Busch & LaBate v. Westell Technologies, Inc. Sharma v. Westell Technologies, Inc.

• Court: Court of Chancery of Delaware
• Decided: March 2, 2023
• Docket: 2022-0090-NAC, 2022-0346-NAC
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

PANKAJ SHARMA, ) ) Plaintiff, ) ) v. ) C.A. No. 2022-0090-NAC ) WESTELL TECHNOLOGIES, INC., et al., ) ) Defendants. ) ) ) STEVEN H. BUSCH, et al., ) ) Plaintiffs, ) ) v. ) C.A. No. 2022-0346-NAC ) WESTELL TECHNOLOGIES, INC., et al., ) ) Defendants. )

ORDER CONSOLIDATING RELATED ACTIONS AND APPOINTING LEAD PLAINTIFF AND LEAD COUNSEL

WHEREAS:

1. On October 1, 2020, Westell Technologies, Inc. (“Westell” or the

“Company”) undertook a transaction whereby the Company effected a 1-for-1,000

reverse stock split followed immediately by a 1,000-for-1 forward stock split (the

“Transaction”). Sharma v. Westell Technologies, Inc., C.A. No. 2022-0090-NAC

(the “Sharma Action”), Docket Index (“D.I.”) 1 (“Sharma Compl.”) ¶6–7. In October 2020, following the completion of the Transaction, Westell took steps to

delist and deregister the Class A common stock of the Company. Id. ¶7.

2. Westell stockholders who owned fewer than 1,000 shares immediately

prior to the reverse stock split received $1.48 in cash for each share they owned at

the effective time of the reverse stock split. Id. ¶3. As a result, these cashed-out

stockholders were no longer stockholders of the Company following the

Transaction. Id.

3. Westell stockholders who owned more than 1,000 shares immediately

prior to the reverse stock split were not entitled to cash for their fractional shares in

the Transaction. Sharma Action, Ex. B to D.I. 34 (“Proxy Statement”) at 2.1 Instead,

those stockholders’ fractional shares were subject to the forward stock split that

immediately followed the reverse stock split. Id. According to the Proxy Statement

filed in connection with the Transaction, “[a]s a result [of the Transaction], the total

number of shares of the Company’s Class A common stock and Class B common

stock held by a Continuing Stockholder [would] not change, but their ownership

percentage [would] increase.” Id.

4. On January 27, 2022, plaintiff Pankaj Sharma filed a Verified

Stockholder Class Action Complaint commencing the Sharma Action.

1 This Court “may take judicial notice of facts publicly available in filings with the SEC.” Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1167 n.3 (Del. Ch. 2002).

2 5. On April 19, 2022, plaintiffs Steven H. Busch and Lindsey LaBate filed

a Verified Class Action Complaint commencing the action styled Busch v. Westell

Technologies, Inc., C.A. No. 2022-0346-NAC (the “Busch/LaBate Action”).

6. Both actions assert putative class action claims for breach of fiduciary

duty and aiding and abetting breach of fiduciary duty relating to the Transaction on

behalf of the cashed-out stockholders who owned fewer than 1,000 shares

immediately prior to the Transaction. Busch/LaBate Action, D.I. 1 (“Busch

Compl.”) ¶11; Sharma Compl. ¶9. Both actions allege that the $1.48 per share cash-

out price in the Transaction was unfairly low. Busch Compl. ¶¶40–51, 56; Sharma

Compl. ¶¶76–90.

7. The Sharma Action also asserts a unique claim for “Insider Trading”

against Defendant Timothy Duitsman, who is the Company’s Chief Executive

Officer and a director. Sharma Compl. ¶¶103–06.

8. The Busch/LaBate Action purports to bring unique class action claims

on behalf of a “subclass” of stockholders who owned more than 1,000 shares and

were not cashed out in the Transaction (other than Defendants). Busch Compl. ¶8.

The Busch/LaBate plaintiffs refer to this “subclass” of continuing stockholders as

the “Busch Subclass.” Id.

3 9. On May 19, 2022, the plaintiffs in the Busch/LaBate Action moved to

consolidate the two actions. Sharma Action, D.I. 18. Defendants join in the request

for consolidation. Sharma Action, D.I. 20.

10. The Sharma Action plaintiff only opposes consolidation to the extent it

would require consolidation with the Busch Subclass portion of the Busch/LaBate

Action. Sharma Action, D.I. 27 at 25–29. The Sharma Action plaintiff

acknowledges that consolidation with the “LaBate Subclass” would be appropriate.

Id.; Sharma Action, D.I. 75 at 63–66.

11. The plaintiffs in the two actions have moved for appointment of lead

plaintiff(s) and lead counsel. Sharma Action, D.I. 27; Busch/LaBate Action D.I. 18.

The Busch/LaBate Action plaintiffs request that I appoint co-lead plaintiffs and co-

lead counsel. Busch/LaBate Action, D.I. 64 at 1–2.

12. On March 2, 2023, I entered an Order granting Defendants’ partial

motion to dismiss the Busch Subclass claims (the “Dismissal Order”).

NOW, THEREFORE, the Court having carefully considered the parties’

papers and oral argument concerning consolidation and appointment of lead plaintiff

and lead counsel, IT IS HEREBY ORDERED, this 2nd day of March 2023, as

follows:

1. Court of Chancery Rule 42(a) provides the Court with the authority to

manage the litigation before it, including consolidating actions that share common

4 issues of law or fact. See Joseph v. Shell Oil Co., 498 A.2d 1117, 1123 (Del. Ch.

1985) (“Where there are common questions of law or fact cases may be

consolidated.”).

2. Here, the Busch/LaBate Action plaintiffs and Defendants agree that the

actions should be consolidated. The Sharma Action plaintiff’s only objection to

consolidation with the Busch Subclass claims is that it presents an undue risk of

conflict between the subclasses. Because the Dismissal Order dismisses the Busch

Subclass claims, that concern is now moot. Accordingly, I consolidate the two

actions under a single caption, styled In re Westell Technologies, Inc. Stockholder

Litigation, C.A. No. 2022-0090-NAC.

3. I turn next to the competing applications for appointment of lead

plaintiff and lead counsel. For this, the Court applies the “Hirt factors,” so named

after Hirt v. U.S. Timberlands Service Company, LLC, 2002 WL 1558342 (Del. Ch.

July 3, 2002).

4. The Hirt factors ask the court to consider the “(1) quality of the

pleadings; (2) relative economic stakes; (3) willingness and ability to litigate

vigorously; (4) absence of any conflict; (5) vigor of prosecution to date; and (6)

competence and resources of counsel to prosecute the claims.” In re Kraft Heinz

Co. Deriv. Litig., 2020 WL 1248471, at *1 (Del.Ch. Mar. 13, 2020) (ORDER).

5 5. Turning to the first factor, Delaware courts recognize a “public policy

interest favoring the submission of thoughtful, well-researched complaints—rather

than ones regurgitating the morning’s financial press.” Biondi v. Scrushy, 820 A.2d

1148, 1162 (Del. Ch. 2003). “To that end, this Court recognizes the relative quality

of the pleadings as an important factor to consider when competing counsel are vying

for a leadership position.” In re Inv’rs Bancorp, Inc. S’holder Litig., 2016 WL

4257503, at *4 (Del. Ch. Aug. 12, 2016) (citation omitted); see also In re Delphi

Fin. Gp. S’holder Litig., 2012 WL 424886, at *2 (Del. Ch. Feb. 7, 2012) (observing

that the quality of the complaint is a predictor of its successfulness and is a reflection

of the “competence and investigative diligence of the counsel who filed it”).

6. “In analyzing this factor, this court has often favored the movant who

has utilized Section 220 documents more effectively or provided more factual fodder

to support its claims.” In re Emisphere Techs., Inc. S’holders Litig., 2021 WL

5815994, at *4 (citation omitted).

7. In this instance, the Sharma Action complaint is clearly superior to the

Busch/LaBate Action complaint. For example, the Sharma Action complaint makes

extensive use of Section 220 documents. The Busch/LaBate Action complaint

makes extensive use of pasted passages from the Proxy Statement. The

Busch/LaBate Action complaint is also flawed for the reasons discussed in the

Dismissal Order.

6 8. The Sharma Action complaint further reflects superior financial

analysis relative to the Busch/LaBate Action complaint. The Busch/LaBate Action

complaint, for example, appears to take issue with language commonly found in

investment banker materials concerning the advisor’s assumptions and reliance on

management information. The Busch/LaBate Action complaint also focuses on

book value metrics, while the Sharma Action complaint directs its allegations to

methods of financial analysis more commonly employed by financial experts and

this Court.

9. With respect to the second factor—relative economic stakes—

Hirt instructs that the Court is to give this factor “great weight.” 2002 WL 1558342,

at *2 (citing TCW Tech. Ltd. P’ship v. Intermedia Commc’ns, Inc., 2000 WL

1654504, at *4 (Del. Ch. Oct. 17, 2000)).2 “The factor is given less weight, however,

when neither of the competing plaintiffs’ ‘stake is . . . large enough to demonstrate

a substantial relative difference’ that would allow the Court to conclude that one

plaintiff will press the case more diligently than the other.” In re Inv’rs. Bancorp,

Inc. S’holder Litig., 2016 WL 4257503, at *2 (omission in original) (quoting Wiehl

v. Eon Labs, 2005 WL 696764, at *3 (Del. Ch. Mar. 22, 2005)).

2 The Hirt decision takes its “great weight” approach from TCW Technology, which in turn notes that this approach is modeled on federal securities litigation. TCW Tech. Ltd. P’ship, 2000 WL 1654504, at *4 (implicitly referencing the Private Securities Litigation Reform Act of 1995). I note that, in TCW Technology, the Court also made clear that it was “not suggesting that [this approach] should be mechanically applied in every case.” Id.

7 10. Here, the Transaction cashed out stockholders owning fewer than 1,000

shares. This means that any representative plaintiff will necessarily have owned a

relatively small number of shares.

11. Indeed, Ms. LaBate owned 600 shares, and Mr. Sharma owned 270

shares. Both stakes are relatively (and necessarily) de minimis. As a result, neither

plaintiff is advantaged by this factor.

12. I note that counsel for Ms. LaBate argues that, because she bought her

shares at $2.20 per share while Mr. Sharma paid an average of just over $1.49 per

share, she had a substantially larger “out of pocket loss” in the Transaction. Sharma

Action, D.I. 74 at 1–2. On this basis, counsel for Ms. LaBate argues that Ms.

LaBate’s losses are “135 times greater than [Mr.] Sharma’s.” Id. at 2–3.

13. As counsel for Mr. Sharma points out, this “out of pocket loss”

argument seems misplaced and perhaps misunderstands the damages theory at issue.

The relevant question here is the number of shares owned and, given the small stakes

of both plaintiffs, the difference is de minimis.

14. The third Hirt factor—willingness and ability to litigate vigorously—

also favors Mr. Sharma and his counsel. In addition to having the superior

complaint, Mr. Sharma and his counsel commenced a Section 220 proceeding to

obtain the books and records used to draft that complaint. See Sharma v. Westell

8 Technologies, Inc., C.A. No. 2020-0838-LWW. 3 Also, Mr. Sharma points out that

Defendants answered his complaint. Sharma Action, D.I. 9. And, until this

leadership dispute arose, he was actively pursuing discovery in his action.

15. The fourth Hirt factor—the absence of any conflict—also favors the

Sharma Action plaintiff or, at best, is a wash. Here, there was an arguable conflict

due to the presence of the Busch Subclass. That potential conflict is resolved by the

Dismissal Order. I ultimately make no determination on whether the presence of the

Busch Subclass would have constituted a conflict for these purposes, but the

circumstances of its pleading do not count as a plus.4

16. The fifth factor—vigor of prosecution to date— also favors the Sharma

Action plaintiff and his counsel for the same reasons as the third factor.

17. The final factor—competence and resources of counsel to prosecute the

claims—is arguably in equipoise. That being said, the circumstances of the Busch

Subclass claims and arguments do not count as a plus.

3 To be clear, the filing of a Section 220 proceeding does not automatically mean that this factor will favor the filing-stockholder. This is not a purely mechanical test. If it were, that would create highly unfavorable incentives for stockholders seeking a leadership role to file Section 220 proceedings regardless of their actual necessity. Application of this factor therefore depends on the totality of the circumstances. 4 Indeed, I suspect that the Busch Subclass claims were added without much thought, to give the Busch/Labate Plaintiffs leverage in negotiations over a potential co-lead role in this litigation.

9 18. In summary, the Hirt factors, taken together, favor the appointment of

the Sharma Action plaintiff and counsel as lead plaintiff and lead counsel.

19. Before concluding, I briefly address the Busch/LaBate Plaintiffs’

request for appointment as co-lead plaintiffs and co-lead counsel. They argue that I

should appoint them as co-lead plaintiffs and co-lead counsel because of a defense

raised by Defendants in their answer to Mr. Sharma’s complaint. Defendants’

answer asserts that Mr. Sharma lacks standing because he purchased his stock after

the Transaction’s announcement. Given the disparity in pleading and approach to

the litigation that I describe elsewhere in this Order, this argument does not move

the needle in my view. In these circumstances, to the extent this defense truly

becomes an issue down the road, it can be addressed then. 5

For these reasons, Mr. Sharma’s leadership application is GRANTED.

Counsel for Mr. Sharma shall submit a form of implementing order within ten days.

/s/ Nathan A. Cook Vice Chancellor Nathan A. Cook

5 See, e.g., In re Emisphere Techs., Inc. S’holders Litig., 2021 WL 5815994, at *5 n.33 (Del. Ch. Dec. 6, 2021) (declining to “order a ‘forced marriage’” because it “would not advance the best interests of [the] stockholders”); Ryan v. Mindbody, Inc., 2019 WL 4805820, at *4 (Del. Ch. Oct. 1, 2019) (“[Y]ou play not your eleven best, but your best eleven. . . . Cognizant that forcing cooperation risks impairing team dynamics, this Court has repeatedly declined to craft its own leadership structure in lieu of selecting a team that the parties have formed themselves.”).