Lance Salladay v. Bruce L. Lev

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LANCE SALLADAY, On Behalf of )
Himself and All Other Similarly Situated )
Former Stockholders of )
INTERSECTIONS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0048-SG
)
BRUCE L. LEV, DAVID A. )
MCGOUGH, and MICHAEL R. )
STANFIELD, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 19, 2019
Date Decided: February 27, 2020
Peter B. Andrews, Craig J. Springer, and David M. Sborz, of ANDREWS AND
SPRINGER LLC, Wilmington, Delaware; OF COUNSEL: Jeremy S. Friedman and
David F.E. Tejtel, of FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New
York, Attorneys for Plaintiff.
D. McKinley Measley and Elliott Covert, of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Charles C. Platt and
Andrew Sokol, of WILMER CUTLER PICKERING HALE AND DORR LLP, New
York, New York, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor
It is axiomatic that transactions in which a majority of the board stands on
both sides of a deal raise questions of whether the directors have acted in their own,
and not the corporate, interest; and that in such situations, the presumption of
business judgement is overcome and the burden shifts to the conflicted fiduciaries
to show that the transaction is entirely fair. It is nearly as axiomatic that, where
entire fairness is the standard of review, a motion to dismiss is rarely granted,
because review under entire fairness requires a record to be meaningful. Such a case
is before me now, on a motion to dismiss.
It is likewise true, however, that value to the entity or its stockholders can
inhere in a conflicted transaction, and that allowing conflicted boards to replicate the
value-enhancing structure of an arms-length transaction and thereby re-invoke the
business judgment rule allows value-maximizing transactions to go forward where
they might otherwise be eschewed in light of the onerous entire fairness standard.
Our courts have recognized two methods (absent a controlling stockholder) for
boards to revive business judgment review for such a transaction: by making the
transaction subject to the informed, un-coerced vote of the majority of shares held
by those free of conflict (under Corwin 1); or by permitting an unconflicted
1
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015).
committee of the board full scope to negotiate and enter any transaction (as proposed
in Trados II2). Here, according to the Defendant directors, the board did both.
Upon examination of this pleading-stage record, however, and in light of the
plaintiff-friendly standard I must employ, I find that entire fairness remains the
standard of review. I find that the special committee of unconflicted directors
entered the negotiations after the point at which it could act to replicate an arms-
length transaction, and that the disclosures to the stockholders in way of the vote
were inadequate to invoke business judgement review. For those reasons, the
Defendants’ Motion to Dismiss is denied. My reasoning is below.
I. BACKGROUND 3
A. The Parties
Non-party Intersections, Inc. (“Intersections” or the “Company”) is a
Delaware corporation headquartered in Virginia.4 It provides identity protection
2
In re Trados Inc. S’holder Litig., 73 A.3d 17 (Del. Ch. 2013).
3
I draw all facts from the Plaintiff’s Verified Amended Class Action Complaint, D.I. 21 (“Am.
Compl.”) and documents incorporated therein. See in re Morton’s Rest. Grp., Inc. S’holder Litig.,
74 A.3d 656, 658–59 (Del. Ch. 2013) (permitting consideration of documents incorporated into
complaint in motion to dismiss); In re Martha Stewart Living Omnimedia, Inc. S’holder Litig.,
2017 WL 3568089, at *3 (Del. Ch. Aug. 18, 2017) (same). As discussed further below, all well-
pled facts are considered true for the sake of this motion.
4
Am. Compl. ¶ 15.
2
software services that help protect sensitive information and data in the virtual
world. 5 Until the going-private transaction, it traded publicly on the NASDAQ. 6
Plaintiff Lance Salladay was a stockholder of Intersections at all relevant
times. 7
Non-party Loeb Holding Corporation (“Loeb”) is a Delaware corporation and
private equity firm. 8 It co-founded Intersections in 1996, and it was the Company’s
largest pre-merger stockholder.9 As of November 15, 2018, Loeb beneficially
owned approximately 42.7% of Intersections’ outstanding common stock.10
Defendant Bruce Lev was a director of Intersections since November 2014.11
He has served as the managing director at Loeb since 2003. 12
Defendant David McGough was a director on the Intersections board (the
“Board”) since August 1999.13 As of November 15, 2018, McGough beneficially
owned approximately 4.7% of Intersections’ outstanding common stock.14
5
Id.
6
Id.
7
Id. ¶ 10.
8
Id. ¶¶ 2, 19.
9
Id.
10
Id. ¶ 11 n.2.
11
Id. ¶ 11.
12
Id.
13
Id. ¶ 12.
14
Id. ¶ 12 n.3.
3
McGough also founded and serves as CEO of Digital Matrix Solutions (“DMS”), a
private company that has partnered with Intersections over the course of multiple
decades. 15
Defendant Michael Stanfield served as Chairman of the Intersections Board
since May 1996.16 Stanfield co-founded CreditComm Services LLC
(“CreditComm”), Intersections’ predecessor, with Loeb.17 From May 1996 until
January 2017, Stanfield served as CEO of Intersections.18 He was reappointed as
CEO in January 2018.19 As of April 1, 2018, Stanfield beneficially owned
approximately 8.7% of Intersections’ outstanding common stock. 20
Non-parties John M. Albertine, Thomas G. Amato, and Melvin R. Seiler were
directors at Intersections. 21
Non-party iSubscribed Inc. (“iSubscribed”) is a Delaware corporation focused
on consumer digital security. 22 Non-parties WndrCo Holdings LLC, General
Catalyst Group IX, L.P., GC Entrepreneurs Fund IX, L.P., and iSubscribed
15
Id. ¶¶ 2, 12.
16
Id. ¶ 13.
17
Id.
18
Id. Prior to joining CreditComm/Intersections as CEO, Stanfield worked as Managing Director
at Loeb Partners Corporation, an affiliate of Loeb. Id.
19
Id.
20
Id.
21
Id. ¶¶ 16–18.
22
Id. ¶ 20.
4
(collectively the “iSubscribed Investment Group”) together formed a joint venture,
WC SACD, a Delaware corporation, for the purpose of purchasing Intersections.23
B. Factual Background
1. Intersections Struggles Financially While It Develops Its Flagship
Product, Identify Guard® with Watson™24
Intersections provides credit management and identity theft protection
services to North American subscribers.25 Its “flagship product,” Identity Guard,
accounts for around 95% of its revenue.26 As of 2018, the Company had over 1.1
million subscribers.27 Originally founded as CreditComm in 1996, Intersections
went public in 2004, and since then the Defendants Stanfield, McGough, and Lev
(through his control of non-party Loeb) have collectively owned a stake that the
Company’s SEC filings recognize as potentially controlling.28
23
Id. ¶ 21.
24
The Amended Complaint consistently refers to the product throughout as Identify Guard® with
Watson™. I include this footnote not only to demonstrate the dexterity of an aged jurist in the
insertion of superscriptic symbols into documents (thank you, law clerks), but also to acknowledge
the trademarks in the product’s name. However, for simplicity’s sake, I discard the symbols for
the remainder of this Memorandum Opinion.
25
Am. Compl. ¶ 22.
26
See id.
27
Id.
28
Id. ¶¶ 23–27. Intersections’ 2018 10-K notes that “[i]nsiders have substantial control over us
and could delay or prevent a change in corporate control, which may harm the market price of our
common stock.” Id. ¶ 27. The 10-K notes that Loeb owned, at the time of the 10-K, 40% of the
stock, and that Loeb in turn was controlled by an Intersections Director [i.e. Lev]. Id. the 10-K
acknowledged that Stanfield and McGough also owned significant stakes. Id. “If these
stockholders act together, they could have the ability to significantly influence or control the
5
In 2017, Intersections launched an upgraded version of its flagship product:
Identity Guard with Watson. 29 This updated software used artificial intelligence (AI)
to, theoretically, improve protection and enhance nearly every feature of the
product. 30 Because such use of AI was unprecedented in its market, Intersections’
former CEO, Johan Roets, predicted that a successful launch had the potential to
swell Intersections’ subscriber base nearly a hundred-fold, up to 100 million users.31
The launch, however, largely failed.32 Intersections went back to the drawing board
to recalibrate the product, and it forecast a release date for an upgraded version in
December 2018, which was then delayed to the first quarter of 2019.33 Intersections
continued to make significant investments in anticipation that Identity Guard with
Watson not only had growth potential, but that it represented the future of the
Company. 34
management and affairs of our company and potentially determine the outcome of matters
submitted to our stockholders for approval.” Id.
29
Id. ¶¶ 30, 33.
30
Id. ¶¶ 30–31.
31
Id. ¶ 32.
32
Id. ¶ 33.
33
Id. ¶¶ 34, 37.
34
Id. ¶¶ 33, 35, 37–38. An advisor to the Special Committee corroborated this growth potential,
noting that Internet fraud was on the rise, while revenue for identity theft protection services
remained flat, so market demand was certain to increase. Id. ¶ 36. The advisor predicted that
“after its full launch in 2019, Identity Guard with Watson would rapidly account for the vast
majority of the Company’s subscribers.” Id. ¶ 38.
6
While Intersections was working to get its upgraded product on the market, it
was also experiencing financial difficulties.35 It limited cash spending early in 2017,
and in late 2017 amended its credit agreement with PEAK6 Investments, L.P.
(PEAK6”) to increase borrowing.36 Early in 2018, the Company began to look for
additional borrowing or stock equity sales to raise capital.37 Several parties
expressed interest, and the Company formed a special committee (the “Committee”),
consisting of three independent directors, to enter due diligence and explore possible
financing options with the potential partners. 38 The Committee retained Houlihan
Lokey, Inc. (“Houlihan Lokey”) as its financial advisor to evaluate potential
financing transactions. 39 In addition, Intersections gave promissory notes to Loeb
and McGough in return for $2 million and $1 million respectively to help pay down
its balance under its credit agreement with PEAK6. 40
35
Id. ¶ 39.
36
Id.
37
Id. ¶¶ 40–41.
38
Id. ¶¶ 41–47. In March, the Company agreed to a non-binding term sheet with Hale Capital
Partners to obtain $25 million in financing, but the parties were unable to finalize the deal. Id. ¶
41. In June, it received a non-binding term sheet from NewSpring Capital (“NewSpring”) for $30
million in financing. Id. ¶ 42. Also in June, private equity firm KKR & Co. Inc. (“KKR”)
submitted an unsolicited non-binding proposal to acquire Intersections for $3.31 per share. Id. ¶
43. KKR eventually dropped out. Id. ¶ 46. NewSpring partnered with other investment funds to
explore financing, and these explorations continued into 2018. Id. ¶ 47.
39
Id. ¶ 45.
40
Id. ¶ 44. Later, on September 28, 2018, the Company would borrow another $1 million from
Loeb through a bridge note. Id. ¶ 54.
7
2. WC SACD Discusses a Potential Transaction with Intersections
and the Defendants
In September 2018, a new player entered the field. On September 14, a
representative of the iSubscribed Investor Group contacted Intersections to explore
a potential transaction, and Stanfield, Lev, and Intersections’ CFO met with
iSubscribed Investor Group representatives. 41 iSubscribed simultaneously reached
out to Loeb about its interest in the Company. 42 Within a week, iSubscribed entered
a non-disclosure agreement and began conducting due diligence. 43 On September
25, an iSubscribed Investor Group representative contacted Lev to discuss its interest
in acquiring Intersections.44 The iSubscribed Investor Group then formed WC
SACD for the purpose of an acquisition.45
On September 27, a WC SACD representative met with Intersections’
Chairman of the Board and CEO Stanfield. 46 At that meeting, Stanfield “effectively
told WC SACD that the Intersections Board would be receptive to an acquisition
offer of $3.50 to $4.00 per share.”47 On October 5, the Board met with management
41
Id. ¶¶ 48–49.
42
Id. ¶ 48.
43
Id. ¶ 50.
44
Id. ¶ 51.
45
Id. ¶ 52.
46
Id. ¶ 53.
47
Id. The Amended Complaint notes that Stanfield did not have authority to negotiate on behalf
of the Company. Id.
8
and discussed the Company’s financial needs, reviewed its status with potential
financers, and reconstituted the Committee, which had been previously abandoned.48
According to the Proxy, before the Board considered WC SACD’s first offer, it
decided it would not approve any transaction not supported by the Committee.49
Prior to this meeting, Defendant directors Stanfield, Lev (on behalf of Loeb) and
McGough had all expressed a desire 50 to roll over “the substantial majority” of their
Intersections stock in a going-private transaction with WC SACD. 51
On October 9, WC SACD proposed to acquire Intersections at $3.50 per share
(the “Merger”) and provide $30 million of senior secured convertible note financing
(the “Note Purchase Agreement,” and together with the Merger the “Transaction”).52
Notably, the $3.50 per share offer was at the precise bottom of the range Stanfield
had suggested to WC SACD representatives. 53 The Transaction also contemplated
that Stanfield, McGough, and Loeb could roll their equity into the deal. 54 Loeb and
48
Id. ¶ 55.
49
Transmittal Aff. of Elliot Covert in Support of Defs. Bruce L. Lev, David A. McGough and
Michael R. Stanfield’s Opening Br. in Support of their Mot. to Dismiss the Am. Compl. (“Covert
Aff.”), Ex. A, Schedule 14D-9 (“14D-9” or the “Proxy”), at 17.
50
The lack of an indirect object in this sentence is an artifact of the Complaint, which does not
identify to whom this desire was “expressed.”
51
Id.
52
Id. ¶ 56. The senior convertible notes would be convertible into Intersections common stock at
$2.27 per share. Id.
53
Compare id. ¶ 53 (Stanfield suggesting Board would be agreeable to offer of $3.50 to $4.00 per
share) with id. ¶ 56 (WC SACD’s making initial offer of $3.50 per share).
54
Id. ¶ 57.
9
McGough would exchange their existing promissory notes for convertible note
financing, at a favorable rate. 55 Finally, the offer was contingent on the Company
granting WC SACD “the right to designate a majority of the members on the Board
of Directors if the proposed acquisition transaction were terminated . . . .” 56 The
Committee renegotiated WC SACD’s designation right so that while it applied if the
Merger failed, it did not apply if that failure was due to WC SACD’s breach or
abandonment. 57
3. The Committee Negotiates a Deal with WC SACD
On October 10, the Committee met to discuss the proposal and engaged legal
counsel. 58 It determined that any acquisition would be conditioned on approval by
a majority-of-the-minority stockholder vote. 59 Negotiations continued on October
11, when WC SACD increased its offer to $3.68 per share.60 The Committee then
recommended that the Board enter an exclusivity agreement with WC SACD, which
55
Id. Like WC SACD’s notes, these would be convertible into Intersections common stock at
$2.27 per share. Id.
56
Id.; 14D-9, at 18.
57
See 14D-9, at 10, 25.
58
Am. Compl. ¶ 58.
59
Id. ¶ 58. In other words, a majority approval by those stockholders not rolling over their shares
in the transaction. Id.
60
Id. ¶ 59.
10
the Board did. 61 At that point, the Committee authorized its counsel to “commence
negotiation of the definitive merger and note financing documentation.”62
At the October 11 meeting, the Committee retained a “nationally recognized
investment banking firm” as financial advisor for the proposed transaction, the price
term of which was already in place. 63 According to the Amended Complaint, “just
days after its retention, the investment banking firm abruptly terminated the
engagement.” 64 Following a brief search, the Committee retained North Point
Advisors (“North Point”), giving it eight days to review the proposed transaction and
provide a fairness opinion while the Committee continued to negotiate and review
details.65
Intersections’ exclusivity agreement with WC SACD lasted through
November 9, 2018, but WC SACD allowed the Company to continue discussions
with potential partners with whom it had already engaged. 66 While negotiations
were ongoing with WC SACD, two of those potential financing partners submitted
proposals offering financing in a mix of debt, convertible notes, and equity. 67 Over
61
Id. ¶¶ 59–60.
62
Id. ¶ 59.
63
Id. ¶ 63.
64
Id.
65
Id. ¶¶ 64–65.
66
Id. ¶ 60.
67
Id. ¶ 61.
11
the next two weeks, while working on the Transaction with WC SACD, the
Committee conducted one phone call with each of the two potential financing
partners and did not make any counter-proposals or engage in further negotiations.68
On October 29, the Committee met a final time, and North Point provided its
fairness opinion on the Transaction (the “Fairness Opinion”). 69 The Amended
Complaint alleges the Fairness Opinion was based on misleading information from
both management and the Committee.70 The Committee recommended approval of
all aspects of the Transaction. 71 Later that day, the Board met, adopted the
Committee’s recommendation, and approved the Transaction at $3.68 per share, just
below the midpoint of the range suggested to WC SACD by Stanfield. 72 After it
68
Id. ¶ 62.
69
Id. ¶ 66.
70
Id. ¶¶ 80–89. Intersections’ management created a base case scenario (“Base Case”) and an
upside case scenario (“Upside Case”) for the Committee. Id. ¶ 82. The Base Case projected 2018
performance below where the Company was actually performing year-to-date. Id. Despite the
fact that the Company did not expect a regression in performance, the Base Case projected
declining EBITDA in 2019 and 2020. Id. The Upside Case, by contrast, reflected improved
Company performance based on the re-release of Identity Guard with Watson, a return to direct-
to-consumer marketing, and additional capital infusions. Id. ¶¶ 83, 85–86. The Committee
determined the Base Case was the appropriate scenario, and according to the Amended Complaint,
“it appears that the Committee did not even provide the Upside Case projections to North Point.”
Id. ¶ 83 (citing 14D-9, at 36). North Point’s Discounted Cash Flow (“DCF”) analysis, when run
on the Upside Case, produces a share value range of $11.49 to $22.81 per share. Id. ¶ 87. North
Point also conducted a Comparable Public Trading Multiple Analysis as well as a Comparable
Precedent Transaction Analysis, both of which yielded a per share price over $7.00. Id. ¶ 88. The
fairness opinion does not mention the Upside Case.
71
Id. ¶ 66.
72
Id. ¶ 67; see also id. ¶ 53 (Stanfield proposing offer range of $3.50 to $4.00 per share).
12
approved the Transaction, Intersections informed the potential financing partners
who had submitted proposals that it was not interested in proceeding with them. 73
4. Intersections Enters the Merger Agreement and the Note Purchase
Agreement
On October 31, 2018, WC SACD and Intersections entered two agreements:
the Merger, and the Note Purchase Agreement. 74 Under the Note Purchase
Agreement, the Company issued senior secured convertible notes (“Notes”) in the
principal amount of $30 million to WC SACD, a Note in the amount of $3 million
to Loeb, and a Note in the amount of $1 million to McGough.75 The Notes were
convertible into common stock at a price of $2.27 per share. 76 Additionally,
Stanfield, Loeb, and McGough entered into support agreements to tender their shares
and grant proxies to vote their shares in favor of the Merger.77 Intersections issued
73
Id. ¶¶ 62, 68.
74
Id. ¶ 69. The Note Purchase Agreement was conditioned on the signing of the Merger
Agreement as well as approval by a majority of Intersections stockholders. Id. Intersections
obtained this majority approval through the written consent of Stanfield’s, Loeb’s, and McGough’s
shares. Id.
75
Id. ¶ 70. The Amended Complaint details the terms of the Notes: 6% annual interest for 12
months after the Merger and 8% thereafter; 36 month maturation date after the Merger; first-
priority security interest of all Intersections assets; guaranteed by Intersections’ subsidiaries;
automatic conversion into Intersections common stock immediately prior to the Merger’s
consummation. Id. ¶¶ 71–72. Loeb converted into 1,324,009 shares of common stock, and
McGough converted into 441,337 shares of common stock upon closing. Id. ¶ 72. As the Plaintiff
notes, this conversion allowed Loeb and McGough to purchase into the new company at $2.27 per
share, a price significantly below the sale price. Id. ¶ 79.
76
Id. ¶¶ 74–75.
77
Id. ¶ 73.
13
a press release announcing the Merger.78 In addition to explaining the Merger, the
press release also described the Note Purchase Agreement, the conversion price of
$2.27 per share, and the use of the funds to repay PEAK6 liabilities.79
In connection with the Merger, each of the Defendants rolled over significant
portions of their equity. 80 Loeb rolled over 80% of its shares, McGough rolled over
68.6% of his shares, and Stanfield rolled over 35.7% of his shares. 81 Other benefits
also resulted. Stanfield received a golden parachute (i.e. change-in-control) payment
of around $5.85 million and an 18-month consultation agreement with WC SACD
worth $500,000 in cash as well as a stock option equity grant to acquire 839,178
shares of WC SACD common stock.82
5. Intersections Issues its 14D-9
On November 29, 2018, Intersections filed its Schedule 14D-9 (“14D-9” or
the “Proxy”) with the Securities and Exchange Commission. 83 The Plaintiff, in his
Amended Complaint, highlights four parts of the 14D-9 he considers materially
deficient or misleading.
78
Id. ¶ 74.
79
Id. ¶¶ 74–75.
80
Id. ¶ 76.
81
Id.
82
Id. ¶ 78.
83
Id. ¶ 94.
14
First, in addition to describing the Merger, the 14D-9 detailed the Note
Purchase Agreement entered into with WC SACD, Loeb, and McGough. 84 The
14D-9 describes, among other things, the aspect of the Note Purchase Agreement
that would potentially give WC SACD control of the Board in case the Merger was
voted down:
If there is a termination of the Merger Agreement (other than a
termination of the Merger Agreement by the Company due to a breach
by Parent) and Parent owns at least 80% of its initial principal amount
of Notes (or shares issued upon conversion thereof), and so long as any
Notes (or Preferred Stock issued upon conversion of Notes) remain
outstanding or any Significant Investor (as defined in the Note Purchase
Agreement) owns Common Stock comprising at least 50% of the shares
issued upon conversion of its Notes, subject to NASDAQ listing
requirements (including NASDAQ Listing Rule 5640), a majority of
the Company Board will resign and Parent will have the right to
designate directors to fill such vacancies (provided that one director so
designated shall be an independent director designated by Loeb
Holding Corporation) and to appoint the Chief Executive Officer of the
Company. 85
In describing the factors the Committee considered in determining whether to
recommend the Merger, the 14D-9 addressed the same feature of the Note Purchase
Agreement a second time:
The Special Committee . . . also considered the following
countervailing factors: . . . the fact that the Note Purchase Agreement
provides that, unless Purchaser elects in writing not to pursue the Offer
or Merger described in the Merger Agreement for any reason, in the
event the Merger Agreement is terminated, other than by reason of a
84
Id. ¶¶ 90–91.
85
Id. ¶ 91; 14D-9, at 10.
15
breach of such agreement by Purchaser, Purchaser has the right, subject
to NASDAQ listing requirements and Commission rules, to designate
a majority of the members of the Board of Directors and appoint the
chief executive officer of the Company[.] 86
According to the Amended Complaint, WC SACD would have approximately a 35%
ownership position in Intersections following the conversion of its Notes.87
Therefore, NASDAQ Rule 5640, which proscribes appointment powers
disproportionate to ownership, would potentially limit it to appointing only a
minority of the Board. 88 However, the 14D-9 did not expressly disclose WC
SACD’s aggregate ownership percentage following the conversion of its Notes, nor
explain how NASDAQ Rule 5640 would apply to the Note Purchase Agreement.89
Second, the 14D-9 did not disclose the reason why the first investment bank
retained by the Committee on October 15 terminated its engagement several days
later. 90
Third, the 14D-9 did not disclose when WC SACD first discussed with
Stanfield, Loeb, and McGough the opportunity to enter into the rollover, note
86
Am. Compl., ¶ 91 n.36; 14D-9, at 25.
87
Am. Compl., ¶ 95.
88
Id. ¶¶ 95–96. As the Amended Complaint describes, and as I discuss further below, the effect
of NASDAQ Rule 5640’s application to the Transaction here remains in dispute. Id. ¶ 95 n.38.
89
Id. ¶ 92 n.37. Additionally, a December 2018 Information Statement related to approval of the
Note Purchase Agreement, filed with the SEC as a part of the Tender Offer, noted that the support
agreements signed by Stanfield, Loeb, and McGough meant that “WC SACD beneficially owned
an aggregate of 62.4% [of] Intersections common stock.” Id. ¶ 97.
90
Id. ¶ 98.
16
conversion, or consulting agreements that they eventually entered into in connection
with the transaction. 91
Fourth, the 14D-9 did not disclose the reason the Committee did not reengage
Houlihan Lokey in October 2018, although it had engaged the firm just months
before in connection with reviewing offers from potential financial partners.92 In
addition, the 14D-9 did not disclose a summary of the financial analysis previously
prepared by Houlihan Lokey for the Committee in connection with the earlier
offers. 93
C. Procedural History
The Plaintiff filed his Complaint on January 22, 2019, originally against all
six members of Intersections’ Board.94 All Defendants moved to dismiss the
Complaint on April 25.95 The Plaintiff voluntarily dismissed the claims against
directors Albertine, Amato, and Seiler and filed an Amended Complaint on June
14.96 The Defendants renewed their Motion to Dismiss on July 24. 97 I heard
91
Id. ¶ 99.
92
Id. ¶ 100.
93
Id.
94
Verified Class Action Compl. for Breach of Fiduciary Duties, D.I. 1.
95
Defs. Bruce L. Lev, David A. McGough and Michael R. Stanfield’s Mot. to Dismiss Pl.’s
Verified Class Action Compl., D.I. 10; Defs. John M. Albertine, Thomas G. Amato, and Melvin
R. Seiler’s Mot. to Dismiss, D.I. 14.
96
Stip. & Order of Voluntary Dismissal of Defs. John M. Albertine, Thomas G. Amato, and Melvin
R. Seiler, D.I. 18; Am. Compl.
97
Defs.’ Mot. to Dismiss Pl.’s Am. Verified Class Action Compl., D.I. 25.
17
argument on the Defendants’ motion on November 19 and considered the matter
fully submitted at that time.
II. ANALYSIS
A. Legal Standards
The Defendants have moved to dismiss this action under Chancery Court Rule
12(b)(6). In considering such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the nonmoving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof. 98
However, I do not need to accept “conclusory allegations unsupported by specific
fact” as true, nor must I “draw unreasonable inferences” in the Plaintiff’s favor.99 I
may consider facts in documents incorporated into the Amended Complaint.100
Under Delaware law, when a disinterested and independent board of directors
acts, this Court reviews those actions under the business judgment rule, a “broadly
permissive standard.”101 Where directors are interested in a transaction, however,
98
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotations
omitted).
99
Thermopylae Capital Partners, L.P. v. Simbol, Inc., 2016 WL 368170, at *9 (Del. Ch. Jan. 29,
2016) (quoting Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011)).
100
See in re Morton’s Rest. Grp., Inc. S’holder Litig., 74 A.3d 656, 658–59 (Del. Ch. 2013); In re
Martha Stewart Living Omnimedia, Inc. S’holder Litig., 2017 WL 3568089, at *3 (Del. Ch. Aug.
18, 2017).
101
Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25, 2016).
18
our scrutiny increases, and the transaction may be subject to entire fairness review.102
Thus, if a board approves a transaction and “at least half of the directors who
approved the transaction were not disinterested or independent,” then the transaction
is subject to entire fairness review.103 Entire fairness can also apply when a
controlling stockholder is conflicted or competes for consideration with fellow
stockholders.104 Where entire fairness is the standard of review, and where, as here,
a plaintiff alleges facts making it reasonably conceivable that the transaction was not
entirely fair to stockholders, the granting of a motion to dismiss is inappropriate,
because the burden is on the defendants to develop facts demonstrating entire
fairness.105 However, even where half or more of the directors are interested, and
even if a conflicted controller is present, a company can implement procedural
safeguards that cleanse the transaction and regain business judgment review,
102
See Weinberger v. UOP, Inc., 457 A.2d 701, 710–11 (Del. 1983) (“When directors of a
Delaware corporation are on both sides of a transaction, they . . . [have] the burden of establishing
its entire fairness, sufficient to pass the test of careful scrutiny by the courts.” (citing Gottlieb v.
Heyden Chem. Corp., 91 A.2d 57, 57–58 (Del. 1952); Sterling v. Mayflower Hotel Corp., 93 A.2d
107, 110 (Del. 1952); Bastian v. Bourns, Inc., 256 A.2d 680, 681 (Del. Ch. 1969), aff’d, 278 A.2d
467 (Del. 1970); David J. Greene & Co. v. Dunhill Int’l Inc., 249 A.2d 427, 431 (Del. Ch. 1968))).
103
Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 WL 770251, at *9 (Del. Ch. Feb. 29, 2016).
104
Larkin, 2016 WL 4485447, at *8.
105
See Cumming v. Edens, 2018 WL 992877, at *23 (Del. Ch. Feb. 20, 2018) (“the applicability
of the entire fairness standard normally will preclude a dismissal of a complaint on a Rule 12(b)(6)
motion to dismiss.” (quoting In re Riverstone Nat’l, Inc. S’holder Litig., 2016 WL 4045411, at *15
(Del. Ch. July 28, 2016))).
19
resulting, where appropriate, in dismissal of the action.106 The defendants asserting
such defenses bear the burden of establishing them. 107
Where entire fairness applies because of a conflicted controller, under Kahn
v. M&F Worldwide (MFW), 108 a board can recover business judgment review by
making the transaction contingent from inception upon the presence of a fully
constituted, fully authorized special committee and a vote of informed and un-
coerced minority stockholders.109 Under Corwin v. KKR Holdings LLC (Corwin),110
“absent a looming conflicted controller,” approval by a fully informed, un-coerced
vote of disinterested stockholders can cleanse the transaction—even where entire
fairness would otherwise apply. 111 Alternatively, absent a conflicted controller, a
fully-empowered, independent special committee can potentially cleanse the
transaction under the rationale noted in In re Trados Inc. Shareholder Litigation
(Trados II). 112
106
See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014) (“We hold that business
judgment is the standard of review that should govern mergers between a controlling stockholder
and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of
an independent, adequately-empowered Special Committee that fulfills its duty of care; and the
uncoerced, informed vote of a majority of the minority stockholders.”).
107
Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018); Corwin v. KKR Fin Holdings LLC, 125
A.3d 304, 312 n.27 (Del. 2016).
108
88 A.3d 635 (Del. 2014).
109
See id. at 644.
110
125 A.3d 304 (Del. 2015).
111
Larkin v. Shah, 2016 WL 4485447, at *13 (Del. Ch. Aug. 25, 2016) (emphasis omitted).
112
73 A.3d 17 (Del. Ch. 2013).
20
Here, the Amended Complaint adequately pleads (and the Defendants do not
contest) that at least half the Board lacked independence because they were
interested parties in the Merger. Stanfield and McGough rolled over substantial
portions of their Intersections equity into the Merger, and Loeb—where Lev serves
as managing director—did the same. 113 The Plaintiff also alleges other facts that
imply a lack of independence, such as Stanfield’s consulting agreement, and
McGough’s and Loeb’s receipt of convertible notes through the Convertible Note
Agreement. 114 Accepting these allegations as true, I find that these three directors
on the six-director Board stood on both sides of the Merger as co-purchasers with
WC SACD. As such, their interests in the Merger diverged from the other
stockholders, and they lacked independence. 115 Because these three constituted “at
least half of the directors who approved the transaction,” the Merger is subject to
entire fairness review unless it was properly cleansed through procedural
safeguards.116 I note the Defendants do not argue otherwise in their Motion to
Dismiss.
113
Am. Compl., ¶ 76; see also In re Trados Inc. S’holder Litig., 2009 WL 2225958, at *8 (Del.
Ch. July 24, 2009) (finding director was interested who had “an ownership or employment
relationship” with an entity that owned target company stock).
114
Am. Compl. ¶¶ 70, 78.
115
Orman v. Cullman, 794 A.2d 5, 29 (Del. Ch. 2002) (finding directors lacked independence
when they stood to receive benefit from transaction not shared by all stockholders).
116
Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016 WL 770251, at *9 (Del. Ch. Feb. 29, 2016).
21
The Plaintiff, for his part, does not assert that the Merger was subject to a
controlling stockholder or stockholder group. 117 Therefore, the Defendants properly
argue that even if half the Board was interested—as I have found at this pleading
stage—the Merger could potentially receive business judgment review under the
doctrines expounded in Corwin and Trados II. 118 The burden, however, is on the
Defendants to effectively invoke these doctrines.
I accept the Plaintiff’s concession that the transaction was not subject to a
controller or control group, and thus cleansing under Corwin or Trados II is possible.
The Amended Complaint adequately alleges, however, that the procedural
safeguards instituted were inadequate to cleanse the Merger and regain business
judgment review. Thus, the transaction remains subject to entire fairness review.
Although the Defendants do not argue that they could withstand entire fairness
scrutiny at the motion to dismiss stage, I note briefly that the Amended Complaint
clears the low hurdle of pleading unfair process and price under entire fairness
117
The Amended Complaint alleges that the Defendants breached their fiduciary duties “[b]y
virtue of their positions as directors and/or officers of Intersections and their exercise of control
and ownership over the business and corporate affairs of the Company.” Am. Compl. ¶ 108
(emphasis added). The Amended Complaint, however, never alleges a control group or explicitly
states that the Defendants exerted control. The Plaintiff clarifies this issue in his briefing: “Plaintiff
does not—and never did—assert that Loeb, Stanfield and/or McGough controlled Intersections as
of the Transaction.” Pl.’s Answ. Br. in Opp’n to Defs.’ Mot. to Dismiss the Am. Compl., D.I. 27
(“Pl.’s Answ. Br.”), at 34 n.18.
118
Alternatively, the Defendants also argue that should I find a controller present, under MFW the
Merger is nonetheless still subject only to business judgment review. Given the fact that the
Plaintiff does not assert that this is a controlled transaction, I do not consider the more difficult
MFW standard further.
22
review by adequately alleging that insiders influenced the transaction to divert
merger consideration to themselves, and that the Company was sold at an unfairly
depressed price. 119
B. The Employment of the Special Committee Does Not Successfully Cleanse
the Transaction
A corporate transaction entered by a conflicted board is subject to entire
fairness, but our case law contemplates that if there is no controller present, then a
fully constituted, adequately authorized, and independent special committee can
cleanse such a transaction.120 This is because the true empowerment of a committee
of independent, unconflicted directors removes the malign influence of the self-
119
E.g. Am. Compl. ¶¶ 48–55 (alleging that interested directors improperly influenced the
transaction process), 80–89 (alleging the Merger was unfairly priced); Ams. Mining Corp. v.
Theriault, 51 A.3d 1213, 1239 (Del. 2012) (noting that entire fairness review examines fair dealing
and fair price) (internal citation omitted). The Defendants focused their briefing on procedural
cleansing and did not address dismissal under entire fairness review. See Opening Br. of Defs.
Bruce L. Lev, David A. McGough, and Michael R. Stanfield in Support of Their Mot. to Dismiss
the Am. Compl., D.I. 25 (“Defs.’ Opening Br.”), at 1–3.
120
In re Trados Inc. S’holder Litig., 73 A.3d 17, 65 n.39 (Del. Ch. 2013) (“The decision not to
form a special committee had significant implications for this litigation . . . If a duly empowered
and properly advised committee had approved the Merger, it could well have resulted in business
judgment deference.”); Frederick Hsu Living Tr. v. ODN Holding Corp., 2017 WL 1437308, at
*33 (Del. Ch. Apr. 14, 2017) (“If the board delegates its full power to address an issue to a
committee, then the judicial analysis focuses on the committee. A decision made by a
disinterested, independent and informed majority of the committee receives business judgment
deference.” (citing Trados II, 73 A.3d at 65 n.39; In re W. Nat’l Corp. S’holders Litig., 2000 WL
710192, at *27 (Del. Ch. May 22, 2000))); see also Teamsters Union 25 Health Servs. & Ins. Plan
v. Baiera, 119 A.3d 44, 65 n.199 (Del. Ch. 2015) (“the full board did not approve the [merger] . .
. only the Audit Committee did so. Thus, the relevant focus for determining the standard of review
for the breach of fiduciary duty claim asserted against the [defendant] directors . . . is on the
members of the Audit Committee, whose presumed independence, disinterestedness, and good
faith Plaintiff failed to call into question for the reasons explained above. Thus, the business
judgment standard would presumably govern.”).
23
interested directors, and thus should result in business judgement review. Whether
such a committee is truly empowered is a necessary question, to be reviewed
practically to determine if the transaction, in fact, is untainted by fiduciary self-
interest. The issue before me in this regard involves the timing of the formation of
the committee. Must the committee be sufficiently constituted and authorized ab
initio; consistent, that is, with the requirements set forth in MFW for cleansing a
transaction in a control situation? The answer, I perceive, is yes.
Our Supreme Court held in MFW:
[B]usiness judgment is the standard of review that should govern
mergers between a controlling stockholder and its corporate subsidiary,
where the merger is conditioned ab initio upon both the approval of an
independent, adequately-empowered Special Committee that fulfills its
duty of care; and the uncoerced, informed vote of a majority of the
minority stockholders. 121
The Supreme Court outlines why the constitution of the committee ab initio is
important: “when these two protections are established up-front, a potent tool to
extract good value for the minority is established. From inception, the controlling
stockholder knows that it cannot bypass the special committee’s ability to say no.”122
The same rationale, I perceive, applies in the context of a majority-conflicted board.
As our Supreme Court recently discussed in Flood v. Synutra Int’l, Inc.123:
121
Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014).
122
Id. (emphasis added).
123
195 A.3d 754 (Del. 2018).
24
The key concern of MFW was ensuring that controllers could not use
the conditions [i.e. the procedural protections of a majority-of-the-
minority vote and a functional special committee] as bargaining chips
during economic negotiations . . . [t]he essential element of MFW, then,
is that these requirements cannot be dangled in front of the Special
Committee, when negotiations to obtain a better price from the
controller have commenced, as a substitution for a bare-knuckled
contest over price. 124
I find the same concerns apply in the instant context, where there is no controlling
stockholder but the board is conflicted. The acquirer—as well as any interested
directors—must know from the transaction’s inception that they cannot bypass the
special committee. Insiders in particular, standing on both sides of the transaction,
may be tempted to exercise the opportunity and influence their positions afford them
to move the transaction favorably toward their own interests. Even in a non-control
setting, commencing negotiations prior to the special committee’s constitution may
begin to shape the transaction in a way that even a fully-empowered committee will
later struggle to overcome. In that scenario, a “bare knuckle contest over price” is
unlikely, and the existence of the committee is insufficient to replicate an arms-
length transaction. Consequently, it is also insufficient to revive business judgement
review.
124
Id. at 762–63.
25
In Flood, our Supreme Court determined that “from the beginning” means
that the required condition125 must exist “before any substantive economic
negotiations begin.”126 The Supreme Court opted for this interpretation rather than
a bright-line rule, such as requiring that the condition be contained in the first
offer.127 Still more recently, in Olenik v. Lodzinski, 128 the Court provided insight
into what might constitute “substantive economic negotiations.” In Olenik, the
parties began discussing a transaction in November 2015.129 The next month, they
signed a confidentiality agreement and conducted due diligence. 130 Discussions
were put on hold for a few months, then resumed. 131 The parties proceeded to engage
in a joint valuation exercise to provide high and low values for the company. 132 The
Supreme Court found that “[w]hile some of the early interactions . . . could be fairly
described as preliminary discussions outside of MFW’s ‘from the beginning’
requirement,” the complaint adequately pled that “the preliminary discussions
125
That is, an empowered, fully functioning special committee.
126
Id. at 762. The Supreme Court’s discussion of the topic spans pages 760–66.
127
Id. at 762.
128
208 A.3d 704 (Del. 2019).
129
Id. at 716.
130
Id.
131
Id. at 716–17.
132
Id. at 717.
26
transitioned to substantive economic negotiations when the parties engaged in a joint
exercise to value [the acquirer and target company].” 133
The Supreme Court found that “it is reasonable to infer that these valuations
set the field of play for the economic negotiations to come by fixing the range in
which offers and counteroffers might be made.” 134 And, “[a]ccording to the
complaint, that generally turned out to be the case.”135 The first offer landed just
under the low valuation, and the final price landed just under the high valuation: in
other words, the valuations conducted prior to the special committee’s constitution
formed a price collar. 136 The pleading-stage inference was that this counted as
substantive economic discussions.137
Applying the guidance provided in Olenik, I find here that the Committee was
not properly constituted from the Merger’s inception in a way that could take
advantage of the cleansing effect proposed in Trados II.
Here, the iSubscribed Investor Group first contacted the Board on September
14, 2018.138 At that point, the Committee—previously constituted to review
133
Id.
134
Id.
135
Id.
136
Id.
137
Id.
138
Am. Compl., ¶¶ 48–49.
27
financial options—had been abandoned.139 The 14D-9 details what occurred next.
On September 18, Stanfield and Lev met with the iSubscribed Investor Group “to
provide an overview of the Company and its financing needs, outline in broad terms
how an acquisition of the Company might be approached, and gain an understanding
of the iSubscribed Investor Group’s intentions.”140 Following this meeting, on
September 20, “iSubscribed entered into a non-disclosure agreement with [the
Company] and began a detailed due diligence process.” 141 iSubscribed’s investment
banker called Lev to discuss the potential acquisition on September 25. 142
On September 26, the iSubscribed Investor Group formed WC SACD, and the
next day a WC SACD representative met with Stanfield. 143 According to the
Amended Complaint, without “authority to negotiate on behalf of the Company or
Board, Stanfield effectively told WC SACD that the Intersections Board would be
receptive to an acquisition offer of $3.50 to $4.00 per share.” 144 The 14D-9
maintains that Stanfield only gave his personal view of what price the directors
would be amenable to “after emphasizing he did not have authority to negotiate on
139
See id. ¶ 55.
140
14D-9, at 16.
141
Id.
142
Id. at 17.
143
Id.
144
Am. Compl., ¶ 53.
28
behalf of the Company.” 145 Acquisition discussions then continued through the first
week of October.146 At that point, the Board reconstituted the Committee, and as of
the time WC SACD submitted its first offer, on October 9, the Board had
“determined that it would not recommend a potential transaction . . . for approval by
the Company’s stockholders, or otherwise approve a potential transaction . . .
without a prior favorable recommendation by the Special Committee.”147
The Defendants point out that in Olenik, the parties’ involvement, pre-
committee, was more extensive than here. There, the parties engaged in several
months of due diligence and general acquisition discussions, while here it was
weeks. There, the parties engaged in a joint valuation process to “fix[] the range” of
values for the company and thereby “set the field of play for the economic
negotiations to come.” 148 Here, Stanfield, Intersections’ Chairman and CEO, told
WC SACD to base an offer on the “independent value” rather than the trading price
and gave a range he thought would engage the Board.149
Acknowledging these factual differences, I find that at the pleading stage I
can infer that this pre-Committee involvement, while more limited than in Olenik,
145
14D-9, at 17.
146
Id. at 16.
147
Id. at 17.
148
Olenik v. Lodzinski, 208 A.3d 704, 717 (Del. 2019).
149
14D-9, at 17.
29
likewise set the stage for future economic negotiations. This inference is
strengthened by the fact that, as the Amended Complaint alleges, WC SACD came
in at $3.50, the exact lower end of Stanfield’s suggestion, and raised its offer, once,
to $3.68, just under the middle of the range he provided. And that was where the
Merger closed.150 Making the inference in favor of the Plaintiff, as I must, I find it
conceivable that these discussions prior to the Committee’s reconstitution essentially
formed a price collar that “set the field of play for the economic negotiations to
come.” 151 Discovery may demonstrate otherwise. But the Amended Complaint
adequately pleads the existence of substantive economic negotiations, pre-
Committee, that raises a pleading-stage inference that these discussions deprived the
Committee of the full negotiating power sufficient to invoke the business judgement
rule.
To summarize, I find that to effectively cleanse a transaction under Trados II
and its progeny, the special committee must be constituted ab initio, as in MFW. As
described in Flood and examined in Olenik, this requires the committee’s
empowerment prior to “substantive economic negotiations,” which include
valuation and price discussions if such discussions “set the field of play for the
150
Am. Compl. ¶¶ 53, 56.
151
Olenik, 208 A.3d at 717. Olenik also notes the well-known phenomenon of “anchoring,” by
which “a starting value biases future adjustments toward that initial value.” Id. (citing Amos
Tversky & Daniel Kahneman, Judgment under Uncertainty: Heuristics and Biases, 185 Science
1124, 1128–30 (1974)).
30
economic negotiations to come.” 152 The transaction here did not meet this
requirement because the Amended Complaint adequately pleads that pre-Committee
discussions plausibly created a price collar for the Merger and thus constituted
substantive economic discussions.153
C. Intersections’ Disclosures do not Cleanse the Transaction under Corwin
Because They are Materially Incomplete or are Materially Misleading
Next, the Defendants argue that the transaction is cleansed under Corwin
because there is no controlling shareholder and the 14D-9 adequately discloses all
material information, leading to an effective favorable vote of the unconflicted
shares. Under Corwin, where a transaction without a conflicted controller “is
approved by a fully informed, un-coerced vote of the disinterested stockholders, the
business judgment rule applies.”154 In such a case, the informed and empowered
corporate electorate has accepted the transaction in light of, and in spite of, any
conflicts of interest or other fiduciary defects, and this Court will not second-guess
such an informed vote by the corporate owners.
In determining the materiality of missing (or misinforming) information at the
pleading stage, the Court asks whether “[i]t is reasonably conceivable that Plaintiff
152
Id.
153
Because of this finding, I do not reach the Plaintiff’s remaining contentions that the Committee
was ineffective. See Am. Compl., ¶¶ 56–66.
154
Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 309 (Del. 2016).
31
will be able to demonstrate a substantial likelihood that . . . reasonable . . .
stockholders would have found this information to be important when deciding how
to vote on the Merger.” 155 If the information is the type that would be material—in
other words, if it would “significantly alter the ‘total mix’ of information made
available”156—then “failure to disclose it in the Proxy undermines the cleansing
effect of the stockholder vote under Corwin.” 157 Counterbalancing the mandate for
complete disclosure, of course, is recognition of the risk of inundating the
stockholder with so much information that the proxy clouds, rather than clarifies, the
stockholder’s decision. 158 A complaint does not state a disclosure violation by
155
In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *13 (Del. Ch. Mar. 31, 2017);
see also In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 899 (Del. Ch. 2016) (materiality requires
that “there is a substantial likelihood that a reasonable shareholder would consider [the omitted
information] important in deciding how to vote.”); Arnold v. Soc’y for Sav. Bancorp, Inc., 650
A.2d 1270, 1277 (Del. 1994) (omissions must “have assumed actual significance in the
deliberations of the reasonable shareholder.”).
156
Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018) (quoting Rosenblatt v. Getty Oil Co., 493
A.2d 929, 944 (Del. 1985)).
157
In re Saba, 2017 WL 1201108, at *13.
158
In re Volcano Corp. S’holder Litig., 143 A.3d 727, 749 (Del. Ch. 2016) (“Assessing materiality
is a difficult practice that requires balancing the benefits of additional disclosures against the risk
that insignificant information may dilute potentially valuable information.” (internal citation
omitted)); In re Plains Expl. & Prod. Co. S’holder Litig., 2013 WL 1909124, at *8 n.74 (Del. Ch.
May 9, 2013) (“Balanced against the requirement of complete disclosure is the pragmatic
consideration that creating a lenient standard for materiality poses the risk that corporations will
bury the shareholders in an avalanche of trivial information a result that is hardly conducive to
informed decisionmaking.” (quoting Skeen v. Jo–Ann Stores, Inc., 1999 WL 803974, at *4 (Del.
Ch. Sept. 27, 1999), aff’d, 750 A.2d 1170 (Del. 2000) (internal citation omitted))); TCG Sec., Inc.
v. S. Union Co., 1990 WL 7525, at *7 (Del. Ch. Jan. 31, 1990) (“a reasonable line has to be drawn
or else disclosures in proxy solicitations will become so detailed and voluminous that they will no
longer serve their purpose.”).
32
noting picayune lacunae or “tell-me-more” details left out. 159 Nonetheless, at this
pleading stage I must decline to employ the business judgement rule so long as it is
reasonably conceivable that the Amended Complaint has alleged misleading or
missing disclosures in the Proxy that are material.
The Defendants argue the Company’s 14D-9 discloses all material facts, and
thus the well-informed stockholders had their choice between attractive alternatives:
on the one hand, a 112% premium over trading price; on the other hand, maintaining
an equity stake in a company about to launch a historic flagship product. 160 By
contrast, the Plaintiff argues that the 14D-9 actually suggested to the stockholders
that if they did not approve the Merger, control would transfer to WC SACD. The
Plaintiff also alleges missing material information regarding the Transaction and
advisors. I find the Amended Complaint adequately alleges that the 14D-9 is
materially incomplete, or materially misleading to stockholders, regarding the
potential transfer of control. In addition, I find the 14D-9 omits material facts
regarding the Committee’s engagement with financial advisors. 161
159
See In re Delphi Fin. Grp. S’holder Litig., 2012 WL 729232, at *18 (Del. Ch. Mar. 6, 2012).
160
Defs.’ Opening Br., at 34–36.
161
Because of my decision here, I need not address other grounds on which the Plaintiff alleges
that the Proxy was insufficient. See Am. Compl., ¶¶ 99–100.
33
1. The 14D-9 Fails to Adequately Disclose WC SACD’s Appointment
Rights if the Stockholders Reject the Merger
“Under Delaware law, when a board chooses to disclose a course of events or
to discuss a specific subject, it has long been understood that it cannot do so in a
materially misleading way, by disclosing only part of the story, and leaving the
reader with a distorted impression.”162 Put differently, “[p]artial disclosure, in which
some material facts are not disclosed or are presented in an ambiguous, incomplete,
or misleading manner, is not sufficient to meet a fiduciary’s disclosure
obligations.”163 A variation of this concept has sometimes been called the “buried
facts” doctrine and rests on the idea that “[d]isclosure is inadequate if the disclosed
information is ‘buried’ in the proxy materials.” 164 Typically, a stockholder’s desire
that information be presented earlier in the proxy or that it receive more emphasis
will not suffice to demonstrate a material inadequacy. 165 If, however, a stockholder
162
Appel v. Berkman, 180 A.3d 1055, 1064 (Del. 2018); see also In re Netsmart Techs., Inc.
S’holders Litig., 924 A.2d 171, 203 (Del. Ch. 2007) (“Once a board broaches a topic in its
disclosures, a duty attaches to provide information that is ‘materially complete and unbiased by
the omission of material facts.’” (quoting In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 448
(Del. Ch. 2002))).
163
Appel, 180 A.3d at 1064.
164
Vento v. Curry, 2017 WL 1076725, at *3 (Del. Ch. Mar. 22, 2017) (quoting Weingarden v.
Meenan Oil Co., 1985 WL 44705, at *3 (Del. Ch. Jan. 2, 1985)).
165
See Weingarden v. Meenan Oil Co., 1985 WL 44705, at *3 (Del. Ch. Jan. 2, 1985) (“The ‘buried
facts’ doctrine cannot be invoked here . . . Inasmuch as the disclosure was made under an
appropriate heading and cross referenced at the beginning of the proxy statement, plaintiffs’
allegation that these disclosures should have been made earlier in the proxy statement is without
merit.”).
34
is sent on a “scavenger hunt” to dig up information one would expect to be stated
clearly and in one place, the disclosure may be inadequate. 166 In other words, proxies
should be lucid, and not a game of Clue.167
The 14D-9 discloses a contractual right that WC SACD gained as a part of the
Note Purchase Agreement:
If there is a termination of the Merger Agreement . . . subject to
NASDAQ listing requirements (including NASDAQ Listing Rule
5640), a majority of the Company Board will resign and Parent will
have the right to designate directors to fill such vacancies (provided that
one director so designated shall be an independent director designated
by Loeb Holding Corporation) and to appoint the Chief Executive
Officer of the Company. 168
The 14D-9 also discloses that the Committee considered WC SACD’s right in
determining whether to recommend the Merger:
The Special Committee . . . also considered the following
countervailing factors: . . . the fact that the Note Purchase Agreement
provides that . . . in the event the Merger Agreement is terminated, other
than by reason of a breach of such agreement by Purchaser, Purchaser
has the right, subject to NASDAQ listing requirements and
Commission rules, to designate a majority of the members of the Board
166
See Vento, 2017 WL 1076725, at *3 (finding disclosure inadequate when material facts
regarding “a financial advisor’s potential conflicts of interest” were located in multiple public
documents); see also Blanchette v. Providence & Worcester Co., 428 F. Supp. 347 (D. Del. 1977)
(finding voting rights disclosures inadequate when the material voting provisions were disclosed
clearly upfront but the fact that they had been invalidated was in a footnote near the end of the
disclosure).
167
See Appel, 180 A.3d at 1064 (noting that proxies are not intended to function as mysteries for
stockholders to solve).
168
Am. Compl., ¶ 91; 14D-9, at 10.
35
of Directors and appoint the chief executive officer of the
Company[.] 169
Both these disclosures state succinctly that a rejection of the proposed Merger
would result in a change of control in favor of WC SACD, leaving stockholders as
equity holders in a controlled entity. The Proxy also provides that such a change in
control is subject to NASDAQ Rule 5640. The 14D-9 further discloses what
NASDAQ Rule 5640 is and its effect:
NASDAQ Listing Rule 5640 . . . provides that voting rights of existing
shareholders of publicly traded common stock registered under Section
12 of the Exchange Act cannot be disparately reduced or restricted
through any corporate action or issuance. Thus, under current
NASDAQ interpretative guidance, should a company allow an investor
to nominate or designate directors at a level which is disproportionately
greater than its aggregate ownership position, NASDAQ would view
that corporate action as disparately reducing the voting power of the
other shareholders.170
Thus, under the NASDAQ rules, even though WC SACD had a contractual right to
appoint a majority of the Board, it could only exercise this right commensurate with
its ownership. To put it simply (as the Proxy itself could have): Under Rule 5640,
WC SACD could only appoint a majority of the Board if it held a majority of the
stock. 171
169
Id. ¶ 91 n.36; 14D-9, at 25.
170
14D-9, at 10.
171
The Defendants argue that because the explanation of the rule is relatively clear, this disclosure
claim is comparable to a recent opinion in which this Court found failure to explain a clause was
immaterial because the clause “speaks for itself; it required no explanation.” Zalmanoff v. Hardy,
2018 WL 5994762, at *4 (Del. Ch. Nov. 13, 2018), aff’d, 211 A.3d 137 (Del. 2019). The clause
36
The Intersections stockholder, assuming she read these disclosures correctly,
would then need to discern WC SACD’s ownership stake at the effective time to
determine whether WC SACD would be permitted to appoint a majority of the Board
under its contractual right. 172 The 14D-9 does not disclose this ownership
percentage outright; however, as Defendants point out, the information needed to
make the calculation can be located entirely within the Proxy materials.
The stockholder can calculate the ownership and apply this information by
following these steps: 173
• The stockholder can glean the total number of outstanding shares pre-
Merger from the first page of the 14D-9: 24,428,246.174
• Then, the stockholder can review the Offer to Purchase for Cash All
Outstanding Shares of Common Stock of Intersections Inc. (the “Offer
to Purchase”).175 The Offer to Purchase is included as Exhibit (a)(1) to
the 14D-9, and was “[i]ncluded in materials delivered to stockholders
of the Company.” 176
• Page 17 of the Offer to Purchase describes the conversion aspect of the
Note Purchase Agreement. From this, the stockholder can learn that
there was a “best efforts” clause that merely stated the company was required to use best efforts to
close the transaction. Id. In my view, that situation is not comparable to the application of a
NASDAQ listing rule to a contractual obligation where the Proxy lacks a reasonable presentation
of information needed for the analysis.
172
The Amended Complaint states that the “Notes would automatically convert into shares of
Intersections common stock immediately prior to the consummation of the Transaction.” Am.
Compl., ¶ 72.
173
These steps are outlined, in varied forms, in the parties briefing. See Pl.’s Answ. Br., at 41–44;
Defs.’ Opening Br., at 34–41.
174
14D-9, at 1 (“As of November 28, 2018, there were 24,428,246 Shares outstanding.”).
175
Covert Aff., Ex. D, Offer to Purchase for Cash All Outstanding Shares of Common Stock of
Intersections Inc. (“Offer to Purchase”).
176
14D-9, at 52, 54.
37
WC SACD gained the right to automatically convert its Notes into
13,215,859 shares of common stock.177
• Page 17 of the Offer to Purchase also conveys that all of the Notes in
the Note Purchase Agreement are convertible into 14,977,974 shares of
common stock.178
• From here, the stockholder can make the calculation: divide WC
SACD’s number of converted shares by the sum of the outstanding
shares and the total number of converted shares: 13,215,859 /
(24,428,246 + 14,977,974) = .3354.179
• Thus, the stockholder can conclude that by exercising its conversion
right in the Note Purchase Agreement, WC SACD can convert into
approximately a 33.54% ownership stake.180
• Armed with WC SACD’s ownership percentage post-conversion, the
stockholder can conclude that Rule 5640 would likely limit WC
SACD’s contractual right to appoint a majority of directors to its
ownership stake of approximately one-third because otherwise
“NASDAQ would view that corporate action as disparately reducing
the voting power of the other shareholders.”
Thus, a truly diligent Intersections stockholder could conclude from the 14D-9 and
the exhibits provided that if she votes against the transaction, as long as NASDAQ
Rule 5640 applies—and no exceptions to the rule apply181—her “no” vote will not
177
Offer to Purchase, at 17.
178
Id.
179
Defs.’ Opening Br., at 37 n.11.
180
Id. The Stockholder will also need to determine that this 33.54% is the applicable number for
analysis under the NASDAQ Rules, rather than the 62.4% number, which is the percentage of the
common stock of which WC SACD was the “Beneficial Owner” as of the Merger. 14D-9, at 48.
181
NASDAQ Rule 5640 permits an exception when a company allows appointment rights
disproportional to ownership “where necessary to rescue a company in financial distress.” Nasdaq
Staff Interpretation Letter 2010-15, available at https://listingcenter.nasdaq.com/assets/
StaffInterpLtrs20111231.pdf (“[W]e have determined to grant an exception from the Voting
Rights Rule [5640] as it applies to the voting power of the preferred stock because both that rule
and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in
financial distress.”). The Defendants argue this exception would not apply because although they
argue that the Company was in “considerable financial distress,” they argue that the appointment
38
result in the change of control that both the Note Purchase Agreement and the 14D-
9 state is WC SACD’s contractual right.
The question is whether this disclosure scheme is adequate to fulfill the
Company’s duty to disclose all material facts and not materially mislead the
stockholder. While the stockholder must be adroit to assemble the information,
everything is included in materials sent to the stockholders.182 The Defendants cite
our case law, in which this Court has held that “mere failure to organize the
documents to meet [the] plaintiff’s best case scenario for maximizing the clarity of
the information presented does not constitute the kind of omission or misleading
half-truth” necessary for a materially inadequate disclosure.183 Conversely, the
Plaintiff notes that this Court has also held that “[d]isclosures are not supposed to
rights would arise after the Note Purchase Agreement relieved that distress. See Defs.’ Opening
Br., at 43; Defs.’ Reply Br. in Support of Their Mot. to Dismiss the Am. Compl., at 22–23 (“Defs.’
Reply Br.”). However, the appointment rights were also bargained for as a part of the contract
that, per the Defendants, relieved the Company of its financial distress. Suffice it to say that it is
unclear how and whether this exception would apply (an issue upon which I am unqualified to
opine), and that the exception is not disclosed in the 14D-9.
182
See Wolf v. Assaf, 1998 WL 326662, at *3 (Del. Ch. June 16, 1998) (“Under no reasonable
interpretation of the facts plead could the placement of the disclosure about the [allegedly omitted
information] in the 10-K accompanying the proxy statement rather than in the statement itself serve
as the basis for a disclosure violation.”).
183
Id.
39
take the form of a scavenger hunt,”184 and that a stockholder should not be required
to “piece together the answer from information buried” in the disclosures. 185
In this situation, and at this pleading stage, I find it reasonably conceivable
that the 14D-9 fails to adequately disclose material facts about WC SACD’s
appointment rights in case of the Merger’s termination. Clearly, a potential that a
“no” vote could lead to ownership of equity in a newly-controlled corporation is
material to a stockholder’s decision on whether to sell her shares. 186 The possibility
that opposing the Merger will result in a newly controlled corporation is certainly
part of the “total mix” of information a reasonable stockholder would take into
account when making her decision.
Here, the statements in the 14D-9 on their face suggest to a reasonable
stockholder that WC SACD has a contractual right to control the Board if the vote
is unfavorable. While it states that NASDAQ Rules apply and points to Rule 5640,
it leaves the stockholder on her own to look past the impression of a contractual right
to control that the 14D-9 creates, and to discern that the application of Rule 5640
184
Ark. Teacher Ret. Sys. v. Alon USA Energy, Inc., 2019 WL 2714331, at *24 (Del. Ch. Jun. 28,
2019).
185
Vento v. Curry, 2017 WL 1076725, at *3–4 (Del. Ch. Mar. 22, 2017).
186
The Defendants appear to argue that stockholders would not find the change in control material
because a change in control would not deprive them of Intersections’ alleged imminent value
increase. See Defs.’ Opening Br., at 39. This, to me, is a non-sequitur. I assume the Company
had a bright future, but fail to see how this bears on the obvious conclusion that a transition to a
controlled company is a material stockholder concern.
40
might supersede this contractual outcome. Then, without guidance from the 14D-9,
the stockholder must track down stock ownership numbers in the exhibits to
complete the analysis. 187
For an issue as fundamental to a stockholder as an apparent decision between
selling or holding subject to a change of control, I find the disclosure regarding WC
SACD’s appointment rights was plausibly “presented in an ambiguous, incomplete,
or misleading manner, [and] is not sufficient to meet a fiduciary’s disclosure
obligations.”188 Either the stockholder would be unable to follow the necessary steps
to conduct her analysis, in which case the disclosure is plausibly coercive because it
suggests on its face a sell-or-change-of-control choice,189 or, in order to find out
whether the vote is coercive, the stockholder is required to undergo the sort of fact-
finding expedition into exhibits and listing rules that our case law discourages.
187
As mentioned, the 14D-9 did not disclose the exceptions to NASDAQ Rule 5640, so unless the
stockholder does independent research into the listing rules, she will be unaware that NASDAQ
has in the past permitted waivers of Rule 5640’s limitations in cases where the appointment rights
were granted to resolve a company’s financial distress, a situation that—despite the Defendants’
protests—arguably applies here.
188
Appel v. Berkman, 180 A.3d 1055, 1064 (Del. 2018).
189
Coercion is present “where stockholders are induced to vote ‘in favor of the proposed
transaction for some reason other than the economic merits of that transaction.’” In re Saba
Software, Inc. S’holder Litig., 2017 WL 1201108, at *14 (Del. Ch. Mar. 31, 2017) (quoting
Williams v. Geier, 671 A.2d 1368, 1382–83 (Del. 1996)). Here, the misled stockholder would
arguably be induced to vote in favor of the Merger not for its economic merits but to avoid the loss
of any future merger premiums that could result from the change in control.
41
2. The 14D-9 Omits Material Information Regarding the Prior
Financial Advisor
In addition to the appointment rights issue, I find it reasonably conceivable
that missing information regarding the exit of the first financial advisor hired to
evaluate the acquisition would have been material to a reasonable stockholder. The
Defendants point out that our law does not entertain “tell me more” disclosure claims
where adequate disclosures have already been provided.190 The compressed timing
of this transaction and the fairness opinion associated with it, however, create a
context in which information regarding a hired financial advisor that walks away
becomes plausibly material. Our Supreme Court has held that in making disclosures,
a company ought to put itself in the shoes of what its own decision-makers would
want to know: “stockholders should not be expected to speculate about facts any
reasonable board advisor or director would find to be of importance.” 191 The missing
information here is likely one such fact.
According to the Amended Complaint, the Committee had recently employed
Houlihan Lokey to advise it on potential financing transactions. 192 Shortly after
failing to enter such a transaction, the Board revived the Committee to consider WC
190
See In re Delphi Fin. Grp. S’holder Litig., 2012 WL 729232, at *18 (Del. Ch. Mar. 6, 2012).
191
Appel, 180 A.3d at 1064.
192
Am. Compl., ¶ 45.
42
SACD’s interest in an acquisition. 193 The Committee hired a new advisor—a
“nationally recognized investment banking firm” presumably not Houlihan Lokey—
only after it received WC SACD’s final proposal for the transaction. 194 Thus, the
new financial advisor it hired after receiving the proposal walked into a nearly fully
formed transaction and merely needed to approve it. A few days later, however, the
new financial advisor mysteriously terminated the engagement. 195 After a two-day
search, the Company hired North Point, which provided a fairness opinion eight days
later. 196
The Defendants argue that disclosures on this topic would be immaterial given
the extensive disclosures regarding the North Point fairness opinion. I disagree.
Houlihan Lokey was informed about the Company’s circumstances, but for
undisclosed reasons was not retained. Instead, a second, “nationally recognized”
financial advisor accepted the Committee’s engagement. Presumably, it reviewed
the Transaction in preparation to provide an opinion. It then walked away. An
innocent inference is that it declined to participate due to unforeseen conflicts or
other logistics that made it impossible to turn a fairness opinion around in a
193
Id. ¶ 55.
194
Id. ¶ 63. The Proxy, I note, implies that the termination was a mutual decision of the advisor
and the Committee.
195
Id.
196
Id. ¶¶ 64–65.
43
compressed timeframe. The Plaintiff’s inference is that the financial advisor found
it could not approve the Transaction as it stood and so it walked away, and the
Company chose not to disclose its disapproval. Either way, in evaluating the
Transaction, the Board and North Point would themselves want to know why a well-
known financial advisor voluntarily terminated an engagement and walked away
from a fully formed transaction. It follows that so would a reasonable stockholder.
The fairness opinion is perhaps the most material factor in a “sell/don’t sell” binary
decision, and the reasons for going to a second—arguably a third—financial advisor
here, in the context of a near-completed deal and a tight schedule, are not trivial. I
do not find, given these unique circumstances, that the Plaintiff is merely asking
“why” and requesting trivial information. 197 I find it reasonably conceivable that
such disclosures, not made here, are material.
III. CONCLUSION
For the forgoing reasons, I find that the Transaction, approved by a board with
half its directors standing on both sides, is subject, based on this pleading-stage
record, to entire fairness review. The Plaintiff has pled facts making it reasonably
conceivable that the Transaction was not entirely fair. Accordingly, the Defendants’
Motion to Dismiss is denied. An appropriate Order is attached.
197
See In re Plains Expl. & Prod. Co. S’holder Litig., 2013 WL 1909124, at *10 (Del. Ch. May 9,
2013) (rejecting claims of the “tell me more variety” in the face of adequate disclosures) (citing In
re Delphi Fin. Grp. S’holder Litig., 2012 WL 729232, at *18 (Del. Ch. Mar. 6, 2012)).
44
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LANCE SALLADAY, On Behalf of )
Himself and All Other Similarly Situated )
Former Stockholders of )
INTERSECTIONS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2019-0048-SG
)
BRUCE L. LEV, DAVID A. )
MCGOUGH, and MICHAEL R. )
STANFIELD, )
)
Defendants. )
ORDER
AND NOW, this 27th day of February, 2020, for the reasons set forth
contemporaneously in the attached Memorandum Opinion dated February 27, 2020,
IT IS HEREBY ORDERED that the Defendants’ Motion to Dismiss is DENIED.
IT IS SO ORDERED.
/s/ Sam Glasscock III
Vice Chancellor
45