Calesa Associates, L.P.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
CALESA ASSOCIATES, L.P.; )
CALESA FAMILY TRUST, JULY 6, )
2000; FRED APPLEGATE; JAY )
BERNSTEIN; GRAEME W. BUSH; )
CRAWFORD FAMILY TRUST, )
SEPTEMBER 8, 2000; PETER C. )
FARRELL; FRANK NORMAN )
FJELDHEIM II; STEVEN R. )
HOWARD; LEONARD GLINER; )
ANDREW HARRISON; ROBERT S. )
KRIM; JOEL LIFFMANN; THOMAS )
LLOYD; JAMES P. MCGUCKIN; RLR )
GROUP, LLC; RICHARD RUBIN; )
STEVEN RUBIN; RUBIN FAMILY )
FUND, LLC; CHARLES ANDREW )
RUSSELL; JACK SCHNEIDER; )
SHERMAN-CALESA )
FAMILY TRUST, FEBRUARY 10, )
1998; and JASON WILD, )
)
Plaintiffs, )
)
v. ) C.A. No. 10557-VCG
)
AMERICAN CAPITAL, LTD.; )
AMERICAN CAPITAL EQUITY I, )
LLC; AMERICAN CAPITAL EQUITY )
II, LP; JEFFREY M. COHEN; NEIL M. )
HAHL; MICHAEL JANISH; JOHN L. )
LEWIS IV; and GORDON O’BRIEN, )
Defendants.
MEMORANDUM OPINION
Date Submitted: November 13, 2015
Date Decided: February 29, 2016
Thaddeus J. Weaver, of DILWORTH PAXSON LLP, Wilmington, Delaware; OF
COUNSEL: Joseph H. Jacovini and Thomas S. Biemer, of DILWORTH PAXSON
LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.
Gregory V. Varallo, Robert J. Stearn, Jr., and Richard P. Rollo, of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: John C.
Massaro and Dana Y. Elliott, of ARNOLD & PORTER LLP, Washington, District
of Columbia, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor
The Plaintiffs, a group of minority stockholders of Halt Medical, Inc. (“Halt”
or the “Company”), filed this action against certain current and former directors of
Halt and its alleged controller, stockholder American Capital, Ltd. (“American
Capital”) and its affiliates, in connection with a transaction (the “Transaction”) that
the Plaintiffs denominate a “squeeze-out merger,” but which was in fact an issuance
of equity that diluted the interest in the Company held by the Plaintiffs, who remain
stockholders. The Complaint alleges breaches of fiduciary duty, aiding and abetting
breaches of fiduciary duty, and violations of Sections 242(b)(1) and 228 of the
Delaware General Corporation Law (“DGCL”). The fiduciary duty claims are
derivative in nature, but the Plaintiffs have eschewed the opportunity to so pursue
them; instead, they seek to proceed only directly, under the rubric, concisely stated
by this Court in Carsanaro v. Bloodhound Technologies, Inc.,1 that a breach of
loyalty resulting in dilution in favor of an insider represents an extraction of value
from the unaffiliated stockholders, a claim which may be advanced directly. The
Plaintiffs seek money damages and a judgment rescinding the Transaction. The
Defendants, in turn, move to dismiss the Complaint on the grounds of acquiescence,
estoppel, and laches, or alternatively, for failure to state a claim. For the following
reasons, that motion is, with one narrow exception, denied.
1
65 A.3d 618 (Del. Ch. 2013).
1
I. BACKGROUND FACTS2
A. The Parties
Non-party Halt is a Delaware corporation, founded in 2004 by Edward F.
Calesa for the purpose of supporting and marketing a procedure to treat fibroid
tumors in women.3 Calesa is a former Halt director and served as Chairman of the
Halt board of directors (the “Board”) at the time of the Transaction.4 Halt’s
intellectual property includes valuable patents and trademarks related to the
Acessa™ System, an FDA-approved procedure and technology for the treatment of
fibroid tumors in women, which is said to substantially reduce the pain, trauma, and
potential cancer risk associated with the once-traditional use of power morcellators.5
As such, the Acessa™ System is well-positioned to become the standard of care for
women in the treatment of fibroid tumors, according to the Complaint.
2
The facts, drawn from the Plaintiffs’ Verified Complaint (the “Complaint”) and from documents
incorporated by reference therein, are presumed true for purposes of evaluating the Defendants’
Motion to Dismiss. The parties dispute whether I may consider the documents related to the
Transaction (the “Transaction Documents”), attached as Exhibit 1 to the Plaintiffs’ Complaint, in
evaluating the Defendants’ Motion to Dismiss. Generally, the Court “may consider documents
outside of the pleadings only when: (1) the document is integral to a plaintiff’s claim and
incorporated in the complaint or (2) the document is not being relied upon to prove the truth of its
contents.” In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *8 (Del. Ch. Oct.
24, 2014) (citation omitted). Here, because the Complaint cites to and relies upon the Transaction
Documents as the basis for many alleged facts—for instance, facts regarding the independence of
Messrs. Hahl, Janish, and O’Brien—I find that it is appropriate to consider them in my analysis.
The parties also dispute whether the Court may take judicial notice of the Halt Capitalization Table.
See Defs’ Reply Br. 32. I do not address this argument, however, as the Capitalization Table is
not pertinent to my analysis.
3
Compl. ¶¶ 52–53.
4
Id. at ¶¶ 52, 68.
5
Id. at ¶ 3. To morcellate is to physically reduce a body to small bits convenient to extraction.
2
Plaintiffs Calesa Associates, L.P. and Calesa Family Trust, July 6, 2000
(collectively, the “Calesa Entities”) are stockholders and minority investors in Halt.6
Calesa serves as General Partner and Trustee, respectively, to these entities.7
Plaintiffs Fred Applegate; Jay Bernstein; Graeme W. Bush; Crawford Family Trust,
September 8, 2000; Peter C. Farrell; Frank Norman Fjeldheim II; Leonard Gliner;
Andrew Harrison; Steven R. Howard; Robert S. Krim; Joel Liffmann; Thomas
Lloyd; James P. McGuckin; RLR Group, LLC; Richard Rubin; Steven Rubin; Rubin
Family Fund, LLC; Charles Andrew Russell; Jack Schneider; Sherman-Calesa
Family Trust, February 10, 1998; and Jason Wild are stockholders and minority
investors in Halt.8 Many of the Plaintiffs also hold debt, options, or warrants as part
of their investments in the Company.9
Defendant American Capital, Ltd. (“American Capital”), a Delaware
corporation with its principal place of business in Bethesda, Maryland, is a publicly
traded private equity firm.10 It is the largest stockholder in Halt and, the Plaintiffs
allege, controls the Halt Board.11 Defendant American Capital Equity I, LLC, a
Delaware limited liability company and affiliate of American Capital, is a
6
Id. at ¶¶ 21–22.
7
Id.
8
Id. at ¶¶ 23–43.
9
Id. at ¶ 1.
10
Id. at ¶ 44.
11
Id.
3
“participant” in American Capital’s investments in Halt.12 Defendant American
Capital Equity II, LP (collectively with American Capital and American Capital
Equity I, LLC, “ACAS”)13 is a Delaware limited partnership and affiliate of
American Capital, and is a “participant” in American Capital’s investments in Halt.14
Collectively, ACAS held a 26 percent equity interest in Halt prior to the
Transaction.15
Defendants Jeffrey M. Cohen, Neil M. Hahl, Michael Janish, John L. Lewis
IV, and Gordon O’Brien (collectively, the “Director Defendants”) are all current or
former Board members of Halt who the Plaintiffs assert were under the control of
ACAS. Cohen is the Chief Executive Officer (CEO) of Halt and a current member
of the Board.16 Prior to the Transaction, the Halt Board voted to more than double
Cohen’s compensation and to raise his secretary’s salary by more than $100,000.17
Cohen was also allowed to continue as CEO after the Transaction and became
eligible to participate in a management incentive plan created as a part of the
Transaction, which will give him six percent of the net equity in Halt.18 The
12
Id. at ¶ 45.
13
The Complaint, at points, appears to conflate “American Capital” and “ACAS.” Subsequent
quoted references to “American Capital” or “ACAS,” for purposes of this Memorandum Opinion,
refer to the alleged control group of American Capital, Ltd.; American Capital Equity I, LLC; and
American Capital Equity II, LP.
14
Compl. ¶ 46.
15
Id. at ¶ 11(b).
16
Id. at ¶ 47.
17
Id. at ¶ 70.
18
Id. at ¶ 71.
4
Plaintiffs concede that Cohen “has not always been a controlled director,” but argue
that he “became a controlled director when ACAS became empowered to decide
whether Mr. Cohen would continue to receive material benefits in the form of salary
and incentives.”19
Hahl was appointed to the Halt Board by ACAS around January 2012.20 He
has also served as a member of the board of directors of American Capital since
1996.21 Throughout his service on the Halt Board, Hahl has consistently taken
positions “that favor American Capital or that are in accord with ACAS’s desires.”22
In documents created by Halt related to the Transaction (the “Transaction
Documents”), Hahl was identified as being “affiliated with American Capital, Ltd.,”
and following the Transaction, Hahl became Chairman of the Halt Board.23
Janish was appointed to the Halt Board by ACAS in late 2013 or early 2014
and served until September 2014.24 Janish also served as President and Chief
Executive Officer of Avalon Laboratories, an American Capital portfolio company
in which ACAS “had invested” over $66 million, until September 2014.25 While
19
Id. at ¶ 69. See also id. at ¶ 108 (“While recognizing that ACAS’s conduct was detrimental, Mr.
Cohen supported ACAS through his votes as a director because he knew that his job as Halt’s
Chief Executive Officer and his income depended upon ACAS’s support.”).
20
Id. at ¶ 48.
21
Id.
22
Id. at ¶ 72.
23
Id. (quoting id. at Ex.1 (the “Transaction Documents”), at 19).
24
Id. at ¶ 49.
25
Id.
5
serving on the Halt Board, Janish “consistently favored positions beneficial to
American Capital and voted in lockstep with other ACAS Controlled Directors.”26
Like Hahl, Janish is identified in the Transaction Documents as being “affiliated
with American Capital, Ltd.”27 Janish’s resignation from the Halt Board in
September 2014 immediately followed ACAS’s “sale of Avalon Laboratories.”28
Lewis joined the Halt Board at American Capital’s request around January
201229 and fills the so-called independent director seat.30 He is also the co-founder
of Gardner Lewis Asset Management, which “was among the largest” investors in
ACAS.31 Lewis is currently the second largest senior debt holder in Halt, after
ACAS.32 Lewis is also a close friend of ACAS Chairman Malon Wilkus33 and has
“consistently voted with ACAS-designated directors for positions favoring
American Capital.”34 In January 2014, Calesa asked Lewis to either resign from the
Halt Board or to fill an ACAS-designated seat, but Calesa “was defeated by ACAS
and . . . Lewis remained on the Halt board as the ‘independent director.’”35
Finally, O’Brien was appointed to the Halt Board by ACAS around January
26
Id. at ¶ 75.
27
Id. (quoting Transaction Documents, at 19).
28
Id. at ¶ 76.
29
Id. at ¶ 50.
30
Id. at ¶ 77.
31
Id. at ¶ 50.
32
Id. at ¶ 79.
33
Id. at ¶ 80.
34
Id. at ¶ 81.
35
Id.
6
2012.36 O’Brien also serves as President, Special Finance and Operations, for ACAS
and is one of seven executive officers of ACAS.37 The Transaction Documents
identify O’Brien as being “affiliated with American Capital, Ltd.,”38 and O’Brien
“routinely represent[ed] ACAS’s interests in ACAS’s negotiations with Halt,”
including in negotiations related to the Transaction.39 The Plaintiffs allege that, upon
information and belief, American Capital Chairman Malon Wilkus directed O’Brien
regarding his dealings with Halt and the Halt Board.40
B. Factual Overview
1. ACAS Investments in Halt
On June 22, 2007, American Capital announced its first investment, along
with Defendant American Capital Equity I, LLC, of $8.9 million in Halt.41 Under
the terms of this initial investment, ACAS was granted two ACAS-designated
directors on Halt’s five-seat Board42 and the right to block any subsequent pari passu
investments in Halt.43 From that point on, the relationship between ACAS and Halt
began to deteriorate. ACAS did not make any further investments in Halt over the
36
Id. at ¶ 51.
37
Id.
38
Id. at ¶ 83 (quoting Transaction Documents, at 19).
39
Id.
40
Id. at ¶ 84.
41
Id. at ¶ 59.
42
Id. at ¶ 66(a).
43
Id. at ¶ 62.
7
next three-and-a-half years,44 often misleading Halt as to whether it intended to
provide or extend funding.45 Instead, certain Halt investors—including Calesa and
the Plaintiff investors—established a bridge loan (the “Bridge Note”) that provided
all of Halt’s financing during this period.46 The Bridge Note consisted of junior debt
at a 15% interest rate plus “options, warrants, and/or conversion rights.”47 Over the
course of this three-and-a-half year period, the Bridge Note came due and was
extended several times by the investors.48
In June 2011, in response to Halt’s need for additional funds, ACAS offered
to provide $5 million in exchange for a 50% interest in Halt.49 The Halt Board
declined the offer,50 instead entering into a short-term loan agreement with
Broadband Capital, under which Broadband Capital provided $5 million secured by
Halt’s intellectual property.51 Miles Arnone, Managing Director of American
Capital’s Technology Group and one of ACAS’s designated directors at the time,
informed the Halt Board that it had made a “big mistake” in not taking American
44
Id. at ¶ 61.
45
See id. at ¶ 85; id. at ¶ 87 (“On several occasions, ACAS, through its designated directors,
informed the Halt board either collectively or through Mr. Calesa that it would provide additional
funding, only to withdraw or never formally make the offer, forcing the Halt board to negotiate
under duress, which was to Halt’s detriment and American Capital’s benefit.”).
46
Id. at ¶ 61.
47
Id. at ¶ 62.
48
Id.
49
Id. at ¶ 89.
50
Id. The Plaintiffs allege that “ACAS’s offer also would have severely diluted the interests of
other shareholders and delayed repayment to debt holders who had been carrying Halt for much
of the preceding three-and-a-half years.” Id.
51
Id. at ¶ 90.
8
Capital’s offer.52 Four months later, Arnone informed the Halt Board that ACAS
had “secretly” purchased the Broadband note and security interest in Halt’s
intellectual property.53
In the fall of 2011, again needing additional funds, the Board negotiated a
potential deal with investors “Genesis” and “Novaquest” for a combined $35 million
investment at a 15% interest rate, subject to ACAS’s waiver of its blocking rights.54
Instead, ACAS exercised those blocking rights, offering, as an alternative, to loan
Halt an additional $20 million at a 22% interest rate, with the right to add one Board
member and appoint Lewis as the “independent director.”55 Halt accepted ACAS’s
offer.56
By the fall of 2013, Halt owed ACAS $50 million under a note due at the end
52
Id. at ¶ 91.
53
Id. at ¶ 92.
54
Id. at ¶ 93. While the Complaint does not specify that the proposed Genesis and Novaquest
investment would consist of senior debt, in order for ACAS’s blocking rights to apply, Genesis
and Novaquest presumably sought a pari passu investment to that of ACAS.
55
Id. at ¶ 94.
56
The Complaint omits details regarding several subsequent issuances of senior secured debt. In
January 2012, the Company sold $12.5 million in Term A Senior Secured Promissory Notes
(“Term A Notes”) and $8.25 million in Term B Senior Secured Promissory Notes (“Term B
Notes”). Id. at Ex. 1, at 9 (Ex. 1, at 1–10 is hereinafter referred to as the “Information Statement”).
In December 2012, the Company sold $15 million of Term C Senior Secured Convertible
Promissory Notes. The Company, in connection with this financing, also agreed to issue an
additional $2,411,111.13 of Term A Notes and an additional $1,453,083.33 in Term B Notes in
exchange for an extension of the maturity dates of the existing Term A Notes and Term B Notes.
Id.
9
of 2013.57 Despite indications that ACAS would extend the note,58 in September
2013, ACAS unexpectedly demanded repayment in full by December 31, 2013.59
Calesa called a Halt Board meeting to discuss different proposals for how Halt might
raise money, including a possible sale from within a Chapter 11 proceeding,
effectively prohibiting voluntary bankruptcy relief absent ACAS consent.60 In
October 2013, ACAS loaned Halt an additional $3 million to help it operate through
the end of 2013, in return for Halt agreeing to a supermajority vote requirement for
any future Chapter 11 proceeding.61 The Plaintiffs allege that a majority of the Board
approved the loan and that, at the time, ACAS had control of four of Halt’s then-six
Board seats: two designated directors, Hahl and O’Brien, and two captured directors,
Lewis and Cohen.62 At some point “thereafter,” Janish also became a member of
the Board.63
Around the same time, the Board launched and conducted a sales process,
57
Compl. ¶ 100. It is not clear from the Complaint whether the $50 million note includes the $20
million loaned to Halt in March 2012. See infra note 61.
58
The Plaintiffs allege that, speaking on behalf of ACAS, O’Brien made it clear to the Board that
they should not be concerned about the $50 million note and that ACAS would extend it if the
need arose. Id. at ¶ 101.
59
Id. at ¶ 102.
60
Id. at ¶ 103.
61
Id. at ¶¶ 104, 106. See also Information Statement, at 9 (describing the Company’s sale of $3
million in Term D Senior Secured Convertible Promissory Notes). The Plaintiffs allege that this
note was an extension of the $20 million March 2012 note, Compl. ¶ 106, and that ACAS “intended
the supermajority voting requirement to give ACAS the absolute authority as to whether Halt could
ever file a voluntary Chapter 11 proceeding.” Id. at ¶ 104.
62
Id. at ¶¶ 105; 66(c).
63
Id. at ¶ 109. It is unclear whether Janish joined the Board in connection with the October 2013
financing or early the following year. See id. at ¶ 49.
10
discussing other alternative transactions with potential advisors, investors, and
acquirers.64 Most recently prior to the Transaction, in December 2013, the Board
approved a proposal from Davidson Kempner Capital Management LCL for a
recapitalization and debt financing, but Davison Kempner could not proceed with
the transaction because, according to Davidson Kempner, its investment committee
did not approve the deal.65 Ultimately, none of these negotiations came to fruition;66
they either could not meet Halt’s working capital needs (operating expenses and
payroll, for example), or were unlikely to close before the maturity dates of Halt’s
existing senior secured notes.67
2. The Transaction
Given Halt’s failure to secure financing elsewhere, and under pressure from
the impending due date of the $50 million note, Calesa, as representative of Halt,
met with O’Brien, as representative of ACAS, to “negotiate a deal that would allow
Halt to be sold to a third party, with Mr. Calesa leading the selling effort.”68 Cohen,
along with ACAS’s Robert Sacks, documented the proposed deal in the Transaction
64
Id. at ¶¶ 95–96; Information Statement, at 10.
65
Information Statement, at 10.
66
Compl. ¶¶ 103, 110.
67
Information Statement, at 10. The Complaint also omits discussion of additional notes issued
in early 2014. In January 2014, the Company sold $500,000 in convertible promissory notes that
were convertible into debt instruments issued in the Transaction financing. Information Statement,
at 9. Additionally, in February and March 2014, the Company sold $1.2 million in additional Term
A Notes. Id.
68
Compl. ¶ 110.
11
Documents.69
The Transaction Documents called for a series of actions including, among
others, the following. First, the Company would form Halt Merger Sub, Inc.
(“Merger Sub”), a Delaware corporation,70 and purchase 100 shares of common
stock of Merger Sub.71 Merger Sub and the Company would enter into an
Agreement and Plan of Merger, pursuant to which Merger Sub would merge with
and into the Company.72 As a result of the merger, the Company’s Certificate of
Incorporation would be amended;73 all issued and outstanding shares of the
Company’s common stock would remain outstanding and be unaffected; all issued
and outstanding shares of the Company’s preferred stock would be “cancelled and
extinguished and delivered in exchange” pursuant to the terms of the merger
agreement; and any shares of capital stock of the Merger Sub would be cancelled.74
Additionally, the stockholders would waive any appraisal rights under the DGCL or
other applicable laws,75 and the bylaws of the Company would be amended and
restated.76
The Company and its stockholders would also enter into a Note Purchase and
69
Id. at ¶ 112.
70
Information Statement, at 1.
71
Compl. ¶ 125; Information Statement, at 1.
72
Compl. ¶ 125; Information Statement, at 1.
73
Compl. ¶ 125; Information Statement, at 1.
74
Information Statement, at 2.
75
Id. at 6.
76
Compl. ¶ 125; Information Statement, at 11.
12
Exchange Agreement with ACAS, pursuant to which ACAS would loan the
Company up to $73 million.77 ACAS would get a blanket first priority security
interest in the Company’s assets and certain other rights as set forth in the Purchase
Agreement and related agreements.78 Additionally, the Transaction Documents
called for the cancellation of any outstanding warrants to purchase common stock or
preferred stock issued pursuant to prior agreements,79 and the adoption of a
management incentive plan, under which 12% of the proceeds of a subsequent sale
of Halt, after repayment of any ACAS debt, would be divided among certain
employees.80 The management incentive plan, the Plaintiffs allege, was adopted
mainly for the benefit of Jeffrey Cohen.81 Finally, the Transaction called for changes
to subordinated notes affecting the Plaintiffs, including provisions in the Transaction
Documents providing that, if Halt were not sold within one year of the Transaction
(by March 2015), the subordinated debt owned by minority investors would be
77
Compl. ¶ 11(a). The Plaintiffs allege that, of the $73 million note, $55 million would be used
to repay existing senior secured notes held by ACAS, plus accrued interest. Id. I note, however,
that the Halt Information Statement suggests that ACAS was not the sole participant in the $73
million note, Information Statement at 3 (“[T]he Company [will] enter into a Note Purchase and
Exchange Agreement with certain investors . . . , pursuant to which the [investors] will loan the
Company up to approximately $73,000,000 and the Company will issue to the Lenders senior
secured promissory notes . . . and shares of its Series AA Preferred Stock, Series BB Preferred
Stock, and Common Stock.”) (emphasis added), and that the Complaint elsewhere indicates that
investors other than ACAS participated, Compl. ¶ 11(b) (“Following the Merger, the holders of
the $73 million note, primarily ACAS, held approximately 66% of the equity in Halt.”) (emphasis
added).
78
Information Statement, at 3.
79
Compl. ¶¶ 11(e), 127.
80
Id. at ¶ 11(c).
81
Id. at ¶ 11(c).
13
converted to equity,82 and the Series BB preferred stock owned by minority investors
would be cancelled.83
3. The Transaction Documents
The Plaintiffs received copies of the Transaction Documents on March 11,
2014 via e-mail with instructions to sign and return them by the end of the following
day.84 The 297-page set of Transaction Documents consists of an “Information
Statement,” 14 other agreements, and various attachments.85 The Information
Statement provides an overview of the Transaction’s structure and key terms. The
Plaintiffs allege that the terms recorded in these Transaction Documents are
significantly different from the deal negotiated by Calesa and O’Brien, to the benefit
of ACAS,86 and that of these documents, several were “incomplete, in draft form, or
were missing entirely.”87
82
Id. at ¶ 11(d).
83
Id. at ¶ 11(f).
84
Id. at ¶ 114.
85
Id. at ¶ 124. The Transaction Documents include the Information Statement; Stockholder
Consent; Certificate of Incorporation of Merger Sub; Agreement and Plan of Merger by and
Among Halt Medical, Inc. and Halt Merger Sub, Inc.; Certificate of Merger; Amended and
Restated Certificate of Incorporation of Halt Medical, Inc.; Second Amended and Restated Bylaws
of Halt Medical, Inc.; Note Purchase and Exchange Agreement; Form of Note; Security
Agreement; IP Security Agreement; Voting Agreement; IRA Termination Agreement; Co-Sale
Agreement; 2011 Amended and Restated Certificate of Incorporation; two 2012 Amendments to
the Amended and Restated Certificate of Incorporation; 2013 Amendment to the Amended and
Restated Certificate of Incorporation; a copy of 8 Del. C. § 262; unaudited financials for Halt;
Subordination and Amendment Agreement; Second Amended and Restated Investor Rights
Agreement; and the Halt Medical Capitalization Table. Id. at ¶ 130.
86
Id. at ¶ 113.
87
Id. at ¶ 15. The allegedly missing terms were not detailed in the Complaint, but the Plaintiffs
clarified during oral argument that the Transaction Documents excluded a provision providing for
14
Additionally, the Plaintiffs allege that “[t]he pressure to close
the . . . Transaction within one day was manufactured by American Capital in order
to force the [Plaintiffs] to sign”88 and that they were “coerced into
the . . . Transaction through ACAS’s Controlled Directors’ pressure and inequitable
conduct, including false representations by ACAS representatives that Halt would
be sold within one year, which would have given the [Plaintiffs] an opportunity to
recover some of their investments, despite the significantly dilutive impact of the
[Transaction] on the [Plaintiffs’] interests.”89 The Plaintiffs only signed, they allege,
“under a threat that if they did not sign, American Capital would demand payment
in full of its $50 Million Note, which Halt could not pay, and could no longer prevent
through a Chapter 11 proceeding.”90
Upon information and belief, the Plaintiffs allege that the Board—which at
the time consisted of Hahl, Janish, O’Brien, Lewis, Cohen, Calesa, and Lee91—also
received and signed the Transaction Documents within one day. 92 The Plaintiffs
allege that, due to this tight timeframe, the Transaction was approved by Halt’s
the sale of Halt within one year. Oral Argument Tr. 62:21–24 (“THE COURT: So what’s the
material term that was missing? Is it this agreement to sell the company in a year? MR. BIEMER:
Yes, Your Honor.”).
88
Compl. ¶ 15.
89
Id. at ¶ 13.
90
Id. at ¶ 115.
91
Id. at ¶¶ 66–67.
92
Id. at ¶ 14.
15
Board with “little or no analysis as to its fairness” to the Plaintiffs.93 Specifically,
the Board approved the Transaction without an independent valuation of the
Transaction or the benefits ACAS was to receive in exchange for its additional
financing; a fairness opinion or the assistance of a financial advisor; a special
committee of independent directors to review the Transaction; an opportunity to
solicit or explore financing from other sources under less “onerous” terms; having
read the Transaction Documents; or holding a meeting of the Board to vote on the
Transaction Documents.94
4. The Board’s Failure to Sell Halt Post-Transaction
Following the Transaction, ACAS’s position in Halt increased from
approximately 26% to almost 66%,95 and ACAS had four ACAS-designated seats
out of a total of seven, held by Hahl, Janish, O’Brien, and non-party Sacks,96 who
93
Id. at ¶ 8. But see infra, note 94.
94
Compl. ¶¶ 9, 119–23. I note, however, that the Information Statement provides that the Board
“determined that the Merger . . . represented the most attractive transaction for Halt and its
stockholders taking into account the terms of the proposal, the level of commitment on the part of
the potential investors and the likelihood that the transaction would close so that Halt could
continue its business.” Information Statement, at 10. The Board noted specifically that “the
proposed transactions provided for the simplification of the Company’s capital structure making
the Company more attractive to prospective investors, provided for the conversion of the Senior
Secured Notes and Bridge Notes, and provided the Company with additional equity financing to
meet[] its near term working capital needs.” Id.
95
Compl. ¶ 11(b). As pled, ACAS’s post-Transaction equity position is not entirely clear. The
Complaint alleges that, “[f]ollowing the Merger, the holders of the $73 million note, primarily
ACAS, held approximately 66% of the equity in Halt,” but does not state what percentage of the
equity of Halt that ACAS, alone, held. Id. (emphasis added).
96
Id. at ¶ 66(d).
16
replaced former director Lee.97 The Plaintiffs allege that ACAS received a
disproportionate benefit from the Transaction, representing an unfair price to
Plaintiffs in light of the substantial contributions made by the minority investors to
help keep Halt afloat during the preceding years.98 They allege that only after the
Transaction did the Defendants’ true motive emerge:99 ACAS sought to starve Halt,
ensuring the dilution of the Plaintiffs’ interests and the cancellation of their Series
BB Preferred stock, all in order to “squeeze” the minority investors out of the
Company.100 According to the Plaintiffs, ACAS—ignoring the fact that Halt was
“well-positioned for a sale” prior to the Transaction101—had no intention to sell Halt,
seeking instead to seize the value of the Company for itself.102
97
Id. at ¶ 68.
98
See id. at ¶ 138 (“American Capital received a disproportionate benefit from the [] Transaction
in the form of almost all of Halt’s value in comparison to the money that ACAS might advance to
Halt as part of the Transaction. On the other hand, the [Plaintiffs], whose Bridge Note and equity
investments provided significant support to Halt for many years, have seen their interests severely
diluted and will suffer further dilution in March 2015. The [] Transaction therefore was entirely
unfair in terms of price.”).
99
Id. at ¶ 16 (“The true facts only emerged post-Merger. Since March 2014, it has been made
clear that the purpose of the . . . Transaction was not to fund Halt, which has seen little benefit
from the [Transaction], but to squeeze out the minority investors and leave ACAS with
everything.”).
100
See id. at ¶ 133 (“American Capital instead has demonstrated an intent to (a) starve Halt by
cutting Halt’s budget to the bone; (b) prevent Halt from commercializing the Acessa™ System;
(c) block any possibility of a sale or full blown commercialization until at least 2016, thereby
making certain that the Minority Investors have no opportunity to prevent the further dilution and
subordination of their interests and the cancellation of the Series BB Preferred stock; and (d)
position Halt to miss its covenants in 2014, which will allow American Capital to take over”).
101
See, e.g., id. at ¶ 98 (“In 2013, the Center for Medicare and Medicaid Service (“CMS”)
announced it would cover the Accessa™ procedure at the highest reimbursement amount offered
for any gynecological procedure.”).
102
Id. at ¶ 18 (“American Capital and the Controlled Directors announced that there is no interest
in selling Halt, and that they will do little in respect to commercializing and marketing the
17
C. Procedural History
The Plaintiffs filed their Verified Complaint on January 16, 2015 as a direct
action against ACAS and the Director Defendants. Count I, against ACAS, alleges
breach of fiduciary duty, owed as a controlling stockholder, to minority investors.103
Count II, against the Director Defendants, alleges breach of fiduciary duty by
approving the Transaction with terms dictated by ACAS and without adequate
review, and by attempting to conceal and avoid disclosure of the relevant details of
the Transaction by providing the Transaction Documents one day before they had to
be signed and returned.104 Count III, pled in the alternative against ACAS, alleges
aiding and abetting breaches of fiduciary duty owed by the Director Defendants.105
Finally, Count IV, against the Director Defendants, alleges violations of Sections
242(b)(1) and 228 of the DGCL.106 The Plaintiffs seek a judgment rescinding the
Transaction and restoring the rights and investment interests of the Plaintiffs,
damages, a judgment enjoining further violations of the Defendants’ fiduciary
duties, and costs of the action.107
Accessa™ System until after 2015, thereby furthering their scheme to seize the value of Halt for
ACAS, to the detriment of Halt’s” minority investors, the Plaintiffs here.).
103
Id. at ¶ 142. The Plaintiffs contend that ACAS, the purported controller of Halt, concocted a
scheme to substantially reduce the Plaintiffs’ interests in Halt and to take control of its valuable
intellectual property without fair price or process. Id. at ¶ 2.
104
Id. at ¶¶ 157–58.
105
Id. at ¶¶ 162–73.
106
Id. at ¶¶ 174–82.
107
Id. at 47.
18
The Defendants filed a Motion to Dismiss on February 10, 2015 (the
“Motion”). After full briefing of the Motion, I heard oral argument on September
16, 2015, at which time I requested supplemental briefing relating to the
acquiescence and estoppel defenses raised by the Defendants.108 This Memorandum
Opinion denies in part and grants in part the Defendants’ Motion.
II. ANALYSIS
A. Standard of Review
In deciding a motion to dismiss under Rule 12(b)(6), the Court “must accept
as true all well-pled allegations of fact and draw reasonable inferences in the
plaintiff’s favor.”109 The Court will dismiss the complaint “only if it determines with
reasonable certainty that, under any set of facts that could be proven to support the
claims asserted, the plaintiff would not be entitled to relief.”110 However, the Court
need not accept “[m]ere conclusions of law or fact.”111
The Plaintiffs have made no attempt to argue that demand on the current
Board should be excused here, and presumably in light of the restriction of the
108
Specifically, I asked the parties to address whether “the actions and knowledge of Mr. Calesa
[can] be imputed to Plaintiffs, Calesa Associates, L.P. and Calesa Family Trust, July 6, 2000, upon
the record appropriate to consideration of the Motion to Dismiss?” Calesa Assoc., L.P. v. Am.
Capital, Ltd., C.A. 10557-VCG, at 1 (Del. Ch. Oct. 15, 2015) (LETTER).
109
Caspian Alpha Long Credit Fund, L.P. v. GS Mezzanine Partners 2006, L.P., 93 A.3d 1203,
1205 (Del. 2014) (citation omitted).
110
Berger v. Intelident Solutions, Inc., 911 A.2d 1164, 1168–69 (Del. Ch. 2006) (internal quotation
omitted).
111
Id. at 1169 (citation omitted).
19
Complaint to extraction-type Gentile112 direct claims, the Defendants have moved
under Rule 12(b)(6), and have argued for dismissal under the lenient notice standard
set out above. A few observations are in order, however.
Claims alleging dilution resulting from a breach of the duty of loyalty
benefiting an insider were recognized as both derivative and direct in Gentile v.
Rossette and Carsanaro. These decisions were in the post-merger context: the
derivative claims there were extinguished by the merger and, absent direct actions,
the breaches of loyalty alleged could never be remedied, an anathema to equity.
Here, by contrast, the fiduciary duty claims alleged—similarly dual in nature as were
those in Gentile and Carsanaro—could be pursued derivatively by the Plaintiffs,
who remain stockholders in Halt. That, however, would require a specific pleading
sufficient to show that demand, with reference to the current Board, would be futile.
In other words, the dual nature of the extraction claim in this context allows a
plaintiff to choose a form of action with either a lenient or a strict pleading standard.
The result is not hard to predict.
Such a situation is problematic. The negative aspects of derivative
litigation—including diversion of the board’s attention from the company’s
business, as well as the possibility of strike suits—gave rise to the pleading
requirements of Rule 23.1. The same negatives apply to the direct extraction claim.
112
Gentile v. Rossette, 906 A.2d 91 (Del. 2006).
20
This pleading anomaly and its potential for mischief was noted by the Court in the
recent In re El Paso Pipeline Partners, L.P. Derivative Litigation.113 In that case, a
cause of action that was in fact both direct and derivative was brought as a derivative
claim only. A merger subsumed the derivative claim. In addition to finding that the
cause of action survived the merger, the El Paso Court opined that
[t]he more appropriate way to view [such a] cause of action . . . is as a
dual-natured claim with aspects that are both derivative and direct. In
my view, Delaware law can and should treat a dual-natured claim as
derivative for purposes of Rule 23.1 and the doctrine of demand, but as
direct for purposes of determining whether sell-side investors can
continue to pursue the claim after a merger.114
In other words, El Paso suggests that a dual-natured claim should be addressed under
the particularized pleading standard of Rule 23.1.
If this rationale—which, to my mind, is self-evidently reasonable and
efficient—were applied here, it would require a pleading that the Plaintiffs have not
attempted to make, and a review under a particularized pleading standard that neither
party has argued is appropriate.115 Therefore, I analyze the Complaint under the
pleading requirements of Rule 12(b)(6).
B. Counts I and II: Breaches of Fiduciary Duties by ACAS and the Director
Defendants
113
2015 WL 7758609 (Del. Ch. Dec. 2, 2015).
114
Id. at *2.
115
The Defendants have argued that the Plaintiffs’ claims are derivative, not direct; they have not
argued that to the extent direct claims were pled, they were nonetheless subject to Rule 23.1.
21
The “reasonable conceivability” pleading standard of Rule 12(b)(6) “asks
whether the allegations in the complaint could entitle a plaintiff to relief,” which in
turn “depends upon the level of scrutiny under which those allegations are
reviewed.”116 The business judgment rule establishes a presumption in favor of the
directors,117 which a plaintiff can overcome by adequately alleging facts to support
a reasonable inference that “(1) a controlling stockholder stands on both sides of a
transaction or (2) at least half of the directors who approved the transaction were not
disinterested or independent.”118 Where the business judgment rule is rebutted,
entire fairness is the applicable standard of review.119 Under the entire fairness
standard, the Court will inquire “into two interrelated concepts: fair dealing and fair
price.”120 Because I find below that the Plaintiffs have pled facts supporting a
116
Crimson Exploration, 2014 WL 5449419, at *8.
117
See id. at *9 (“Under 8 Del. C. § 141(a), the business and affairs of a corporation are managed
under the direction of the board of directors. The business judgment rule is a principle of prudence
and discretion that operates to preclude a court from imposing itself unreasonably on the business
and affairs of a corporation. The rule in effect provides that where a director is independent and
disinterested, there can be no liability for corporate loss, unless the facts are such that no person
could possibly authorize such a transaction if he or she were attempting in good faith to meet their
duty. The rule posits a powerful presumption in favor of actions taken by the directors in that a
decision made by a loyal and informed board will not be overturned by the courts unless it cannot
be attributed to any rational business purpose.”) (internal quotations omitted).
118
In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 990 (Del. Ch. 2014) (citations
omitted).
119
E.g., New Jersey Carpenters Pension Fund v. info GROUP, Inc., 2011 WL 4825888, at *8 (Del.
Ch. Sept. 30, 2011).
120
Crimson Exploration, 2014 WL 5449419, at *9. See also id. (“[Fair dealing] embraces
questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed
to the directors, and how the approvals of the directors and stockholders were obtained. The [fair
price] aspect of fairness relates to the economic and financial considerations of the proposed
merger, including all relevant factors: assets, market value, earnings, future prospects, and any
22
reasonable inference that ACAS was a controlling stockholder standing on both
sides of the Transaction, entire fairness review is triggered.121
A stockholder is controlling, and owes fiduciary duties to the other
stockholders, “if it owns a majority interest in or exercises control over the business
affairs of the corporation.”122 Here, because ACAS owned only 26% of the
Company prior to the Transaction, the Plaintiffs must allege facts to demonstrate
that ACAS exercised “actual control” over the Board at the time of the Transaction.
The Plaintiffs allege in Count I that ACAS breached its fiduciary duties owed as a
controlling stockholder to the minority Plaintiff investors by “exercise[ing] control
over Halt’s business and affairs,”123 and by “promoting its own interests over the
interests” of the Plaintiffs.124 They allege further that “American Capital on its own
and through [the Director Defendants] on the Halt Board has repeatedly manipulated
Halt by promising, then withholding, funding, and acquiring the Broadband note
secured by Halt’s intellectual property in order to force the Halt board to make
other elements that affect the intrinsic or inherent value of a company's stock.” (quoting Emerald
Partners v. Berlin, 787 A.2d 85, 97 (Del. 2001))).
121
Orman v. Cullman, 794 A.2d 5, 21 (Del. Ch. 2002) (“One way for a plaintiff to overcome [the]
burden [of the business judgment rule], for example, is to allege facts demonstrating a squeeze out
merger or a merger between two corporations under the control of a controlling shareholder. If
facts of that nature are sufficiently alleged, the business judgment presumption is rebutted and
entire fairness is the standard of review.”).
122
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (emphasis in original).
123
Compl. ¶ 144.
124
Id. at ¶ 145.
23
decisions under duress that were to the detriment” of the Plaintiffs.125 The
Defendants counter that the “Plaintiffs’ theory appears to be that the contractual
rights held by ACAS allegedly gave it superior bargaining position with respect to
the Transaction and, therefore, ACAS had the ability to control the Halt Board by
virtue of that bargaining position,”126 contending that “[n]o other theory is pled.”127
They argue that, because a plaintiff cannot demonstrate control by merely alleging
facts demonstrating that a stockholder has exercised duly obtained contractual rights
to its benefit and to the detriment of the company,128 I should dismiss Count I for
failure to state a claim.
While I agree with the Defendants that the Plaintiffs’ allegations regarding
ACAS’s exercise of contractual rights, alone, are not sufficient to demonstrate
control,129 that is not the only theory on which the Plaintiffs have relied in claiming
125
Id. at ¶ 146.
126
Defs’ Opening Br. 25.
127
Id.
128
See, e.g., Thermopylae Capital Partners v. Simbol, Inc., 2016 WL 368170, at *14 (Del. Ch.
Jan. 29, 2016) (“[A] stockholder who—via majority stock ownership or through control of the
board—operates the decision-making machinery of the corporation, is a classic fiduciary; in
controlling the company he controls the property of others—he controls the property of the non-
controlling stockholders. Conversely, an individual who owns a contractual right, and who exploits
that right—even in a way that forces a reaction by a corporation—is simply exercising his own
property rights, not that of others, and is no fiduciary.”); Superior Vision Serv., Inc. v. ReliaStar
Life Ins. Co., 2006 WL 2521426 (Del. Ch. Aug. 25, 2006).
129
For instance, the Plaintiffs’ following allegation, alone, would be insufficient to demonstrate
control by ACAS:
ACAS . . . has used its blocking rights (a) to force the Halt board to accept funding
on increasingly egregious terms, including an above-market interest rate, exorbitant
fees, additional equity, and additional seats on the Halt board; (b) to prevent Halt
from financing with other institutional investors on a pari passu basis from ACAS;
24
that ACAS exercised control over the Halt “corporate machinery”;130 the Plaintiffs
have pled sufficient facts to demonstrate that a majority of the Board was under the
actual control and influence of ACAS.131
In In re Crimson Exploration Inc. Stockholders Litigation,132 after conducting
a survey of nine cases considering controller status for a minority stockholder, then-
Vice Chancellor Parsons found no correlation between the percentage of equity
owned and the determination of control status, holding that “[t]hese cases show that
a large blockholder will not be considered a controlling stockholder unless [it]
actually control[s] the board's decision about the challenged transaction.”133 In
conducting this survey, the Vice Chancellor determined that there is no magic
formula to find control; rather, it is a highly fact specific inquiry.134 For example, in
and (c) to preclude certain [Plaintiffs] from participating on a pari passu [sic] even
when the terms were better than those offered by ACAS.
Compl. ¶ 63.
130
See Harman v. Masoneilan Int’l., Inc., 442 A.2d 487, 499 (Del. 1982).
131
The facts before me here differ from those in ReliaStar and Thermopylae, where the plaintiffs
did not allege facts sufficient to demonstrate that a majority of the board was under the control of
the purported controller. In ReliaStar, any issuance of dividends by the company’s board of
directors was subject to a limitation in a series of stock purchase agreements requiring the “written
consent of at least two-thirds of the [securities] then owned by such [i]nvestors.” ReliaStar—a
44% equity-holder—thus wielded the contractual power to unilaterally block any issuance of
dividends approved by the company’s board. The action, alleging a breach of fiduciary duties by
ReliaStar through its refusal to provide written consent to a dividend issuance unanimously
approved by the board, was ultimately dismissed on the grounds that the exercise of a duly obtained
contractual right does not amount to control. Similarly, the complaint in Thermopylae was
dismissed, in part, because the allegation that the purported controller exercised its duly obtained
contractual rights to the detriment of the Company, alone, was insufficient to demonstrate control.
132
2014 WL 5449419 (Del. Ch. Oct. 24, 2014).
133
Crimson Exploration, 2014 WL 5449419, at *10.
134
Id. (“[T]he scatter-plot nature of the holdings highlights the importance and fact-intensive
nature of the actual control factor.”).
25
one of the examined cases, New Jersey Carpenters Pension Fund v. info GROUP,
Inc.,135 the Court “denied the defendants’ motion to dismiss merger-related duty of
loyalty claims on the grounds that the complaint adequately alleged that a majority
of the directors lacked independence from Gupta, a director and the alleged
controller, who the court found was interested in the transaction because of a unique
liquidity need.”136 Similarly, I find here that the Plaintiffs’ factual allegations are
sufficient, under the low “reasonable conceivability” standard of Rule 12(b)(6), to
infer that a majority of the Board was not independent or disinterested, but rather
was under the influence of, or shared a special interest with, ACAS in regard to the
Transaction, such that ACAS was a controlling stockholder at the time of the
Transaction. This determination, in turn, is sufficient to rebut the business judgment
rule with respect to actions of the Board.
Directors are “self-interested” when they appear on “both sides of a
transaction” or expect to “derive any [material] personal financial benefit from it in
the sense of self-dealing.”137 They lack independence where they were “‘beholden’
to . . . or so under [the controller’s] influence that their discretion would be
sterilized.”138 The Plaintiffs allege that, at the time of the Transaction, five of the
135
2013 WL 610143 (Del. Ch. Feb. 13, 2013).
136
Crimson Exploration, 2014 WL 5449419, at *11.
137
Orman, 794 A.2d at 23 (internal quotation marks omitted).
138
Id. at 24 (alteration in original).
26
Halt Directors were under the “control and influence of ACAS”: Cohen, Hahl,
Janish, Lewis, and O’Brien.139 However, because there were seven directors on the
Board at the time of the Transaction,140 I need only make such a determination with
respect to four of the Director Defendants in order to deny the Motion.
ACAS appointed several of the Director Defendant to the Board of Halt. The
Defendants correctly argue that “[t]he fact that an allegedly controlling stockholder
appointed its associates to the board of directors . . . without more, does not establish
actual domination.”141 Whether these Defendants were controlled is an issue of fact
which must, at this stage, be determined from an examination of the well-pled facts
in the Complaint. I turn first to the allegations surrounding Director Defendants
O’Brien and Hahl. “[F]or purposes of this Motion,” the Defendants do not contest
that O’Brien—who negotiated the Transaction on ACAS’s behalf—lacked
independence.142 With respect to Hahl, the Plaintiffs allege that he, in addition to
serving on Halt’s Board, also served on the board of American Capital starting in
1996.143 Hahl is thus a classic dual fiduciary, with duties to both sides in the
139
Compl. ¶ 7.
140
Id. at ¶ 67.
141
In re Primedia Inc. Derivative Litig., 910 A.2d 248, 258 (Del. Ch. 2006) (citation omitted).
142
See Defs’ Opening Br. 35 (“The Complaint does not articulate a theory by which Mr. O’Brien
is interested in the Transaction. However, the Complaint alleges that Mr. O’Brien is an officer of
ACAS, who acted as the primary negotiator for ACAS in the Transaction. Although Defendants
do not concede that Mr. O’Brien lacked independence from ACAS, they do not contest that issue
for purposes of this Motion.”).
143
Compl. ¶ 48.
27
Transaction.144
I next turn to Director Defendant Janish. The Plaintiffs allege that at the time
of the Board action on the Transaction, Janish served as President and Chief
Executive Officer of Avalon Laboratories, an American Capital portfolio company
in which ACAS “had invested” over $66 million.145 The Defendants argue that this
is insufficient; they point out that the Complaint does not establish that Janish’s
position at Avalon Laboratories was in any way under the control of ACAS, or that
any compensation from Avalon Laboratories was material to him.146 For purposes
of this Motion, I need not resolve this issue, because Halt’s Information Statement
itself provides the following disclosure regarding Janish, as well as O’Brien and
Hahl:
In considering whether to approve the Merger, Halt Stockholders
should be aware that certain members of the Board of Directors have
interests that are in addition to or different than the interests of Halt’s
Stockholders generally.
The following directors are affiliated with parties that have
indicated their intention to participate in the Financing: Gordon
O’Brien (by virtue of his association with American Capital, Ltd.
and/or its affiliates), Neil Hahl (American Capital, Ltd. and/or its
affiliates), and Mike Janish (American Capital, Ltd. and/or its
affiliates).147
It is well-settled that a director “is considered interested when he will receive a
144
See Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983).
145
Compl. ¶ 74.
146
Defs’ Opening Br. 31–32.
147
Information Statement, at 8 (emphasis added).
28
personal financial benefit from a transaction that is not equally shared by the
stockholders.”148 Therefore, I find that this disclosure in the Information Statement,
along with the other factual allegations described above, is sufficient for Plaintiffs
to satisfy the low “reasonable conceivability” standard of pleading under a 12(b)(6)
motion with respect to these Director Defendants, including Janish.
I turn next to the allegations surrounding Cohen, the Halt CEO. The Plaintiffs
suggest that Cohen was subject to a classic Morton’s Fork:149 approve the transaction
despite what the Plaintiffs allege is the detriment to the unaffiliated stockholders, or
see the Company—the source of his income—driven into ruin. Thus, in the
Plaintiffs’ view, Cohen was unable to exercise his independent business judgement
on behalf of the Company. Specifically, the Plaintiffs allege that Cohen became
beholden to ACAS when ACAS “became empowered to decide whether Mr. Cohen
would continue to receive material benefits in the form of salary and incentives,”150
and that Cohen, “[w]hile recognizing that ACAS’s conduct was
detrimental, . . . supported ACAS through his votes as a director because he knew
that his job as Halt’s Chief Executive Officer and his income depended upon
ACAS’s support.”151 I find that these factual allegations are sufficient to
148
Orman, 794 A.2d at 29 (emphasis in original) (citation omitted).
149
Not to be confused with the less-problematic Morton’s Toe.
150
Compl. ¶ 69.
151
Id. at ¶ 108.
29
demonstrate that Cohen was not independent from ACAS. Given that Cohen faced
a decision between supporting the Transaction, on terms highly favorable to ACAS,
and rejecting the Transaction, which was tantamount (on the facts alleged) to voting
for the collapse of the Company and losing his employment, it is reasonably
conceivable that Cohen was “beholden” to ACAS.152
I therefore find that the Plaintiffs have pled sufficient facts to support a
reasonable inference that a majority of the Board was not disinterested or lacked
independence from ACAS,153 such that ACAS was a controlling stockholder at the
time of the Transaction. Accordingly, the Defendants’ Motion is denied with respect
to Count I.154 Count II alleges that the Director Defendant acted in pursuit of self-
interest in breach of the duty of loyalty. For the reasons stated above, explaining
that the Complaint has sufficiently pled that ACAS controlled the Board, it has
similarly sufficiently pled that the majority of the directors were interested in this
transaction, and the Motion is denied with respect to Count II as well.
C. Count III: Aiding and Abetting a Breach of Fiduciary Duty
Count III asserts a claim against ACAS for aiding and abetting the Director
152
Carsanaro, 65 A.3d at 639 (citing Rales v. Blasband, 634 A.2d 927, 937 (Del. 1993); Orman,
794 A.2d at 25 n.50).
153
Because I have already determined that sufficient allegations of lack of independence or
disinterestedness were made with respect to four of the seven Directors, I need not address the
allegations surrounding Director Defendant Lewis.
154
See Orman, 794 A.2d at 20 n.36 (holding that, once triggered, entire fairness “normally will
preclude dismissal of a complaint on a Rule 12(b)(6) motion to dismiss.”).
30
Defendants’ breaches of fiduciary duty. To state a claim for aiding and abetting, a
plaintiff must allege “(1) the existence of a fiduciary relationship; (2) the fiduciary
breached its duty; (3) a defendant, who is not a fiduciary, knowingly participated in
a breach; and (4) damages to the plaintiff resulted from the concerted action of the
fiduciary and the nonfiduciary.”155
Should I ultimately determine that ACAS was a controlling stockholder at the
time of the Transaction, then this claim will fail for lack of a “defendant, who is not
a fiduciary,” participating in the breach. However, if I ultimately find that ACAS
was not a controlling stockholder, but that a majority of the Board nonetheless lacked
independence or was not disinterested, it is conceivable that ACAS was a
non-fiduciary aider and abettor of the disloyal Board; thus, the Complaint states a
justiciable claim.156 Of course, this is an alternative pleading, and the Plaintiffs must
recover under one theory or the other. That can await a developed record.
Accordingly, I reserve this determination for a later stage of the proceedings, and
the Defendants’ Motion with respect to Count III is denied.
155
Metro. Life Ins. Co. v. Tremont Grp. Holdings, Inc., 2012 WL 6632681, at *18 (Del. Ch. Dec.
20, 2012).
156
Carsanaro, 65 A.3d at 658 (“In my view, the Delaware Supreme Court's decisions preserve
stockholder standing to pursue individual challenges to self-interested stock issuances when the
facts alleged support an actionable claim for breach of the duty of loyalty. Standing will exist if a
controlling stockholder stood on both sides of the transaction. Standing will also exist if the board
that effectuated the transaction lacked a disinterested and independent majority. Standing will not
exist if there is no reason to infer disloyal expropriation, such as when stock is issued to an
unaffiliated third party, as part of an employee compensation plan, or when a majority of
disinterested and independent directors approves the terms.”).
31
D. Count IV: Violation of DGCL Sections 242(b)(1) and 242
Count IV asserts a violation of DGCL Sections 242(b)(1)157 and 228158 against
the Director Defendants. Specifically, the Plaintiffs allege that “[b]y giving the
[Plaintiffs] only one day to review the 297-page [Transaction] Documents and
demanding that they execute the stockholder consent and other agreements related
to the [Transaction] under duress, the [Directors Defendants] violated the purpose
of the Delaware law, which is to make certain that shareholders make informed
judgments.”159 Additionally, the Plaintiffs allege that “several of the [Transaction]
Documents that [the Plaintiffs] were asked to sign were incomplete, had missing
attachments, or were in draft form.”160 In reply, the Defendants argue that neither
section sets a minimum time for considering and executing a written consent 161 and
that, “[a]t best, Plaintiffs’ allegations suggest some sort of breach of fiduciary duty
157
Under Section 242(b)(1), when an amendment to a certificate of incorporation effects a change
in stock or stockholder rights, the board of directors “shall adopt a resolution setting forth the
amendment proposed, declaring its advisability, and either calling a special meeting of the
stockholders entitled to vote in respect thereof for the consideration of such amendment or
directing that the amendment proposed be considered at the next annual meeting of the
stockholders.” 8 Del. C. § 242(b)(1) (emphasis added).
158
Section 228 provides, in part, that “[u]nless otherwise provided in the certificate of
incorporation,” the stockholders may act “without a meeting, without prior notice and without a
vote, if a consent or consents in writing” are “signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present and voted . . . .” 8 Del.
C. § 228(a) (emphasis added).
159
Compl. ¶ 178 (emphasis added).
160
Id. at ¶ 179.
161
Defs’ Reply Br. 29.
32
regarding disclosure.”162
The Plaintiffs fail to state a claim with respect to Section 242. The Plaintiffs
allege that they were given the directive to “review, execute, and return the
stockholder consent and other agreements within one day,” 163 and that this quick
timeframe forced them to “act without a complete understanding of what was
contained in the documents or what changes the Halt board intended with respect to
Halt ownership,”164 which constituted a failure to “strictly comply with Delaware
law in form or substance.”165 The Plaintiffs do not specifically tie any of these
allegations to Section 242(b)(1). As I understand this argument, it is that the time
for consideration of the action by consent must be as full as would be the case where
the action was considered at a Section 242 meeting. However, as a threshold matter,
I find that Section 242 is not relevant to the facts at hand; the Board availed itself of
the exception to the general rule set forth in Section 242(b)(1)—Section 228—in
obtaining stockholder approval by written consent. If that section was complied
with, the statutory scheme is satisfied.
However, the Plaintiffs do allege sufficient facts to state a claim under Section
162
Id. at 30. The Defendants continue to argue that, even if such a disclosure claim were made in
the Complaint, it would nonetheless fail, because the Plaintiffs have failed to allege “that the
purported disclosure deficiencies were material to their decision to vote in favor of the
transaction.” Id. (emphasis in original).
163
Compl. ¶ 180.
164
Id.
165
Id. at ¶ 181.
33
228. They allege that “several of the [Transaction] Documents that [the Plaintiffs]
were asked to sign were incomplete, had missing attachments, or were in draft
form.”166 Parts of the Transaction Documents, the 297-page series of documents
sent to the Plaintiffs for review, were named as exhibits to the stockholder written
consent. I agree with this Court’s reasoning in Carsanaro, pointing out that,
“[b]ecause Section 228 permits immediate action without prior notice to minority
stockholders,” actions under Section 228 require strict compliance to avoid mischief
and disorder in corporate actions.167 The Carsanaro Court held that, “[w]hen a
consent specifically refers to exhibits and incorporates their terms, the plain
language of Section 228(a) requires that a stockholder have the exhibits to execute
a valid consent.”168 Though Carsanaro involved more clear-cut facts—in that
several of the referenced exhibits were missing in their entirety—the Plaintiffs’
allegation here that several of the exhibits were in draft form or were missing
attachments is nonetheless sufficient to state a claim at this stage of the
proceedings.169
E. Acquiescence, Estoppel, and Laches
166
Id. at ¶ 179.
167
Carsanaro, 65 A.3d at 641 (quoting Empire of Carolina, Inc. v. Deltona Corp., 501 A.2d 1252,
1255–56 (Del. Ch. 1985), aff’d, 505 A.2d 452 (Del. 1985)).
168
Carsanaro, 65 A.3d at 641.
169
Because I find sufficient the Plaintiffs’ allegations regarding incomplete documents attached as
exhibits to the stockholder written consent, I do not reach the Plaintiffs’ allegations that the
stockholder written consents were signed under duress.
34
The Defendants urge me to, in the alternative, dismiss the Complaint under
the doctrines of acquiescence, estoppel, and laches. They argue that the factual
allegations of the Complaint make clear that the Plaintiffs “acquiesced in the
transaction and cannot now attack it,” and that the Plaintiffs unreasonably delayed
in raising their challenges to the Transaction by waiting ten months to file their
Complaint.170 The Plaintiffs, in turn, contend that the Defendants’ acquiescence and
estoppel defenses must fail for two reasons: first, the Defendants rely upon authority
that does not apply in transactions governed by entire fairness; and second, the
Defendants ignore case law applying to situations, such as the Plaintiffs allege is the
case here, where the plaintiffs lacked informed consent or acted under duress.171
With respect to the laches defense, the Plaintiffs argue that a ten-month delay was
not unreasonable given their need to carefully examine the Transaction Documents,
secure representation, and draft the Complaint.172
Whether or not the acquiescence and estoppel defenses apply is a highly fact-
specific inquiry, and one that I cannot conduct on the record before me now. The
Defendants, for instance, urge me to impute the actions of Halt’s co-founder and
former Director, Calesa, to the Calesa Entities that are named Plaintiffs in this action.
170
Defs’ Opening Br. 12 (quoting Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 848 (Del.
1987)).
171
Pls’ Answering Br. 40.
172
Id. at 47.
35
They argue that because Calesa negotiated the Transaction, urged the Plaintiffs to
vote for it, and then did personally vote for it, he—and the entities on behalf of which
he signed—should be barred from now challenging the Transaction. After reviewing
the Complaint and the supplemental briefing with respect to this issue, however, I
do not find that the record is sufficient, at this stage of the proceedings, to impute
the actions of Calesa to the Calesa Entities. Moreover, even if the acquiescence and
estoppel doctrines could apply to the facts of this case, which assumption I note the
parties vigorously debate,173 the application of these defenses would not bar every
named Plaintiff from pursuing this action. Of the 23 named Plaintiffs, the
Defendants have identified only 17 that executed written stockholder consents to the
Transaction.174 Given this fact—that the application of these defenses would not
require dismissal of the entire Complaint—it makes little sense from the perspective
of judicial economy to address these arguments now, without the aid of a developed
record. Similarly, I consider the fact-intensive laches analysis—in light of the fact
that that the analogous statute of limitations had not run at the filing of the
173
The Plaintiffs have vigorously argued that the doctrines of estoppel and acquiescence cannot
be applied to transactions warranting entire fairness review, in light of this Court’s opinions in
Gesoff v. IIC Industries, Inc., 902 A.2d 1130 (Del. Ch. 2006); In re JCC Holding Co., Inc., 843
A.2d 713 (Del. Ch. 2003); and In re Best Lock Corp. S’holder Litig., 845 A.2d 1057 (Del. Ch.
2001). See Oral Arg. Tr. 63:16–64:9. Conversely, the Defendants have pointed to the opinions in
Bershad, 535 A.2d 840, and Kahn v. Household Acquisition Corp., 591 A.2d 166 (Del. 1991), to
demonstrate that, historically, the Delaware Supreme Court has allowed the application of these
doctrines in cases triggering entire fairness review. See Oral Arg. Tr. 21:10–22:1.
174
See Pls’ Answering Br. 45 n.13.
36
Complaint—to be better deferred to a time when the record is more developed.
III. CONCLUSION
For the foregoing reasons, the Defendants’ Motion to Dismiss is granted with
respect to the portion of Count IV alleging non-compliance with DGCL Section
242(b)(1), and is otherwise denied. The parties should supply an appropriate form
of order.
37