In re AmTrust Financial Services, Inc. Stockholder Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) IN RE AMTRUST FINANCIAL SERVICES, ) Consolidated INC. STOCKHOLDER LITIGATION ) C.A. No. 2018-0396-AGB )
MEMORANDUM OPINION
Date Submitted: November 5, 2019 Date Decided: February 26, 2020
Ned Weinberger, Thomas Curry, and Mark D. Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; Jay W. Eisenhofer, Michael J. Barry, and Kyle J. McGee, GRANT & EISENHOFER P.A, Wilmington, Delaware; Marcus E. Montejo, Stephen D. Dargitz, and John G. Day, PRICKETT, JONES & ELLIOTT, P.A, Wilmington, Delaware; Carl L. Stine, Adam J. Blander, and Antoinette Adesanya, WOLF POPPER LLP, New York, New York; Jeremy Friedman, Spencer Oster, and David Tejtel, FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Eric L. Zagar, Robin Winchester, Michael C. Wagner, and Christopher M. Windover, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; David Wales and Edward Timlin, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Joseph E. White, III and Adam D. Warden, SAXENA WHITE P.A, Boca Raton, Florida; Steven B. Singer and Joshua Saltzman, SAXENA WHITE P.A, White Plains, New York; Attorneys for Plaintiffs Arca Investments, a.s., Arca Capital Bohemia, a.s., Krupa Global Investments, Pompano Beach Police & Firefighters’ Retirement System, City of Lauderhill Police Officers’ Retirement System, West Palm Beach Police Pension Fund, and Cambridge Retirement System.
Edward B. Micheletti and Bonnie W. David, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Attorneys for Defendants Stone Point Capital LLC, Trident VII Professionals Fund, L.P., Trident VII, L.P., Trident VII DE Parallel Fund, L.P., Trident VII Parallel Fund, L.P, and Trident Pine Acquisition LP. Gregory P. Williams, Blake Rohrbacher, Daniel E. Kaprow, and Ryan D. Konstanzer, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Tariq Mundiya and Sameer Advani, WILLKIE FARR & GALLAGHER LLP, New York, New York; Attorneys for Defendants Donald T. DeCarlo, Susan C. Fisch, Abraham Gulkowitz, and Raul Rivera.
Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Andrew G. Gordon and William A. Clareman, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Attorneys for Defendants Barry D. Zyskind, George Karfunkel, Leah Karfunkel, The Estate of Michael Karfunkel, Evergreen Parent, L.P., K-Z Evergreen, LLC and Evergreen Merger Sub, Inc.
BOUCHARD, C. This case concerns a transaction in which the controlling stockholders of
AmTrust, Inc.—George Karfunkel, Leah Karfunkel, and Barry Zyskind—teamed up
with a private equity firm to take AmTrust private through a merger that closed in
November 2018. In conveying their initial proposal to acquire the rest of the shares
of the company for $12.25 per share, the buyout group conditioned the transaction
on receiving the approval of a special committee of the company’s board of directors
and a majority of AmTrust’s minority stockholders.
On February 28, 2018, after negotiating with the buyout group for about seven
weeks, the special committee voted to approve a $13.50 per share merger with the
buyout group. The proposed merger drew criticism from major stockholders of the
company, including Carl Icahn, who sued the controlling stockholders for breach of
fiduciary duty and opposed the proposed share price as inadequate. On June 3, 2018,
the day before the stockholder meeting scheduled to consider the proposal, the
company adjourned the meeting when it became apparent that a majority of the
unaffiliated stockholders would not approve the proposal.
On June 4, one day after the company adjourned the ill-fated stockholder
meeting, Icahn indicated his willingness to support a transaction at $14.75 per share
during discussions with Zyskind and George Karfunkel. The special committee did
not participate in these discussions. On June 6, the special committee and the
company’s board approved an amended merger agreement with a price of $14.75 per share. In connection with amending the merger agreement, Icahn entered into a
settlement agreement in which he agreed to drop his lawsuit, support the merger, and
forego his appraisal rights. Thereafter, 67.4% of the unaffiliated stockholders of
AmTrust approved the amended merger proposal.
Plaintiffs are former stockholders of AmTrust. Their consolidated complaint
asserts several claims for breach of fiduciary duty and aiding and abetting against
the controlling stockholders, AmTrust’s directors, and other participants in the
buyout. All of the defendants moved to dismiss the complaint under Court of
Chancery Rule 12(b)(6) for failure to state a claim for relief.
The primary issue before the court is whether the transaction complied with
the framework set forth in Kahn v. M & F Worldwide Corp. (“MFW”)1 for subjecting
a squeeze-out merger by a controlling stockholder to business judgment review
rather than the entire fairness standard. Plaintiffs argue there are many reasons it did
not. For the reasons explained below, the court concludes that the transaction did
not satisfy the MFW standard because the complaint pleads a reasonably conceivable
set of facts that three of the four members of the special committee had a material
self-interest in the transaction, which was expected to extinguish viable derivative
claims exposing each of them to significant personal liability.
1 88 A.3d 635 (Del. 2014). 2 The net result of this decision is that the plaintiffs’ claims for breach of
fiduciary duty against the controlling stockholders and the self-interested members
of the special committee will survive, and the court will dismiss the remaining claims
for failure to state a claim for relief.
I. BACKGROUND
Unless otherwise noted, the facts recited in this opinion are based on the
allegations of the Amended Verified Consolidated Class Action Complaint
(“Complaint”) and documents incorporated therein.2 Any additional facts are
subject to judicial notice.
A. The Players
AmTrust, Inc. (“AmTrust” or the “Company”) is a Delaware corporation
engaged in the property and casualty insurance businesses. AmTrust was founded
in 1998 by two brothers: Michael Karfunkel and George Karfunkel.3
Plaintiffs in this case are Arca Investments, a.s., Arca Capital Bohemia, a.s.,
Krupa Global Investments, (collectively, “Arca”), Pompano Beach Police &
Firefighters’ Retirement System, City of Lauderhill Police Officers’ Retirement
2 Am. Verified Compl. (“Compl.”) (Dkt. 87). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[P]laintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms” in connection with a motion to dismiss). 3 Compl. ¶¶ 48-49. 3 System, West Palm Beach Police Pension Fund, and Cambridge Retirement System
(together, “Plaintiffs”). They each held AmTrust common stock through the closing
of the buyout transaction at issue in this action (the “Transaction”), with Arca
holding approximately 2.4% of AmTrust’s outstanding shares.4
Defendant Barry D. Zyskind has served on the Company’s board of directors
(the “Board”) since 1998 and as the Chairman of the Board since May 2016.
Zyskind has served as CEO and President of AmTrust since 2000, and serves as an
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
) IN RE AMTRUST FINANCIAL SERVICES, ) Consolidated INC. STOCKHOLDER LITIGATION ) C.A. No. 2018-0396-AGB )
MEMORANDUM OPINION
Date Submitted: November 5, 2019 Date Decided: February 26, 2020
Ned Weinberger, Thomas Curry, and Mark D. Richardson, LABATON SUCHAROW LLP, Wilmington, Delaware; Jay W. Eisenhofer, Michael J. Barry, and Kyle J. McGee, GRANT & EISENHOFER P.A, Wilmington, Delaware; Marcus E. Montejo, Stephen D. Dargitz, and John G. Day, PRICKETT, JONES & ELLIOTT, P.A, Wilmington, Delaware; Carl L. Stine, Adam J. Blander, and Antoinette Adesanya, WOLF POPPER LLP, New York, New York; Jeremy Friedman, Spencer Oster, and David Tejtel, FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Eric L. Zagar, Robin Winchester, Michael C. Wagner, and Christopher M. Windover, KESSLER TOPAZ MELTZER & CHECK, LLP, Radnor, Pennsylvania; David Wales and Edward Timlin, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Joseph E. White, III and Adam D. Warden, SAXENA WHITE P.A, Boca Raton, Florida; Steven B. Singer and Joshua Saltzman, SAXENA WHITE P.A, White Plains, New York; Attorneys for Plaintiffs Arca Investments, a.s., Arca Capital Bohemia, a.s., Krupa Global Investments, Pompano Beach Police & Firefighters’ Retirement System, City of Lauderhill Police Officers’ Retirement System, West Palm Beach Police Pension Fund, and Cambridge Retirement System.
Edward B. Micheletti and Bonnie W. David, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Wilmington, Delaware; Attorneys for Defendants Stone Point Capital LLC, Trident VII Professionals Fund, L.P., Trident VII, L.P., Trident VII DE Parallel Fund, L.P., Trident VII Parallel Fund, L.P, and Trident Pine Acquisition LP. Gregory P. Williams, Blake Rohrbacher, Daniel E. Kaprow, and Ryan D. Konstanzer, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Tariq Mundiya and Sameer Advani, WILLKIE FARR & GALLAGHER LLP, New York, New York; Attorneys for Defendants Donald T. DeCarlo, Susan C. Fisch, Abraham Gulkowitz, and Raul Rivera.
Daniel A. Mason, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Andrew G. Gordon and William A. Clareman, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, New York, New York; Attorneys for Defendants Barry D. Zyskind, George Karfunkel, Leah Karfunkel, The Estate of Michael Karfunkel, Evergreen Parent, L.P., K-Z Evergreen, LLC and Evergreen Merger Sub, Inc.
BOUCHARD, C. This case concerns a transaction in which the controlling stockholders of
AmTrust, Inc.—George Karfunkel, Leah Karfunkel, and Barry Zyskind—teamed up
with a private equity firm to take AmTrust private through a merger that closed in
November 2018. In conveying their initial proposal to acquire the rest of the shares
of the company for $12.25 per share, the buyout group conditioned the transaction
on receiving the approval of a special committee of the company’s board of directors
and a majority of AmTrust’s minority stockholders.
On February 28, 2018, after negotiating with the buyout group for about seven
weeks, the special committee voted to approve a $13.50 per share merger with the
buyout group. The proposed merger drew criticism from major stockholders of the
company, including Carl Icahn, who sued the controlling stockholders for breach of
fiduciary duty and opposed the proposed share price as inadequate. On June 3, 2018,
the day before the stockholder meeting scheduled to consider the proposal, the
company adjourned the meeting when it became apparent that a majority of the
unaffiliated stockholders would not approve the proposal.
On June 4, one day after the company adjourned the ill-fated stockholder
meeting, Icahn indicated his willingness to support a transaction at $14.75 per share
during discussions with Zyskind and George Karfunkel. The special committee did
not participate in these discussions. On June 6, the special committee and the
company’s board approved an amended merger agreement with a price of $14.75 per share. In connection with amending the merger agreement, Icahn entered into a
settlement agreement in which he agreed to drop his lawsuit, support the merger, and
forego his appraisal rights. Thereafter, 67.4% of the unaffiliated stockholders of
AmTrust approved the amended merger proposal.
Plaintiffs are former stockholders of AmTrust. Their consolidated complaint
asserts several claims for breach of fiduciary duty and aiding and abetting against
the controlling stockholders, AmTrust’s directors, and other participants in the
buyout. All of the defendants moved to dismiss the complaint under Court of
Chancery Rule 12(b)(6) for failure to state a claim for relief.
The primary issue before the court is whether the transaction complied with
the framework set forth in Kahn v. M & F Worldwide Corp. (“MFW”)1 for subjecting
a squeeze-out merger by a controlling stockholder to business judgment review
rather than the entire fairness standard. Plaintiffs argue there are many reasons it did
not. For the reasons explained below, the court concludes that the transaction did
not satisfy the MFW standard because the complaint pleads a reasonably conceivable
set of facts that three of the four members of the special committee had a material
self-interest in the transaction, which was expected to extinguish viable derivative
claims exposing each of them to significant personal liability.
1 88 A.3d 635 (Del. 2014). 2 The net result of this decision is that the plaintiffs’ claims for breach of
fiduciary duty against the controlling stockholders and the self-interested members
of the special committee will survive, and the court will dismiss the remaining claims
for failure to state a claim for relief.
I. BACKGROUND
Unless otherwise noted, the facts recited in this opinion are based on the
allegations of the Amended Verified Consolidated Class Action Complaint
(“Complaint”) and documents incorporated therein.2 Any additional facts are
subject to judicial notice.
A. The Players
AmTrust, Inc. (“AmTrust” or the “Company”) is a Delaware corporation
engaged in the property and casualty insurance businesses. AmTrust was founded
in 1998 by two brothers: Michael Karfunkel and George Karfunkel.3
Plaintiffs in this case are Arca Investments, a.s., Arca Capital Bohemia, a.s.,
Krupa Global Investments, (collectively, “Arca”), Pompano Beach Police &
Firefighters’ Retirement System, City of Lauderhill Police Officers’ Retirement
2 Am. Verified Compl. (“Compl.”) (Dkt. 87). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[P]laintiff may not reference certain documents outside the complaint and at the same time prevent the court from considering those documents’ actual terms” in connection with a motion to dismiss). 3 Compl. ¶¶ 48-49. 3 System, West Palm Beach Police Pension Fund, and Cambridge Retirement System
(together, “Plaintiffs”). They each held AmTrust common stock through the closing
of the buyout transaction at issue in this action (the “Transaction”), with Arca
holding approximately 2.4% of AmTrust’s outstanding shares.4
Defendant Barry D. Zyskind has served on the Company’s board of directors
(the “Board”) since 1998 and as the Chairman of the Board since May 2016.
Zyskind has served as CEO and President of AmTrust since 2000, and serves as an
officer and director of AmTrust’s many wholly-owned subsidiaries.5 Zyskind is
married to the daughter of co-founder Michael Karfunkel, who died in 2016.
Defendant George Karfunkel has served as a director on the Board since 1998.
He is the brother of the Michael Karfunkel.6 Defendant Leah Karfunkel has served
as a director on the Board since May 2016. She is the widow of Michael Karfunkel,
the sister-in-law of George Karfunkel, and the mother-in-law of Zyskind.7
George Karfunkel, Leah Karfunkel, and Zyskind are referred to together in
this opinion as the “K-Z Family.” Members of the K-Z Family have controlled
4 Id. ¶¶ 43-47. 5 Id. ¶ 48. 6 Id. ¶ 49. 7 Id. ¶ 50. 4 AmTrust since its founding, and owned or controlled approximately 55% of its
outstanding shares at the time of the Transaction.8
At the times relevant to this action, the Board consisted of seven
members: George Karfunkel, Leah Karfunkel, Zyskind, and four others who served
on a special committee formed to negotiate the terms of the Transaction (the “Special
Committee”). The members of the Special Committee were defendants Donald T.
DeCarlo, Abraham Gulkowitz, Susan C. Fisch, and Raul Rivera. DeCarlo and
Gulkowitz joined the Board in 2006.9 Fisch and Rivera joined the Board in 2010
and August 2016, respectively.10
To undertake the Transaction, the K-Z Family teamed up with Stone Point
Capital LLC (“Stone Point”), a private equity firm, and certain funds that Stone Point
manages, namely defendants Trident VII Professionals Fund, L.P., Trident VII, L.P.,
Trident VII DE Parallel Fund, L.P., and Trident VII Parallel Fund, L.P. The Trident
funds participated in the Transaction through defendant Trident Pine Acquisition
L.P.11 This decision refers to Stone Point and these various Trident entities
collectively as the “Stone Point Defendants,” and to the K-Z Family and the Stone
Point Defendants together as the “MBO Group.”
8 Id. ¶¶ 16, 51. 9 Id. ¶¶ 52, 59. 10 Id. ¶¶ 54, 66. 11 Id. ¶¶ 68-70. 5 The remaining three defendants in this action, which are referred to
collectively as the “Evergreen Entities,” served as investment or merger vehicles to
effectuate the Transaction: Evergreen Parent, L.P., Evergreen Merger Sub, Inc., and
K-Z Evergreen, LLC.12
B. The Previous Derivative Actions
In April 2015, Cambridge Retirement System, an AmTrust stockholder, filed
a derivative action in this court on behalf of AmTrust (the “Cambridge Action”).
The Cambridge Action included claims against the members of the K-Z Family and
four outside directors (DeCarlo, Fisch, Gulkowitz, and Jay J. Miller) “for breaching
their fiduciary duties of loyalty and usurping a corporate opportunity from AmTrust
in connection with the Company’s and the Karfunkel-Zyskind Family’s dealings
with insurance company Tower Group International, Ltd.”13
All of the defendants in the Cambridge Action except Miller answered the
complaint in lieu of filing a motion to dismiss.14 Miller retired from the Board before
the events relevant to this case. In denying his motion to dismiss in the Cambridge
Action, the court commented that the core allegations of the complaint were “very
12 Id. ¶¶ 71-74. 13 Id. ¶ 97. 14 Cambridge Ret. Sys. v. DeCarlo, Del. Ch., C.A. No. 10879-CB, Dkts. 39, 42, 43, 45. 6 troubling” and “describe a very unusual set of circumstances” concerning the
approval of a conflicted transaction.15
In May and June 2017, AmTrust stockholders filed two derivative actions in
the United States District Court for the District of Delaware, which the district court
consolidated. The complaint asserts claims for “violations of Sections 10(b), 20A,
and 29(b) of the Securities Exchange Act, breaches of fiduciary duties, unjust
enrichment, and corporate waste” against AmTrust’s management and Board,
including Rivera.16
The district court action was filed in response to various alleged disclosure
violations, including “restatements of multiple years of the Company’s financials
stemming from issues with its financial reporting, increases in the Company’s loss
reserves, and the public revelation of a long-running SEC investigation.”17
According to the Complaint, this series of negative disclosures caused AmTrust’s
stock price to fall by more than 50% in the year before the Transaction, from $27 in
the first quarter of 2017 to $13 at the end of the third quarter of 2017.18
15 Cambridge Action, Mot. to Dismiss Hr’g Tr. (“Cambridge Action Tr.”) 46, 47 (Dkt. 82). 16 Konstanzer Aff. Ex. 31, at 10. 17 Compl. ¶ 167. 18 Id. 7 C. The K-Z Family Sets the Stage for the Transaction
In early May 2017, there were reports that the K-Z Family would seek to take
the Company private.19 The K-Z Family denied the reports at the time.20
On May 8, 2017, Zyskind told investors on an earnings call that the Company
was “exploring several ways to monetize the value of [AmTrust’s] fee business” and
that the Company was seeking to sell a 51% stake to a “private equity-like partner.”21
Later that summer, AmTrust issued 24,096,384 shares of common stock to members
of the K-Z Family through a private placement at $12.45 per share, increasing their
ownership of the outstanding shares of common stock from 49% to 55%.22
Sometime in September 2017, Stone Point initiated discussions with Zyskind
regarding a potential take-private transaction, but the discussions did not progress.23
On November 6, 2017, AmTrust announced it would sell 51% of its fee
business to Madison Dearborn Partners.24 On November 9, 2017, the credit rating
agency A.M. Best announced that AmTrust was “under review with negative
implications until: (1) the Fee Business Sale closed, and A.M. Best assessed the
19 Id. ¶ 203. 20 Id. ¶ 191. 21 Id. ¶ 206. 22 Id. ¶¶ 51, 204. 23 Id. ¶ 210. 24 Id. ¶ 337; Konstanzer Aff. Ex. 1 (“Proxy”), at 22 (Dkt. 94). 8 transaction’s impact on risk-adjusted capital; and (2) the Company’s annual report
on Form 10-K for fiscal year 2017 . . . was filed.”25 That same month, the
Company’s Form 10-Q stated that AmTrust’s $13.46 stock price at the end of the
third quarter of 2017 was well below its “fair value” and its recent “share price
decline . . . is relatively short-term in nature.”26
D. The Initial Take-Private Proposal
On November 16, 2017 Zyskind informed the Board that “the Company had
begun to receive unsolicited calls from potential investors,” and that “senior
management was in the process of negotiating non-disclosure agreements with
certain parties so they could commence due diligence and have discussions with
Company management.”27 At this meeting, “various alternative transactions were
discussed, including not only a going-private transaction, but also ‘a significant
investment from an unrelated third party or possibly a combination of a third party
investor with the Karfunkel and Zyskind families participating.’” 28 On November
17, 2017, Stone Point entered into a confidentiality agreement with the Company.29
25 Compl. ¶¶ 215, 217. 26 Id. ¶ 27. 27 Id. ¶ 218. 28 Id. ¶ 219. 29 Id. ¶ 221; Proxy at 22. 9 On December 27, 2017, Zyskind asked the Board to grant Stone Point, “who
he and the Karfunkel Family have known . . . for many years,” a waiver under 8 Del.
C. § 203 to allow it to discuss a joint proposal with the K-Z Family (the “Waiver”).30
The K-Z Family’s lawyers, Paul, Weiss, Rifkind, Wharton and Garrison LLP, then
advised the Board on “the requirements for the Waiver.”31
On December 29, 2017, the Board formed a limited special committee
comprised of DeCarlo, Fisch, Gulkowitz, and Rivera to consider the Waiver.32 On
January 8, 2018, the limited special committee granted the Waiver, allegedly for no
consideration.33
On January 9, 2018, Stone Point and the K-Z Family entered into a joint
bidding agreement.34 That same day, the MBO Group made a confidential
presentation to a ratings agency, disclosing that they intended to make an offer to
take AmTrust private.35 After the presentation, the MBO Group made their initial
proposal to the Board for them to acquire all outstanding shares of common stock
unaffiliated with the K-Z Family for $12.25 per share in cash,36 conditioned “on
30 Compl. ¶ 230-31. 31 Id. 32 Id.¶ 233. 33 Id. ¶ 234. 34 Id. ¶ 252. 35 Id. ¶ 238. 36 Id. ¶ 243. 10 approval by an independent special committee and a fully informed majority of
AmTrust’s minority stockholders.”37 The initial proposal also stated that the K-Z
Family had no interest in selling any of their shares of AmTrust:
[T]he Family Stockholders have no interest in selling any of the shares of common stock of AmTrust owned or controlled by them. As such, the Family Stockholders would not expect, in their capacity as stockholders of AmTrust, to vote in favor of any alternative sale, merger or similar transaction involving AmTrust. If the special committee does not recommend, or the stockholders of AmTrust do not approve, the proposed transaction, the Family Stockholders currently intend to continue as long-term stockholders of AmTrust.38
Also on January 9, 2018, the Board formed the Special Committee to negotiate
and evaluate the initial proposal.39 The Special Committee retained Willkie Farr &
Gallagher LLP as its legal counsel and Deutsche Bank as its financial advisor.
According to the Complaint, the Special Committee retained Deutsche Bank before
reviewing any conflicts of interest.40
37 Id. ¶ 244. 38 Id. 39 Id. ¶¶ 239, 249. 40 Id. ¶ 242; see also id. ¶¶ 325-27 (alleging conflicts of interests Deutsche Bank had based on prior work it performed for Stone Point, AmTrust, and their respective affiliates). 11 E. The Negotiation Process41
On January 16, 2018, the Special Committee met to evaluate the MBO
Group’s proposal. According to the proxy statement for the Transaction (the
“Proxy”), the Special Committee determined that projections that had been prepared
based on the Company’s ordinary course annual budgeting and planning process
“were no longer current, and that updated projections from Company management
would be necessary.”42
The next week, AmTrust management provided the Special Committee and
Deutsche Bank with a new set of financial projections (the “Case 1 Projections”).
According to the Proxy, “the Case 1 Projections were inconsistent with financial
analysts’ consensus estimates for the Company and the Company’s peer group,” and
“did not appear to reflect certain adverse industry trends and Company issues
discussed with the Company management at a January 23, 2018 Audit Committee
meeting.”43 DeCarlo thus requested another set of projections. On January 31, 2018,
AmTrust management delivered the lower projections (the “Case 2 Projections”) to
the Special Committee.44
41 With respect to the Special Committee’s process, the Complaint points out a number of discrepancies in the description of events in the Company’s minutes versus the Proxy. See Compl. ¶¶ 277, 281, 305. 42 Id. ¶¶ 275-77. 43 Id. ¶ 280. 44 Id. ¶ 282. 12 On February 8, 2018, the Special Committee communicated a counter-
proposal at $17.50 per share. Between February 14 and 18, the Special Committee
met with the MBO Group and then Company management to discuss their views on
the Company’s financial position and the effect any potential going-private
transaction could have on the Company’s rating by A.M. Best.45 Shortly thereafter,
the Special Committee requested a third set of financial projections (the “Special
Committee Case Projections”).46 The same day it received the Special Committee
Case Projections, which were lower than the Case 2 Projections, the Special
Committee revised its counteroffer to $15.10 per share, despite receiving no formal
rejection of the $17.50 per share offer.47
During a meeting on February 16, 2018, DeCarlo informed the Special
Committee that he was recusing himself “from all discussions and decisions made
by the Special Committee in respect of the Cambridge [Action]” as a result of his
“involvement” in that litigation.48
On February 23, 2018, the MBO Group rejected the $15.10 counteroffer and
increased its offer to $13.00 per share.49 The MBO Group also rejected the inclusion
45 Id. ¶¶ 289-92. 46 Id. ¶ 292. 47 Id. ¶ 293. 48 Id. ¶ 383. 49 Id. ¶ 293. 13 of a “go shop” and a voting agreement requiring the K-Z Family to vote in favor of
a superior proposal.50
On February 25, 2018, the Special Committee asked to review the Company’s
current draft of its 2017 10-K, which was going to be filed late, and requested another
set of financial projections based on the scenario that the Company’s rating would
be downgraded by A.M. Best.51 On February 26, 2018, the Special Committee made
a counteroffer of $14.00 per share.52
According to the Proxy, the MBO Group made a counteroffer of $13.50 to the
Special Committee later on February 26, 2018.53 The Proxy also states that the
Special Committee “resolved to approve and adopt the Special Committee Case
Projections” on February 26, and directed Deutsche Bank to use these projections in
its financial analysis.54
On February 28, 2018, Deutsche Bank provided a presentation to the Special
Committee that referenced a “contingent litigation asset (based on upper end of
Willkie [Farr] estimate)” worth between $15 million and $25 million.55 This was
50 Id. 51 Id. ¶¶ 294-95. 52 Id. ¶¶ 302-03. 53 Id. ¶ 305. 54 Id. ¶ 306. 55 Id. ¶ 388. 14 the first time a value for the Cambridge Action was discussed with the Special
Committee.
Later on February 28, the Special Committee recommended that the Board
approve the MBO Group’s $13.50 offer, which it did that evening.56 On March 1,
2018, AmTrust announced that it had entered into the merger agreement.57
F. The Transaction Negotiated by the Special Committee Fails to Obtain the Support of the Public Stockholders The $13.50 per share proposal that the Special Committee negotiated was met
with opposition by major stockholders, including Carl Icahn, who held more than
9.3% of the Company’s outstanding shares and had started soliciting proxies to
oppose the transaction.58 According to Icahn, “management’s own claim that the
Company expected a future return on operating equity of 12–15% implied a
valuation significantly higher than $13.50 per share based on the Company’s book
value per share as of March 31, 2018,” and another analysis suggested that the shares
should trade at “a price of $26.06 to $31.86 per share.”59 On May 21, 2018, Arca
56 Id. ¶¶ 317-18. 57 Id. ¶ 321. 58 Id. ¶ 364. 59 Id. ¶¶ 368-69. 15 also announced its opposition to the $13.50 per share proposal that the Special
Committee had negotiated.60
On May 25, 2018, Institutional Shareholder Services (“ISS”) criticized the
Special Committee’s “less-than-robust sale process,” and recommended voting
against the $13.50 per share proposal because “a standalone scenario seems to be a
preferable alternative to the currently proposed transaction.”61 ISS suggested that a
valuation range between $14.35 and $20.82 per share was more appropriate.62
On June 3, 2018, “a preliminary assessment of proxies received by . . . the
Company’s proxy solicitor” showed that a majority of the public stockholders would
not support the $13.50 per share proposal.63 Also on June 3, the Company adjourned
the special meeting of stockholders scheduled for the next day to consider the $13.50
proposal.64
G. The Public Shareholders Approve a Revised Transaction On June 4, 2018, during a meeting with Zyskind, George Karfunkel, and the
Company’s financial and legal advisors, Icahn informed them that he would support
60 Id. ¶ 372. 61 Id. ¶ 374. 62 Id. 63 Id. ¶ 400 & n.37; Konstanzer Aff. Ex. 2 (“Proxy Supp.”) at S-5 (Dkt. 94). 64 Compl. ¶ 400 n.37. 16 a transaction at $14.75 per share.65 Later that evening, Zyskind informed Icahn that
he was prepared to increase the price to $14.75 per share subject to Icahn entering
into a satisfactory support agreement.66 The Special Committee was not part of these
discussions.67
On June 6, 2018, after the merger agreement was amended to a price of $14.75
per share, the Special Committee and the Board approved the revised transaction.68
On June 7, 2018, the Company announced that it had entered into an amendment
whereby the MBO Group increased its offer from $13.50 to $14.75 per share.69 In
connection with the amendment, Icahn entered into a settlement in which he agreed
to support the Transaction, dismiss his breach of fiduciary duty action, and forego
any appraisal rights.70
On June 21, 2018, the Company reconvened the special meeting of
stockholders to vote on the adoption of the amended merger agreement. It was
approved by 67.4% of the unaffiliated stockholders.71
65 Id. ¶ 396 n.36; Proxy Supp. at S-6. 66 Compl. ¶ 396 n.36; Proxy Supp. at S-6. 67 Compl. ¶ 396 n36; Proxy Supp. at S-6. 68 Compl. ¶ 8; Proxy Supp. at S-6. 69 Compl. ¶ 396. 70 Id. 71 Id. ¶ 400. 17 H. The A.M. Best Downgrade On July 3, 2018, A.M. Best downgraded the financial strength of AmTrust’s
insurance companies from an “A” to “A-.”72 A.M. Best noted that “[t]he rating
actions reflect AmTrust’s balance sheet strength, which A.M. Best categorizes as
very strong.”73 A.M. Best also noted that “[t]he recently approved plan under which
[AmTrust] will be privatized has a neutral impact on the rating.”74 After A.M. Best
announced the downgrade, the MBO Group stated that it would not be asserting its
right to terminate the Transaction due to the ratings downgrade, which it had
specifically negotiated for in the merger agreement.75
On August 9, 2018, AmTrust issued its second quarter Form 10-Q, which
stated the following concerning the A.M. Best downgrade:
Although a ratings downgrade occurred, A.M. Best categorizes our balance sheet as very strong with a high-quality capital profile. In addition, our risk-adjusted capitalization, as measured by A.M. Best’s Capital Adequacy Ratio (BCAR) strengthened materially through the first quarter of 2018. From a credit strength perspective, we are not aware of any significant implications to our business as a consequence of the downgrade, and do not believe it has materially impacted our access to the capital markets. We are not aware of any significant loss of business or change in business mix related to this event. The downgrade had no impact on any of our debt covenants or credit facilities, as we did not fall below any minimum credit rating requirements.
72 Id. ¶ 401. 73 Id. 74 Id. ¶ 402. 75 Id. ¶ 403; Proxy at 38. 18 On November 29, 2018, the Transaction closed.76 The closing of the
Transaction eliminated Plaintiffs’ standing to maintain the Cambridge Action,77
which the parties dismissed by stipulation on January 30, 2019.78
II. PROCEDURAL HISTORY
From May 2018 to February 2019, Plaintiffs filed three separate class action
complaints challenging the Transaction, which the court consolidated.79 On May 8,
2019, Plaintiffs filed the Amended Verified Consolidated Class Action Complaint
(as defined above, the “Complaint”).
The Complaint asserts four claims. Count I asserts that the “Director
Defendants breached their fiduciary duties by supporting and/or acquiescing to the
Transaction that greatly undervalued AmTrust and provided consideration to
AmTrust’s minority stockholders that was grossly unfair.”80 Count II asserts that
Zyskind breached his fiduciary duty as an officer “by placing his own interests ahead
76 Compl. ¶ 408. 77 See In re Massey Energy Co. Deriv. & Class Action Litig., 160 A.3d 484, 497-98 (Del. Ch. 2017) (“[I]t has been a matter of well-settled Delaware law for over three decades that stockholders of Delaware corporations must hold shares not only at the time of the alleged wrong, but continuously thereafter throughout the litigation in order to have standing to maintain derivative claims, and will lose standing when their status as stockholders of the company is terminated as a result of a merger . . . .”) (citing Lewis v. Anderson, 477 A.2d 1040 (Del. Ch. 1984)). 78 Cambridge Action, Dkt. 227. 79 Dkts. 56, 86. 80 Compl. ¶ 451. 19 of those of AmTrust’s public stockholders. . . . [and] orchestrating a deal that
guaranteed that AmTrust’s insiders would take the Company private at an artificially
low price. . . .”81 Count III asserts that Zyskind, George Karfukel, and Leah
Karfunkel breached their fiduciary duties as controlling stockholders by
“manipulat[ing] and control[ing] the Transaction process, including the Company’s
financial projections and the valuation process used by the conflicted Special
Committee.”82 Count IV asserts that the Stone Point Defendants “aided and abetted
the Director Defendants and Zyskind as an officer defendant, in the aforesaid breach
of their fiduciary duties.”83
In June 2019, each of the Defendants moved to dismiss the Complaint under
Court of Chancery Rule 12(b)(6) for failure to state a claim for relief as to each of
them. After briefing, the court held oral argument on November 5, 2019.
III. ANALYSIS
The standards governing a motion to dismiss under Rule 12(b)(6) for failure
to state a claim for relief are well settled:
81 Id. ¶ 457. 82 Id. ¶¶ 460, 470. 83 Id. ¶¶ 475-78. 20 (i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and [(iv)] dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.84
Defendants’ briefs are lengthy but they raise essentially four issues. First,
should the Transaction be subject to business judgment review under the framework
our Supreme Court articulated in MFW?85 Second, if the MFW standard is not
satisfied, does the Complaint state a non-exculpated claim for breach of fiduciary
duty against each of the Special Committee members in accordance with the test set
forth in In re Cornerstone Therapeutics Inc, Stockholder Litigation?86 Third, does
the Complaint state a claim for breach of fiduciary duty against Zyskind as an officer
of the Company? Fourth, does the Complaint state a claim for aiding and abetting
against the Stone Point Defendants? The court addresses each issue in turn below.87
84 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal quotations and citations omitted). 85 88 A.3d 635. 86 115 A.3d 1173 (Del. 2015). 87 The K-Z Family asserts that the court should dismiss the Evergreen Entities because the Complaint “does not assert any claims against them.” K-Z Family Opening Br. ¶ 15 (citing Chester Cty. Ret. Sys. v. Collins, 2016 WL 7117924, at *3, ¶ 12 (Del. Ch. Dec. 6, 2016) (ORDER) (granting motion to dismiss), aff’d, 165 A.3d 286 (Del. 2017) (TABLE)) (Dkt. 99). The court agrees. None of the counts in the Complaint are directed against the Evergreen Entities, see Compl. ¶¶ 449-78, and Plaintiffs made no effort to explain why they should not be dismissed. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”) (citations omitted); see also Brinckerhoff v. 21 A. Defendants’ MFW Defense
In MFW, our Supreme Court held that the business judgment rule is the
appropriate standard of review for a challenge to a squeeze-out merger by a
controlling stockholder if the transaction satisfies certain procedural protections:
We hold that business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.88
In so holding, the high court reasoned that the “simultaneous deployment of [these]
procedural protections . . . create a countervailing, offsetting influence of equal—if
not greater—force” than the undermining influence of a controller.89 The high court
further explained that the dual protections of special committee review and approval
of a majority of the minority stockholders are “consistent with the central tradition
of Delaware law, which defers to the informed decisions of impartial directors,
especially when those decisions have been approved by the disinterested
stockholders on full information and without coercion.”90 Although MFW itself was
Enbridge Energy Co., Inc., 2012 WL 1931242, at *1 (Del. Ch. May 25, 2012), aff’d, 67 A.3d 369 (Del. 2013). Accordingly, the Evergreen Entities will be dismissed. 88 88 A.3d at 644. 89 Id. 90 Id. 22 decided after discovery on a motion for summary judgment, courts have applied its
framework at the pleadings stage as well.91
In Flood v. Synutra International, Inc., our Supreme Court addressed some
“confusing dicta in MFW” to clarify that the focus of the inquiry is on process, not
price.92 Specifically, the high court explained that its previous affirmance of the
Court of Chancery’s decision in Swomley v. Schecht “eliminat[ed] any ambiguity
created by MFW and confirm[ed] that a plaintiff can plead a duty of care violation
only by showing that the Special Committee acted with gross negligence, not by
questioning the sufficiency of the price.”93
Plaintiffs assert that the MFW framework does not apply to the Transaction
because it “was not negotiated by a Special Committee and approved by minority
stockholders.”94 From Plaintiffs’ perspective, “[t]he Special Committee’s work”—
which yielded a proposed transaction for $13.50 per share—“was rejected by
minority stockholders” and the Transaction that the minority stockholders did
approve—for $14.75 per share—was “negotiated directly between Icahn and the K-
91 See In re Books-A-Million Inc. S’holders Litig., 2016 WL 5874974 (Del. Ch. Oct. 10, 2016), aff’d, 164 A.3d 56 (Del. 2017) (TABLE); Swomley v. Schlecht, C.A. No. 9355– VCL (Del. Ch. Aug. 27, 2014) (TRANSCRIPT), aff’d, 128 A.3d 992 (Del. 2015) (TABLE). 92 195 A.3d 754, 767 (Del. 2018). 93 Id. at 768. 94 Pls.’ Answering Br. 51. 23 Z Family without any involvement by the Special Committee” as their negotiating
agent.95 This is significant, according to Plaintiffs, not only because Icahn (rather
than the Special Committee) was responsible for the transaction on which the
stockholders actually voted, but because Icahn had no access to non-public
information about the Company, owed no fiduciary duty to AmTrust’s other
stockholders, and had his own short-term motivations to bump the price and sell his
shares quickly. Plaintiffs’ argument seems to find support in Synutra, where the
high court emphasized that “the entire point of the MFW standard is to recognize the
utility to stockholders of replicating the two key protections that exist in a third-party
merger: an independent negotiating agent whose work is subject to stockholder
approval.”96
Defendants counter that MFW does not require that “every aspect of the
challenged transaction be negotiated by the Special Committee” and, even if it did,
“the Special Committee remained involved in the negotiations with the [MBO]
Group and approved the subsequent increase to the deal price.”97 Defendants further
contend that “the fundamental policy underlying MFW does not exclude—and, in
fact, welcomes—the notion that price bumps may be due to both the Special
95 Id. 51-52. 96 195 A.3d at 766-76 (emphasis added). 97 Special Committee Reply Br. 4-5 (Dkt. 123). 24 Committee’s negotiations and the unaffiliated stockholders’ veto power” and that
the price bump Icahn extracted “is proof that MFW worked—not the opposite.”98
Although the parties have identified an interesting and seemingly novel question, the
court need not resolve it, at least at this time, because Plaintiffs have pled sufficient
facts to demonstrate that at least one of the conditions of the MFW standard has not
been satisfied.
In summarizing its holding, the Supreme Court in MFW identified six
conditions that must be satisfied to invoke business judgment review of a squeeze-
out merger by a controlling stockholder:
[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority. 99
“If a plaintiff can plead a reasonably conceivable set of facts showing that any or all
of those enumerated conditions did not exist,” the plaintiff would state a claim for
relief and be entitled to conduct discovery.100 “If, after discovery, triable issues of
98 Id. 6-7. 99 MFW, 88 A.3d at 645 (formatting altered), overruled on other grounds by Synutra, 195 A.3d 754. 100 Id. 25 fact remain about whether either or both of the dual procedural protections were
established, or if established were effective, the case will proceed to a trial in which
the court will conduct an entire fairness review.”101
Plaintiffs contend that the last five of the six conditions enumerated in MFW
have not been satisfied here. As just discussed, the court need not address each of
these contentions because the failure to comply with a single condition is sufficient
to defeat reliance on the MFW standard. For the reasons discussed next, the court
concludes that Plaintiffs have pled a reasonably conceivable set of facts that the
second condition has not been satisfied based on the Complaint’s allegations that
three of the four members of the Special Committee had a material self-interest in
the Transaction.
Before addressing Plaintiffs’ factual allegations, it bears mention that the
second MFW condition speaks in terms of the “independence” of members of a
special committee. In my opinion, however, this condition—and the overall MFW
framework—was intended to ensure not only that members of a special committee
must be independent in the sense of not being beholden to a controlling stockholder,
101 Id. at 645-46. 26 but also that the committee members must have no disabling personal interest in the
transaction at issue.102
It is well established under Delaware law that directors are interested in a
transaction if they “expect to derive any personal financial benefit” from the
transaction “as opposed to a benefit which devolves upon the corporation or all
stockholders generally.”103 In the absence of self-dealing, for the interest of a
director to be disabling, the “benefit must be alleged to be material to that
director.”104
Plaintiffs argue that “each of DeCarlo, Fisch, and Gulkowitz was interested in
the Transaction because it extinguished potential liability in the Cambridge
Action.”105 Relying on In re Riverstone National, Inc. Shareholder Litigation,
Plaintiffs argue that the relevant inquiry in this context is whether the pled facts
demonstrate that the directors “were aware that they faced a derivative claim at the
102 See Orman v. Cullman, 794 A.2d 5, 23-24 (Del. Ch. 2002) (discussing the separate issues of independence and interestedness). 103 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (citations omitted). 104 Orman, 794 A.2d at 23 (citing Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 363 (Del. 1993)). 105 Pls.’ Answering Br. 60. Plaintiffs contend that for MFW to apply, “all members of the Special Committee must have been disinterested and independent.” Id. at 59. Given that the court finds that a majority of the members of the Special Committee had a material self-interest in the Transaction, it is not necessary to address this argument. 27 time they were considering the [Transaction], that the claim was viable, and that
potential liability was material to [the directors].”106
In Riverstone, plaintiffs argued “that by orchestrating a merger that
extinguished a possible derivative action, the Director Defendants obtained a special
benefit for themselves, and were thus interested in the transaction.”107 In addressing
this argument, Vice Chancellor Glasscock cautioned that “much ground for strike
suits and other mischief would be possible” if the court were to endorse the theory
based on “a conclusory allegation,” but found the argument to be persuasive where
plaintiffs had:
plead particularized facts with respect to individual directors showing the existence of a chose-in-action against the directors which, if brought as a claim would have survived a motion to dismiss; that the director at the time of negotiating and recommending the merger was aware of the potential action; that the potential for liability was material to the director; and that the directors obtained and recommended an agreement that extinguished the claim directly by contract.108
Although the court shares Vice Chancellor Glasscock’s concern for caution,
Riverstone sets forth an appropriate framework in my opinion to evaluate Plaintiffs’
argument that the second MFW condition has not been satisfied.
106 2016 WL 4045411, at *15 (Del. Ch. July 28, 2016). 107 Id. at *8. 108 Id. 28 Significantly, Defendants do not challenge (i) that DeCarlo, Fisch, and
Gulkowitz were aware that they faced a derivative claim in the Cambridge Action
when they were considering whether to approve the Transaction, (ii) that the claim
was viable, or (iii) that the potential liability they faced was material to each of them
personally.109 Nor could they credibly do so.
DeCarlo, Fisch, and Gulkowitz (and all the other defendants in the Cambridge
Action except Miller) tacitly conceded the viability of the claims against them by
answering Cambridge’s complaint in lieu of making a pleadings stage motion.110 In
denying Miller’s motion to dismiss, furthermore, the court found that the core
allegations of the complaint in the Cambridge Action, which concerned the approval
of a conflicted transaction, were “very troubling” and “very unusual.”111
As to the materiality of the derivative claim, the Complaint alleges that
(i) Cambridge’s expert valued the claim to be worth “in excess of $300 million” and
109 To be clear, Defendants do challenge the materiality of the potential liability in the Cambridge Action relative to the $2.95 billion value of the Transaction. This comparison is relevant to the inquiry addressed in In re Primedia, Inc. S’holders Litig., 67 A.3d 455 (Del. Ch. 2013), which considers whether a stockholder whose standing to pursue a derivative claim was extinguished by a merger nevertheless may challenge the merger directly based on the target board’s failure to obtain sufficient value for the derivative claim. In that scenario, “the value of the derivative claim must be material in the context of the merger.” Id. at 477. Here, the question is simply whether the special committee members had a material self-interest in approving the merger. The relevant focus in this scenario is whether the potential liability in the Cambridge Action was material to those directors personally. 110 Cambridge Action, Dkts. 39, 42, 43, 45. 111 Cambridge Action Tr. 46-48. 29 (ii) the Special Committee’s financial advisor (Deutsche Bank) informed the Special
Committee that the estimated “net settlement value” of the claim was “between $15
million and $25 million.”112 It certainly is reasonably conceivable that the prospect
of joint and several liability for a claim with a settlement value in this range—from
which it is reasonable to infer the amount of the exposure was much higher—would
be material to DeCarlo, Fisch, and Gulkowitz personally.113
The Special Committee members attempt to distinguish Riverstone on its facts
because, unlike in that case, the Plaintiffs here do not allege that “the merger
agreement the directors obtained and recommended . . . eliminated any pursuit of the
matter as a corporate asset purchased by the acquirer, as a matter of contract.”114
This distinction does not make a substantive difference in my view.
Riverstone involved a merger with a third party, Greystar Real Estate Partners,
LLC, in which Riverstone’s stockholders were cashed out and control of the
company transferred to Greystar.115 In this context, a contractual release of claims
against the former Riverstone directors who had been accused of usurping a
112 Compl. ¶¶ 379, 388; Special Committee Opening Br. 27. 113 See Orman, 794 A.2d at 31 (“I think it would be naïve to say, as a matter of law, that $3.3 million is immaterial.”) (finding it “reasonable to infer” director “suffered a disabling interest when considering how to cast his vote in connection with the challenged merger when the Board’s decision on that matter could determine whether or not his firm would receive $3.3 million”). 114 Special Committee Reply Br. 30 (quoting Riverstone, 2016 WL 4045411, at *1). 115 Riverstone, 2016 WL 4045411, at *5. 30 corporate opportunity would be important to the directors because, post-merger, the
company and the fate of the claims would be in the hands of a third party with no
exposure to the claims.
Here, by contrast, the Transaction involves a squeeze-out merger in which
AmTrust’s controlling stockholders (the K-Z Family)—who are the focus of the
usurpation claim at the heart of the Cambridge Action—retained control of the
Company when they took it private. In this context, the absence of a contractual
release of claims would be of little, if any, importance to DeCarlo, Fisch, or
Gulkowitz because it stands to reason that, post-merger, the K-Z Family would never
press claims relating to their own alleged usurpation of a corporate opportunity.
In sum, for the reasons stated above, the court concludes that Plaintiffs have
pled a reasonably conceivable set of facts showing that each of the conditions
necessary to apply the MFW framework to subject the Transaction to business
judgment review have not been satisfied.116 Accordingly, subject to the court’s
116 In a footnote, Defendants argue that, “[s]hould the Court decline to dismiss the Complaint under MFW, the Court should shift the burden of persuasion to Plaintiffs.” Special Committee Opening Br. 61 n.18. The basis for this request is that the presence of either of the two procedural protections upon which MFW is premised (i.e., a functioning special committee of independent directors or approval of an informed and uncoerced vote of a majority of the unaffiliated stockholders) would shift the burden of persuasion on the issue of fairness. See MFW, 88 A.3d at 642 (citing Kahn v. Lynch Comm’n Sys., Inc., 638 A.2d 1110. 1117 (Del. 1994)). Although a burden shift ultimately may be appropriate in this case, it would be premature to shift the burden of persuasion at this stage, before discovery has been completed. 31 disposition of the Special Committee defendants’ motion to dismiss under
Cornerstone, which is discussed in the next section, Counts I and III of the
Complaint state claims for relief for which Plaintiffs are entitled to take discovery.117
B. The Special Committee Defendants’ Cornerstone Defense
In addition to relying on MFW, the Special Committee defendants argue that
the court should dismiss them from this action because the Complaint fails to allege
a non-exculpated claim for breach of fiduciary duty against them.
The Special Committee defendants are protected by a Section 102(b)(7)
provision in Amtrust’s certificate of incorporation.118 As our Supreme Court
explained in Cornerstone, “[w]hen a director is protected by an exculpatory charter
provision, a plaintiff can survive a motion to dismiss by that director defendant by
pleading facts supporting a rational inference that the director harbored self-interest
adverse to the stockholders’ interests, acted to advance the self-interest of an
117 MFW, 88 A.3d at 645 (“If a plaintiff that can plead a reasonably conceivable set of facts showing that any or all of those enumerated conditions did not exist, that complaint would state a claim for relief that would entitle the plaintiff to proceed and conduct discovery.”). During oral argument, Defendants argued for the first time that even if the court concludes that MFW does not apply, the court should prohibit Plaintiffs from challenging the value the Special Committee attributed to the Cambridge Action as part of their direct challenge to the overall fairness of the Transaction. Mot. to Dismiss Hr’g Tr. 56 (November 5, 2019) (Dkt. 129). Defendants did not fairly present this argument during briefing and thus the court declines to impose any such limitation at this time. 118 See Konstanzer Aff. Ex. 33 Art. XI (Dkt. 95); see also McMillan v. Intercargo Corp., 768 A.2d 492, 501 n.40 (Del. Ch. 2000) (noting the court may take judicial notice of the Company’s certificate of incorporation). 32 interested party from whom they could not be presumed to act independently, or
acted in bad faith.”119
For the reasons discussed above, Plaintiffs have pled facts supporting a
rational inference that DeCarlo, Fisch, and Gulkowitz harbored self-interest adverse
to the interests of Amtrust’s minority stockholders when they approved the
Transaction because, as a practical matter, it would have extinguished viable claims
against each of them for which they faced significant potential liability.
Accordingly, the motion to dismiss Count I for failure to state a non-exculpated
claim for breach of fiduciary duty is denied as to these three individuals.
The fourth member of the Special Committee, Rivera, is situated differently
than its other three members. Rivera joined the Board in August 2016, almost two
years after the transaction challenged in the Cambridge Action closed, and was not
named as a defendant in the Cambridge Action.120 Plaintiffs do not allege that Rivera
had a material self-interest in the Transaction. Nor do they allege facts challenging
Rivera’s independence. Given the absence of any such allegations, Plaintiffs’ claim
against Rivera turns on whether the Complaint alleges sufficient facts from which it
is reasonably conceivable he acted in bad faith.
119 115 A.3d at 1179-80. 120 Compl. ¶¶ 66, 154. 33 To support an assertion of bad faith, Plaintiffs must plead facts demonstrating
that Rivera “intentionally fail[ed] to act in the face of a known duty to act,
demonstrating a conscious disregard for [his] duties.”121 Plaintiffs have not done so.
There are few allegations in the Complaint specifically about Rivera.
Lumping him together with the other three members of the Special Committee,
Plaintiffs argue through group pleading that he acted in bad faith because the Special
Committee defendants (i) sought downward projections, (ii) failed to engage
actively in the sale process with Icahn, and (iii) knew the Proxy was materially
misleading. As to each of these acts or omissions, however, Plaintiffs’ allegations
are conclusory and do not provide factual support that rises to the level of bad faith.
With respect to the disclosures in the Proxy, for example, Plaintiffs state that
the Special Committee members “knew language in the Proxy was materially
misleading”122 but they provide no factual support to backup this assertion, much
less to suggest that Rivera intended to disregard his obligation to ensure that the
Company disclosed all material information to its stockholders. To be sure, the
series of revisions to the Company’s projections in the midst of negotiations with
the MBO Group and the Special Committee’s lack of involvement with Icahn and
121 Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009) (citation and internal quotations omitted). 122 Pls.’ Answering Br. 88. 34 members of the K-Z Family as they separately discussed a price increase, raise
significant questions about the process that the Special Committee undertook and its
effectiveness. Plaintiffs have failed, however, to allege facts concerning these
matters that rise to the level of bad faith on the part of the Special Committee
members, including Rivera.
*****
For the reasons discussed above, the motion to dismiss Count I is denied as to
DeCarlo, Fisch, and Gulkowitz, but granted as to Rivera.
C. The Claim Against Zyskind in his Capacity as an Officer
Count II of the Complaint asserts that Zyskind, in his capacity as an AmTrust
officer, “breached his fiduciary duties by placing his own interests ahead of those of
AmTrust’s public stockholders.”123 The K-Z Family defendants argue that the court
should dismiss this claim because Zyskind “is not alleged to have taken any actions
in his capacity as an officer that would constitute a breach of his fiduciary duties to
the Company’s stockholders.”124
Although the Complaint repeatedly refers to AmTrust management in
describing the negotiation process, it does not contain allegations regarding specific
actions taken or statements made by Zyskind in his capacity as an officer during the
123 Compl. ¶ 457. 124 K-Z Family Opening Br. ¶ 14. 35 negotiations. When the Complaint specifically mentions Zyskind, it does so in his
capacity as a director of AmTrust. Plaintiffs did not address this deficiency in their
brief or at oral argument, and thus waived the issue.125 Accordingly, the court will
grant the motion to dismiss Count II. Zyskind, of course, will remain in the case as
a defendant for purposes of Counts I and III in his capacity as a director of the
Company and part of its control group.
D. The Aiding and Abetting Claim Against the Stone Point Defendants Count IV of the Complaint asserts that the Stone Point Defendants “aided and
abetted the Director Defendants and Zyskind as an officer defendant, in the aforesaid
breach of their fiduciary duties.”126 The elements of a claim for aiding and abetting
a breach of fiduciary duty are: “(1) the existence of a fiduciary relationship, (2) a
breach of the fiduciary’s duty, (3) knowing participation in that breach by the
defendants, and (4) damages proximately caused by the breach.”127 “An aider and
abettor knowingly participates in a breach when it acts with the knowledge that the
conduct advocated or assisted constitutes such a breach.”128
See Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed are deemed waived.”) (citations 125
omitted). 126 Compl. ¶¶ 475-78. In re Volcano Corp. S’holder Litig., 143 A.3d 727, 750 (Del. Ch. 2016), aff’d, 156 A.3d 127
697 (Del. 2017). 128 Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *18 (Del. Ch. June 21, 2019) (internal citations omitted). 36 For the reasons discussed above, Plaintiffs have satisfied the first two
elements of an aiding and abetting claim by successfully pleading claims for breach
of fiduciary duty against three of the four members of the Special Committee and
against the three members of the K-Z Family as directors of the Company. Plaintiffs
advance essentially two arguments in an effort to satisfy the element of knowing
participation, but both fail to plead facts demonstrating that the Stone Point
Defendants knew that their conduct advocated for or assisted in a breach of fiduciary
duty by any of the individual defendants.
First, Plaintiffs contend that the Stone Point Defendants “knew the members
of the Special Committee were not independent and disinterested.”129 In support of
this contention, Plaintiffs assert that it was widely known that “[t]he chairperson of
the Special Committee (DeCarlo) was a longtime friend, lawyer, business associate
and ally of the Karfunkel-Zyskind Family.”130 Plaintiffs also assert that “Stone Point
had to have been aware of the Cambridge Derivative Action and the Accounting
Derivative Action,” that these actions “undoubtedly would have been analyzed as
part of Stone Point’s due diligence,” and thus Stone Point must have known “it was
not paying value for [those derivative actions] despite ‘deeply troubling’ conduct
129 Pls.’ Answering Br. 90. 130 Id. 90-91 (citing Compl. ¶ 375). 37 observed by this Court.”131 The Complaint, however, fails to allege facts sufficient
to support these assertions such that it would be reasonable to infer that the Stone
Defendants “knowingly participated” in a breach of fiduciary duty.
Plaintiffs ask the court to infer that Stone Point Defendants knew DeCarlo
would not consider the merits of the Transaction independently based on a single
allegation in the Complaint. The relevant allegation is that ISS reported three
months after the Transaction was announced that “DeCarlo ‘has served since 2006
as an AmTrust director and since 2010 as a director of [NGHC], an insurance
company where Zyskind has been a director since 2013 and whose CEO Barry
Karfunkel.’”132 This allegation of board service on the AmTrust Board and one other
company controlled by the K-Z Family, without more, is insufficient to support a
reasonable inference that DeCarlo did not have the independence to serve on the
Special Committee.133 Plaintiffs’ assertions that the Stone Point Defendants must
have known members of the Special Committee were interested in the Transaction
131 Id. 91. 132 Id. 91 n.298 (citing Compl. ¶ 375). “NGHC” refers to National General Holdings Corp., an entity the K-Z Family controlled that played a role in the transaction involving Tower Group International, Ltd., which was the subject of the Cambridge Action. Compl. ¶ 17. 133 See In re BGC P’rs, Inc., 2019 WL 4745121, at *7-8 (Sept. 30, 2019) (Although “our law is not blind to the practical realities of serving as a director of a corporation with a controlling stockholder,” this allegation alone is insufficient to establish a lack of independence from the controller.). 38 due to the Cambridge Action are not only speculative as stated in their brief, they
are unsupported by any citations to the Complaint and thus are conclusory.134
Second, Plaintiffs argue that the court should infer that the Stone Point
Defendants acted with scienter because they and the K-Z Family met privately with
A.M. Best and later explained to the Special Committee their “views on the
Company’s financial position and the effect that the going private transaction could
have on the Company’s rating by A.M. Best Company.”135 The flaw in this theory
is that Plaintiffs do not explain why it would be reasonable to infer that the MBO
Group’s alleged discussions with the Special Committee about the potential impact
a transaction would have on its rating by A.M. Best—which had placed AmTrust
“under review with negative implications” months earlier136—amounted to anything
other than arm’s-length negotiations.137
134 See Pls.’ Answering Br. 91. As discussed above, the Complaint pleads a reasonably conceivable set of facts that three of the four members of the Special Committee had a material self-interest in the Transaction. See Part III.A. With respect to the aiding and abetting claim, however, the critical failure of the Complaint is the lack of any factual allegations supporting a reasonable inference that the Stone Point Defendants knew about and exploited this conflict of interest in its dealings with the Special Committee. 135 Id. 92-93 (citing Compl. ¶ 289). 136 Compl. ¶ 215 (“On November 9, 2017, A.M. Best announced that AmTrust was ‘under review with negative implications.’”). 137 Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010) (“[A]rm’s-length bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and abetting.”). 39 In sum, Plaintiffs have failed to plead facts sufficient to support a reasonable
inference that the Stone Point Defendants knowingly participated in a breach of
fiduciary duty by the members of the Special Committee or the K-Z Family.
Accordingly, the court will grant the motion to dismiss Count IV.
IV. CONCLUSION
For the reasons explained above, the court grants in part, and denies in part,
the Defendants’ motions to dismiss the Complaint. The parties should confer and
submit an order implementing this decision within five business days.
Related
Cite This Page — Counsel Stack
In re AmTrust Financial Services, Inc. Stockholder Litigation, Counsel Stack Legal Research, https://law.counselstack.com/opinion/in-re-amtrust-financial-services-inc-stockholder-litigation-delch-2020.