In re BGC Partners, Inc. Derivative Litigation

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE BGC PARTNERS, INC. CONSOLIDATED
DERIVATIVE LITIGATION C.A. No. 2018-0722-AGB
MEMORANDUM OPINION
Date Submitted: June 6, 2019
Date Decided: September 30, 2019
Nathan A. Cook and Kimberly A. Evans, GRANT & EISENHOFER P.A.,
Wilmington, Delaware; Mark Lebovitch, Jeroen van Kwawegen, Christopher J.
Orrico, and Andrew E. Blumberg, BERNSTEIN LITOWITZ BERGER &
GROSSMANN LLP, New York, New York; Attorneys for Plaintiffs Roofers Local
149 Pension Fund and Northern California Pipe Trades Trust Funds.
C. Barr Flinn and Paul Loughman, YOUNG CONAWAY STARGATT &
TAYLOR, LLP, Wilmington, Delaware; Eric Leon, Nathan Taylor, and Amanda
Meinhold, LATHAM & WATKINS LLP, New York, New York; Attorneys for
Defendants Howard Lutnick, CF Group Management, Inc., Cantor Fitzgerald, L.P.,
and Nominal Defendant BGC Partners, Inc.
Raymond J. DiCamillo, Kevin M. Gallagher, and Kevin M. Regan, RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware; Joseph De Simone and
Matthew E. Fenn, MAYER BROWN LLP, New York, New York; Michele L.
Odorizzi, MAYER BROWN LLP, Chicago, Illinois, Attorneys for Defendants Linda
Bell, Stephen Curwood, William Moran, and John Dalton.
BOUCHARD, C.
This case concerns a transaction in which BGC Partners, Inc.—a public
company controlled by Howard Lutnick—paid $875 million to acquire Berkeley
Point Financial LLC, a private company also controlled by Lutnick. Plaintiffs are
two stockholders of BGC. They allege that Lutnick, who stood on both sides of the
transaction, was highly motivated to—and did—have BGC overpay for Berkeley
Point because his economic interest in Berkeley Point (60%) far exceeded his
economic interest in BGC (13.8%), and that the outside directors of BGC acted in
bad faith in allowing this to happen.
The complaint asserts three derivative claims for breach of fiduciary duty
against Lutnick as a director, controlling stockholder, and officer of BGC; two
entities through which Lutnick controls BGC and Berkeley Point; and BGC’s four
outside directors. Defendants have filed motions to dismiss that raise two issues.
First, defendants assert that the complaint should be dismissed in its entirety because
plaintiffs have failed to establish that it would have been futile for them to make a
demand on BGC’s board to decide whether or not BGC should pursue the claims
itself. Second, the outside directors assert that the claim brought against them should
be dismissed for failure to state a claim for relief.
For the reasons explained below, the court concludes that both of the grounds
for dismissal that defendants have advanced fail. Accordingly, defendants’ motions
to dismiss will be denied.
1
I. BACKGROUND
Unless otherwise noted, the facts recited in this opinion are based on the
allegations of the Verified First Amended Stockholder Derivative Complaint
(“Complaint”) and documents incorporated therein,1 including documents produced
in response to a demand to inspect books and records under 8 Del. C. § 220.2 Any
additional facts are subject to judicial notice.
A. The Players
On September 8, 2017, BGC Partners, Inc. (“BGC” or the “Company”)
purchased Berkeley Point Financial LLC (“Berkeley Point”) from Cantor
Commercial Real Estate Company, L.P. (“CCRE”) for $875 million. BGC
simultaneously invested $100 million for a 27% interest in CCRE’s remaining
commercial mortgage-backed securities business (the “CMBS Business”). These
two transactions are referred together in this decision as the “Transaction”.
Nominal defendant BGC is a Delaware corporation headquartered in New
York that provides brokerage and financial services. Its predecessor entity, BGC
Partners, L.P., was formed in 2004 when it was spun off by Cantor Fitzgerald, L.P.
(“Cantor”). In 2008, BGC Partners, L.P. merged with eSpeed, Inc, another former
Cantor subsidiary, to form the public company BGC Partners, Inc.
1
See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[P]laintiff may not
reference certain documents outside the complaint and at the same time prevent the court
from considering those documents’ actual terms” in connection with a motion to dismiss).
2
The plaintiffs in this case are Roofers Local 149 Pension Fund and Northern
California Pipe Trades Trust Funds (together, “Plaintiffs”). They allege they were
stockholders of BGC at the time of the Transaction and have been stockholders
continuously since then.3
The defendants in this case consist of Howard Lutnick, the Chairman and
CEO of BGC; four other individuals on BGC’s board at the time of the Transaction;
and two entities that—along with Lutnick—sit on top of a complicated web of
affiliated entities and appear on both sides of the Transaction: Cantor and CF Group
Management, Inc. (“CF Group”).
Cantor is a privately owned financial services and brokerage firm based in
New York. CF Group is a New York corporation that serves as Cantor’s managing
general partner. Lutnick is the sole stockholder of CF Group. He also owns
approximately 60% of Cantor, and has sole voting control of Cantor.4
At all relevant times, Cantor, CF Group, and Lutnick controlled BGC through
their beneficial ownership of 100% of BGC’s Class B super-voting common stock,
2
As a condition of receiving documents, plaintiff Roofers Local 149 Pension Fund agreed
that, if it filed a complaint relating to its Section 220 demand, the complaint “shall be
deemed to incorporate by reference the entirety of the books and records on which
inspection is permitted.” BGC Defs.’ Opening Br. 18-19 (Dkt. 36).
3
Compl. ¶¶ 10-11.
4
Id. ¶¶ 13-14.
3
giving them 60% of the Company’s total voting power.5 In 2017, Cantor and
Lutnick owned 17.3% and 2.8%, respectively, of BGC’s common stock equivalents.
Before the Transaction, Berkeley Point was a wholly-owned subsidiary of
CCRE, which, in turn, was an affiliate of Cantor. The Transaction provided that
Cantor would receive BGC’s $875 million payment to acquire Berkeley Point.
Lutnick allegedly had “much larger ownership interests” in Cantor (60%) than BGC
(approximately 13.2%), which “motivated him to cause BGC to overpay for
Berkeley Point.”6 Thus, according to the Complaint, “Lutnick’s ownership interests
in Cantor and BGC guaranteed that he would personally receive approximately
46.8% of every dollar that BGC overpaid” in the Transaction.7
Lutnick has been the Chairman of the Board and CEO of BGC and its
predecessors (including eSpeed) since June 1999.8 Lutnick also serves or has served
on the boards of multiple other Cantor-affiliated entities, including (i) eSpeed; (ii)
ELX Futures; (iii) GFI; (iv) Newmark; and (v) Cantor Exchange.9 Lutnick allegedly
5
Id. ¶ 15.
6
Id. ¶ 3. The 13.2% figure is the rounded sum of (i) Lutnick’s personal interest in BGC
common stock equivalents (2.8%) and (ii) 60% of Cantor’s interest in BGC common stock
equivalents (17.3% * 60% = 10.38%).
7
Id.
8
Id. ¶ 18.
9
Id. ¶ 19.
4
has a “reputation as a Wall Street bruiser” and is “famously sharp-elbowed.”10
Lutnick also has strong ties to Haverford College, his alma mater. He has served on
the Haverford Board of Managers for twenty-one years and donated at least $65
million to the college over the past twenty-five years, including a record-setting $25
million donation in 2014.11 Lutnick has described the motivation for his generous
giving as “Love” and the belief that Haverford people “make [his] life special.”12
The other four individual defendants are Linda Bell, Stephen Curwood,
William Moran, and John Dalton. At all relevant times, they each were members of
the BGC board, its Audit Committee, and the Special Committee that evaluated the
Transaction.13 They are referred to hereafter, at times, collectively as the “Special
Committee Defendants.” In February 2015, Lutnick placed all of the Special
Committee Defendants on a publicly-filed list of potential appointees to the board
of GFI, an entity that BGC acquired in 2016.14 Other relationships between Lutnick
and each of the four members of the Special Committee are discussed in detail later
in Sections III.C-D of this opinion.
10
Id. ¶ 2.
11
Id. ¶ 20.
12
Id.
13
Id. ¶ 5.
14
Id. ¶ 31.
5
B. Lutnick and Cantor Set the Stage for the Transaction
On February 11, 2017, Lutnick informed BGC’s Audit Committee (consisting
of Bell, Curwood, Dalton, and Moran) that BGC’s management was considering
acquiring Berkeley Point.15 Berkeley Point is a designated underwriting and
servicing lender for multi-family homes from government-sponsored entities such
as the Department of Housing and Urban Development, Freddie Mac, and Fannie
Mae.16 BGC and Newmark—a subsidiary of BGC—had been originating business
for Berkeley Point since late 2011.17
Lutnick told the Audit Committee on February 11 that a potential purchase
price for Berkeley Point would be in the “low $700 million range” and that Cantor
already had reached agreements in principle with outside investors in CCRE—a
Cantor affiliate that wholly-owned Berkeley Point—to buy their interests, setting the
stage for a sale of Berkeley Point to BGC.18 Lutnick also informed the Audit
Committee that BGC management was considering a potential $150 million
investment by BGC in CCRE that would be “riskier and more volatile than Berkeley
Point’s business” but would allow BGC to access data about properties that would
15
Id. ¶ 63.
16
Id. ¶ 17.
17
Id. ¶¶ 59, 61.
18
Id. ¶ 63.
6
be beneficial to BGC’s brokerage business.19 These were the first steps in a multi-
step plan called “Project Referee,” which would culminate in a spin-off and an initial
public offering of a combined Newmark and Berkeley Point entity by the end of
2017.20
On March 14, 2017, Bell, Curwood, Dalton, and Moran, were appointed to a
Special Committee to evaluate the merits of the proposed Transaction.21 Debevoise
& Plimpton acted as the Special Committee’s legal advisor and Sandler O’Neill
acted as its financial advisor in connection with the Transaction.22
The Special Committee resolutions recognized that Lutnick had a potential
conflict of interest and was not disinterested or independent with respect to the
Transaction.23 The Special Committee nevertheless “immediately authorized
management—i.e., Lutnick—to proceed with negotiating” the Transaction.24 The
Special Committee resolutions also provided that officers of the Company, including
Lutnick, had to furnish information to the Special Committee members but that
obligation did not extend to “any items in the possession of or available to officers
19
Id.
20
Id. ¶ 64.
21
Id. ¶ 66 & n.4.
22
Id. ¶¶ 54, 56.
23
Id. ¶ 66.
24
Id.
7
of [BGC] which is held in their capacity as officers of Cantor or its affiliates” other
than BGC, which was not otherwise provided to BGC.25 The resolutions “placed no
corresponding restriction on Lutnick’s ability to share BGC information with
Cantor.”26
C. The Negotiation Process
Plaintiffs allege that Lutnick “controlled the negotiations and coopted the
Special Committee,” citing as evidence the fact that “the Special Committee’s Co-
Chair, Moran, emailed Lutnick on April 6, 2017 and asked whether Lutnick had
‘changed our timetable for execution???’” of the Transaction.27 Lutnick attended
multiple BGC board and Special Committee meetings, and directed certain changes
to the modeling used to determine the valuation of Berkeley Point.28 Neither the
Special Committee nor BGC considered any alternative transactions.29
Plaintiffs further allege that the Special Committee’s failure to look out for
BGC’s interests in negotiating the price of the Transaction can be seen in the upward
trajectory of the amounts Cantor proposed BGC pay for Berkeley Point, which
moved from an initial indication in the low $700 million range in February 2017 to
25
Id. ¶ 67.
26
Id. ¶ 68.
27
Id. ¶ 69.
28
Id. ¶¶ 71-72.
29
Id. ¶ 70.
8
$875 million about five months later, in July 2017. The first upward movement
occurred on March 2, 2017, when Cantor increased the proposed purchase price from
the low $700 million range that Lutnick floated on February 11, to $750 million for
a 95% stake in Berkeley Point.30
The amount increased again on April 21, 2017, when Cantor submitted a term
sheet to BGC proposing that BGC would invest $1 billion to obtain a limited
partnership interest in CCRE, which implied a price of $850 million for a 95%
interest in Berkeley Point and contemplated that the remaining 5% would be retained
by Cantor and/or its affiliates.31 The other $150 million “accounted for the proposed
investment in CCRE’s remaining Cantor CMBS Business.”32 The term sheet
contemplated granting a put option to BGC that would allow BGC, no earlier than
five years after closing, to put to CCRE its interest in all of CCRE in exchange for
100% of Berkeley Point’s equity and a return of its deemed capital account in the
Cantor CMBS Business, less $30 million.33 The term sheet indicated that this $30
million was the “amount . . . attributable to the 5% of [Berkeley Point] owned by
[Cantor and/or its affiliates].”34 Plaintiffs extrapolate from this valuation of a 5%
30
Id. ¶ 73.
31
Id. ¶ 74.
32
Id.
33
Id. ¶ 75.
34
Id.
9
interest in Berkeley Point that the 95% interest proposed to be sold to BGC “should
have been valued at approximately $570 million, a far cry from Cantor’s egregiously
inflated asking price of $850 million.”35
On May 11, 2017, the Special Committee received a presentation from Cantor
and Lutnick, indicating that the purchase price of Berkeley Point would be
approximately $850 million. The minutes do not indicate that the Special
Committee pushed back on the increase in the purchase price from $750 million
proposed about two months earlier, on March 2, to approximately $850 million.36
The presentation also acknowledged that BGC had caused its subsidiary, Newmark,
to confer substantial value on Berkeley Point, and thus Cantor, yet the value BGC
had contributed was not used as leverage in negotiations.37
On May 23, 2017, Cantor provided to the Special Committee a term sheet that
was substantially similar to the April 21, 2017 term sheet.38 On May 25, 2017, at a
meeting of the Special Committee, Sandler O’Neill presented its preliminary
perspective as to a proper valuation of the Transaction. During the meeting, Sandler
O’Neill acknowledged that it needed to better understand “the economic terms of
35
Id. ¶ 76.
36
Id. ¶ 80.
37
Id. ¶ 81.
38
Id. ¶ 83.
10
CCRE’s initial investment in Berkeley Point in 2014 and the prices at which CCRE’s
outside investors invested and would exit.”39
D. Sandler O’Neill’s Analysis of the Transaction
On June 4 and 5, 2017, Sandler O’Neill presented the Special Committee with
an analysis of the proposed Transaction.40 The presentation contained eight reasons
why Cantor’s $880 million total valuation of Berkeley Point overvalued the
company.41
One reason was that the multiples implied by Cantor’s valuation were 50-
100% higher in six different metrics than those Cantor paid when it acquired
Berkeley Point in April 2014 for $259.3 million.42
Several other reasons concerned the only purportedly comparable company
that had been identified for Berkeley Point: Walker & Dunlop. To start, the $880
million valuation was based on a multiples comparison to Walker & Dunlop, but
Berkeley Point had not experienced the same consistency or growth as Walker &
Dunlop.43 Sandler O’Neill also pointed out that BGC’s ownership of Berkeley Point
would be illiquid and thus justify a discount relative to Walker & Dunlop, which
39
Id. ¶ 84.
40
Id. ¶ 86.
41
Id.
42
Id. ¶ 86(a).
43
Id. ¶ 86(b).
11
was a publicly traded company.44 Sandler O’Neill further pointed out that Walker
& Dunlop’s price had increased significantly between February 2017, when Cantor
and Lutnick first floated the idea of the acquisition, and the May 2017 term sheet,
which Cantor allegedly used as leverage to increase the price of Berkeley Point.45
Finally, after explaining that Berkeley Point’s growth rate would have lagged behind
Walker & Dunlop’s if originations from Newmark—BGC’s own subsidiary—were
excluded, Sandler O’Neill presentation stated bluntly that BGC “should not be
paying for the value it already brings to Berkeley Point.”46
Sandler O’Neill’s presentation also expressed concern that (i) the Transaction
structure was designed to maximize Cantor’s tax benefits, but limited BGC’s ability
to exercise control over Berkeley Point, (ii) BGC was being asked to bear the risk of
Berkeley Point’s questionable value proposition for Newmark, and (iii) mortgage
related government sponsored entities may change their procedures and protocols in
a way that could adversely impact Berkeley Point.47
In light of these concerns, Sandler O’Neill recommended that the valuation
should be reduced to $720 million, which it contended would be an “appropriate”
valuation, although it recognized there were reasons why BGC should pay even
44
Id. ¶ 86(d).
45
Id. ¶ 86(f).
46
Id. ¶ 86(c).
47
Id. ¶ 86(e), (g)-(h).
12
less.48 Sandler O’Neill also recommended that BGC seek other concessions,
including “requiring Cantor to bear losses to the full extent of its investment, a
change of the preferred return rate to be earned by BGC from 5% to 6%, and an
increase in BGC’s share of gross returns from 60% to 90%.”49
E. Terms of the Transaction
At a June 6, 2017 meeting, the Special Committee proposed to Cantor the
$720 million valuation that Sandler O’Neill had endorsed.50 Cantor offered a
counter proposal, the terms of which are not disclosed in the Special Committee’s
meeting minutes, and which the Special Committee discussed for no more than 75
minutes.51 After the negotiations resumed, the parties reached an agreement that
BGC would acquire 100% of the equity interest in Berkeley Point for $875 million
and would invest $100 million in the CMBS Business for a period of five years, with
a preferred return of 5% and a prohibition on distributions until BGC received said
return.52
48
Id. ¶ 87.
49
Id. ¶ 89.
50
Id. ¶ 90.
51
Id.
52
Id. ¶ 91.
13
BGC did not receive other protections that Sandler O’Neill had urged it to
seek.53 The written agreement granted Cantor 100% voting control over the general
partner of the Cantor CMBS Business in which BGC had invested, allegedly
disadvantaging BGC.54 Sandler O’Neill did not issue a fairness opinion with respect
to BGC’s investment in the CMBS Business, but did issue an opinion that the “terms
of the investment were ‘reasonable’ to BGC and its investors.”55
On July 13, 2017, the Special Committee approved the Transaction, which
was not subject to approval by BGC’s stockholders. On September 8, 2017, the
Transaction closed.56
F. The Newmark IPO
By October 23, 2017, Berkeley Point had been integrated into Newmark,
which completed an initial public offering about two months later on December 19,
2017.57 Based on the IPO price, the value of Newmark, after Berkeley Point had
been integrated into it, was approximately $1.84 billion. From this, and the fact that
Newmark allegedly derived 30.6% of its EBITDA from Berkeley Point, Plaintiffs
contend that the Newmark IPO implied a value for Berkeley Point of only $563
53
Id. ¶ 93.
54
Id. ¶ 94.
55
Id. ¶ 96.
56
Id. ¶ 97.
57
Id. ¶ 98.
14
million (i.e., 30.6% of approximately $1.84 billion), just three months after BGC
had paid $875 million to acquire Berkeley Point in the Transaction.58
II. PROCEDURAL HISTORY
In October and November 2018, Plaintiffs each filed derivative actions in this
court challenging the Transaction. On December 4, 2018, those actions were
consolidated. On February 12, 2019, Plaintiffs filed their Verified First Amended
Stockholder Derivative Complaint (as defined above, the “Complaint”).
The Complaint contains three derivative claims. Count I asserts that BGC’s
directors breached their fiduciary duties by approving a related-party transaction “on
unfair terms and pursuant to an unfair process.”59 Count II asserts that Lutnick, CF
Group, and Cantor, as controlling stockholders of BGC, “breached their fiduciary
duties by using their control over BGC and the Special Committee Defendants to
cause the Company to enter into the [Transaction] on unfair terms and pursuant to
an unfair process.”60 Count III asserts that Lutnick breached his fiduciary duties “as
an officer of BGC by dominating, directing, and otherwise interfering with the
process through which the Company entered into the [Transaction], including by
58
Id. ¶ 99.
59
Id. ¶ 137.
60
Id. ¶ 141.
15
taking control of the Company’s interactions with rating agencies and financing
sources.”61
In March 2019, defendants filed two motions to dismiss. In one motion,
Lutnick, CF Group, and Cantor moved to dismiss the Complaint in its entirety under
Court of Chancery Rule 23.1 based on Plaintiffs’ failure to make a demand on BGC’s
board before initiating derivative litigation. In the second motion, the Special
Committee Defendants also moved to dismiss under Rule 23.1 and separately moved
to dismiss Count I of the Complaint as to them under Court of Chancery Rule
12(b)(6) for failure to state a claim for relief. No motion was filed seeking dismissal
of Counts II and III under Rule 12(b)(6). After the completion of briefing, the court
heard argument on the motions on June 6, 2019.62
III. ANALYSIS
Defendants’ motions raise two issues. First, have Plaintiffs pled sufficient
particularized facts to show that making a demand on the BGC board before filing
their derivative claims would have been futile? This issue is discussed in Sections
A-C below. Second, if the answer to the first question is yes, does the Complaint
state a claim for relief against each of the Special Committee Defendants under the
61
Id. ¶ 146.
62
Dkt. 68; see Tr. (June 6, 2019) (Dkt. 69).
16
test set out in In re Cornerstone Therapeutics Inc., Shareholder Litigation?63 This
issue is discussed in Section D below.
A. Demand Futility Standards
Under Court of Chancery Rule 23.1, a stockholder who wishes to bring a
derivative claim on behalf of a corporation must “allege with particularity the efforts,
if any, made by the plaintiff to obtain the action the plaintiff desires from the
directors or comparable authority and the reasons for the plaintiff’s failure to obtain
the action or for not making the effort.”64 This requirement stems from a “basic
principle of the Delaware General Corporation Law . . . that the directors, and not
the stockholders, manage the business and affairs of the corporation.”65
“The decision to bring or to refrain from bringing suit on behalf of the
corporation is the responsibility of the board of directors.”66 This allows “a
corporation, on whose behalf a derivative suit is brought, the opportunity to rectify
the alleged wrong without suit or to control any litigation brought for its benefit.” 67
Under the heightened pleading requirements of Rule 23.1, “conclusionary
63
115 A.3d 1173 (Del. 2015).
64
Ch. Ct. R. 23.1.
65
FLI Deep Marine LLC v. McKim, 2009 WL 1204363, at *2 (Del. Ch. Apr. 21, 2009).
66
Id.67
Lewis v. Aronson, 466 A.2d 375, 380 (Del. Ch. 1983), rev’d on other grounds, 473 A.2d
805 (Del. 1984).
17
allegations of fact or law not supported by the allegations of specific fact may not
be taken as true.”68
Under Delaware law, courts employ two different tests for determining
whether demand may be excused: the Aronson test and the Rales test. The court
applies the test from Aronson v. Lewis69 when “a decision of the board of directors
is being challenged in the derivative suit.”70 On the other hand, the test from Rales
v. Blasband71 governs when “the board that would be considering the demand did
not make a business decision which is being challenged in the derivative suit,” such
as “where directors are sued derivatively because they have failed to do
something.”72 The Aronson and Rales tests both ultimately focus on the same
inquiry, i.e., whether “the derivative plaintiff has shown some reason to doubt that
the board will exercise its discretion impartially and in good faith.”73
68
Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988), overruled on other grounds by Brehm
v. Eisner, 746 A.2d 244 (Del. 2000).
69
466 A.2d 375.
70
Rales v. Blasband, 634 A.2d 927, 933 (Del. 1993).
71
Id.72
Id. at 933-34, 934 n.9. The Rales test also applies “where a business decision was made
by the board of a company, but a majority of the directors making the decision have been
replaced” and where “the decision being challenged was made by the board of a different
corporation.” Id. at 934.
73
In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 986 (Del. Ch. 2007).
18
Here, both parties agree that the Aronson test applies because Plaintiffs are
challenging the Board’s decision to enter into the Transaction.74 Under that test, the
court asks “whether, under the particularized facts alleged, a reasonable doubt is
created that: (1) the directors are disinterested and independent [or] (2) the
challenged transaction was otherwise the product of a valid exercise of business
judgment.”75 Plaintiffs have advanced arguments under both prongs of Aronson.
Those arguments are considered next, in reverse order.
B. Plaintiffs’ Argument Under the Second Prong of Aronson Fails
Focusing on the second prong of Aronson, Plaintiffs argue that “demand is
excused as a matter of law” simply because the Transaction is subject to entire
fairness review since “BGC’s controlling stockholder stood on both sides.”76 The
court rejected this same argument four years ago in Teamsters Union 25 Health
Services & Insurance Plan v. Baiera.77 There, I explained that “[a]lthough this
74
Id. at 933-34.
75
Aronson, 473 A.2d at 814.
76
Pls.’ Answering Br. 47. Plaintiffs also argue that the demand is excused under second
prong of Aronson because “the particularized allegations of the Complaint create a reason
to doubt that the members of the Special Committee acted in good faith.” Id. 39. The court
does not address this issue because it finds that demand is excused under the first prong of
Aronson for the reasons stated in Section III.C.
77
119 A.3d 44 (Del. Ch. 2015).
19
argument has some superficial appeal, it is inconsistent with controlling authority,”78
in particular our Supreme Court’s decisions in Aronson and Beam v. Stewart:79
As Aronson, Beam, and Rule 23.1 make plain, the demand futility test
under Delaware law focuses exclusively on whether there is a
reasonable doubt that the directors could impartially respond to a
demand. . . . Under these authorities, neither the presence of a
controlling stockholder nor allegations of self-dealing by a controlling
stockholder changes the director-based focus of the demand futility
inquiry.80
In reaching this conclusion, the court did not hold that the presence of a
controller is irrelevant to the director-based focus of the demand futility inquiry.
Rather, Teamsters simply holds, based on well-established precedent, that the
second prong of Aronson is not automatically satisfied when the challenged
transaction would be subject to entire fairness review because it involves a
controlling stockholder.
That said, our law is not blind to the practical realities of serving as a director
of a corporation with a controlling stockholder. As this court explained in Ezcorp:
Delaware Supreme Court decisions have recognized the risk that
directors laboring in the shadow of a controlling stockholder face a
threat of implicit coercion because of the controller’s ability to not
78
Id. at 65.
79
845 A.2d 1040 (Del. 2004).
80
Teamsters, 119 A.3d at 67.
20
support the director’s re-nomination or re-election, or take the more
aggressive step of removing the directors.81
Or, as stated more colorfully by then-Vice Chancellor Strine:
In colloquial terms, the Supreme Court saw the controlling stockholder
as the 800–pound gorilla whose urgent hunger for the rest of the
bananas is likely to frighten less powerful primates like putatively
independent directors who might well have been hand-picked by the
gorilla (and who at the very least owed their seats on the board to his
support).82
Because of the dynamics involved where a controlling stockholder stands on
both sides of a corporate transaction, there is “an obvious fear that even putatively
independent directors may owe or feel a more-than-wholesome allegiance to the
interests of the controller, rather than to the corporation and its public
stockholders.”83 Put simply, “Delaware is more suspicious when the fiduciary who
is interested is a controlling stockholder.”84
The implications of taking action in the controlling stockholder context is that
directors may “preserve their positions and align themselves with the controller by
not doing something, viz. by not initiating litigation.”85 Given these practical
81
In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *20 (Del. Ch.
Jan. 25, 2016) (citing Kahn v. Lynch Commc’n Sys. Inc., 638 A.2d 1110, 1116-17 (Del.
1994); and Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997)).
82
In re Pure Res., Inc., S'holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002).
83
Leo E. Strine, Jr., The Delaware Way: How We Do Corporate Law and Some of the
New Challenges We (and Europe) Face, 30 Del. J. Corp. L. 673, 678 (2005).
84
Id.85
In re EzCorp, 2016 WL 301245, at *29 n.24.
21
realities, although application of the entire fairness standard to a transaction
involving a controller does not automatically satisfy the second prong of Aronson,
the presence and influence of a controller is an important factor that should be
considered in the director-based focus of the demand futility inquiry under the first
prong of Aronson, particularly on the issue of independence.
Former Chancellor Chandler thoughtfully explained the considerations
implicated in considering the question of independence, including where a
stockholder has the unilateral power to determine whether a director may continue
to receive a benefit, as follows:
“Independence” does not involve a question of whether the challenged
director derives a benefit from the transaction that is not generally
shared with the other shareholders. Rather, it involves an inquiry into
whether the director's decision resulted from that director being
controlled by another. A director can be controlled by another if in fact
he is dominated by that other party, whether through close personal or
familial relationship or through force of will. A director can also be
controlled by another if the challenged director is beholden to the
allegedly controlling entity. A director may be considered beholden to
(and thus controlled by) another when the allegedly controlling entity
has the unilateral power (whether direct or indirect through control over
other decision makers), to decide whether the challenged director
continues to receive a benefit, financial or otherwise, upon which the
challenged director is so dependent or is of such subjective material
importance to him that the threatened loss of that benefit might create
a reason to question whether the controlled director is able to consider
the corporate merits of the challenged transaction objectively. 86
86
Orman v. Cullman, 794 A.2d 5, 25 n.50 (Del. Ch. 2002).
22
Here, the Complaint specifically alleges that Lutnick, through his control of
Cantor, had the unilateral power to remove any of BGC’s directors at any time:
Specifically, BGC’s public filings provide that BGC is “controlled by
Cantor, which has potential conflicts of interest with [BGC] and may
exercise its control in a way that favors its interests to [BGC’s]
detriment.” According to the 10-K, this control includes the ability,
“without the consent of public holders of [BGC’s] Class A common
stock, to elect all of the members of [BGC’s] board of directors and to
control [BGC’s] management and affairs.” Pursuant to the Company’s
bylaws and certificate of incorporation, Cantor could use its control of
the Company’s voting power to call a special meeting at any time for
the purpose of “remov[ing], with or without cause, any Director.”
Accordingly, Lutnick and Cantor had the power to remove any of the
BGC directors at will.87
With this well-pled fact and the foregoing discussion in mind, the court turns next
to the director-based analysis required under the first prong of Aronson.
C. The Complaint’s Factual Allegations Create a Reasonable Doubt
About the Impartiality of a Majority of the Demand Board
When the Complaint was filed, BGC’s board consisted of five directors:
Lutnick, three members of the Special Committee that approved the Transaction
(Bell, Curwood, and Moran), and a new director (David Richards) who did not
consider the Transaction (collectively, the “Demand Board”).88 Therefore, to
demonstrate that the Demand Board is unable to consider a pre-suit demand
87
Compl. ¶ 25.
88
Id. ¶ 113.
23
impartially, the Complaint must plead facts that create a reason to doubt that at least
three of these five individuals are disinterested or independent.
Defendants concede that Lutnick is interested for purposes of this motion.89
They could not credibly do otherwise. As previously discussed, Lutnick stood on
both sides of the Transaction through his control of Cantor and personally stood to
receive almost 47% of every dollar that BGC allegedly overpaid for Berkeley Point
because Lutnick’s economic interest in Cantor far exceeded his economic interest in
BGC. For their part, Plaintiffs do not challenge Richards’ impartiality.
Thus, whether or not demand would be futile in this case turns on whether
Plaintiffs have plead particularized facts sufficient to create a reasonable doubt that
two of the three remaining members of the Demand Board are disinterested or
independent. For the reasons explained below, the court concludes that the
particularized allegations of the Compliant create a reason to doubt the independence
of each of these three individuals. Before analyzing those factual allegations, the
court turns to review the recent teachings of our Supreme Court on the issue of
director independence in the demand futility context.
“A lack of independence turns on whether the plaintiffs have pled facts from
which the director’s ability to act impartially on a matter important to the interested
party can be doubted because that director may feel either subject to the interested
89
BGC Defs.’ Opening Br. 22.
24
party’s dominion or beholden to that interested party.”90 When assessing
independence, “our law cannot ignore the social nature of humans or that they are
motivated by things other than money, such as love, friendship, and collegiality.” 91
At the pleadings stage, a “plaintiff cannot just assert that a close relationship exists,
but when the plaintiff pleads specific facts about the relationship—such as the length
of the relationship or details about the closeness of the relationship—then this Court
is charged with making all reasonable inferences from those facts in the plaintiff’s
favor.”92 Relatedly, the court must consider plaintiff’s allegations “in their totality
and not in isolation from each other.”93 In short, a plaintiff must allege a
“constellation of facts that, taken together, create a reasonable doubt about [the
director]’s ability to objectively consider a demand.”94
Applying these principles, our Supreme Court has reversed Court of Chancery
findings of director independence in the demand futility context on three occasions
over the past four years under a de novo standard of review. These decisions, which
reinforce the importance of considering a plaintiff’s factual allegations holistically
and affording plaintiff all reasonable inferences, are reviewed next.
90
Marchand v. Barnhill, 212 A.3d 805, 818 (Del. 2019) (internal quotation marks omitted).
91
Id. (internal quotation marks omitted).
92
Id.93
Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1019 (Del. 2015).
94
In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *18 (Del. Ch. Mar. 19, 2018).
25
In Sanchez, the Supreme Court ruled that the plaintiffs had “pled
particularized facts, that when considered in the plaintiff-friendly manner required,
create a reasonable doubt about [the] independence” of a director named Alan
Jackson.95 Jackson had been close friends for more than five decades with the
patriarch of a family (Chairman Sanchez) that held 16% of the company’s shares,
donated $12,500 to Chairman Sanchez’s gubernatorial campaign, and his “personal
wealth [was] largely attributable to business interests over which Chairman Sanchez
[had] substantial influence.”96 The high court commented that while Jackson’s
personal and professional relationships “may be coincidental,” they were sufficient
to support “a pleading stage inference that Jackson’s economic positions derive in
large measure from his 50-year close friendship with Chairman Sanchez, and that he
is in these positions because Sanchez trusts, cares for, and respects him.” 97
Explaining why it had reached a different conclusion about Jackson’s independence
than the trial court, the Supreme Court stated that “the Court of Chancery’s analysis
seemed to consider the facts the plaintiffs pled about Jackson’s personal friendship
with Sanchez and the facts they pled regarding his business relationships as entirely
separate issues.”98
95
124 A.3d at 1024.
96
Id. at 1020.
97
Id. at 1023.
98
Id. at 1021.
26
In Sandys, the Supreme Court held in a 4-1 decision that one of the directors
of Zynga, Inc. (Ellen Siminoff) was not independent of its controlling stockholder
(Mark Pincus) because they co-owned a private airplane together.99 The high court
reasoned that co-owning a plane “is not a common thing, and suggests that the Pincus
and Siminoff families are extremely close to each other and are among each other’s
most important and intimate friends.”100 The Supreme Court commented that
pleading demand futility “does not require a plaintiff to plead a detailed calendar of
social interaction to prove that directors have a very substantial personal relationship
rendering them unable to act independently of each other.”101 Rather, the co-
ownership of the plane supported a reasonable inference that Siminoff “would not
be able to act impartially” as the relationship could be inferred to be one that “one
would expect to heavily influence a human’s ability to exercise impartial
judgment.”102
Most recently, in Marchand, the Supreme Court found there was reason to
doubt that a former employee of Blue Bell Creameries USA, Inc. (W.J. Rankin) had
the capacity to impartially decide whether to sue the company’s CEO, who was a
99
Sandys v. Pincus, 152 A.3d 124, 129-31 (Del. 2016).
100
Id. at 130.
101
Id.
102
Id.
27
member of the Kruse family that had run Blue Bell for generations.103 Rankin started
as an assistant to the CEO’s father, rose to the position of CFO during his 28 years
with the company, and was added to the Blue Bell board while he was an employee
with the support of the Kruse family.104 The family had spearheaded efforts that led
to a $450,000 donation to a local college in Rankin’s name and resulted in the new
agricultural facility at the college being named after Rankin.105 The high court
reasoned that these facts, “support a reasonable inference that there are very warm
and thick personal ties of respect, loyalty, and affection,”106 and that, like in Sanchez
and Pincus, “the important personal and business relationship that Rankin and the
Kruse family have shared supports a pleading-stage inference that Rankin cannot act
independently.”107 Notably, the Supreme Court placed little if any weight on the fact
that Rankin had voted differently from the CEO in the past, explaining that “the
decision whether to sue someone is materially different and more important than the
decision to part company with that person on a vote about corporate governance.”108
103
212 A.3d at 818-19.
104
Id. at 808.
105
Id. at 819.
106
Id.
107
Id.
108
Id.
28
With the foregoing guidance in mind, the court turns to consider the factual
allegations of the Complaint with respect to the three members of the Special
Committee who were on the Demand Board.109
1. William Moran
Moran and Lutnick’s professional relationship spans approximately twenty
years, during which Moran has served with Lutnick on the boards of four Cantor-
affiliated companies: (i) eSpeed, which was BGC’s predecessor, from 1999 to 2005;
(ii) ELX Futures, of which Lutnick was a co-founder and Chairman, from 2009 to
2013; (iii) GFI, from February 2015 until it was merged with BGC in January 2016;
and (iv) BGC, since 2013.110 Defendants downplay the significance of the number
of boards on which Moran and Lutnick have served together based on the fact that
most of it occurred sequentially and did not overlap.111 To my mind, however, that
Moran has served on at least one Cantor-affiliated board for sixteen of the past
109
Demand futility typically is analyzed on a claim-by-claim basis. See Cambridge Ret.
Sys. v. Bosnjak, 2014 WL 2930869, at *4 (Del. Ch. June 26, 2014) (citing Beam v. Stewart,
833 A.2d 961, 977 n.48 (Del. Ch. 2003) aff’d, 845 A.2d 1040 (Del. 2004)). In this case,
the parties did not analyze the three claims in the Complaint separately and the court sees
no reason to do so because Lutnick is clearly the focal point of each claim. He is named
as a defendant in his capacity as a BGC director for Count I, as BGC’s controller for Count
II, and as a BGC officer for Count III. Compl. ¶¶ 136, 140, 145. Thus, insofar as the court
finds that the alleged facts create a reasonable doubt about a director’s independence from
Lutnick, that finding would apply to all of the claims in the Complaint.
110
Compl. ¶ 40.
111
See Tr. 48-49 (June 6, 2019).
29
twenty years suggests that Lutnick “trusts, cares for, and respects him”112 and,
reciprocally, that it would be important to Moran to maintain a good relationship
with Lutnick, who has the unilateral ability to terminate the perquisites of Moran’s
board service to Cantor affiliates, which yielded Moran $931,986 (mostly in cash)
over the past five years.113
In addition to alleging that Moran has had a lengthy and lucrative professional
relationship with Lutnick, the Complaint alleges several specific facts from which it
reasonably can be inferred that they have a close personal relationship, including
that: (i) Moran and his wife have attended public events with Lutnick, including a
black-tie gala in 2007 where the three of them were photographed together in a
staged setting; (ii) Moran’s wife honored Lutnick’s sister at another gala event in
2014, and (iii) Lutnick offered to help arrange a private tour of the Tate Art Museum
in London for Moran’s wife and granddaughters, at the time that the Transaction was
under consideration.114 Although the tour did not occur, the alleged fact that Lutnick
would use his influence to set up a private tour at a prominent museum in another
112
Sanchez, 124 A.3d at 1023.
113
Compl. ¶ 44. See In re Oracle, 2018 WL 1381331, at **17-20 (noting that each of the
challenged directors stood to lose half a million dollars in director’s fees if they were to
lose the controller’s support for their directorships, which standing alone would have been
insufficient to establish a lack of independence on the part of the directors, but when viewed
holistically, were deemed sufficient to constitute a “constellation of facts” that dictated that
very conclusion).
114
Compl. ¶¶ 41-43.
30
country as a favor to Moran, and that Moran’s wife chose to honor Lutnick’s sister,
who co-founded the Cantor Fitzgerald Relief Fund with Lutnick, suggests that the
relationship between Lutnick and Moran is a close one and not simply a “thin social-
circle friendship.”115
Taking into consideration the totality of the Complaint’s allegations
concerning the 20-year professional and personal relationship between Moran and
Lutnick, and drawing all reasonable inferences in Plaintiffs’ favor at this stage of the
case, as the court must, Plaintiffs have adequately pled a “constellation of facts” that
create a reasonable doubt about Moran’s independence from Lutnick for purposes
of deciding whether or not to bring a lawsuit against Lutnick.
2. Linda Bell
Bell has served with Lutnick on two Cantor-affiliated boards over the past ten
years: (i) ELX Futures, from 2009 to July 2013; and (ii) BGC, since July 2013.116
In 2015, Lutnick placed Bell on a publicly-filed list of potential board appointees to
GFI.117 Although Bell’s board-service relationship with Lutnick has not been as
lengthy as Moran’s, she appears to be another of Lutnick’s go-to choices for board
appointments on companies he controls. As such, it is reasonable to infer that
115
Sanchez, 124 A.3d at 1022.
116
Compl. ¶¶ 26, 30.
117
Id. ¶ 31.
31
Lutnick has confidence in Bell and that it would be important to Bell not to
compromise her good relationship with Lutnick, who has the unilateral power to
discontinue the benefits Bell has received from serving on Cantor-affiliated boards.
This inference is bolstered by specifically alleged facts suggesting that these
board appointments have been financially material to Bell.118 In particular, after
conducting an ostensibly thorough search of publicly-available information,
including Form 990’s that tax-exempt organizations must file annually, Plaintiffs
allege that Bell’s board compensation from BGC (e.g., $266,000 in 2017, with
$216,000 paid in cash) has represented over 30% of her annual income in recent
years during which she has served as Provost, Dean of the Faculty, and a Professor
of Economics at Barnard College, and earned $351,409 and $373,547 in 2015 and
2016, respectively.119
Apart from their board service together, the Complaint goes on to plead more
particularized facts about Bell’s relationship with Lutnick. Before joining Barnard,
Bell had an extensive career at Haverford College, dating back to the 1990’s and
118
Orman, 794 A.2d at 25 n.50 (“A director may be considered beholden to (and thus
controlled by) another when the allegedly controlling entity has the unilateral power . . . to
decide whether the challenged director continues to receive a benefit, financial or
otherwise, upon which the challenged director is so dependent or is of such subjective
material importance to him that the threatened loss of that benefit might create a reason to
question whether the controlled director is able to consider the corporate merits of the
challenged transaction objectively.”).
119
Compl. ¶¶ 28-29.
32
including service as its Provost and the John B. Hurford Professor of Economic from
2007 to 2012.120 While at Haverford, Bell, her husband, and Lutnick were members
of the “1833 Society,” which honors the most generous annual fund donors.121 Over
the past 25 years, Lutnick donated at least $65 million to Haverford, helping to pay
for its Gary Lutnick Tennis & Track Center, Douglas B. Gardner ’83 Integrated
Athletic Center, Lutnick Library, Cantor Fitzgerald Art Gallery, and five student
scholarships.122 It can reasonably be inferred that these donations benefited Bell
professionally as Provost at Haverford,123 and deepened her personal relationship
with Lutnick given his self-professed “Love” for Haverford College and its
people.124 In that vein, it is reasonable to infer it was no coincidence that Bell was
first appointed to a Cantor-affiliated board during her tenure as Haverford’s
Provost.125 Although Bell left Haverford several years ago, “past benefits conferred
120
Compl. ¶ 26.
121
Id.122
Id. ¶ 20.
123
See In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 930 (Del. Ch. 2003) (differentiating
between, for the purposes of an independence analysis, tenured professors from those
members of the university community such as “the University’s President, deans, and
development professionals, all of whom, it can be reasonably assumed, are required to
engage heavily in the pursuit of contributions to the University”); see also Off v. Ross, 2008
WL 5053448, at *11 (Del. Ch. Nov. 26, 2008) (stating in approving a settlement that
“Ross’s substantial donation raises considerable doubt as to the independence of Dolan”
who was the Dean of the University of Michigan School of Business when the donation
was made).
124
Compl. ¶ 20.
125
Id. ¶¶ 26, 30.
33
. . . may establish an obligation or debt (a sense of ‘owingness’) upon which a
reasonable doubt as to a director’s loyalty to a corporation may be premised.”126
All-in-all, the particularized facts alleged paint a picture of a close relationship
between Lutnick and Bell, both professionally and personally, such that there is a
reasonable doubt as to Bell’s independence from Lutnick for purposes of deciding
whether or not to bring a lawsuit against Lutnick.127
3. Stephen Curwood
Similar to Bell, Curwood has served with Lutnick on a Cantor-affiliated board
(BGC) for ten years, since December 2009, and Lutnick placed Curwood on a
publicly-filed list of potential board appointees to another Cantor-affiliated entity—
GFI.128 The Complaint specifically alleges that Curwood received more than $1.3
million as a BGC director, including $938,000 over the past five years.129
The Complaint also alleges specific facts from which it reasonably may be
inferred that Curwood’s compensation as a BGC director, which Lutnick has the
126
In re Ply Gem Indus., Inc. S’holders Litig., 2001 WL 1192206, at *1 (Del. Ch. Oct. 3,
2001).
127
In reaching this conclusion, the court does not credit Plaintiffs’ contention that “it is
inconceivable that Lutnick played no role” in Bell’s son gaining admission midway
through high school to the Horace Mann School, an “elite private preparatory school”
where Lutnick was on the board and was a “major donor.” See Compl. ¶¶ 23-24, 27. While
it is certainly possible this occurred, the Complaint’s allegations concerning this matter are
too speculative to credit.
128
Compl. ¶¶ 31-32.
129
Id. ¶ 38.
34
unilateral power to discontinue, would be financially material to him. Those
allegations include that (i) since 1992, Curwood primarily has been employed as
President of World Media Foundation, Inc., which, according to its Form 990’s, paid
total compensation to all of its executives in the amount of $61,939 in 2015,
$107,104 in 2014, and $215,000 or less from 2011 to 2013; and (ii) since 2005,
Curwood has been the Senior Managing Director of SENCAP LLC, an investment
group allegedly run out of his residence in New Hampshire that “lacks any internet
footprint whatsoever.”130 The Complaint further alleges, credibly, that Curwood’s
work as an occasional lecturer at Harvard, teacher of one course every other year at
the University of Massachusetts, and as environmental journalist, likely generated
less income than his BGC compensation.131
Like Bell, Curwood’s ties to Lutnick predate his appointment to the BGC
board, as he served with Lutnick on the Haverford Board of Managers for many
years. Indeed, the Complaint alleges that Lutnick has been quoted saying he
appointed Curwood to the BGC board because he “formerly served on the Board of
Managers of Haverford with Mr. Curwood.”132 Since 2000, Curwood also has
130
Id. ¶¶ 35-39.
131
Id. ¶ 39.
132
Id. ¶ 33.
35
served on the Haverford College Corporation, which holds “legal title to the College
assets” and has a working group that encourages financial support to Haverford.133
As our Supreme Court said in Marchand, “any realistic consideration of the
question of independence must give weight to . . . important relationships and their
natural effect on the ability of the parties to act impartially toward each other.”134
Given Lutnick’s extraordinary generosity to Haverford, and Curwood’s own deep
ties to Haverford, it stands to reason that Curwood naturally would be reluctant to
support bringing a lawsuit against Lutnick. When this consideration is combined
with the possibility that Curwood “could lose his rather lucrative directorship” and
the status of serving on a public company board if he agreed to sue Lutnick, Plaintiffs
have plead sufficient facts to create a reasonable doubt concerning Curwood’s ability
to be independent from Lutnick.135
*****
133
Id. ¶ 34. Defendants assert that since only some of the members of the Haverford
College Corporation work to encourage donations, this allegation is insufficient. BGC
Defs.’ Opening Br. 38-39. But, as our Supreme Court has emphasized, the court must draw
reasonable inferences from particularized facts in Plaintiffs’ favor. Sanchez, 124 A.3d at
1022 (“[I]t cannot be ignored that although plaintiff is bound to plead particularized facts
in pleading a derivative complaint, so too is the court bound to draw all inferences from
those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a
derivative complaint is sought.”). Thus, alleging Curwood’s membership in an
organization with fundraising as a goal is sufficient at this stage of the case.
134
Marchand, 212 A.3d at 820.
135
See Oracle, 2018 WL 1381331, at **17-20 (considering plaintiff’s particularized facts,
holistically).
36
For the reasons explained above, Plaintiffs have plead particularized facts that
create a reasonable doubt that four of the directors serving on the Demand Board are
either disinterested (Lutnick) or independent (Bell, Curwood, and Moran).
Defendants’ motion to dismiss the Complaint under Court of Chancery Rule 23.1
thus must be denied.
D. Count I States a Claim Against the Special Committee Defendants
The Special Committee Defendants also seek to dismiss Count I of the
Complaint against them under Court of Chancery Rule 12(b)(6) for failure to state a
claim for relief. The standard for deciding a motion to dismiss under Rule 12(b)(6)
is well-settled:
(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 non-moving 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.136
The Special Committee Defendants are protected by a Section 102(b)(7)
provision in BGC’s certificate of incorporation.137 “When a director is protected by
an exculpatory charter provision, a plaintiff can survive a motion to dismiss by that
director defendant by pleading facts supporting a rational inference that the director
136
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal quotation marks
omitted).
137
Regan Aff. Ex. 1 (Dkt. 39).
37
harbored self-interest adverse to the stockholders’ interests, acted to advance the
self-interest of an interested party from whom they could not be presumed to act
independently, or acted in bad faith.”138 For the reasons discussed above, Plaintiffs
have plead facts supporting a rational inference that, by voting to approve the
Transaction, Bell, Curwood, and Moran acted to advance the self-interest of an
interested party who stood on both sides of the Transaction (Lutnick) from whom
they could not be presumed to act independently. Accordingly, the motion to
dismiss under Rule 12(b)(6) is denied as to these three individuals.
The remaining member of the Special Committee, who is not on the Demand
Board, is John Dalton. The Complaint alleges that Dalton’s professional relationship
with Lutnick has spanned approximately twenty years, during which Dalton served
on the following Cantor-affiliated boards: (i) Cantor Exchange, an electronic
exchange for trading U.S. Treasury futures that is a subsidiary of Cantor, since 1999;
(ii) BGC, from 2002 until he resigned in December 2017 to accept a director position
at Newmark around the time of its IPO; and (iii) Newmark, from late 2017 until late
2018.139 Lutnick also placed Dalton on a publicly-filed list of potential board
appointees to GFI in 2015.140 Dalton allegedly received more than $2 million from
138
In re Cornerstone, 115 A.3d at 1179-80.
139
Compl. ¶¶ 46-47, 51.
140
Id. ¶ 31.
38
his service on Cantor-affiliated boards, and for at least the past five years has derived
40-50% of his income from Cantor-affiliated entities.141
Under the heightened pleading standards of Rule 23.1, these facts, without
more, 142 would not overcome the presumption of independence our law accords to
a director of a Delaware corporation in my opinion.143 Under the lower pleading
standard of Rule 12(b)(6), however, it is reasonably conceivable that, when deciding
whether or not to approve the Transaction, Dalton would be unwilling to jeopardize
his longstanding position as one of Lutnick’s go-to choices for Cantor-affiliated
board appointments by negotiating harder for BGC to pay a lower price for Berkeley
Point, or to reject the proposed Transaction outright, given how lucrative his Cantor-
affiliated board positions have been to him and Lutnick’s unilateral power to decide
who should serve on those boards. In other words, it is reasonably conceivable that
Dalton would not be presumed to have acted independently of Lutnick in deciding
whether to approve the Transaction, which advanced Lutnick’s self-interest.
141
Id. ¶¶ 50-51.
142
Unlike with the other Special Committee members, Plaintiffs have not plead facts
suggestive of a meaningful personal relationship between Dalton and Lutnick outside of
Dalton’s lengthy service on Cantor-affiliated boards. The Complaint alleges Dalton is not
independent because Dalton is a passionate supporter of Navy athletics and the Cantor
Fitzgerald Relief Fund has donated to the Naval Academy Foundation. Id. ¶ 48. The
Complaint, however, pleads no specifics concerning the magnitude of any such donations
or whether Dalton had any role soliciting them.
143
Beam, 845 A.2d at 1055.
39
Accordingly, the motion to dismiss Count I under Rule 12(b)(6) also is denied as to
Dalton.
IV. CONCLUSION
For the reasons explained above, both of defendants’ motions to dismiss are
denied.
IT IS SO ORDERED.
40