Robert A. Davidow v. LRN Corporation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ROBERT A. DAVIDOW, )
)
Plaintiff, )
v. )
) C.A. No. 2019-0150-MTZ
LRN CORPORATION, DOV )
SEIDMAN, LEE FELDMAN AND )
MATS LEDERHAUSEN, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 5, 2019
Date Decided: February 25, 2020
Stephen D. Dargitz, Kevin H. Davenport, and Jason W. Rigby, PRICKETT, JONES,
& ELLIOTT, P.A., Wilmington, Delaware, Attorneys for Plaintiff Robert A.
Davidow.
Kevin G. Abrams, J. Peter Shindel, and April M. Kirby, ABRAMS & BAYLISS
LLP, Wilmington, Delaware; James E. Brandt and Blair Connelly, LATHAM &
WATKINS, LLP, New York, New York, Attorneys for Defendants LRN
Corporation, Dov Seidman, Lee Feldman, and Mats Lederhausen.
ZURN, Vice Chancellor.
A corporation that advises firms on ethics and compliance launched a self-
tender offer. The plaintiff, who tendered all his shares in that offer, now alleges that
the defendant corporation, its founder and chairman, and two additional directors
breached their fiduciary duties by launching a coercive self-tender at an unfair price
of $1.35 per share, providing inadequate disclosures, and authorizing the self-tender
notwithstanding the directors’ interestedness. The self-tender was allegedly part of
a scheme to increase the founder’s control over the company by excising outstanding
stockholders at an unfair price before completing an undisclosed sales process that
was underway at the time of the self-tender. Through that sales process, the
individual defendants received a windfall when they cashed out at $7.00 per share,
and the founder secured other benefits for himself. The defendants moved to dismiss
for failure to state a claim. I deny the motion to dismiss with respect to the individual
defendants, but grant the motion to dismiss with respect to the defendant corporation.
I. BACKGROUND
On February 25, 2019, Plaintiff Robert A. Davidow filed a Verified Complaint
(the “Complaint”) pursuant to Court of Chancery Rule 23, individually and on behalf
of all stockholders who tendered in the subject self-tender (the “Class”).1
Defendants in this action are LRN Corporation (“LRN” or the “Company”), and its
1
Docket Item (“D.I.”) 1 [hereinafter “Compl.”]. Defendants have not challenged
Plaintiff’s class allegations.
1
directors Dov Seidman, Lee Feldman, and Mats Lederhausen (collectively, the
“Individual Defendants,” and together with LRN, “Defendants”). On April 23, 2019,
Defendants moved to dismiss for failure to state a claim (the “Motion”).2 I heard
argument on November 5.3
I draw the following facts from Plaintiff’s Complaint and certain documents
integral to it.4 LRN is a Delaware corporation that provides advisory services in
ethics and compliance. As of October 6, 2017, LRN had 39,705,818 shares of
common stock issued and outstanding and had 6,020,000 shares of stock issuable
upon the exercise of stock options. Seidman founded LRN and has been its chief
executive officer and chairman of its board of directors since 1993. Lederhausen
has been a director since 2012, and Feldman has been a director since 2000. Feldman
is a former partner of an LRN stockholder, Softbank Capital Partners, which held
LRN shares until 2011. The Individual Defendants have not disclosed the number
of LRN shares they hold personally.
2
D.I. 12.
3
D.I. 27.
4
See generally Compl. On this Motion, I consider the Offer to Purchase, Introductory
Letter, Cover Letter, Letter of Transmittal, and Merger Notice, attached as exhibits to
Defendants’ opening brief, because they are integral to the Complaint. In re Gardner
Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014).
Accordingly, considering those documents does not convert Defendants’ Motion to a
motion for summary judgment.
2
Historically, the Company has given its stockholders only minimal and
selective disclosures. LRN has not held an annual stockholders’ meeting for many
years. LRN has not provided proxy statements, timely notices of major transactions,
or quarterly financial reports. Accordingly, stockholders have not elected directors
or received disclosures that are typically provided by a proxy statement, including
information about director and officer compensation and the number of shares held
by directors and officers. LRN has provided stockholders with annual financial
statements, but not until nearly one year after the fiscal year-end, and those
statements were meager.5 LRN’s common stock has never been publicly traded or
registered with the SEC.
Plaintiff also alleges a history of granting stock options and buying stock at
arbitrary prices and with inadequate disclosures to benefit LRN’s board members
and their affiliates. These transactions enabled LRN to “pick[] off hundreds of
thousands of additional shares from its shareholders at an unfair price” 6 and
significantly increase Seidman’s voting power. Defendants never disclosed
Seidman’s holdings.
5
For example, LRN sent stockholders 2012’s financial statements on October 4, 2013,
2013’s financial statements on November 4, 2015, and 2014’s financial statements on
December 7, 2016. The notes to these statements provided little information beyond basic
performance, and failed to disclose the number of shares owned by LRN’s directors and
officers or their compensation. The statements also did not disclose complete information
on conflicted transactions.
6
Compl. ¶ 22.
3
For example, LRN disclosed in 2010’s financial statements that its board
repriced 2,733,507 stock options granted to “various employees across the
Company” from $3.43 to $2.67 in February 2010.7 Less than one year later, in
January 2011, LRN agreed to repurchase common and converted preferred stock at
different prices from two LRN stockholders, one of which was affiliated with
Feldman.8 In that transaction, LRN purchased over 12.5 million shares of common
stock at an average of $3.38 per share, and specifically bought from Feldman’s
affiliate at an average of $3.14 per share.9 Shortly thereafter, in November 2011,
7
Id. ¶ 15. LRN did not disclose how the board arrived at $2.67, or whether any valuation
was performed in setting that price. LRN also did not disclose which LRN employees were
granted the options, or whether Seidman held such options. LRN only informed
stockholders that this “modification” increased LRN’s compensation expense for 2010 by
$414,275.00.
8
LRN entered into a Share Purchase Agreement with SOFTBANK Capital Advisor Fund
L.P., SOFTBANK Capital L.P., and SOFTBANK Capital Partners L.P. (collectively,
“Softbank”) and Polaris Venture Partners IV L.P., and Polaris Venture Partners
Entrepreneurs’ Fund IV L.P to repurchase shares at prices above $2.67 per share. At that
time, Feldman was a partner of Softbank.
9
Under the Share Purchase Agreement, LRN repurchased Softbank’s 1,500,000 shares of
common stock at $2.33 per share and then converted Softbank’s 1,479,762 shares of Series
A Convertible Preferred Stock into 4,439,286 shares of common stock, repurchasing that
converted stock for $3.42 per share. In addition, LRN converted 2,022,654 shares of
Polaris’s Series A-1 Convertible Preferred Stock into 6,590,205 shares of common stock,
then repurchased that converted stock for $3.59 per share. LRN amended the Share
Purchase Agreement five times between June 2011 and September 2011. LRN did not
promptly disclose the Share Purchase Agreement; how the parties negotiated the Share
Purchase Agreement; the reason the parties entered the Share Purchase Agreement; the
reason the repurchased share prices differed; how the Company determined the repurchase
prices; or whether the Company obtained a fairness opinion on the repurchases. LRN also
failed to provide adequate disclosures regarding Feldman’s involvement in the transaction
and the five amendments.
4
LRN initiated a self-tender offer for up to 4 million shares of common stock for
$2.00 per share. Defendants only disclosed that LRN’s “most recent third party
appraisal . . . , which was conducted for tax and accounting purposes used in the
issuance of the Company’s options, valued our Common Stock at $2.59 per share as
of October 31, 2009[;]”10 and that “$2.00 per share reflects the amount that we
believe is reasonable and appropriate.”11 In the accompanying letter of transmittal,
Defendants included boilerplate release language.
Then, in December 2013, LRN repurchased 808,834 shares for $0.62 per
share.12 LRN’s performance could not have precipitated the meager purchase price.
To the contrary, LRN performed well enough to donate to Seidman’s charitable
organization and pay off approximately $12 million of the Company’s $30 million
long-term debt in 2013. And in 2014, LRN was able to pay off its long-term debt
with a single $13.57 million payment.
10
Id. ¶ 19. LRN did not disclose who performed the appraisal, how it was conducted, or
what information and methodologies the appraiser relied on.
11
Id. ¶18. But LRN failed to disclose why the Board determined the $2.00 price—which
reflected a 22.8% discount from $2.59—was “reasonable and appropriate” in light of the
2009 appraisal, especially considering that just months after the 2009 appraisal LRN
repriced options at $2.67 per share and that shortly before the 2011 Self-Tender LRN
repurchased shares from Feldman’s company at approximately $3.14 per share.
12
The purchase totaled roughly $500,000. LRN disclosed no other information about the
2013 stock repurchase.
5
In this murky context, the multi-step scheme alleged in this case began with
an undisclosed grant of “spring-loaded” stock options to the Individual Defendants
and other insiders (the “2017 Options”). According to LRN’s 2015 financial
statements, LRN had approximately 3.8 million stock options outstanding and no
options left to grant under the Company’s Amended and Restated 2000 Stock Option
Plan. But between the end of 2015 and October 2017, LRN issued 2.2 million
options, a 58% increase to the 2015 amount, without ever disclosing any information
about the grants. These 2017 Options represented nearly 5% of LRN’s fully diluted
equity.
To price the 2017 Options, LRN obtained an appraisal on May 31, 2017,
which valued LRN stock at $1.35 per share (the “Appraisal”). Plaintiff alleges that
Defendants issued the 2017 Options on the May Appraisal date. Defendants never
disclosed whether all of LRN’s outstanding options had been repriced at the
Appraisal price of $1.35 per share.
Defendants intentionally timed the Appraisal and the 2017 Options. When
the Appraisal was conducted, LRN expected to receive over $20 million in cash
payments for “non-recurring events outside the ordinary course of business.”13
Indeed, LRN received that sum in August and September 2017. Defendants
intentionally excluded the $20 million from the Appraisal to reduce the option price,
13
Id. ¶¶ 27, 32.
6
spring-loading the 2017 Options. In this way, the Individual Defendants set the stage
for the self-tender offer and subsequent sale at issue by obtaining the Appraisal
(which omitted an extraordinary cash infusion) and issuing themselves the 2017
Options (based on that Appraisal) in secret.
The next step was to increase Seidman’s control through the self-tender offer
(the “2017 Self-Tender”), which was paid for with the Company’s $20 million cash
infusion and justified by the Appraisal. The Individual Defendants allegedly
initiated the 2017 Self-Tender to reduce the number of shares outstanding and
increase the amount of consideration they would receive in the subsequent and
anticipated sale of the Company.
On October 6, 2017, Defendants launched the 2017 Self-Tender to acquire up
to 7,407,407 shares of common stock, or up to $10 million worth of shares, for $1.35
per share. Defendants sent an Offer to Purchase (“OTP”) to LRN stockholders. The
OTP repeatedly stated that the purpose of the 2017 Self-Tender was to provide
stockholders with liquidity. The OTP disclosed that “[i]n August and September
2017, we received certain one-time lump sum payments of over $20.0 million in the
aggregate as the result of certain non-recurring events outside the ordinary course of
business.”14 Defendants disclosed their determination that LRN had “no strategic or
operational need to retain this cash within LRN,” and that “in recognition of your
14
D.I. 12, Ex. 1 at 2.
7
support and also that a number of you have expressed an interest in obtaining
liquidity, the LRN board decided to allocate a portion of these funds to provide you
an opportunity to sell your shares.”15 Defendants did not disclose any information
about how or why LRN received this $20 million, who paid it and why, what LRN
sold or did in exchange for it, or how or why it was outside the ordinary course of
business. The $20 million was allegedly material to LRN, which had $46.9 million
in total assets and $43.4 million in revenue in 2015.
Plaintiff alleges that when Defendants commenced the 2017 Self-Tender, they
had already began discussing a strategic process to sell the Company at a price higher
than $1.35 per share, and had either received or expected to receive offers from
potential buyers at higher prices. Defendants did not disclose this information to
stockholders. But the OTP warned stockholders that if they did not tender, it was
“possible you would have to hold your Common Stock for a long period of time
without receiving any cash or other payment for them. It is possible that you may
never receive cash or other payment for your Common Stock if you do not take the
Offer.”16 It further stated, “[F]rom time to time we may evaluate or consider
pursuing strategic alternatives, including but not limited to a sale of the Company.”17
15
See id. Ex. 3 at 1, Ex. 4 at 1.
16
Compl. ¶ 24.
17
Id.
8
Defendants disclosed that $1.35 per share “is not a determination of the fair
market value of your shares,” but “reflects the amount that we believe is reasonable
and appropriate for each of the Aggregate Shares in light of the purposes of the
Offer.”18 The OTP stated that the “current fair market value of your shares or the
value of those shares in the future could be worth substantially more, particularly to
a potential strategic buyer or investor, or substantially less than $1.35 per share.”19
The OTP disclosed that the $1.35 per share price was based on the May 2017
Appraisal, and further disclosed that the Company relied on the Appraisal “in the
issuance of the Company’s options.”20 This was the first time stockholders learned
of the Appraisal and that additional options, i.e. the 2017 Options, had been granted.
The OTP explained that the $20 million lump sum payment was intentionally
excluded from the Appraisal. That was the only information disclosed about the
Appraisal. Defendants did not disclose who performed the Appraisal, what standard
of value was used, what valuation methodologies or inputs were used, what
information was relied on, or whether management provided any financial
projections to the supposed appraiser.
18
Id. ¶ 28.
19
Id. ¶ 26.
20
Id. ¶ 29.
9
As to the OTP’s statement that the Appraisal was used in issuance of stock
options, the stockholders had previously understood that LRN had not granted
options since 2009. The 2015 financial statements, which were the most recent
financial statements provided to stockholders before the 2017 Self-Tender, stated
that there were 3,811,707 shares of stock issuable upon the exercise of options. The
OTP states that there were 6,020,000 shares of stock issuable upon the exercise of
options. The OTP does not explain this difference. And the OTP does not disclose
whether the Appraisal was used for the additional purpose of repricing existing stock
options or for some other option-related reason.
Other than the Appraisal, the OTP provided scant information to use in
assessing the offer price. The OTP did not provide current or recent information
about LRN’s performance. Plaintiff alleges that the 2017 Self-Tender was
purposefully timed to avoid providing stockholders with current and accurate
statements from 2016: Defendants did not include audited financial statements for
2016 purportedly because those statements were not finished by the October 6, 2017
OTP.
The OTP only provided audited financial statements from 2014 and 2015 for
stockholders to use in deciding whether to tender their shares in October 2017. The
OTP also provided a draft, two-paged unaudited balance sheet and statement of
operations for LRN as of the year ended December 31, 2016 and eight months ended
10
August 31, 2017. But the OTP instructed stockholders not to rely on those draft
statements “as being representative of our results of operation or financial condition
for those periods or as an indicator of our future results of operations or financial
condition.”21 The OTP did not contextualize or fully explain the brief financial
information provided, and selectively disclosed financial events.22 The OTP
instructed stockholders to rely “only on the information contained in the [OTP] and
in the Letter of Transmittal.”23
The OTP disclosed that, if successful, it would cause Seidman to own more
than 50% of LRN’s stock:
Assuming we consummate the purchase of all Aggregate Shares in this
Offer, Mr. Seidman will beneficially own more than 50% of our voting
stock. As a result, these persons will be able to exercise significant
control over all matters requiring stockholder approval, including the
election of directors and the approval of significant corporate
transactions, which could delay or prevent someone from acquiring or
merging with us. The interests of our officers and directors, when
acting in their capacity as stockholders, may lead them to:
 vote for the election of directors who agree with the incumbent
officers’ or directors’ preferred corporate policy; or
 oppose or support significant corporate transactions when these
transactions further their interests as incumbent officers or
directors, even if these interests diverge from their interests as
stockholders per se and thus from the interests of other
stockholders.24
21
Id. ¶ 34.
22
Negative information like the loss of a customer was explained, but positive information
like the $20 million lump payment was not explained.
23
Id. ¶ 23.
24
Id. ¶ 36.
11
The OTP did not disclose how many shares or what percentage of outstanding shares
Seidman, or the other Individual Defendants, owned.
The OTP provided for proration of repurchased shares if more than 7,407,407
shares were tendered. Defendants told stockholders that the Company would
repurchase the first 25,000 shares that any stockholder tendered, but that if more
than 7,407,407 total shares were tendered, all excess shares would be prorated.
Nonetheless, Defendants “reserve[d] the right, in [their] sole discretion, to purchase
more than 7,407,407 shares of Common Stock pursuant to the Offer.”25
Finally, as with LRN’s self-tender in 2011, Defendants included boilerplate
release language, allegedly to discourage stockholders from holding them
accountable, in the 2017 Self-Tender’s letter of transmittal.
The 2017 Self-Tender closed on November 17, 2017. Stockholders tendered
9,092,278 shares, representing roughly 23% of LRN’s 39,705,818 issued and
outstanding shares.26 The board did not prorate and instead accepted all tendered
shares. Plaintiff held 211,502 shares of LRN common stock and tendered all of
25
D.I. 12, Ex. 1 at i.
26
The OTP provided two charts purporting to predict the percentage of outstanding equity
LRN would purchase. The charts disclosed that the 2017 Self-Tender would repurchase a
maximum of 11.4% of LRN’s total equity, disclosed as including treasury stock. The
charts did not directly disclose how much of LRN’s total outstanding equity would be
purchased in the 2017 Self-Tender of 7,407,407 shares, which was 18.7%. Due to the
decision not to prorate, the 9,092,278 shares repurchased equaled 22.8% of LRN’s
outstanding equity.
12
those shares in the 2017 Self-Tender. Because the board did not prorate, all of
Plaintiff’s shares were cashed out.
Neither the Individual Defendants nor LRN’s other officers participated in the
2017 Self-Tender. To the contrary, the 2017 Self-Tender materially increased the
value of the Individual Defendants’ undisclosed LRN holdings and their equity stake
in the Company. After the 2017 Self-Tender, Seidman had near-total control over
LRN.
Approximately one year later, Defendants completed the final step in their
alleged scheme to squeeze out LRN stockholders for the Individual Defendants’
financial benefit. On November 27, 2018, LRN informed its remaining stockholders
that it had agreed to be acquired by Leeds Equity Partners (“Leeds”) for
approximately $255 million, or $7.00 per share (the “Merger” or “Leeds
Transaction”). Seidman, as LRN’s controlling stockholder, approved the Merger by
written consent. He used his control to negotiate other unique personal benefits
through the Merger, including a spin-off of an LRN business to a company he
completely controlled, and the right to sit as chairman and appoint two additional
members to LRN’s post-close board. Seidman is expected to appoint Lederhausen
to one of those positions.
Plaintiff alleges that the Leeds Transaction was underway at the time
Defendants initiated the 2017 Self-Tender. But according to the Leeds Transaction
13
merger notice sent to stockholders (the “Merger Notice”), “[i]n the spring of 2018,
without soliciting or approaching any potential buyers, the Company received
expressions of interest from potential buyers.”27 LRN claims it engaged GCA
Advisors, LLC on April 6 to “respond to the expressions of interest and to explore
the Company’s strategic options.”28 Plaintiff alleges that Defendants purposefully
drafted the Merger Notice to conceal material facts concerning the timing of the sale
process because they knew stockholders who tendered only a portion of their shares
in the 2017 Self-Tender would receive the Merger Notice. Defendants disclosed
very little information about the Merger, allegedly in an effort to keep stockholders
who tendered in the 2017 Self-Tender in the dark.
Defendants provided Leeds with greater, more detailed, and more current
financial information about the Company’s historical and projected performance
than they provided to stockholders in the 2017 Self-Tender. For the Merger, LRN
was valued at $255 million, resulting in payment of $7.00 per share. As controlling
stockholder, Seidman received a majority of the Merger consideration. The Merger
Notice disclosed that Seidman was cashing out over 80% of his shares and rolling
the remainder into the post-close company. The rollover value of Seidman’s shares
27
Compl. ¶ 42 (alteration in original).
28
Id.
14
was $32 million, which means he received approximately $128 million in cash for
his other LRN shares.
The Individual Defendants also cashed out their shares in the Merger at a
higher price than offered in the 2017 Self-Tender. As alleged, the Individual
Defendants reaped the benefits of the unfair 2017 Self-Tender by first increasing
their equity stake and control over the Company, and then consummating the Merger
at $7.00 per share, thereby obtaining millions of dollars of additional consideration
at the expense of the Class.
II. ANALYSIS
Plaintiff claims that the 2017 Self-Tender was coercive, that material
information relating to the transaction was inadequately disclosed, that the
Individual Defendants breached their fiduciary duties, and that the 2017 Self-Tender
was not entirely fair. Count I alleges that the Individual Defendants breached their
fiduciary duties by issuing a materially misleading and incomplete OTP and related
documents in connection with the 2017 Self-Tender. Count II alleges that the
Individual Defendants breached their fiduciary duties by launching a coercive tender
offer. Count III alleges that the Individual Defendants breached their fiduciary
duties by conducting a self-interested and unfair 2017 Self-Tender. On behalf of all
stockholders who tendered, Plaintiff seeks damages or other equitable relief from
15
the Individual Defendants, asking that they disgorge their profits and alleged ill-
gotten gains. Defendants have moved to dismiss for failure to state a claim.
The standard for dismissal pursuant to Rule 12(b)(6) for failure to state a claim
upon which relief can be granted is well established.29 In considering this motion, I
must accept as true all well pleaded facts and inferences that can reasonably be
drawn therefrom. “[D]ismissal is inappropriate unless the ‘plaintiff would not be
entitled to recover under any reasonably conceivable set of circumstances
susceptible of proof.’”30 A motion to dismiss will be granted only if “it appears with
reasonable certainty that the plaintiff could not prevail on any set of facts that can
be inferred from the pleading.”31 That determination is generally limited to the
factual allegations contained in the complaint and documents integral thereto.32
“By its very nature and form, a tender offer is normally regarded as a
voluntary transaction.”33 But self-tenders have “built-in conflicts of interest between
the fiduciaries responsible for conducting the offer and the stockholders to whom
the offer is directed.”34 “The interest of the corporate offeror (qua buyer) is to pay
29
Feldman v. Cutaia, 2006 WL 920420, at *7 (Del. Ch. Apr. 5, 2006).
30
Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002) (quoting Kofron v. Amoco
Chems. Corp., 441 A.2d 226, 227 (Del. 1982)).
31
Feldman, 2006 WL 920420, at *7.
32
In re Gardner Denver, Inc., 2014 WL 715705, at *2; Feldman, 2006 WL 920420, at *7.
33
Eisenberg v. Chi. Milwaukee Corp., 537 A.2d at 1051, 1056 (Del. Ch. 1987).
34
Id. at 1057.
16
the lowest price possible; the interest of the stockholders (qua sellers) is to receive
as high a price as possible.”35 In such circumstances, “[t]he directors are acting both
as the representatives of the corporate offeror and as fiduciaries for the shareholder-
offerees. That dual role necessarily gives rise to a potential conflict of the directors,
which calls for procedural protections for the stockholders whose interests may not
be adequately represented.”36
When self-tendering, directors must structure the offer non-coercively and
disclose all material facts.37
[A] tender offer—particularly one made by a corporation for its own
shares—may be voluntary in appearance and form but involuntary as a
matter of reality and substance. Thus far two classes of situations have
arisen that have been found to deprive a tender offer of its voluntary
character: (i) cases involving materially false or misleading disclosures
made to shareholders in connection with the offer . . . and (ii) cases
where the offer, by reason of its terms or the circumstances under which
it is made, is wrongfully coercive.38
“The standard applicable to the plaintiff’s claim of inequitable coercion is whether
the defendants have taken actions that operate inequitably to induce the
35
Id.
36
Id.
37
Pfeffer v. Redstone, 2008 WL 308450, at *7 (Del. Ch. Feb. 1, 2008), aff’d, 965 A.2d 676(Del. 2009).
38
Eisenberg, 537 A.2d at 1056; see also Solomon v. Pathe Commc’ns Corp., 672 A.2d 35,
39–40 (Del. 1996).
17
[stockholders] to tender their shares for reasons unrelated to the economic merits of
the offer.”39
Delaware does not apply entire fairness where there is a voluntary, non-
coercive offer by the corporation to acquire its own shares.40 But entire fairness
applies where the self-tender is coercive or where the company’s directors are
interested or lack independence in approving the transaction.41 Such circumstances
support a claim for the individual defendants’ breach of the duty of loyalty in
deciding to launch the self-tender.42
Accepting Plaintiff’s allegations as true, I conclude he has pled facts sufficient
to state a claim that the Individual Defendants breached their duties of disclosure in
relation to the 2017 Self-Tender. As alleged, those disclosure deficiencies, as well
as structural components of the 2017 Self-Tender, rendered it coercive. Because
Plaintiff has successfully alleged that the 2017 Self-Tender was coercive and that
39
Eisenberg, 537 A.2d at 1061 (citing Ivanhoe P’rs v. Newmont Mining Corp., 533 A.2d
585, 605 (Del. Ch.), aff’d 535 A.2d 1334 (Del. 1987)); accord Gradient OC Master, Ltd.
v. NBC Univ., Inc., 930 A.2d 104, 119 (Del. Ch. 2007) (“[A] shareholder is actionably
coerced when he is forced into ‘a choice between a new position and a compromised
position’ for reasons other than those related to the economic merits of the decision.”
(quoting In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 621 (Del. Ch. 1999))).
40
Pfeffer, 2008 WL 308450, at *7.
41
Id.; Feldman, 2006 WL 920420, at *6.
42
See Solomon, 672 A.2d at 39–40; Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL
920420, at *6; In re Limited, Inc., 2002 WL 537692, at *7 (Del. Ch. Mar. 27, 2002);
Eisenberg, 537 A.2d at 1056.
18
the Individual Defendants are interested in the transaction, the 2017 Self-Tender is
subject to entire fairness review.
A. Plaintiff Has Pled That Individual Defendants Breached Their
Duties Of Disclosure In Connection With The 2017 Self-Tender.
Here, Plaintiff alleges the Individual Defendants intentionally concealed
material facts from stockholders concerning LRN’s value, the prospect of a sale,
LRN’s recent performance, the Appraisal, the receipt of $20 million outside the
ordinary course of business, and spring-loaded 2017 Options issued to insiders.
Plaintiff further contends that the 2017 Self-Tender’s stated purpose, to share the
benefit of the extraordinary lump sum in a liquidity event, was materially
misleading. Plaintiff alleges that complete and accurate information was reasonably
available to Defendants, and therefore should have been disclosed in the OTP.
Plaintiff has stated a claim for breach of the Individual Defendants’ duty of
disclosure, and the alleged disclosure deficiencies support a claim that the 2017 Self-
Tender was coercive.
“Corporate directors owe a fiduciary duty to their stockholders to disclose all
facts material to the transaction in an atmosphere of entire candor.”43 “[W]hen
fiduciaries undertake to describe events, they must do so in a balanced and accurate
43
Eisenberg, 537 A.2d at 1057 (citing Smith v. Van Gorkom, 488 A.2d 858, 890 (Del.
1985), and Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977)).
19
fashion, which does not create a materially misleading impression.”44 “Where a
corporation tenders for its own shares, the exacting duty of disclosure imposed upon
corporate fiduciaries is even ‘more onerous’ than in a contested offer. That is
because in a self-tender, the disclosures are unilateral and not counterbalanced by
opposing points of view.”45 “A related reason for requiring the strictest possible
standard of disclosure is that corporate self-tenders, by their very nature, involve
built-in conflicts of interest . . . .”46
“Corporate fiduciaries can breach their duty of disclosure under Delaware
law . . . by making a materially false statement, by omitting a material fact, or by
making a partial disclosure that is materially misleading.”47 Where defendants
44
Pfeffer, 2008 WL 308450, at *13 (quoting Clements v. Rogers, 790 A.2d 1222, 1240
(Del. Ch. 2001)).
45
Eisenberg, 537 A.2d at 1057 (quoting Blanchette v. Providence & Worcester Co., 428
F. Supp. 347, 356 (D. Del. 1977)).
46
Id.47
Pfeffer, 2008 WL 308450, at *8 (omission in original) (quoting O’Reilly v. Transworld
Healthcare, Inc., 745 A.2d 902, 916 (Del. Ch. 1999)). The standards for each type of
breach vary slightly. In Redstone, Vice Chancellor Lamb analyzed Plaintiff’s specific
allegations as to each type of disclosure breach. See id. at *8–13. Plaintiff has pled that
the disclosures in the offering materials were deficient in numerous respects. Thus, as in
Feldman and Eisenberg, I do not apply a particular standard at this juncture, but instead
ask only whether the Individual Defendants failed to disclose all facts material to the tender
offer. See Feldman, 2006 WL 920420, at *8; Eisenberg, 537 A.2d at 1057–61. Whether
that failure should be categorized as a materially false statement, omission, or partial,
misleading disclosure will be developed through discovery and need not be determined at
this stage.
20
inadequately disclose all material information related to a self-tender, the self-tender
is coercive.48 Our Court requires
[a] showing of substantial likelihood that under all the circumstances,
the omitted fact would have assumed actual significance in the
deliberations of the reasonable shareholder. Put another way, there
must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly altered the “total mix” of information available.49
As the Delaware Supreme Court stated in Loudon v. Archer–Daniels–Midland Co.,
“[a] claim based on disclosure violations must provide some basis for a court to infer
that the alleged violations were material.”50 Materiality allegations “need not be
pleaded with particularity,” as plaintiffs need only provide “some factual basis . . .
from which the Court can infer materiality of an identified omitted fact.” 51 This
inquiry is fact-intensive, and the Court should deny a motion to dismiss when
developing the factual record may be necessary to make a materiality
determination.52
48
Eisenberg, 537 A.2d at 1056–1057; see also Solomon, 672 A.2d at 39–40.
49
Eisenberg, 537 A.2d at 1057 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944
(Del. 1985)); accord TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
50
700 A.2d 135, 146 (Del. 1997); accord Pfeffer, 2008 WL 308450, at *8.
51
Loudon, 700 A.2d at 146.
52
See, e.g., McMullin v. Beran, 765 A.2d 910, 926 (Del. 2000) (reversing order granting
defendants’ motion to dismiss because “[w]hen a complaint alleges disclosure violations,
courts are required to decide a mixed question of fact and law” and because “[i]n the
specific context of this case, an answer to the complaint, discovery and a trial may all be
necessary to develop a complete factual record before deciding [materiality] . . . as a matter
of law”); Wells Fargo & Co. v. First Interstate Bancorp., 1996 WL 32169, at *10 (Del.
21
Plaintiff has alleged three categories of deficient information that, in
Eisenberg v. Chicago Milwaukee Corporation, were material at the motion to
dismiss stage: offer purpose, price fairness, and director interestedness.53 First,
Eisenberg held that stockholder offerees “are entitled to an accurate, candid
presentation of why the self-tender offer is being made.”54 Where, considering the
offering materials as a whole, the stated purpose of the offer is materially misleading
or where the stated purpose can give more than one inaccurate impression, the
plaintiff alleges a claim for breach of the duty of disclosure.55 Here, Plaintiff has
successfully alleged that the OTP’s disclosures relating to the “liquidity” purpose
“served not to enlighten but to obscure the real reasons motivating the Offer.”56
Plaintiff alleges that the true purpose was to squeeze out LRN stockholders and buy
Seidman control, and ultimately enable the Individual Defendants to cash out at a
Ch. Jan. 18, 1996) (declining to rule that an omission was immaterial as a matter of law
because “[a] question of materiality is difficult to treat as a question of law on a motion to
dismiss,” and “[i]n fact, issues of materiality are generally held to be mixed questions of
law and fact, but predominantly questions of fact” and “are matters that in many instances
require a rich factual context to responsibly decide” (citing TSC Indus., 426 U.S. at 450 ));
Branson v. Exide Elecs. Corp., 1994 WL 164084, at *3 (Del. Apr. 25, 1994) (TABLE)
(finding that questions of materiality “generally cannot be resolved on a motion to dismiss,
but rather . . . must be determined after the development of an evidentiary record”).
53
537 A.2d at 1058–61.
54
Id. at 1059 (citing Blanchette, 428 F. Supp. at 354–55).
55
Id. at 1058–59.
56
Id. at 1059.
22
higher value in an undisclosed forthcoming transaction. At this stage, I accept as
these allegations as true.
Defendants’ alleged obfuscation of the 2017 Self-Tender’s true purpose also
colors their inadequate disclosures of the $20 million lump sum and LRN’s
financials. It is reasonably conceivable that the Individual Defendants concealed
information about LRN’s financials and about the $20 million payment to bolster
the stated purpose of sharing found money in a liquidity event. The OTP did not
provide sufficient financials to allow stockholders to determine whether LRN was
in a position to provide stockholders with liquidity at that time. The OTP instructed
stockholders to rely solely on the limited and dated information therein; failed to
provide reliable information about LRN’s performance; included two pages of stale
financial information that stockholders were directed not to rely on; and included
disclaimers that ultimately forced stockholders to rely on financial statements from
2014 and 2015.
While the OTP disclosed the cash injection and that it was excluded from the
Appraisal, the OTP did not disclose how or why the Company acquired those funds.
As alleged, LRN obtained the $20 million for the sole purpose of completing the
2017 Self-Tender, as one of multiple steps to squeeze out LRN stockholders at a
meager price. The disclosure deficiencies regarding the $20 million and LRN’s
23
financials are material as alleged because they supported, or made more credible, the
misleading stated purpose for the 2017 Self-Tender.
Second, Plaintiff contends that the $1.35 offer price is unfair and that the
disclosures relating to that price were intended to, and did, obscure that fact. “If that
were the case, the disclosures would clearly be defective. Shareholders are entitled
to be informed of information in the fiduciaries’ possession that is material to the
fairness of the price.”57 Accepting Plaintiff’s allegations as true, the OTP fell short.
Defendants explicitly stated that the price was not a determination of “fair market
value” and that the shares could be worth “substantially more” or “substantially less”
than $1.35.58 Defendants disclosed their belief that the offer price was “reasonable
and appropriate,”59 while at the same time making no recommendation on whether
stockholders should tender and abstaining from tendering themselves.60 The OTP
failed to disclose material facts to explain those conclusions.61
57
Id. (citations omitted) (citing Kahn v. U.S. Sugar Corp., 1985 WL 4449, at *14 (Del. Ch.
Dec. 10, 1985); Joseph v. Shell Oil Co., 482 A.2d 335, 342 (Del. Ch. 1984); Lynch, 383
A.2d at 281).
58
D.I. 12, Ex. 1 at 2.
59
Compl. ¶ 28.
60
See Eisenberg, 537 A.2d at 1055, 1059–60 (permitting disclosure claim to proceed where
“[a]lthough the Offer to Purchase disclosed the opinion of . . . the Board of Directors that
the $55 offering price was fair, that document also admonished that neither CMC nor its
directors were making any recommendation as to whether or not the Preferred shareholders
should tender”).
61
See Frank v. Arnelle, 1998 WL 668649, at *6 (Del. Ch. Sept. 16, 1998), aff’d, 725 A.2d
441 (Del. 1999); Eisenberg, 537 A.2d at 1060.
24
Had the foregoing facts been disclosed, shareholders would have been
given a more even-handed presentation of the economic merits of the
Offer. The need for such a presentation would appear even more
essential, because the directors had concluded that the Offer was
[“reasonable and appropriate”], yet decided not to recommend that their
shareholders tender into it.62
The OTP disclosed only that the $1.25 share price was based on the May 2017
Appraisal. But the OTP did not disclose the basis or methodology for the valuation
other than the exclusion of the $20 million lump sum. This, too, went unexplained.
The OTP disclosed the Appraisal was conducted for tax purposes and was used in
issuance of stock options. When stockholders received the OTP, they were unaware
that Defendants had recently issued the 2017 Options. Rather, stockholders believed
that LRN had not granted options since 2008. The OTP did not reconcile this belief
and the 2017 Options, rendering the OTP’s Appraisal statements misleading.
Finally, the OTP did not adequately disclose that the Individual Defendants
were interested in the 2017 Self-Tender.63 As this Court stated in Eisenberg, “an
issuer making a tender offer for its own shares is the most inside of insiders and the
62
Eisenberg, 537 A.2d at 1060; see Compl. ¶ 28. In Eisenberg, the directors disclosed
their belief that the price was “fair.” 537 A.2d at 1059. While the facts of this case differ,
I do not find the Defendants’ determination that the price was “reasonable and appropriate”
to be a means of circumventing fiduciaries’ onerous duty of disclosure in the self-tender
context. Eisenberg does not stand for the proposition that fiduciaries must disclose all
material facts related to price when they determine the price is “fair.” Rather, Eisenberg
stands for the proposition that when fiduciaries speak, they must do so completely and
candidly, and that their duty is even more exacting when facing the inherent conflicts
created in a self-tender.
63
Eisenberg, 537 A.2d at 1060–61.
25
insider par excellence.”64 “In the instant case the [Individual Defendants] were not
only in a sense insiders but in their capacity as officers and directors of [LRN] were
fiduciaries for the stockholders.”65 Taking as true that the Individual Defendants
were interested in the 2017 Self-Tender, they faced “the heavy responsibility of
advising the stockholders fully and impartially about the advantages and
disadvantages of the tender, especially in view of the personal interest which the
[Individual Defendants] had in the success of the offer.”66
The OTP disclosed that the transaction would give Seidman a controlling
position in the Company, that LRN’s directors and officers were not tendering, and
that the board and management may pursue transactions in the future under which
their interests may diverge from those of the remaining stockholders. But in light of
Plaintiff’s theory of the case, these disclosures were misleading and incomplete.
Plaintiff has alleged that the Individual Defendants owned a significant amount of
LRN stock and options, including the 2017 Options, which they desired to cash out
in the pending Leeds Transaction. The OTP failed to disclose the number of shares
and options held by the Individual Defendants, and most importantly failed to
64
Id. at 1057 (internal quotation marks omitted) (quoting Blanchette, 428 F. Supp. at 356).
In Section II(C), infra, I conclude Plaintiff has pled the Individual Defendants were
interested in the 2017 Self-Tender.
65
Id. (quoting Blanchette, 428 F. Supp. at 356).
66
Id. (quoting Blanchette, 428 F. Supp. at 356).
26
disclose that they would not tender in the offer because they planned to sell in the
Leeds Transaction at a much higher price. The 2017 Self-Tender would make that
transaction more lucrative for the Individual Defendants. The LRN “shareholders
were entitled to know that certain of their fiduciaries had a self-interest that was
arguably in conflict with their own, and the omission of the fact was material.”67 As
alleged, the Individual Defendants failed to discharge their disclosure
responsibilities as interested fiduciaries.
Defendants contend that they had no duty to disclose the alleged secret
strategic sales process because it was immaterial as a matter of law. 68 In support,
Defendants point out Plaintiff has not pled that the purported strategic process was
“anything more than preliminary,”69 and argue it was immaterial because
“[i]nformation about a possible merger or similar transaction generally becomes
material when there is an ‘agree[ment] on the price and structure of the
transaction.’”70 Further, Defendants contend that Plaintiff’s alleged timeline is
contradicted by the Merger Notice.
67
Id. at 1061.
68
D.I. 12 at 23–30.
Id. at 27 (quoting In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *58 (Del.
69
Ch. Sept. 4, 2014) (subsequent history omitted)).
70
Id. at 26 (alteration in original) (quoting In re Nine Sys., 2014 WL 4383127, at *57).
27
Defendants correctly state the law on this point. But without the benefit of
discovery, Defendants’ materiality arguments are premature. “A question of
materiality is difficult to treat as a question of law on a motion to dismiss.”71 Plaintiff
alleges that, when Defendants commenced the 2017 Self-Tender, they were in the
midst of discussing a strategic process and had received an offer. The details of
those discussions and the offer are unknown at this stage, precisely because Plaintiff
alleges Defendants purposefully withheld this information from stockholders.
Nonetheless, at this stage, I can reasonably infer from Plaintiff’s allegations that the
process was more than preliminary. Whatever level of interest prospective buyer(s)
demonstrated was sufficiently concrete to inspire Defendants to take measures to
reap additional benefits for themselves, to stockholders’ detriment. That offer or
overture materialized in the Leeds Transaction. As for the conflicting Merger
Notice, when Plaintiff was cashed out in the 2017 Self-Tender, his access to LRN’s
information became even more restricted. The Merger Notice was Plaintiff’s only
source of information regarding the Leeds Transaction, and, consistent with his
theory of the 2017 Self-Tender, Plaintiff alleges that it too contains materially false
and misleading information.
71
Wells Fargo & Co., 1996 WL 32169, at *10 (declining to rule that an omission was
immaterial as a matter of law and noting that “[i]n fact, issues of materiality are generally
held to be mixed questions of law and fact, but predominantly questions of fact”).
28
Plaintiff has alleged material omissions related to the undisclosed strategic
process. Plaintiff alleges that Defendants historically wronged stockholders;
intended to squeeze out stockholders at an unfair price through the 2017 Options,
Appraisal, and 2017 Self-Tender; and intended to take as many of the benefits from
the Leeds Transaction as they could. Considering those allegations, the identified
omissions likely would have altered the “total mix” of information available when
considering the 2017 Self-Tender and likely “would have assumed actual
significance in the deliberations of the reasonable shareholder.”72 At a minimum,
Plaintiff’s theory of the case leads to the conclusion that determining whether
Defendants’ identified omissions are “immaterial” is fact-intensive and should be
developed through discovery.73 “[T]he court will not dismiss the plaintiff’s
disclosure claims at this early stage of the litigation, before the basic facts relating
to the challenged transactions . . . are established of record.”74
And as I have found, Plaintiff has adequately alleged that the omitted
information of purpose, the source of funds, the reasonableness of the offer, and
72
Eisenberg, 537 A.2d at 1057 (quoting Rosenblatt, 493 A.2d at 944); see also TSC Indus.,
426 U.S. at 449.
73
See McMullin, 765 A.2d at 926; Wells Fargo & Co., 1996 WL 32169, at *10; Branson,
1994 WL 164084, at *3.
74
Feldman, 2006 WL 920420, at *8.
29
interestedness were material under Eisenberg.75 At the motion to dismiss stage, I
need not determine whether each disclosure deficiency, alone, is sufficient to find a
75
Defendants also contend that they had no duty to disclose additional information about
the Appraisal or LRN’s recent performance, citing a number of cases that found appraisals
for tax purposes immaterial. D.I. 12 at 30–36. Those cases are inapposite here. For
example, Defendants cite Frank v. Arnelle for the proposition that “Delaware courts do not
require mandatory disclosure of valuation opinions prepared in connection with a board’s
approval of a self-tender offer.” Frank, 1998 WL 668649, at *6. But Defendants omit the
context for that statement. Chancellor Chandler went on to explain that “it is settled under
our decisional law that where a board is not obligated to offer or pay a fair price, absent
any materially misleading disclosures, it is neither required to disclose to its stockholders
the pricing methodology nor an investment bank fairness opinion, including valuations.”
Id. (emphasis added). In that case, he found that “the terms of the Offer to Purchase would
have made it clear to a reasonable stockholder that the auction price range was market
driven” and that there were no disclosure violations that triggered the board’s duty to offer
a fair price. Id. Further, Frank was decided at the summary judgment stage, after the
parties developed the record as to materiality.
With regard to additional information about LRN’s performance, Defendants argue
Plaintiff has failed to demonstrate why “the additional granularity he seeks is anything
more than helpful or cumulative to the information already disclosed,” D.I. 12 at 34
(quoting Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *12 (Del. Ch. June 30, 2014)),
or why he needs such immaterial “soft information.” Id. at 31 (quoting Olenik v. Lodzinski,
208 A.3d 704, 720 n.79 (Del. 2019)). To the contrary, Plaintiff has pled why he needed
that information in considering the “total mix” when deciding to tender. See Eisenberg,
537 A.2d at 1057, 1059–60.
Further, Defendants claim that Plaintiff’s disclosure claim is based, at least in part,
on information that did not exist, and contend “Plaintiff does not allege that more current
or more accurate financial information even existed.” D.I. 12 at 30 (citing In re JCC Hldg.
Co., Inc., 843 A.2d 713, 721 (Del. Ch. 2003) (“Under Delaware law, there is no obligation
on the part of a board to disclose information that simply does not exist . . . .”)). I disagree.
By pointing out the paucity and age of the financials stockholders were given, and by
alleging the 2017 Self-Tender and OTP were timed to precede formal preparation of the
2016 financials, Plaintiff has pled Defendants had more current and complete financial
information that could have been provided to stockholders.
Finally, Defendants claim they had no duty to disclose additional details regarding
the one-time, $20 million payment, claiming they had no duty to provide stockholder with
an “avalanche of trivial information.” Id. at 36 (quoting In re Gen. Motors (Hughes)
S’holder Litig., 2005 WL 1089021, at *13 (Del. Ch. May 4, 2005), aff’d, 897 A.2d 16230
breach. Rather, I look at the disclosure allegations collectively. 76 “All of those
disclosure items, when taken together and considered against the background of the
transaction, clearly demonstrate that the defendants have not met their disclosure
obligations under Delaware law.”77 Defendants’ arguments do not disturb that
conclusion.
Those material inadequacies are sufficient for Count I to state a claim.
Furthermore, those inadequacies mandate denying the Motion on Count II because
“actionable coercion may inhere in either the disclosures or in the terms of the offer
itself.”78 Despite Defendants’ contentions that they prudently and cautiously made
disclosures in the OTP, reading those disclosures collectively under the
circumstances alleged, they were designed to induce stockholders to tender.79 Those
disclosures rendered the 2017 Self-Tender “voluntary in appearance and form but
involuntary as a matter of reality and substance.”80 Accordingly, the OTP’s
(Del. 2006)). Plaintiff has pled that further information about the $20 million cash injection
would have altered the total mix of information available in deciding whether to tender.
Ultimately, under the alleged circumstances, I follow Eisenberg’s mandate holding
Defendants to their more exacting duty of disclosure that required them to disclose all facts
necessary for the stockholder to understand the $1.35 price and the 2017 Self-Tender’s
purpose, including information about the Appraisal and the one-time, $20 million payment.
76
Eisenberg, 537 A.2d at 1058 (citing Joseph, 482 A.2d at 343).
77
Id. (citing Joseph, 482 A.2d at 343).
78
Id. at 1056 n.7.
79
Id. at 1062.
80
Id. at 1056.
31
materially incomplete disclosures mandate that I deny the Motion to dismiss Counts
I and II with respect to the Individual Defendants.
B. Plaintiff Has Pled The 2017 Self-Tender Was Structurally
Coercive.
Although Defendants’ disclosure deficiencies are sufficient to state a claim
for a coercive self-tender, Plaintiff has also stated a coercion claim by alleging that
2017 Self-Tender was structurally coercive. The Court has found actionable
coercion where the plaintiff “is forced into a choice between a new position and a
compromised position,”81 and where, under the circumstances, stockholders may
have perceived, “not unreasonably, that unless they tender, they may not realize any
return on or value for their investment in the foreseeable future.”82
As alleged, four aspects of the 2017 Self-Tender’ terms and circumstances
contributed to Plaintiff’s reasonable belief that he would receive little or no return
on his LRN investment unless he tendered, ultimately forcing Plaintiff to choose
between being cashed out at a low price or remaining a stockholder in a controlled
company with a troubled transactional history and bleak prospects for a future
liquidity event.83
81
Gradient OC Master, Ltd., 930 A.2d at 119 (internal quotation marks omitted) (quoting
In re Gen. Motors Class H S’holders Litig., 734 A.2d at 621).
82
Eisenberg, 537 A.2d at 1061.
83
See id.
32
First, Plaintiff has alleged that the Company’s dealings with its stockholders
preceding the 2017 Self-Tender, including its history of executing transactions with
inadequate disclosures at arbitrary and declining prices, rendered the 2017 Self-
Tender coercive. LRN is a private company, so there was no market-based exit for
stockholders or market price to test the offer price’s adequacy. The Company had
not held stockholder meetings to give stockholders a vote on corporate matters,
including director elections and certificate amendments; provided only limited and
stale financial information; and failed to provide notice of potentially conflicted
transactions. In this context, the Company also repeatedly granted cheap options
and repurchased shares at arbitrary and declining prices, despite improving
performance. It is reasonably conceivable that stockholders were “coerced into
accepting the unfair $1.35 per share because of Defendants’ prior conduct of offering
less and less in tender offers while having no basis for the prices.”84
Second, the OTP framed the 2017 Self-Tender as the last opportunity for
stockholders to avoid a total loss on their investment. Defendants presented the 2017
Self-Tender as a fleeting liquidity event, made possible by an unexplained $20
million cash injection outside the ordinary course. The OTP warned stockholders
there was no market for LRN stock and that the 2017 Self-Tender may provide the
only exit for some time. And the OTP warned stockholders that the post-close
84
Compl. ¶ 3.
33
controller, directors, and officers would not hesitate to pursue their own interests in
the future, even if they diverged from the stockholders’ interests. Defendants’
disclosure was consistent with the Company’s history of entering transactions in an
effort to increase the Individual Defendants’ equity stake over time. In view of
LRN’s historic transactions, lack of a market for LRN stock, and the OTP’s
statement that stockholders might “never receive cash or other payment for your
Common Stock if you do not take the Offer,”85 it is reasonably conceivable that LRN
stockholders tendered to achieve a measure of liquidity with respect to their
investment, even at an inadequate price. As alleged, LRN stockholders were
wrongfully coerced to tender for reasons unrelated to the economic merits of the
transaction.
Third, the Individual Defendants structured the 2017 Self-Tender so that the
shares that did not tender would be worth less or exposed to greater risk. 86 This
Court has found wrongful coercion in such cases.87 Defendants disclosed that, after
the 2017 Self-Tender, Seidman would have near total control over LRN and that the
interests of LRN’s directors and officers “may lead them to . . . oppose or support
85
Id. ¶ 24.
86
See, e.g., Gradient OC Master, Ltd., 930 A.2d at 119, 121, 126; AC Acqs. Corp. v.
Anderson, Clayton & Co., 519 A.2d 103, 113–14 (Del. Ch. 1986); Eisenberg, 537 A.2d at
1061–62; Kahn, 1985 WL 4449, at *3–4.
87
See, e.g., Gradient OC Master, Ltd., 930 A.2d at 119, 121, 126; AC Acqs. Corp., 519
A.2d at 113–14; Eisenberg, 537 A.2d at 1061–62; Kahn, 1985 WL 4449, at *3–4.
34
significant corporate transactions when these transactions further their interests as
incumbent officers or directors, even if these interests diverge from their interests as
stockholders per se and thus from the interests of other stockholders.”88 This forced
stockholders to face a coercive choice:89 either tender at an unexplained price, or
risk retaining their interest in a company controlled by a self-interested fiduciary.
Finally, Plaintiff has alleged that the 2017 Self-Tender’s proration plan was
coercive under the circumstances. The OTP provided for proration of repurchased
shares if more than 7,407,407 shares were tendered. Facing proration, LRN
stockholders tendered more shares in order to receive the greatest possible return in
what Defendants represented as a fleeting, one-time liquidity event: the 2017 Self-
Tender was oversubscribed. The board did not prorate and instead accepted all
9,092,278 tendered shares. Defendants disclosed their right to do so; the OTP stated
that LRN reserved the right to purchase a greater number of shares. While proration
of this kind may be a valid exercise of business judgment in ordinary circumstances,
88
Compl. ¶ 36.
89
See Gradient OC Master, Ltd., 930 A.2d at 119 (“Keeping the shareholders in the ‘same’
position, then, does not require an ‘identical’ position, economic or otherwise. Instead, a
shareholder is actionably coerced when he is forced into ‘a choice between a new position
and a compromised position’ for reasons other than those related to the economic merits of
the decision. (quoting In re Gen. Motors Class H S’holders Litig., 734 A.2d at 621)); see
also AC Acqs. Corp., 519 A.2d at 114; Eisenberg, 537 A.2d at 1061–62.
35
Plaintiff’s allegations render the 2017 Self-Tender’s proration term suspicious.90 By
choosing not to prorate, Defendants were able to buy out a greater percentage of
LRN’s outstanding shares, bolstering Seidman’s control and increasing the
Individual Defendants’ equity in the Company. Under the totality of circumstances
alleged, it is reasonably conceivable LRN’s intended proration coerced stockholders
to tender more shares than they otherwise would have because proration could
reduce the number of shares actually repurchased.91
The 2017 Self-Tender allowed Seidman to extract control for himself;
subjected non-tendering stockholders to the risk of becoming minority stockholders
under Seidman, who disclosed his and his fellow fiduciaries’ divergent interests;
subjected stockholders to the risk that any future liquidity opportunity would be
worse, as supported by LRN’s history of similar transactions, or perhaps even
nonexistent; and squeezed more shares out of each tendering stockholder by
invoking proration but accepting all tendered shares. Given those circumstances,
LRN stockholders may have perceived, not unreasonably, that unless they tendered,
they would not realize any return on or value for their investment in the foreseeable
future. “In that sense the offer does have coercive aspects. And the coercion may
90
See Eisenberg, 537 A.2d at 1061 (“If these were the only relevant circumstances (and if
proper disclosure was made of all material facts), the Court would have difficulty
concluding, at least on this preliminary record, that the Offer is inequitably coercive.”).
91
See id. at 1056 (noting that a tender offer may be “voluntary in appearance and form but
involuntary as a matter of reality and substance”).
36
be attributed, at least to some extent, to acts of the directors . . . .” 92 Plaintiff has
adequately pled that the 2017 Self-Tender was structurally coercive, and the Motion
to dismiss the Individual Defendants is denied with respect to Count II.93
C. The 2017 Self-Tender Is Subject To Entire Fairness Review;
Plaintiff Has Pled Non-Exculpated Claims.
In this context, there are two clear avenues to trigger entire fairness review:
pleading that the defendant directors structured a coercive self-tender, or pleading
that the defendant directors were interested in the transaction.94 Defendants seek to
avoid such review by contending Plaintiff has not shown the 2017 Self-Tender was
involuntary and, therefore, Defendants owed no duty of fairness. As explained,
Plaintiff has pled the 2017 Self-Tender was coercive; therefore, it will be reviewed
under entire fairness.95
The Court also applies entire fairness if the plaintiff adequately pleads that the
directors approved or structured the tender offer in a way that puts their own interests
above those of the stockholders.96 In Feldman v. Cutaia, this Court refused to
dismiss an entire fairness challenge to a self-tender offer in which the directors were
92
Id. at 1061.
93
These grounds are sufficient to deny the Motion to dismiss Count II. Other grounds may
exist to support a finding of wrongful structural coercion, but I need not reach those
grounds today.
94
See Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at *6.
95
See Pfeffer, 2008 WL 308450, at *7.
96
See id.; Feldman, 2006 WL 920420, at *6.
37
alleged to have received “a financial benefit not equally shared by the company’s
stockholders.”97 There, the self-tender’s structure was suspect when coupled with
the other circumstances surrounding the transaction, “suggest[ing] that the
individual director defendants placed their own interests above those of the
[company’s] stockholders.”98
The same holds true here. Plaintiff has alleged that the Individual Defendants
wanted to increase their personal benefit from selling the Company via a series of
steps that included buying out LRN stockholders at a low price. The Individual
Defendants’ spring-loaded 2017 Options preceded the 2017 Self-Tender. At the
time of the 2017 Self-Tender, the Individual Directors “own[ed] a significant
percentage of [LRN’s] voting stock.”99 They reduced the total outstanding shares
through the 2017 Self-Tender, allegedly knowing that a strategic process was
underway in which LRN either received or expected to receive offers above $1.35
per share. To receive “a disproportionate benefit from the [Leeds Transaction] than
97
2006 WL 920420, at *6. The complaint in Feldman included allegations that the pricing
of the exchange offer was “severely inflated” ($10 per share for a stock that never traded
above $4) to allow the directors, holding 89% of the company’s otherwise underwater
options and warrants, to improperly enrich themselves. Id. at *4. These allegations led the
court to conclude that the complaint adequately alleged that the individual director
defendants were interested in the transaction. Id. at *6.
98
Id.
99
D.I. 12, Ex. 1 at 29.
38
they would otherwise have been entitled to,”100 the Individual Defendants structured
the 2017 Self-Tender to eliminate 23% of outstanding shares at a low price, on
coercive terms, and with misleading disclosures, before selling their shares at $7.00
in the Merger. By approving the 2017 Self-Tender, the Individual Defendants
increased their equity stake in LRN, and thereby received millions of additional
consideration in the Merger that otherwise would have gone to LRN stockholders.101
Plaintiff has adequately alleged that the Individual Defendants were interested in the
2017 Self-Tender, such that it should be reviewed under entire fairness.102
Further, the 2017 Self-Tender eliminated enough shares to gift Seidman free
control. Seidman allegedly approved the 2017 Self-Tender to bolster his control
over LRN, which he then wielded by approving the Merger, and related personal
benefits, by written consent. These benefits included an asset spinoff, retaining his
position as chairman, and securing two additional seats on the post-close board. It
is reasonably conceivable that granting Seidman control also ensured he had the sole
power to keep both Feldman and Lederhausen on the board; as alleged, Seidman
100
Feldman, 2006 WL 920420, at *6.
101
Id. The exact amount of their gain must be determined by discovery because the
Individual Defendants withheld information about their stock holdings.
102
Eisenberg, 537 A.2d at 1060–61. Plaintiff also alleges that the Individual Defendants
were interested in the 2017 Self-Tender because they attempted to purchase a personal
release of potential fiduciary duty claims in the letter of transmittal. Because Plaintiff has
adequately alleged other grounds to support an inference that the Individual Defendants
were interested in the 2017 Self-Tender, I need not reach this issue today.
39
planned to retain Lederhausen. Feldman and Lederhausen approved the 2017 Self-
Tender and used LRN’s money to buy Seidman control.103 These circumstances,
together with the additional Merger compensation the 2017 Self-Tender enabled
each Individual Defendant to receive, support a claim that the Individual Defendants
put their own interests above the stockholders’ in approving and structuring the 2017
Self-Tender, such that the 2017 Self-Tender is subject to entire fairness.104
Having triggered entire fairness, Plaintiff has adequately alleged that the 2017
Self-Tender was the product of an unfair process and resulted in an unfair price. As
evidence of unfair process, Plaintiff points to the OTP disclosures, which as
discussed, were materially misleading, false, and incomplete. The Individual
Defendants failed to adequately disclose the extent of their interest in the transaction
and failed to enact safeguards to ensure the 2017 Self-Tender was otherwise fair to
LRN stockholders.105 Additionally, the timing was unfair as it was initiated just as
LRN planned an undisclosed strategic sale process for a higher price, and before
103
See In re Limited, Inc., 2002 WL 537692, at *7 (holding actions of corporation’s
directors in unanimously approving a self-tender offer, which allegedly benefitted
corporation’s chief executive officer without a corresponding benefit to corporation, gave
rise to cause of action by stockholders for breach of duty of loyalty, where directors were
either interested or lacked independence).
104
Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at *6; In re Limited, Inc.,
2002 WL 537692, at *7.
105
See, e.g., Feldman, 2006 WL 920420, at *8; Eisenberg, 537 A.2d at 1060–61.
40
LRN finalized its financial statements for 2016. Plaintiff has alleged the Individual
Defendants engaged in an unfair process.
Plaintiff has also alleged that the Individual Defendants launched the 2017
Self-Tender at an unfair price. In a non-coercive tender offer, the company has no
duty to pay fair price.106 But where the Court finds coercion or director
interestedness, as alleged here, the Court must look to the adequacy of the price.107
Plaintiff has pled $1.25 was unfair. The inadequacy of this price is supported by
LRN’s history of arbitrary pricing; its foundation in the questionable Appraisal and
incomplete and outdated financials; and the Merger’s price of $7.00 per share.
Further, the Individual Defendants failed to retain an advisor or obtain a fairness
opinion or independent valuation for the Self-Tender. Defendants’ failure to
adequately disclose why or how they chose the tender offer price suggests they had
an improper motive to set the price below fair value.108
As alleged, the Individual Defendants’ choice to structure the 2017 Self-
Tender for their benefit amounts to a non-exculpated breach of the duty of loyalty
106
See, e.g., Solomon, 672 A.2d at 39–40.
107
See, e.g., id. at 39–40; Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at
*6.
108
See Feldman, 2006 WL 920420, at *6. While Defendants argue that Plaintiff’s claim
must be dismissed because the OTP stated that $1.35 was not a determination of fair value,
D.I. 12 at 42–44, that is insufficient to overcome the allegations that the Individual
Defendants were conflicted and that the disclosure that $1.35 was a “reasonable and
appropriate” price was misleading and incomplete.
41
that is subject to entire fairness review.109 Contrary to Defendants’ augment,110 an
exculpatory provision pursuant to Section 102(b)(7) cannot be grounds for dismissal
at the pleading stage.111 The Motion to dismiss the Individual Defendants is denied
with respect to Count III.112
D. LRN Must Be Dismissed.
Plaintiff does not bring Counts I, II, and III against LRN. Plaintiff brings
those claims against the Individual Defendants only. Where no claim is advanced
109
See Feldman, 2006 WL 920420, at *6; In re Limited, Inc., 2002 WL 537692, at *7, *10
n.65.
110
D.I. 12 at 44 (citing D.I. 12, Ex. 7 at 3, and then citing In re Cornerstone Therapeutics
Inc. S’holder Litig., 115 A.3d 1173, 1179–80 (Del. 2015), and Emerald P’rs v. Berlin, 787
A.2d 85, 91 & n.35 (Del. 2001)).
111
See In re Limited, Inc., 2002 WL 537692, at *7 (holding that, where the plaintiff alleged
interestedness, directors’ approval of self-tender offer gave rise to cause of action for
breach of duty of loyalty); id. at *10 n.65 (“Defendants . . . have also sought to invoke the
exculpatory charter provision adopted under the authority of 8 Del. C. § 102(b)(7). To the
extent that a duty of loyalty claim is implicated, that provision, of course, is
inapplicable. Malpiede v. Townson, 780 A.2d 1075, 1094–95 (Del. 2001). In addition, as
to those defendants about whom there is no question as to their disinterestedness and
independence, I am reluctant to evaluate the § 102(b)(7) defense at this stage.”).
112
See Orman v. Cullen, 794 A.2d 5, 20 n.36 (Del. Ch. 2002) (ruling that if entire fairness
applies to a transaction, that conclusion “normally will preclude dismissal of a complaint
on a Rule 12(b)(6) motion to dismiss” and that “[a] determination of whether the defendant
has met [the entire fairness] burden will normally be impossible by examining only the
documents the Court is free to consider on a motion to dismiss”).
42
against a named defendant, dismissal is required.113 Plaintiff does not seek any relief
from LRN.114 Accordingly, the Motion is granted on all counts with respect to LRN.
III. CONCLUSION
For the foregoing reasons, the Motion is DENIED with respect to the
Individual Defendants and GRANTED with respect to LRN. The parties shall
submit an order implementing this decision.
113
See Lechliter v. Del. Dep’t of Nat. Res. Div. of Parks & Recreation, 2015 WL 7720277,
at *2 n.17 (Del. Ch. Nov. 30, 2015).
114
See Compl. at 31–32 (“Prayer for Relief”).
43