IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AN NGUYEN, ) ) Plaintiff, ) ) v. ) C.A. No. 11511-VCG ) MICHAEL G. BARRETT, THOMAS R. ) EVANS, ROBERT P. GOODMAN, ) PATRICK KERINS, ROSS B. ) LEVINSOHN, WENDA HARRIS ) MILLARD, JAMES A. THOLEN, AOL ) INC., and MARS ACQUISITION SUB, ) INC., ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: June 30, 2016 Date Decided: September 28, 2016
James R. Banko and Derrick B. Farrell, of FARUQI & FARUQI, LLP, Wilmington, Delaware; OF COUNSEL: Juan E. Monteverde, of MONTEVERDE & ASSOCIATES PC, New York, New York; Michael J. Palestina, of KAHN SWICK & FOTI, LLC, Madisonville, Louisiana, Attorneys for Plaintiff.
Kevin R. Shannon and Jaclyn C. Levy, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: William Savitt, Anitha Reddy, and Nicholas Walter, of WACHTELL, LIPTON, ROSEN & KATZ, New York, New York, Attorneys for All Defendants.
GLASSCOCK, Vice Chancellor This matter can now be considered twice-tested, but not in the beneficial sense
made famous by Professor Berle. The action involves a challenge to a merger
agreement, brought pre-close, alleging inadequate price and process, as well as some
thirty disclosure violations. In his motion for preliminary injunctive relief,1
however, the Plaintiff pursued only his “serious”2 disclosure violation, involving
lack of disclosure of purportedly material financial information. I found that a
preliminary injunction was unsustainable on the merits, and the Plaintiff sought an
interlocutory appeal, which our Supreme Court denied. The stockholders
overwhelmingly chose to tender into the merger, which closed; the Plaintiff now
seeks damages for breach of duty in regard to two alleged mal-disclosures; one, the
financial disclosure claim I found not reasonably likely to succeed at the preliminary
injunction stage; and a second, involving incentives of the financial advisor, which
the Plaintiff pled pre-close but elected not to argue in the motion for preliminary
injunctive relief—presumably, his second most serious disclosure claim. For the
reasons below, I find that neither claim can withstand a motion to dismiss.
1 The pleadings and briefing in this case have referred to the Plaintiff, An Nguyen, by both male and female pronouns. Here I use the pronoun used by Plaintiff’s counsel in their most recent filing. No disrespect is meant if this is incorrect. 2 Prelim. Inj. Hrg. Tr. 11:15–19.
1 I. BACKGROUND
The matter is currently before me on Defendants’ Motion to Dismiss the
Second Verified Amended Complaint (the “Motion”).3 On September 16, 2015,
Plaintiff An Nguyen on behalf of himself, and a class of similarly situated
stockholders of Millennial Media, Inc. (“Millennial” or the “Company”), filed this
action, challenging the proposed acquisition of the Company by AOL, Inc. (“AOL”)
for $1.75 per share in cash through a tender offer and second-step short-form merger,
pursuant to 8 Del. C. § 251(h) (the “Transaction”).4 In his initial complaint, the
Plaintiff brought two counts: one for breach of the fiduciary duties of loyalty and
care against the directors of Millennial (the “Director Defendants”), for their alleged
failure to obtain a fair price or follow a fair process with respect to the Transaction;
and the other against AOL for aiding and abetting those breaches. Because the
Plaintiff has since abandoned those claims, as discussed infra, I need not detail the
rigorous sales process conducted by the Millennial board, which culminated in the
Transaction.
3 The facts are drawn from the well-pled allegations of Plaintiff’s Second Amended Complaint (the “Complaint”) and documents integral to the Complaint or incorporated by reference therein, and are presumed true for purposes of evaluating Defendants’ Motion. 4 This price represented, at the time, a 33% premium for Millennial’s shares. Defs’ Opening Br., Transmittal Aff. of Jaclyn C. Levy, Esq., Ex. A (the “Proxy”), at 23. This action is one of five lawsuits filed challenging the Transaction between September 10 and September 16, 2015. The other four suits, which were all voluntarily dismissed, were Parshall v. Millennial Media, Inc., C.A. No. 11485-VCG (Sept. 9, 2015); Desjardins v. Millennial Media, Inc., C.A. No. 11490-VCG (Sept. 10, 2015); Chen v. Barrett, C.A. No. 11496-VCG (Sept. 10, 2015); and Wagner v. Barrett, C.A. No. 11503-VCG (Sept. 15, 2015). Defs’ Opening Br. 8–9.
2 The Millennial board unanimously approved the merger agreement on
September 2, 2015.5 It was executed, and the Transaction announced, the following
day.6 AOL commenced the tender offer on September 18, 2015.7 That same day,
the Company filed a Schedule 14D-9 Solicitation/Recommendation Statement (the
“Proxy”) with the SEC, in connection with the tender offer.8 On September 24,
2015, the Plaintiff filed his first amended complaint, adding roughly thirty alleged
disclosure violations concerning financial analyses prepared by the Company’s
financial advisor, LUMA Securities LLC (“LUMA”); Millennial’s projections;
board conversations with other potential bidders; and the Director Defendants’ stock
ownership.9
The Plaintiff moved for expedited proceedings and for preliminary injunctive
relief on September 29, 2015. Following a telephone conference held on October 6,
2015, I determined that expedited discovery was not warranted and directed the
parties to complete truncated briefing on the preliminary injunctive relief request;
specifically, I directed the Plaintiff to clarify his grounds for relief sought, which to
that point had constituted somewhat of a moving target. I heard oral argument on
October 8, 2015, immediately following which I denied Plaintiff’s request for
5 Proxy, at 12. 6 Compl. ¶ 5. 7 Id. at ¶ 3. 8 Id. at ¶ 88. 9 First Am. Compl. ¶¶ 88–97.
3 preliminary injunctive relief. The Plaintiff then moved for certification of an
emergency interlocutory appeal to the Delaware Supreme Court. After taking the
matter under review, I issued a letter opinion later that day denying Plaintiff’s
request.10 The Supreme Court refused the appeal on October 9, 2015.11
In seeking preliminary injunctive relief, the Plaintiff pursued only one of the
roughly thirty disclosure violations alleged in his first amended complaint: a claim
concerning unlevered, after-tax free cash flow projections (“UFCF”). The Plaintiff
advanced two principal—and mutually exclusive—arguments concerning this
claim. First, although the Plaintiff acknowledged that our case law indicates that
banker-derived financial projections need not be disclosed, he argued that here,
Millennial management forecasted all of the components of the UFCF and the
Company’s financial advisor, LUMA, simply plugged those values into a widely
used formula. As a result, the Plaintiff argued, either those inputs or the UFCF
themselves should be disclosed. Second, and in the alternative, the Plaintiff
contended that a corrective disclosure was required because the Proxy misleadingly
created the impression that Millennial management, and not LUMA, calculated the
UFCF that were used by LUMA to perform its discounted-cash-flow analysis.
10 Nguyen v. Barrett, 2015 WL 5882709 (Del. Ch. Oct. 8, 2015). 11 Nguyen v. Barrett, 2015 WL 5924668, *1 (Del. Oct. 9, 2015) (TABLE).
4 After careful review of the Proxy and applicable precedent, I determined that
“a fair reading of the Proxy disclosed accurately that management did not prepare
forecasts of unlevered, after-tax free cash flows,”12 and, “[w]ith respect to the
argument that all inputs provided by management on which the financial advisor
relied in its [discounted cash flow] valuation must, as a matter of law, be disclosed
to stockholders, I found such a per se rule inconsistent with our case law.”13 In sum,
I concluded that “the Plaintiff had failed to demonstrate under the facts here that the
Proxy was materially incomplete or misleading.”14
The tender offer was completed on October 22, 2015, and the merger closed
the following day.15 Just over 80% of shares were tendered into the offer.16 The
Plaintiff filed a second amended complaint (the “Complaint”) on January 4, 2016,
which repeats the price and process claims (including aiding and abetting against
AOL) of the earlier complaints, narrows down the alleged disclosure violations to
only three claims, and adds a count for “quasi-appraisal.”17
12 Nguyen, 2015 WL 5882709, at *3. 13 Id. at *4. 14 Id. 15 Compl. ¶ 5. 16 Id. 17 I note, however, that quasi-appraisal is a remedy, not a cause of action. See Houseman v. Sagerman, 2015 WL 7307323, at *4 (Del. Ch. Nov. 19, 2015) (“[Q]uasi-appraisal is not itself a cause of action, but is instead a remedy that, where appropriate, awards stockholders damages based on the going-concern value of their previously owned stock upon a finding of a breach of fiduciary duty, such as the duty to disclose.”) (citation omitted). The Complaint may not be sustained solely on the basis of a count for quasi-appraisal; rather, the Plaintiff must demonstrate some underlying violation, for which quasi-appraisal is the appropriate remedy. See, e.g., Chen v. Howard-Anderson, 87 A.3d 648, 691 (Del. Ch. 2014) (“If the plaintiffs prove at trial that the
5 The Defendants filed their Motion to Dismiss on January 19, 2016, and the
parties completed briefing. Through his briefing, the Plaintiff implicitly waived the
price and process claims, by failing to defend them with any argument or authority, 18
and expressly waived one of his three remaining disclosure claims. 19 I heard oral
argument on June 30, 2016, following which the Plaintiff voluntarily waived his
aiding and abetting claim against AOL.20 That leaves for my consideration here only
two disclosure claims: the first, concerning the Company’s UFCF which was the
subject of the preliminary injunctive relief hearing; and a second, concerning
LUMA’s contingent-fee arrangement. For the following reasons, I find that the
Plaintiff has failed to state a non-exculpated claim of breach of fiduciary duty with
respect to either alleged disclosure violation; accordingly, I grant Defendants’
Motion.
defendants committed a non-exculpated breach of the fiduciary duty of disclosure, then damages can be awarded using a quasi-appraisal measure.”). 18 See Forsythe v. ESC Fund Mgmt. Co. (U.S.), 2007 WL 2982247, at *11 (Del. Ch. Oct. 9, 2007) (“The plaintiffs have waived these claims by failing to brief them in their opposition to the motion to dismiss.”) (citing Emerald Partners v. Berlin, 2003 WL 21003437, at *43 (Del. Ch. Apr. 28, 2003) (stating “[i]t is settled Delaware law that a party waives an argument by not including it in its brief”)). 19 See Pl’s Answering Br. 13 n.7 (“However, in light of recent developments in Delaware disclosure law, see, e.g., In re Trulia, Inc. Stockholder Litigation, 129 A.2d 884, 901 n.57 (Del. Ch. 2016), Plaintiff has elected not to raise [the third] disclosure point in this opposition.”). 20 Transcript of June 30, 2016 Oral Arg. 77:15–17.
6 II. ANALYSIS
The Defendants move to dismiss under Court of Chancery Rule 12(b)(6) for
failure to state a claim. When considering such a motion, the Court must accept all
well-pled factual allegations in the complaint as true, draw all reasonable inferences
in favor of the plaintiff, and deny the motion “unless the plaintiff could not recover
under any reasonably conceivable set of circumstances susceptible of proof.”21
In order to sustain a pre-close disclosure claim, heard on a motion for
preliminary injunctive relief, a plaintiff must demonstrate “a reasonable likelihood
of proving that the alleged omission or misrepresentation is material;”22 by contrast,
when asserting a disclosure claim for damages against directors post-close, a
plaintiff must allege facts making it reasonably conceivable that there has been a
non-exculpated breach of fiduciary duty by the board in failing to make a material
disclosure.23 “Information is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote”; or, in
other words, “if, from the perspective of a reasonable stockholder, there is a
substantial likelihood that it significantly alters the ‘total mix’ of information made
21 Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 536–37 (Del. 2011). 22 In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 896 (Del. Ch. 2016) (internal quotation omitted). 23 Chen v. Howard, 87 A.3d 648, 691 (Del. Ch. 2014) (“If the plaintiffs prove at trial that the defendants committed a non-exculpated breach of the fiduciary duty of disclosure, then damages can be awarded using a quasi-appraisal measure.”).
7 available.”24 Where, as here, an exculpation provision under 8 Del. C. § 102(b)(7)
shields a board from duty-of-care claims, this means a plaintiff must demonstrate
that a majority of the board was not disinterested or independent, or that the board
was otherwise disloyal because it failed to act in good faith, in failing to make the
material disclosure.25 A showing of bad faith requires an “extreme set of facts to
establish that disinterested directors were intentionally disregarding their duties or
that the decision . . . [was] so far beyond the bounds of reasonable judgment that it
seems essentially inexplicable on any ground other than bad faith.”26 For the
following reasons, the Plaintiff has failed to clear the bar of pleading disloyalty with
regard to either disclosure claim.
24 Trulia, 129 A.3d at 899 (internal quotations omitted). 25 In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *6 (Del. Ch. Jan. 31, 2013). To the extent it was not waived at oral argument, I reject Plaintiff’s contention, expressed in briefing, that because the existence of a 102(b)(7) exculpatory provision was not explicitly pled in Plaintiff’s Complaint, it is outside the bounds of Defendants’ Motion to Dismiss. Plaintiff’s position, if accepted, would undermine the very purpose of a 102(b)(7) exculpation provision— that is, to spare directors from the burden and expense of litigation where the only conceivable claim is one for breach of the duty of care. Nor does Plaintiff’s position comport with the Delaware Supreme Court’s decision in In re Cornerstone Therapeutics Inc, Stockholder Litigation, 115 A.3d 1173 (Del. 2015), where the Court held that, even in the entire fairness context, a case may be dismissed at the motion-to-dismiss stage if the plaintiff has not alleged any non-exculpated claims against the director defendants. Id. at 1187. Rather, as the Delaware Supreme Court indicated in Malpiede v. Townson, 780 A.2d 1075 (Del. 2001), the Court can take judicial notice of the existence of a 102(b)(7) exculpatory provision, which can easily be found in public filings on record with the Delaware Secretary of State’s office. See id. at 1090 (“The trial court therefore tacitly accepted it as authentic without defendants formally asking the court to take judicial notice of [102(b)(7) provision’s] existence, which could easily be found in the public files in the Secretary of State's office and could properly be noticed judicially by the court.”). 26 In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *7 (Del. Ch. May 20, 2016) (internal quotations omitted).
8 A. The Unlevered, After-Tax Free Cash Flow Projections
I turn first to Plaintiff’s claim regarding the UFCF, which was the subject of
Plaintiff’s application for preliminary injunctive relief.
In their briefing the Plaintiff remakes arguments similar to those previously
considered in this action. The Plaintiff argues that the Defendants made selective
disclosure of certain financial projections in the Proxy and “intentionally excised
[what the Plaintiff describes as] Millennial’s UFCF—despite the fact that LUMA’s
Discounted Cash Flow Analysis was specifically based on these figures.”27 They
assert that the UFCF, and the components that went into it were material because
Millennial “stockholders were asked to exchange their ownership stake in the
Company and forego the Company’s future cash flows in exchange for all-cash
consideration.”28 They argue that the UFCF and its components were “even more
significant than usual” here because two of LUMA’s disclosed cash flow
projections, which used UFCF as an input, resulted in a price per share of $0.00.29
Additionally, they repeat their argument that these projections are not banker
formulated projections but, essentially, management figures.30 They allege LUMA
took UFCF components projected by management and “using no meaningful
27 Pl’s Answering Br. 19 (citing Second Am. Compl. ¶¶ 92–93, 101). 28 Id. at 21 (citing Second Am. Compl. ¶105). 29 Id. (citing Second Am. Compl. ¶ 105). 30 Id. at 22–24 (“[S]emantic gamesmanship aside, the UFCF figures were for all intents and purposes derived by Millennial’s management.”).
9 independent judgment of any kind, plugged them into a calculator to arrive at the
UFCF figures.”31 Under these facts, they contend that the Company had a duty to
disclose UFCF, or at the very least, all of the UFCF components provided to LUMA,
because the Company cannot escape a duty to provide management projections by
simply giving a banker numbers to plug into a formula for the banker to merely hit
the “equals” button.32 They allege that because “some management projections were
disclosed, the Board was required to give materially complete information about all
of the Company’s projections and provide a complete summary of the key inputs
relied upon by LUMA.”33
The Defendants argue that the UFCF figures were derived by LUMA.34 They
assert that the cases cited by the Plaintiff, for the proposition that management
cannot avoid its duty to disclose projections by simply handing inputs to bankers for
them to perform the ministerial task of hitting enter, are distinguishable. They argue
those cases involved situations where no cash flows were disclosed.35 Here
however, “all of the cash flow information that was directly prepared by
management was disclosed.”36 Further, they assert that the Complaint does not
allege that management directed LUMA in selecting the formula, or even knew how
31 Id. at 23. 32 Id. 33 Id. at 27–28 (emphasis added). 34 Transcript of June 30, 2016 Oral Arg. 56:22. 35 Id. at 57:10–11. 36 Id. at 57:13–15.
10 LUMA would treat the components management provided them, or that
management had anything to do with LUMA’s methodology.37 Thus “[i]n these
circumstances, it simply cannot be said that these were management’s numbers.”38
Because these were banker prepared numbers and management’s best projections
were disclosed, the Defendants argue, the law is clear that the UFCF were not
material and need not be disclosed.
Even if I were to find that the UFCF disclosures—contrary to my earlier
determination on the record at the preliminary injunction hearing—constitute a
material lack of disclosure, Plaintiff’s UFCF claim must fail. The Plaintiff has failed
to plead facts such that it is reasonably conceivable that the allegedly incomplete
disclosure was made by the board disloyally or in bad faith, as is required to sustain
this claim post-close. The only conflict that the Plaintiff alleges as to six of the
directors—all except Millennial CEO, Michael Barrett39—is that they held stock
options that vested in the event of a transaction, providing a lucrative payout.40
When pressed at oral argument, the Plaintiff elaborated that the Director Defendants
must have wanted to accelerate their vesting because they faced “risk.”41 The
37 Id. at 58:21–59:12. 38 Id. at 59:19–21. 39 As to Barrett, the Plaintiff alleges that he had a significant prior employment relationship with AOL, which caused the board to favor AOL, and that he stood to gain “an additional 12 months’ salary of $476,000, 100% of his restricted stock units, and 100% of his stock options” in connection with the Transaction. Second Am. Compl. ¶¶ 12–14, 21, 65. 40 Id. at ¶ 12. 41 Transcript of June 30, 2016 Oral Arg. 40:23–41:12.
11 Plaintiff conceded that he did not know why the directors would cash out at lower
price, rather than wait to maximize the value of the Company.42 Instead, the Plaintiff
argued that he need not answer that question at the motion-to-dismiss stage, without
the aid of further discovery.
Under Delaware law, directors are presumed to be independent, disinterested,
and faithful fiduciaries.43 While a plaintiff need not know and articulate the exact
motive of directors in order to sustain a claim, the Plaintiff does bear the burden to
allege facts that rebut the presumption afforded to directors—that is, to demonstrate
that it is reasonably conceivable that the board acted in bad faith or disloyally. Here,
the single allegation as to the six directors (other than Barrett) is insufficient as a
matter of law to do so. It is well-settled that where the interests of directors and
stockholders are aligned, as here, the accelerated vesting of shares in a merger does
not create a conflict of interest.44 Additionally, even if an incongruency of interest
had been plead, the Plaintiff has also failed to allege how the payouts that these
directors stood to earn were material to them.45 I need not address the allegations
42 Id. at 39:21–40:4. 43 See, e.g., Beam ex rel. Martha Stewart Living Omnipedia, Inc. v. Stewart, 845 A.2d 1040, 1048– 49 (Del. 2004). 44 See Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *8 (Del. Ch. Nov. 30, 2007) (“The accelerated vesting of options does not create a conflict of interest because the interests of the shareholders and directors are aligned in obtaining the highest price.”) (internal quotations omitted). 45 See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1167 (Del. 1995) (“[A] shareholder plaintiff [must] show the materiality of a director’s self-interest to the given director’s independence . . . .”).
12 with respect to Barrett; he is only one of seven on the board, and the Plaintiff can
only sustain a claim for the breach of the duty of loyalty by pleading facts showing
that it is reasonably conceivable that each of a majority of the board is conflicted.46
Finally, I note that Plaintiff’s reliance on this Court’s decision in Chen v. Howard-
Anderson47—where the Court found that it was unclear at the motion-for-summary-
judgment phase whether the alleged disclosure violations in the proxy statement
resulted from a breach of loyalty or a breach of care, and declined the motion—is
misplaced. The Chen court determined that, at that procedural stage, and given the
“confounding evidence of the directors’ knowledge and the problems that occurred
in discovery,” it needed further factual development to determine whether and to
what extent the 102(b)(7) exculpatory provision applied.48 That is not the case here.
Because the Plaintiff has failed to allege a reasonably conceivable breach of
the duty of loyalty based on self-interest, he can only sustain his claim if he can
demonstrate facts supporting an inference that the board acted in bad faith in making
its allegedly incomplete disclosure—that is, facts showing an “intentional”
46 See Plumtree, 2007 WL 4292024, at *9 (“Even assuming [the plaintiff] was correct, which it is not, and such benefits were sufficient for the Court to infer [the CEO] was interested in the transaction, [the CEO] is only one member of a six person Board. The other five uninterested Individual Defendants constitute a clear majority.”); Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993) (“This Court has never held that one director’s colorable interest in a challenged transaction is sufficient, without more, to deprive a board of the protection of the business judgment presumption of loyalty.”) (emphasis added). 47 87 A.3d 648 (Del. Ch. 2014). 48 Id. at 693.
13 dereliction or a “conscious disregard” of duty.49 The Plaintiff has not met that
burden. Again, nothing in the pleadings, considered in the light most favorable to
the Plaintiff, suggests bad faith. I note that I found at the preliminary injunction
stage that the Plaintiff lacked a colorable claim of non-disclosure, and the
Defendants presumably relied on that preliminary conclusion by this Court, which
was undisturbed on appeal by the Supreme Court. Nothing in the record creates an
inference that the Defendants deliberately withheld information or disregarded a
manifest duty.50
B. LUMA’s Contingent Compensation
I next turn to Plaintiff’s claim regarding LUMA’s contingent fee. The
Plaintiff contends that the Proxy failed to disclose the amount of LUMA’s fee that
was contingent upon the completion of the Transaction. The Proxy discloses that
LUMA Securities has acted as financial advisor to the Company in connection with the Merger and will receive a fee of $3.6 million for its services, a substantial portion of which is contingent upon the completion of the Merger (the “Advisory Fee”). LUMA Securities has also acted as financial advisor to the Board and received a $500,000 fee upon delivery of its opinion, which is not contingent upon the conclusion expressed or the consummation of the Merger (the “Opinion
49 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009). 50 The Plaintiff’s reliance on this Court’s decision in Doppelt v. Windstream Holdings, Inc., 2016 WL 612929 (Del. Ch. Feb. 5, 2016), is unavailing. There, the plaintiff alleged specific facts that the board had knowingly withheld in its proxy: the proxy announced a $0.70 post-transaction dividend target, while the board was planning to slash that target to $0.58 following stockholder approval. Even with such facts, which do not exist here, then-Vice Chancellor Noble remarked that the complaint “test[ed] the limits of the ‘reasonably conceivable’ standard.” Id. at *8 n.81.
14 Fee”), provided that such Opinion Fee is partially creditable against any Advisory Fee.51
The Plaintiff argues that this “partial” disclosure was “inadequate to inform
stockholders of how much of LUMA’s fee was contingent upon a transaction coming
to fruition,” as “what constitutes a ‘substantial portion’ is highly subjective and open
to various interpretations.”52
As a threshold matter, the Defendants argue that this claim has been waived;
it was pled in Plaintiff’s first amended complaint, but was abandoned during the
course of the expedited proceedings, through Plaintiff’s failure to pursue the claim
in briefing or argument on his motion for a preliminary injunctive relief. In my letter
opinion denying certification of an emergency interlocutory appeal, I remarked that
the “number of disclosure violations alleged [in the first amended complaint] is
extraordinary,” and found that “[b]y the time th[e] preliminary injunction request
was submitted, these disclosure violations were abandoned, and are therefore
waived, with a single exception” (referring to the claim concerning the unlevered,
after-tax free cash flow projections).53 The Plaintiff, on the other hand, contends
that I should not consider the claim waived in this post-close context, arguing first
that recent decisions have indicated a disposition toward addressing disclosure
51 Proxy, at 33–34 (emphasis added). 52 Defs’ Answering Br. 17. 53 Nguyen, 2015 WL 5882709, at *1, 3.
15 claims post-close,54 and second, that he adequately preserved his right to pursue
other disclosure claims post-close during argument on the motion for preliminary
injunctive relief.55 Essentially, the Plaintiff posits that Delaware has recently
established a new “regime,” under which a plaintiff can elect to bring disclosure
claims pre- or post-close, but creating uncertainties in the process which make
leeway towards his approach appropriate here.56
To be clear, where a plaintiff has a claim, pre-close, that a disclosure is either
misleading or incomplete in a way that is material to stockholders, that claim should
be brought pre-close, not post-close. There are two aspects to such a claim: the first
concerns a stockholder’s right to a fully informed vote; and the second is a potential
damages claim. While the latter may be remedied post-close, the former is
54 The Plaintiff points to Chester Cnty. Ret. Sys. v. Collins, C.A. No. 12072-VCL, at 21:16–23 (Del. Ch. Mar. 14, 2016) (TRANSCRIPT); Johnson v. Driscoll, C.A. No. 11721-VCL, at 45:19– 46:5 (Del. Ch. Feb. 3, 2016) (TRANSCRIPT). 55 See Prelim. Inj. Hrg. Tr. 11:15–19 (“Defendants also made this reference of frivolity. Nothing here is frivolous, Your Honor. We’re moving on the serious disclosure, and whether we have other disclosures in our pleadings, we can do those post-close for quasi-appraisal.”). 56 The Plaintiff argues that recent rulings of this Court cause Plaintiffs’ counsel to face a Catch- 22: bring disclosure claims pre-close and risk denial of expedition on ground that damages is a sufficient remedy, or bring the claims post-close, and have them dismissed for failure to plead non- exculpated breach of duty. No such dilemma exists, in my view. This Court’s jurisprudence makes clear that it is preferable to bring disclosure claims before closing. Such pleadings allow this Court to employ equitable relief to ensure an informed vote of stockholders. Those disclosure claims must, of course, be colorable—otherwise, they could not justify the expense to litigants and the Court of expedition, and in any event could not sustain equitable relief. Non-colorable claims are properly refused expedition. Post-closing, what may remain are claims for damages. To the extent an improper disclosure was the result of an actionable breach of fiduciary duty on the part of directors, causing damages, a remedy is available post-closing, but as with any claim of breach of fiduciary duty, the plaintiff must plead facts that make it reasonably conceivable that an actionable breach of duty has occurred. That burden is not inconsequential, as the instant matter demonstrates.
16 irretrievably lost following a stockholder vote.57 The preferred method for
vindicating truly material disclosure claims is to bring them pre-close, at a time when
the Court can insure an informed vote. Because of this interest, a salutary incentive
could be provided by considering claims based on disclosure, pled but not pursued
pre-close, to be waived.
However, the Defendants argue, and I agree, that regardless of whether I
consider this claim waived, it fails on the merits. Here, the Proxy discloses that a
“substantial portion” of LUMA’s fee was contingent on the completion of the
merger.58 This Court has repeatedly held that such a disclosure regarding advisor
fees, absent some indication that the fee was exorbitant or unusual, or otherwise
improper, is sufficient.59
57 In re Transkaryotic Therapies, Inc., 954 A.2d 346, 360–61 (Del. Ch. 2008) ([T]his Court has explicitly held that a breach of the disclosure duty leads to irreparable harm. On account of this, the Court grants injunctive relief to prevent a vote from taking place where there is a credible threat that shareholders will be asked to vote without such complete and accurate information. The corollary to this point, however, is that once this irreparable harm has occurred—i.e., when shareholders have voted without complete and accurate information—it is, by definition, too late to remedy the harm. If the Court could redress such an informational injury after the fact, then the harm, by definition, would not be irreparable, and injunctive relief would not be available in the first place.”) (citations omitted) (emphasis added). 58 Proxy, at 33; see also, Second Am. Compl. ¶ 91. 59 See, e.g., Cnty. of York Emps. Ret. Plan v. Merrill Lynch & Co., 2008 WL 4824053, at *11 (Del. Ch. Oct. 28, 2008) (“It is true that compensation contingent on consummation of the transaction has the potential to influence a financial advisor. However, that fact was disclosed in the proxy: ‘Merrill Lynch has agreed to pay a fee to MLPFS, a substantial portion of which is contingent upon the merger being consummated.’ And this Court has held that the precise amount of consideration need not be disclosed, and that simply stating that an advisor's fees are partially contingent on the consummation of a transaction is appropriate. In other words, the Plaintiff has simply not alleged a disclosure violation.”) (emphasis added) (citations omitted); Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *13 (Del. Ch. Nov. 30, 2007) (“The Merger Proxy stated that Jefferies' fees were ‘customary’ and partially contingent, but did not provide
17 The Plaintiff points to this Court’s decision in In re Atheros Communications,
Inc.60 for the proposition that the level of contingency of an advisor’s fee can be
material. There the Court found misleading a disclosure that the investment banker’s
fee was “substantially contingent” on the deal’s closing, when the well-pleaded facts
of the complaint showed that nearly all—98%—of the fee was contingent. The
Court held that while “[c]ontingent fees are undoubtedly routine,” the “percentage
of the fee that is contingent exceeds both common practice and common
understanding of what constitutes ‘substantial,’” and “may fairly raise questions
about the financial advisor's objectivity and self-interest.”61 In other words, the
Court found that the plaintiff’s pleadings themselves showed that the proxy was
inaccurate, by understating the level of contingency.62 To my mind, Atheros does
not undermine the body of cases that hold that, generally, the disclosure that a
further details. Without a well-pled allegation of exorbitant or otherwise improper fees, there is no basis to conclude the additional datum of Jefferies' actual compensation, per se, would significantly alter the total mix of information available to stockholders.”) (citation omitted). 60 2011 WL 864928 (Del. Ch. Mar. 4, 2011). 61 Id. at *8. 62 Id. at *8; see also In re Alloy, 2011 WL 4863716, at *11 (Del. Ch. Oct. 13, 2011) (“Although this Court has held that stockholders may have sufficient concerns about contingent fee arrangements to warrant disclosure of such arrangements, that need to disclose does not imply that contingent fees necessarily produce specious fairness opinions. In this case, Plaintiffs provide nothing more than conclusory allegations that the presence of a contingent fee structure must have influenced [the banker], but they do not allege, for example, that the actual compensation received was excessive or extraordinary. In these circumstances, I cannot conclude that a broad salvo against such a common practice, standing alone, supports a reasonable inference that the fairness opinion rendered in this case is so flawed that the [Company’s] directors could not have relied upon it in good faith.”) (citations omitted).
18 “substantial portion” of a fee is contingent is sufficient. The Plaintiff here points to
no well-pled facts indicating that the fee arraignment falls outside this general rule.63
Moreover, as with Plaintiff’s other disclosure claim, the Plaintiff has not pled
facts such that it is reasonably conceivable that this allegedly incomplete disclosure
was made in bad faith. When pressed at oral argument, the Plaintiff described his
theory as follows:
Our theory is that all that information has not been disclosed intentionally to mislead shareholders in approving this transaction, and that the fact that the banker is getting paid a lot of money and that it’s contingent on closing goes hand in hand, that that’s why they didn’t want the free cash flow disclosed.64
Beyond alleging, in this conclusory fashion, that the two alleged disclosure
violations are related, the Plaintiff has not pled facts creating a reasonable inference
that the Director Defendants acted deliberately to knowingly withhold material
information regarding the contingent-banker-fee arrangement from the stockholders.
The Plaintiff, in declining to pursue this claim pre-close, conceded that the claim
was not its “serious” claim,65 instead choosing only to pursue its disclosure claim
regarding the UFCF; it is hard to see how the Defendants, in light of that concession,
63 I note that the other cases cited by Plaintiff—In re Del Monte Foods Co. Shareholders Litigation, 25 A.3d 813 (Del. Ch. 2011), and In re TIBCO Software Inc. Stockholders Litigation, 2015 WL 6155894 (Del. Ch. Oct. 20, 2015)—did not address disclosure claims concerning an advisor’s fee. 64 Transcript of June 30, 2016 Oral Arg. 11:3–9. 65 Prelim. Inj. Hrg. Tr. 11:15–19.
19 acted in bad faith in not altering the disclosure; in any event, facts evincing bad faith
are not adequately plead.
III. CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is granted. An
appropriate Order is attached.
20 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AN NGUYEN, ) ) Plaintiff, ) ) v. ) C.A. No. 11511-VCG ) MICHAEL G. BARRETT, THOMAS R. ) EVANS, ROBERT P. GOODMAN, ) PATRICK KERINS, ROSS B. ) LEVINSOHN, WENDA HARRIS ) MILLARD, JAMES A. THOLEN, AOL ) INC., and MARS ACQUISITION SUB, ) INC., ) ) Defendants. )
ORDER
AND NOW, this 28th day of September, 2016,
The court having considered Defendants’ Motion to Dismiss, and for the
reasons set forth in the Memorandum Opinion dated September 28, 2016, IT IS
HEREBY ORDERED that Defendants’ motion is GRANTED.
SO ORDERED:
/s/ Sam Glasscock III
Vice Chancellor