In re Happy Child World, Inc.
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE HAPPY CHILD WORLD, INC. ) CONSOLIDATED ) C.A. No. 3402-VCS
MEMORANDUM OPINION
Date Submitted: June 15, 2020 Date Decided: September 29, 2020
George H. Seitz, III, Esquire and James S. Green, Sr., Esquire of Seitz, Van Ogtrop & Green, P.A., Wilmington, Delaware, Attorneys for Boraam Tanyous and Happy Child World, Inc.
Jeffrey S. Goddess, Esquire of Cooch and Taylor, P.A., Wilmington, Delaware, Attorney for Medhat Banoub and Mariam Banoub.
SLIGHTS, Vice Chancellor “Perhaps the broadest and most accepted idea [in our adversarial system of
justice] is that the person who seeks court action should justify the request, which
means that the plaintiffs bear the burdens on the elements in their claims.”1 Deeply
enmeshed in the fabric of our jury trial courts, this bedrock principle of our
adversarial legal system is, it seems, sometimes overlooked by parties litigating in
this court of equity where matters are tried to the Bench. This is especially so when
parties come to the court charged with emotions, such as when former friends accuse
each other of dishonesty leading to fractured relationships, both personal and
professional. In such instances, supplication often takes the place of proof. The
parties beseech the court to view the facts as they see them—as they lived them—
whether supported by evidence or not. But that is not how trials work. Factual proof,
not fervent pleas for justice, is what drives trial outcomes.
Yet trials, by their nature, are imperfect. “[I]n a judicial proceeding in which
there is a dispute about the facts of some earlier event, the factfinder cannot acquire
unassailably accurate knowledge of what happened. Instead, all the factfinder can
1 C. Mueller & L. Kirkpatrick, Evidence § 3.1 (3d ed. 2003). Stated another way, “[t]he reus has no duty of satisfying [t]he court; it may be doubtful, indeed extremely doubtful, whether he be not legally in the wrong and his adversary legally in the right, and yet he may gain and his adversary lose, simply because the inertia of the court has not been overcome, or, to use the more familiar figure, because the actor has not carried his case beyond the equilibrium of proof, or, as the case may be, of all reasonable doubt. Whatever the standard be, it is always the actor and never the reus who has to carry his proof to the required height; for, truly speaking, it is only the actor that has any duty of proving at all.” James B. Thayer, The Burden of Proof, 4 HARV. L. REV. 45, 58 (1890).
1 acquire is a belief of what probably happened.”2 This is especially so when the
factfinder must parse through testimony of witnesses attempting to recollect events
that occurred more than a decade before trial, and when the parties to the litigation
made no effort to document their activities or interactions in real time. Such is the
case here.
This post-trial decision resolves a decade-old dispute between former friends,
Boraam Tanyous and Medhat and Mariam Banoub (together, the “Banoubs”),
arising from their ultimately failed endeavor to own and operate a daycare center in
New Castle County, Delaware, ironically named Happy Child World, Inc. (“HCW”
or the “Company”).3 While both parties allege they are casualties of serious
breaches of fiduciary duty by the other, neither party took care to marshal evidence
in support or defense of their claims, making the post-trial adjudication of this long-
running dispute exceptionally difficult. When the many evidentiary gaps were
revealed during trial, the Court directed, and at times implored, the parties to fill
them.4 Unfortunately, most of the gaps remain. Consequently, I am left with an
2 In re Winship, 397 U.S. 358, 370 (1970) (Harlan, J. concurring). 3 For the sake of clarity, I will occasionally refer to the parties by their given names. I intend no familiarity or disrespect. 4 See, e.g., Tr. of Post-Trial Closing Args. at 3–4 (Nov. 15, 2019) (“The lack of joinder in these papers is remarkable. . . . It’s been a frustrating exercise.”); id at 89 (urging counsel to close evidentiary gaps, and observing: “I am loath to ask this, but there a couple of additional things that I need from counsel. And to be clear—and I apologize for coming out and immediately lobbing criticisms, but it is frustrating, and I stand by the fact 2 evidentiary record that is disjointed, incomplete and wholly inadequate to enable
thoughtful post-trial deliberations. But the matter is submitted for decision and the
Court must render judgment.
HCW was incorporated in Delaware in 2002, with the majority-owner,
Tanyous, providing the capital and the minority-owners, Medhat and Mariam
Banoub, controlling the day-to-day operations of the daycare. Tanyous resided in
Egypt and did not carefully oversee the Banoubs’ work at HCW. This dynamic led
to miscommunication, surprises, allegations of mismanagement and ultimately a
disintegration of the relationship.
The Court first encountered the parties in 2007 when Tanyous filed a demand
to inspect HCW’s books and records under 8 Del. C. § 220. That dispute morphed
into a dispute over who owned what equity in HCW. In 2008, the Court determined
that Tanyous was the controlling shareholder of HCW, owning 55% of HCW’s
equity.5 Noting its frustration with the state of the evidence, the Court observed,
“the books and records of HCW are in shambles,” a state of affairs that continues to
frustrate the judicial resolution of the many disputes between these parties.6
[as previously expressed] that this record is unprecedented, in my experience as a trial judge, in terms of having a basis to actually render a verdict, based on gaps in evidence— but I certainly don’t fault counsel.”) (D.I. 417). 5 Tanyous v. Happy Child World, Inc., 2008 WL 2780357, at *7 (Del. Ch. July 17, 2008). 6 Id.
3 After the Court declared in 2008 that Tanyous was HCW’s majority owner,
the Banoubs abruptly left the daycare, leaving Tanyous to assume control of HCW’s
operations. HCW floundered under his leadership, culminating in the State’s
revocation of HCW’s operating license in September 2011. A year later, Tanyous
executed a squeeze-out merger, cancelling the Banoubs’ shares and assessing their
share of the enterprise fair value at $8,457.17.
The parties then unleashed a series of claims and counterclaims in several
actions before this Court, all of which were ultimately consolidated for trial. The
case as currently framed presents “another progeny of one of our law’s hybrid
varietals: the combined appraisal and entire fairness action.”7 But this case also
presents a unique twist: both owners of the corporation to be appraised have asserted
claims on behalf of that corporation against the other relating to conduct that
occurred before the merger. For his part, Tanyous asserts claims on behalf of HCW
against the Banoubs seeking to recover damages for breach of fiduciary duties and
misappropriation of corporate assets while the Banoubs operated the daycare. As a
setoff to Tanyous’ claims, the Banoubs counterclaim that HCW owes them back
wages for work performed as the daycare’s operators. They also bring their own
claims on behalf of HCW against Tanyous for various breaches of fiduciary during
7 Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE HAPPY CHILD WORLD, INC. ) CONSOLIDATED ) C.A. No. 3402-VCS
MEMORANDUM OPINION
Date Submitted: June 15, 2020 Date Decided: September 29, 2020
George H. Seitz, III, Esquire and James S. Green, Sr., Esquire of Seitz, Van Ogtrop & Green, P.A., Wilmington, Delaware, Attorneys for Boraam Tanyous and Happy Child World, Inc.
Jeffrey S. Goddess, Esquire of Cooch and Taylor, P.A., Wilmington, Delaware, Attorney for Medhat Banoub and Mariam Banoub.
SLIGHTS, Vice Chancellor “Perhaps the broadest and most accepted idea [in our adversarial system of
justice] is that the person who seeks court action should justify the request, which
means that the plaintiffs bear the burdens on the elements in their claims.”1 Deeply
enmeshed in the fabric of our jury trial courts, this bedrock principle of our
adversarial legal system is, it seems, sometimes overlooked by parties litigating in
this court of equity where matters are tried to the Bench. This is especially so when
parties come to the court charged with emotions, such as when former friends accuse
each other of dishonesty leading to fractured relationships, both personal and
professional. In such instances, supplication often takes the place of proof. The
parties beseech the court to view the facts as they see them—as they lived them—
whether supported by evidence or not. But that is not how trials work. Factual proof,
not fervent pleas for justice, is what drives trial outcomes.
Yet trials, by their nature, are imperfect. “[I]n a judicial proceeding in which
there is a dispute about the facts of some earlier event, the factfinder cannot acquire
unassailably accurate knowledge of what happened. Instead, all the factfinder can
1 C. Mueller & L. Kirkpatrick, Evidence § 3.1 (3d ed. 2003). Stated another way, “[t]he reus has no duty of satisfying [t]he court; it may be doubtful, indeed extremely doubtful, whether he be not legally in the wrong and his adversary legally in the right, and yet he may gain and his adversary lose, simply because the inertia of the court has not been overcome, or, to use the more familiar figure, because the actor has not carried his case beyond the equilibrium of proof, or, as the case may be, of all reasonable doubt. Whatever the standard be, it is always the actor and never the reus who has to carry his proof to the required height; for, truly speaking, it is only the actor that has any duty of proving at all.” James B. Thayer, The Burden of Proof, 4 HARV. L. REV. 45, 58 (1890).
1 acquire is a belief of what probably happened.”2 This is especially so when the
factfinder must parse through testimony of witnesses attempting to recollect events
that occurred more than a decade before trial, and when the parties to the litigation
made no effort to document their activities or interactions in real time. Such is the
case here.
This post-trial decision resolves a decade-old dispute between former friends,
Boraam Tanyous and Medhat and Mariam Banoub (together, the “Banoubs”),
arising from their ultimately failed endeavor to own and operate a daycare center in
New Castle County, Delaware, ironically named Happy Child World, Inc. (“HCW”
or the “Company”).3 While both parties allege they are casualties of serious
breaches of fiduciary duty by the other, neither party took care to marshal evidence
in support or defense of their claims, making the post-trial adjudication of this long-
running dispute exceptionally difficult. When the many evidentiary gaps were
revealed during trial, the Court directed, and at times implored, the parties to fill
them.4 Unfortunately, most of the gaps remain. Consequently, I am left with an
2 In re Winship, 397 U.S. 358, 370 (1970) (Harlan, J. concurring). 3 For the sake of clarity, I will occasionally refer to the parties by their given names. I intend no familiarity or disrespect. 4 See, e.g., Tr. of Post-Trial Closing Args. at 3–4 (Nov. 15, 2019) (“The lack of joinder in these papers is remarkable. . . . It’s been a frustrating exercise.”); id at 89 (urging counsel to close evidentiary gaps, and observing: “I am loath to ask this, but there a couple of additional things that I need from counsel. And to be clear—and I apologize for coming out and immediately lobbing criticisms, but it is frustrating, and I stand by the fact 2 evidentiary record that is disjointed, incomplete and wholly inadequate to enable
thoughtful post-trial deliberations. But the matter is submitted for decision and the
Court must render judgment.
HCW was incorporated in Delaware in 2002, with the majority-owner,
Tanyous, providing the capital and the minority-owners, Medhat and Mariam
Banoub, controlling the day-to-day operations of the daycare. Tanyous resided in
Egypt and did not carefully oversee the Banoubs’ work at HCW. This dynamic led
to miscommunication, surprises, allegations of mismanagement and ultimately a
disintegration of the relationship.
The Court first encountered the parties in 2007 when Tanyous filed a demand
to inspect HCW’s books and records under 8 Del. C. § 220. That dispute morphed
into a dispute over who owned what equity in HCW. In 2008, the Court determined
that Tanyous was the controlling shareholder of HCW, owning 55% of HCW’s
equity.5 Noting its frustration with the state of the evidence, the Court observed,
“the books and records of HCW are in shambles,” a state of affairs that continues to
frustrate the judicial resolution of the many disputes between these parties.6
[as previously expressed] that this record is unprecedented, in my experience as a trial judge, in terms of having a basis to actually render a verdict, based on gaps in evidence— but I certainly don’t fault counsel.”) (D.I. 417). 5 Tanyous v. Happy Child World, Inc., 2008 WL 2780357, at *7 (Del. Ch. July 17, 2008). 6 Id.
3 After the Court declared in 2008 that Tanyous was HCW’s majority owner,
the Banoubs abruptly left the daycare, leaving Tanyous to assume control of HCW’s
operations. HCW floundered under his leadership, culminating in the State’s
revocation of HCW’s operating license in September 2011. A year later, Tanyous
executed a squeeze-out merger, cancelling the Banoubs’ shares and assessing their
share of the enterprise fair value at $8,457.17.
The parties then unleashed a series of claims and counterclaims in several
actions before this Court, all of which were ultimately consolidated for trial. The
case as currently framed presents “another progeny of one of our law’s hybrid
varietals: the combined appraisal and entire fairness action.”7 But this case also
presents a unique twist: both owners of the corporation to be appraised have asserted
claims on behalf of that corporation against the other relating to conduct that
occurred before the merger. For his part, Tanyous asserts claims on behalf of HCW
against the Banoubs seeking to recover damages for breach of fiduciary duties and
misappropriation of corporate assets while the Banoubs operated the daycare. As a
setoff to Tanyous’ claims, the Banoubs counterclaim that HCW owes them back
wages for work performed as the daycare’s operators. They also bring their own
claims on behalf of HCW against Tanyous for various breaches of fiduciary during
7 Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 299 (Del. Ch. 2006).
4 the time he ran the daycare that allegedly caused the demise of the business,
including misappropriation of corporate assets. Finally, in the wake of the squeeze-
out merger executed by Tanyous, the Banoubs seek an appraisal of the fair value of
their HCW shares under 8 Del. C. § 262.
One approach the Court might take to adjudicate the competing claims is to
provide the plaintiff/owner bringing the claim on behalf of HCW a direct damages
recovery, assuming the claim is proven, adjusted to account for that owner’s pro rata
stake in HCW. As a court of equity, this Court, I believe, would be within its
authority to fashion a remedy in that manner if it did so with care.8 At first glance,
while neither party has endorsed it, one might observe a certain elegance in this
approach since it would prevent wrongdoers who misappropriated corporate
property from enjoying any aspect of the corporation’s recovery.9
The other approach, and the one I follow here, is to value the competing
derivative claims, incorporate those values in the appraisal of the corporation and
then adjust the petitioner’s appraisal recovery to account for his liability to the
8 Cf. In re El Paso Pipeline P’rs L.P. Deriv. Litig., 132 A.3d 67, 120–29 (Del. Ch. 2015) (providing a thorough and thoughtful explication of the law on pro rata direct recoveries in derivative litigation), rev’d, 152 A.3d 1248 (Del. 2016). 9 See id. at 123 n.71 (identifying this as one of six recurring fact patterns in which “[c]ourts have been willing to award a pro rata recovery to shareholders”) (quoting 13 Fletcher Cyclopedia of Corporations § 6028, at 325 (rev. ed. 2013)). I discuss this “wrongdoer recovery” dynamic later when performing my appraisal.
5 corporation. It appears, as best I can discern, that the parties endorse this approach,
and it too is consistent with our law.
Unfortunately, the parties’ tangled web of claims and counterclaims, fueled
by rampant emotion and resting on disjointed factual and legal predicates, has
resulted in a post-trial decision that is longer than it ought to be. The fault for the
woefully inadequate factual record does not lie at the feet of counsel. They did their
best to package what their clients gave them, which was not much. The post-trial
deliberations were arduous, as reflected here, and the result, I am certain, will be
unsatisfying for all involved.
My findings of fact reveal that both parties engaged in fiduciary wrongdoing,
but not nearly to the extent claimed by the other. After valuing the proven claims,
incorporating those values in my appraisal, and then adjusting for their liability to
the Company, the end-result is that the Banoubs will receive $36,017.96 for their
equity in HCW, plus appropriate pre-judgment interest.
I. FACTUAL BACKGROUND
The Court held a three-day trial during which it received 167 exhibits, lodged
depositions and live testimony.10 I have drawn the facts from the related post-trial
judgment entered in 2008, stipulations entered before trial and the evidentiary record
10 Joint Trial Ex. List (“JX List”) (D.I. 381).
6 presented during trial.11 The following facts were proven by a preponderance of the
evidence.
A. The Formation of HCW
In 1991, Egyptian citizen and “international businessman,” Boraam Tanyous,
met Medhat Banoub through mutual business acquaintances.12 A friendship
blossomed and the two kept in touch.13
In 1999, Tanyous visited the newly married Medhat and his wife Mariam in
the United States.14 Medhat revealed to Tanyous that Mariam dreamed one day of
owning and operating a daycare center—a dream deferred because the newlyweds
lacked the financial means to start a new business.15 Coincidentally, Tanyous was
11 Citations will appear as follows: “PTO ¶ __” shall refer to stipulated facts in the pre-trial order; “Op. __” shall refer to the related post-trial opinion Tanyous v. Happy Child World, Inc., 2008 WL 2780357 (Del. Ch. July 17, 2008); “D.I.” shall refer to docket entries by docket number; “Tr. __ ([Name])” shall refer to witness testimony from the trial transcript (D.I. 389–91); “JX __” shall refer to trial exhibits using the JX-based page numbers generated for trial; “D.I. __ ([Name] Dep.) __” shall refer to witness testimony from a deposition transcript lodged with the Court for trial. 12 Op. at *2; PTO at 3, ¶ 1. See Greene v. Conn. Mut. Life Ins. Co., 1979 WL 174435, at *4 (Del. Ch. Sept. 19, 1979) (holding the court may draw factual findings from a prior opinion involving similar issues and the same parties under the doctrine of collateral estoppel). I note that even though the parties referred to the Court’s prior post-trial decision extensively in their Pretrial Stipulation, I have referred to that opinion as support only for facts that are background in nature, but not for facts of consequence to the outcome here. 13 Op. at *2; PTO at 3, ¶ 1. 14 Op. at *2. 15 Op. at *2; see Tr. 236–38 (Mariam) (recounting how the Banoubs moved to the United States in 1999 shortly after their marriage and began searching for a way to further 7 looking to acquire an E-2 Treaty Investor visa (the “Investor Visa”) that would
enable his family to move to the United States. To do so, the law required that he
assume a majority ownership interest in a company chartered in the United States.16
Hoping to seize an opportunity, Tanyous offered to provide capital for, and assume
majority ownership of, a daycare center in Delaware if the Banoubs would agree to
operate it.17 Medhat demurred.18
Tanyous continued to press the issue. In 2001, the Banoubs agreed that the
venture made sense and requested $100,000 in capital from Tanyous to acquire a
daycare facility in Delaware.19 Tanyous wired $20,000 to the Banoubs’ personal
bank account in the spring of 2001 and brought a check for an additional $80,000 on
his next visit to Delaware in June 2001.20 During this visit, Tanyous executed a
general power of attorney authorizing Medhat to act on his behalf with respect to
Mariam’s career in childcare); Tr. 473 (Medhat) (discussing the Banoubs’ financial state in the late-1990s and early-2000s). 16 Tr. 469 (Medhat); Op. at *2–3. The E-2 visa is authorized under the Immigration and Nationality Act, 8 U.S.C. § 1101, et seq. 17 PTO at 3, ¶¶ 1–4. 18 See id. at 3, ¶¶ 1–2 (stating Tanyous broached the possibility of a joint business venture in the 1990s, but the suggestion did not gain traction with the Banoubs until 2001). 19 Op. at *3; PTO at 3, ¶ 2. 20 Op. at *2; PTO at 4, ¶ 3.
8 HCW in all matters, including those instances where Tanyous’ signature, as majority
owner, would be required to take action on behalf of the business.21
In 2002, Medhat purchased an operating daycare business and property in
Newark, Delaware for $647,000.22 The Banoubs secured a mortgage to finance the
acquisition of the daycare with a second mortgage on their residence, while
Tanyous’ prior capital contributions primarily funded the down payment required
for closing.23 The newly formed Delaware corporation was named Happy Child
World, Inc., and the daycare then created was to be operated under the same name.
B. The Banoub Era
The Banoubs, who were both officers and directors of HCW, controlled
HCW’s day-to-day operations from September 2002 through July 18, 2008
(the “Banoub Era”).24 Mariam worked daily as the Chief Administrative Officer of
the Company, and Medhat chipped in on nights and weekends to acquire supplies
and perform maintenance at the facility while working a full-time job elsewhere
21 Op. at *3; PTO at 4, ¶ 4. 22 Op. at *3; PTO at 5, ¶ 8. 23 PTO at 5, ¶ 8. 24 Id. at 2, ¶ 3; Id. at 5–6, ¶¶ 8–9, 13; Op. at *1.
9 during the day.25 Under the Banoubs’ management, HCW achieved modest
growth.26
Issues with communication and recordkeeping surfaced early in the parties’
business relationship. In January 2003, Tanyous discovered that Medhat had
unilaterally reduced Tanyous’ interest in the Company from his anticipated 77.5%
to 55%.27 Tanyous was irate, but he was ultimately persuaded to accept the change
because of the significant effort expended by the Banoubs as operators of HCW.28
He continued to bankroll HCW as a 55% owner.29
In July 2003, Medhat and Tanyous met with immigration attorney Emre Ozgu
to assist with Tanyous’ Investor Visa application.30 Medhat agreed to work as
Tanyous’ liaison during the application process.31 Even at that nascent stage of
HCW’s existence, Mr. Ozgu raised concerns about the Company’s “haphazard
25 Tr. 201–06 (Clark). 26 JX 147, Ex. B; PTO at 5, ¶ 9. 27 Op. at *4; Tr. 524–25 (Tanyous); PTO at 4, ¶ 7. 28 Op. at *4; Tr. 524–25 (Tanyous). 29 Op. at *4; PTO at 7, ¶ 1. 30 Op. at *5. 31 Id.; Tr. 469 (Medhat).
10 documentation” of Tanyous’ investment.32 Sure enough, Tanyous’ Investor Visa
application was later denied for precisely that reason.33
Trust between the parties was eroded further when, in December 2005,
Tanyous saw that HCW’s 2004 tax return disclosed that the Banoubs’ ownership
interest in HCW was 80% while his was 20%.34 Tanyous took the extraordinary step
of flying from Kuwait to Delaware in order to confront Medhat about this latest
unauthorized attempt to dilute Tanyous’ majority ownership stake in HCW. 35 This
time Medhat relented, agreeing to amend the tax returns to reflect the previously
agreed 55-45% split.36 At that point, Tanyous curtailed Medhat’s authority
conferred by the 2001 power of attorney, thereby limiting Medhat’s ability to act on
behalf of the business.37
Trouble finally overwhelmed the business relationship when, in 2006, the
Banoubs formed Happy Kids Academy, Inc. (“HKA”), another Delaware
corporation through which the Banoubs acquired a competing daycare facility in
32 Op. at *5. 33 Id. 34 Id.; Tr. 338–39, 475–77 (Medhat); Tr. 556–57 (Tanyous). 35 Op. at *5; Tr. 338–39, 475–77 (Medhat). 36 Op. at *5; Tr. 338–39, 475–77 (Medhat). 37 JX 32; Tr. 556–58 (Tanyous).
11 Newark, Delaware.38 Tanyous raised concerns that the Banoubs were neglecting
HCW to prop up HKA.39 In 2007, Tanyous demanded, through Delaware counsel,
to inspect HCW’s books and records pursuant to 8 Del. C. § 220 (“Section 220”).40
The Banoubs refused the demand on the basis that Tanyous’ contributions to HCW
were loans, not capital contributions for equity, and, therefore, Tanyous did not
possess stockholder inspection rights under Section 220.41 The dispute culminated
in a post-trial Opinion from this Court in July 2008 finding that Tanyous was the
controlling shareholder of HCW with a 55% equity stake.42
In response to the Court’s opinion, the Banoubs promptly ceased their work
at HCW and turned their full efforts to running HKA.43 This left Tanyous to take
over the day-to-day operations of HCW as both controlling shareholder and daycare
manager.44
38 Op. at *6; Tr. 284–85, 303 (Mariam); Tr. 411 (Medhat). 39 Op. at *6; PTO at 8, ¶¶ 4–5. 40 Op. at *6; PTO at 6, ¶ 13. 41 Op. at *6; PTO at 6, ¶ 13. 42 Op. at *2–7; PTO at 6, ¶ 13. 43 Tr. 463 (Medhat). 44 Tr. 525–26 (Tanyous).
12 C. The Tanyous Era
The Tanyous Era began at the close of the July 2008 litigation, when Tanyous
replaced the Banoubs as operator of HCW.45 Tanyous’ stewardship was turbulent
from the start, beginning with his allegation that the Banoubs had stolen HCW
records. According to Tanyous, on July 18, 2008, the day after the Section 220
litigation concluded, the Banoubs removed all HCW attendance and State program
records from before 2006, a desktop computer containing operating records, and
other records used in HCW’s day-to-day operations46 The Banoubs denied the
allegations and maintained they left all files that were needed to run the business at
the daycare.47
Stolen or not, the HCW records in dispute are not in the trial record. In an
attempt to fill this void, Tanyous engaged a forensic accountant, David Ford, CPA,
to attempt to reconstruct the missing records in a costly effort that, according to
Tanyous, was ultimately unsuccessful.48
Because he was fully engaged in business dealings abroad, Tanyous left the
day-to-day operations of HCW to his wife, Gaklin Guirguis, and his associate, Nabil
45 D.I. 385 (Tanyous Dep.) 6–7; Tr. 531–33 (Tanyous). 46 Tr. 533–38 (Tanyous). 47 Tr. 445–49, 498–502 (Medhat); Tr. 286–69 (Mariam). 48 PTO at 13–14, ¶¶ 1–3.
13 Girgis.49 Under their supervision, HCW’s performance suffered. Receipts fell by
$108,119 in 2009, from $462,035 to $353,916, and fell another $51,543 in 2010,
from $353,916 to $302,373.50 In addition to declining financial performance, HCW
struggled to meet regulatory standards. The daycare was cited by the State Office
of Child Care Licensing (the “OCCL”) for numerous instances of non-compliance
with State daycare standards in late 2008 and April 2009.51 OCCL placed the
daycare on a two-year “Warning of Probation” in May 2009.52 In September 2010,
HCW’s continued noncompliance caused the OCCL to escalate the daycare’s
probationary status closer to license revocation.53
Girgis resigned in April 2011 amidst mounting conflict with the OCCL.54
He was replaced by Tanyous’ son-in-law, David Mikhaiel,55 who worked with
Program Director, Deborah Hofmann, and Mrs. Guirguis to bring HCW up to code.56
49 D.I. 383 (Girgis Dep.) 6–13. 50 JX 147, Ex. B. 51 JX 127. 52 Id. 53 Surprisingly, notwithstanding the parties’ inability to produce records throughout this and previous litigation, HCW does not appear to have been cited by the OCCL for its insufficient record keeping. See JX 70, 74–76, 79, 86, 102–04, 107–11. 54 JX 94. 55 Tr. 566 (Tanyous). 56 JX 93.
14 Despite these efforts, new management could not right the listing ship. By mid-
August 2011, the OCCL observed “the facility [appears to be] spiraling out of
control.”57 Two days later, HCW closed its doors.58 Consequently, the OCCL
suspended HCW’s license and then revoked it on September 27, 2011.59
When HCW closed its doors, parents were told to direct all questions to Little
Scholars—a separate daycare facility acquired by Tanyous in 2007, also located in
Newark, Delaware.60 While Tanyous and his wife owned Little Scholars,61 Girgis
ran its day-to-day operations.62 Given that Girgis, at various times, had been in
charge of both HCW and Little Scholars, there was significant overlap between the
management of the two daycares.63 But, unlike HCW, Little Scholars was successful
and remains in operation today.64
57 JX 111. 58 JX 113. 59 PTO at 16, ¶ 6. 60 JX 52, 55, 100, 113; Tr. 528 (Tanyous). 61 JX 48–49, 52, 55, 100; Tr. 530 (Tanyous). 62 PTO at 16–17, ¶¶ 7–9. 63 D.I. 383 (Girgis Dep.) 6–13, 59–63, 78, 115–24. 64 PTO at 16–17, ¶¶ 7–9.
15 D. The Merger
On August 6, 2012 (the “Merger Date”), Tanyous acted as the majority
stockholder of HCW, without a meeting and by written consent under Section 228
of the Delaware General Corporation Law, to adopt resolutions approving the
merger of HCW into Happy Child World Acquisition Corp. (“HCWA”)
(the “Merger”).65 As a result of the Merger, HCW shares previously held by the
Banoubs were cancelled and converted into the right to receive cash.66 The fair value
of the Banoubs’ equity ownership in HCW was set at $8,457.17 by a valuation expert
retained by Tanyous.67 The Banoubs elected to pass on the merger consideration
and to exercise their right to appraisal.
E. Procedural History
The Court (through my predecessor) is familiar with these parties from prior
litigation that relates directly to the claims addressed here.68 As noted, in his first
Verified Complaint filed on May 2, 2007, Tanyous sought an order compelling
HCW to allow him to inspect HCW’s books and records under Section 220.69 HCW
65 Id. at 6, ¶ 1. 66 Id. at 6, ¶ 3. 67 JX 147, 149. 68 See Tanyous, 2008 WL 2780357. 69 Id.
16 filed its Answer on June 6, 2007, refusing to comply with Tanyous’ books and
records demand on the ground that Tanyous was not a stockholder of HCW.70 This
prompted a contest over HCW ownership, with Tanyous’ standing to assert rights
under Section 220 as the ultimate question to be decided.71 That case was tried from
October 23–24, 2007. In its post-trial decision, the Court concluded that Tanyous
was, in fact, the owner of 55% of HCW’s equity and entitled to inspect its books and
records.72
On December 11, 2007, Tanyous filed his original Complaint in this action,
which he Amended on February 13, 2008.73 The Amended Complaint comprises six
counts. Count I asserts a claim for appointment of a Custodian pursuant to 8 Del. C.
§ 226; Count II asserts a claim for declaratory judgment that Tanyous owns a 55%
interest in HCW; Count III asserts a claim for breach of fiduciary duties against the
Banoubs; Count IV asserts a claim for conversion of HCW assets by the Banoubs;
Count V asserts a claim for an accounting; and Count VI asserts a claim for breach
of contract and fraud against the Banoubs.74
70 Id. 71 Id. 72 Id. at *6–7. 73 Compl. (D.I. 1); Am. Compl. (D.I. 7). 74 Am. Compl. ¶¶ 64–94.
17 Count II was decided in the books and records litigation.75 Tanyous’
application for appointment of a Custodian was denied on May 22, 2008.76
Thereafter, Tanyous filed his Second Amended Verified Complaint (his now
operative Complaint) on November 24, 2008, in which he reasserted the initial
Complaint’s Counts III–VI as Counts I–IV, respectively.77
Complicating matters for the next decade of litigation, the Banoubs’ counsel
withdrew (for good reason), leaving the Banoubs without counsel to defend complex
claims and then to initiate and pursue their own complex claims.78 Proceeding
pro se, the Banoubs denied Tanyous’ allegations,79 brought counterclaims,80 and
then initiated or defended years’ worth of often-misguided motion practice.81
75 See Tanyous, 2008 WL 2780357, at *6. 76 Tanyous v. Banoub, 3402-VCN, at 4 (Del. Ch. May 22, 2008) (denying Tanyous’ motion for appointment of custodian) (D.I. 18). 77 2d Am. Compl. ¶¶ 71–90 (D.I. 37). 78 Mot. to Withdraw Appearance (D.I. 28); Tanyous v. Banoub, 3402-VCN (Del. Ch. Dec. 5, 2008) (ORDER) (granting motion to withdraw as Banoubs’ counsel) (D.I. 44). 79 Defs.’ Answer to 2d Am. Compl. (D.I. 48). 80 Tanyous v. Banoub, 3402-VCN, at 3 (Del. Ch. Apr. 26, 2012) (granting the Banoubs leave to assert counterclaims) (D.I. 168). 81 See generally D.I. 49–147.
18 The Banoubs’ counterclaims, as currently pled, comprise five counts.82
Count I asserts a claim for breach of contract against HCW, as a setoff to Tanyous’
accounting demand and derivative claims; Count II asserts a claim for breach of
fiduciary duty against Tanyous; Count III asserts a claim of waste against Tanyous;
Count IV asserts a claim for misappropriation of corporate funds against Tanyous;
and Count V asserts a claim for gross mismanagement, again against Tanyous.83
The Banoubs’ filed a separate action seeking appraisal under Section 262 of the
DGCL following Tanyous’ execution of the squeeze-out Merger on December 3,
2012.84 The Court consolidated the appraisal action with the plenary fiduciary duty
actions in December 2017.85
Once again, years of motion practice (mainly discovery) ensued.86 As among
the countless motions brought by the parties, one is relevant here. On April 4, 2018,
82 Defs.’ Am. Countercl. (D.I. 157). 83 Id. 84 D.I. 1 (C.A. No. 8076-VCS). 85 In re Happy Child World, Inc., 3402-VCS, at 2 (ORDER) (Del. Ch. Dec. 29, 2017) (granting motion to consolidate) (D.I. 289). 86 See generally D.I. 152–266; Letter from Court to Parties (Jan. 29, 2018) (concerning discovery issues) (D.I. 300); Letter from Court to Parties (Feb. 21, 2018) (regarding additional document requests) (D.I. 305); Letter from Court to Parties (Mar. 27, 2018) (regarding document requests) (D.I. 316).
19 the Banoubs filed a Motion for Discovery Abuse and Spoliation, which, given its
fact-intensive premise, was deferred to trial and is addressed below.87
When it became clear the matter was proceeding to trial, the Banoubs finally
heeded the Court’s many admonitions and retained counsel in June 2018, ending
their ten years of self-representation.88 That important development restored order
to the litigation and allowed the case to be readied for trial.
Trial convened from February 12 to February 14, 2019. After post-trial
briefing and oral arguments were completed, I requested several supplemental
submissions in an effort to focus the issues for decision, and ultimately deemed the
matter submitted on June 15, 2020.
In post-trial briefing, Tanyous did not brief his claims for breach of contract
and fraud. Similarly, the Banoubs did not brief their claim for waste. And
“Delaware law does not recognize an independent cause of action . . . for reckless
and gross mismanagement. Such claims are treated as claims for breach of fiduciary
87 Banoubs’ Mot. for Disc. Abuse and Spoliation, Apr. 4, 2018 (D.I. 321). 88 Entry of Appearance by Jeffery S. Goddess, Esquire, on behalf of the Banoubs, June 8, 2018 (D.I. 358).
20 duty.”89 Accordingly, I deem all of those claims either waived or not supported as a
matter of law.90
Thus, what remains for decision are Tanyous’ claims against the Banoubs for
breach of fiduciary duties (Count I) and conversion (Count II), and the Banoubs’
counterclaims against HCW for spoliation, breach of contract (Count I), breach of
fiduciary duty (Count II), misappropriation (Count IV), and the appraisal action.
II. ANALYSIS
The claims submitted for decision correspond to each of the timeframes
delineated above. The Banoub Era gave rise to Tanyous’ claims (on behalf of HCW)
against the Banoubs, as well as the Banoubs’ direct claims against HCW for
unfulfilled obligations, which they present as “offsets” to any damages awarded to
HCW. The Tanyous Era gave rise to the Banoubs’ derivative claims against
Tanyous for breach of fiduciary duties. Finally, the Merger gave rise to the Banoubs’
appraisal action.
I begin by addressing the Banoubs’ threshold claim that HCW (through
Tanyous) should be found liable for spoliation of evidence. I address this claim first
because, if proven, evidence secretion or destruction might justify negative
89 In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 114 n.6 (Del. Ch. 2009). 90 See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
21 inferences that would color the lens through which all of the other claims are viewed.
As explained below, the Banoubs have failed to demonstrate intentional or reckless
destruction of evidence, so their spoliation claim fails.
I next address Tanyous’ derivative claims for breach of fiduciary duties and
misappropriation of corporate assets, as well as the Banoubs’ “setoff” counterclaims
against HCW for outstanding loans and wages. After rejecting the factual premise
of most of the claims, I value Tanyous’ derivative claims at $62,199.11. I reject the
Banoubs’ offset counterclaims.
I then take up the value of the Banoubs’ derivative claims against Tanyous for
breach of fiduciary. I value those claims at $20,099.19.
Next, I address the Banoubs’ claim that the process leading to the squeeze-out
Merger was unfair. I reject that claim as to process, but do find that the price at
which the Merger was executed was unfair.
Finally, I address the Banoubs’ appraisal action, encompassing the value of
the derivative claims both parties have asserted against the other. While it might be
possible to adjudicate the parties’ competing derivative claims post-merger outside
of the appraisal process, and to fashion a remedy for proven claims as a matter of
equity, I have elected instead to value the derivative claims, all of which were
possessed by HCW at the time of the Merger, and then incorporate those values into
my final fair value appraisal. I take this approach for two reasons. First, as discussed
22 below, it is the approach the parties have endorsed, although not as clearly as they
might have.91 Second, I am satisfied this approach is consistent with our law.92
After carefully considering “all relevant factors,”93 I have appraised the fair
value of HCW as of the Merger at $218,260.15, and assess the Banoubs’ share of
that value, after adjusting for liabilities, at $36,017.96 (or $800.40 per share).
A. HCW (Through Tanyous) Did Not Commit Spoliation
Before finding spoliation, “a trial court must first determine that a party acted
willfully or recklessly in failing to preserve evidence.”94 And, before imposing an
adverse inference sanction following a finding of spoliation, the court must be
satisfied that the aggrieved party has demonstrated “a reasonable possibility, based
91 See PTO at 2 (referring to letter from Tanyous’ counsel conceding that derivative claims should be valued in the appraisal action and citing for that proposition, Kohls v. Duthie, 765 A.2d 1274, 1289 n.33 (Del. Ch. 2000)); Banoubs’ Post-Trial Opening Br. at 2 (acknowledging that derivative claims should be valued in the appraisal) (D.I. 399). See also Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142 (Del. 1989) (observing that it was appropriate for the trial court to value derivative claims in a statutory appraisal because, in addition to comporting with Delaware law, the parties “consented” to “accord recognition to derivative-like claims for future valuation purposes”). 92 See Nagy v. Bistricer, 770 A.2d 43, 55–56 (Del. Ch. 2000) (holding the court should value breach of fiduciary claims in an appraisal proceeding as “those claims are assets of the corporation being valued”); Porter v. Tex. Commerce Bancshares, Inc., 1989 WL 120358, at *5 (Del. Ch. Oct. 12, 1989) (Allen, C.) (“If the company has substantial and valuable derivative claims, they, like any asset of the company, may be valued in an appraisal.”). 93 8 Del. C. § 262(h). 94 Sears, Roebuck and Co. v. Midcap, 893 A.2d 542, 548 (Del. 2006).
23 on concrete evidence rather than a fertile imagination, that access to the lost material
would have produced evidence favorable to his cause.”95
The Banoubs proffer four bases upon which the Court could justify a finding
of spoliation. First, they assert Tanyous did not respond to the Banoubs’ discovery
requests until 2015, years after they were propounded. Second, former HCW
employee Girgis admitted to shredding paid invoices while litigation was ongoing.96
Third, Tanyous purported to lose “a box containing HCW operating records” after a
burglary of his home in December 2010.97 Fourth, Tanyous’ wife, Guirguis, failed
to appear at trial even though the Banoubs moved to compel her attendance after she
returned to her home in Kuwait.98
After carefully reviewing the record, I am satisfied the Banoubs have not
carried their burden to prove intentional or reckless destruction of favorable
evidence. First, counsel’s unresponsiveness does not fit under the rubric of
spoliation, as there is no alleged destruction of evidence. Discovery in this case was
an exercise in boundless frustration (and delay) for all concerned. That some
95 In re DaimlerChrysler AG, 2003 WL 22951696, at *2 (D. Del. Nov. 25, 2003) (internal quotations omitted). 96 D.I. 383 (Girgis Dep.) 17, 21. 97 JX 156. 98 D.I. 54; Tr. 583–84 (Tanyous).
24 discovery responses were delayed was par for the course (on both sides) in this
litigation. Second, while Girgis admitted to shredding HCW’s paid invoices after
his employment there concluded,99 a substantial amount of HCW’s payroll and
operating records were ultimately made available to the Banoubs through other
sources.100 And there is no indication that what little is missing would have been
favorable to the Banoubs.101 Third, there is no persuasive evidence that materials
lost in the burglary of Tanyous’ home were intentionally secreted or destroyed. The
testimony regarding the burglary was credible.102 Finally, Guirguis’ failure to
appear at trial is due in large part to the Banoubs’ own lack of diligence: they did
not seek to take her deposition and only requested her attendance on the last day of
the discovery period. Moreover, the Banoubs’ argument that her testimony is
suddenly crucial to their case is particularly hard to believe when, in their post-trial
brief, they characterize Guirguis’ role at HCW as so negligible as to disable her from
99 D.I. 383 (Girgis Dep.) 17, 22. 100 JX 61–62. 101 I note that both parties accuse the other of either stealing, secreting or losing documents. There has been little precision attending these allegations, leaving the Court to guess what other records might exist and how they might help or hurt either party’s cause. Suffice it to say, neither the Banoubs nor Tanyous were good record keepers. That is all that can be drawn from the cross-accusations and the evidentiary record submitted at trial. 102 Tr. 580–82 (Tanyous).
25 drawing any salary from the Company.103 The spoliation claim fails for want of
proof.
B. Tanyous’ Derivative Claims and the Banoubs’ Setoff Counterclaims
Tanyous seeks entry of a judgment against the Banoubs for breach of their
fiduciary duty of loyalty as officers by engaging in self-dealing, as well as
misappropriating corporate funds. He offers several categories of alleged damages
totaling $857,628. To reach this number, Tanyous relies principally upon an expert
forensic analysis of corporate records he commissioned at the close of the Banoub
Era.104 This report (the “Damages Report”) was based not on the Company’s books
and records—which Tanyous alleges were taken by the Banoubs when they left
HCW—but rather on a compilation of records produced by third-parties (mainly
banks).105
I begin by laying out the legal standards by which Tanyous’ derivative claims
must be evaluated. The standards are particularly important here, where so little
evidence has been produced by either party to support or rebut any claim. Next,
103 Banoubs’ Post-Trial Opening Br. at 42. 104 JX 82. I note that Tanyous originally included an additional claim for damages based on a stolen corporate opportunity when the Banoubs founded Happy Kids Academy. That claim was abandoned in the Tanyous Post-Trial Answering Brief. See Tanyous’ Post-Trial Answering Br. at 39 (“HCW is not pressing any corporate opportunity claim.”) (D.I. 402). 105 JX 82 at 4.
26 I evaluate Tanyous’ claims on their merits. I organize the claims into four
categories: compensation-related claims, expense-related claims, revenue-related
claims and Tanyous’ catch-all “suggestions of additional damages.” I then address
Tanyous’ claim seeking reimbursement from the Banoubs for the cost of recreating
HCW’s records. Finally, I address the Banoubs’ “setoff” counterclaims.
1. The Legal Standards
Tanyous’ derivative claims implicate the fiduciary duty of loyalty, as well as
conversion, for which the generally applicable standards are well settled.106
“The essence of a duty of loyalty claim is the assertion that a corporate officer or
director has misused power over corporate property or processes in order to benefit
himself rather than advance corporate purposes.”107 “Most basically, the duty of
loyalty proscribes a fiduciary from any means of misappropriation of assets
entrusted to his management and supervision.”108 “If corporate fiduciaries stand on
both sides of a challenged transaction, an instance where the directors’ loyalty has
106 While Tanyous stated in the parties’ Joint Pretrial Stipulation that he would present a claim of corporate waste as a separate cause of action, his Post-Trial Briefs did not address this claim and so it is deemed withdrawn. 107 Steiner v. Meyerson, 1995 WL 441999, at *2 (Del. Ch. July 19, 1995) (Allen, C.). 108 U.S. W., Inc. v. Time Warner Inc., 1996 WL 307445, at *21 (Del. Ch. June 6, 1996) (Allen, C.).
27 been called into question, the burden shifts to the fiduciaries to demonstrate the
‘entire fairness’ of the transaction.”109
A party bringing a claim for fiduciary breach generally “ha[s] the burden of
proving each element, including damages, of each of [his] causes of action . . . by a
preponderance of the evidence.”110 “[P]roof by a preponderance of the evidence
means that something is more likely than not.”111 “By implication, the
preponderance of the evidence standard also means that if the evidence is in
equipoise, the Plaintiff[] lose[s].”112 In the context of Tanyous’ breach of fiduciary
duty claims, his burden is to prove a basis to implicate self-dealing. If he carries that
burden, then the burden shifts to the fiduciaries (the Banoubs) to demonstrate that
the dealings were entirely fair.113
109 Oliver v. Boston Univ., 2006 WL 1064169, at *18 (Del. Ch. Apr. 14, 2006). 110 Revolution Retail Sys., LLC v. Sentinel Techs., Inc., 2015 WL 6611601, at *8 (Del. Ch. Oct. 30, 2015). 111 Narayanan v. Sutherland Glob. Hldgs. Inc., 2016 WL 3682617, at *8 (Del. Ch. July 5, 2016) (citing Aigilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *14 (Del. Ch. Feb. 18, 2010)). 112 Revolution Retail, 2015 WL 6611601, at *9 (quoting 2009 Caiola Family Tr. v. PWA, LLC, 2015 WL 6007596, at *12 (Del. Ch. Oct. 14, 2015)). 113 See Avande, Inc. v. Evans, 2019 WL 3800168, at *12 (Del. Ch. Aug. 13, 2019) (determining a party asserting a claim for an accounting of the disposition of assets must first make “a prima facie showing based on substantial evidence that the expenditures in question are self-interested transactions.”) (emphasis in original); Technicorp Int’l II, Inc. v. Johnston, 1997 WL 538671, at *15–16 (Del. Ch. Aug. 25, 1997) (holding that plaintiff must make an initial showing of fiduciary self-dealing before the court will shift the burden 28 If Tanyous fails to meet his prima facie burden, then the Court cannot and will
not shift the burden of proof to the Banoubs as fiduciaries to defend the entire
fairness of their conduct.114 Instead, the Court must review their decisions and
conduct under the deferential business judgment rule, which “is a presumption that
in making a business decision the [fiduciary] acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the
company.”115
“Entire fairness has two components: fair dealing and fair price. ‘Fair dealing’
focuses on the actual conduct of corporate fiduciaries in effecting a transaction, such
to the fiduciary “of proving the fairness of the transaction”); CanCan Dev., LLC v. Manno, 2015 WL 3400789, at *19 (Del. Ch. May 27, 2015) (allocating to the defendant fiduciary the “burden of accounting for compensation and expenses” only after plaintiff demonstrated that the transactions were self-interested); Zutrau v. Jansing, 2014 WL 3772859, at *27–28 (Del. Ch. July 31, 2014) (refusing post-trial to shift the burden to fiduciary defendants under Technicorp after the plaintiff failed to make “a prima facie showing that any of the remaining Amex charges were incurred improperly . . . [with] substantial evidence”); Sutherland v. Sutherland, 2010 WL 1838968, at *16 (Del. Ch. May 3, 2010) (granting summary judgment for defendants after plaintiffs failed to make the prima facie showing of “unaccounted-for dispositions” of corporate assets as required by Technicorp); Carlson v. Hallinan, 925 A.2d 506, 537 (Del. Ch. 2006) (holding post- trial that an accounting would be necessary after “Plaintiffs’ showing of definite instances where [fiduciary] Defendants did not properly allocate expenses”). 114 Avande, 2019 WL 3800168, at *12. 115 Aronson v. Lewis, 463 A.2d 805, 811 (Del. 1984).
29 as its initiation, structure, and negotiation. ‘Fair price’ includes all relevant factors
relating to the economic and financial considerations of the proposed transaction.”116
As for conversion, that claim rests on “any distinct act of dominion wrongfully
exerted over the property of another, in denial of [the plaintiff’s] right, or
inconsistent with it.”117 In order to state a claim for conversion, “the plaintiff must
generally allege that the defendant violated an independent legal duty.” 118
2. The Compensation-Related Claims
Tanyous challenges the Banoubs’ right to draw any salary from HCW without
his approval as an independent director and majority shareholder. He also claims
that, even if authorized, the Banoubs’ salary was excessive. Finally, Tanyous alleges
the Banoubs improperly diverted HCW funds from their salary into an unauthorized
retirement account.
116 Carlson, 925 A.2d at 531 (internal quotations omitted). Fair price is commonly characterized as the most important consideration in determining the fairness of the transaction. See, e.g., Del. Open MRI, 898 A.2d at 311 (“[T]he overriding consideration [in an entire fairness review of a transaction] is whether the substantive terms of the transaction were fair.”). 117 Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 889 (Del. Ch. 2009) (citing Drug, Inc. v. Hunt, 168 A. 87, 93 (Del. 1933)). 118 Id.
30 a. Excess Salary
According to Tanyous, based on the Damages Report, the Banoubs received
$256,975 in excessive salary payments.119 The Banoubs do not dispute the Damages
Report’s calculation of the amounts they drew from HCW as compensation while
they served as corporate officers. They argue, instead, that their compensation was
entirely justified and not excessive.120
To shift to an officer the burden to prove that his compensation was entirely
fair, a plaintiff must first show that the board or the relevant committee lacked
independence or good faith in making or approving the compensation award.121
“Independence means that a director’s decision is based on the corporate merits of
the subject before the board rather than extraneous considerations or influences.”122
“Self-interested compensation decisions made without independent protections are
subject to the same entire fairness review as any other interested transaction.”123
119 JX 82 at 25–29; PTO at 12, ¶ 13(l). 120 Banoubs’ Post-Trial Opening Br. at 21–25. 121 Nelson v. Emerson, 2008 WL 1961150, at *9 (Del. Ch. May 6, 2008); Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 (Del. Ch. 1996). 122 Aronson, 473 A.2d at 816. 123 Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 745 (Del. Ch. 2007); see also Carlson, 925 A.2d at 529 (holding that executive defendants were on both sides of a decision to cause their company to pay them executive compensation and thus bore the burden of establishing their compensation was entirely fair).
31 Not surprisingly, there was no formal process that led to setting compensation
for the Banoubs, at either the HCW board level or otherwise. Indeed, the Banoubs
admit they set their own salary without any process at all, placing the burden on
them to prove that their compensation was entirely fair.124
No process, in this context, is an unfair process. Medhat admitted at trial the
Banoubs did not consult Tanyous when deciding whether or how much to pay
themselves.125 While Medhat asserted that Tanyous generally knew what the
Banoubs were paying themselves because that information was buried in the
documentation submitted to obtain his Investor Visa,126 that evidence is not in the
record, and that visa was ultimately denied due to poor documentation.127 The fact
that HCW is a small company does not excuse the Banoubs “complete and total
failure to adopt any meaningful procedure for ensuring” that compensation decisions
were reasonable to the corporation.128
124 Tr. 469 (Medhat). 125 Tr. 468–70 (Medhat). Medhat still maintains that he had no duty to consult with Tanyous because Tanyous was merely a lender, not an owner. Id. 126 Tr. 469 (Medhat). 127 Op. at *4. 128 Zutrau, 2014 WL 3772859, at *23 (emphasis in original).
32 As for fair price, the Damages Report reveals the Banoubs took “Officers’
Salaries” of $360,855 over six years, for an average salary of $60,142.50 per year
between the two.129 They also drew $42,889 over six years in “Other Salary
Payments,” averaging $7,148 per year.130 As factfinder, I do not view this average
salary as excessive on its face. Mariam worked at HCW full-time from its inception,
serving as “Chief Administrator” of the center, which State regulations define as
“the person designated by the governing body of a Center to assume direct
responsibility for and continuous supervision of the day-to-day operation of the
Center.”131 While Tanyous presented testimony from employee Deborah Hoffman
that the Banoubs were rarely present, this was contradicted by more credible
testimony from co-worker Deborah Clark that Mariam worked long hours.132
Mariam also shepherded HCW’s enrollment in important State programs, such as
the Purchase of Care (“POC”) program, which expanded HCW’s client-base by
qualifying the daycare to receive supplemental tuition payments from the State for
lower income families.133 For his part, Medhat testified that he worked at the
129 JX 82, Ex. N. 130 Id. 131 JX 70. 132 Tr. 201–06 (Clark). 133 Tr. 263–64 (Mariam).
33 daycare on weekends and evenings when he was not working his full-time job,134
and he only began drawing salary in 2006 for less than $8,846.135
On the other hand, while the Banoubs presented credible testimony that they
worked hard as operators, they did not provide evidence of what their work was
worth (through comparables or otherwise). And, notwithstanding their hard work,
the Banoubs’ salary increased even as they started a separate daycare business and
even as HCW’s performance suffered.136 In 2006, Medhat drew salary of $8,846,
while Mariam’s pay continued to increase from $52,003 in 2004 to $60,660 in
2005.137 That same year, the Banoubs started their own daycare, HKA, presumably
leaving them less time to attend to HCW. 138 Even still, their collective wages
skyrocketed 39% from $69,506 in 2006 to $96,731 in 2007.139 And yet, HCW’s net
134 Tr. 331 (Medhat). 135 JX 82, Ex. N. 136 In evaluating the entire fairness of a salary, courts may look to evidence that the compensation was appropriate in light of the company’s economic and financial circumstances. Cf. Carlson, 925 A.2d at 536 (holding defendants failed to show the fairness of their compensation where no credible “attempt to quantify the value of those goods and services or to show the relation between them and the [compensation]” was made). 137 JX 82, Ex. N. 138 Tr. 284–85, 303 (Mariam); Tr. 411 (Medhat). 139 JX 82, Ex. N.
34 income fell from the previous year’s $4,841 to -$74,808.140 Of course, Tanyous
directed his books and records request to HCW that same year, catalyzing the dispute
between the two parties.141 In 2008, the Banoubs’ salaries collectively were on track
to reach a near-six digit number prior to this Court’s decision resolving the
ownership dispute in July of that year, which, as noted, prompted the Banoubs’
abrupt departure from the daycare.142
There is only one year of compensation on record that might have been
approved/ratified by the majority owner (Tanyous).143 In December 2005, Tanyous
signed a revised 2004 income tax return. That tax return showed clearly on its first
page: “Compensation of officers . . . $52,308.”144 A majority owner’s signature on
a tax return typically would not suffice to ratify unilateral self-interested
140 JX 147, Ex. B. 141 See Op. at *2–7 (holding Tanyous was not a lender to, but rather a majority owner of, HCW); see also PTO at 6, ¶ 13 (summarizing the prior litigation between the parties). 142 JX 82, Ex. N. 143 I note here that the gravamen of Tanyous’ compensation-related claims is that the Banoubs failed to obtain his approval as majority owner to pay themselves any compensation. To the extent the Banoubs present evidence that Tanyous did, in fact, approve their compensation in any particular year, that would go a long way toward undermining at least a significant factual predicate of the compensation-related claims. 144 JX 32.
35 compensation decisions by corporate officers.145 In this case, however, where the
majority owner alleges a loyalty breach based on the officers’ failure to advise him
that they were drawing any salary, the highly scrutinized 2004 tax return puts the lie
to that claim. This was the same tax return that listed the inaccurate equity split that
caused Tanyous to travel from Kuwait to Delaware to confront the Banoubs.146 That
confrontation led Tanyous to limit Medhat’s power of attorney. 147 Even still,
Tanyous—an independent director and majority shareholder accompanied by an
English translator—signed off on that document after an evidently meaningful
review of its contents, which included clear disclosure of the fact and amount of the
Banoubs’ annual compensation.148
After carefully reviewing the evidence, I conclude the Banoubs failed to meet
their burden to prove, with competent evidence, that their salary was entirely fair in
any year except 2004. This leaves for decision the question of remedy for the breach.
145 See CanCan Dev., 2015 WL 3400789, at *16 (refusing to protect defendant with the business judgment rule for compensation decisions where an arguably dependent business partner approved larger checks that encompassed salary increases). 146 Op. at *5; Tr. 556–58 (Tanyous). 147 Tr. 556–58 (Tanyous). 148 I note here that I give no weight to Tanyous’ self-serving testimony at trial that he expressly forbade the Banoubs from drawing salary from HCW. See Tr. 525 (Tanyous) (“Q. Did you authorize Mr. and Mrs. Banoub to take a salary from Happy Child World? A. No.”). That testimony makes no sense given all parties’ understanding that the Banoubs would be on point for all aspects of the daycare’s operations.
36 “When a transaction does not meet the entire fairness standard, the Court of
Chancery may fashion any form of equitable and monetary relief as may be
appropriate.”149
Starting with the Banoubs’ ratified 2004 salary, I apply the Damages Report’s
3.0% inflation rate to estimate their entirely fair salary both on a backward- and
forward-looking basis. For the year 2008, I calculate the Banoubs’ salary pro rata
for the seven and one-half months they worked at HCW, until they left on July 18,
2008. The results are as follows:
The Banoubs’ Wages 2002 $49,216.60 2003 $50,738.76 2004 $52,308.00 2005 $53,877.24 2006 $55,493.56 2007 $57,158.36 2008 $35,723.98 Total $354,516.50
Based on this calculation, I find that the Banoubs were entitled to draw compensation
from HCW in the amount of $354,516.50. As noted, they actually drew salary of
$403,744.
149 Julian v. E. States Constr. Serv., Inc., 2008 WL 2673300, at *19 (Del. Ch. July 8, 2008). See also Technicorp, 1997 WL 538671, at *15 (providing a remedy after determining a fiduciary had improperly set his own salary that accounted for the value of the service the fiduciary did provide to the corporation).
37 b. Retirement Funding
Tanyous next claims the Banoubs’ retirement funding in the amount of
$33,597 amounts to improper self-dealing.150 The Banoubs admit they unilaterally
determined to apply these funds for retirement savings, but argue the funds were
diverted from their salary and thus were not paid by HCW directly.151
An employee’s decision to divert money from his salary into a retirement
savings account has no adverse effect on the employer. If the employee causes the
company to match the employee’s contribution, however, that, obviously, does
affect the employer. And if that employee is a fiduciary, that self-interested decision
will be reviewed for entire fairness.
Here, there is no evidence that HCW made any significant matching
contribution to the Banoubs’ retirement savings.152 While the Damages Report
calculated the Banoubs’ salary, the report provides no indication that the Banoubs
caused HCW to match their contributions to their retirement account.153 The only
evidence of company matching in the record reveals that employee salaries were
150 JX 82 at 10–11; PTO at 13, ¶ 13(m). 151 Banoubs’ Post-Trial Opening Br. at 7–8 (citing JX 28, 78). 152 Tr. 131–32 (Ford). 153 See JX 82 at 11 (“The review of the available Form W-2’s for Mrs. Banoub did reflect that the retirement payments were withheld from her payroll and remitted to the SEP.”).
38 matched at $3.85 per biweekly pay, or just $100 per year, and that four other
employees benefitted from this program.154 Even assuming the burden shifts to the
Banoubs to justify this limited company matching, the cost to the Company is
de minimis and reasonable on its face.
Because the Banoubs’ contributions to retirement savings were not improper
self-dealing, I see no basis in this record to compensate HCW for amounts the
Banoubs diverted from their own salary for retirement savings. The claim fails for
want of proof.
c. Citizens Bank Withdrawals as Salary
Tanyous claims the Banoubs improperly withdrew $5,144.09 ($5,044.09 from
HCW’s Citizens Bank commercial account and $100 from HCW’s payroll account)
on July 18, 2008, following the Court’s decision that Tanyous was the controlling
shareholder of HCW.155 According to Tanyous, these withdrawals were a wrongful
conversion of funds for unearned salary. The Banoubs counter that the evidence
does not support the claim that the withdrawals were improper.156 In particular, they
point to a July 2008 monthly account statement from Citizens Bank showing the
154 D.I. 387, Ex. 7; see also JX 82 at 11 (“We were unable to determine from the records provided, the aggregate amount to withholdings versus company matching contributions to the retirement plan.”). 155 PTO at 10, ¶ 13(a); Tanyous’ Post-Trial Opening Br. at 17 (D.I. 397). 156 Banoubs’ Post-Trial Opening Br. at 13–14.
39 $5,044.09 withdrawal from HCW’s money market account.157 The statement also
shows a deposit that same day into HCW’s checking account for $5,144.09.158 From
that checking account, the Banoubs attempted to cash their past paychecks for
amounts already included in Tanyous’ claim for excessive salary.
The Banoubs’ position here is supported by the preponderance of evidence.
The temporal proximity of the withdrawal and deposit, and the corresponding
amounts involved in the transactions, supports the Banoubs’ testimony that the
transactions involve the same money. Because Tanyous’ claimed damages of
$5,144.09 is subsumed within the Damages Report’s excess salary numbers, I see
no basis in the evidence or law to double-count that amount.
*****
To reiterate, I have determined the Banoubs properly drew a salary of
$354,516.50. The Damages Report sets the total salary drawn by the Banoubs from
2002 to 2008 at $403,744. The Banoubs contest the arithmetic behind this figure,
arguing that Ford double-counted in the course of his calculation. But while Ford
cites to the evidentiary record for his totals, the Banoubs cite to nothing; they simply
assert there was overcounting.
157 D.I. 387, Ex. 3. 158 Id. The extra $100 was obtained from closing the payroll account. Id.
40 It bears repeating here that the evidentiary record on which I must base this
decision is muddled. The Damages Report offers the clearest picture, although even
that image is necessarily incomplete given the fragmented information supplied to
Ford. With respect to the salary claim, the Banoubs bore the burden of proof for the
reasons stated. They did not carry that burden. To assess damages, I rely on the
Damages Report’s $403,744 figure for actual salary drawn by the Banoubs, and
subtract from that the $354,516.50 salary properly owed, to conclude that the
Banoubs are liable to HCW for $49,228 as compensation-related damages.
3. Expense-Related Claims
The first category of expenditures for which Tanyous seeks damages is
characterized in the Damages Report as “Alleged Unsubstantiated Expenses.”
Of course, the mere fact that an expense is unsubstantiated is not grounds for finding
a fiduciary breach. Rather, Tanyous must present substantial evidence of self-
dealing to carry his prima facie burden before any burden shifts to the Banoubs as
fiduciaries to justify the expenditures.159 In most instances discussed below,
Tanyous has failed to carry his threshold burden of proof.
159 Technicorp Int’l II, Inc. v. Johnston, 2000 WL 713750, at *15 (Del. Ch. May 31, 2000).
41 a. The Banoubs’ Personal Credit Card Payments
Tanyous’ claims $178,929 for unsubstantiated disbursements from HCW to
various financial institutions to pay-off credit card debt during the Banoub Era.160
But Tanyous has failed to satisfy his burden to make a prima facie showing that the
expenditures in question were self-interested in nature. No specific instance (or even
indicia) of self-dealing was flagged in these payments. Indeed, the Damages Report
recognizes “a portion of these credit card payments may be [legitimate] business
expenses of HCW.”161
In Zutrau v. Jansing, the court rejected a plaintiff’s derivative claim for
unsubstantiated credit card expenses when “neither side ha[d] submitted convincing
evidence as to the nature of the[] expenses.”162 The court shifted the burden of proof
to the defendant solely as a sanction for failure to comply with discovery obligations
with respect to specifically requested credit card charges.163 Here, Tanyous did not
move to compel the production of the Banoubs’ credit card records, presumably
content to leave the evidentiary landscape barren under the misimpression that the
160 PTO at 12, ¶ 13(i); Tanyous’ Post-Trial Opening Br. at 8. 161 JX 82 at 9. 162 Zutrau, 2014 WL 3772859, at *27–28. 163 Id. at *29–30.
42 Banoubs bore the initial burden to establish the propriety of those credit card
charges.164
Because Tanyous did not submit any evidence suggesting the challenged
credit card expenses were improper and did not vigorously pursue these records in
discovery, he failed to shift to the Banoubs the burden of establishing their fairness.
The claim fails for want of proof.
b. Automobile Related Expenses
Tanyous claims $52,990 for unauthorized automobile expenses charged by
the Banoubs to HCW.165 The Banoubs maintain these expenses were products of
legitimate business decisions that are entitled to protection under the business
judgment rule.166
The Banoubs stand on both sides of the transactions for automobiles they
bought and then drove, so they bear the burden of establishing entire fairness.167
164 While Tanyous requested credit card records from the Banoubs, he made no effort to follow up on those requests and, instead, subpoenaed the records directly from third-party banks. D.I. 410. This does not, on its own, shift the burden to the Banoubs to prove the entire fairness of the card expenses. 165 Tanyous’ Post-Trial Opening Br. at 8–9; PTO at 12, ¶ 13(j). 166 Banoubs’ Post-Trial Opening Br. at 5–6; see also Tr. 468–71 (Medhat) (describing his business rationale for purchasing the automobiles). 167 See Cancan Dev., 2015 WL 3400789, at *16 (“Decisions by interested fiduciaries to reimburse their own expenses or provide themselves with other corporate benefits are similarly subject to entire fairness review.”) (citing Sutherland v. Sutherland, 2009 WL 857468, at *4 n.16 (Del. Ch. Mar. 23, 2009)).
43 They admit they did not include Tanyous in the decision to purchase the vehicles in
question.168 But Tanyous signed off on the automobile expense in the same amended
2004 tax return where he approved the Banoubs’ salary decisions prior to 2005.169
That amended tax return showed HCW was paying notes on two vehicles and taking
depreciation on one of them.170 Because the amended 2004 tax return was subject
to rigorous scrutiny by Tanyous, I am satisfied that the Banoubs’ ostensibly self-
interested decision to purchase the automobiles was ratified by Tanyous’ uncoerced
and fully informed approval of the transactions, and the business judgment rule
applies.171
Under the business judgment rule, these automobiles were properly charged
to HCW. In this regard, I find credible Medhat’s testimony—corroborated by repair
slips on these vehicles in 2005 and 2007 showing low mileage—that these vehicles
made good business sense and were used primarily for commutes to and from the
168 Tr. 470 (Medhat). 169 JX 32. 170 Id.; Tr. 337–42 (Medhat). 171 See generally Rosser v. New Valley Corp., 2000 WL 1206677, at *3–4 (Del. Ch. Aug. 15, 2000) (discussing shareholder ratification of allegedly conflicted transactions). Even if the transactions were reviewed for entire fairness, I am satisfied the Banoubs carried that burden. There is no evidence HCW overpaid for the vehicles. Nor is there evidence that HCW did not need or, through the Banoubs, use the vehicles for legitimate business purposes.
44 daycare and to transport food supplies and materials to the facility.172 Deborah Clark
offered credible testimony that Medhat often used the vehicles in his efforts to
maintain the physical plant and to conduct other HCW business.173 There is no
credible evidence in the record to rebut that evidence. Nor is there evidence (or
meaningful argument) regarding what did or should have happen(ed) to the vehicles
after the Banoubs left the daycare in 2008. The claim fails for want of proof.
c. Legal Expenses
Tanyous seeks $38,700 in legal expenses incurred by HCW during 2007 and
2008, when the Banoubs hired legal counsel to assist in the defense of Tanyous’
Section 220 action.174 A Section 220 demand is directed against the corporation, not
the corporation’s officers.175 It is proper, then, that the corporation pay the legal fees
incurred in connection with the company’s response to a books and records demand.
While Tanyous amended his pleadings after the trial to include a declaratory
judgment claim, and to join Medhat as a defendant in order to resolve the dispute
regarding Tanyous’ equity stake in the Company, the case still proceeded as a
172 Tr. 337–42 (Medhat); JX 26, 53 (Repair slips). 173 Tr. 205 (Clark). 174 PTO at 12, ¶ 13(d); see also Tanyous v. Happy Child World, Inc., C.A. No. 2947-VCN. 175 8 Del. C. § 220.
45 Section 220 action.176 Thus, I find all legal fees incurred by HCW up to the Court’s
July 17, 2008 post-trial opinion were properly charged to HCW.
This leaves one charge for legal fees of $2,500, dated December 17, 2008.177
In the Banoubs’ attorney’s motion to withdraw, counsel stipulated that he had
“finished up his work in the first action (preparing and filing a response to plaintiff’s
motion for costs in August).”178 Counsel withdrew after advising the Banoubs that
they would be responsible for fees incurred defending the plenary action, at which
point the Banoubs elected to proceed pro se.179
After reviewing the evidence, I am satisfied the December 17 payment
reflected services rendered by counsel to HCW as the Company wound down its
obligations with respect to the Section 220 action (e.g., prevailing party costs, etc.).
Tanyous’ claim for reimbursement of legal expenses, therefore, fails for want of
176 Op. at *1. 177 JX 82, Ex. E. 178 Mot. to Withdraw Appearance, supra note 78. 179 Tr. 345–46 (Medhat).
46 d. Undocumented Reimbursements
Tanyous claims the Banoubs owe $19,947 in undocumented reimbursements
in the form of 29 checks between May 2005 and October 2006.180 The Banoubs
counter that these reimbursements represented proper business expenses.181
While a reimbursement flowing from HCW to the Banoubs is self-dealing on
its face, I am satisfied that the relatively minimal scope of these expenses, and the
presence of supporting documentation for nearly all of them, suggests there is no
need to shift the burden of proof to the Banoubs in this limited instance.182 Indeed,
only three of the challenged checks lack legends documenting the business-related
expense for which the reimbursement was sought.183 And the reimbursements
amount to $1,108.17 per month, certainly reasonable as expenses incurred by a
daycare business operating at full or near full capacity. The claim fails for want of
180 JX 82, Ex. F; PTO at 12, ¶ 13(k). 181 Banoubs’ Post-Trial Opening Br. at 9–11; Tr. 314–17 (Mariam); Tr. 346–49 (Medhat). 182 See Zutrau, 2014 WL 3772859, at *28 (“Although [Defendant’s] lack of formal expense reporting is far less than ideal, I find that the relatively minimal nature of the personal expenses that Jansing has been shown to have charged to the Company over a span of six years is not sufficient to warrant shifting the burden of proof to him.”). 183 JX 82, Ex. F.
47 e. Past Due Payroll Taxes
Tanyous seeks to recover $11,809 for a tax penalty assessed against HCW
after he assumed operational control of the business.184 There is no proof the
Banoubs received any personal benefit from the circumstances that gave rise to the
penalty, and so there is no semblance of self-dealing. And Tanyous does not
articulate a theory for recovery under a duty of care. Even if he did, this would not
qualify as a duty of care breach because Medhat reasonably relied upon an advisor
to address the daycare’s taxes, which, by law, he was entitled to do.185 For that
reason, the claim fails for want of proof.
4. Revenue-Related Claims
Tanyous asserts several claims for unrecorded or missing revenue based on
the Damages Report. The claims amount to $147,443 and consist of unrecorded
cash receipts, unremitted tuition deposits, and unremitted tuition payments from the
Banoubs for time their children attended the daycare. All of these claims depend on
the same false premise that Tanyous need not provide any evidence of self-dealing
in order to hold the Banoubs to account for the speculated amounts allegedly due.
184 PTO at 11, ¶ 13(e); Tanyous’ Post-Trial Opening Br. at 22–23. 185 Tr. 350–52 (Medhat); see also 8 Del. C. § 141(e); Aronson, 473 A.2d at 812.
48 a. Unrecorded Cash Receipts
Tanyous claims HCW is owed $73,800 in unrecorded cash receipts.186 The
absence of cash receipts is not self-dealing on its face, so Tanyous must make a
prima facie showing based on substantial evidence that the Banoubs duty of loyalty
is implicated. Tanyous fails to meet that burden. The Damages Report on which
Tanyous relies bases its calculation of damages on an estimate of one year (2006) of
revenues that is then carried backwards and projected forwards over the course of
the Banoub Era.187 It is difficult to discern from this “evidence” whether HCW was
even missing cash receipts, much less where that missing cash may have gone.188
Even if cash receipts are, in fact, unaccounted for, Tanyous must set forth
some evidence of self-dealing to shift the burden to account for the receipts onto the
Banoubs. He has presented no such evidence. The only link to Medhat is the
Damages Report’s cross-reference to Medhat’s personal bank account, and a note
that there were deposits made between 2002 and 2007 into Medhat’s savings
186 PTO at 11, ¶ 13(c); Tanyous’ Post-Trial Opening Br. at 29–30. 187 JX 82 at 18–19. 188 Indeed, HCW used a software program—Procare—to track how much each parent had paid by cash or by check, and at year end provided parents with reports of their payments. See JX 24, 157; Tr. 277–367 (Mariam); Tr. 360–61 (Medhat). There is no evidence from Procare that HCW was missing receipts.
49 account.189 The fact Medhat was making deposits to savings is hardly incriminating
evidence given that Medhat was working another job at the time. This is precisely
the sort of speculative claim of wrongdoing this court has rejected for failing to
establish a prima facie showing of self-dealing.190 The claim fails for want of proof.
b. Unremitted Tuition Deposits
Tanyous stakes the same ground for his argument concerning $17,940 in
allegedly unremitted tuition deposits.191 HCW policy required parents to make a
two-week deposit before their children started at HCW.192 Tanyous asserts these
deposits should have been stored in escrow and that, because no escrow existed when
he assumed operations, the Banoubs must be held to account for “missing” tuition
deposits calculated based on the number of students at the center.193
Again, Tanyous fails to carry his initial burden. Not only is there no evidence
of self-dealing to support these claims, there is no evidence of the need for an escrow
189 Ex. 82 at 19. 190 See, e.g., Avande, 2019 WL 3800168, at *12–13 (refusing to hold a fiduciary to account for expenses where the plaintiff “ha[d] not provided substantial evidence that the transactions making up the Challenged Amount, which likely consist of thousands of individual expenditures incurred over a span of more than five years, constitute self- interested transactions involving [the defendant]”). 191 PTO at 13, ¶ 13(o); Tanyous’ Post-Trial Opening Br. at 25–26. 192 JX 16. 193 PTO at 13, ¶ 13(o); Tanyous’ Post-Trial Opening Br. at 25.
50 account at all. The relevant company policy states that “one week’s advance tuition
will be applied to the child’s first week. The remaining advance tuition will be
applied to the child’s last week, provided that the center is given a two weeks
advance notice of the child’s withdrawal.”194 In other words, the advance tuition
payments were nonrefundable.195 Because HCW was entitled to those funds upon
payment, it had no need to hold them in escrow. There is no proof of self-dealing.
Consequently, the claim fails for want of proof.
c. Unremitted Tuition Payments for the Banoubs’ Children
Finally, Tanyous alleges the Banoubs’ two children attended HCW from 2002
to 2008, and yet the Banoubs never paid their tuition. Tanyous seeks payment for
the Banoubs’ unremitted tuition payments, totaling $39,503.196
Again, Tanyous bears the initial burden to present a prima facie claim based
on substantial evidence of self-dealing. To this end, he offers the testimony of a
single witness, Ms. Hofmann, along with a one-day entry on a Food Program record
in 2006 revealing that the Banoubs’ children were served lunch at the daycare on
that day.197
194 JX 16. 195 Tr. 270–71 (Mariam). 196 PTO at 11, ¶ 13(h); Tanyous’ Post-Trial Opening Br. at 26–27. 197 JX 82 at 26.
51 Here again, the evidence is insufficient to shift the burden of proof to the
Banoubs. Ms. Hofmann’s testimony regarding the Banoubs’ presence at HCW was
earlier contradicted by Deborah Clark—a more credible witness. 198 This casts doubt
upon the reliability of all aspects of Hoffman’s testimony.199 And the existence of a
single entry on a Food Program record is insufficient to prove that the Banoubs’
allowed their children to attend the daycare without paying the employee tuition rate.
Indeed, Mariam credibly testified that her children were likely on-site because they
were scheduled for a doctor’s visit that day at the hospital across the street.200
Moreover, if the Banoubs’ children actually attended HCW, then their names would
appear on various records, such as classroom lists, attendance sheets, and tracking
sheets listing the other students. There are no such references. The claim fails for
See Cede & Co. v. Technicolor, Inc., 884 A.2d 26, 35 (Del. 2005) (“[T]he Court of 198
Chancery is the sole judge of the credibility of live witness testimony.”) (internal quotation omitted) (“Cede III”). 199 See, e.g., Manichaean Capital, LLC v. SourceHOV Hldgs., Inc., 2020 WL 496606, at *19–21 (Del. Ch. Jan. 30, 2020) (discounting a witness’s entire testimony after finding parts of the testimony demonstrably not credible). 200 Tr. 286–87 (Mariam).
52 5. Suggestions of Additional Damages
Finally, Tanyous asserts the Banoubs misappropriated HCW funds totaling
$119,493 in order to acquire two properties and to support their competing daycare,
HKA. I address the claims in turn.
a. The Newark Personal Residence
Tanyous claims HCW is entitled to recoup $26,329 after the Banoubs
converted these funds to purchase their home in Newark, Delaware.201 The Damages
Report observes that Tanyous’ initial capital contribution to the Banoubs in February
and June of 2001—$20,000 wired to the Banoubs’ personal bank account and a
check for $80,000 deposited in HCW’s newly-created business account—was soon
followed by the Banoubs’ purchase of their suburban home with a $14,596.12 cash
down payment.202 Because Tanyous’ $20,000 wire was in the Banoubs’ personal
account when the Banoubs purchased this home, the Damages Report states,
“it could be concluded that the Banoubs used the capital contribution from Tanyous
as a source of funds for the purchase.”203
Since the Banoubs exercised exclusive control over HCW funds that were
transferred into their personal account, they bear the burden to prove those funds
201 PTO at 11, ¶ 13(f); Tanyous’ Post-Trial Opening Br. at 33. 202 JX 82 at 30–31. 203 Id. at 31.
53 were used properly.204 In this instance, the Banoubs carried that burden. Because
money is fungible, the Banoubs can only demonstrate that HCW funds were not used
in the purchase of their Newark home by showing that their remaining balance
covered the amount earmarked for HCW purposes. The Banoubs had a total of
$39,742.74 in their personal accounts after Tanyous’ $20,000 infusion.205 Thus, they
had $19,742.74 of their own money on hand for the $14,596.12 down payment on
the Newark property. After closing on the home in July 2001, the Banoubs had a
total of $25,182.47 in their personal account—more than enough to fund the cash
component of the HCW acquisition or to refund the cash to Tanyous had he ever
asked for it.206
There is no claim that the Banoubs used Tanyous’ initial cash infusion for
some other improper purpose; the focus at trial was on the Banoubs’ alleged
misappropriation of Tanyous’ money to fund the purchase of real property. Because
the preponderance of the evidence reveals that HCW funds were not used in the
purchase of the Banoubs’ home, the claim fails for want of proof.
204 Cf. Technicorp, 2000 WL 713750, at *20 (holding fiduciary defendant exercising exclusive control over company cash deposited into his personal account bore the burden of demonstrating the cash was used for proper business purposes). 205 JX 1 (Wilm. Trust Feb. 2001 statement). 206 JX 4 (Wilm. Trust July 2001 statement).
54 b. The Newark Investment Property
Tanyous next claims the Banoubs used HCW funds ($23,856.83) to fund a
down payment on a personal investment property in Newark, Delaware.207
In February of 2004, the Banoubs moved $35,600 from HCW’s Money Market
account to the Banoubs’ personal account.208 Two months later, in April 2004, the
Banoubs made a $23,856.83 down payment on the investment property.209 The
Damages Report states, “[b]ased upon the large amounts of HCW funds moved in
and out of the Banoubs’ personal accounts, it could be concluded that the source of
the funds used at settlement for the [investment] property came indirectly from
HCW.”210 The Banoubs claim that, even if some HCW funds were mixed in their
personal account at the time of the purchase, their account balance of $48,048.97
was comprised of more than enough of their personal funds to cover the $23,820.83
down payment on the investment property.211
The Banoubs’ unilateral transfer of corporate funds into their personal bank
account is self-dealing on its face, so the Banoubs bear the burden to show those
207 PTO at 11, ¶ 13(g); Tanyous’ Post-Trial Opening Br. at 28. 208 JX 82 at 32–33. 209 Id. 210 Id. at 33. 211 JX 22.
55 funds were not misappropriated. With respect to the investment property, they have
not carried that burden. Unlike the purchase of their personal residence, the
Banoubs’ personal account did not have sufficient funds to cover the down payment
on the investment property without HCW’s money. Excluding the $35,600 transfer
from HCW, the Banoubs had only $13,048.97 of personal funds in their account—
$10,771.86 shy of the $23,820.83 needed for the down payment on the investment
property. The Banoubs failed to demonstrate that the $35,600 transfer from HCW
was no longer in their personal account at the time they acquired their investment
property. HCW funds, therefore, are implicated in that transaction.
Because the Banoubs failed to satisfy their burden of proof and their duty to
account, they failed to show the fairness of the transaction, and damages must be
assessed. Here again, the Court has broad power to fashion a remedy in equity.212
Tanyous asks the Court to disgorge profits from the investment property based
on a calculation of the funds appropriated ($23,857.82) and interest ($5,009.93)
calculated by a 3.5% simple interest rate over 70 months, plus estimated rental value
($38,513.98) and interest at the same rate ($1,322.71). The proffered rental amount
is entirely speculative without any evidentiary support, so I disregard it completely.
212 See Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983) (“[W]e do not intend any limitation on the historic powers of the Chancellor to grant such other relief as the facts of a particular case may dictate.”); Julian, 2008 WL 2673300, at *19 (“When a transaction does not meet the entire fairness standard, the Court of Chancery may fashion any form of equitable and monetary relief as may be appropriate.”). 56 I also find that a calculation of damages based on all the transferred funds is
inappropriate here, where the credible evidence leads me to conclude that only
$10,771.86 of HCW’s funds were misappropriated.213
After carefully considering the evidence, I find damages are equal to the
amount of funds proven to be misappropriated, plus interest (as laid out in the
Damages Report).214 The table below computes the damages:
Interest on $10,771.86 from 4/21/2005 - 3/1/2010 2004 $ 251.34 2005 $ 377.02 2006 $ 377.02 2007 $ 377.02 2008 $ 377.02 2009 $ 377.02 2010 $ 62.84 Total Interest $ 2,199.25
HCW Funds $ 10,771.86
Damages $ 12,971.11
The Banoubs are liable to HCW for $12,971.11, representing funds misappropriated
from HCW to purchase their investment property.
213 JX 22; Tr. 370–71 (Medhat); JX 82 at 33. I note again that the claim of misappropriation here focused solely on the use of HCW funds to acquire a personal investment property. And given the propensity of both of HCW’s owners to draw from HCW to suit their own needs, I see no basis in equity to order disgorgement of profits from the investment property. 214 JX 82 at 32–33, Ex. P.
57 c. HKA
Finally, Tanyous brings a claim for several disbursements from HCW to HKA
totaling $24,000 during July 2006, as purportedly reflected in the Banoubs’ personal
bank account.215 The Banoubs admit Medhat mistakenly effected three online
transfers from HCW to HKA accounts in July, 2006.216 Because the Banoubs
exercised exclusive control over these accounts and stood on both sides of the
transaction, they have the burden to prove the transactions were entirely fair to
HCW.
The Banoubs successfully carry that burden here. Tanyous’ claim is based on
his allegation that net transfers to the Banoubs’ personal accounts were, at that time,
unfavorable to HCW. This allegation, in turn, was based on Exhibit H of the
Damages Report, documenting a net gain of $17,200 to the Banoubs’ personal
account.217 But Tanyous dropped his claim for net transfer payments owed by the
Banoubs to HCW when he discovered records that revealed the Banoubs did not, in
fact, come out ahead on those transfers.218 Even so, Tanyous presses on with this
claim under the theory that the Banoubs must show that these specific funds were
215 JX 82 at 34, Ex. H; PTO at 13, ¶ 13(p). 216 Banoubs’ Post-Trial Answering Br. at 23 (D.I. 403). 217 JX 82, Ex. H. 218 Tanyous’ Post-Trial Answering Br. at 10.
58 returned to HCW.219 The claim is difficult to follow, much less assess in the
evidence. In any event, Medhat testified convincingly that the evidence upon which
Ford relied to “flag” this issue was the product of recordkeeping errors on Medhat’s
part.220 After reviewing the evidence, I share that view and draw a reasonable
inference that these funds, in fact, were returned to HCW, as the Banoubs say they
were.221 The claim fails for want of proof.
6. Records Recreation Expenses
Tanyous claims $87,276 for the amount paid to Ford’s firm to “reconstruct
the records to continue [HCW’s] day to day operations,” again under a theory that
the expenses were the proximate result of a breach of fiduciary duties.222 The central
premise behind that claim is that HCW business records were either taken, lost, or
destroyed by the Banoubs.223 Tanyous leaves unclear what particular duty he
219 Tr. 94 (Ford) (stopping short of opining that funds “that went to Happy Kids” were misappropriated from HCW, and noting that he “felt we needed to this matter to the Court and say, you know, it’s out there”). 220 Tr. 425 (Medhat). 221 Tr. 411, 425 (Medhat). 222 PTO at 13–14, ¶¶ 2–3; Tanyous’ Post-Trial Opening Br. at 34–35. 223 Tr. 533–38 (Tanyous).
59 believes is breached. Because he did not brief any duty of care claim, I deem that
claim either waived, withdrawn or never asserted.224
While the Court previously observed that the “unfortunate state of the
Company’s books is largely Medhat’s own doing,”225 that observation does not
equate to a finding that the absence of proper records is a product of actionable
wrongdoing. The only testimony that addresses purportedly missing records comes
from Girgis, Guirguis, and Hofmann.226 That testimony, in my view, was not
credible, particularly given that HCW had a security system in place at the time the
Banoubs allegedly made off with HCW records, and yet Tanyous (who controlled
the system) did not produce videos or reports from that system.227 The Banoubs, on
the other hand, were credible in their adamant denials when asked if they
misappropriated HCW’s records.228 Finally, the record is entirely unclear as to why
the financial software used by HCW could not reproduce the supposedly missing
224 See Emerald P’rs, 726 A.2d at 1224 (“Issues not briefed are deemed waived.”). 225 Op. at *2. 226 D.I. 383 (Hofmann) 20–21; see also Tr. 539–40 (Tanyous) (testifying that Girgis and his wife, Guirguis, informed him of missing records). 227 JX 25; Tr. 246–80 (Mariam); Tr. 429–57 (Medhat). The system tracks who “swipes” in and out of the building and notes the corresponding time, and can produce videos of the comings and goings if prompted to do so. Tr. 249–50 (Mariam); Tr. 440–44 (Medhat). 228 Tr. 445–49, 498–502 (Medhat); Tr. 286–69 (Mariam).
60 records.229 In this regard, I note that Tanyous’ own inability to keep track of HCW
records does not instill confidence that his sense of what records exist, and what
records are missing, comports with reality.230 The records recreation claim fails for
7. The Banoubs’ Counterclaim
The Banoubs counterclaim for a declaration that they may negotiate twelve
HCW uncashed paychecks for work they performed while operating the daycare.231
The Banoubs also seek the return of funds they allegedly loaned to HCW after April
2007 that were not tallied in the Damages Report.232 They characterize these claims
as “setoffs” to Tanyous’ fiduciary breach claims “in the nature of an affirmative
defense.”233 “Set-off is a mode of defense by which the defendant acknowledges the
229 See JX 157 (showing receipts for “Procare” software); JX 24 (advertising “Procare” software’s capabilities, including tracking accounting, tuition expenses, employee data and payroll). 230 JX 156. 231 Banoubs’ Post-Trial Opening Br. at 14 n.4, 33. 232 JX 82, Ex. H; 2d Am. Countercl. at ¶ 13 (D.I. 239). 233 Tanyous v. Banoub, 2012 WL 1526873, at *1 (Del. Ch. Apr. 26, 2012).
61 justice of the plaintiff’s demand, but sets up a defense of his own against the plaintiff,
to counterbalance it either in whole or in part.”234
With respect to the uncashed paychecks, the Banoubs have failed to enter
those paychecks into evidence or otherwise support their claim with competent
evidence. The claim fails, therefore, for want of proof.
The Banoubs’ claim for $7,200 in loans likewise fails because they have not
provided any accounting for what these loans represented, nor did they prove the
actual source of the funds in order to prove that a loan, in fact, occurred.235 The
Banoubs admit they often intermingled HCW funds with personal funds in their
accounts. Without clear evidence that loans were even made, much less any details
regarding the loans, the claim fails for want of proof.
To recount, I have found the Banoubs are liable to HCW for (1) $49,228 in
compensation-related damages; and (2) $12,971.11 for misappropriated funds,
totaling $62,199.11. The value of these claims will be incorporated in the appraisal,
as discussed below. I have also found the Banoubs failed to prove their “set-off”
counterclaims.
234 Finger Lakes Capital P’rs, LLC v. Honeoye Lake Acq., LLC, 151 A.3d 450, 453 (Del. 2016) (quoting Victor B. Woolley, Practice in Civil Actions and Proceedings in the Law Courts of the State of Delaware § 492 (1906)). 235 Banoubs’ Post-Trial Opening Br. at 12–13, 28 (citing JX 50).
62 C. The Banoubs’ Derivative Claims
The Banoubs have asserted counterclaims against Tanyous for breaches of
fiduciary duties and misappropriation prior to the Merger. “[B]reach of fiduciary
duty claims that do not arise from the merger are corporate assets that may be
included in the determination of fair value.”236 None of the claims arise from the
Merger. As discussed below, the value of the proven claims, therefore, will be
incorporated in the appraisal along with the value of HCW’s proven claims against
the Banoubs. Three of the four claims against Tanyous implicate the duty of loyalty,
while the last implicates the duty of care.
1. The Duty of Loyalty Claims
The Banoubs challenge three specific transactions. First, it is alleged that
Tanyous’ wife withdrew $14,750 from the HCW’s accounts between June 7 and
July 15, 2011 for personal use.237 Second, it is alleged that Guirguis drew salary
totaling $1,349.19 from HCW when Tanyous testified she did not work at HCW.238
Third, it is alleged that Tanyous caused $4,000 to be wrongfully diverted from HCW
236 Bomarko, Inc. v. Int’l Telecharge, Inc., 1994 WL 198726, at *3 (Del. Ch. May 16, 1994); see also Nagy, 770 A.2d at 55–56 (noting the appraiser must value breach of fiduciary claims as these claims are “part of the going concern value of the corporation”). 237 JX 61. 238 D.I. 386 (Tanyous Dep.) 80–81.
63 to Little Scholar, Tanyous’ solely owned daycare. 239 In total, these claims amount
to $20,099.19.
Tanyous did not rebut any of these three claims on their merits or argue that
they were not instances of self-dealing. Rather, his defense rests on the notion that
the Banoubs lack standing to bring derivative claims after the Merger or,
alternatively, that the Banoubs’ expert’s failure to value their derivative claim means
they cannot sustain their burden to prove them. Neither defense withstands scrutiny.
First, HCW’s claims against Tanyous were HCW assets as of the Merger Date
and may be considered as a “relevant factor” in the Court’s appraisal. Tanyous
acknowledged as much before trial.240 Even if the Court were to countenance
Tanyous’ post-trial change of position, the new position fails on the merits.
To ignore the value of these claims, all of which were available to HCW as of the
Merger, would be to ignore both HCW’s pre-Merger “operative reality” and all
relevant factors that inform the appraisal of HCW’s fair value. 241 It would also
deprive the Court of important evidence regarding the fairness of the Merger price
239 Banoubs’ Post-Trial Opening Br. at 41 (citing JX 61). 240 PTO at 2. 241 See M.G. Bancorporation, Inc. v. Le Beau, 737 A.2d 513, 525 (Del. 1999) (noting that, in an appraisal proceeding, the “corporation must be valued as a going concern based upon the ‘operative reality’ of the company as of the time of the merger”) (citation omitted).
64 (an issue squarely before the Court in the context of this squeeze-out merger, as
discussed below).242
Second, Tanyous points to no authority for the proposition that a petitioner’s
expert must testify as to the value of derivative claims in order for the court to
consider that value in its appraisal. If the record contains competent non-expert
evidence from which the Court can reliably value a derivative claim, no expert
testimony is required. Indeed, in this case, the Court has adjudicated the claims and
has set their value. No expert input (beyond Tanyous’ Damages Report) was (or is)
required to make those findings.
Turning to the merits, each of the claims involve self-dealing on their face;
thus, Tanyous bears the burden to prove entire fairness. Tanyous admits that the
withdrawals at issue were undocumented243 and, while some evidence suggested
Guirguis was principally operating HCW while Tanyous was abroad, Tanyous was
adamant in his testimony that she “has nothing to do with the daycare. She is solely
242 See El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff, 152 A.3d 1248, 1250–51 (Del. 2016) (observing that a cashed-out equity holder has standing “to challenge the fairness of the merger by alleging that the value of his [derivative] claims was not reflected in the merger consideration”); Del. Open MRI, 898 A.2d at 311 (holding that the court should engage in an entire fairness review of the squeeze-out merger when conducting a post-merger statutory appraisal). 243 D.I. 416.
65 my wife . . . and has nothing to do with the business.”244 Tanyous similarly fails to
justify the $4,000 transferred from HCW to Tanyous’ solely-owned Little
Scholars.245 Because Tanyous has failed to demonstrate the entire fairness of the
self-dealing transactions, the claims for breach of fiduciary relating to those
transactions are both factually and legally sound. Their value, for appraisal
purposes, is $20,099.19.
2. The Duty of Care Claim
The Banoubs claim that Tanyous grossly mismanaged HCW. Gross
mismanagement, as alleged here, is a duty of care claim.246
The fiduciary duty of care mandates that directors of Delaware corporations
act in good faith and “consider all material information reasonably available in
making business decisions.”247 “[D]uty of care violations are actionable only if the
244 D.I. 386 (Tanyous Dep.) 80–81. See also Tr. 570–71 (Tanyous) (when confronted, Tanyous was unable to explain his wife’s withdrawals from HCW accounts). 245 See Technicorp, 2000 WL 713750, at *15 (finding plaintiffs “made a prime facie showing” that the defendants diverted almost $12 million from a plaintiff’s company while that company was under the defendants’ exclusive control). 246 See In re Citigroup Inc., 964 A.2d at 114 n.6 (“Delaware law does not recognize an independent cause of action against corporate directors and officers for reckless and gross mismanagement; such claims are treated as claims for breach of fiduciary duty.”).
In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 747 (Del. Ch. 2005), aff’d, 906 A.2d 247
27 (Del. 2006) (quoting Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000)) (internal quotations omitted).
66 directors acted with gross negligence.”248 Under our fiduciary law, gross negligence
means “reckless indifference to or a deliberate disregard of the whole body of
stockholders or actions which are without the bounds of reason.”249 As former-
Chancellor Allen explained:
[C]ompliance with a director's duty of care can never appropriately be judicially determined by reference to the content of the board decision that leads to a corporate loss, apart from consideration of the good faith or rationality of the process employed. That is, whether a judge or jury considering the matter after the fact, believes a decision substantively wrong, or degrees of wrong extending through “stupid” to “egregious” or “irrational”, provides no ground for director liability, so long as the court determines that the process employed was either rational or employed in a good faith effort to advance corporate interests.250
The Banoubs rely on two facts to support their claim that Tanyous’
mismanagement breached his fiduciary duty of care to HCW. First, HCW receipts
fell $108,119 (from $462,035 to $353,916) in 2009, and another $51,543
(from $353,916 to $302,373) in 2010.251 Second, HCW failed to comply with
248 Id. at 750. 249 Tomczak v. Morton Thiokol, Inc., 1990 WL 42607, at *12 (Del. Ch. Apr. 5, 1990) (internal quotations omitted). 250 In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996) (emphasis in original). 251 Tanyous’ Post-Trial Opening Br. at 35 n.122 (citing JX 147).
67 regulatory requirements, as revealed in “lack of supervision, incorrect child staff
ratio and safety issues.”252
The Banoubs’ duty of care claims fail because there is no evidence in this
record that the corporate setbacks the Banoubs have identified were products of
irrational processes or bad faith.253 By asking the Court to infer a breach of Tanyous’
duty of care from HCW’s poor business performance, the Banoubs urge the Court
to engage in precisely the sort of “substantive [judicial] second guessing” that our
law forbids.254 The claim fails for want of proof.
D. The Appraisal
The Banoubs seek an appraisal of the fair value of their common stock in
HCW. One month prior to the Merger Date, HCW’s equity was valued by an
independent appraiser (Ford) at $85,357, or $157.80 per share.255 Tanyous maintains
that price was fair, and Ford defended his valuation as an expert witness at trial.256
252 JX 70, 74–76, 79, 86, 88, 90, 99, 110, 111. 253 In re Caremark, 698 A.2d at 967. 254 Id. As an aside, I note that in 2007—the year before Tanyous took over—HCW operated at a net loss of $74,808. JX 147, Ex. B. 255 JX 147. 256 Id. Ford holds a BS in accounting from the University of Delaware, an MS in taxation from Widener University, and is a Certified Public Accountant. Tr. 56 (Ford). In addition to being well-credentialed, he presented as a credible witness.
68 The Banoubs presented their own expert witness, Victor S. Pelillo,257 who opined
that the “fair market value” of HCW’s equity, as of December 31, 2008, was
$790,552, or $7,905.52 per share.258
I have conducted my appraisal analysis in four steps. First, I review the legal
framework by which I am bound to conduct the appraisal in the context of this
squeeze-out Merger. Second, I assess the value of HCW’s non-litigation assets. In
doing so, as I must, I evaluate the fairness of the Merger process and the Merger
price. Third, I incorporate the value of HCW’s litigation assets, as determined
above, into the fair value appraisal. Fourth, I adjust the Banoubs’ fair value appraisal
award to account for their liability on HCW’s derivative claims against them.
I address each step seriatim.
1. The Appraisal Standards Following a Squeeze-Out Merger
The resolution of the Banoubs’ statutory appraisal claim is complicated by
their additional equitable entire fairness claim, prompted by the squeeze-out Merger
initiated unilaterally by a controlling shareholder. While the analytical rubrics for
each issue (merger fairness and appraisal) differ, both ultimately call the same
257 JX 160. Pelillo holds a BA in Accounting from Pace University and is a Certified Public Accountant. JX 162. While I have no doubt he was sincere in rendering his opinions, for reasons explained below, his methodology here was not reliable in that it was not suited for the task at hand. 258 Tr. 389, 401 (Pelillo).
69 question, namely, whether the Merger price was fair.259 Even so, when conducting
an appraisal following a squeeze-out merger alleged to be the product of an unfair
process, the Court must “address each claim on its own distinct terms.”260
The Delaware appraisal statute “provide[s] equitable relief for shareholders
dissenting from a merger on grounds of inadequacy of the offering price.”261
The statute directs the court to:
determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.262
The statutory concept of “fair value . . . is not equivalent to the economic
concept of fair market value.”263 Rather, fair value is a jurisprudential construct
meant to capture “the value of the company as a going concern, rather than its value
259 See Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110, 1117 (Del. 1994) (“[T]he exclusive standard of judicial review in examining the propriety of an interested cash-out merger transaction by a controlling or dominating shareholder is entire fairness”); accord In re Sunbelt Beverage Corp. S’holder Litig., 2010 WL 26539, at *5 (Del. Ch. Jan. 5, 2010); Del. Open MRI, 898 A.2d at 310. 260 Del. Open MRI, 898 A.2d at 310. 261 Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988) (“Cede I”). 262 8 Del. C. § 262(h). 263 Merion Capital L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *13 (Del. Ch. Dec. 16, 2016) (quotation and citation omitted).
70 to a third party as an acquisition.”264 A court tasked with determining fair value is
“not to find the actual real world economic value of [parties’] shares, but instead to
determine the value of the [parties’] shares on the assumption that they are entitled
to a pro rata interest in the value of the firm when considered as a going concern,
specifically recognizing its market position and future prospects.”265
While judges of this court have “significant discretion” to determine fair value
in the context of an appraisal action,266 the statutory direction to consider
“all relevant factors” is well-understood to mean the court should consider
“all generally accepted techniques of valuation used in the financial community” to
the extent those techniques have been proffered by the parties through competent
evidence.267 After giving due consideration to that evidence, “it is entirely proper
for the [court] to adopt any one expert’s model, methodology, and mathematical
calculations, in toto, if that valuation is supported by credible evidence and
withstands a critical judicial analysis on the record.”268
264 Del. Open MRI, 898 A.2d at 310; see also Glassman v. Unocal Expl. Corp., 777 A.2d 242, 246 (Del. 2001). 265 Finkelstein v. Liberty Digital, Inc., 2005 WL 1074364, at *12 (Del. Ch. Apr. 25, 2005) (citations omitted). 266 Golden Telecom, Inc. v. Glob. GT LP, 11 A.3d 214, 218 (Del. 2010). 267 Cede I, 542 A.2d at 1186–87 (citing Weinberger, 457 A.2d at 712–13). 268 M.G. Bancorporation, 737 A.2d at 526.
71 While a statutory appraisal typically places upon both parties “the burden of
establishing fair value by a preponderance of the evidence,”269 a squeeze-out merger,
such as occurred here, triggers a slightly different allocation of burdens. Because
the Merger is self-dealing on its face, Tanyous bears the burden to show that the
process leading to the Merger and the price it yielded were entirely fair to the
minority.270 As noted above, a showing of entire fairness involves procedural
fairness in the party’s dealing (e.g., the transaction’s timing, initiation, structure,
negotiation, disclosure and approval) as well as fair price (i.e., all elements of
value).271 While this court has observed that “the overriding consideration” in these
inquiries tends to be whether the transaction’s price was fair, the questions triggered
by entire fairness review must be examined holistically.272
2. The Merger Process
Tanyous effected the Merger of HCW into HCWA without a meeting by
delivering his own written consent, as was his right under Section 228 of the
269 In re Appraisal of Ancestry.com, Inc., 2015 WL 399726, at *16 (Del. Ch. Jan. 30, 2015) (citing Huff Fund Inv. P’ship v. CKX, Inc., 2013 WL 5878807, at *9 (Del. Ch. Nov. 1, 2013)). 270 Del. Open MRI, 898 A.2d at 310–11. 271 Glassman, 777 A.2d at 246. 272 Del. Open MRI, 898 A.2d at 311.
72 DGCL.273 He did not attempt to “temper” or “eliminate” the “application of the
entire fairness standard” by employing a special committee of disinterested directors
to negotiate the Merger or subjecting the Merger to a majority-of-the-minority
stockholder vote.274 These undisputed facts, however, standing alone, are not
evidence of unfairness.275 A squeeze-out merger under circumstances like those
attending the Merger of this closely held corporation, effected with the assistance of
an independent appraiser to ensure that fair value is paid to the minority, typically
will satisfy both the process and price prongs of entire fairness.276
Tanyous retained an independent appraiser, Ford, to provide valuation input
in advance of the Merger. Thus, the critical question is whether Tanyous’ expert
provided a fair valuation.277 If the valuation was too low, as the Banoubs contend,
then Tanyous will have failed to meet his burden to prove that the Merger was
entirely fair.278
273 PTO at 6, ¶ 1. 274 Del. Open MRI, 898 A.2d at 311. 275 Id. at 312. 276 Id. 277 Id. 278 Id.
73 3. The Merger Price Does Not Reflect HCW’s Fair Value
The Banoubs attack Ford’s appraisal at the time of the Merger in two respects.
First, they claim Ford’s valuation is flawed for the simple reason that it differs from
their own expert’s valuation. Second, they take issue with various decisions Ford
made in the course of conducting his valuation. I address both criticisms in turn.
a. The Experts’ Valuations
Even when conducting an appraisal through the lens of entire fairness review,
the Court must come to its own determination of fair value. To that end, in the course
of evaluating the parties’ competing expert valuations, “[t]he Court may . . . select
the most representative analysis, and then make appropriate adjustments to the
resulting valuation.”279 In situations involving small closely held companies, like
HCW, “the absence of both market information about the subject company and good
public comparables force the court to rely even more than is customary on the
testimonial experts. That reality is inescapable.”280
In preparing his pre-Merger valuation, Ford employed three separate
methodologies: (i) the Capitalization of Earnings (“CE”) method, (ii) the Net Asset
279 In re Appraisal of Dell Inc., 2016 WL 3186538, at *20 (Del. Ch. May 31, 2016), aff’d in part, rev’d in part sub nom. Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017). 280 Del. Open MRI, 898 A.2d at 331.
74 Value (“NAV”) method, and (iii) the Transactions method.281 The CE yielded an
indicated equity value of $50,794, and the NAV yielded an indicated equity value of
$119,920. The Transactions method, however, did not yield a useful result, as Ford
concluded there were too few comparable businesses from which to derive a reliable
estimate of HCW’s fair value.282 Accordingly, Ford based his conclusions
exclusively on the CE and NAV valuations, considering the Transactions method
only as a “sanity check” of the market multiples yielded by his other approaches.283
CE is an income-based valuation method that normalizes historical earnings
to estimate the future earnings capacity of a company, and then capitalizes it to
develop an enterprise value.284 Ford derived the future earnings by calculating
HCW’s debt-free net cash flow from nine years of tax returns (2003 to 2011).285
He then calculated the capitalization rate by subtracting HCW’s long-term growth
rate from the Company’s discount rate.286 Finally, he divided the debt-free net cash
281 JX 147 at 9. 282 Id. at 18. 283 Id. 284 Id. at 9. Ford explained that he chose the CE method over a Discounted Cash Flow (“DCF”) method because DCFs rely on a company’s projected results over several years, and HCW did not prepare cash flow projections. Tr. 98–113 (Ford). 285 JX 147 at 10. 286 Id. at 11.
75 flow figure by the computed capitalization rate to derive an enterprise value for
HCW of $461,210.287 After reducing this figure by HCW’s interest-bearing debt,
Ford arrived at an indicated equity value of $50,794.288
In addition to his CE analysis, Ford engaged in a cost-based NAV analysis
because, at the time of his valuation, HCW was not operating as a childcare
provider.289 An NAV approach restates the assets and liabilities appearing on a
company’s balance sheet to their fair market value, and then subtracts the fair market
value of a company’s liabilities from the fair market value of its assets to determine
the company’s net asset value.290
According to Ford, the “only significant asset” held by HCW as of
December 21, 2011, was a parcel of real estate with improvements.291 Real estate
appraisal expert Douglas L. Nickel was hired to value that asset.292 To do so, Nickel
employed two separate methodologies: the (i) Sales Comparison method and (ii) the
287 Id. at 13–14. 288 Id. at 14. 289 Id. at 9. 290 Id. at 7, 14. 291 Id. at 15. 292 Id.; see also JX 137. Nickel holds a B.A. in economics from University of Richmond. Nickel is a licensed General Real Property Appraiser in the state of Delaware, a member of the Appraisal Institute, and a fellow at the Royal Institute of Chartered Surveyors. Tr. 13 (Nickel).
76 Income Capitalization method.293 The former approach compares the sales prices of
similar properties with the real estate to be valued; the latter approach analyzes the
income-generating potential of the property and the anticipated rate of return to
arrive at an estimated value for the property.294 Nickel reconciled the difference
between the sales approach and income capitalization approach by weighting them
equally, calculating the market value of the real estate to be $530,000.295
With Nickel’s valuation of HCW’s property assets in hand, Ford then
calculated the Company’s liabilities.296 He ultimately concluded that the total fair
value of HCW’s liabilities was $410,416.297 Subtracting the cost of HCW’s
liabilities from its assets’ value, Ford’s cost approach yielded an NAV of
$119,920.298
Ford reconciled his CE and NAV values by weighting them equally, yielding
a fair value for HCW’s equity of $85,357.299 Because Ford reclassified certain
293 JX 147 at 15. 294 JX 137 at 4. 295 Id. at 55. 296 See JX 147 at 15–17. 297 Id. at 16–17. 298 Id. at 17. 299 Id. at 19–20.
77 previously recorded shareholder loans to equity, the ultimate fair value of stock on
a post-capitalization per share basis was determined to be $157.80.
The Banoubs’ valuation expert, Pelillo, took a different tack. Pelillo
“determined [total fair market value] on a going concern basis stated as the gross
asset value of the Company’s Tangible and Intangible Assets.”300 For reasons
unclear, Pelillo conducted his valuation as of 2008, even though the Merger Date
was August 6, 2012.301 To calculate the value of HCW’s tangible and intangible
assets, Pelillo used an asset-based approach for the former and an income-based
approach for the latter, adding both values together to reach his final value.302
Like Ford, Pelillo’s asset valuation placed particular emphasis on pricing
HCW’s real estate. But, unlike Ford, Pelillo did not engage an expert real estate
appraiser.303 Instead, he relied on a 2009 appraisal of Happy Kids Academy
300 Id. 301 Of course, at the outset, it is clear Pelillo, who was engaged by the Banoubs when they were pro se, solved for the wrong problems—fair market value (as opposed to fair value) as of 2008 (as opposed to as of the Merger Date). See Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 296 (Del. 1996) (emphasizing that the appraisal statute requires the court to appraise fair value “as of the date of the merger”); Merion Capital L.P., 2016 WL 7324170, at *13 (noting that “fair value,” in the statutory appraisal context, “is not equivalent to the economic concept of fair market value”). That Pelillo asked the wrong questions, as a matter of law, provides basis alone to discount, if not disregard entirely, his valuation opinions. 302 Tr. 378–79 (Pelillo). 303 Tr. 396–401 (Pelillo).
78 (not HCW), a June 2012 lease of the HCW property, and his own “drive by”
appraisal of a residence on the HCW property.304 He projected the value of the
property by applying a multiple to the lease, adding what he guessed to be the value
of the residential property, and discounting that sum back to 2008.305 After other
adjustments and subtracting the property’s liabilities from its fair market value,
Pelillo concluded that the fair market value of HCW’s assets was $335,140.306
Summing his calculated fair market value of HCW’s tangible and intangible assets,
Pelillo concluded that the fair market value of HCW’s assets were, as of
December 31, 2008, $790,552.
Not surprisingly, I conclude that Ford’s valuation analysis and trial testimony
is more credible and reliable, for two primary reasons. First, the two experts chose
different dates on which to appraise the Company. One (Ford) chose the right date;
the other (Pelillo) chose the wrong date.307
304 JX 160. 305 Id. at 6. 306 Id. 307 8 Del. C. § 262. The Banoubs argue Tanyous’ ongoing breach of fiduciary duty from 2008 through the Merger Date warrants backdating HCW’s valuation to December 2008 as an equitable remedy for the breach. Banoubs’ Opening Post-Trial Br. at 47, 59. Of course, they cite no authority for this proposition. In any event, to the extent claims for breach of fiduciary duty against Tanyous have been proven, the value of those claims as of the Merger have been incorporated in my appraisal as litigation assets belonging to HCW.
79 Second, Ford’s approach to valuing HCW’s principal asset, its real estate, was
credible. Pelillo’s approach was not. For his part, Ford recognized that his expertise
was not in real estate valuation so he retained Nickel—an expert real estate
appraiser—to perform the real estate valuation. Nickel went about his work using
accepted methods, including a detailed comparable sales and lease transactions
analysis.308 Pelillo, by contrast, conducted the real estate appraisal himself even
though he admittedly lacks that expertise.309 He relied on a 2009 appraisal of a
different daycare facility, a June 2012 lease of the HCW property, and his own “drive
by” appraisal of HCW’s on-premise owner’s residence.310 I have no confidence in
these assessments. The utility of an appraisal of a single, separate comparable
property is limited. The utility of a lease that may or may not cover an attached
residence is questionable. The utility of a tack-on guess at the value of a residential
property based on a “drive by” view of the property is nil.
After carefully considering the evidence, I find Pelillo’s valuation an
unsatisfactory rebuttal to Ford’s substantially more reliable work. As I work through
my own fair value analysis, then, I make reference (with occasional adjustments) to
308 I discuss the reliability of Nickel’s application of these accepted methods (and ultimate conclusions) below. 309 Tr. 373–75 (Pelillo). 310 JX 137.
80 Ford’s valuation. In doing so, I pay special attention to those aspects of the Ford
opinion the Banoubs identify as flawed, namely: (1) in the NAV analysis, Nickel’s
real estate appraisal; and (2) in the Capitalization of Earnings analysis, Ford’s (i) cost
of debt, (ii) cost of equity, and (iii) the relative weighting of the different analyses.
b. The Asset-Based Fair Value of HCW
On a high level, the NAV model adjusts the appraised fair market value of a
company’s assets and subtracts the fair market value of its liabilities. Neither party
disputes that Ford’s calculation of total liabilities is reasonable and credible. Rather,
the Banoubs take issue with Ford’s calculation of the value of HCW’s assets.
Specifically, the Banoubs maintain that Nickel, Ford’s real estate appraiser,
made overly conservative assumptions when conducting his valuation. Nickel used
two approaches—the sales comparison approach and the income capitalization
approach. For the sales comparison approach, he selected five comparable daycare
centers sold between 2008 and 2011.311 After making adjustments up and down
based on various factors, Nickel calculated an adjusted per square foot (psf) sale
price for each of the five centers.312 He then honed in on two transactions—a 2009
daycare sale in Frazer, Pennsylvania at $104.92 psf and a 2011 daycare sale in
311 JX 137 at 37. 312 Id. at 41.
81 Middletown, Delaware at $145.31 psf—as an upper and lower bound for HCW’s
price psf.313 He ultimately determined that HCW’s indicated property value was just
above the lower bound at $105 psf. After other adjustments, Nickel derived HCW’s
real estate value under the sales comparison approach at $500,000.
While light on specifics, and even lighter on expert analysis (Pelillo did not
undertake any review of Ford or Nickel’s work), it appears the Banoubs’ primary
objection to Nickel’s valuation is that he chose a value just pennies above the lower
bound he set without “showing his work.” I am not persuaded.
I note at the outset that I found Nickel’s trial testimony, where he explained
his real estate valuation, both reasonable and credible. Nickel characterized his
comparables approach as “an interpretation of the data which is an interpretation of
market participant actions.”314 While these evaluations are not performed with
mathematical precision, this alone does not render them unreliable.315 Nickel did
what real estate appraisers do—he employed his expertise to select the most
appropriate comparables, explained his rationale and then completed his valuation.
313 Id. at 39–42. 314 Tr. 33 (Nickel). 315 Indeed, our Supreme Court has cautioned against “the visual appeal of a mathematical formulation to create an impression of precision.” DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346, 388 (Del. 2017).
82 The Banoubs ask the Court to consider the upper-bound or average of the
range, but provide no justification for doing so. Thus, any effort to “split the baby”
by choosing the mathematical midpoint of the upper- and lower-bound would be
completely arbitrary. A mathematical average is especially inapt in circumstances
with so few comparable sales to begin with, because fewer comparables means a
higher expected standard deviation of value among comparables. I see no
compelling reason to substitute a mathematical average or my own guess for
Nickel’s expertise, and the Banoubs have offered none.
Next, the Banoubs take aim at Nickel’s income capitalization approach. For
this approach, Nickel found leases for comparable daycares, adjusted their price up
or down based on various factors, determined a likely range based on two of the
samples and, from that, derived an indicated rental psf figure to apply to HCW’s
4882 square feet.316 In Nickel’s report, he estimated the annual rental value of
HCW’s facility to be $61,025 and the annual rental value of the single-family
residence on HCW’s property to be $14,280, for a collective potential annual gross
rental value of $75,305.317 After adjusting for expenses, he derived a net operating
income of $60,407. In two final steps, Nickel applied a capitalization rate of 9.50%
316 JX 137 at 43–48; Tr. 38–43 (Nickel). 317 JX 137 at 54.
83 to the net operating income and subtracted estimated lease-up costs and
entrepreneurial incentive costs (totaling $73,938) to compute a final capitalized
value of $560,000.318
The Banoubs contend that a better indication of the fair value of HCW’s real
estate existed at the time of Nickel’s report: an actual, signed lease for HCW’s
property.319 In fact, unbeknownst to Nickel, Tanyous was negotiating a lease with a
tenant while Nickel prepared his real estate valuation.320 Nickel offered his opinion
on May 17, 2012.321 Tanyous closed the lease only two weeks later, on June 1, 2012
(the “HCW lease”).322 The Merger Date, of course, was just over two months after
the HCW lease was signed.
The HCW lease term was for one year.323 The rent was waived for the lessee’s
first two months—June and July—and the rents for August and September were at
a reduced rate of $5,000 per month.324 The rent for the final eight months was
318 Id. 319 JX 146. 320 JX 146 (Lease between HCW and Happy Place Day Care, dated June 1, 2012); Tr. 43– 45 (Nickel). 321 JX 137. 322 JX 146. 323 Id. 324 JX 147 at 15.
84 $6,000 per month.325 Thus, the annual rent was $58,000, while the effective annual
rental rate (i.e., the scaled up $6,000 rental rate over one year) was $72,000.326
The broker’s commission was $3,480.327
The Banoubs argue that I should substitute the relevant values substantiated
by the HCW lease into Nickel’s model. More specifically, they say I should
substitute Nickel’s estimated facility rental value of $61,025 for the lease’s effective
rental rate of $72,000, and reduce the entrepreneurial and lease-up costs from
$73,938 to $17,480—the sum of the broker’s commission and the reduced rent
provided in the first two months of the lease.
I agree, in principle, that the relevant values substantiated by the HCW lease
are more reliable inputs and should be substituted for Nickel’s hypothetical values.
Delaware law is clear that “elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger and
not the product of speculation, may be considered” in an appraisal proceeding.328
Nickel’s valuation estimates the actions of market participants, while the HCW lease
substantiates them. The HCW lease, therefore, is a better indicator of the value of
325 Id. 326 Id. at 1. 327 Id. 328 Weinberger, 457 A.2d at 713; see also Technicolor, 684 A.2d at 300.
85 HCW’s real estate, and its relevant values will be substituted into the model where
appropriate.
Before revising the Nickel model, I must confront three related issues. First,
it remains unclear whether the HCW lease includes the residence located on the
HCW property. The answer to that question has obvious implications. On the one
hand, if the $72,000 HCW lease includes the residential property, then Nickel’s
estimation of the potential gross rental rate ($75,305) is too high. On the other hand,
if the HCW lease does not include the residential property, then Nickel’s estimation
of the daycare property ($61,025) is too low.
It is appropriate here to remember the burden of proof. When conducting an
appraisal under entire fairness review, I must “endeavor[] to resolve doubts, at the
margins, in favor of the [minority shareholders].”329 With this in mind, I proceed
under the assumption that the lease does not include the value of the residence on
the property.330
Second, the HCW lease was to expire in one year, whereas Nickel’s model
was built assuming the typical lease in the daycare industry runs for five years.331
329 Del. Open MRI, 898 A.2d at 313. 330 I note that Tanyous could have clarified whether the lease he negotiated included the residential property; he failed to do so. 331 JX 137; Tr. at 45 (Nickel).
86 This raises the question of whether the effective rental rate of $72,000 is affected by
the HCW lease’s one-year term. Nickel answered the question at trial; one would
not expect a tenant to pay more or less for a one-year lease.332
Third, I must decide how to account for the $17,480 broker’s fee and reduced
rent. The Banoubs assert these fees should be substituted for the entrepreneurial
incentives and lease-up costs, while Tanyous contends the fees should be subtracted
from the $72,000 rental rate. After carefully considering the evidence, I am satisfied
that the broker’s fee and reduced rent fall in the category of lease-up costs, i.e., those
costs “associated with locating a day care operator to either lease or purchase the
property.”333 I also eliminate all costs associated with “entrepreneurial incentives.”
Nickel described entrepreneurial incentives as “a measure of reward associated with
locating a daycare operator to either lease or purchase the property.”334 The
existence of the HCW lease implies that a daycare operator had already been located
at the time of the transaction, rendering this deduction inapt.
332 See Tr. at 45 (Nickel) (“Q. Would one expect a tenant to pay less the shorter the term for a one-year lease? A. No. I wouldn’t expect it. No.”). 333 JX 137 at 54. 334 Id.
87 After carefully considering the evidence, I derive an income capitalization
value of $763,091.335 After averaging that value with the sales comparables estimate
of $500,000, as Nickel did, I derive a total real estate value of $631,450.50. After
making the uncontested adjustments for HCW’s liabilities as of the Merger Date,
I conclude HCW’s NAV equals $221,129.50.336
c. The Earnings-Based Indicated Equity Value of HCW Is $50,794
Neither party disagrees with the utility of Ford’s Capitalization of Earnings
(“CE”) Method.337 The Banoubs, however, take issue (without expert support) with
two critical inputs in Ford’s model: the cost of debt and the cost of equity. I find
Ford’s computation on both fronts reasonable and credible.
To calculate the cost of debt, Ford used an 11.25% rate, which was the sum
of the mortgage rate (6.25%) and the penalty rate imposed by HCW’s mortgage
335 More specifically, I substitute into Nickel’s Direct Capitalization model $72,000 in base annual rental rate for the daycare’s base rent. I add his undisputed estimate for the owner- occupied single-family residence ($14,280) to derive a potential gross rent of $86,280. After subtracting an estimated 5% for vacancy and collection loss, and his undisputed expenses incurred in the ordinary course of running a facility, I reach a net operating income figure of $70,833. After capitalizing that figure by Nickel’s 9.5% capitalization rate, and adjusting for the substituted $17,480 in lease up costs (and $0 for the entrepreneurial incentive), I derive a stabilized value indication of $763,090.53 for the property, which I then round to $763,091. 336 See JX 14, Ex. D. 337 See Banoubs’ Post-Trial Opening Br. at 58 (stating “there is no opposition to utilization of [Ford’s Capitalization of Earnings] approach”).
88 lender (5%).338 The Banoubs counter that the penalty rate should be subtracted from
the mortgage rate because Tanyous was responsible for the mortgage landing in
default.
The Banoubs’ argument is unconvincing. HCW’s financial records show that
it was highly leveraged, operating at an average net loss of $57,500 from 2009 to
2011.339 A mortgage penalty is understandable for a company with a large mortgage
obligation and limited operating income. Thus, the mortgage penalty rate is properly
accounted for in the calculation of HCW’s cost of debt as a feature of HCW’s
operative reality.
For the cost of equity, Ford used a generally accepted build up method, relying
on the Ibbotson SBBI 2011 Valuation Yearbook, which documents publicly
available data for stocks, bonds, bills and inflation from 1926-2011.340 When
employing the build-up method, the appraiser must compute the company’s
“Size Premium.”341 The Banoubs object to Ford’s reliance on this dataset for the
calculation of a size premium because the lowest decile of companies available in
338 JX 147, Ex. C; JX 128 (Default Letter from Citizens Bank, dated Mar. 9, 2012). 339 JX 147, Ex. B. 340 JX 147 at 12. 341 Id.
89 Ibbotson had a market capitalization between $1.028 million and $86.757 million.342
HCW is nowhere near that size, they observe, making any comparison to the
Ibbotson companies inappropriate.
I am satisfied, however, that Ford’s approach to deriving the cost of equity is
reliable under the circumstances. As then-Vice Chancellor Strine noted while
conducting a similar appraisal under entire fairness review, the application of
income-based valuation models such as the CE in valuing a small, privately owned
entity “has its challenges, principally in the area of calculating a proper cost of
capital. In this situation, the absence of both market information about the subject
company and good public comparables force the court to rely even more than is
customary on the testimonial experts. That reality is inescapable.”343 The Banoubs
offer no alternative data set and point, instead, to their own expert report, which I
have already held to be unreliable and not credible for too many reasons to count.
The fact is that finding comparables for HCW is difficult. Ibbotson is the best data
on record, and I am satisfied it is appropriate to rely on that data, in this circumstance,
to derive a cost of equity.
342 Id. at 13. 343 Del. Open MRI, 898 A.2d at 331.
90 After carefully considering Ford’s CE valuation, and the Banoubs’ criticisms
of that analysis, I am satisfied that Ford’s approach is both credible and reliable.
Thus, I conclude the value of HCW, per the Capitalized Earnings method, is
$50,794.
d. HCW’s Fair Value Without Litigation Assets
In his final step, Ford chose to weight equally the different values derived
from the NAV and CE methods in calculating his final fair value of HCW on the
Merger Date.344 The Banoubs challenge this weighting on two grounds. First, they
argue it makes little sense to trust Ford’s CE method when he describes the NAV as
a “floor” in his report.345 In other words, if the NAV valuation is, in Ford’s own
words, a “‘floor’ or the lower range of a fair value determination of the Company,”
and the CE valuation is less than the NAV valuation, then the CE valuation should
be disregarded entirely. Second, they argue that the NAV value and the CE value
should be added, just as Pelillo added values derived from the methods he employed.
Once again, I am not persuaded. The CE method gives primary consideration
to cash flow, and so is typically used to value operating entities; the NAV approach
gives primary consideration to the value of underlying assets, and so is most apt for
344 JX 147 at 9. 345 Id. at 14.
91 investment or holding companies.346 An operating daycare business is a cash-flow
business that would typically merit an income-based valuation approach.
An operating company presumably incurs higher operating expenses than a non-
operating company. In HCW’s case, these expenses led to an average net income
loss of $76,941.20 from 2007 through the Merger Date.347 If HCW were to continue
as a daycare post-merger, there is no basis in the evidence to conclude that its
performance or value would have improved.
Upon the execution of the Merger, however, HCW was no longer operating
as a daycare center. Regulators were threatening to revoke HCW’s license to
operate, and Tanyous recently discovered that he could lease the building without a
daycare license.348 He opted to lease out the real estate for one year and then decide
whether to restart operations.349 A pure leasing business model is more appropriately
valued under an NAV approach. If the one-year HCW lease was not renewed,
however, there is no evidence another lessor was waiting in the wings, nor is there a
346 JX 147. 347 JX 147, Ex. B. 348 JX 133. 349 Tr. 578 (Tanyous).
92 basis to predict, as of the Merger, whether HCW would have resumed its daycare
operations.350
Because the Company’s future business model was uncertain as of the Merger
Date, it makes sense to average the CE value and the NAV value, as Ford elected to
do to reach his final fair value appraisal.351 Here again, I find that Ford’s explanation
for his allocation approach was credible, and I have no basis in the evidence to
allocate differently. Having determined HCW’s asset-based value is $221,129.50,
its income-based value is $50,794, and the two models should be weighted equally,
I conclude that the fair value of HCW’s equity interest as of the Merger Date was
$135,961.75.
One final issue remains before turning to the value of the derivative claims.
In Ford’s Report, he reclassifies certain stockholder loans to equity in determining
each party’s indicated equity value on the Merger Date. This diluted the Banoubs’
share of HCW from 45% to less than 10%. The Banoubs, understandably, object.
A company generally metabolizes investors’ capital in one of two ways:
equity or debt. These two types of infusions are differentiated in demonstrable ways,
such as a note indicating the interest at which a debt is meant to be paid. According
350 Tr. 551 (Tanyous) (testifying that he had the option to reopen the daycare after the State revoked its license if he brought it up to code). 351 Tr. 111 (Ford); JX 147.
93 to Ford, stockholder loans were originally characterized as such in HCW’s 2011 tax
return.352 If Tanyous argues these loans should be reclassified, then the burden is on
him to explain why. Ford offers nothing to support the reclassification beyond his
summary statement (in his report, not explained at trial) that “it was my
determination that these loans acted more like capital infusions into the Company.”
That says nothing of the bases for the reclassification. Without more, I reject Ford’s
reclassification. HCW has 100 shares, and the Banoubs own 45 of those shares.
e. HCW’s Fair Value With Litigation Assets
Having determined the fair value of HCW without its litigation assets, I turn
next to the questions of whether and how to incorporate HCW’s pre-merger litigation
assets in the appraisal. The answer to the first question is clearly yes, for reasons
already stated; the pre-merger litigation assets, in this case HCW’s claims against
the Banoubs and Tanyous, should and will be incorporated in the appraisal.353
352 JX 147 at 16. 353 See Cavalier Oil Corp., 564 A.2d at 1142; Nagy, 770 A.2d at 55–56; Porter, 1989 WL 120358, at *5. I acknowledge that, at first glance, there may be some incongruity in this outcome. Giving value to company claims of wrongdoing against owners in an appraisal, and then “round tripping” that value back to the owner via an appraisal award, in some instances, may offend notions of equity. But here, both owners have been found to have misappropriated funds prior to the Merger. The approach I have taken values each owner’s share in the Company as if they have had returned those funds to the Company in advance of the Merger and thereby enhanced the firm’s value for the benefit of all concerned. My sense of equity is not offended by this outcome, under the circumstances, and I am further convinced that the approach taken provides the most efficient means to 94 The answer to the second question—how to incorporate the litigation assets—
requires further discussion. When valuing contingent (unfiled) corporate (or
derivative) claims for appraisal, the court often will consider litigation risk and
expenses associated with the claims, and may discount the value of the claims to
account for that risk.354 There is no need to apply such discounts here. The parties
have litigated HCW’s pre-Merger claims in this consolidated case, and I have
decided them. The value of those claims, now determined, is the equivalent of cash
in the corporate coffers. I treat the litigation assets in that manner for purposes of
appraisal.
As explained, HCW’s combined litigation assets (HCW’s proven claims
against the Banoubs and Tanyous) have a fair value of $82,298.40, and HCW’s non-
litigation equity has a fair value of $135,961.75. Thus, I appraise the fair value of
HCW as of the Merger at $218,260.15.
resolve all claims in recognition of the rather unique and convoluted posture in which they have been presented. 354 See, e.g., Cavalier Oil Corp., 564 A.2d at 1141–44 (observing it is appropriate to value accrued, but unlitigated derivative claims, with consideration of litigation risks and costs as discounts to value); In re Countrywide Corp. S’holders Litig., 2009 WL 846019, at *8 (Del. Ch. Mar. 31, 2009) (same); Oliver, 2006 WL 1064169, at *20 (same); Bomarko, Inc. v. Integra Bank, 794 A.2d 1161, 1189 (Del. Ch. 1999), aff’d, 766 A.2d 437 (Del. 2000) (same); Onti, Inc. v. Integra Bank, 751 A.2d 904, 931–32 (Del. Ch. 1999) (same).
95 f. The Banoubs’ Adjusted Appraisal Award
To derive the Banoubs’ proper appraisal award, I must account for both their
share in HCW’s fair value at the time of the Merger (including its litigation assets),
as well as their liability to HCW for their breaches of fiduciary duty. In other words,
I subtract the Banoubs’ liabilities to the Company from their pro rata interest in
HCW’s fair value, including its litigation assets. This method effectively adjusts the
Banoubs’ equity-based appraisal award in proportion to their personal liabilities to
the Company.
The math is simple. The Banoubs’ 45% share of HCW’s fair value of
$218,260.15 at the Merger is $98,217.07. Their liability to HCW for breaches of
fiduciary duty as of the Merger is $62,199.11. Their adjusted appraisal award
($98,217.07 – $62,199.11) is $36,017.96.
III. CONCLUSION
The Court has found that the HCW fiduciaries, the Banoubs and Tanyous,
all breached their fiduciary duties to HCW. The Court has valued HCW’s claims in
that regard and has incorporated that value into an appraisal of HCW. The appraisal
petitioner is entitled to his share of HCW’s fair value at the Merger, adjusted for his
liability to HCW. That equates to $36,017.96 in total, or $800.40 per share. The
legal rate of interest, compounded quarterly, shall accrue on this amount from the
96 date of the Merger until the date of payment. The parties shall confer and submit a
final judgment and order to the Court within the next fourteen (14) days.
Related
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