike in El Paso, plaintiffs cannot claim to
245
Krevlin, Sweedler, Edelman, and McPhee all benefited from these transactions by
receiving, personally or through affiliated entities, an interest in the Windsong Note or
shares of stock or options issued in connection with the 2012 Stock Sale. In Krevlin’s case,
these benefits were obtained through his status as the largest holder of the Glenhill Long
Fund at all relevant times. See Tr. 105-06 (Krevlin). That is the vehicle through which
Glenhill acquired its 20% membership interest in Windsong I (the entity holding the
Windsong Note) and purchased approximately 28% of the shares sold in the 2012 Stock
Sale.
246
See Lewis, 477 A.2d at 1047, n.10 (“The two recognized exceptions to the rule are: (1)
where the merger itself is the subject of a claim of fraud; and (2) where the merger is in
reality a reorganization which does not affect plaintiff’s ownership of the business
enterprise.”).
72
have been ambushed. They did not assert any of the Overpayment Claims in real
time but chose to file them after the Merger closed, presumably aware of the risk of
litigating derivative claims in that context.
V. ANALYSIS OF PLAINTIFFS’ REMAINING CLAIMS
In this section, the court considers plaintiffs’ remaining claims. Each of these
claims, which were litigated seemingly as an afterthought to the claims discussed in
Sections III and IV above, relates to the Merger. They are styled as claims for breach
of fiduciary duty, equitable fraud, and aiding and abetting, and they concern
essentially two subjects: the manner in which the Change of Control Bonuses were
paid and certain disclosures in the Merger Notice. Based on these theories, plaintiffs
seek, among other relief, rescissory damages.
A. Change of Control Bonuses
As previously discussed, during due diligence for the Merger, DWR’s counsel
discovered that a greater number of options had been granted to twelve employees
than was authorized under the Company’s 2009 Equity Incentive Award Plan. The
Company addressed this problem by paying the affected employees Change of
Control Bonuses in a cash equivalent to what they would have received had their
options been exercised in connection with the Merger. Edelman and McPhee
together received approximately $2 million in Change of Control Bonuses.
73
Plaintiffs assert in Count X that the Board breached its fiduciary duty by
having the Company pay the Change of Control Bonuses on the theory that it caused
plaintiffs to bear a pro rata portion of the expense.247 This claim fails for two related
reasons.
First, the contractual obligation to pay the option holders plainly belonged to
the Company as the counterparty to the stock option agreements with its
employees.248 That obligation was not owed by the Director Defendants or any
subgroup of stockholders, and plaintiffs have offered no logical reason why the
Company’s directors would be under a fiduciary obligation to treat the options as
anything other than a liability of the Company.
Second, plaintiffs have not established any harm resulting from the Company
paying the Change of Control Bonuses. As plaintiffs concede, the Company selected
a zero-sum solution where the option holders received exactly the same value they
would have received had the options been valid.249 Thus, the Change of Control
Bonuses did not reduce the Merger consideration the plaintiffs received. If anything,
247
Pls.’ Opening Br. at 72-73. Count X also was asserted against the Glenhill Defendants
(Compl. ¶¶ 190-91), but plaintiffs did not brief and thus waived that aspect of the claim.
See Emerald P’rs, 726 A.2d at 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
248
See JX 394 at DWR_EM_0006761, 6765, 6769, 6773; see also JX 411 (flow of funds
memorandum).
249
Pls.’ Opening Br. at 72 (“After discovering that DWR had awarded more options than
authorized under its option plan, the Board decided to pay the holders of invalid options
the value they would have received in the Merger had the options been valid.”).
74
the solution was beneficial to the Company (and all of its stockholders) because it
eliminated—for no cost—the risk of employees seeking to impede the closing of the
Merger to enforce their contractual rights.250
B. The Merger Notice
Plaintiffs assert two claims predicated on alleged material misstatements or
omissions in the Merger Notice that principally concern the background of the
Merger and the circumstances concerning the Change of Control Bonuses:251 breach
of fiduciary duty (Count IX) and equitable fraud (Count XII). I address each in turn.
1. Fiduciary Duty of Disclosure
“[D]irectors 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.”252 “[T]he duty of disclosure is not an independent duty, but
derives from the duties of care and loyalty.”253 To recover damages for a breach of
this nature, plaintiffs bear the burden of proving: “(i) a culpable state of mind or
250
See Tr. 500-01 (Edelman).
251
See Pls.’ Opening Br. at 81-82.
252
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
253
Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (internal quotations and citations
omitted).
75
non-exculpated gross negligence, (ii) reliance by the stockholders on the information
that was not disclosed, and (iii) damages proximately caused by that failure.”254
At the times relevant to this action, DWR’s certificate of incorporation
contained a provision, authorized under 8 Del. C. § 102(b)(7), exculpating DWR’s
directors from monetary liability for breaches of the duty of care.255 Thus, the
Director Defendants only could be liable with respect to the Merger Notice if they
breached their duty of loyalty.256 Here, however, plaintiffs have not identified any
evidence of disloyalty or bad faith precipitating the contents of the Merger Notice.
Indeed, plaintiffs made no effort in their post-trial briefs to discuss Glenhill’s or the
directors’ involvement in the Merger Notice’s preparation or approval, or how they
were responsible for the contents of any of the alleged misstatements or omissions.257
Plaintiffs’ fiduciary duty claim concerning the Merger Notice also fails
because plaintiffs have not adduced any evidence of damages proximately caused
by the alleged misstatements or omissions in the Merger Notice. “When seeking
post-closing damages for breach of the duty of disclosure, . . . plaintiffs must prove
254
In re Wayport Inc. Litig., 76 A.2d 296, 315 (Del. Ch. 2013) (citing Loudon v. Archer-
Daniels-Midland Co., 700 A.2d 135, 146-47 (Del. 1997)).
255
JX 1 at GH/WS 1392 (Ninth Article).
256
In re Transkaryotic Therapies, Inc., 954 A.2d 346, 360-63 (Del. Ch. 2008), as
revised (June 24, 2008).
257
See Emerald P’rs, 726 A.2d at 1224 (Del. 1999) (“Issues not briefed are deemed
waived.”).
76
quantifiable damages that are ‘logically and reasonably related to the harm or injury
for which compensation is being awarded.’” 258 Plaintiffs have not made such a
showing here, nor could they.
The sole question the Merger Notice presented to plaintiffs was whether to
accept the Merger consideration or to demand appraisal. Here, however, as Almond
and Franklin both testified,259 plaintiffs have never contended—even after full
discovery and the retention of experts—that the Merger consideration was unfair.
Plaintiffs did not even present an expert to offer an opinion on that subject. Instead,
plaintiffs’ consistent strategy throughout this case has been to advance arguments to
obtain a larger share of the Merger consideration. They employed this strategy by,
among other things, opposing the relief sought under Section 205 to correct the
double dilution problem and pressing the purely derivative Overpayment Claims
despite their lack of standing to do so. Plaintiffs’ failure to challenge the sufficiency
of the Merger consideration is fatal to their claim for damages relating to the Merger
Notice.
258
In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 53 (Del. Ch. 2014) (quoting
In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 766, 775 (Del. 2006)).
259
Tr. 1192 (Franklin); JX 497 at 264 (Almond Dep.). Given plaintiffs’ admissions that
the Merger consideration was fair and the manner in which plaintiffs consistently litigated
this case, I do not credit Franklin’s testimony—in response to a leading question from his
own counsel—that he would have sought appraisal “if the Merger Notice disclosed
everything [he] now know[s] about DWR.” Tr. 1110 (Franklin).
77
2. Equitable Fraud
To recover on a claim for equitable fraud, plaintiffs must establish “1) a false
representation, usually of fact, by defendant; 2) an intent to induce plaintiff to act or
to refrain from acting; 3) that plaintiff’s action or inaction was taken in justifiable
reliance upon the representation; and 4) damage to plaintiff as a result of such
reliance.”260 Plaintiffs’ equitable fraud claim in Count XII is based on the same
alleged misstatements and omissions in the Merger Notice as their breach of
fiduciary duty claim discussed above. As with that claim, plaintiffs’ equitable fraud
claim fails because it is conceded that the Merger consideration was fair. Thus,
plaintiffs have not, and cannot, establish damages based on any alleged reliance on
the contents of the Merger Notice.
C. Aiding and Abetting
Plaintiffs assert in Count XI that Herman Miller aided and abetted breaches
of fiduciary duty by the Director Defendants and the Glenhill Defendants with
respect to (i) the Change of Control Bonuses (Count X); and (ii) the Merger Notice
(Count IX).261 Under Delaware law, to prove a claim for aiding and abetting a breach
of fiduciary duty, a plaintiff must establish: “(i) the existence of a fiduciary
260
Shamrock Hldgs. of Cal., Inc. v. Iger, 2005 WL 1377490, at *7 (Del. Ch. June 6, 2005)
(citations omitted).
261
Pls.’ Opening Br. at 82-83.
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relationship, (ii) a breach of the fiduciary’s duty, (iii) knowing participation in that
breach by the defendants, and (iv) damages proximately caused by the breach.”262
Because plaintiffs have failed to establish a predicate breach of fiduciary duty
with respect to the Change of Control Bonuses and the Merger Notice, or any harm
resulting therefrom, the aiding and abetting claim against Herman Miller fails for
the reasons discussed above.263 Additionally, plaintiffs have failed to prove that
Herman Miller knowingly participated in any wrongdoing.
“Knowing participation in a board’s fiduciary breach requires that the third
party act with the knowledge that the conduct advocated or assisted constitutes such
a breach.”264 In other words, the aider and abettor must act with scienter, meaning
that “the aider and abettor must act knowingly, intentionally, or with reckless
indifference that is, with an illicit state of mind. To establish scienter, the plaintiff
must demonstrate that the aider and abettor had actual or constructive knowledge
that their conduct was legally improper.”265
Plaintiffs have not proven that Herman Miller acted with scienter concerning
either the Change of Control Bonuses or the Merger Notice. With respect to the
262
RBC Capital Markets, LLC v. Jervis, 129 A.3d 816, 861 (Del. 2015).
263
See, e.g. In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *27 (Del. Ch.
Oct. 24, 2014) (“Because the underlying breaches of fiduciary duty are being dismissed,
Plaintiffs’ aiding and abetting claim must be dismissed as well.”).
264
Malpiede v. Townson, 780 A.2d 1075, 1097 (Del. 2001).
265
RBC, 129 A.3d at 862 (internal quotations and citations omitted).
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Change of Control Bonuses, plaintiffs have not presented any evidence suggesting
that anyone at Herman Miller knew that its conduct was “legally improper.” It is
unsurprising that such evidence does not exist, given that having the Company—as
the counterparty to the employees’ option agreements—pay the Change of Control
Bonuses was an objectively reasonable solution. With respect to the Merger Notice,
plaintiffs have not identified any evidence suggesting that Herman Miller actually
knew that the Merger Notice contained any of the alleged false or misleading
statements or omissions.
D. Rescissory Damages
Finally, plaintiffs contend in Count I that they are entitled to rescissory
damages on the theory that the Merger was tainted by defendants’ breaches of
fiduciary duty with respect to the Change of Control Bonuses and the Merger Notice,
and Herman Miller’s aiding and abetting of the same.266
Rescissory damages are “the monetary equivalent of rescission”267 and are “an
exception to the normal out-of-pocket measure” of compensatory damages.268 “An
266
Plaintiffs also argue they are entitled to rescissory damages because the Merger was not
lawfully effected as a short-form merger under 8 Del. C. § 253, on the theory that Herman
Miller held fewer than 90% of DWR’s shares at the time of the Merger due to the defective
corporate acts identified in the Ratification Resolutions. This argument fails given the
court’s validation of those acts under Section 205.
267
Lynch v. Vickers Energy Corp., 429 A.2d 497, 501 (Del.1981), overruled in part on
other grounds, Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983).
268
Strassburger v. Earley, 752 A.2d 557, 579 (Del. Ch. 2000), as revised (Jan. 27, 2000).
80
award of rescissory damages is one form of relief that could be imposed if [a] merger
is found not to be entirely fair and if one or more of the defendants are found to have
violated their fiduciary duty of loyalty.”269 “Any award of rescissory damages only
would be imposed on those fiduciaries who committed a loyalty breach.”270 Given
that plaintiffs do not challenge the fairness of the Merger and have not proven a
breach of the fiduciary duty of loyalty, no basis exists to entertain plaintiffs’ request
for rescissory damages.
VI. CONCLUSION
For the reasons explained above, judgment is entered in defendants’ favor and
against plaintiffs on all claims in this case, i.e., Counts I-XII of the Complaint and
the counterclaim. The parties are directed to confer and submit an implementing
order within ten business days. If plaintiffs intend to seek an award of attorneys’
fees with respect to the court’s granting of relief under Section 205, the form of order
should include a schedule for briefing that issue.
269
In re Orchard Enter., Inc. S’holder Litig., 88 A.3d 1, 41 (Del. Ch. 2014).
270
Id. See also Strassburger, 752 A.2d at 578 (“Rescissory damages must approximate as
closely as possible the financial equivalent of rescission, and may be recovered only for a
breach of the duty of loyalty.”); Transkaryotic Therapies, 954 A.2d at 360 (“[W]here a
breach of the disclosure duty does not implicate bad faith or self-interest, both legal and
equitable monetary remedies (such as rescissory damages) are barred on account of the
exculpatory provision authorized by 8 Del. C. § 102(b)(7).”); Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1134, 1144 (Del. Ch. 1994), aff’d, 663 A.2d 1156 (Del. 1995)
(“R]escissory damages should never be awarded against a corporate director as a remedy
for breach of his duty of care alone; that remedy may be appropriate where a breach of the
directors duty of loyalty has been found.”).
81