Equity-League Pension Trust Fund, derivatively on behalf of Wayfair, Inc. v. Great Hill Partners, L.P.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
EQUITY-LEAGUE PENSION TRUST )
FUND, derivatively on behalf of )
WAYFAIR INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0992-SG
)
)
GREAT HILL PARTNERS, L.P., GHEP )
VII AGGREGATOR, L.P., )
CHARLESBANK CAPITAL )
PARTNERS, LLC, CBEP )
INVESTMENTS, LLC, NIRAJ SHAH, )
JULIE BRADLEY, STEVEN CONINE, )
ROBERT GAMGORT, ANDREA )
JUNG, MICHAEL KUMIN, JAMES )
MILLER, JEFFREY NAYLOR, and )
ANKE SCHÄFERKORDT, )
)
Defendants, )
)
and )
)
WAYFAIR INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: August 23, 2021
Date Decided: November 23, 2021
Corinne Elise Amato, Kevin H. Davenport, and Jason W. Rigby, of PRICKETT,
JONES & ELLIOTT, P.A., Wilmington, Delaware; OF COUNSEL: Eric L. Zagar
and Matthew C. Benedict, of KESSLER TOPAZ MELTZER & CHECK, LLP,
Radnor, Pennsylvania; and Patrick C. Lynch, of LYNCH & PINE, Providence,
Rhode Island, Attorneys for Plaintiff Equity-League Pension Trust Fund.
Paul J. Lockwood, Jenness E. Parker, Jacob J. Fedechko, and Trevor T. Nielsen, of
SKADDEN, ARPS, SLATE, MEAGHER & FLOM, Wilmington, Delaware,
Attorneys for Defendants Julie Bradley, Robert Gamgort, Andrea Jung, James
Miller, Jeffrey Naylor, Anke Schäferkordt, and Wayfair Inc.
John L. Reed, Ronald N. Brown, III, Peter H. Kyle, and Kelly L. Fruend, of DLA
PIPER LLP (US), Wilmington, Delaware, Attorneys for Defendants Great Hill
Partners, L.P., GHEP VII Aggregator, L.P., and Michael Kumin.
Rudolf Koch, Matthew D. Perri, and Andrew L. Milam, of RICHARDS, LAYTON
& FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Roberto M. Braceras,
Caroline H. Bullerjahn, John A. Barker, and Dylan E. Schweers, of GOODWIN
PROCTER LLP, Boston, Massachusetts, Attorneys for Defendants Niraj Shah and
Steven Conine.
Kurt M. Heyman and Gillian L. Andrews, of HEYMAN ENERIO GATTUSO &
HIRZEL, LLP, Wilmington, Delaware; OF COUNSEL: Brandon F. White,
Euripides Dalmanieras, and Leah S. Rizkallah, of FOLEY HOAG LLP, Boston,
Massachusetts, Attorneys for Defendants Charlesbank Capital Partners, LLC and
CBEP Investments, LLC.
GLASSCOCK, Vice Chancellor
The decision if, how and when to take on company debt is a quintessential
function of the board of directors. This is a purported derivative suit brought on
behalf of Wayfair Inc. (“Wayfair” or the “Company”) to challenge the issuance of
$535 million in convertible debt (the “Transaction”) to The Spruce House
Partnership LLC (“Spruce House”) and subsidiaries of Charlesbank Capital
Partners, LLC (“Charlesbank”) and Great Hill Partners, L.P. (“Great Hill”). A
committee of the board recommended, and the board of directors approved the
transaction at a time of marked market turmoil and general uncertainty in the retail
sales business, which is Wayfair’s business, resulting from the onset of the
COVID-19 pandemic.
Before me are the Defendants’ Motions to Dismiss under Rule 23.1. The
Plaintiff, a Wayfair stockholder, failed to make a demand on the Wayfair board to
bring this litigation, as required by Rule 23.1. Thus, the Defendants’ Motions must
be granted unless the Complaint pleads specific facts that, if true, raise a reasonable
doubt that the Directors could have brought their business judgment to bear on behalf
of Wayfair to consider a demand. Wayfair is alleged to be a controlled entity, and
the Transaction was allegedly conflicted. Nonetheless, the burden remains on the
Plaintiff to demonstrate that demand is excused. At issue are three independent
directors who formed the audit committee, charged with reviewing conflicted
transactions. If these directors are able to apply their business judgment on
Wayfair’s behalf, demand is not excused; if they cannot, they and other directors
alleged to be interested in the Transaction form a majority of the board, and Rule
23.1 is satisfied. The Plaintiff points only to the alleged liability of these audit
committee directors as raising a reasonable doubt as to their disinterest in the
Transaction.
Upon a review of the facts pled, it is clear that the Transaction, as
characterized in the Complaint, was far from a model of best practices. It appears
to have been rushed, in light of fears (not, perhaps, without reason) of a continuing
crisis in the market caused by the pandemic. But to find sufficient likelihood of
liability on the part of these directors to excuse demand, that is insufficient. In light
of the Company’s exculpation clause, the Complaint, to be successful, must plead
bad faith on the audit committee directors’ part. As explained below, the allegations
in the Complaint are insufficient to indicate bad faith, such that demand would have
been futile; accordingly, the Motion to Dismiss is granted.
2
I. BACKGROUND 1
A. The Parties and Relevant Non-Parties
Plaintiff Equity-League Pension Trust Fund is a pension fund that has
beneficially owned shares of Wayfair Class A common stock continuously since
before the Transaction. 2
Nominal Defendant Wayfair is an online retailer of home goods with
operations in North America and Europe. 3 Wayfair was founded in 2002, and it was
incorporated in Delaware in 2014.4 Wayfair has two classes of common stock:
Class A, which is traded on the New York Stock Exchange (the “NYSE”) and
entitles holders to one vote per share; and Class B, which is not publicly traded, and
entitles holders to ten votes per share. 5 Wayfair identifies as a “controlled” company
under the NYSE corporate governance standards.6
1
Unless otherwise noted, the facts referenced in this Memorandum Opinion are drawn from the
Verified Derivative Complaint (referred to herein as the “Complaint”) and the documents
incorporated therein. See generally Compl., Dkt. No. 1. I may also consider documents produced
by the Defendants in response to the Plaintiff’s 8 Del. C. § 220 books and records demand “to
ensure that the plaintiff has not misrepresented their contents and that any inference the plaintiff
seeks to have drawn is a reasonable one.” Voigt v. Metcalf, 2020 WL 614999, at *9 (Del. Ch. Feb.
10, 2020). Citations in the form of “Fedechko Decl. —” refer to the Transmittal Declaration of
Jacob J. Fedechko in Support of the Independent Directors’ Opening Br. in Supp. of their Mot. to
Dismiss the Verified Derivative Compl., Dkt. No. 28. Citations in the form of “Fedechko Decl., Ex.
—” refer to the exhibits attached to the Fedechko Declaration, Dkt. No. 28.
2
Compl. ¶ 25.
3
Id. ¶ 26.
4
Id.
5
Id.
6
Id.
3
Defendant Great Hill is a Delaware limited partnership located in Boston,
Massachusetts.7 Great Hill invests in high-growth mid-market companies.8
According to the Complaint, Great Hill demands board representation at every
company in its portfolio, including Wayfair.9 Defendant Kumin serves as Great
Hill’s designee on the Wayfair board of directors (the “Board”). 10 As of April 17,
2020, Great Hill beneficially owned 4,277,786 shares of Wayfair Class A common
stock. 11
Defendant GHEP VII Aggregator, L.P. (“GHEP”) is a Delaware limited
partnership that is wholly owned by Great Hill.12 GHEP was formed for the purpose
of effectuating the Transaction.13
Defendant Charlesbank is a Massachusetts limited liability company based in
Boston, Massachusetts that provides investment advisory and management
services.14
7
Id. ¶ 27.
8
Id.
9
Id.
10
Id.
11
Id.
12
Id. ¶ 28.
13
Id.
14
Id. ¶ 29.
4
Defendant CBEP Investments, LLC (“CBEP”) is a Delaware limited liability
company.15 CBEP and its manager are beneficially owned by Charlesbank.16 CBEP
is the investment vehicle utilized by Charlesbank to effectuate the Transaction.17
Great Hill, GHEP, Charlesbank, and CBEP are collectively referred to as the
“Noteholder Defendants.”
Defendant Julie Bradley has been a member of the Board since September
2012 and has chaired the Board’s audit committee (the “Audit Committee”) since its
inception. 18
Defendant Steven Conine co-founded Wayfair in 2002 and has served as a
director and as co-Chairman of the Board since then.19 He also served as the
Company’s Chief Technology Officer (“CTO”) until 2015.20 At the time of the
Transaction, Conine owned 613,600 shares of Wayfair Class A common stock and
13,465,948 shares of Wayfair Class B common stock, 21 as well as limited
partnership interests in Great Hill and Charlesbank. 22
15
Id. ¶ 30.
16
Id. ¶¶ 29, 30.
17
Id. ¶ 30.
18
Id. ¶ 32.
19
Id. ¶ 33.
20
Id.
21
Id.
22
Id. ¶ 97.
5
Defendant Robert Gamgort served as a member of the Board from February
2015 until May 12, 2020.23
Defendant Andrea Jung has served as a member of the Board since May
2018. 24
Defendant Michael Kumin has been a member of the Board since June 2011.25
Since October 2014, Kumin has been the Company’s lead independent director,
compensation committee chairman, and nominating and governance committee
chairman.26 Kumin has also been employed at Great Hill since 2002, which
designated him to serve on the Wayfair Board.27
Defendant James Miller served as a member of the Board from July 2016 until
April 20, 2020.28 Miller also served as a member of the Audit Committee until
August 1, 2019, when he became Wayfair’s interim CTO.29 Two weeks after the
Transaction was announced, he became Wayfair’s permanent CTO.30
Defendant Jeffrey Naylor has served as a member of the Board since January
2018, and as a member of the Audit Committee since shortly thereafter. 31 Naylor
23
Id. ¶ 34.
24
Id. ¶ 35.
25
Id. ¶ 36.
26
Id.
27
Id.
28
Id. ¶ 37.
29
Id.
30
Id.
31
Id. ¶ 38.
6
also served as a member of the ad hoc transaction committee of the Board that was
formed for the purpose of negotiating and executing the terms of the Transaction
(the “Transaction Committee”).32
Defendant Anke Schäferkordt has served as a member of the Board and the
Audit Committee since September 17, 2019. 33
Defendant Niraj Shah co-founded Wayfair in 2002.34 Since then, he has
served as Wayfair’s Chief Executive Officer (“CEO”) and President, and as a
director and co-Chairman of the Board.35 At the time of the Transaction, Shah
beneficially owned 613,500 shares of Wayfair Class A common stock and
13,465,108 shares of Wayfair Class B common stock, 36 as well as limited
partnership interests in Great Hill and Charlesbank. 37 The Complaint alleges that
Shah and Conine together control a majority of the voting power of the Company’s
common stock.38
Defendants Bradley, Conine, Gamgort, Jung, Kumin, Miller, Naylor,
Schäferkordt, and Shah are collectively referred to herein as the “Director
32
Id. ¶¶ 14, 38.
33
Id. ¶ 39.
34
Id. ¶ 40.
35
Id.
36
Id.
37
Id. ¶ 97.
38
Id. ¶¶ 1, 10, 33, 40, 48, 139.
7
Defendants.” The Director Defendants and the Noteholder Defendants are
collectively referred to herein as the “Defendants.”
Non-party Michael Sneed has served as a member of the Board since
November 11, 2020.39
B. Factual Background
Wayfair has expanded significantly since its founding in 2002.40 By the end
of 2019, Wayfair employed nearly 17,000 full-time employees and generated over
$9 billion in annual net revenue.41 But the Company had not yet achieved
profitability. 42 In late 2019 and early 2020, according to the Complaint, Wayfair
undertook a series of cutbacks and cost-cutting measures in order to streamline the
Company, position itself for long-term profitability, and become less dependent on
Chinese manufacturing.43 On February 13, 2020, for instance, Wayfair laid off 3%
of its global workforce and cancelled its participation in upcoming college recruiting
events.44
The Company’s financial forecasts, which reflected these recent
modifications to its operations, projected optimistic results over the next six years.45
39
Id. ¶ 115.
40
See id. ¶¶ 43–47, 50, 53.
41
Id. ¶ 53.
42
Id. ¶ 68.
43
Id. ¶¶ 55–56, 58.
44
Id. ¶ 57.
45
See id. ¶¶ 59–63.
8
On February 20, 2020, Wayfair’s management provided the Board with forecasts
through 2026 that presented three sets of six-year financial projections.46 First, the
forecast discussed the “NSS 2/15/20 Case,” which the forecast described as “[m]ore
of a 50/50 case for revenue growth, with top line reaccelerating to 30% by Q4
2020.” 47 Second, the forecast discussed a “20% Revenue Growth Case,” which the
forecast described as “conservative.” 48 Finally, the forecast discussed a “Recession
Case” that assumed a “severe recession” lasting until 2021. 49 The Recession Case
projected positive EBITDA and $3.278 billion in net revenue for the fourth quarter
of 2021, and by 2026, over $30 billion in net revenue and $2 billion in EBITDA
annually.50 Thus, according to the Complaint, Wayfair management projected
optimistic long-term financial results even under the worst-case scenario forecast. 51
But these forecasts did not account for a global pandemic. In late February
and March 2020, an exponential rise in detected cases of COVID-19 sparked panic
on Wall Street and wreaked havoc on the global economy.52 On February 27, 2020,
a week after Wayfair management presented the optimistic forecast to the Board, the
Dow Jones Industrial Average suffered its largest ever one-day decline.53 It would
46
Id. ¶ 59.
47
Id.
48
Id.
49
Id.
50
Id. ¶¶ 60–61.
51
Id. ¶¶ 5, 60–61, 64.
52
See id. ¶¶ 6, 8, 71.
53
Id. ¶ 71.
9
go on to break that record five more times between March 9, 2020 and March 18,
2020. 54 According to the Complaint, the downturn in the stock market was more
severe than in any period since the Great Depression.55
During this time, furniture retailers—brick-and-mortar and online alike—
were hampered by the economic impact of the COVID-19 pandemic.56 Brick-and-
mortar stores closed due to government-mandated quarantines.57 Meanwhile, online
retailers such as Amazon delayed shipments of “non-essential” items by up to a
month. 58 Wayfair’s stock price fell from over $72.50 per share on February 24, 2020
to $23.52 per share on March 19, 2020.59
Amid this economic maelstrom, Wayfair began negotiating a private
investment in public equity (“PIPE”) transaction to raise $500 million through the
issuance and sale of convertible notes, 60 which culminated in the Transaction.
Wayfair was not alone in this endeavor. In April 2020, for instance, U.S.
corporations sold over $300 billion in debt, breaking the previous monthly record.61
54
Id.
55
Id. ¶ 78.
56
See id. ¶ 69.
57
Id. ¶¶ 68–69.
58
Id. ¶ 69.
59
Id. ¶¶ 4, 71.
60
Id. ¶ 73.
61
Id. ¶ 75.
10
Companies raised approximately the same amount in convertible debt financings in
the second quarter of 2020 as they had during all of 2019. 62
1. Wayfair Negotiates the Transaction
According to the Complaint, Wayfair began negotiating the Transaction in
early March 2020. On March 4, 2020, Kumin, on behalf of Great Hill, executed a
non-disclosure agreement with Wayfair “in connection with a business/investor
relationship.”63 The next day, Great Hill purchased 829,510 shares of Wayfair
Class A common stock. 64 On March 18, 2020, Wayfair invited eight private equity
firms to submit indications of terms for a $500 million investment in convertible
notes. 65 Seven of the eight firms expressed interest, and five of those executed non-
disclosure agreements, in addition to Great Hill.66
By March 29, 2020, Wayfair had received preliminary term sheets from four
firms. 67 Because of the drastic changes in Wayfair’s stock price from day to day
amidst the stock market’s unprecedented volatility, the premiums of these offers
over the market price of Class A common stock varied significantly, even though
the offers came in just days apart. 68 On March 24, 2020, one bidder (“Bidder One”)69
62
Id.
63
Id. ¶ 65.
64
Id. ¶ 66.
65
Id. ¶¶ 13, 76–77.
66
Id. ¶ 77.
67
Id.
68
Id. ¶¶ 78–80.
69
The identity of this bidder remains under seal.
11
offered a conversion price of $65, which represented a 115% premium relative to
the prior day’s closing price. 70 Three days later, on March 27, 2020, Great Hill
submitted a term sheet that reflected a $68.85 conversion price, which was a 25%
premium to the prior day’s closing market price. 71 Charlesbank submitted a bid two
days later that reflected a lower conversion price of $62.50, but was a 35% premium
to the then-current market price.72
Although Great Hill and Charlesbank each initially proposed purchasing up
to $250 million in convertible notes, they paired up on March 30, 2020 and began
conducting due diligence in preparation of a joint revised bid. 73 Bidder One,
meanwhile, offered to invest the full $500 million alone, though it was “OK . . . to
bring in an insider.”74 On March 31, 2020, Great Hill and Charlesbank submitted a
joint offer featuring a $72.50 conversion price, 75 and Bidder One indicated that it
still “need[ed] to complete diligence with [its] operating partners.” 76
2. The Board Reviews and Approves the Transaction
According to the Complaint, the Board became involved in the Transaction
on March 31, 2020. 77 By written consent, the Board established the Transaction
70
Id. ¶ 80.
71
Id.
72
Id.
73
Id. ¶ 81.
74
Id. ¶ 82.
75
Id. ¶ 84.
76
Id.
77
Id. ¶ 85.
12
Committee, composed of directors Naylor and Miller.78 At the time, Miller was
Wayfair’s interim CTO, and he was therefore not considered independent under the
NYSE standards of corporate governance. 79 The written consent delegated the
Transaction Committee the following authority to conduct a transaction process:
[E]xercise all of the powers of the Board in connection
with (i) the Private Offering, (ii) the timing of the Private
Offering, (iii) the issuance and sale of the Securities and
the terms thereof, (iv) the engagement of any financial
advisor or placement agent . . . in connection with the
Private Offering and (v) any and all matters incident
thereto, including, without limitation, the power to
negotiate with potential investors for the purpose of
determining the terms and conditions of the Private
Offering, the preparation of any documentation to be used
in connection therewith, the aggregate size of the Private
Offering (including, without limitation, the principal
amount of any convertible notes), the price(s) to be
received by the Company for the Securities and Placement
Agent discounts and commissions, to determine
conclusively the structural elements of the Private
Offering, including, without limitation, any maturity
date(s), the issue price(s), the interest rate(s) (including
any contingent interest), the ranking(s), the redemption
and repurchase prices (including any premium) and the
conversion rate(s) and conversion terms of any convertible
notes, and to take all such other actions as the Transaction
Committee deems necessary, appropriate or desirable to
commence and consummate the Private Offering[.] 80
78
Id.
79
Id. ¶ 86.
80
Id. ¶ 88.
13
As discussed above, however, Wayfair’s management had already begun the
transaction process, including by hiring financial and legal advisors and identifying
prospective financiers. 81 As a result, the written consent also ratified the work that
Wayfair’s management had already done “as if such actions had been presented to
th[e] Board for its approval prior to such actions being taken.” 82 The Complaint
alleges that the Transaction Committee did not hire its own advisors, revisit any of
management’s prior determinations about the timing of the Transaction, or attempt
to contact any of the other firms that submitted bids.83
On April 2, 2020, Bidder One submitted a revised offer on the same terms as
the offer from Great Hill and Charlesbank. 84 The same day, Wayfair management
also invited two large Wayfair stockholders to participate in the Transaction,
including Spruce House.85 Spruce House ultimately joined the Transaction,
purchasing an additional $35 million in convertible notes as part of the consortium
with Great Hill and Charlesbank. 86
Three days later, on April 5, 2020, the Transaction Committee met for
twenty-five minutes, along with Conine, Shah, six other members of management,
81
Id. ¶ 89.
82
Id. ¶ 90.
83
Id. ¶ 91.
84
Id. ¶ 92.
85
Id.
86
Id. ¶¶ 2, 104.
14
and Wayfair’s financial advisor, Goldman Sachs & Co. (“Goldman Sachs”).87 At
this meeting, management and Goldman Sachs informed the Transaction Committee
of the latest negotiation developments and agreement terms.88 The Transaction
Committee then approved eleven resolutions recommending that the Board approve
the Transaction without any changes to the terms or form presented by Wayfair’s
management. 89 The resolutions were prefaced by a statement that “Mr. Niraj Shah
and Mr. Steven Conine hold limited partner interests in [Charlesbank] and [Great
Hill].” 90 The preface also recognized Miller and Naylor as “disinterested
directors.”91
Thirty-five minutes later, the Board met to discuss the Transaction, along with
Goldman Sachs and Wayfair’s legal advisor. 92 Defendant Kumin recused himself
from the meeting. 93 Management requested that the Board approve the Transaction
in time for the Company to announce it before the market opened the next morning.94
Goldman Sachs delivered a presentation concerning the Transaction, which provided
an overview and timeline of the negotiation process, summarized discussions with
ten potential investors, and compared the key terms of the proposed offer from
87
Id. ¶ 93.
88
Id.
89
Id.
90
Id. ¶ 94.
91
Id. ¶ 95.
92
Id. ¶ 96.
93
Id.
94
Id.
15
Charlesbank, Great Hill and Spruce House against the key terms of the offer from
Bidder One. 95 The presentation noted that Wayfair was exploring a PIPE transaction
“to bolster its balance sheet and liquidity position, at a time of heightened market
volatility and uncertainty about the prolonged impact of COVID-19.”96 The
presentation also noted that the offer from Great Hill, Charlesbank and Spruce House
featured a conversion price of $72.50 per share, while the offer from Bidder One
featured a conversion price of $65 per share. 97
A half-hour into the meeting, the Board took a five minute break, during
which the Audit Committee unanimously passed a resolution approving the
Transaction.98 The Audit Committee meeting minutes stated that this resolution
“had been provided in advance to the [Audit] Committee.”99 Like the resolution
passed by the Transaction Committee, the Audit Committee resolution included a
preface stating that “it has been disclosed and made known to the [Audit] Committee
that two of the Company’s directors, Mr. Niraj Shah and Mr. Steven Conine, hold
limited partner interests in [Great Hill] and [Charlesbank], and another of the
Company’s directors, Mr. Michael Kumin, is a member of the managing committee
of [Great Hill].”100 The preface further stated that “the terms of the Transaction have
95
See Fedechko Decl., Ex. 3.
96
See id. at WAYFAIR-220-0000036.
97
Compl. ¶ 96.
98
Id. ¶ 97.
99
See Fedechko Decl., Ex. 6 at WAYFAIR-220-0000004.
100
Id.; see also Compl. ¶ 97.
16
been reviewed and negotiated by a Transaction Committee of the Board composed
entirely of disinterested directors.” 101 The preface also stated that the following
details about the Transaction were “provided” or “presented” to the Audit
Committee “in advance”:
(i) the principal terms of the Securities to be set forth in
the Indenture . . . , (ii) the proposed indenture between the
Company and the . . . trustee . . . , (iii) the principal terms
of one or more purchase agreements between the
Company and the Investors pursuant to which the
Company will issue and sell to the Investors up to
$535,000,000 aggregate principal amount of Securities,
(iv) the principal terms of a registration rights agreement
between the Company and the Investors, and (v) a
summary of the process by which the Transaction was
identified and negotiated by Goldman Sachs, the
Company’s financial advisor, members of the Company’s
management team, and the Transaction Committee. 102
After the Audit Committee approved the resolution, the full Board resumed
its meeting and voted to approve the Transaction. 103 The following day, on April 6,
2020, Wayfair issued a press release announcing the Transaction and disclosing
positive financial results for late March and early April. 104 As part of the
Transaction, Wayfair granted Great Hill and Charlesbank the right to each designate
101
Compl. ¶ 97; see also Fedechko Decl., Ex. 6 at WAYFAIR-220-0000004.
102
Fedechko Decl., Ex. 6 at WAYFAIR-220-0000005.
103
Compl. ¶ 98.
104
Id. ¶ 100.
17
a nominee for election to the Board. 105 Great Hill designated Kumin, and
Charlesbank selected its CEO, Michael Choe. 106
In the ensuing months, Wayfair’s stock price rose significantly. By May 5,
2020, Wayfair’s stock had risen to $31.77 per share, and within a week it traded
above $190 per share. 107 By August 5, 2020, Wayfair’s stock price was over $300
per share. 108
C. Procedural History
The Plaintiff initiated this action on November 18, 2020. 109 The Complaint
brings breach of fiduciary duty claims against Defendants Conine and Shah
(Count I) and the Director Defendants (Count II) and an unjust enrichment claim
against the Noteholder Defendants (Count V) relating to the Transaction. 110 The
Complaint also brings a Brophy insider trading claim against Defendant Kumin
(Count III) and unjust enrichment claims against Defendants Kumin and Great Hill
(Count IV) in connection with Great Hill’s March 5, 2020 purchase of Wayfair
stock. 111 On February 16, 2021, the Defendants filed four separate motions to
105
Id. ¶ 103.
106
Id.
107
Id. ¶ 108.
108
Id. ¶ 109.
109
See id.
110
See id. ¶¶ 138–47, 157–60.
111
See id. ¶¶ 148–56.
18
dismiss the Complaint (the “Motions to Dismiss”),112 along with supporting opening
briefs.113 The Plaintiff filed an omnibus answering brief in opposition to the Motions
to Dismiss on April 13, 2021.114 On May 11, 2021, the Defendants filed reply briefs
in further support of the Motions to Dismiss. 115 The parties submitted supplemental
authorities on August 6, 2019, 116 August 19, 2021 117 and August 23, 2021.118
On August 23, 2021, I heard oral argument on the Motions to Dismiss, and I
consider the Motions to Dismiss submitted for decision as of that date. During oral
argument, the Plaintiff released the Brophy claim against Defendant Kumin, and I
consider that claim to be dismissed.119
112
See Defs. Great Hill Partners, L.P., GHEP VII Aggregator, L.P., and Michael Kumin’s Mot.
Dismiss Pl.’s Verified Derivative Compl., Dkt. No. 23; Defs. Niraj Shah and Steven Conine’s Mot.
Dismiss Verified Derivative Compl., Dkt. No. 25; Independent Directors’ Mot. Dismiss Verified
Derivative Compl., Dkt. No. 28; Defs. Charlesbank Capital Partners, LLC and CBEP Investments,
LLC’s Mot. Dismiss, Dkt. No. 29.
113
See Opening Br. Supp. Defs. Great Hill Partners, L.P., GHEP VII Aggregator, L.P., and Michael
Kumin’s Mot. Dismiss Pl.’s Verified Derivative Compl., Dkt. No. 23; Opening Br. Supp. Defs.
Niraj Shah and Steven Conine’s Mot. Dismiss Verified Derivative Compl., Dkt. No. 26;
Independent Directors’ Opening Br. Supp. Mot. Dismiss the Verified Derivative Compl.,
Dkt. No. 28; Opening Br. Supp. Defs. Charlesbank Capital Partners, LLC and CBEP Investments,
LLC’s Mot. Dismiss, Dkt. No. 30.
114
Pl.’s Omnibus Answering Br. Opp. Defs.’ Mots. Dismiss Verified Derivative Compl., Dkt.
No. 41 [hereinafter “Pl.’s Answering Br.”].
115
Reply Br. Supp. Defs. Great Hill Partners, L.P., GHEP VII Aggregator, L.P., and Michael
Kumin’s Mot. Dismiss Pl.’s Verified Derivative Compl., Dkt. No. 49; Reply Br. Further Supp.
Defs. Niraj Shah and Steven Conine’s Mot. Dismiss Verified Derivative Compl., Dkt. No. 52;
Independent Directors’ Reply Br. Further Supp. Mot. Dismiss Verified Derivative Compl., Dkt.
No. 50; Reply Br. Supp. Defs. Charlesbank Capital Partners, LLC and CBEP Investments, LLC’s
Mot. Dismiss Verified Derivative Compl., Dkt. No. 48.
116
Dkt. No. 63.
117
Dkt. No. 68.
118
Dkt. No. 69.
119
See Tr. Oral Arg. Defs.’ Mots. Dismiss, Dkt. No. 71 at 80:6–81:15.
19
II. ANALYSIS
A. Legal Standards
Under Delaware law, “‘directors, rather than shareholders, manage the
business and affairs of the corporation.’” 120 “The board’s authority to govern
corporate affairs extends to decisions about what remedial actions a corporation
should take after being harmed, including whether the corporation should file a
lawsuit against its directors, its officers, its controller, or an outsider.” 121
A derivative action, like this one, “encroaches ‘on the managerial freedom of
directors’ by seeking to deprive the board of control over a corporation’s litigation
asset.”122 “‘In order for a stockholder to divest the directors of their authority to
control the litigation asset and bring a derivative action on behalf of the corporation,
the stockholder must’ (1) make a demand on the company’s board of directors or
(2) show that demand would be futile.” 123 The demand requirement “is a substantive
requirement that ‘[e]nsure[s] that a stockholder exhausts his intracorporate
remedies,’ ‘provide[s] a safeguard against strike suits,’ and ‘assure[s] that the
120
United Food and Com. Workers Union and Participating Food Indus. Emps. Tri-State Pension
Fund v. Mark Zuckerberg et al., 2021 WL 4344361, at *6 (Del. Sept. 23, 2021) (quoting Aronson
v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746
A.2d 244 (Del. 2000)).
121
Id.122
Id. (quoting Aronson, 473 A.2d at 811).
123
Id. (quoting Lenois v. Lawal, 2017 WL 5289611, at *9 (Del. Ch. Nov. 7, 2017)).
20
stockholder affords the corporation the opportunity to address an alleged wrong
without litigation and to control any litigation which does occur.’” 124
A shareholder seeking to assert a derivative claim must, under Court of
Chancery Rule 23.1, “allege with particularity the efforts, if any, made by the
plaintiff to obtain the action the plaintiff desires from the directors or comparable
authority and the reasons for the plaintiff’s failure to obtain the action or for not
making the effort.” 125 “Rule 23.1 is not satisfied by conclusory statements or mere
notice pleading. On the other hand, the pleader is not required to plead evidence.
What the pleader must set forth are particularized factual statements that are essential
to the claim.” 126 “When considering a motion to dismiss a complaint for failing to
comply with Rule 23.1, the Court does not weigh the evidence, must accept as true
all of the complaint’s particularized and well-pleaded allegations, and must draw all
reasonable inferences in the plaintiff’s favor.”127 Where a demand has not been
made, only if, in light of the allegations and the inferences therefrom, the complaint
fails to raise a reasonable doubt that the board could act on behalf of the corporation
in considering a demand, may a motion to dismiss under Rule 23.1 be granted. 128
124
Id. (quoting Lenois, 2017 WL 5289611, at *9).
125
Ct. Ch. R. 23.1(a).
126
Brehm, 746 A.2d at 254.
127
Zuckerberg, 2021 WL 4344361, at *7.
128
See id.21
B. The Complaint Does Not Plead with Particularity that A Pre-Suit
Demand Would Be Futile
The Plaintiff did not make a demand on the Board to institute this action.129
Therefore, to survive a motion to dismiss under Rule 23.1, the Plaintiff must plead
with particularity that demand would be futile. That inquiry is satisfied if, given the
truth of the particularized facts alleged and the reasonable inferences therefrom, the
Complaint creates a reasonable doubt that a majority of the Board is able to “bring
[its] business judgment to bear” on behalf of the Company to assess the substance
of the demand.130 This Court considers the following factors, on a
director-by-director basis, in assessing whether demand would be futile:
(i) whether the director received a material personal
benefit from the alleged misconduct that is the subject of
the litigation demand;
(ii) whether the director faces a substantial likelihood of
liability on any of the claims that would be the subject of
the litigation demand; and
(iii) whether the director lacks independence from
someone who received a material personal benefit from
the alleged misconduct that would be the subject of the
litigation demand or who would face a substantial
likelihood of liability on any of the claims that are the
subject of the litigation demand.131
129
See Compl. ¶¶ 111–37.
130
Ryan v. Armstrong, 2017 WL 2062902, at *2 (Del. Ch. May 15, 2017), aff’d, 176 A.3d 1274(Del. 2017).
131
Zuckerberg, 2021 WL 4344361, at *17.
22
Demand is excused if the Court determines that, for at least half of the members of
the demand board, the answer to any of these questions is “yes.” 132
The Plaintiff does not dispute that Defendant Jung and director Sneed could
bring their business judgment to bear with respect to a pre-suit demand.133 The
Plaintiff contends, however, that the other seven members of the nine-member Board
that would consider any demand are incapable of bringing their business judgment
to bear on a demand to initiate this action, such that demand is excused.134 Namely,
the Plaintiff contends that Directors Choe, Shah, Conine, and Kumin are interested
in the Transaction because they each participated on the buy-side, 135 and that
Defendants Bradley, Naylor and Schäferkordt, the three members of the Audit
Committee, face a substantial likelihood of liability for bad faith in connection with
their review and approval of the Transaction. 136
I assume for purposes of the Motions to Dismiss that Choe, Shah, Conine and
Kumin were interested and thus unable to consider a demand. The Plaintiff,
132
Id.133
See Pl.’s Answering Br. at 45–58. The Plaintiff initially asserted in the Complaint that eight
members of the demand Board could not consider a demand, including Defendant Jung. See
Compl. ¶¶ 115, 131–37. The Plaintiff’s Answering Brief, however, asserts that only seven
members of the demand Board could not adequately consider a demand, and does not dispute the
independence or disinterestedness of Defendant Jung. See Pl.’s Answering Br. at 45–58. See
Emerald Partners v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed
waived.”).
134
See Pl.’s Answering Br. at 45.
135
Id. at 46; Compl. ¶¶ 116–26.
136
Pl.’s Answering Br. at 46–58; Compl. ¶¶ 127–30.
23
however, must through particular pleading raise a reasonable doubt regarding at least
one additional Director to survive the Motions to Dismiss. Having conceded the
ability of Jung and Sneed to consider the demand, the Plaintiff must point to
disabling interests of one of the remaining three Directors. The Plaintiff points only
to those Directors’ service on the Audit Committee and posits that the likelihood of
liability arising from that service is such that they are disabled from considering
demand. 137 The Audit Committee existed in part to review and authorize related
party transactions,138 and under Wayfair’s policies and procedures, it was charged
with considering “the extent of the related party’s interest in the transaction” and
“whether the transaction is on terms comparable to those that could be obtained in
an arm’s length transaction.” 139 The Plaintiff contends that the members of the Audit
Committee face a substantial likelihood of liability arising from their alleged failure
to perform these duties. 140 On review of the allegations, I disagree.
The Complaint does not plead with particularity that any of the three members
of the Audit Committee—Bradley, Naylor or Schäferkordt—face a substantial
likelihood of liability regarding the Transaction. The Complaint does not allege that
the Audit Committee Defendants were interested in the Transaction or lacked
137
Pl.’s Answering Br. at 46–58; Compl. ¶¶ 127–30.
138
Compl. ¶¶ 16, 49.
139
Id. ¶ 49.
140
Id. ¶¶ 128–259.
24
independence. 141 The Plaintiff relies instead on an assertion of potential liability for
these Defendants arising from their role in approving the Transaction. 142
This is not an insignificant pleading requirement to satisfy. “A simple
allegation of potential directorial liability is insufficient to excuse demand, else the
demand requirement itself would be rendered toothless, and directorial control over
corporate litigation would be lost.”143 Because Wayfair’s certificate of incorporation
exculpates directors “for monetary damages for breach of fiduciary duty” “[t]o the
maximum extent permitted by the Delaware General Corporation Law,”144 the “[t]he
likelihood of directors’ liability is significantly lessened.”145 The Plaintiff “‘must
plead particularized facts showing bad faith in order to establish a substantial
likelihood of personal directorial liability.’” 146 “This is a high pleading standard, as
Delaware courts typically frame a lack of good faith in terms of ‘intentional’
141
According to the Complaint, Conine and Shah acted in concert and formed a control group with
regard to the Transaction. Id. ¶¶ 138–43. Although Conine’s and Shah’s status as controlling
stockholders would be pertinent to the standard of review under Rule 12(b)(6), it does not affect
the demand futility analysis “without particularized allegations of relationships between the [Audit
Committee members] and [Conine and Shah] demonstrating that the [Audit Committee members]
are beholden to [Conine and Shah].” Beam ex rel. Martha Stewart Living Omnimedia, Inc. v.
Stewart, 845 A.2d 1040, 1054 (Del. 2004). The Plaintiff has not attempted such a demonstration
here.
142
Pl.’s Answering Br. at 46–58; Compl. ¶¶ 127–30.
143
In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 WL 4826104, at *18 (Del. Ch. Oct. 12,
2011).
144
Fedechko Decl., Ex. 10 Art. VIII § A.
145
Goldman Sachs, 2011 WL 4826104, at *18.
146
Id. (quoting In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12 (Del. Ch. Jan. 11,
2010)).
25
misconduct.”147 “Importantly, where (as here) there is no adequate pleading of
conflicted interests or lack of independence on the part of the [members of the Audit
Committee], the scienter requirement compels that a finding of bad faith should be
reserved for situations where the nature of [the Audit Committee members’]
action[s] can in no way be understood as in the corporate interest.”148 “Thus
conceived, bad faith is similar to the much older fiduciary prohibition of waste, and
like waste, is a rara avis.”149
The Plaintiff contends that the members of the Audit Committee acted in bad
faith because they met for only five minutes to approve the Transaction during a
break in the full April 5, 2020 Board meeting. 150 The Plaintiff argues that “[t]he
Section 220 Documents demonstrate” that at this meeting, the Audit Committee did
not know or attempt to determine the extent of Shah’s and Conine’s interests in the
Transaction counterparties, and could not determine whether the Transaction was
“on terms comparable to those that could be obtained in an arm’s length
transaction.”151
147
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 63 (Del. Ch. 2015).
148
In re USG Corp. S’holder Litig., 2020 WL 5126671, at *29 (Del. Ch. Aug. 31, 2020) (quoting
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017)).
149
In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch. May
20, 2016).
150
See Compl. ¶ 129; Pl.’s Answering Br. at 51.
151
See Compl. ¶ 128–29; Pl.’s Answering Br. at 46–58.
26
These arguments are unsupported by the Section 220 documents themselves,
which are incorporated by reference into the Complaint. First, the Audit Committee
resolutions approving the Transaction stated that “there [was] presented to the
Committee or provided to the Committee in advance . . . a summary of the process
by which the Transaction was identified and negotiated by Goldman Sachs, the
Company’s financial advisor, members of the Company’s management team, and
the Transaction Committee.”152 That summary, which Goldman Sachs delivered to
the full Board, including Bradley, Naylor and Schäferkordt, before the Audit
Committee’s five-minute meeting, specifically summarized discussions with ten
potential investors and compared the key terms of the two lead proposals, including
the alternative proposal from Bidder One. 153 The Audit Committee was therefore
aware of negotiations conducted with other arm’s length bidders, including the key
terms of the lead alternative proposal.
Likewise, the Audit Committee resolutions approving the Transaction, which
“had been provided in advance to the [Audit] Committee,” stated that “two of the
152
See Fedechko Decl., Ex. 6 at WAYFAIR-220-0000005. The Court can consider the April 5,
2020 Audit Committee meeting minutes because they are incorporated by reference into the
Complaint. See Compl. ¶¶ 97, 129.
153
See Fedechko Decl., Ex. 3 at WAYFAIR-220-0000040–41; Ex. 4 at WAYFAIR-220-0000022.
The Court can consider these Board presentations at the motion to dismiss stage because they were
quoted and cited in the Complaint, and are therefore incorporated by reference. See Compl. ¶¶
80–82, 84, 92, 96. The Complaint also vaguely asserts that unspecified “Section 220 Documents
demonstrate” that the Audit Committee was not able to assess whether the Transaction was
comparable to an arm’s length transaction. See id. ¶ 129.
27
Company’s directors, Mr. Niraj Shah and Mr. Steven Conine, hold limited partner
interests in [Great Hill] and [Charlesbank], and another of the Company’s directors,
Mr. Michael Kumin, is a member of the managing committee of [Great Hill].”154
The Audit Committee was thus aware of the nature of Shah’s and Conine’s interests
in the Transaction counterparties.
The Plaintiff argues that the Audit Committee should have asked for more
information regarding the Transaction and Shah’s and Conine’s interests in the
counterparties.155 Perhaps, but not pertinent. These arguments, at most, support a
breach of the duty of care. The failure to become fully informed before making a
decision is not, on its own, bad faith.156 Instead, the Plaintiff must plead with
154
See Fedechko Decl., Ex. 6 at WAYFAIR-220-0000004.
155
The Plaintiff contends, for instance, that the Audit Committee should have asked (i) for the
“extent” of Shah’s and Conine’s ownership interests in the Transaction counterparties, (ii) why a
PIPE in the amount of $500 million “was deemed preferable,” (iii) whether convertible debt was
the best way to raise capital, (iv) whether the offering was likely to provide sufficient capital,
(v) the date by which any capital would be needed, (vi) the Company’s liquidity position, and
(vii) the value of the Company’s stock. Pl.’s Answering Br. at 55–58, 57 n.234.
156
United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862, 900 (Del. Ch. 2020)
(allegations that committee was, among other things, “not fully informed” “allege a breach of the
duty of care” “at most”), aff’d sub nom. Zuckerberg, 2021 WL 4344361; Higher Educ. Mgmt.
Grp., Inc. v. Mathews, 2014 WL 5573325, at *11 n.63 (Del. Ch. Nov. 3, 2014) (“Due to [the
Company’s] exculpation clause under 8 Del. C. 102(b)(7), there would be no recourse for Plaintiffs
and no substantial likelihood of liability if the Director Defendants’ only failing was that they had
not become fully informed.”); Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993)
(“reaching an uninformed decision” was a “duty of care” breach), decision modified on
reargument, 636 A.2d 956 (Del. 1994); In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 289
(Del. Ch. 2003) (directors’ “mere[] fail[ure] to inform themselves or to deliberate adequately about
an issue of material importance to their corporation” constitutes “negligen[ce] or gross[]
neglien[ce]”); In re Answers CorporationShareholders Litig., 2014 WL 463163, at *13 (Del. Ch.
Feb. 3, 2014) (arguments that independent directors “were deliberately uninformed . . . focus on
the care with which the Board executed its duties and do not sustain [a] bad faith claim”).
28
particularity that the Audit Committee members “consciously and intentionally
disregarded their responsibilities, adopting a ‘we don’t care about the risks’ attitude
concerning” the Transaction.157 The Complaint and the Section 220 documents
incorporated by reference therein demonstrate that the Audit Committee considered
the Transaction with Shah’s and Conine’s potential conflicts in mind. The Audit
Committee members were also aware of the terms offered by arm’s length bidders,
including Bidder One, as an alternative to the Transaction. The allegations that these
Directors should have done more falls short of “[k]nowing or deliberate
indifference” 158 to the risks posed by the Transaction. They are insufficient to
support an inference that the Audit Committee’s actions must have been against the
corporate interest, and thus in bad faith.159
Accordingly, the Complaint fails to plead that the three members of the Audit
Committee face a substantial likelihood of liability for bad faith, such that they could
not bring their business judgment to bear to consider the substance of a demand.
And, as discussed above, the Plaintiff does not dispute that Defendant Jung and
director Sneed could bring their business judgment to bear to consider a demand.
157
Walt Disney, 825 A.2d at 289.
158
Id. The Plaintiff’s citation to Walt Disney is not availing. There, this Court held that the
complaint alleged that the directors “failed to exercise any business judgment and failed to make
any good faith attempt to fulfill their fiduciary duties.” Id. at 278 (emphasis in original).
159
See USG, 2020 WL 5126671, at *29.
29
Therefore, at least five of the nine members of the demand Board could have
considered a pre-suit demand. Demand is not excused.
III. CONCLUSION
For the foregoing reasons, the Motions to Dismiss are GRANTED in their
entirety. The parties should confer and submit a form of order consistent with this
opinion.
30