Gallagher Industries, LLC v. William M. Addy
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GALLAGHER INDUSTRIES, LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0106-SG ) WILLIAM M. ADDY and JOSEPH E. ) EASTIN, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: February 20, 2020 Date Decided: May 29, 2020
Jon Abramczyk, John DiTomo, Matthew Clark, and A. Gage Whirley, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Plaintiff.
Peter Walsh, Kevin Shannon, and Callan Jackson, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Tammy Wood and Brent Hockaday, of BELL NUNNALLY & MARTIN LLP, Dallas, Texas, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor This post-trial Memorandum Opinion involves a cash-out merger by a
controller of a privately-held company, ISN Software Corporation (“ISN” or the
“Company”). The Plaintiff, an LLC involved in private equity, acquired stock in
ISN in late December 2012 by exchanging its interest in ranchland. No cash changed
hands. The merger followed less than three weeks later.
At the time of the merger, ISN provided the Plaintiff with a check for the
merger price of its stock, notice of its appraisal rights, and scant details regarding
how the Company had set its value for the merger. The Plaintiff, I find after trial,
had ample evidence that the merger was unfair, and its interest undervalued.
Nonetheless, it cashed the check tendered for its shares, waiving appraisal, and did
not bring a breach of fiduciary duty claim during the statutory tort limitations period.
I conclude, based on the trial record and reasonable inferences therefrom, that the
Plaintiff made a business decision in 2013 that the litigation game was not worth its
candle; it was content with the merger price rather than the uncertainties of an
appraisal action, and was unwilling to invest the considerable cost and effort
involved in a fiduciary tort action, even with the benefit of the entire fairness
standard it would have enjoyed.
Meanwhile, two other stockholders sought appraisal rights. The Plaintiff was
well aware of this consolidated case; it underwent rather extensive discovery as a
non-party in that action. The results of the appraisal were eye-catching—the merger
1 consideration implied the value of ISN as $138 million. After the appraisal trial, I
found the fair value to be $357 million. ISN appealed. The Supreme Court affirmed
on October 30, 2017. At that point, according to one of the Plaintiff’s principals, the
matter of a fiduciary duty suit became “very real.” In other words, the Plaintiff knew
of fiduciary duty claims as of the time they accrued, when it received notice of the
merger. It sat on its rights for five years, based on a business decision that it was not
worth pursuing appraisal or tort damages, given the costs and risks involved. Once
the efforts of the appraisal plaintiffs removed all doubt of the quantum of damages
available, however, the Plaintiff brought this suit, alleging that the incomplete and
misleading disclosure it had received from ISN was in violation of fiduciary duties,
and seeking a quasi-appraisal recovery.
It is clear that the merger process and price were unfair to the stockholders
and that the disclosures were materially inadequate. Such was, or should have been,
cognizable by the Plaintiff based upon information it had at the time of the merger.
Breach of fiduciary duty is a tort, and suits in equity based on tort are, generally
speaking, barred by laches no later than the running of the analogous statute of
limitations, three years after the action accrues. The Plaintiff argues that it could not
have understood the nature of its claim until the Supreme Court’s affirmance of the
appraisal decision, and it makes less extreme claims that the limitation period was
tolled sufficiently to allow this matter to go forward. After consideration of this
2 matter on a full record, however, I find the Plaintiff’s tolling argument unavailing,
and that the statute of limitations ran in early 2016. Accordingly, the Plaintiff’s
claim is barred by laches, and I find for the Defendants. My reasoning is below.
I. BACKGROUND1
This is a post-trial Memorandum Opinion. The trial took place over two days
on October 8 and 9, 2019. The parties submitted 286 joint exhibits and lodged two
depositions. The following facts were stipulated or proved by a preponderance of
evidence at trial.
A. The Parties
Plaintiff Gallagher Industries, LLC (“Gallagher”) is a private equity firm with
total investments of approximately $25 million.2 Non-party Charles Gallagher
founded Gallagher and still indirectly controls it through family trusts.3
Non-Party ISN is a privately held Delaware corporation that provides “a
subscription-based online contractor management database called ISNetworld.”4
1 Citations to Joint Trial Exhibits (“JX”) are expressed as JX __, at __. Citations in the form “Tr.” refer to the trial transcript. The parties submitted a Joint Statement of Facts (“JSOF”) containing both undisputed facts as well as “Additional Record Facts” from each party regarding disputed facts, a format I found useful. Joint Statement of Facts, D.I. 94. To avoid confusion, I cite directly to the JSOF only for undisputed facts. Where factual matters are disputed and weighing evidence is required, I cite directly to the record. 2 JSOF, ¶ 8. 3 Id. ¶ 9. I refer to Gallagher Industries, LLC as “Gallagher,” and Charles Gallagher as “Mr. Gallagher” to distinguish them. 4 Id. ¶ 2.
3 Defendant William “Bill” Addy is the founder and executive chairman of
ISN.5 Formerly ISN’s CEO, Addy remains the Company’s executive chairman, a
member of the ISN board of directors (the “Board”), and ISN’s controlling
stockholder.6
Defendant Joseph E. Eastin is currently CEO and a director of ISN.7 He
formerly served as President.8
Non-party Thomas C. Loftus is the President of Gallagher, where he has
worked since 1998.9
B. Factual Background
1. ISN Company History
ISN provides a “contractor management database” that connects contractors
and business owners.10 It generates revenue selling subscriptions to both the
contractors and the business owners.11 It works chiefly in the oil and gas industry,
but serves clients all over the world.12 ISN has more than 500 employees.13 Its
5 Id. ¶ 11. 6 Id. 7 Id. ¶ 12. 8 Id. 9 Id. ¶ 10. 10 Id. ¶ 2. 11 Id. 12 Id. 13 Id. ¶ 3.
4 Board consists of two directors: Defendants Addy and Eastin, both of whom own
substantial stakes in the Company.14 Addy is a controlling stockholder.15
In 2011, ISN had one outside stockholder: Ad-Venture Capital Partners, L.P.
(“Ad-Venture”), a company controlled by Defendant Addy’s brother, Brian Addy.16
Extensive litigation experience has demonstrated to me that the relationship between
the brothers Bill and Brian Addy is contentious.17 Ad-Venture owned 900 shares of
ISN.18 Wanting to value its shares for the purpose of a sale to Polaris Venture
Partners (“Polaris”), Ad-Venture filed a books and records action under 8 Del. C. §
220 (the “220 Action”) on June 28, 2011.19 ISN contested the 220 Action.20
On June 30, 2011, just after the 220 Action commenced, ISN received a
valuation it had requested from Peter J. Phalon of Waterview Advisors, Inc. (the
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GALLAGHER INDUSTRIES, LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0106-SG ) WILLIAM M. ADDY and JOSEPH E. ) EASTIN, ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: February 20, 2020 Date Decided: May 29, 2020
Jon Abramczyk, John DiTomo, Matthew Clark, and A. Gage Whirley, of MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for Plaintiff.
Peter Walsh, Kevin Shannon, and Callan Jackson, of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; OF COUNSEL: Tammy Wood and Brent Hockaday, of BELL NUNNALLY & MARTIN LLP, Dallas, Texas, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor This post-trial Memorandum Opinion involves a cash-out merger by a
controller of a privately-held company, ISN Software Corporation (“ISN” or the
“Company”). The Plaintiff, an LLC involved in private equity, acquired stock in
ISN in late December 2012 by exchanging its interest in ranchland. No cash changed
hands. The merger followed less than three weeks later.
At the time of the merger, ISN provided the Plaintiff with a check for the
merger price of its stock, notice of its appraisal rights, and scant details regarding
how the Company had set its value for the merger. The Plaintiff, I find after trial,
had ample evidence that the merger was unfair, and its interest undervalued.
Nonetheless, it cashed the check tendered for its shares, waiving appraisal, and did
not bring a breach of fiduciary duty claim during the statutory tort limitations period.
I conclude, based on the trial record and reasonable inferences therefrom, that the
Plaintiff made a business decision in 2013 that the litigation game was not worth its
candle; it was content with the merger price rather than the uncertainties of an
appraisal action, and was unwilling to invest the considerable cost and effort
involved in a fiduciary tort action, even with the benefit of the entire fairness
standard it would have enjoyed.
Meanwhile, two other stockholders sought appraisal rights. The Plaintiff was
well aware of this consolidated case; it underwent rather extensive discovery as a
non-party in that action. The results of the appraisal were eye-catching—the merger
1 consideration implied the value of ISN as $138 million. After the appraisal trial, I
found the fair value to be $357 million. ISN appealed. The Supreme Court affirmed
on October 30, 2017. At that point, according to one of the Plaintiff’s principals, the
matter of a fiduciary duty suit became “very real.” In other words, the Plaintiff knew
of fiduciary duty claims as of the time they accrued, when it received notice of the
merger. It sat on its rights for five years, based on a business decision that it was not
worth pursuing appraisal or tort damages, given the costs and risks involved. Once
the efforts of the appraisal plaintiffs removed all doubt of the quantum of damages
available, however, the Plaintiff brought this suit, alleging that the incomplete and
misleading disclosure it had received from ISN was in violation of fiduciary duties,
and seeking a quasi-appraisal recovery.
It is clear that the merger process and price were unfair to the stockholders
and that the disclosures were materially inadequate. Such was, or should have been,
cognizable by the Plaintiff based upon information it had at the time of the merger.
Breach of fiduciary duty is a tort, and suits in equity based on tort are, generally
speaking, barred by laches no later than the running of the analogous statute of
limitations, three years after the action accrues. The Plaintiff argues that it could not
have understood the nature of its claim until the Supreme Court’s affirmance of the
appraisal decision, and it makes less extreme claims that the limitation period was
tolled sufficiently to allow this matter to go forward. After consideration of this
2 matter on a full record, however, I find the Plaintiff’s tolling argument unavailing,
and that the statute of limitations ran in early 2016. Accordingly, the Plaintiff’s
claim is barred by laches, and I find for the Defendants. My reasoning is below.
I. BACKGROUND1
This is a post-trial Memorandum Opinion. The trial took place over two days
on October 8 and 9, 2019. The parties submitted 286 joint exhibits and lodged two
depositions. The following facts were stipulated or proved by a preponderance of
evidence at trial.
A. The Parties
Plaintiff Gallagher Industries, LLC (“Gallagher”) is a private equity firm with
total investments of approximately $25 million.2 Non-party Charles Gallagher
founded Gallagher and still indirectly controls it through family trusts.3
Non-Party ISN is a privately held Delaware corporation that provides “a
subscription-based online contractor management database called ISNetworld.”4
1 Citations to Joint Trial Exhibits (“JX”) are expressed as JX __, at __. Citations in the form “Tr.” refer to the trial transcript. The parties submitted a Joint Statement of Facts (“JSOF”) containing both undisputed facts as well as “Additional Record Facts” from each party regarding disputed facts, a format I found useful. Joint Statement of Facts, D.I. 94. To avoid confusion, I cite directly to the JSOF only for undisputed facts. Where factual matters are disputed and weighing evidence is required, I cite directly to the record. 2 JSOF, ¶ 8. 3 Id. ¶ 9. I refer to Gallagher Industries, LLC as “Gallagher,” and Charles Gallagher as “Mr. Gallagher” to distinguish them. 4 Id. ¶ 2.
3 Defendant William “Bill” Addy is the founder and executive chairman of
ISN.5 Formerly ISN’s CEO, Addy remains the Company’s executive chairman, a
member of the ISN board of directors (the “Board”), and ISN’s controlling
stockholder.6
Defendant Joseph E. Eastin is currently CEO and a director of ISN.7 He
formerly served as President.8
Non-party Thomas C. Loftus is the President of Gallagher, where he has
worked since 1998.9
B. Factual Background
1. ISN Company History
ISN provides a “contractor management database” that connects contractors
and business owners.10 It generates revenue selling subscriptions to both the
contractors and the business owners.11 It works chiefly in the oil and gas industry,
but serves clients all over the world.12 ISN has more than 500 employees.13 Its
5 Id. ¶ 11. 6 Id. 7 Id. ¶ 12. 8 Id. 9 Id. ¶ 10. 10 Id. ¶ 2. 11 Id. 12 Id. 13 Id. ¶ 3.
4 Board consists of two directors: Defendants Addy and Eastin, both of whom own
substantial stakes in the Company.14 Addy is a controlling stockholder.15
In 2011, ISN had one outside stockholder: Ad-Venture Capital Partners, L.P.
(“Ad-Venture”), a company controlled by Defendant Addy’s brother, Brian Addy.16
Extensive litigation experience has demonstrated to me that the relationship between
the brothers Bill and Brian Addy is contentious.17 Ad-Venture owned 900 shares of
ISN.18 Wanting to value its shares for the purpose of a sale to Polaris Venture
Partners (“Polaris”), Ad-Venture filed a books and records action under 8 Del. C. §
220 (the “220 Action”) on June 28, 2011.19 ISN contested the 220 Action.20
On June 30, 2011, just after the 220 Action commenced, ISN received a
valuation it had requested from Peter J. Phalon of Waterview Advisors, Inc. (the
“Phalon Valuation”).21 The Phalon Valuation created five-year revenue projections
for the Company out to 2016, which were based on discussions with Addy.22 Based
14 Id. ¶¶ 3, 11–12. 15 See id. ¶¶ 5, 12. 16 Id. ¶ 4. 17 E.g. Tr. 11:17–24 (Addy) (testifying “it’s no secret there was friction between myself and my brother . . . he had sued me for emotional distress. He had sued the company a couple of times.”). 18 JSOF, ¶ 16. 19 Id. 20 See id. ¶¶ 17–18. 21 Id. ¶ 22. 22 Tr. 92:17–93:14 (Addy).
5 on these projections, the Phalon Valuation valued ISN as of June 30, 2011, at $127
million.23
On October 31, 2011, while the 220 Action was ongoing, the Board met for
thirty minutes, and after that meeting, Addy wrote a letter that he distributed to the
ISN stockholders (a letter referred to in prior proceedings of this court, and here, as
the “Halloween Letter”).24 At the time of the Halloween Letter, Ad-Venture was the
only unaffiliated ISN stockholder.25 In other words, the Halloween Letter was in
essence written to Ad-Venture.26 The Halloween Letter reads, in full:
Dear Shareholders:
I am writing to advise you of a significant change in strategy for ISN Software Corporation. As you may have seen in our most recent submission of revenue figures to INC Magazine, ISN’s growth rate has slowed substantially. In fact, our reported 25% growth rate from 2009 to 2010 is our slowest reported growth rate in the history of the company. It appears that 2011 growth will be roughly the same as 2010. After a number of years of successfully exploiting our niche, we expect slower contractor addition growth rates for the foreseeable future.
In light of this forecast and in an effort to increase long-term shareholder returns, the ISN board of directors has authorized 23 JX 37, at 5. 24 JSOF, ¶¶ 28–30; JX 39, at 1 (October 31, 2011 Board minutes indicating meeting was conducted from “9 am to 9:30 am”). The parties embraced the Halloween Letter moniker, resulting in much wordplay at trial. E.g. Tr. 437:17–20 (“So I like to think of the Halloween letter as trying to spook Ad-Venture, not the data; isn’t that right?”), 459:4–8 (“And to the extent Gallagher was spooked by the Halloween letter, could they look at the financials that they were actually sent to put themselves at ease?”). 25 See JX 40, at 2. 26 Tr. 10:22–11:4 (Addy).
6 management to pursue two new and complimentary strategic thrusts, namely, acquisition of businesses and acquisition of real estate.
Business acquisitions will concentrate on businesses where: 1) There is potential to sell additional services to our existing customer base, and/or 2) There is potential to leverage ISN experience in SAAS business practices.
We will solicit business acquisition opportunities and may also invest in private equity funds that have the potential to increase our access to acquisition deal flow.
Real estate acquisitions (including new construction) are expected to fall into two categories: 1) Operations Support including office buildings, parking lots, data centers and ancillary support facilities. 2) Business Development Support including hunting ranches, ski homes, beach properties and city central condominiums. Ownership of these types of Business Development Support properties is common among the owner and contractor customers we serve. We expect these properties to be used for customer meetings, entertainment, management retreats, travel accommodation and, subject to company guidelines, employee personal use.
Real estate acquisitions are initially contemplated to be no leverage/low leverage deal structures that can be used as loan collateral in the event funds are needed for business acquisitions. In light of current economic conditions, our expectation is that real estate acquisitions, when eventually liquidated, will achieve attractive returns on investment as well as facilitating near-term support for operations and business development.
We will explore for acquisition opportunities in both the US and abroad. Leading these efforts will immediately become a primary duty for me.
Thank you for your continued support.
Sincerely, 7 /s/ William M. Addy Chairman and CEO27
The “significant change in strategy” identified in the Halloween Letter was one of
three other major topics discussed at the thirty-minute board meeting.28 From trial
testimony, it appears that this “change in strategy” first arose in 2009 and was in fact
largely promulgated to help leverage a buyout of Ad-Venture shares.29 ISN wanted
such a buyout in order to prevent those shares from being sold to third parties.30
Although the Defendants purported to investigate several of the opportunities
outlined in the Halloween Letter, with a single limited exception, it ultimately
pursued none.31 In addition, Addy testified (in a separate action) that he never
informed ISN senior management about these “significant change[s] in strategy” for
the Company.32
As the Defendants themselves testified, the Halloween Letter portrayed
declining growth at ISN.33 While the Company’s growth rates were declining, it
27 JX 40, at 2–3. 28 JX 39, at 1–2. 29 Tr. 416:2–420:20 (Eastin). 30 Id. 31 See JX 39, at 2; JX 257; JX 181; JX 156; Tr. 10:9–11, 17:8–18 (Addy), 355:7–356:3, 442:19– 443:14 (Eastin). ISN invested in a private equity fund in January 2012. Tr. 17:6–14 (Addy). 32 JX 211, at 852:3–6; see also Tr. 442:4–445:8 (Eastin). 33 Tr. 437:9–13 (Eastin).
8 continued to add the same numbers of new clients, expand its revenues through price
increases, improve its margins, and exceed its stretch budget. 34 In other words,
business was good; in fact, business was good enough that Addy’s and Eastin’s
compensation more than doubled from 2009 to 2011.35 2012 followed on this
growth and became what Addy described as ISN’s “best year ever.”36
In April 2012, following the 220 Action, ISN produced certain books and
records (the “220 Production”).37 Although ISN possessed the Phalon Valuation
during the entirety of the 220 Action, it did not include it in the 220 Production.38
ISN did include the Halloween Letter in the 220 Production.39
2. Gallagher Obtains ISN Stock
In general, Loftus was responsible for Gallagher’s business, and Mr.
Gallagher—though he had final authority on decisions—relied on Loftus to conduct
the business.40 A Gallagher affiliate owned four “ranch properties”41 (the “Ranch
34 Tr. 8:9–22, 58:23–59:8, 63:9–13, 72:14–17 (Addy), 391:5–6, 401:5–403:21, 413:22–414:11, 432:15–438:3 (Eastin); JX 95, at 4; JX 53, at 2; JX 39, at 1; JX 52, at 2. 35 Tr. 431:13–432:14 (Eastin); JX 155, at 49–50. 36 Tr. 63:14–17, 76:24–77:10 (Addy). 37 JSOF, ¶¶ 17–18. 38 Id. ¶¶ 23–24. Addy testified at trial that disclosure was not required under the terms of the agreement reached as a result of the 220 Action. See Tr. 48:6–7 (Addy). 39 JSOF, ¶ 33. 40 See Tr. 140:6–10, 146:2–11 (Loftus), 288:3–22 (Gallagher). 41 Apparently, these are multi-acre residential lots. See Tr. 99:6–13 (Loftus), 277:5–8 (Gallagher).
9 Properties”) it wished to sell.42 These Ranch Properties were illiquid assets, and
Gallagher’s main goal in selling them for the affiliate was to obtain a certain dollar
amount to protect the affiliate’s interest, rather than achieve the highest price
available.43 Ad-Venture’s controller, Brian Addy, approached Gallagher in 2012
about acquiring the Ranch Properties in exchange for shares of ISN stock.44 Loftus
negotiated with Brian Addy regarding the exchange.45 As a part of the exchange,
Gallagher and Ad-Venture entered a “Minimum Proceeds Agreement,” which
obliged Ad-Venture to pay Gallagher the difference between the value of the ISN
shares and $5.2 million if Gallagher disposed of the shares for less than that
amount.46
During negotiations, Brian Addy told Loftus that he had a valuation of ISN
supporting a value for the Company of $425 million.47 The two discussed valuations
ranging from $275 million to $500 million.48 During negotiations, Gallagher
received two actual valuations.49 The first, prepared by Ad-Venture, valued ISN at
42 JSOF, ¶ 52. 43 Tr. 140:15–18, 147:7–148:10 (Loftus). 44 JSOF, ¶ 52. 45 Id. ¶ 53. 46 JX 87, Ex. D, Minimum Proceeds Agreement. 47 JSOF, ¶ 54; JX 61. 48 Tr. 142:12–15 (Loftus). 49 JSOF, ¶¶ 55–56.
10 $395 million.50 The second, prepared by an independent valuation firm, valued ISN
at $450 million.51 Loftus expressed some skepticism of these, given that they were
produced by Ad-Venture or at Ad-Venture’s direction.52
Gallagher did not perform its own official valuation, as there were no
company projections.53 As part of his presentation of the deal to Mr. Gallagher,
though, Loftus included a page titled “Valuation,” which assigned an equity value
to ISN of $285 million.54 Loftus did not, however, provide Mr. Gallagher with the
valuations he had received from Ad-Venture.55
To facilitate the transaction, Gallagher (through Ad-Venture) submitted due
diligence requests to ISN, and the parties entered a non-disclosure agreement.56 As
a part of due diligence, ISN produced the Halloween Letter, but it did not produce
the Phalon Valuation.57 Then, at Gallagher’s request, ISN supplemented its due
diligence production with additional documents.58 ISN did not, however, produce
50 Id. ¶ 55; JX 55. 51 JSOF, ¶ 56; JX 59. 52 Tr. 155:22–156:14 (Loftus). 53 See id. at 151:16–24 (Loftus). 54 JX 80, at 5. 55 Tr. 291:1–23 (Gallagher). 56 JSOF, ¶¶ 61–63. 57 Id. ¶¶ 64–65. 58 Id. ¶¶ 66–68.
11 information beyond what it had produced to Ad-Venture in the 220 Action.59 Loftus
described the relationship between Gallagher and ISN as “adversarial.”60
In November 2012, Loftus and Addy corresponded briefly about the due
diligence and the Halloween Letter.61 Ultimately, Gallagher agreed to exchange the
Ranch Properties for 155 ISN shares.62 The exchange of the Ranch Properties for
155 ISN shares (the “Exchange Transaction”) closed on December 20, 2012.63
3. ISN Conducts a Merger and Makes Disclosures
In January 2013, ISN discussed conducting a cash-out merger (the “Merger”)
of the shares owned by Polaris and Gallagher under 8 Del. C. § 251.64 The purpose
of the Merger was to reduce the total number of shareholders so that ISN could move
closer toward converting to an S-Corporation, which would be beneficial for tax
purposes.65 As long as Ad-Venture, Polaris, and Gallagher held shares, ISN would
not qualify for S-corporation treatment.66 However, ISN decided not to cash out all
three because of risks associated with that size of Merger, including the possibility
59 Tr. 18:19–21, 19:3-11 (Addy), 100:19–103:7 (Loftus); JX 69, at 4. 60 Tr. 100:13–101:2 (Loftus). 61 JX 73, at 1. 62 JSOF, ¶¶ 87–90. 63 Id. ¶ 91. 64 Id. ¶ 103; JX 92 at 7–10; JX 97. 65 JSOF, ¶ 121; JX 92, at 6. 66 JSOF, ¶ 122.
12 of a negative result in an appraisal proceeding.67 It was Addy’s intent that Ad-
venture, run by his brother, not be cashed-out.68 Ad-Venture, nonetheless, had
statutory appraisal rights under the Merger contemplated.
To prepare for the Merger, ISN retained prominent Delaware counsel (“ISN
Delaware Counsel”) to advise on Delaware law.69 ISN Delaware Counsel attended
a January 9, 2013 board meeting, where the Board resolved to approve the Merger.70
The Board did not retain a financial advisor or obtain a fairness opinion in
connection with the Merger.71
Addy set the Merger consideration at $38,317 per share (the “Merger
Consideration”), and Eastin agreed to the amount.72 This per share price valued the
Company at $138 million.73 To reach this determination, the Board started with the
Phalon Valuation from 2011 and made various adjustments by hand on a piece of
paper.74 The Defendants testified they made these adjustments by comparing the
Phalon Valuation against the Company’s 2012 performance.75 However, Addy’s
67 JX 92, at 5–6. 68 See Tr. 135:18–136:9, 160:16–161:17 (Loftus). 69 See JX 92. 70 JSOF, ¶¶ 104, 107. 71 Id. ¶¶ 111–12. 72 Id. ¶ 129; Tr. 29:23–30:2 (Addy). 73 Tr. 116:7–12 (Loftus). 74 JSOF, ¶ 130; JX 91; Tr. 49:8–22 (Addy). 75 Tr. 30:3–32:22, 94:8–95:16 (Addy).
13 adjustments are not compatible with this testimony; they fail to account for the fact
that actual revenue in 2011 and 2012, as well as projected revenue in 2013, were all
substantially higher than projected in the Phalon Valuation.76 In fact, the Company’s
projected revenue for 2013 already exceeded the revenue that the Phalon Valuation
projected for the end of its five-year period in 2016.77 In the notice ISN would send
the next week, it provided neither the projections it relied on to calculate the Merger
Consideration nor the mismatch between actual performance and these projections.78
Following discussions about the Company’s desire to move toward S-
corporation status at the January 9 board meeting, ISN executed the Merger, with
Addy signing on behalf of Sub Inc., Eastin signing on behalf of ISN, and Addy and
Eastin providing majority shareholder approval through a written consent.79
On January 16, 2013, ISN notified the shareholders of the Merger and their
appraisal rights in connection with the Merger (the “Notice”).80 ISN supplemented
the Notice with disclosure documents, which included all documents produced
during Gallagher’s due diligence, as well as 24 pages of additional financial
76 Compare JX 37, at 49 (Phalon Valuation) with JX 76 (historical revenues for 2011 and 2012 and projected 2013 budget) and JX 91 (Addy’s adjustments); see also Tr. 94:8–95:16 (Addy), 390:8–394:19, 399:1–4 (Eastin); JX 76; JX 101, at 423. 77 Compare JX 76 (2013 budget) with JX 37 (Phalon Valuation). 78 Tr. 51:10–52:4, 89:23–90:5, 95:9–16 (Addy), 369:7–13, 370:8–18, 413:6–17 (Eastin). 79 JSOF, ¶¶ 108–109; JX 97. 80 JSOF, ¶ 138; JX 98.
14 information (the “Supplemental Documentation”).81 These additional pages
provided only minimal forward-looking finances, focusing chiefly on the
Company’s historical financial information for 2005 through projected 2013.82 The
Notice identified Gallagher and Polaris as the stockholders eligible for appraisal.83
The Notice also purported to inform the stockholders how ISN calculated the Merger
consideration, thusly:
In establishing the consideration provided to the holders of the Common Stock in the Merger, the board of directors of the Company considered a variety of factors, including the Supplemental Documentation (as defined below) enclosed with this Notice and the financial condition of the Company as reflected therein. The board of directors of the Company established such consideration based on those factors and such other considerations as the board in its judgment deemed appropriate.84
At trial, Addy testified that to understand how ISN arrived at the Merger
Consideration, one would use the Phalon Valuation, his adjustments to it, and the
January 9 board meeting minutes.85 None of these three items were provided with
81 JSOF, ¶ 140; JX 101. 82 Tr. 342:14–21, 376:9–377:11 (Eastin); see also JX 101, at 429. 83 JSOF, ¶ 142. 84 Id. ¶ 141; JX 97, at 7. 85 Tr. 50:2–24 (Addy). Addy later confirmed this for the purpose of ISN’s audit. JX 162, at 1.
15 the Supplemental Documentation.86 The Supplemental Documentation did,
however, include the Halloween Letter.87
Along with providing the Notice to Gallagher, ISN included a check for
$5,939,135, which represented the value of Gallagher’s 155 ISN shares at the
Merger price.88 The Notice stated: “upon cashing or negotiating the enclosed check,
Gallagher will be treated by the company as having waived any appraisal rights to
which it may otherwise be entitled.”89
4. Gallagher Reviews the Notice and Accepts the Merger Consideration
Gallagher received the Notice, Supplemental Documentation, and the check
for the Merger on January 17, 2013.90 After Loftus received the Notice from ISN,
he provided it to Gallagher’s counsel at Moye White, where two attorneys spent over
an hour reviewing the materials, then conducted a call with Loftus.91 Loftus himself
reviewed the Supplemental Documentation provided with the Notice.92 Based on
his review, he conducted informal calculations and came up with a range of $250
86 Tr. 32:6–8, 51:10–18 (Addy), 369:7–13, 370:8–18 (Eastin). 87 JX 101, at 178–79. 88 JSOF, ¶ 143. 89 Id. 90 Id. ¶ 222. 91 Tr. 181:6–14 (Loftus); JX 111, at 2 (time records from Moye White indicating review and phone call with Loftus). 92 Tr. 118:10–16 (Loftus).
16 million to $350 million for ISN’s value.93 Loftus testified he questioned his analysis
because ISN’s insiders had determined a lower value, and he presumed they had
better information.94 He also testified, however, that the delta between his rough
calculations and ISN’s assigned value were sufficiently large to raise “concerns”
about the fairness of the ISN valuation.95 Ultimately, however, he “assumed
[Gallagher] could trust the process and the management team,” and so he did not
contact ISN with questions.96
Loftus emailed Mr. Gallagher, attaching the Notice, at 2:20 p.m. that same
day, January 17.97 Final authority to accept the Merger Consideration or seek
appraisal sat with Mr. Gallagher.98 Loftus did not share with Mr. Gallagher his
informal calculations based on the ISN financials that roughly valued the Company
at $250 million to $350 million.99 He did share with Mr. Gallagher, however, his
93 Id. at 120:3–121:8, 149:5–153:5, 198:6–199:10, 200:19–201:23 (Loftus). 94 Id. at 149:5–153:5, 198:6–199:10, 200:19–201:23 (Loftus). Loftus testified that the Halloween Letter led him to conclude the lower valuation might be due to the slowing growth and directional changes described in that letter. Id. at 108:1–20, 119:10–15, 205:3–19 (Loftus). However, he also observed that the balance sheets did not reflect a change in strategy toward real estate or business acquisitions. Id. at 174:12–175:1 (Loftus). 95 Id. at 206:22–207:7 (Loftus). 96 Id. at 202:20–203:2 (Loftus). Part of Loftus’s unwillingness to reach out to ISN was based on his previous adversarial encounters with Addy when Gallagher was conducting diligence prior to acquiring the stock. Id. at 203:3–15 (Loftus). 97 JSOF, ¶ 223; JX 102. 98 JSOF, ¶ 249. 99 Tr. 201:4–202:7 (Loftus).
17 confusion about the basis for ISN’s valuation, as well as the potential that ISN’s
growth was slowing, based on the Halloween Letter, with the result that ISN’s
valuation might overvalue or undervalue the Company.100
Mr. Gallagher agreed with Loftus’s decision not to inquire further with ISN
because, he testified, he believed ISN had a legal duty to give Gallagher fair value
for its shares.101 However, rather than “simply trust defendants,” Mr. Gallagher
asked Loftus to review the materials provided and give him a “view as to the
fairness” and enough information to make a decision.102 Loftus told Gallagher that
ISN’s assigned value “might be low,” and as a result, Gallagher might be “leaving
money on the table” if it accepted the Merger Consideration.103 After discussing the
Halloween Letter, Mr. Gallagher felt that ISN might be experiencing “a very
significant decline,” including “almost a collapse of their earnings.”104
The Notice provided Gallagher twenty days to decide whether to accept the
Merger Consideration or seek appraisal.105 In making the decision, Gallagher’s
“number one goal” was to ensure the Gallagher affiliate whose Ranch Properties had
100 Tr. 196:24–201:23 (Loftus), 300:10-301:20 (Gallagher). 101 Id. at 308:3–309:2 (Gallagher). 102 Id. at 265:9–15 (Loftus), 327:18–22 (Gallagher). 103 Id. at 311:20–312:4 (Gallagher), 269:7–14 (Loftus). 104 Id. at 305:10–306:2 (Gallagher). 105 JX 98, at 3.
18 been exchanged for the ISN shares was “taken care of.”106 The Merger
Consideration was sufficient to achieve that goal.107 In fact, the $5.9 million cash-
out significantly exceeded the $5.2 million called for in the Minimum Proceeds
Agreement.108 Thus, accepting the Merger Consideration satisfied Gallagher’s
investment goals and avoided a risk-laden and potentially costly appraisal action.109
Based on these factors, Mr. Gallagher made the decision on the spot.110 Late
in the afternoon of January 17—the same day it received the Notice, Supplemental
Documentation, and Merger Consideration—Gallagher deposited the check.111 Ad-
venture, by contrast, made the decision to seek an appraisal of it stock.112 Mr.
Gallagher testified that at the time he accepted the Merger Consideration, he was
aware that Ad-Venture would seek appraisal.113
106 Tr. 214:3–215:12 (Loftus). 107 Id. at 214:24–215:3 (Loftus). 108 See JX 87, Ex. D, Minimum Proceeds Agreement. 109 Tr. 213:5–8, 215:13–216:24 (Loftus). 110 Id. at 321:23–322:9 (Gallagher). 111 JSOF, ¶ 287; JX 105–106. Mr. Gallagher decided to distribute the Merger consideration to Gallagher’s owners pro rata. JSOF, ¶ 288. 112 See JSOF, ¶ 292. 113 Tr. 324:2–7 (Gallagher).
19 5. Ad-Venture and Polaris Seek Appraisal
Following the Merger, both Ad-Venture and Polaris petitioned this Court for
appraisal of the fair value of their shares (the “Appraisal Action”).114 During the
course of the litigation, ISN maintained that it had paid fair value in the Merger.115
On September 19, 2013, as a part of the Appraisal Action, ISN subpoenaed
Gallagher, seeking both document production and testimony.116 Gallagher was
served with the subpoena on September 23, 2013.117 Gallagher retained Moye White
to assist in responding.118
On October 10, 2013, ISN Delaware Counsel emailed Moye White regarding
a deposition, and Moye White responded on October 21.119 Thereafter, Gallagher
produced more than 1,800 pages of documents and a privilege log.120 Moye White
again communicated with ISN Delaware Counsel on January 24 and 28, 2014,
regarding Gallagher’s deposition.121 The attorneys continued to communicate up
until Loftus was deposed as Gallagher’s representative on February 10, 2014.122 At
114 JSOF, ¶ 292. 115 JX 261, at 7; JX 188, at 73; JX 195, at 3. 116 JSOF, ¶ 304. 117 Id. 118 Id. ¶ 305. 119 Id. ¶¶ 307–308. 120 Id. ¶ 306. 121 Id. ¶ 309. 122 Id. ¶¶ 310–13.
20 his deposition, Loftus provided testimony regarding, among other things, his rough
valuations that calculated ISN’s value at around twice the Merger Consideration.123
He also testified at his deposition that he thought the Merger Consideration was too
low.124
During the Appraisal Action, Ad-Venture and Polaris moved to compel
documents from ISN twice, the first time on October 1, 2013, and the second on
March 4, 2014.125 These motions to compel were resolved by a special discovery
master, who publicly filed a report on April 10, 2014.126 Loftus testified that he did
not know about the motions to compel until his deposition because he was not
“monitoring th[e] case.”127 Both motions to compel alleged disclosure violations by
ISN.128
123 Tr. 221:22–222:17 (Loftus); JX 145, at 30. 124 JX 145, at 29. This included testimony regarding supporting factors, such as high contractor growth rates. JX 145, at 29, 31. 125 JSOF, ¶¶ 326–28. 126 Id. ¶ 329; JX 153. 127 Tr. 253:18–20, 254:7–9, 257:24–258:6 (Loftus). 128 Neither motion to compel disclosed that the Phalon Valuation was based on materials not included with the Supplemental Documentation. See JX 133; JX 148. However, the first motion to compel states that “when the ISN board set the Merger consideration, it appears as if all it did was make a number of its own ‘adjustments’ to a valuation study that was commissioned over two years ago. . .” JX 133, at 2; see also JX 133, at 6 (“it appears that . . . the ISN board simply dusted off the 2011 Valuation and made a number of its own adjustments. . .”). The Motion to Compel also stated that the “2011 Valuation” (i.e. the Phalon Valuation) was not conducted consistent with Delaware law. JX 133, at 3 n.1. The second Motion to Compel made these same types of statements. See JX 148, at 3, 12–14.
21 On October 2, 2015, the parties in the Appraisal Action identified their trial
witnesses.129 In October and early November 2015, Loftus, Brian Addy, Moye
White, and Ad-Venture’s counsel conducted various communications with one
another centered on the Appraisal Action.130 Loftus held a call with Mr. Gallagher
relating to an “ISN Update.”131 The parties in the Appraisal Action identified Loftus
as a trial witness, and Loftus contacted lawyers at Moye White and at Ad-Venture’s
counsel to discuss the implications.132 Ultimately, however, neither Loftus nor
anyone from Gallagher testified at trial in the Appraisal Action.133
On January 29, 2016, Ad-Venture’s counsel sent Moye White the public
versions of the pre-trial briefs in the Appraisal Action.134 Moye White forwarded
these briefs to Loftus.135 Counsel at Moye White testified he glanced at them, and
Loftus testified that he did not read them.136 However, Moye White counsel billed
129 JSOF, ¶ 343. 130 Id. ¶¶ 343–47. 131 Id. ¶ 348. 132 Tr. 222:22–224:13, 225:11–21. Counsel at Moye White billed 1.2 hours for each of two calls, one on October 9, 2015, and the second on November 3, 2015. JX 192, at 2; JX 197, at 2. The billing entry described the call as a “call with client regarding . . . strategic issues relating to lawsuit.” JX 197, at 2. 133 JSOF, ¶ 349. 134 Id. ¶¶ 362–63; JXs 199–202. 135 JSOF, ¶ 364. 136 Jones Dep., at 73:9–74:8; Tr. 131:16–21 (Loftus).
22 1.5 hours to “[r]eview pre-trial briefs as filed [in the] Delaware appraisal action.”137
On February 1, 2016, Loftus emailed the pre-trial briefs to Mike Kennedy (the broker
for the original exchange transaction) and K.C. Gallagher (Gallagher’s then-
president).138 That same day, Loftus scheduled a call with Moye White regarding
“ISN.”139
The Appraisal Action pre-trial briefs contained allegations such as “conflicted
[ISN] board set the merger price by making ‘back of the envelope’ adjustments to a
stale valuation commissioned years earlier,” and “[t]he record now shows that none
of th[e] statements [in the Halloween Letter] were true when made and were
certainly not true by 2012, when provided to Polaris and Gallagher,” and “the
Supplemental Documentation did not contain . . . the 2011 Phalon Valuation, the
adjustments that Bill Addy made to the 2011 Phalon Valuation to set the Merger
Consideration, or the January 9, 2013 minutes (which presented the Board’s reasons
for the Merger and the Merger Consideration).”140 As Loftus testified, several
arguments and claims in the pre-trial briefs for the Appraisal Action essentially
mirror Gallagher’s claims in this litigation.141
137 JX 210, at 2. 138 JSOF, ¶¶ 365–66. 139 Id. ¶ 367. 140 JX 199, at 8, 37, 43–44. 141 Tr. 237:2–23, 243:20–244:23 (Loftus).
23 Months later, in November 2016, Brian Addy scheduled a call with Loftus to
“update [Loftus] on the ISN litigation.”142 They held the call on December 13,
2016.143
The parties in the Appraisal Action submitted vastly disparate values: ISN
valued the Company at $106 million; Ad-Venture valued the Company at $645
million; Polaris valued the Company at $820 million.144 I determined the fair value
of ISN was $357 million, or $98,783 per share.145 After this Court entered judgment
on January 9, 2017, ISN appealed, and the Supreme Court of Delaware affirmed on
October 30, 2017.146 ISN paid Ad-Venture and Polaris the amount mandated by the
Court in the appraisal action on December 13, 2017, and the Court entered a final
order discharging the supersedeas bond on December 18, 2017.147
6. Gallagher Sues the Defendants for Breach of Fiduciary Duty
On December 15, 2017, Moye White sent Loftus copies of this Court’s
opinion in the Appraisal Action as well as the Supreme Court’s Order affirming that
opinion.148 Loftus and Mr. Gallagher testified at trial that they first became aware
142 JSOF, ¶ 369; JX 220. 143 JSOF, ¶ 370; JX 224. 144 JSOF, ¶ 293. 145 Id. ¶ 294. 146 Id. ¶¶ 296–97. 147 Id. ¶ 299. 148 Id. ¶ 386.
24 of the facts supporting Gallagher’s claim in the present action when they read the
opinion in the Appraisal Action and the Supreme Court’s order affirming that
opinion.149 Loftus also testified that even had he read the pre-trial briefs or this
Court’s appraisal opinion (he testified he read neither at the time), he would not have
been aware of the facts supporting the current claim because of the inconclusive
nature of the parties’ allegations and of trial court opinions on appeal.150 Once the
Supreme Court affirmed, Loftus testified that ISN’s wrongdoing seemed “very real”
and he began “paying closer attention.”151 Gallagher filed this present action on
February 14, 2018, alleging that the Defendants breached their fiduciary duties by
providing false and misleading disclosures regarding the Merger.152
C. Procedural History
The Plaintiff filed a Petition for Breach of Fiduciary Duty (the “Complaint”)
on February 14, 2018.153 The Defendants answered on April 10, 2018.154 The next
day, the Defendants moved for summary judgment.155 I held argument on the
149 Tr. 263:2–7 (Loftus), 283:23–284:6 (Gallagher). 150 Id. at 235:12–236:11, 237:24–238:22, 250:3–9 (Loftus). 151 Id. at 238:7–22 (Loftus); Loftus Dep., at 204:22–205:5. 152 JSOF, ¶¶ 1, 387. 153 Verified Petition for Breach of Fiduciary Duty, D.I. 1. 154 Defs.’ Answer to Pl.’s Verified Compl., D.I. 9. 155 Defs.’ Mot. for Summ. J., D.I. 12.
25 Motion for Summary Judgment on October 5, 2018.156 I denied the motion and
ordered the parties to develop the factual record on several issues.157 After the
parties conducted additional discovery, I held a two-day trial on October 8 and 9,
2019.158 The parties gave post-trial arguments on February 20, 2020.159 I considered
the matter fully submitted at that time.
II. ANALYSIS
The Plaintiff brings a claim for a breach of fiduciary duty by way of disclosure
infirmities against the Defendants. It attempts to isolate this claim from an unfair
price and process claim to avoid application of laches. Although the Defendants
strenuously deny a breach of duty in way of the disclosures, their central defense is
that the Plaintiff’s claim is time-barred. The situation presents a tension where
equity is concerned: I am presented with Defendant fiduciaries, on the one hand,
who have breached their fiduciary duties in connection with a squeeze-out of
minority stockholders by a corporate controller; and on the other hand, with a
Plaintiff that slept on its rights for a half-decade while red flags not only were raised
but snapped crisply in the breeze. To resolve this, I examine both the claim and the
156 D.I. 35. 157 Oral Argument on Defs.’ Mot. for Summ. J. and the Court’s Ruling held on October 5, 2018, D.I. 37 (“October 5, 2019 Ruling”). 158 D.I. 83. 159 D.I. 104.
26 defense; because it is apparent that the Plaintiff knew it had a claim when it accrued,
I find for the Defendants. Gallagher had ample reason to know the Merger was
unfair, but the consideration tendered met its main goal of sufficient value for the
Ranch Properties it had just exchanged for its ISN shares. Gallagher accepted the
consideration, then waited five years to bring its claim, until after the lengthy
Appraisal Action conducted by its fellow stockholders verified the significantly
higher value of its shares. It declined to pursue its rights until all risk concerning the
quantum of damages had been resolved by others. As such, its claim is time-barred.
Accordingly, I need not resolve the fiduciary claims. For completeness’ sake,
however, I briefly address the record on fiduciary duty, first.
A. The Defendants Breached their Fiduciary Duties Regarding the Merger
Defendants Addy and Eastin, as directors of a Delaware corporation, owed
fiduciary duties of care and loyalty to the corporation and its stockholders.160 Addy
additionally owed fiduciary duties as the controlling stockholder.161 Where, as here,
a self-interested fiduciary cashes out the minority, the process employed must be
entirely fair to the minority. Also included in the Defendants’ fiduciary duties is the
160 See Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006). 161 eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 26 (Del. Ch. 2010) (“[C]ontrolling stockholders are fiduciaries of their corporations’ minority stockholders.” (citing Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987))).
27 duty to disclose all material information when requesting stockholder action.162
“Material,” in this context, means “a substantial likelihood that the undisclosed
information would significantly alter the total mix of information already
provided.”163 In the merger context, the company must disclose sufficient
information for a stockholder to understand the value of the interest for which she is
asked to accept cash or pursue appraisal.
A director’s duty of disclosure, I note, acquires particular importance in a
private company’s cash-out merger because stockholders of such companies lack
recourse to publicly-filed audited financial statements that could assist in evaluating
the offer.164 Regardless of the situation, however, when a company asks its
stockholders to choose between accepting consideration and seeking appraisal, it
162 Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) (“[T]he term ‘duty of candor’ does not import a unique or special rule of disclosure. It represents nothing more than the well-recognized proposition that directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.”); see also Pfeffer v. Redstone, 965 A.2d 676, 685 (Del. 2009) (“To state a claim for breach of the fiduciary duty of disclosure on the basis of a false statement or representation, a plaintiff must identify (1) a material statement or representation in a communication contemplating stockholder action (2) that is false.” (quoting O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 920 (Del. Ch. 1999))); Berger v. Pubco Corp., 976 A.2d 132, 138 (Del. 2009); Glassman v. Unocal Expl. Corp., 777 A.2d 242, 248 (Del. 2001). 163 In re United Capital Corp., S’holders Litig., 2017 WL 389520, at *3 (Del. Ch. Jan. 4, 2017) (internal quotation omitted); Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000). 164 See Wacht v. Cont’l Hosts, Ltd., 1986 WL 4492, at *1–2 (Del. Ch. Apr. 11, 1986); see also Berger v. Pubco Corp., 2008 WL 2224107, at *3 (Del. Ch. May 30, 2008), rev’d on other grounds, 976 A.2d 132 (Del. 2009).
28 must provide all information material to the stockholders’ decision to sell or seek
fair value in the courts.165
Here, the Defendants decided to cash out some of the minority stockholders.
They created a valuation for that purpose by a cursory and inaccurate update of a
stale valuation. That process was not fair to the minority. Through that process,
they arrived at a price that wildly understated the value of ISN. That price,
obviously, was unfair.166 In asking the stockholders to agree to that price, they made
disclosures that were inadequate to the decision, as well.
The Defendants failed to disclose key documents that showed the basis for
and the methods underlying their determination of the Merger Consideration based
on a Company value of $138 million. In a situation such as this, where information
is not readily available, and the minority stockholders must rely on management’s
calculations and determine whether to trust management, ISN’s method of
calculating the merger price becomes material.167 Where, as here, the Defendants’
165 Berger, 2008 WL 2224107, at *3. 166 The cash-out price implied a corporate fair value of $138 million; I found fair value to be $357 million. Valuation is as much art as science, and I have no illusion that in fulfilling my statutory duty to determine fair value, I reached the “actual” or “intrinsic” value of ISN. Having said that, the disparity of a statutory value over two-and-a-half times the cash-out value makes it clear to me that the price was vastly low, and unfair. 167 See Berger, 2008 WL 2224107, at *3 (“Where . . . a minority shareholder needs to decide only whether to accept the merger consideration or to seek appraisal, the question is partially one of trust: can the minority shareholder trust that the price offered is good enough, or does it likely undervalue the Company so significantly that appraisal is a worthwhile endeavor? . . . [W]here so little information is available about the Company, such a disclosure [about the method of 29 method of valuation was haphazard and based on admittedly stale projections, the
materiality of the valuation process is heightened.168 But the Defendants did not
provide the Phalon Valuation on which they based their calculations.169 They did
not provide the adjustments that Addy made to the Phalon Valuation to arrive at a
value of $138 million.170 Nor did they provide the January 9 board minutes that gave
an overview of the Merger Consideration calculation.171 At trial, the Defendants
testified that these three documents—which were undisclosed to stockholders in the
Notice—provided a complete picture of how they calculated the Merger
Consideration.172 I need not decide what disclosures would be required here to
comply with a duty of candor to note that the disclosures actually made were
materially incomplete. Fatal to the Plaintiff’s pursuit of its claims here, however, is
that the breaches of duty were apparent to it when it received the Notice.
calculating the merger price] would significantly change the landscape with respect to the decision of whether or not to trust the price offered by the parent.”). 168 Wacht v. Cont’l Hosts, Ltd., 1994 WL 525222, at *3 (Del. Ch. Sept. 16, 1994) (“[I]t appears that [defendant] simply arrived at [the merger price] rather haphazardly. . . A shareholder, in determining whether to seek appraisal or accept the terms of the Merger, would surely deem information regarding how the merger price was determined to be material.”) 169 Tr. 32:6–8, 51:10–18 (Addy), 369:7–13, 370:8–18 (Eastin). 170 Id. 171 Id. 172 Id. at 50:2–15 (Addy).
30 B. The Plaintiff was on Inquiry Notice of the Defendants’ Fiduciary Breaches, Including the Disclosure Violations
1. Legal Standards for Notice of Claims and Important Dates
As noted, Addy and Eastin’s viable defense to their breach of fiduciary duty
is that Gallagher was on notice of their malfeasance when it received the Merger
Notice, and that it improperly sat on its rights. Gallagher, they note, waited five
years to file suit, until after the Supreme Court affirmed this Court’s Opinion in the
Appraisal Action, which reduced litigation risk regarding damages to zero. In
response, Gallagher contends that while it knew it had appraisal rights, and while it
knew it had a breach of fiduciary duty claim for entire fairness, it could not have
known that the Defendants breached their fiduciary duties by providing inadequate
disclosures—the claim Gallagher brings here—until after it received copies from its
counsel of the Supreme Court’s affirmation of the Appraisal Action in December
2017.173
173 See Pl. Gallagher Industries, LLC’s Answering Post-Trial Br., D.I. 102 (“Pl.’s Answering Br.”), at 24 (“Gallagher . . . did not know that they had been misled by the directors until December 2017, when Gallagher first saw the opinions in the Appraisal Litigation.”), 26 (“The evidence at trial established that Gallagher did not know that the Notice was false and misleading until December 15, 2017, when Gallagher first learned of the decisions in the Appraisal Litigation.”). Gallagher asserts that nothing in the Appraisal Action could have given it inquiry notice because it had no duty to monitor the litigation, did not monitor it, and even if it had, any facts it encountered would have remained contested and thus speculative. Id. at 42–52. Gallagher hedges this statement by arguing that “the earliest possible date” of inquiry notice was when its counsel received the pre- trial briefs from the Appraisal Action in January 2016. Id. at 26.
31 This Court of equity applies the legal statute of limitations absent “unusual or
mitigating circumstances.”174 The statute of limitations for a breach of fiduciary
duty claim is three years.175 It begins to run when a plaintiff’s claim accrues, not
when the effects are felt.176 Thus, the statute of limitations begins to run “even if the
plaintiff is unaware of the cause of action or the harm.”177 The limitations period,
however, may be tolled in case of one of the following: an inherently unknowable
injury, fraudulent concealment, or equitable tolling.178 The Plaintiff relies on the
second two tolling rubrics here.
Fraudulent concealment requires a plaintiff to “allege an affirmative act of
‘actual artifice’ by the defendant that either prevented the plaintiff from gaining
knowledge of material facts or led the plaintiff away from the truth.”179 Equitable
tolling suspends the limitations period “while a plaintiff . . . reasonably relie[s] upon
174 Atlantis Plastics Corp. v. Sammons, 558 A.2d 1062, 1064 (Del. Ch. 1989); see also U.S. Cellular Inv. Co. of Allentown v. Bell Atlantic Mobile Sys., Inc., 677 A.2d 497, 502 (Del. 1996). The parties agree that the equitable doctrine of laches typically incorporates the statute of limitations by analogy, and that the applicable statute of limitations is the proper analysis here. See Pl. Gallagher Industries, LLC’s Opening Post-Trial Br., D.I. 97 (“Pl.’s Opening Br.”), at 35 n.106; Defs.’ Opening Post-Trial Br., D.I. 96 (“Defs.’ Opening Br.”), at 35–36. 175 Smith v. Mcgee, 2006 WL 3000363, at *3 (Del. Ch. Oct. 16, 2006); In re Tyson Foods, Inc., 919 A.2d 563, 584 (Del. Ch. 2007) (citing 10 Del. C. § 8106). 176 Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, 2010 WL 363845, at *6 (Del. Ch. Jan. 27, 2010), aff’d, 7 A.3d 485 (Del. 2010) (TABLE) (citing In re Coca-Cola Enters., Inc., 2007 WL 3122370, at *5 (Del. Ch. Oct. 17, 2007)). 177 In re Tyson Foods, 919 A.2d at 584 (citing Isaacson, Stolper & Co. v. Artisan’s Sav. Bank, 330 A.2d 130, 132 (Del. 1974)). 178 Id. at 584–85. 179 Id. at 585 (quoting Ewing v. Beck, 520 A.2d 653, 667 (Del. 1987)).
32 the competence and good faith of a fiduciary.”180 However, while plaintiffs “are
entitled to rely on the ‘competence and good faith of a fiduciary,’ . . . they are not
entitled to ignore red flags.”181 Even the “trusting plaintiff still must be reasonably
attentive to his interests.”182
Where tolling occurs, it lasts until a plaintiff is put on “inquiry notice” by
“facts that ought to make [it] suspect wrongdoing.”183 A plaintiff need not be aware
of “all of the aspects of the alleged wrongful conduct.”184 Notice of such facts, or
“red flags,” requires a plaintiff to “diligently investigate and to file within the
limitations period as measured from that time.”185 Once a plaintiff is put on inquiry
notice, she is deemed to be on notice of “everything to which such inquiry might
have led.”186 In in re Primedia, Inc. Stockholders Litigation,187 this Court outlined
a two-step analysis to determine inquiry notice: first, the plaintiff must encounter
180 Forman v. CentrifyHealth, Inc., 2019 WL 1810947, at *8 (Del. Ch. Apr. 25, 2019). 181 In re Primedia, Inc. S’holders Litig., 2013 WL 6797114, at *13 (Del. Ch. Dec. 20, 2013) (quoting Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008)). 182 Id. (quoting In re Dean Witter P’ship Litig., 1998 WL 442456, at *8 (Del. Ch. July 17, 1998), aff’d, 725 A.2d 441 (Del. 1999)). 183 Pomeranz v. Museum Partners, L.P., 2005 WL 217039, at *13 (Del. Ch. Jan. 24, 2005) (emphasis added). 184 Dean Witter, 1998 WL 442456, at *7. 185 Pomeranz, 2005 WL 217039, at *13; In re Primedia, 2013 WL 6797114, at *13 (“Stockholders must exercise ‘reasonable diligence’ when monitoring corporate filings for potential claims.” (quoting Weiss, 948 A.2d at 452)). 186 Pomeranz, 2005 WL 217039, at *13. 187 2013 WL 6797114 (Del. Ch. Dec. 20, 2013).
33 facts that reasonably should arouse suspicion; second, these facts must lead to an
investigation capable of producing facts sufficient to allow the plaintiff to file a
complaint capable of surviving a motion to dismiss.188
The salient question, therefore, is when Gallagher was put on inquiry notice
that it had a breach of fiduciary duty claim against the Defendants for inadequate
disclosures. Several important dates frame this analysis:
• January 17, 2013: Gallagher received the Notice, Supplemental Documentation, and Merger Consideration.189 • September 23, 2013: ISN served a subpoena on Gallagher in the Appraisal Action.190 • October 1, 2013: Ad-Venture and Polaris filed their first motion to compel discovery from ISN.191 • February 10, 2014: Loftus sat for a deposition as Gallagher’s representative.192 • March 4, 2014: Ad-Venture and Polaris filed their second motion to compel discovery from ISN.193 • April 10, 2014: The special discovery master in the Appraisal Action filed a public report.194 • January 29, 2016: Moye White received public versions of the pre- trial briefs in the Appraisal Action and forwarded them to Loftus.195
188 Id. at *13–14. 189 JSOF, ¶ 222. 190 Id. ¶ 304. 191 Id. ¶¶ 326–28. 192 Tr. 221:22–222:17 (Loftus). 193 JSOF, ¶¶ 326–28. 194 Id. ¶ 329; JX 153. 195 JSOF, ¶¶ 362–63; JXs 199–202.
34 • August 11, 2016: This Court issued an Opinion setting the fair value at $357 million.196 • October 30, 2017: The Supreme Court affirmed the Opinion.197 • December 13, 2017: Gallagher received copies of the Supreme Court Opinion affirming the fair value of ISN.198 • February 14, 2018: Gallagher filed the Complaint in this action.199
Given the three-year limitation, the question is whether any event prior to February
14, 2015 put Gallagher on inquiry notice. This would include (1) Gallagher’s receipt
of the Notice, Merger Consideration, and Supplemental Documentation; (2) the
subpoenas and Loftus’s deposition in the Appraisal Action, and (3) the two motions
to compel and the results from the special discovery master in the Appraisal Action.
2. Gallagher was on Inquiry Notice on January 17, 2013
Receipt of the Notice, Merger Consideration, and Supplemental
Documentation on January 17, 2013 should have (and did) raise a “red flag”
regarding disclosure violations. On that date, Gallagher knew it was working in an
information vacuum. As Loftus acknowledged at trial, he did not believe the
Defendants provided enough information for him to conduct a proper valuation, and
he expressed concern to Mr. Gallagher regarding this lack of information.200 He
196 JSOF, ¶ 294; JX 219. 197 JSOF, ¶¶ 296–97. 198 Id. ¶ 386. 199 Id. ¶¶ 1, 387. 200 Tr. 196:8–18 (Loftus).
35 testified that the dearth of information was, in his experience, unprecedented.201
Only weeks before the merger, when Gallagher had been negotiating the purchase
of ISN stock, Ad-Venture had offered estimates of ISN’s value in the range of $395
million to $450 million, although Loftus had expressed some skepticism, given Ad-
Venture’s motive to inflate the price.202 After receiving the Notice, Loftus’s own
rough “ballpark” calculations provided values as high as $250 million to $350
million.203 Nonetheless, he testified that without being provided projections or
methods of valuation, Gallagher decided it was “going to trust management, at the
end of the day, because management must know their business way better than we
do.”204 At the same time, the disparity of values raised concerns for Loftus that the
Defendants’ valuation “might be low” and Gallagher might be “leaving money on
the table.”205 In other words, Gallagher suspected it was being wronged, and knew
it had not been provided the information to find out if this was so. That was a red
flag that reasonably ought to have alerted it to the possibility that the Merger was
unfair, and the disclosures were inadequate, and thus alerted it of potential entire
fairness and disclosure-based claims.
201 Id. 202 JSOF, ¶¶ 55–56, JX 55; JX 59; Tr. 155:22–156:14 (Loftus) (noting skepticism of valuations because they were produced by or at behest of the seller). 203 Tr. 120:3–121:8, 149:5–153:5, 198:6–199:10, 200:19–201:23 (Loftus). 204 Id. at 150:5–7 (Loftus). 205 Id. at 311:20–312:4 (Gallagher), 269:7–14 (Loftus).
36 Throughout post-trial briefing, Gallagher makes a “hoist Defendants on their
own petard” argument with a certain equitable appeal. Gallagher notes that the
Defendants maintain that the Notice was proper, and that Addy testified that it was
neither misleading nor deficient.206 Consequently, Gallagher argues, from Addy’s
own mouth came the proof that the Notice did not appear deficient, and Gallagher
could have had no way to know it had a potential claim for a disclosure violation.207
The problem with this argument is that, for the reasons detailed above, there was in
fact sufficient reason for Gallagher to be aware of a claim.
I have found that Gallagher was alerted by the Notice to potential disclosure
inadequacies. Gallagher had an obligation to diligently investigate and was on
notice of everything to which such an investigation would have led.208 Had
Gallagher investigated, it would not have run into a dead end. On January 17, 2013,
it knew that it was being cashed out in a controlled transaction without any
procedural safeguards. Because of this, it certainly could have filed an entire fairness
claim that would survive a motion to dismiss. Discovery in such a claim would have
made concrete the apparent disclosure violations, just as discovery in the Appraisal
Action demonstrated those same violations. In sum, because of the red flag present
206 See, e.g., Pl.’s Answering Br., at 23, 25. 207 See id. 208 Pomeranz v. Museum Partners, L.P., 2005 WL 217039, at *13 (Del. Ch. Jan. 24, 2005); In re Primedia, Inc. S’holders Litig., 2013 WL 6797114, at *13 (Del. Ch. Dec. 20, 2013).
37 on January 17, 2013 regarding possible disclosure violations, I find that Gallagher
was on inquiry notice as of that date.209
Having received the Merger Consideration it knew might be unfair, but
frustrated by an inability to verify whether it was unfair because of insufficient
information, Gallagher should have been aware of the potential for price/process and
disclosure claims. No tolling of the limitation period applies.
3. Gallagher had Additional Reason to Inquire and Pursue its Claims Prior to April 10, 2014
Other ISN stockholders pursued a timely appraisal claim. I note that the
progress of this Appraisal Action provided Gallagher with further inquiry notice.
Gallagher states that would-be plaintiffs do not have a duty to monitor litigation and
scour court filings looking for claims, but that is true only “absent any reason to
209 Gallagher does not deny that it was aware of a potential claim that the merger was unfair at the time it received ISN’s Notice; its contention is that it was unaware of a potential disclosure claim. See Pl.’s Answering Br., at 1–2. Where a squeezed-out stockholder in a controller transaction has evidence that the transaction is unfair in regard to price, and it cannot reconcile that evidence with disclosed information from the company seeking its acceptance of the deal price, it is on notice of a disclosure violation. I find Gallagher’s argument—that it had notice of an entire fairness claim, but not a disclosure claim—an artificial and immaterial distinction on these facts. I note that, even if there had been no suspicious facts regarding inadequate disclosures (which I find there were), Gallagher would still presumably have been on inquiry notice because it was on notice of the price and process claim, which on these facts is all that the inadequate disclosures are alleged to have masked. Our case law does not require, as Gallagher argues, that the red flag relate precisely to the claim ultimately litigated, if the claim arose from the incident serving as the red flag. See In re Tyson Foods, Inc. 919 A.2d 563, 593–94 (Del. Ch. 2007) (finding plaintiff on inquiry notice of breach of fiduciary duty claim regarding related-party transactions but not for fiduciary duty claim based on other discrete related-party transactions). If a plaintiff has “facts that ought to make [it] suspect wrongdoing,” then the plaintiff is on notice of “everything to which such inquiry might have led.” Pomeranz, 2005 WL217039, at *13. 38 think [it has] been injured.”210 Here, Gallagher suspected it might be leaving a great
deal of money on the table—perhaps as much as half what it was owed. The only
two other outside shareholders—faced with the same facts—sought appraisal.
This is not a situation where Gallagher would have to scour court filings trying
to flush out information about speculative wrongdoing. If it wanted to investigate
the injury it already suspected, it knew exactly where to look and exactly who to ask
for that information. In fact, it hardly needed to investigate at all: Gallagher itself
was subpoenaed, produced documents, sat for a deposition, and discussed the case
with counsel. When the injury it already suspected was so closely intertwined with
the ongoing litigation, and where Gallagher itself was thrust into discovery in that
litigation, monitoring the litigation, I find, falls under its obligation to “diligently
investigate.”211 Having looked at ISN’s financials, considered the possibility that
the Merger Consideration was severely undervalued, and speculated about what the
Defendants knew that they were not telling Gallagher, one would imagine the
Appraisal Action would be the first place a diligent investigation would lead. Even
casual attention to the public filings would have revealed further red flags to notify
Gallagher of the facts underlying this litigation.
210 Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 646 (Del. Ch. 2013). 211 In re Primedia, 2013 WL 6797114, at *13.
39 Because Gallagher was on notice of a potential breach of fiduciary duty claim,
it cannot rely upon the fraudulent concealment rubric to toll the limitations period.
Neither can the concept of equitable tolling aid Gallagher here. Equitable tolling
halts the running of the limitations period “while a plaintiff has reasonably relied
upon the competence and good faith of a fiduciary.”212 This the Plaintiff argues that
it did, testifying that it decided “to trust management, at the end of the day, because
management must know their business way better than we do.”213 Such trust,
however, does not entitle plaintiffs “to ignore red flags.”214 Here, the Plaintiff was
squeezed out at what it had ample reason to believe was an unfair price, without
disclosure of the means to understand how the Defendants set that price. Even the
“trusting plaintiff still must be reasonably attentive to his interests.”215 Gallagher
leans entirely on the first principle of equitable tolling—trusting the good faith of
fiduciaries—and ignores the second, reasonable reliance. Given the red flags that
ought to have made it suspicious at several different dates and in several different
ways that the disclosures it received from the Defendants were inadequate and
misleading, I find it was not entitled to this reliance and was not “reasonably
212 Forman v. CentrifyHealth, Inc., 2019 WL 1810947, at *8 (Del. Ch. Apr. 25, 2019). 213 Tr. 150:5–7 (Loftus). 214 In re Primedia, 2013 WL 6797114, at *13 (quoting Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008)). 215 Id. (quoting In re Dean Witter P’ship Litig., 1998 WL 442456, at *8 (Del. Ch. July 17, 1998)).
40 attentive to [its] interests.”216 Had it investigated based on the red flags, it would
have timely discovered the facts that underlie a complaint made five years after its
injury accrued.
That it did not bolsters my belief that Gallagher was well aware of the
existence of its claim from the time it received the Merger Notice. What changed in
the intervening five years was not its understanding of the claim, but the
attractiveness of the litigation given the result of the Appraisal Action. Gallagher’s
claim is barred by laches.
III. CONCLUSION
The Plaintiff’s claim for breach of fiduciary duty is dismissed as time-barred.
An appropriate Order is attached.
216 Id.
41 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GALLAGHER INDUSTRIES, LLC, ) ) Plaintiff, ) ) v. ) C.A. No. 2018-0106-SG ) WILLIAM M. ADDY and JOSEPH E. ) EASTIN, ) ) Defendants. )
ORDER
AND NOW, this 29th day of May, 2020, for the reasons set forth
contemporaneously in the attached Memorandum Opinion dated May 29, 2020, the
Plaintiff’s claims against Defendants for breach of fiduciary duty and aiding and
abetting the breach of fiduciary duty are hereby DISMISSED.
IT IS SO ORDERED.
/s/ Sam Glasscock III
Vice Chancellor
Related
Cite This Page — Counsel Stack
Gallagher Industries, LLC v. William M. Addy, Counsel Stack Legal Research, https://law.counselstack.com/opinion/gallagher-industries-llc-v-william-m-addy-delch-2020.