In re USG Corporation Stockholder Litigation
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Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE USG CORPORATION ) CONSOLIDATED STOCKHOLDER LITIGATION ) C.A. No. 2018-0602-SG
MEMORANDUM OPINION
Date Submitted: June 22, 2020 Date Decided: August 31, 2020
Blake A. Bennett, of COOCH & TAYLOR, P.A., Wilmington, Delaware; OF COUNSEL: Michael J. Palestina, of KAHN SWICK & FOTI, LLC, New Orleans, Louisiana; Juan E. Monteverde and Miles D. Schreiner, of MONTEVERDE & ASSOCIATES, New York, New York, Attorneys for Plaintiffs.
Raymond J. Dicamillo, Srinivas M. Raju, Robert L. Burns, Matthew D. Perri, and Angela Lam, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Robert S. Faxon, Andrienne F. Mueller, and Robert E. Johnson, of JONES DAY, Cleveland, Ohio, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor This matter involves the acquisition (the “Acquisition”) of USG Corporation
(“USG”)1, a building materials company, by a strategic buyer, Gebr. Knauf KG. The
Plaintiffs, former USG stockholders, allege that USG’s directors—party
Defendants—breached fiduciary duties in connection with USG’s sale to Knauf.2
They seek monetary damages.
USG’s stockholders overwhelmingly approved the sale. The Defendants have
moved to dismiss; first, they seek a dismissal under the rubric of Corwin v. KKR
Financial Holdings, LLC.3 That case stands for the proposition that where the
stockholder-owners of a corporation are given an opportunity to approve a
transaction, are fully informed of the facts material to the transaction, and where the
transaction is not coercive, there is no agency problem for a court to review, and
litigation challenging the transaction is subject to dismissal under the business
judgment rule. The Defendants’ Motion in reliance on Corwin is rather easy to deal
with, as the Plaintiffs’ Verified Amended Complaint (the “Amended Complaint”)
specifically pleads facts, which I must assume at this pleading stage are true, that
make it reasonably conceivable that USG’s stockholders were not fully informed at
the time they approved the Acquisition. The Plaintiffs allege that USG’s Board of
1 USG makes a popular product so dominant in its field that it risks becoming a common noun: the famous “Sheetrock” wallboard. 2 Knauf, as defined below, includes Gebr. Knauf KG, together with affiliated entities and individuals. 3 125 A.3d 304 (Del. 2015).
1 Directors (the “Board”) had reached a subjective belief that USG had an intrinsic
value nearly 15% higher than the deal price, yet the directors failed to disclose this
fact to USG’s stockholders. Breaches of duty inherent in the Acquisition, therefore,
cannot be deemed cleansed under the Corwin rationale.
This raises the question of what bearing the determination described above
has on the balance of the Defendants’ Motion to Dismiss, which alleges that the
Plaintiffs have failed to state a claim upon which relief can be granted against the
Defendants. Due to an exculpation clause in USG’s charter, the Plaintiffs will be
required to demonstrate a breach of the duty of loyalty, or its doppelganger bad faith,
to recover damages.4 It became clear in briefing and at Oral Argument that the
Plaintiffs make two assumptions that I find unwarranted. The first is that, having
pled facts that raise a reasonable inference of disclosure deficiencies sufficient to
scuttle the Corwin defense, they have necessarily cleared the bar of pleading bad
faith on the part of the Defendant directors for purpose of withstanding a dismissal
under Rule 12(b)(6). Doctrinally, however, the concept of bad faith, and the
determination of adequate disclosure for Corwin purposes, are fundamentally
separate. They involve different inquiries, the outcomes of which are not necessarily
mutually supportive.
4 In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179–80 (Del. 2015).
2 A series of hypotheticals may help illustrate the distinction. First, consider an
allegation, for example, that directors omitted from a proxy statement the fact that
they had received a kickback from the buyer, in return for which they cut short a
sales process. Such an allegation, if adequately pled, would easily support a
rejection of Corwin cleansing and a pleading of breach of loyalty. But the focus of
the two inquires would be different. For Corwin purposes, the focus would be on
what the stockholders were told; the 12(b)(6) analysis would focus on the director’s
allegedly faithless actions. By counterexample, this hypothetical bribe, if fully
disclosed to the stockholders in way of a non-coercive vote, and in the (unlikely)
scenario that the stockholders nonetheless approved the transaction, theoretically
would result in dismissal under Corwin despite adequate pleading of a clear breach
of loyalty on the part of the directors.5
Conversely, posit a situation where the defendant directors have approved and
submitted a merger in which the stockholders will receive $9.50/share. They
authorize a proxy statement that discloses, truthfully and completely, that their
financial advisor has opined that a range of fair value for the company is $9.00–
$9.99 per share. Now assume that, via a printer’s error, half the proxies issued
erroneously give the fairness range as $6.00–$6.66 per share. The stockholders
approve the sale, half of them in theoretical reliance on the erroneous fairness range.
5 I concede that likelihood that any vote in such a scenario would be coercive.
3 Clearly, the error would be material and would render Corwin inapplicable. Such a
finding by the court would have no bearing, however, on whether the complaint
otherwise adequately pled bad faith or breach of the duty of loyalty against the
directors sufficient to withstand a motion under Rule 12(b)(6).
In my view, civil litigation in general can be seen as akin to a steeplechase,
where the plaintiff must clear a series of obstacles: first, sufficient pleading to state
a claim and withstand a motion to dismiss under 12(b)(6); next, perhaps, amassing
a record sufficient to carry across a motion for summary judgment, and finally proof
by a preponderance of the evidence at trial. After having cleared such hurdles the
plaintiff would be entitled to a remedy. But fiduciary duty litigation in the corporate
arena, of the type before me here, is designed to address problems of agency, and
where fiduciaries can eliminate agency problems by satisfying Corwin, they may
seek dismissal on that ground. Then, the course is never run: the starting tape never
drops to allow the steeplechase to begin. Where a court determines that Corwin does
not apply, conversely, the race is on; the starter calls, the tape falls away, and the
litigants are off—to run the same course that lies in front of them just as they would
had the defendants never sought to dismiss under Corwin.
Viewed in that light, and having determined that Corwin does not cleanse the
transaction here, I must turn to the allegations of the Amended Complaint to see
whether a claim has been pled upon which I may grant relief.
4 The Plaintiffs’ second assumption—erroneous, in my view—is that they must
simply plead claims that are reasonably conceivable as a breach of duty under
Revlon6 and its progeny to withstand a motion to dismiss. That is, according to the
Plaintiffs, they have stated a claim by merely alleging facts that make it reasonably
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE USG CORPORATION ) CONSOLIDATED STOCKHOLDER LITIGATION ) C.A. No. 2018-0602-SG
MEMORANDUM OPINION
Date Submitted: June 22, 2020 Date Decided: August 31, 2020
Blake A. Bennett, of COOCH & TAYLOR, P.A., Wilmington, Delaware; OF COUNSEL: Michael J. Palestina, of KAHN SWICK & FOTI, LLC, New Orleans, Louisiana; Juan E. Monteverde and Miles D. Schreiner, of MONTEVERDE & ASSOCIATES, New York, New York, Attorneys for Plaintiffs.
Raymond J. Dicamillo, Srinivas M. Raju, Robert L. Burns, Matthew D. Perri, and Angela Lam, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Robert S. Faxon, Andrienne F. Mueller, and Robert E. Johnson, of JONES DAY, Cleveland, Ohio, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor This matter involves the acquisition (the “Acquisition”) of USG Corporation
(“USG”)1, a building materials company, by a strategic buyer, Gebr. Knauf KG. The
Plaintiffs, former USG stockholders, allege that USG’s directors—party
Defendants—breached fiduciary duties in connection with USG’s sale to Knauf.2
They seek monetary damages.
USG’s stockholders overwhelmingly approved the sale. The Defendants have
moved to dismiss; first, they seek a dismissal under the rubric of Corwin v. KKR
Financial Holdings, LLC.3 That case stands for the proposition that where the
stockholder-owners of a corporation are given an opportunity to approve a
transaction, are fully informed of the facts material to the transaction, and where the
transaction is not coercive, there is no agency problem for a court to review, and
litigation challenging the transaction is subject to dismissal under the business
judgment rule. The Defendants’ Motion in reliance on Corwin is rather easy to deal
with, as the Plaintiffs’ Verified Amended Complaint (the “Amended Complaint”)
specifically pleads facts, which I must assume at this pleading stage are true, that
make it reasonably conceivable that USG’s stockholders were not fully informed at
the time they approved the Acquisition. The Plaintiffs allege that USG’s Board of
1 USG makes a popular product so dominant in its field that it risks becoming a common noun: the famous “Sheetrock” wallboard. 2 Knauf, as defined below, includes Gebr. Knauf KG, together with affiliated entities and individuals. 3 125 A.3d 304 (Del. 2015).
1 Directors (the “Board”) had reached a subjective belief that USG had an intrinsic
value nearly 15% higher than the deal price, yet the directors failed to disclose this
fact to USG’s stockholders. Breaches of duty inherent in the Acquisition, therefore,
cannot be deemed cleansed under the Corwin rationale.
This raises the question of what bearing the determination described above
has on the balance of the Defendants’ Motion to Dismiss, which alleges that the
Plaintiffs have failed to state a claim upon which relief can be granted against the
Defendants. Due to an exculpation clause in USG’s charter, the Plaintiffs will be
required to demonstrate a breach of the duty of loyalty, or its doppelganger bad faith,
to recover damages.4 It became clear in briefing and at Oral Argument that the
Plaintiffs make two assumptions that I find unwarranted. The first is that, having
pled facts that raise a reasonable inference of disclosure deficiencies sufficient to
scuttle the Corwin defense, they have necessarily cleared the bar of pleading bad
faith on the part of the Defendant directors for purpose of withstanding a dismissal
under Rule 12(b)(6). Doctrinally, however, the concept of bad faith, and the
determination of adequate disclosure for Corwin purposes, are fundamentally
separate. They involve different inquiries, the outcomes of which are not necessarily
mutually supportive.
4 In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179–80 (Del. 2015).
2 A series of hypotheticals may help illustrate the distinction. First, consider an
allegation, for example, that directors omitted from a proxy statement the fact that
they had received a kickback from the buyer, in return for which they cut short a
sales process. Such an allegation, if adequately pled, would easily support a
rejection of Corwin cleansing and a pleading of breach of loyalty. But the focus of
the two inquires would be different. For Corwin purposes, the focus would be on
what the stockholders were told; the 12(b)(6) analysis would focus on the director’s
allegedly faithless actions. By counterexample, this hypothetical bribe, if fully
disclosed to the stockholders in way of a non-coercive vote, and in the (unlikely)
scenario that the stockholders nonetheless approved the transaction, theoretically
would result in dismissal under Corwin despite adequate pleading of a clear breach
of loyalty on the part of the directors.5
Conversely, posit a situation where the defendant directors have approved and
submitted a merger in which the stockholders will receive $9.50/share. They
authorize a proxy statement that discloses, truthfully and completely, that their
financial advisor has opined that a range of fair value for the company is $9.00–
$9.99 per share. Now assume that, via a printer’s error, half the proxies issued
erroneously give the fairness range as $6.00–$6.66 per share. The stockholders
approve the sale, half of them in theoretical reliance on the erroneous fairness range.
5 I concede that likelihood that any vote in such a scenario would be coercive.
3 Clearly, the error would be material and would render Corwin inapplicable. Such a
finding by the court would have no bearing, however, on whether the complaint
otherwise adequately pled bad faith or breach of the duty of loyalty against the
directors sufficient to withstand a motion under Rule 12(b)(6).
In my view, civil litigation in general can be seen as akin to a steeplechase,
where the plaintiff must clear a series of obstacles: first, sufficient pleading to state
a claim and withstand a motion to dismiss under 12(b)(6); next, perhaps, amassing
a record sufficient to carry across a motion for summary judgment, and finally proof
by a preponderance of the evidence at trial. After having cleared such hurdles the
plaintiff would be entitled to a remedy. But fiduciary duty litigation in the corporate
arena, of the type before me here, is designed to address problems of agency, and
where fiduciaries can eliminate agency problems by satisfying Corwin, they may
seek dismissal on that ground. Then, the course is never run: the starting tape never
drops to allow the steeplechase to begin. Where a court determines that Corwin does
not apply, conversely, the race is on; the starter calls, the tape falls away, and the
litigants are off—to run the same course that lies in front of them just as they would
had the defendants never sought to dismiss under Corwin.
Viewed in that light, and having determined that Corwin does not cleanse the
transaction here, I must turn to the allegations of the Amended Complaint to see
whether a claim has been pled upon which I may grant relief.
4 The Plaintiffs’ second assumption—erroneous, in my view—is that they must
simply plead claims that are reasonably conceivable as a breach of duty under
Revlon6 and its progeny to withstand a motion to dismiss. That is, according to the
Plaintiffs, they have stated a claim by merely alleging facts that make it reasonably
conceivable that the Defendant directors did not act reasonably with regard to
achieving maximum value for USG’s stockholders via the Acquisition. In this post-
closing damages action, however, the Defendants are exculpated from liability for
damages by a provision in USG’s charter, absent breach of the duty of loyalty or bad
faith. Therefore, to plead a claim sufficient to withstand the Defendants’ Motion to
Dismiss, the Plaintiffs must plead facts that make it reasonably conceivable that the
Defendants have acted with the requisite culpability. I find that the disclosure
deficiency alleged, although it prevents the application of Corwin, is insufficient to
reasonably imply bad faith, and that the other facts alleged likewise fail to state a
claim of breach of the duty of loyalty or reasonably imply actions taken in bad faith.
Accordingly, the Defendants’ Motion to Dismiss is granted. The facts, together with
a more detailed statement of my rationale, are laid out, below.
6 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
5 I. BACKGROUND7
A. The Parties and Relevant Non-Parties
Non-party USG was a Delaware corporation headquartered in Chicago,
Illinois.8 USG was a manufacturer and distributor of building materials, and is best
known as the manufacturer and seller of Sheetrock brand drywall and wall products.9
At the time of the Acquisition, USG was the largest distributor of wallboard in the
United States and the largest manufacturer of gypsum products in North America.10
Defendant Steven F. Leer was a director of USG from July 2005 through the
close of the Acquisition, and was Chairman of the Board at all relevant times.11
Defendant Jennifer F. Scanlon was USG’s Chief Executive Officer and
President from November 2016 through the close of the Acquisition, and was a
director of USG from September 2016 through the close of the Acquisition.12
Defendant Jose Armario was a director of USG from January 2007 through
the close of the Acquisition.13 Armario was not re-elected to the Board at USG’s
7 The facts, except where otherwise noted, are drawn from the Plaintiffs’ Verified Amended Class Action Complaint, D.I. 78 (the “Amended Complaint” or “Am. Compl.”), and are presumed true for the purposes of evaluating the Defendants’ Motion to Dismiss. 8 Am. Compl., ¶ 21. 9 Id. ¶ 2. 10 Id. 11 Id. ¶ 11. 12 Id. ¶ 12. 13 Id. ¶ 13.
6 2018 annual stockholder meeting, but continued to serve as a holdover director at all
relevant times.14
Defendant William H. Hernandez was a director of USG from September
2009 through the close of the Acquisition.15 Hernandez was not re-elected to the
Board at USG’s 2018 annual stockholder meeting, but continued to serve as a
holdover director at all relevant times.16
Defendant Richard P. Lavin was a director of USG from November 2009
through the close of the Acquisition.17
Defendant Brian A. Kenney was a director of USG from February 2011
through the close of the Acquisition.18
Defendant Gretchen R. Haggerty was a director of USG from May 2011
through the close of the Acquisition.19 Haggerty was not re-elected to the Board at
USG’s 2018 annual stockholder meeting, but continued to serve as a holdover
director at all relevant times.20
Defendant Matthew Carter, Jr. was a director of USG from September 2012
through the close of the Acquisition.21
14 Id. 15 Id. ¶ 14. 16 Id. 17 Id. ¶ 15. 18 Id. ¶ 16. 19 Id. ¶ 17. 20 Id. 21 Id. ¶ 18.
7 Defendant Thomas A. Burke was a director of USG from September 2013
through the close of the Acquisition.22
Non-party Gebr. Knauf KG (“Gebr. Knauf”) is a limited partnership
organized under the laws of the Federal Republic of Germany. 23 Gebr. Knauf is
owned and controlled by members of the Knauf family.24 C&G Verwaltungs GmbH
(“C&G”) is a limited liability company organized under the laws of the Federal
Republic of Germany and is an indirect subsidiary of Gebr. Knauf.25 World Cup
Acquisition Corporation (“Merger Sub”) is a Delaware corporation and wholly
owned subsidiary of Gebr. Knauf.26 Gebr. Knauf together with its various affiliated
individuals and entities including Alexander Knauf (“Mr. Knauf”), Manfred
Grundke, C&G, and Merger Sub, are collectively referred to herein as “Knauf.”27
Knauf is a German manufacturer of building materials.28 Knauf beneficially
owned approximately 10.6% of USG’s outstanding common stock at the time of the
execution of the agreement and plan of merger between USG, Gebr. Knauf, and
Merger Sub (the “Merger Agreement”).29
22 Id. ¶ 19. 23 Id. ¶ 22. 24 Id. 25 Id. ¶ 23. 26 Id. ¶ 24. 27 Id. ¶ 25. I refer to all individuals in this Memorandum Opinion by only their last name other than Alexander Knauf, who I refer to as Mr. Knauf. I use the honorific only to distinguish Mr. Knauf from the Knauf entities. 28 Id. ¶ 3. 29 Id. ¶ 25.
8 Berkshire Hathaway Inc. is a Delaware corporation headquartered in Omaha,
Nebraska.30 Berkshire Hathaway Inc. is a holding company that owns subsidiaries
engaged in various business activities including insurance, freight, rail
transportation, utilities, and consumer goods.31 The famed investor Warren Buffett
is Berkshire Hathaway Inc.’s Chairman and controller.32 Berkshire Hathaway Inc.
together with its various affiliated entities is collectively referred to herein as
“Berkshire Hathaway” or “Berkshire.”33 At the time of the execution of the Merger
Agreement Berkshire Hathaway beneficially owned approximately 31.1% of USG’s
outstanding common stock.34
Plaintiffs Kevin D. Anderson and Susan Fitzgerald are, and at all times
pertinent were, stockholders of USG.35
B. Knauf and Berkshire Hathaway Amass Stakes in USG
Knauf initially acquired USG stock in October 2000 when Knauf International
GmbH purchased approximately 4.3 million shares of USG common stock on the
30 Id. ¶ 26. 31 Id. ¶ 47. 32 Id. 33 Berkshire Hathaway Inc.’s affiliated entities include, but are not limited to: Berkshire Hathaway Life Insurance Company of Nebraska, a Nebraska corporation; Berkshire Hathaway Assurance Corporation, a New York corporation; National Indemnity Company, a Nebraska corporation; General Re Life Corporation, a Connecticut corporation; General Reinsurance Corporation, a Delaware corporation; and General Re Corporation, a Delaware corporation. Id. ¶¶ 27–32. 34 Id. ¶ 33. 35 Id. ¶ 10. I assume by this pleading the Plaintiffs intend to convey that they were stockholders of USG until the Acquisition closed.
9 open market.36 Subsequently, Knauf representatives regularly met with USG’s
senior management to discuss Knauf’s ownership in USG and opportunities for
transactions between USG and Knauf.37 In 2001, USG and Knauf formed a joint
venture to manufacture and distribute concrete panels throughout Europe and the
former Soviet Union.38 Knauf began purchasing more USG shares on the open
market in 2007, and by January 8, 2008 had amassed a stake of 14.5% of USG’s
outstanding common stock.39 USG explored an equity offering in 2008, and Knauf
approached USG about expanding its equity stake in USG with a path to acquiring
a controlling interest and/or eventual full ownership of USG, but Knauf ultimately
declined to participate in the equity offering.40 In 2012, Knauf acquired USG’s
European ceilings and surfaces business for approximately $80 million, and in
December 2015, Knauf acquired USG’s interest in USG and Knauf’s
aforementioned European joint venture for approximately €48 million in cash.41
Knauf explored additional possibilities of commercial cooperation between itself
and USG, although they did not ultimately come to fruition.42
36 Id. ¶ 44. 37 Id. 38 Id. 39 Id. 40 Id. ¶ 45. 41 Id. ¶ 46. 42 Id.
10 Berkshire Hathaway first acquired an interest in USG in November 2000 by
purchasing 6.5 million shares on the open market.43 In January 2006, during the
pendency of USG’s Chapter 11 reorganization, Berkshire Hathaway provided a
backstop commitment to purchase up to 45 million shares of USG as part of a rights
offering transaction that formed part of the funding for USG’s then-proposed
Chapter 11 plan of reorganization and bankruptcy exit.44 Berkshire Hathaway
committed to a maximum aggregate purchase price of $1.8 billion in connection with
the rights offering, and was paid a non-refundable commitment fee of $100 million
by USG.45
Berkshire Hathaway acquired beneficial ownership of an additional 6,969,274
shares of USG common stock pursuant to the rights offering transaction.46 Berkshire
Hathaway immediately began purchasing more shares of USG on the open market
and by October 4, 2006, Berkshire Hathaway had increased its stake in USG to
17,072,192 shares, equivalent to 19% of USG’s outstanding common stock.47
In November of 2008, Berkshire Hathaway purchased an aggregate of $300
million of 10% Contingent Convertible Senior Notes due 2018 (the “Notes”), which
became convertible into USG common stock at any time prior to the Notes’ final
43 Id. ¶ 48. 44 Id. ¶ 50. 45 Id. 46 Id. ¶ 52. 47 Id.
11 maturity (unless repurchased or redeemed by USG).48 By April 11, 2014, Berkshire
Hathaway had converted all of the Notes into common stock—pursuant to such
conversion Berkshire Hathaway beneficially owned an aggregate of 43,387,980
shares of USG, amounting to 30.4% of USG’s outstanding common stock.49
C. Knauf Approaches USG and Berkshire Hathaway Regarding an Acquisition; Knauf and Berkshire Hathaway’s Initial Discussions; Knauf Makes a Formal Offer to USG
Knauf had long cited USG as a potential acquisition target that would allow
Knauf to secure a significant beachhead in the North American market.50 At a
January 25, 2017 meeting between Knauf’s principals (Mr. Knauf and Grundke) and
certain members of USG’s management (including Defendant Scanlon, USG’s
CEO), Knauf indicated that it was looking for ways to partner with USG.51 On
February 8, 2017, Scanlon updated USG’s Board regarding the January 25 meeting,
and noted that following Knauf’s then-recent acquisition of a wallboard plant in
Mexico, Knauf was potentially considering entering the U.S. wallboard market
(wallboard being USG’s primary business).52 The next day, the Board indicated to
Knauf that USG would not be in a position to respond to its inquiry until the
completion of a strategic review process expected to be completed in mid-2017.53
48 Id. ¶¶ 53–54. 49 Id. ¶ 55. 50 Id. ¶ 61. 51 Id. ¶ 62. 52 Id. ¶ 63. 53 Id. ¶ 64.
12 In March 2017, Knauf (through its financial advisor Morgan Stanley Bank
AG (“Morgan Stanley”)) reached out to Berkshire Hathaway regarding Knauf’s
plans and the sides discussed such plans throughout the month.54 By mid-May 2017
it was clear to Knauf that Berkshire Hathaway was ready to sell its stake in USG and
that it would do so at or near $40 per share.55 Indeed, at Berkshire Hathaway Inc.’s
May 6, 2017 annual stockholder meeting, Warren Buffett noted that Berkshire
Hathaway’s USG investment was “disappointing,” not a “brilliant investment,” and
“not one of my great ideas.”56 Knowing it would have Berkshire Hathaway’s
support for an acquisition that valued USG at over $40 per share, Knauf began to
consider how to structure such a transaction.57 Knauf sought to avoid executing a
formal agreement with Berkshire Hathaway in the short term to avoid disclosure
obligations under U.S. securities laws.58 Knauf and Berkshire Hathaway continued
to negotiate and began communicating directly (rather than through Morgan Stanley)
in July of 2017.59
On September 19, 2017, USG informed Knauf that based on its strategic
review USG did not see value in a combination.60 On October 4, 2017, Morgan
54 Id. ¶ 65. 55 Id. ¶ 66. 56 Id. ¶ 67. 57 Id. ¶ 68. 58 Id. 59 Id. ¶ 69. 60 Id. ¶ 70.
13 Stanley delivered a Knauf-USG Acquisition Analysis Presentation to Berkshire
Hathaway that assumed a purchase price of $40 per USG share.61 On October 18,
2017, Knauf (represented by Mr. Knauf and Grundke) and Berkshire Hathaway
(represented by Buffett and his first lieutenant Combs) met in Omaha, Nebraska to
discuss USG, and at the meeting agreed to a price of $40 per share.62
On November 29, 2017, Knauf met with Scanlon—along with USG’s Chief
Financial Officer and General Counsel—and informed USG of Knauf’s intention to
make a proposal to acquire USG in an all-cash transaction.63 At the meeting Knauf
delivered to USG an indicative and non-binding proposal to acquire USG for $40.10
per share in cash—the offer stated that it was not to be disclosed except to the Board,
USG’s advisors, and Berkshire Hathaway.64 USG’s Board met on December 15,
2017 and discussed the possibility of a hostile tender offer by Knauf or others, and
discussed Knauf’s business and the relationship between USG and Knauf
generally.65 Berkshire Hathaway’s interest in USG was also discussed, including
Berkshire Hathaway’s previously stated desire for an exit from its USG
investment.66 The Board recognized that Berkshire Hathaway was practically unable
61 Id. ¶ 72. 62 Id. ¶ 74. 63 Id. ¶ 79. 64 Id. 65 Id. ¶ 83. 66 Id. ¶ 84.
14 to exit its USG investment at the market price given its large position.67 The Board
decided to contact Berkshire Hathaway prior to responding to Knauf’s offer to
inquire about Berkshire Hathaway’s interactions with Knauf.68
Informed by its own determination of USG’s intrinsic value, the Board
determined at the meeting that Knauf’s offer was “inadequate and insufficient.”69 At
the meeting management noted that USG was experiencing positive momentum in
the fourth quarter of 2017 and specifically expressed confidence in management’s
long term plan for USG.70 The Board also received a detailed review of valuation
analyses conducted by its financial advisors.71
On December 19, 2017, Scanlon and USG’s General Counsel held a call with
Buffett where Buffett acknowledged that Berkshire Hathaway had communicated
with Knauf’s financial advisors as of that morning—Buffett did not disclose the
parties’ previous discussions.72 Buffett also remarked that he would not take
independent action.73 Scanlon stated that the Board had determined that Knauf’s
offer was “not in the range of [USG’s] intrinsic value”—Buffett communicated his
support for an all-cash acquisition and encouraged Scanlon to engage with Knauf.74
67 Id. ¶ 85. 68 Id. 69 Id. ¶ 86. 70 Id. ¶ 83. 71 Id. 72 Id. ¶ 87. 73 Id. 74 Id.
15 On December 20, 2017, USG formally notified Knauf that the Board had
determined Knauf’s offer was “wholly inadequate given [USG’s] intrinsic value and
therefore it was not in the best interests of [USG’s] stockholders.”75 Berkshire
Hathaway indicated to Knauf that it viewed the Board’s rejection as “absolutely
disgusting,” that Berkshire Hathaway was “willing to vote against the directors,” and
that Berkshire Hathaway would share its opinion publicly should the offer become
public.76
D. Knauf Makes a Second Offer; Knauf’s Overtures Become Public
Knauf and Berkshire Hathaway continued to engage in discussions regarding
an acquisition of USG in late 2017 and early 2018—Berkshire Hathaway made clear
that it would vote against the Board though it was not yet willing to say so publicly.77
On February 8, 2018, Knauf contacted Leer, USG’s Chairman, and demanded a
meeting to “establish a relationship” with Leer.78 On March 8, 2018, USG held its
inaugural “Investor Day” presentation, the primary purpose of which was to “help
investors and analysts understand the long-term value proposition of [USG]”—at the
Investor Day USG disclosed certain financial projections through the end of USG’s
2020 fiscal year.79
75 Id. ¶ 89. 76 Id. ¶ 91. 77 Id. ¶ 93. 78 Id. ¶ 94. 79 Id. ¶ 96.
16 On March 12, 2018, Mr. Knauf and Grundke met with Leer and Scanlon and
reiterated Knauf’s “determination” to acquire USG, indicated that a revised proposal
would be forthcoming, and threatened that it would approach USG’s stockholders
directly if the Board would not “play ball.”80 Three days later Knauf delivered to
USG a revised takeover proposal for $42.00 per share.81 The proposal stated:
“Should you choose not to engage in good faith discussions with us we may
reconsider our behavior.”82 USG and Berkshire Hathaway thereafter discussed
Knauf’s revised proposal.83
On March 23, 2018, the Board met to discuss Knauf’s revised proposal.84 At
the meeting one of USG’s financial advisors noted the “possibility of a change of
behavior” by Knauf, and that USG’s 52-week high stock price and the median and
highest analyst stock prices had all increased.85 The financial advisors also informed
the Board that USG’s discounted cash flow (“DCF”) valuation had increased since
December 2017, and that Knauf’s revised proposal was at the low end of their DCF
value ranges and below the average for various premium analysis metrics.86 The
Board discussed its thoughts regarding USG’s “intrinsic value.” 87 The Board also
80 Id. ¶ 97. 81 Id. ¶ 98. 82 Id. 83 Id. ¶ 99. 84 Id. ¶ 100. 85 Id. 86 Id. 87 Id.
17 discussed Berkshire Hathaway and specifically recognized that “they could not
substitute the judgment of one shareholder for what they believed to be in the best
interest of all shareholders, particularly given the different posture of that one
shareholder.”88 The Board further discussed the possibility that Knauf would
attempt to acquire USG for “less than its intrinsic value” and that Knauf may
“attempt to push for a shareholder vote.”89 The Board unanimously determined that
Knauf’s revised proposal was “wholly inadequate.”90
On that same day, Berkshire Hathaway and Knauf met, and at the meeting
Berkshire Hathaway proposed to grant Knauf an option to purchase all of Berkshire
Hathaway’s USG stock for $42.00 per share.91 On March 25, 2018, Berkshire
Hathaway notified Morgan Stanley that it would publicly disclose the existence of
Knauf’s proposal, Knauf and Berkshire Hathaway’s communications, and that
Berkshire Hathaway had offered Knauf an option to buy Berkshire Hathaway’s USG
stock at $42.00 per share.92 Knauf sought to persuade Berkshire Hathaway to not
make the public disclosure, and also sought at a minimum to edit some of the text of
the proposed disclosure.93
88 Id. ¶ 101. 89 Id. ¶ 102. 90 Id. 91 Id. ¶ 104. 92 Id. ¶ 105. 93 Id. ¶¶ 106–08.
18 On March 26, 2018, Berkshire Hathaway amended its Schedule 13D to
disclose the March 23, 2018 conversation and option offer—Knauf likewise
amended its own Schedule 13D to disclose the option offer and its revised
proposal.94 Neither filing substantively disclosed the coordination between Knauf
and Berkshire Hathaway that had occurred in the previous year.95
Also on March 26, 2018, USG’s Board formally rejected Knauf’s revised
proposal as “wholly inadequate”—the Board was “focused on the intrinsic value of
our long-term strategic plan and measuring that against the proposal price.”96 On
the same day, USG issued a press release that acknowledged its receipt of Knauf’s
proposal, disclosed that the Board has unanimously rejected the revised proposal,
and stated that the $42.00 per share offer “substantially undervalues the Company
and is not in the best interest of all of USG’s shareholders,” and that the revised
proposal “does not reflect USG’s intrinsic value.”97
E. Knauf Initiates the Withhold Campaign; Berkshire Hathaway Publicly Supports Knauf’s Bid and Withhold Campaign
After the public disclosures, Knauf took measures consistent with the
commencement of hostile stockholder action, specifically an 8 Del. C. § 220 demand
requesting a list of USG’s stockholders in advance of USG’s 2018 annual meeting
94 Id. ¶ 111. 95 Id. 96 Id. ¶ 112. 97 Id.
19 with a stated purpose of communication regarding the stockholders’ mutual interests
“including the solicitation of proxies for the election of directors in connection with
the annual meeting.”98
At an April 5, 2018 meeting between USG and Knauf’s respective advisors,
USG’s advisors remarked that Knauf’s offer was not within a range to support
engaging in a diligence process and that it did not appear that Knauf would be willing
to propose a price that would reflect the Board’s intrinsic value of USG. 99 When
asked about its intentions regarding the § 220 demand, Knauf stated that it “simply
intended to preserve [its] options.”100 Knauf left the meeting with an understanding
that an offer of $45.00 per share would guarantee it access to additional
information.101 On that same day, Buffett and Scanlon spoke in order to provide
Buffett with a confidential update on the USG’s engagement with Knauf to date—
Buffett encouraged continued engagement with Knauf and communicated that he
thought USG’s stockholders would approve a transaction.102 Buffett confirmed that
Berkshire Hathaway was “engaging” with Knauf on Berkshire Hathaway’s option
offer.103
98 Id. ¶ 115. 99 Id. ¶ 116. 100 Id. 101 Id. 102 Id. ¶ 117. 103 Id.
20 An April 9, 2018 Knauf internal presentation remarked on Knauf’s leverage
over the Board considering Berkshire Hathaway’s support, and Knauf determined
not to pursue Berkshire Hathaway’s option offer because it already had Berkshire
Hathaway’s public support at $42 per share “without having to pay for it upfront.”104
The next day USG indicated that Knauf’s § 220 demand did not comply with the
statute and asked for additional evidence that Knauf was a stockholder of USG.105
On April 10, 2018, Knauf issued a press release announcing its intention to
solicit proxies from USG’s stockholders against USG’s four director nominees in
connection with the 2018 annual meeting and filed its preliminary proxy materials
in connection with Knauf’s withhold campaign (the “Withhold Campaign”).106
Knauf’s press release acknowledged that Knauf had Berkshire Hathaway’s support
for any offer over $42.00 per share and reserved the right to nominate one or more
individuals for election as directors.107 USG issued a reactionary press release
wherein Leer stated that USG’s offer was “wholly inadequate, opportunistic, and
104 Id. ¶¶ 119–20. 105 Id. ¶ 121. 106 Id. ¶ 122. “In uncontested director elections—and the overwhelming majority of elections are uncontested—the only choice for shareholders who do not want to vote for a board nominee is to mark their proxy card (or voting instruction form) to withhold authority to vote for the director at issue.” Marcel Kahan & Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347, 1358 (2011). 107 Am. Compl., ¶ 122.
21 does not reflect the intrinsic value of the company.” 108 Scanlon stated that Knauf
“ha[d] not indicated any willingness to pay full value to all of our shareholders.”109
On April 12, 2018, the Board issued a formal letter to USG’s stockholders
urging stockholders to vote for the election of USG’s four director nominees at the
2018 annual meeting.110 The Board stated that Knauf’s campaign was a “misguided
attempt to pressure the Board into accepting a proposal from Knauf to purchase
USG, that we believe is substantially below our intrinsic value,” and that “[t]he
Board is creating value for all our stockholders through the execution of our strategic
plan[.]”111
On the same day, Berkshire Hathaway publicly communicated its intent to
support Knauf and vote against the Board’s nominees.112 Knauf stated that it was
“pleased” that Berkshire Hathaway had indicated its support for the Withhold
Campaign and reiterated that its offer “present[ed] and [sic] immediate, high-value
and cash-certain monetization opportunity for all USG shareholders.”113 The
Plaintiffs note a “strong suggestion” that Berkshire Hathaway’s and Knauf’s public
statements were coordinated.114 Morgan Stanley told Knauf that Buffett “pushed it
108 Id. ¶ 123. 109 Id. 110 Id. ¶ 124. 111 Id. 112 Id. ¶ 126. 113 Id. ¶ 127. 114 Id. ¶ 128.
22 into the public and now declared his vote against the company; never does this;
speaks volume [sic].”115
On April 16, 2018, USG’s Board met to discuss the “new reality.”116 At the
meeting, representatives of the Board’s legal counsel reviewed the Board’s legal
obligations and provided an update on the possible outcome of a vote against USG’s
director nominees.117 On the same day, Knauf publicly responded to the rejection
of its § 220 demand and threatened litigation.118
On April 17, 2018, Knauf filed materials with the Securities and Exchange
Commission (“SEC”) including a presentation touting Berkshire Hathaway’s
support for Knauf’s $42.00 per share offer.119 Knauf issued a press release on the
same day similarly emphasizing Berkshire Hathaway’s support for the offer and the
Withhold Campaign, stating that Berkshire Hathaway “has offered Knauf an option
at $42, which Knauf believes validates the value of its offer, and has publicly stated
its intention to VOTE AGAINST USG’s four director nominees.”120 Knauf
similarly publicized Berkshire Hathaway’s support in other public filings and
115 Id. ¶ 130. 116 Id. ¶ 137. 117 Id. 118 Id. ¶ 138. 119 Id. ¶ 139. 120 Id. ¶ 140 (capitalization in original).
23 statements, with one opining: “[r]arely does Berkshire Hathaway take such public
positions.”121
On April 20, 2018, Knauf and USG both filed their respective proxy materials
in connection with the Withhold Campaign.122 Around this date, both Knauf and
Berkshire Hathaway spoke separately with Institutional Shareholder Services
(“ISS”).123 On April 24, 2018, Knauf met with Shapiro Capital (“Shapiro”), USG’s
fifth-largest stockholder—Shapiro stated that they would publicly announce their
intention to vote against the Board.124 On the same day, Morgan Stanley circulated
to Knauf an analysis of voting scenarios that estimated 57% of withholds in the “base
case” of just Knauf and Berkshire Hathaway voting against out of the large proxy
institutions and proxy advisors, 65% withholds if ISS endorsed the Withhold
Campaign but without the support of the other large stockholders, and 74% with
support of the proxy advisors and largest institutions other than Vanguard and
Harris.125
USG’s Board met on April 25, 2018.126 During the meeting, Scanlon
informed the Board that both Berkshire Hathaway and Shapiro had publicly
indicated their support for the Withhold Campaign, and that with 45% of USG’s
121 Id. ¶¶ 140, 144. 122 Id. ¶ 142. 123 Id. ¶ 143. 124 Id. ¶ 145. 125 Id. ¶ 146. 126 Id. ¶ 147.
24 stockholders already indicating they would vote against the director nominees it was
likely that USG’s director nominees would not receive a majority of the votes cast
at USG’s 2018 annual meeting.127 The Board considered providing its view of value
to either Knauf or publicly, but “deferred doing so at that time and until other
potential acquirers were ruled out.”128 USG issued a press release the same day
announcing its first quarter 2018 results and filed its quarterly report in connection
with the same—USG disclosed a 4% increase on an adjusted basis in net sales year-
over-year.129 Scanlon was quoted as saying that the quarter “reinforces our
confidence in our strategy” and that USG had “the opportunity and available capital
to focus on growth and shareholder value creation with a balance sheet that supports
our plan.”130 The following day, Knauf issued a press release reaffirming its
proposal to acquire USG at $42.00 per share and promoting the Withhold
Campaign.131
On April 26, 2018, the Board filed a letter and presentation to all of USG’s
stockholders; the presentation was entitled “USG Maximizing Value for All
Shareholders.”132 The presentation described Knauf’s offer as “significantly
undervalu[ing] USG” and that it did not “adequately compensate[] ALL
127 Id. 128 Id. 129 Id. ¶ 148. 130 Id. 131 Id. ¶ 149. 132 Id. ¶ 150 (bold in original).
25 shareholders.”133 The presentation also stated that the Board rejected the bid “based
on USG’s intrinsic value.”134 The letter reiterated many of the same themes, and
remarked that the Withhold Campaign was designed “to undermine YOUR Board’s
ability to negotiate to maximize value for ALL stockholders” and that Knauf was
“trying to get you to pressure the USG Board into accepting its opportunistic
proposal.”135 The Board continued: “YOU OWN the industry’s CROWN JEWEL
and its does not make sense to sell below intrinsic value.”136
The Board began receiving interest from other potential buyers in April
2018.137 The Amended Complaint states that USG interfaced with a “Company A”
regarding Company A’s potential interest in making a proposal for USG, but
Company A later communicated that it was unable to pursue a transaction with USG
at that time.138 Companies “C” and “D” indicated potential interest in a strategic
transaction with USG but were not in a position to do so at that time. 139 While it was
awaiting Company’s A’s response, the Board reviewed the pros and cons of
engaging with Knauf or waiting until USG received further information regarding
133 Id. (capitalization in original). 134 Id. 135 Id. ¶ 151 (capitalization in original). 136 Id. (capitalization in original). 137 Id. ¶ 152. 138 Id. 139 Id.
26 Company A’s interest, but ultimately declined to make a decision and decided to
“discuss further actions at a later date.”140
F. Knauf Prevails in its Withhold Campaign; Knauf and USG Agree to the Acquisition
USG’s Board meet on April 30, 2018, and Scanlon informed the Board that
the last of the few potential competing bidders with whom the Board had attempted
to engage was unwilling or unable to pursue a transaction at that time. 141 Scanlon
also notified the Board that proxy voting advisory services ISS and Glass Lewis had
publicly announced their support for the Withhold Campaign, and that the Board
was “facing the likelihood of a majority vote against its four director nominees.”142
At the same meeting, the Board authorized Scanlon to begin negotiations within a
unanimously-agreed range of $48.00 to $51.00 per share.143 This range was
informed by the Board’s view of USG’s intrinsic value, and the Board held a detailed
discussion with input from its financial advisor to this end.144 USG’s management
specifically recommended against the Board publicly stating its views on USG’s
intrinsic value, and the Board determined not to make such a statement; the Board
140 Id. 141 Id. ¶ 154. 142 Id. 143 Id. ¶ 155. 144 Id.
27 concluded that Knauf’s $42.00 per share offer did not reflect USG’s intrinsic
value.145
Knauf and USG met later that day and Knauf stated its “desire to have
assurances regarding the final price that the Board would accept before making a
further offer” and remarked on the likelihood that the Board would want a resolution
before the upcoming 2018 annual meeting to avoid a vote against USG’s four
director nominees.146 On May 1, 2018, USG issued a press release announcing the
Board’s authorization for USG to begin negotiations with Knauf; Scanlon called
Buffett that same day to discuss the public announcement of the commencement of
negotiations with Knauf.147
USG’s Board held a meeting on May 3, 2018 where it again considered
issuing a public statement on USG’s intrinsic value but did not do so.148 The Board
also discussed the length of a standstill with Knauf, which was then being negotiated;
Knauf sought a 30-day standstill at most while USG proposed a 12-month standstill,
and the parties eventually entered into a confidentiality agreement with a four-month
standstill period.149
145 Id. 146 Id. ¶ 156. 147 Id. 148 Id. ¶ 158. 149 Id.
28 On May 7, 2018, two days before USG’s annual meeting, Buffett was
interviewed on CNBC and stated that this may have been the first time in 53 years
that Buffett and Berkshire Hathaway had voted against a slate of directors; Buffett
remarked: “we felt that they – they did not represent our interest, and we said that
we intended to vote against them at the annual meeting . . . . [W]e just think that
directors are there to represent shareholders. And we do not feel that they were
certainly representing us with a 30% interest.”150
On May 8, 2018, USG met with Knauf and communicated a counterproposal
of $50.00 per share.151
USG’s 2018 annual meeting was held on May 9, 2018.152 At the meeting
approximately 75% of shares voted were cast against each of USG’s director
nominees.153 As a result, Defendants Armario, Haggerty, and Hernandez were not
duly re-elected and only continued to serve as holdover directors; Dana Cho was not
elected to the Board and the Board voted to reduce its size.154 The Board met later
that day, and Scanlon discussed the defeat as well as the decision to propose $50 per
share as USG’s counterproposal to Knauf, which Scanlon said was based on DCF
150 Id. ¶ 159. 151 Id. ¶ 160. 152 Id. ¶ 161. 153 Id. 154 Id.
29 valuations performed by the Board’s financial advisors and was within the authority
approved by the Board.155
On May 22, 2018, Knauf rejected USG’s $50.00 per share counteroffer and
indicated that it was willing to increase its offer to $43.50 per share.156 During a
meeting the next day, Knauf informed Scanlon and Leer that if “Knauf and USG
[were] not able to reach agreement, Knauf did not intend to stop pursuing an
acquisition of USG.”157 In response, Scanlon and Leer reiterated to Knauf “that the
Board believes the intrinsic value of [USG] is $50 a share and that conversations
with shareholders led [the Board] to believe that stockholder expectations were
closer to the Board’s view of value.”158 Nevertheless, Scanlon and Leer indicated
that they believed the Board may be willing to support a sale as low as $47.00 per
share.159
USG’s Board met on May 24, 2018 to discuss the ongoing negotiations.160
The Board was told that Knauf was not assuming any value from synergies, not
engaging with the Board’s bankers in a typical fashion, and that Knauf did not
consider the $47.00 per share suggested by Scanlon and Leer to be a formal
155 Id. ¶ 162. 156 Id. ¶ 164. 157 Id. 158 Id. 159 Id. 160 Id. ¶ 165.
30 counteroffer.161 The Board noted its concerns and the risk that Knauf would walk
away from negotiations and engage in a hostile acquisition of USG at or below
$42.00 per share or pursue an alternative transaction with one of USG’s domestic
competitors.162 Scanlon recounted to the Board Mr. Knauf’s assertion that “Knauf
did not intend to stop pursuing an acquisition of USG.”163 Scanlon informed the
Board that she intended to “reiterate the Board’s view of intrinsic value” in
upcoming negotiations with Knauf and intended to “ground th[ose] conversation[s]
in the Board’s view of intrinsic value.”164 The Board acknowledged that $47 was a
“walk away price for Knauf” and contemplated the likely next steps by Knauf and
Berkshire Hathaway in the event the parties were unable to agree on a transaction.165
Leer polled each of the directors as to what they believed USG’s walk away price
should be, though those views are not recorded in the Board’s minutes.166 After
discussion, the Board approved the negotiation of a transaction as low as $44.00 per
share.167
Throughout May 2018, USG and Knauf continued to engage in
negotiations.168 During this time the Board authorized outreach to Company A and
161 Id. 162 Id. 163 Id. 164 Id. ¶ 166. 165 Id. 166 Id. ¶ 167. 167 Id. 168 Id. ¶ 168.
31 four other potential bidders, but each potential bidder indicated that they were unable
or unwilling to submit a competing bid for USG at that time.169
On May 29, 2018, Knauf reaffirmed its $43.50 per share proposal and
prepared internally to present USG’s Board with a “best and final” ultimatum of
$44.00 per share.170 Knauf recognized internally that USG’s Board was unwilling
to go below $45.00 per share and Knauf’s advisors noted that Knauf’s
representatives should “avoid making direct threats.”171
On June 5, 2018, Knauf delivered to USG a “best and final” offer of $44.00
per share, consisting of $43.50 per share in cash at closing plus $0.50 per share in a
conditional special dividend that USG would be permitted to pay upon obtaining
stockholder approval of adoption of the Merger Agreement.172
USG’s Board met and discussed Knauf’s revised offer on June 6, 2018.173 The
Board determined that it was willing to accept this offer, and in coming to the
decision specifically “discussed whether [absent a deal] Knauf would be obligated
to vote for [USG’s] director nominees at the next annual meeting[.]”174 The Board
also discussed Knauf’s “perseverance” and Knauf’s representation that it expected
169 Id. 170 Id. ¶ 169. 171 Id. 172 Id. ¶ 170. 173 Id. ¶ 171. 174 Id.
32 the support of Berkshire Hathaway.175 The next day, Scanlon and USG’s General
Counsel spoke with Buffett on a confidential basis to inform him that Knauf wanted
Berkshire Hathaway to sign a voting agreement supporting a transaction with USG
(the “Voting Agreement”).176 Buffett informed Scanlon that he supported the deal,
and Knauf communicated that it was “very important that Berkshire continue to
demonstrate its support for the transaction.”177
On June 10, 2018, USG’s Board unanimously approved the Merger
Agreement at $44.00 per share and the parties executed the Merger Agreement on
the same day.178 Berkshire Hathaway executed the Voting Agreement, pursuant to
which Berkshire Hathaway agreed to vote all of its beneficially owned shares in
favor of the adoption of the Merger Agreement and the approval of the Acquisition,
and agreed to vote all of its shares then owned against any acquisition proposal,
whether or not it was a superior proposal.179
On June 11, 2018, USG and Knauf issued a joint press release announcing the
execution of the Merger Agreement.180 On that same day, Knauf and Berkshire
175 Id. 176 Id. ¶ 172. 177 Id. 178 Id. ¶ 174. 179 Id. Berkshire Hathaway also agreed “to vote (or cause to be voted) all of its shares then owned against . . . any action or omission that would result in a breach of any representation, warranty, covenant, agreement or other obligation of Berkshire Hathaway under the Voting Agreement[.]” Id. 180 Id. ¶ 175.
33 Hathaway amended their respective Form SC 13D/As to disclose the execution of
the Voting Agreement and Knauf’s concomitant shared voting power with respect
to Berkshire Hathaway’s USG stock.181 On August 23, 2018, the Board authorized
USG’s filing of a proxy statement in connection with the Acquisition (the “Proxy
Statement”).182 USG’s stockholders voted on and approved the Merger Agreement
on September 26, 2018, and the Acquisition closed on April 24, 2019.183
G. Procedural History
The original complaint in this Action was filed on August 13, 2018. After
two substantially similar putative class actions challenging the Acquisition were
consolidated, I heard oral argument on the Plaintiffs’ motion for preliminary
injunction seeking to enjoin the Acquisition on the basis that the Plaintiffs were
likely to succeed in showing that the Acquisition violated 8 Del. C. § 203 and that
the Proxy Statement failed to make material disclosures.184 I denied the Plaintiffs’
motion for a preliminary injunction on September 25, 2018, finding that the Proxy
Statement provided an adequate description of Berkshire Hathaway’s role in the
Acquisition, and that 8 Del. C. § 203 was not implicated because Berkshire
Hathaway and Knauf never entered a meeting of the minds that would allow Knauf
181 Id. ¶ 176. 182 Id. ¶ 179. 183 Id. ¶ 180. 184 Pls.’ Opening Br. in Support of Mot. for Prelim. Inj., D.I. 51, at 62–69; see Pls.’ Reply Br. in Further Support of Mot. for Prelim. Inj., D.I. 65.
34 to control Berkshire Hathaway’s shares.185 As noted, supra, the Acquisition closed
on April 24, 2019.
The Plaintiffs filed the Amended Complaint on November 26, 2019. The
Amended Complaint pleads one count: breach of fiduciary duty against each of
USG’s directors at the time of the Acquisition.186 The Amended Complaint alleges
that USG’s stockholders “did not receive the highest available value for their equity
interest in USG,” and “suffered the injury of an uninformed stockholder vote”; the
Plaintiffs seeks damages including by way of quasi-appraisal.187
The Defendants moved to dismiss this Action on February 5, 2020. I heard
Oral Argument on the Defendants’ Motion on June 22, 2020, and considered the
matter submitted for decision on that date.
II. ANALYSIS
The Defendants have moved to dismiss this Action pursuant to Chancery
Court Rule 12(b)(6).188 The standard of review for a Rule 12(b)(6) motion is well
settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences
185 Telephonic Ruling of the Court Re Pls.’ Mot. for Prelim. Inj. Relief, D.I. 71. I specifically found that “[t]he record demonstrates that Berkshire Hathaway retained control of its stock to pursue its interest, regardless of whether that interest diverged from that of Knauf.” Id. at 12:17– 12:20. 186 Am. Compl., ¶¶ 207–11. 187 Id. ¶ 211. 188 Ch. Ct. R. 12(b)(6).
35 in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.189
When reviewing a motion to dismiss, the Court may take into consideration
documents incorporated into the pleadings by reference and judicially noticeable
facts available in public SEC filings.190
The Amended Complaint pleads a single claim for breach of fiduciary duty
against each of the nine members of USG’s Board regarding their approval of the
Acquisition. The Plaintiffs allege that USG’s Board failed to obtain the “highest
value available for USG in the marketplace,” in a process that, per the Plaintiffs, was
infected by both a conflicted controlling stockholder (Knauf) and approved in bad
faith by an interested (and/or non-independent) Board. In moving to dismiss, the
Defendants contend that the Plaintiffs’ claims are subject to business judgment rule
review under the rationale of Corwin v. KKR Financial Holdings LLC.191 The
Defendants argue that Knauf was not USG’s controller, and that Corwin’s cleansing
effect bars me from engaging in a substantive review of the Acquisition.192
189 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation marks omitted). 190 Reith v. Lichtenstein, 2019 WL 2714065, at *1 (Del. Ch. June 28, 2019). I take judicial notice of the Proxy Statement filed with the SEC in connection with the Acquisition, which is attached as Exhibit B to the Defendants’ Opening Brief in support of their Motion to Dismiss, and quoted throughout the Amended Complaint. 191 125 A.3d 304 (Del. 2015). 192 Singh v. Attenborough, 137 A.3d 151, 151–52 (Del. 2016) (“When the business judgment rule standard of review is invoked because of a vote, dismissal is typically the result. That is because the vestigial waste exception has long had little real-world relevance, because it has been
36 Because the Plaintiffs allege that Knauf was a conflicted controlling
stockholder of USG, I first must determine whether the Plaintiffs have sufficiently
pled that Knauf was a conflicted controller before reaching the Defendants’ Corwin
defense.193 After review, I find that it is not reasonably conceivable that Knauf was
USG’s controlling stockholder, and it is consequently not reasonably conceivable
that the Plaintiffs’ claims are subject to entire fairness on that ground.
I next determine that though USG’s stockholder vote could have cleansed the
Acquisition under Corwin, it did not do so because a rational inference exists, based
on the facts pled, that the vote was not fully informed due to a material omission in
the Proxy Statement.194
But that the Acquisition is not cleansed under Corwin does not end my inquiry
at this motion to dismiss stage. In light of USG’s charter’s 8 Del. C. § 102(b)(7)
exculpatory clause, to survive the Motion to Dismiss the Plaintiffs must plead facts
making it reasonably conceivable that the Defendant directors breached their duty
understood that stockholders would be unlikely to approve a transaction that is wasteful.” (footnotes omitted)); see e.g. In re Merge Healthcare Inc. S’holders Litig., 2017 WL 395981, at *13 (Del. Ch. Jan. 30, 2017); In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839, at *13 (Del. Ch. Jan. 5, 2017). 193 See In re Rouse Props., Inc. Fiduciary Litig., 2018 WL 1226015, at *11 (Del. Ch. Mar. 9, 2018) (noting that the Corwin analysis “must be deferred” until the allegation that the defendant was a conflicted controller is addressed); Larkin v. Shah, 2016 WL 4485447, at *8 (Del. Ch. Aug. 25, 2016). 194 See Corwin, 125 A.3d at 309; Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018).
37 of loyalty or acted in bad faith.195 Because I find that the Plaintiffs have not
adequately pled such facts, this Action must be dismissed.
A. Knauf Was Not USG’s Controlling Stockholder
In Corwin, the Delaware Supreme Court held that “when a transaction not
subject to the entire fairness standard is approved by a fully informed, uncoerced
vote of the disinterested stockholders, the business judgment rule applies.”196 In
Larkin v. Shah,197 Vice Chancellor Slight clarified that “a transaction not subject to
the entire fairness standard,” as used in Corwin, should not be read “rigorously
literal[ly]”—that is Corwin should not be read to hold that all transactions subject to
entire fairness for any reason are not subject to Corwin cleansing—and is instead
meant only to refer to certain entire fairness transactions involving a controlling
stockholder.198 Moreover, “the mere presence of a controller does not trigger entire
fairness per se. Rather, coercion is assumed, and entire fairness invoked, when the
controller engages in a conflicted transaction, which occurs when a controller sits on
both sides of the transaction, or is on only one side but ‘competes with the common
195 In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179 (Del. 2015). 196 Corwin, 125 A.3d at 309. 197 2016 WL 4485447 (Del. Ch. Aug. 25, 2016). 198 Id. at *1 (Del. Ch. Aug. 25, 2016) (“In the absence of a controlling stockholder that extracted personal benefits, the effect of disinterested stockholder approval of the merger is review[ed]” under business judgment, “even if the transaction might otherwise have been subject to the entire fairness standard due to conflicts faced by individual directors.”).
38 stockholders for consideration.’”199 Where a controller exists, it is thus only those
instances where the controller has engaged in a conflicted transaction that Corwin
necessarily has no application.200 Corwin cannot cleanse such an “inherently
coercive” transaction because of the concern that “fear of controller retribution in
the face of a thwarted transaction may overbear a determination of best corporate
interest by the unaffiliated majority.”201
The Plaintiffs contend that Knauf was a conflicted controller of USG. Knauf
undoubtedly sat on both sides of the Acquisition, as both the purchaser and a
blockholder of USG stock. Consequently, Corwin is inapplicable if the Plaintiffs
have adequately alleged Knauf’s controller status.
A stockholder can be found to be a controller under Delaware law where they
“(1) own[] more than 50% of the voting power of a corporation or (2) own[] less
than 50% of the voting power of the corporation but exercise[] control over the
business affairs of the corporation.”202 The Plaintiffs plead that Knauf beneficially
owned only 10.6% of USG’s common stock outstanding at the time the Merger
199 In re Merge Healthcare Inc. S’holders Litig., 2017 WL 395981, at *6 (Del. Ch. Jan. 30, 2017) (citing Larkin, 2016 WL 4485447, at *8; Kahn v. M &F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014)). 200 Larkin, 2016 WL 4485447, at *15; Merge, 2017 WL 395981, at *6; In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839, at *6 n.28 (Del. Ch. Jan. 5, 2017). 201 Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *15 (Del. Ch. May 31, 2017). 202 Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251 (Del. 2019) (quoting In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014)) (internal quotation marks omitted); accord In re Rouse Props., Inc. Fiduciary Litig., 2018 WL 1226015, at *11 (Del. Ch. Mar. 9, 2018).
39 Agreement was executed, far below the 50% threshold.203 Consequently, to plead
control, the Plaintiffs must adequately pled that Knauf was a controller under the
“actual control” test.204
To plead actual control, a plaintiff must allege facts that support a reasonable
inference of either “(i) control over the corporation’s business and affairs in general
or (ii) control over the corporation specifically for purposes of the challenged
transaction.”205 Pleading general control requires that a plaintiff allege facts
showing that a defendant or a group of defendants “exercised sufficient influence
that they, as a practical matter, are no differently situated than if they had majority
voting control.”206 The Plaintiffs do not attempt to plead that Knauf had general
control over USG.
But pleading such ubiquitous control is not required, because even a
stockholder who does not exercise actual control over a corporation generally can
“exercise actual control over the board of directors during the course of a particular
transaction,” and consequently “assume fiduciary duties for purposes of that
transaction.”207 Thus, a plaintiff can plead control by pleading facts supporting a
203 Am. Compl., ¶ 25. 204 Rouse, 2018 WL 1226015, at *11. 205 Voigt v. Metcalf, 2020 WL 614999, at *11 (Del. Ch. Feb. 10, 2020). 206 Id. (quoting In re PNB Holding Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006)) (internal quotation marks omitted). 207 Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *26 (Del. Ch. July 6, 2018).
40 reasonable inference that the defendant “in fact exercised actual control with regard
to the particular transaction that is being challenged.”208 The challenged transaction
here is, of course, Knauf’s Acquisition of USG. Therefore, to invoke entire fairness
on the basis of Knauf being USG’s controlling stockholder, the Amended Complaint
must contain well-pled facts demonstrating Knauf’s actual control over USG with
regard to the Acquisition.209
“It is impossible to identify or foresee all of the possible sources of influence
that could contribute to a finding of actual control over a particular decision,” but,
“[i]nvariably, the facts and circumstances surrounding the particular transaction will
loom large.”210 In determining actual control over a challenged transaction, the court
“can consider whether the [alleged controller] insisted on a particular course of
action, whether there were indications of resistance or second thoughts from other
fiduciaries, and whether the [alleged controller’s] efforts to get its way extended
beyond ordinary advocacy to encompass aggressive, threatening, disruptive, or
punitive behavior.”211
208 Voigt, 2020 WL 614999, at *11 (quoting Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006)) (internal quotation marks omitted). 209 Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152, at *16 (Del. Ch. May 31, 2017) (“To invoke entire fairness, the Complaint must contain well-pled facts ‘demonstrating [the stockholder’s] actual control with regard to the particular transaction that is being challenged.’” (quoting In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014))). 210 Basho, 2018 WL 3326693, at *26, *28. 211 Id. at *28 (citing Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114 (Del. 1994); In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293, at *15 (Del. Ch. Mar. 28, 2018); New Jersey Carpenters Pension Fund v. Infogroup, Inc., 2011 WL 4825888, at *11 (Del. Ch. Sept. 30, 2011)).
41 As an initial matter, it is, to my mind, not reasonably conceivable that Knauf
exercised actual control over the Board before the culmination of the Withhold
Campaign. That is, the Plaintiffs’ allegations of a hard-fought proxy contest urging
USG’s stockholders to withhold votes from USG’s director nominees makes it not
reasonably conceivable that prior to the success of the Withhold Campaign, Knauf
had “such formidable voting and managerial power that they, as a practical matter,
[were] no differently situated than if they had majority voting control [of USG].”212
The reason for this is simple: the Board appointed its nominees for election; Knauf
fought tooth-and-nail such that those nominees would not be re-elected by a vote of
USG’s stockholders; had Knauf exercised control over USG’s Board, it inferably
would have been able to control who the Board’s nominees were; and, inferably
would not have consented to the appointment of nominees who it would then oppose
in a public and bruising campaign.
Knauf did not formally prevail in the Withhold Campaign until USG’s 2018
annual meeting on May 9, 2018.213 But the Plaintiffs have pled that USG’s Board
acknowledged the “writing on the wall”214—that Knauf would be victorious—on
212 KKR, 101 A.3d at 992 (quoting In re PNB Holding Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006)). 213 Am. Compl., ¶ 161. 214 This is an apt reference by the Plaintiffs given that it meant that the days of the directors’ reign were numbered.
42 April 30, 2018.215 Consequently, even drawing all reasonable inferences in favor of
the Plaintiffs, as I must, it is not reasonably conceivable that Knauf had actual control
over USG’s Board with regard to the Acquisition before April 30, 2018.
This leaves the crux of the Plaintiffs’ control claim: is it reasonably
conceivable that Knauf exercised actual control over USG’s Board with regard to
the Acquisition between April 30, 2018 and June 10, 2018, the date that the Board
unanimously approved the Merger Agreement?
The Plaintiffs’ briefing cites to scattershot allegations of the Amended
Complaint regarding Knauf and Berkshire Hathaway’s relationship, including that
Knauf (independently and through its coordination with Berkshire Hathaway)
“wielded substantial control” and that Knauf and Berkshire Hathaway had aligned
interests that manifested in a coordinated effort to pressure the Board into selling to
Knauf.216 The Plaintiffs contend that Knauf forced the Board into the Acquisition
and the Board succumbed because it was “confronted with the reality that its two
largest shareholders were working together to force the [Acquisition].”217
215 Id. ¶ 154 (“Defendant Scanlon also informed the Board that both ISS and Glass Lewis had publicly announced their support for the [W]ithhold [C]ampaign and that, ‘in light of these recommendations, and the fact that Berkshire and Shapiro have publicly stated that they intend to vote against the directors,’ the Board was facing the likelihood of a majority vote against its four director nominees.”). 216 Br. in Opp’n to Defs.’ Mot. to Dismiss the Verified Am. Class Action Compl., D.I. 95 “(Pls.’ Opp’n Br.”), at 47. 217 Id. at 47–48.
43 “Stockholders can collectively form a control group where those shareholders
are connected in some legally significant way—e.g. by contract, common
ownership, agreement, or other arrangement—to work together toward a shared
goal.”218 But while the Plaintiffs’ briefing insinuates that Knauf and Berkshire
Hathaway formed a control group, the Amended Complaint does not explicitly
allege a control group—inferably, the Plaintiffs concede that such a finding is
foreclosed by my previous findings that Knauf and Berkshire Hathaway “never
entered a meeting of the minds” and that Berkshire Hathaway’s interests were “allied
with the other unaffiliated stockholders.”219 Regardless, the Amended Complaint
offers no contradicting reasonable inferences.
The Plaintiffs have pled facts from which I can reasonably infer that both
Knauf and Berkshire sought a sale of USG, but, importantly, the Plaintiffs have pled
no facts to permit me to reasonably infer the existence of a control group given the
fact that Knauf’s and Berkshire Hathaway’s interests diverged regarding the most
important detail of the Acquisition: the price. The only reasonable inference is that
Berkshire Hathaway’s interests aligned with the Board—not Knauf—insofar as the
Acquisition price was concerned. Inferably, Knauf (as the buyer) sought to pay as
218 van der Fluit v. Yates, 2017 WL 5953514, at *5 (Del. Ch. Nov. 30, 2017) (quoting Frank v. Elgamal, 2012 WL 1096090, at *8 (Del. Ch. Mar. 30, 2012)) (internal quotation marks omitted). 219 Telephonic Ruling of the Court Re Pls.’ Mot. for Prelim. Inj. Relief, D.I. 71, at 12:21–13:1, 18:5–18:7.
44 little as possible, and Berkshire Hathaway (as USG’s largest stockholder) sought to
obtain as high a price as possible for its USG stock. Berkshire Hathaway allegedly
wished an exit, but that only indicates Berkshire Hathaway would have supported
an acquisition at the highest price exceeding its minimum return. Indeed, while there
are plenty of allegations that the Board (and Knauf) considered Berkshire
Hathaway’s potential actions after the culmination of the Withhold Campaign, there
are meager allegations of coordination between Knauf and Berkshire Hathaway.220
According to the Amended Complaint it was, in fact, USG’s CEO who informed
Berkshire Hathaway that Knauf wanted Berkshire Hathaway to sign the Voting
Agreement supporting the Acquisition and that “Knauf’s counsel would be in touch
with Berkshire Hathaway’s counsel.”221 That the Plaintiffs have pled that USG’s
CEO was the one to inform Berkshire Hathaway that Knauf wanted Berkshire
220 E.g. Am. Compl., ¶¶ 166 (“In the same breath, though, the Board also acknowledged that $47 was ‘a walk away price for Knauf’ and worried over ‘the likely next steps by Knauf and other shareholders i.e., Berkshire in the event that the parties are unable to reach terms. During this meeting, the Board also specifically considered the fact that, while Knauf was limited to making only one public statement during its standstill period, Berkshire was not so limited, and the Board engaged in a discussion of ‘the potential paths for Berkshire to exit USG’s stock, with a banker noting that none of them are likely if Berkshire believes a sale of [sic] Knauf is possible.’ The Board also received a presentation on alternative ways for Berkshire to exit its investment.”), 169 (“On May 29, 2018, Mr. Knauf reaffirmed Knauf’s $43.50 per share proposal. Internally, Knauf prepared to present the Board with a ‘best and final’ ultimatum of $44.00 per share. In so doing, it internally planned to leverage Berkshire’s continued support.”), 171 (“On June 6, 2018, following discussion, which included a discussion of Knauf’s ‘perseverance in the current instance’ and Mr. Knauf’s representation to Defendant Scanlon that Knauf expected the support of Berkshire Hathaway, the Board determined that it was willing to accept this offer—marking a decrease of more than $1 billion in what the Board considered fair value for the Company.”). 221 Id. ¶ 172.
45 Hathaway’s support for a sale of USG at $44.00 per share hardly suggests that Knauf
and Berkshire Hathaway were in coordination. At most, the Amended Complaint
pleads a shared goal of a sale of USG, supported by the Plaintiffs’ allegations
regarding the Withhold Campaign, but the Plaintiffs “must allege more than mere
concurrence of self-interest among certain stockholders to state a claim based on the
existence of a control group.”222 Because it is not reasonably conceivable that Knauf
and Berkshire Hathaway formed a control group with respect to Knauf’s Acquisition
of USG at $44.00 per share, to the extent that the Amended Complaint implies that
a control group was formed, such implication is not supported by well-pled facts.
Left with the allegation that Knauf—a 10.6% stockholder, mind you—was a
controller in its own right, the Amended Complaint fails to plead facts from which I
can reasonably infer Knauf’s actual control over USG’s Board. In In re Tesla
Motors, Inc. Stockholder Litigation,223 Vice Chancellor Slights remarked that “the
cases where this Court has found that a minority blockholder was, in fact, a
controlling stockholder recognize that it is the controller’s ‘ability to dominate the
corporate decision-making process’ that is important to the controlling stockholder
analysis.”224 Likewise, in In re Cysive, Inc. Shareholders Litigation,225 a post-trial
222 van der Fluit, 2017 WL 5953514, at *5 (quoting In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *15 (Del. Ch. Oct. 24, 2014)). 223 2020 WL 553902 (Del. Ch. Feb. 4, 2020). 224 Id. at *5 (quoting Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006)). 225 836 A.2d 531 (Del. Ch. 2003).
46 opinion, a 35% stockholder, who was the company’s “visionary founder and a
‘hands-on’ Chairman and CEO” was found to be a controlling stockholder.226 The
CEO in Cysive “had placed two of his close family members in executive positions
at the company,” giving him influence over “the ordinary managerial operations of
the company.”227 Thus, under these circumstances the minority blockholder
“possessed, as a practical matter, a combination of stock voting power and
managerial authority that enabled him to control the corporation, if he so wished.”228
Notably, the Plaintiffs do not plead that Knauf had any managerial authority.
Moreover, there is no reasonable inference that Knauf’s stock voting power alone
enabled Knauf to control USG “if [it] so wished.”229
Recognizing that a 10.6% voting stake leaves a steep uphill climb to plead the
Knauf was USG’s controlling stockholder, the Plaintiffs note that “[a]ctual control
over business affairs may stem from sources extraneous to stock ownership.”230 The
Plaintiffs argue that Knauf was a controller because it had the ability to take
“retributive action in the wake of rejection by an independent board.”231 The
226 In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014) (citing Cysive, 836 A.2d 531). 227 Cysive, 836 A.2d at 551–52; see In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656, 665–66 (Del. Ch. 2013). 228 Morton’s, 74 A.3d at 666 (quoting Cysive, 836 A.2d at 553) (internal quotation marks and alterations omitted). 229 Id. (quoting Cysive, 836 A.2d at 553) (internal quotation marks and alterations omitted). 230 In re Zhongpin Inc. S’holders Litig., 2014 WL 6735457, at *8 (Del. Ch. Nov. 26, 2014) rev’d on other grounds, In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173 (Del. 2015). 231 In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 441 (Del. Ch. 2002).
47 retributive action doctrine concerns the “risk that that those who pass upon the
propriety of the transaction might perceive that disapproval may result in retaliation
by the controlling shareholder.”232 Examples of retaliatory acts by a controlling
stockholder include “decid[ing] to stop dividend payments or to effect a subsequent
cash out merger at a less favorable price.”233
The “retributive action” put forth by the Plaintiffs is that Knauf launched the
Withhold Campaign.234 But the Plaintiffs fail to identify what precisely is retributive
about the attempt to obtain support from other stockholders in order to influence the
course of corporate decision making. Further, even if the Board’s defeat in the
Withhold Campaign led to the directors acceding to the Acquisition, it was the
approximately 75% vote of USG’s stockholders that would have caused such a
decision by the Board, not Knauf’s decision to launch the Withhold Campaign in the
first place. With this in mind, the Plaintiffs’ retributive action argument must then
rely only on the allegation that the simple decision to embark on the Withhold
Campaign was a retributive act. But any stockholder could have engaged in such a
232 Cysive, 836 A.2d at 552 n.31 (quoting Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997)). 233 Pure, 808 A.2d at 436 n.18 (quoting Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1116 (Del. 1994)). 234 Pls.’ Opp’n Br., at 49 (“Here, Plaintiffs have adequately alleged that Knauf exercised ‘actual control’ and secured the sale that it demanded through its ability to take ‘retributive action,’ that it did as a matter of fact take retributive action against the Board through its Withhold Campaign when its overtures were initially rejected, and that the Board responded by acceding to the [Acquisition].”).
48 campaign. For these reasons, it is not reasonably conceivable that the Withhold
Campaign was a retributive act evincing Knauf’s controller status.
The Plaintiffs have failed to plead facts from which I can reasonably infer that
Knauf exercised actual control over USG’s Board. Consequently, it is not
reasonably conceivable that Knauf was a conflicted controller of USG, nor that the
Acquisition is subject to entire fairness review on that basis. Thus, the Acquisition
is eligible for Corwin cleansing.235
B. The Stockholder Vote Was Not Fully Informed
Under Corwin, the Acquisition will be reviewed under the business judgment
rule if it was approved by a “fully informed, uncoerced majority of the disinterested
stockholders.”236 88.07% of USG’s votes outstanding approved the adoption of the
Merger Agreement.237 The Amended Complaint does not allege nor do the Plaintiffs
argue that a majority of USG’s disinterested stockholders did not approve the
Acquisition or that such disinterested stockholders were coerced. However, the
Plaintiffs do plead that the stockholder vote was not fully informed.238
235 Larkin v. Shah, 2016 WL 4485447, at *15 (Del. Ch. Aug. 25, 2016); In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839, at *6 n.28 (Del. Ch. Jan. 5, 2017). 236 Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 306 (Del. 2015). 237 Opening Br. in Support of Defs.’ Mot. to Dismiss the Verified Am. Class Action Compl., D.I. 87 (“Defs.’ Opening Br.”), Ex. D., at 2. I take judicial notice of USG’s Form 8-K, filed with the SEC on September 26, 2018, disclosing the results of the stockholder vote to approve the Merger Agreement. 238 Am. Compl., ¶ 204.
49 In analyzing whether USG’s stockholder vote was fully informed, I must
determine whether USG’s disclosures “apprised stockholders of all material
information and did not materially mislead them.” 239 The operative question is
whether the Amended Complaint “supports a rational inference that material facts
were not disclosed or that the disclosed information was otherwise materially
misleading.”240 This inquiry is “necessarily fact intensive and the Court should deny
a motion to dismiss when developing the factual record may be necessary to make a
materiality determination as a matter of law.”241
To show that USG’s stockholder vote was uninformed, the Plaintiffs must
adequately allege that material facts were not disclosed or that the disclosures made
were materially misleading. “An omitted fact is material if there is a substantial
likelihood that a reasonable shareholder would consider it important in deciding how
to vote.”242 Stated otherwise, materiality turns on whether there is “a substantial
likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’ of information
made available.”243 That disclosures must not be materially misleading means that
239 Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018) (citing Appel v. Berkman, 180 A.3d 1055, 1057 (Del. 2018)). 240 Id. 241 Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *10 (Del. Ch. June 21, 2019). 242 Morrison, 191 A.3d at 282 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)). 243 Id. at 283 (quoting Rosenblatt, 493 A.2d at 944).
50 “once [D]efendants traveled down the road of partial disclosure of the history
leading up to the [Acquisition] . . . they had an obligation to provide [USG’s]
stockholders with an accurate, full, and fair characterization of those historic
events.”244
Once the Plaintiffs identify a deficiency in the Proxy Statement the
Defendants have the burden to “establish that the alleged deficiency fails as a matter
of law in order to secure the cleansing effect of the vote.”245
The Plaintiffs allege that the Proxy Statement issued by the Board in
connection with the stockholder vote did not disclose: (1) the Board’s internal
valuation of USG on an inherent, standalone basis, and the Board’s “internal
misgivings” that $44.00 per share did not reflect USG’s intrinsic value,246 (2)
information regarding the Board’s motive to support the Acquisition, 247 and (3)
certain preliminary banker analyses that led the Board to reject Knauf’s $42.00 per
share offer.248
1. The Board’s View of USG’s Intrinsic Value
The Plaintiffs’ allegations regarding the Board’s view of USG’s intrinsic
value test the line between omissions and misleading disclosures. That is, the
244 Id. (quoting Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1280 (Del. 1994)). 245 English v. Narang, 2019 WL 1300855, at *10 (Del. Ch. Mar. 20, 2019) (quoting In re Solera Holdings, Inc. S’holder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017)). 246 Am. Compl., ¶ 205. 247 Id. ¶¶ 84, 165, 171. 248 Id. ¶ 100.
51 Plaintiffs essentially plead that the Board determined USG had an intrinsic value,
that the Board did not disclose this material fact, and that by not disclosing its
intrinsic valuation the Board’s other disclosures, namely its representations that the
Acquisition was favorable to USG’s stockholders, were rendered materially
misleading.249
The Plaintiffs have alleged that the Board believed that USG’s intrinsic value
was $50.00 per share, and have pled that this fact was not disclosed to USG’s
stockholders.250 Among other retorts, the Defendants dispute whether the Board had
a “personal and unanimous” opinion of USG’s intrinsic value.251 But the Proxy
249 The Proxy Statement reads: “The Board considered that the transaction value was more favorable to our stockholders than the potential value that would reasonably be expected to result from other alternatives available to the Company, including the continued operation of the Company on a standalone basis and other potential actionable strategic transactions.” Defs.’ Opening Br., Ex. C (“Proxy Statement”), at 45. 250 Am. Compl., ¶¶ 164, 193. 251 For example, the Plaintiffs cite USG’s opening counteroffer of $50.00 per share, together with the disclosure that the counteroffer was informed by the Board’s view of intrinsic value, as support for their allegation that the Board had a view of USG’s intrinsic value. See Pls.’ Opp’n Br., at 8. The Defendants urge that the USG’s negotiating position (i.e. USG’s counteroffer of $50.00 per share) should not be confused with the Board’s opinion of USG’s value. See In re OPENLANE, Inc., 2011 WL 4599662, at *15 (Del. Ch. Sept. 30, 2011) (“[A] counteroffer is not necessarily a reliable indicator of a Board’s view of the Company’s value.”); Van de Walle v. Unimation, Inc., 1991 WL 29303, at *17 (Del. Ch. Mar. 7, 1991) (“[T]he $120 to $150 million figures were not intended as the board’s opinion of the company’s value. They were merely an asking price, deliberately set high . . . .”). The Defendants are correct that basic negotiation tactics instruct that a counteroffer is not necessarily representative of value. OPENLANE, 2011 WL 4599662, at *15 (“[R]egardless of what a selling party may consider a company’s fair value to be, that person will seek the highest price she can receive, even if that price is far above the presumed fair value. Thus, it is not clear from a counteroffer what a seller believes a company’s fair value to be.”). But, the Plaintiffs cite the counteroffer merely as support of their allegation, which is explicitly pled, that the Board’s view of intrinsic value was $50.00; thus, the Defendants’ argument in this regard is unpersuasive.
52 Statement frequently cites to the Board’s view of USG’s intrinsic value.252
Therefore, it is not an unreasonable inference that the Board actually had formed a
252 By my count, the Proxy Statement references USG’s intrinsic value fifteen times. Proxy Statement, at 3 (“Our focus on intrinsic value, not daily share price, is evident in the timing of our proposal.”), 35 (“She also informed Mr. Buffett that the Board had determined that the per share price proposed by Knauf did not adequately reflect the Company’s intrinsic value.”) (“Ms. Scanlon stated that the Board would consider any bona fide offer that reflected the Company’s intrinsic value.”) (“On December 20, 2017, the Company provided a written response to Knauf indicating that the Board, in consultation with its financial and legal advisors, had considered Knauf’s proposal and had determined that the per share purchase price was wholly inadequate given the Company’s intrinsic value and therefore it was not in the best interest of the Company’s stockholders.”) (“Ms. Scanlon explained certain factors the Board considered in determining the Company’s intrinsic value, as well as how the Board viewed U.S. tax reform.”) (“She also noted that Knauf would need to offer a higher value before the Company’s senior management would be authorized to share non-public information and that the Board would consider all bona fide proposals that reflected the Company’s intrinsic value.”), 36 (“The Board, members of the Company’s senior management and the advisors also discussed certain possible transaction complexities that could arise relating to the Company’s UBBP joint venture, the fact that Berkshire Hathaway was positioned differently than the Company’s other stockholders and would need to take a substantial discount to market to exit its position in the Company’s stock in the absence of a sale of the Company, the supermajority vote required by the Company’s stockholders to approve a merger with Knauf and possible actions by Knauf or other stockholders to attempt to acquire the Company for less than its intrinsic value.”) (“The Board then discussed with the Company’s senior management and representatives of Jones Day, Goldman Sachs and J.P. Morgan the possible responses to Knauf’s revised proposal and methods to give Knauf additional direction that could cause Knauf to meaningfully improve its proposal to better reflect the Company’s intrinsic value, including the strategy of rejecting Knauf’s offer so that Knauf would further increase its proposal.”) (“The Board authorized Ms. Scanlon to send a written response to Knauf rejecting the current $42.00 proposal, while also providing additional information regarding the elements of the Company’s business plan that the Board believed supported a higher intrinsic value for the Company.”), 37 (“Ms. Scanlon again reiterated that the Board would engage around any bona fide proposal that reflects the Company’s intrinsic value, and offered to have a meeting between the respective financial advisors to discuss the Company’s views on value.”) (“The Board requested that legal counsel attend any meeting of financial advisors given the competitive concerns and also confirmed that the purpose of the meeting was not to negotiate value, but to provide insights on how the parties were thinking about intrinsic value.”) (“The Company’s advisors again reiterated that Knauf’s proposed price was not within a range to support the additional costs and distraction to the Company of engaging in a diligence process with Knauf or the risks to the Company of sharing material non-public information with a strategic competitor, and it did not appear that Knauf would be willing to propose a price per share that would be reflective of the Board’s view of the intrinsic value of the Company.”), 38–39 (“The letter to stockholders indicated that although the Board had not made a decision to sell the Company, it remained open to evaluating any proposal to acquire the Company, as it had done with Knauf’s proposals, and that if Knauf, or any
53 view of USG’s intrinsic value, supported by the Plaintiffs’ pleading that Scanlon
told Knauf that “the Board believes that the intrinsic value of [USG] is $50 a
share.”253
The Defendants also contend that if the Board did have an opinion of USG’s
intrinsic value the Board disclosed this opinion by disclosing (i) that it authorized
Scanlon to begin negotiations within a range of $48.00 to $51.00 per share, and (ii)
USG’s first counterproposal to Knauf of $50.00.254 The Defendants argue that these
disclosures, along with the disclosure that USG attempted to persuade Knauf to
increase its offer based on the Board’s view of USG’s intrinsic value, were sufficient
to make the stockholder vote fully informed.255 But, as the Defendants themselves
have successfully argued,256 negotiating price is not indicative of a view of intrinsic
value. More fundamentally, it cannot be seriously disputed that the Proxy Statement
did not disclose the Board’s view of USG’s intrinsic value, because the Proxy
other viable bidder, made a proposal that reflected the Company’s intrinsic value, the Board would seek to negotiate an appropriate confidentiality arrangement to allow it to share information with the potential counterparty.”) (“The Company also filed a letter to its stockholders, which among other things, outlined its disagreements with Knauf’s public statements and reiterated the Board’s view that Knauf’s proposal did not represent the intrinsic value of the Company.”), 40 (“The Board also authorized Ms. Scanlon to begin negotiations on value within a range of $48.00 and $51.00 per share and discussed the pros and cons of issuing a public statement regarding the Board’s view of intrinsic value, but decided not to issue such a statement.”) (emphasis added to all). 253 Am. Compl., ¶ 164. 254 See Proxy Statement, at 40–41. 255 See id. at 41–42. 256 See n.251, supra.
54 Statement discloses that the Board determined not to disclose its view of intrinsic
value.257
Even if the Board had a view of intrinsic value, and even if it did not disclose
such a view, the Defendants argue that the Board’s undisclosed belief of USG’s
intrinsic value was not material. To this end, Vice Chancellor Laster noted in In re
Appraisal of Stillwater Mining Co.258: “Whether called fundamental value, true
value, intrinsic value, or fair value, the really-real value of something is always an
unobservable concept. No valuation methodology provides direct access to it.
Fundamental value is like a Platonic form, and the various valuation methodologies
only cutouts casting shadows on the wall of the cave.”259 In this vein, the Defendants
contend that any belief the Board may have had regarding USG’s intrinsic value was
amorphous, and that the material fact required to be disclosed, and that was
disclosed, was that the Board considered $44.00 a share to provide “attractive value”
to USG’s stockholders considering financial valuations of the company260 and “the
possibility that, in the absence of a proposed strategic transaction with Knauf, when
factoring in the cyclicality of the industry in which [USG] operates, the trading price
257 Proxy Statement, at 40 (“The Board also authorized Ms. Scanlon to begin negotiations on value within a range of $48.00 and $51.00 per share and discussed the pros and cons of issuing a public statement regarding the Board’s view of intrinsic value, but decided not to issue such a statement.” (emphasis added)). 258 2019 WL 3943851 (Del. Ch. Aug. 21, 2019). 259 Id. at *51. 260 On DCF, unaffected market price, recent precedent transactions, and trading multiple bases.
55 of [USG’s] common stock . . . may decrease in relation to its trading price prior to
the initial public announcement of Knauf’s proposal.”261
I agree with Vice Chancellor Laster’s eloquent explanation that “intrinsic
value” or “fair value” are nebulous, even illusory, concepts. Belief in any particular
intrinsic value, by any being less than an omniscient god, is necessarily a belief that
is subjective in nature.262 But that is not determinative of the disclosure issue at
hand. The Amended Complaint avers that the Defendants had a belief as to the
precise intrinsic value of USG, and that their disclosures in the Proxy Statement
repeatedly imply that such a belief was formed. They, as directors, had a better
opportunity to develop a reliable, if still subjective, belief as to intrinsic value than
did USG’s unaffiliated stockholders.
The animating question is whether by disclosing that the directors had reached
a conclusion as to intrinsic value, and in not disclosing what that conclusion was but
nonetheless recommending the Acquisition, is it reasonably conceivable that the
Defendants created a proxy that was materially misleading to stockholders. I find
that the answer is yes.
USG’s stockholders should have been “informed of the value that the [Board]
placed on [USG] at a point in the negotiations when it had sufficient financial
261 Proxy Statement, at 45. 262 But see 8 Del. C. § 262.
56 information to make a serious offer.”263 This disclosure requirement ordinarily
refers to the value of a price proposal in negotiations.264 But here, because the Proxy
Statement disclosed that the Board held a view of intrinsic value and frequently
referenced such a view during its disclosures about the sales process,265 USG’s
stockholders were entitled to know the Board’s opinion of USG’s intrinsic value,
even if it was unachievable due to market forces and Knauf’s threats to launch a
hostile takeover.
If the Board “believed that one estimate was more accurate or realistic than
another, it was free to endorse that estimate and to explain the reason for doing so;
but full disclosure, in [my] view, was a prerequisite.”266 The Amended Complaint
supports a rational inference that the Board held a view of USG’s intrinsic value that
it referred to and relied on throughout the sales process, and that the Board’s view
of intrinsic value was not disclosed to USG’s stockholders. There is a substantial
likelihood that a reasonable stockholder would have considered the Board’s oft-
mentioned view of intrinsic important in deciding how to vote.267 Because this view
of intrinsic value was not disclosed, there is a rational inference that material facts
263 In re Dell Techs. Inc. Class V S’holders Litig., 2020 WL 3096748, at *40 (Del. Ch. June 11, 2020) (quoting In re S. Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 795 (Del. Ch. 2011)). 264 E.g. id.; S. Peru Copper, 52 A.3d at 795. 265 See n.252, supra. 266 Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977). 267 Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018).
57 were not disclosed, and consequently, USG’s stockholder vote was not fully
informed.268
Since the stockholder vote was insufficient to impose Corwin, I could end my
Corwin analysis here. However, given the distinct but related issues regarding
whether the Board’s disclosures were in good faith, I think it is appropriate to discuss
the other alleged non-disclosures in the Proxy Statement.
2. The Board’s Motives
The Plaintiffs also contend that the Proxy Statement misrepresented the
Board’s motives for approving the Acquisition. The Plaintiffs cite allegations that
the Board did not disclose its discussion of Berkshire Hathaway’s “previously stated
desire for an eventual exit,” that Knauf “did not intend to stop pursuing an
acquisition of USG,” and the Board’s concern of whether Knauf “would be obligated
to vote for [USG’s] director nominees at the next annual meeting.”269
Regarding Berkshire Hathaway’s desires, the Plaintiffs essentially contend
that Berkshire Hathaway forced the Board to capitulate to the Acquisition, and the
Proxy Statement did not disclose that this was the source of the Board’s support for
the Acquisition. The Proxy Statement did disclose that “[t]he Board considered the
268 To the extent disclosures in the Proxy Statement were rendered materially misleading because the Board’s view of USG’s intrinsic value was not disclosed, USG’s stockholder vote was likewise not fully informed. 269 Am. Compl., ¶¶ 94, 165, 171.
58 fact that a significant number of the Company’s stockholders had urged the
Company to engage with Knauf following the public disclosure of Knauf’s proposal
to acquire the Company for $42.00 per share.”270 It is not reasonably conceivable
that this was not a disclosure of the Board’s consideration of stockholder desires for
a sale of USG, particularly because the Withhold Campaign was framed by both
sides as a referendum on USG’s $42.00 per share offer.271 USG’s director nominees
lost by a wide margin, and even “[g]etting a substantial, but less than a majority,
withhold vote is still an embarrassment and often induces board actions.”272 The
Amended Complaint also acknowledges that Berkshire Hathaway’s support for the
Withhold Campaign was widely known.273 Thus, it is not reasonably conceivable
that the effect of the loss of the Withhold Campaign, i.e. overwhelming support of
Berkshire Hathaway’s desire for a sale at $42.00 per share, was concealed from
USG’s stockholders via the Proxy Statement. It is therefore not reasonably
270 Proxy Statement, at 47. 271 E.g. Am. Compl., ¶¶ 140 (A Knauf press release stated: “Additionally, after Knauf initiated its ‘Withhold’ campaign, Berkshire Hathaway publicly stated its intention to vote against USG’s director nominees. Knauf believes that this is a clear indication that Berkshire Hathaway views $42.00 as a reasonable offer price.”), 150 (The Board’s investor presentation stated: “If Knauf wants to buy USG, it should meaningfully improve its offer price — a vote FOR USG’s Board nominees strengthens our negotiating position with Knauf.” (capitalization in original)), 151 (“The Board also stated: ‘Knauf . . . has launched a campaign to encourage you to vote against USG’s Board nominees. Knauf is doing this in support of its $42 per share proposal to acquire USG . . . .’”). 272 Sherwood v. Ngon, 2011 WL 6355209, at *10 (Del. Ch. Dec. 20, 2011) (quoting Marcel Kahan & Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347, 1419 (2011)). 273 Am. Compl., ¶ 140 (“Berkshire Hathaway, a long-term USG shareholder with an approximately 31% ownership stake . . . has publicly stated its intention to VOTE AGAINST USG’s four director nominees.” (capitalization in original)).
59 conceivable that the Proxy Statement did not disclose the effect of Berkshire
Hathaway’s desire to exit its investment on the Board’s decision to approve the
Acquisition.
The Plaintiffs also contend that the Proxy Statement only disclosed that a
delay in negotiations “could result in Knauf potentially . . . commencing a hostile
tender offer to acquire [USG] at a lower price,” when the Plaintiffs allege that the
Board knew as a certainty that Knauf would launch a hostile tender offer because
Mr. Knauf told Scanlon that “should Knauf and USG not be able to reach agreement,
Knauf did not intend to stop pursuing an acquisition of USG.” 274 But it is not
reasonably conceivable that the Board knew as a certainty that Knauf would launch
a hostile tender offer,275 and, nevertheless, the Amended Complaint “alleges no facts
suggesting that the undisclosed information is inconsistent with, or otherwise
significantly differs from, the disclosed information.”276 What the Proxy Statement
disclosed—that failure to approve the Acquisition could result in Knauf launching a
hostile tender offer—does not materially differ from Mr. Knauf’s alleged statement
made in the midst of tense negotiations. Consequently, it is not reasonably
conceivable that there was a material omission in the Proxy Statement with regard
to the prospect of a hostile tender offer by Knauf.
274 Proxy Statement, at 45 (emphasis added); Am. Compl., ¶ 165. 275 There is no allegation that any Board member is a clairvoyant. 276 Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000).
60 Remaining of the Plaintiffs’ allegations regarding omissions of the Board’s
motives is the Board’s consideration of whether, absent the transaction, Knauf
“would be obligated to vote for [USG’s] director nominees at the next annual
meeting.”277 But it is unclear what effect the Amended Complaint alleges the
Board’s consideration of an upcoming stockholder meeting had on its motives to
approve the Acquisition, and to the extent it was tied to Knauf’s ability to engage in
further hostilities, that was disclosed. It is not reasonably conceivable that disclosing
whether Knauf would have supported the Board’s nominees at the following year’s
annual meeting would have “been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available,” when the Proxy
Statement already disclosed the possibility that Knauf would go hostile if the
stockholders did not immediately approve the Acquisition.278 It is clear from the
Proxy Statement that in recommending that USG’s stockholders approve the
Acquisition the Board considered and disclosed the possibility of future hostilities
between itself and Knauf.
277 Am. Compl., ¶ 171. 278 Morrison v. Berry, 191 A.3d 268, 283 (Del. 2018) (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)).
61 3. Banker Analyses
The final alleged nondisclosure is the banker analyses that informed the
Board’s decision to reject Knauf’s $42.00 per share offer as “wholly inadequate.”279
Specifically, the Plaintiffs contend that these preliminary analyses showed that the
$42.00 per share proposal was at the low end of the analyses’ DCF valuations, below
the average for premium analyses, and did not appear to account for lower corporate
tax rates.280
But the Board was only required to provide a “fair summary of the substantive
work performed by the investment bankers upon whose advice the recommendations
of their board as to how to vote on a merger or tender rely.”281 The Proxy Statement
did provide a fair summary of the preliminary analyses, and regardless the financial
analyses underlying the Board’s recommendation that USG’s stockholders approve
the Acquisition282 were disclosed in a manner that the Plaintiffs do not challenge.
The Plaintiffs attempt to fit the square peg of the facts alleged here into the
round hole of Clements v. Rodgers,283 which involved two analyses where the latter
was “more pessimistic,” and there was a plausible inference “that the [valuations]
changed in order to justify a bargaining outcome.”284 Conversely, there is no
279 Am. Compl., ¶¶ 100–02. 280 Id. ¶ 100. 281 In re Pure Res., Inc., S’holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002). 282 Proxy Statement, at 36, 50–63. 283 790 A.2d 1222 (Del. Ch. 2001). 284 Id. at 1243.
62 allegation here that the analyses underlying the Acquisition were fudged to support
the Board’s desired-for outcome, nor any allegation from which I can reasonably
infer that differences that could have existed between the preliminary and final
analyses were pretense. Consequently, it is not reasonably conceivable that material
facts were not disclosed regarding the preliminary banker analyses.
C. The Plaintiffs Have Not Adequately Pled a Non-Exculpated Claim for Breach of Fiduciary Duty
Because there is a rational inference that USG’s stockholder vote was not fully
informed, Corwin is inapplicable, and the Plaintiffs are entitled to a review of
whether they have adequately pled breach of fiduciary duty claims against USG’s
directors. USG’s Restated Certificate of Incorporation (the “Charter”) contains an
exculpatory provision under 8 Del. C. § 102(b)(7) that insulates the Defendants from
liability for violations of their duty of care.285 Consequently, under In re
Cornerstone Therapeutics Inc. Stockholder Litigation,286 the Plaintiffs must plead a
non-exculpated breach of fiduciary duty claim, that is, one that implicates the
Defendants’ duty of loyalty.287 “This ‘rule applies regardless of the underlying
standard of review for the transaction.’”288
285 Defs.’ Opening Br., Ex. E., at Article Eleventh. I take judicial notice of USG’s Charter. 286 115 A.3d 1173 (Del. 2015). 287 Id. at 1179–80. 288 Reith v. Lichtenstein, 2019 WL 2714065, at *18 (Del. Ch. June 28, 2019) (quoting Cornerstone, 115 A.3d at 1179).
63 To plead a non-exculpated claim sufficient to survive this Motion to Dismiss,
the Plaintiffs must plead facts “supporting a rational inference that the director[s]
harbored self-interest adverse to the stockholders’ interests, acted to advance the
self-interest of an interested party from whom they could not be presumed to act
independently, or acted in bad faith.’”289 A “plaintiff must [adequately plead] a
loyalty breach against each individual director; so-called ‘group pleading’ will not
suffice.”290
The Plaintiffs allege that the Board breached its duty of loyalty because it
lacked independence and was interested in the Acquisition. The Plaintiffs also
contend that the Board otherwise acted in bad faith in approving the Acquisition.
But, to my mind, it is not reasonably conceivable under the facts pled that the Board
breached a non-exculpated duty, and consequently the Plaintiffs’ claims must be
dismissed.
1. It is Not Reasonably Conceivable that the Board Lacked Independence or Was Interested in the Acquisition
Other than by pleading bad faith (which I address, infra), a plaintiff can plead
a non-exculpated breach of duty by pleading facts from which it is reasonably
289 Cornerstone, 115 A.3d at 1179–80. 290 Reith, 2019 WL 2714065, at *18 (quoting In re Tangoe, Inc. S’holders Litig., 2018 WL 6074435, at *12 (Del. Ch. Nov. 20, 2018)).
64 conceivable that the defendants lacked independence or were interested in the
transaction.291
“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.”292 “Establishing a lack of independence requires pleading allegations
that the directors are beholden to the [interested party] or so under [its] influence
that their discretion would be sterilized.”293 The Plaintiffs allege that the Defendant
Board members lacked independence from Knauf because of their alleged fear of
Knauf.
The Plaintiffs contend that after Knauf succeeded in its Withhold Campaign,
the Board abandoned its standalone plan for USG, rushed or abandoned other
potential buyers, and acceded to the Acquisition even though it had “misgivings”
about the deal.294 But the Plaintiffs allege no facts from which it can be reasonably
inferred that the Board’s actions were the result of anything other than the corporate
merits of the subject. The Plaintiffs simply argue that the Board’s actions “have
little rational explanation other than fear of Knauf.”295 But “Delaware law presumes
291 Morrison v. Berry, 2019 WL 7369431, at *13 (Del. Ch. Dec. 31, 2019). 292 In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *21 (Del. Ch. Oct. 24, 2014) (quoting Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)). 293 Id. (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993)) (internal quotation marks omitted). 294 Am. Compl., ¶ 8; see Pls.’ Opp’n Br., at 52. 295 Pls.’ Opp’n Br., at 52.
65 the independence of corporate directors,” and the Plaintiffs must overcome the
presumption by alleging facts as to Board’s lack of independence.296 The Plaintiffs’
conclusory allegation that no other explanation exists for the Board’s actions is
insufficient to carry their burden.297 That the Board chose to approve the Acquisition
three months after it had told Knauf that its $42.00 proposal was “wholly
inadequate” and that the Board was “highly focused on the intrinsic value of [its]
long-term strategic plan and measuring that against [$42.00 per share]” 298 is
insufficient to reasonably infer lack of independence because the Plaintiffs offer no
reasonable basis from which to conclude that the Board’s decision to accept the later
$44.00 offer was the result of “extraneous considerations or influences.”299 Again,
it is the Plaintiffs’ burden to plead lack of independence.300
Additionally, to my mind it is not clear how “fear” evinces lack of
independence when such fear, as alleged, results from a withhold campaign that the
Board vigorously contested. The Plaintiffs fail to allege facts that show the Board
simply capitulated after its defeat; on the contrary the Proxy Statement reflects
296 In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 995 (Del. Ch. 2014). 297 Pfeffer v. Redstone, 965 A.2d 676, 685 (Del. 2009) (“[C]onclusory allegations need not be treated as true, nor should inferences be drawn unless they truly are reasonable.” (quoting Feldman v. Cutaia, 951 A.2d 727, 731 (Del. 2008))). 298 Am. Compl., ¶ 112; 299 In re Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *21 (Del. Ch. Oct. 24, 2014) (quoting Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)). 300 Actions inexplicable as a matter of business judgment, of course, may be relevant to allegations of lack of good faith, a matter addressed, infra.
66 robust negotiations between USG and Knauf in May and June of 2018.301 The only
reasonable inference is that any influence that Knauf had on the Board resulted from
quotidian calculations of corporate interest, not a disabling lack on independence.
“Fear” of a corporate takeover threat—here fully justified after Knauf’s resounding
withhold victory—is a nod to reality, not a disabling extraneous influence. For these
reasons, it is not reasonably conceivable that the Board lacked independence from
The Plaintiffs also attempt to plead a non-exculpated claim by invoking the
Defendants’ alleged interestedness in the Acquisition. The Plaintiffs plead that all
Defendants other than Scanlon—that is, all eight of USG’s Board members other
than USG’s CEO (the “Non-Scanlon Defendants”)—were interested in the
Acquisition because a public ouster by Knauf would have imperiled their other
business and career interests, which they were not willing to sacrifice in light of their
relatively small financial interest in a higher sale price. If adequately pled, such a
claim would survive the Defendants’ Motion to Dismiss because “[w]hen entire
fairness is invoked at the pleading stage, the plaintiffs will be able to survive a
motion to dismiss by interested parties regardless of the presence of an exculpatory
301 E.g. Am. Compl., ¶¶ 164 (“Mr. Knauf rejected the Company’s $50.00 per share counterproposal and indicated that Knauf was willing to increase its proposed price per share to $43.50 . . . Defendants Scanlon and Leer . . . indicated that they believed that the Board may be willing to support a sale as low as $47.00 per share.”), 170 (“On June 5, 2018, Mr. Knauf delivered by email a revised written proposal, together with a markup of the merger agreement, in which he communicated Knauf’s ‘best and final’ offer of $44.00 per share.”).
67 charter provision because their conflicts of interest support a pleading-stage
inference of disloyalty.”302 “Interestedness means that the directors ‘appear on both
sides of a transaction [or] expect to derive any personal benefit from it in the sense
of self-dealing, as opposed to a benefit which devolves upon the corporation or all
stockholders generally.’”303 That the extraneous “benefit” here is actually the
avoidance of a detriment is of no moment to the analysis. The Defendant directors
must be considered individually in determining whether they were interested in the
Acquisition in breach of their duty of loyalty.304
The Amended Complaint details the other business interests and positions of
the Non-Scanlon Defendants which the Plaintiffs contend made the Non-Scanlon
Defendants interested in the Acquisition. They include director and officer positions
at other public companies, and board positions at nonprofit organizations.305 Though
the Defendants must be considered individually, it suffices to say that the Plaintiffs’
argument with respect to each of the Non-Scanlon Defendants’ interest in the
Acquisition (given their various reputational interests) is identical. The Plaintiffs
allege that each of the Non-Scanlon Defendants faced an “inherent positional
302 In re Straight Path Commc’ns Inc. Consol. S’holder Litig., 2018 WL 3120804, at *19 n.244 (Del. Ch. June 25, 2018) (quoting In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1180–81 (Del. 2015)). 303 Crimson, 2014 WL 5449419, at *21 (quoting Aronson, 473 A.2d at 812). 304 Cornerstone, 115 A.3d at 1182 (“[E]ach director has a right to be considered individually when the directors face claims for damages in a suit challenging board action.”). 305 Am. Compl., ¶ 186.
68 conflict” regarding the Acquisition because they had much to lose from a
“potentially career-ending and reputation killing proxy fight loss,” little to gain from
standing up to Knauf, and the Acquisition afforded them a liquidity event in the sale
of their equity interests in USG.306
The Plaintiffs’ principal argument is that Non-Scanlon Defendants capitulated
to Knauf because Knauf had made it known they would not stop pursuing an
acquisition of USG, and a proxy fight loss would damage their other business
interests, positions in other companies, and memberships on other public boards.307
Quoting at length a law review article by then-Chief Justice Strine, the Plaintiffs
contend that independent directors—such as the Non-Scanlon Defendants—are
“highly sensitive to resisting institutional campaigns at any company on whose
board they serve for fear that they will be targeted for withhold campaigns at all
companies with which they are affiliated.”308
Regardless of the merits of Chief Justice Strine’s argument, it is simply not
applicable here. Under the facts alleged, it is not reasonably conceivable that the
Non-Scanlon Defendants capitulated to Knauf in selfish defense of their outside
reputational interests because USG’s directors had already lost a public fight with
306 Id. ¶¶ 186–91; see Pls.’ Opp’n Br., at 53. 307 See Am. Compl., ¶ 186. 308 Pls.’ Opp’n Br., at 55 (quoting Leo E. Strine, Jr., Who Bleeds When the Wolves Bite?: A Flesh- and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, 126 Yale L.J. 1870, 1926 (2017)).
69 Knauf. Withhold votes were first proposed by Professor Grundfest as a referendum
on managerial performance, and they “represent an important form of shareholder
activism.”309 The Amended Complaint recounts at length the publicity surrounding
the Withhold Campaign, including Warren Buffett’s public opposition to the Board,
and that both ISS and Glass Lewis supported Knauf. Thus, the Board had already
lost exactly the type of public fight that the Plaintiffs contend made the Board
interested.310
In fact, the Plaintiffs plead that in the midst of the Withhold Campaign, Knauf
“threat[ened]” that the Board “would surely want resolution [on a deal] prior to the
annual meeting of stockholders scheduled for May 9, 2018, to avoid a vote against
the Company’s four director nominees.”311 That is, Knauf alluded to the Defendants’
opportunity to take the path that the Plaintiffs suggest amounts to a breach of the
duty of loyalty. But the Board declined this course of action, instead proceeding
with negotiations on a more measured timeline, thereby accepting the reputational
harm of an institutional campaign defeat in order to continue to pursue the corporate
interest.
309 Marcel Kahan & Edward Rock, The Insignificance of Proxy Access, 97 Va. L. Rev. 1347, 1358, 1374 (2011). 310 Pope Clement VII learned in dealing with Henry VIII that excommunication is a tool that loses its edge after it is employed. It is the same with withhold campaigns, I presume. 311 Am. Compl., ¶ 156 (internal quotation marks omitted).
70 Likewise, the Plaintiffs ask me to draw the inference that the Non-Scanlon
Defendants “for the purpose of protecting their reputations as fiduciaries, breached
their fiduciary duties, risking the far greater blackening of their fiduciary
reputations.”312 Ironic if true. This sounds like a misplaced motivation, because, I
believe it is. Given the circumstances alleged by the Plaintiffs, it is not reasonably
conceivable that the Non-Scanlon Defendants capitulated to Knauf to protect their
reputations, after the Withhold Campaign’s success, when any reputational loss that
could come from a public loss to Knauf had already occurred.
The Plaintiffs’ remaining allegations regarding the interestedness of the Non-
Scanlon Defendants are likewise not reasonably conceivable. The Plaintiffs allege
that the Non-Scanlon Defendants did not have enough of a financial interest to push
Knauf for a better price but at the same time had enough pecuniary interest in a
liquidity event such that they were interested in the Acquisition. But this Court has
held that “[w]hen directors or their affiliates own ‘material’ amounts of common
stock, it aligns their interests with other stockholders by giving them a ‘motivation
to seek the highest price’ and the ‘personal incentive as stockholders to think about
the tradeoff between selling now and the risks of not doing so.’”313 The Non-Scanlon
Defendants’ personal financial interest in liquidating their USG stock thus aligned
312 Morrison v. Berry, 2019 WL 7369431, at *14 (Del. Ch. Dec. 31, 2019). 313 Chen v. Howard-Anderson, 87 A.3d 648, 671 (Del. Ch. 2014) (quoting In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 600 (Del. Ch. 2010)).
71 their interests with stockholders and they did not receive a benefit in that regard other
than “a benefit which devolves upon the corporation or all stockholders
generally.”314 Given that it is not reasonably conceivable that the Non-Scanlon
Defendants were interested in the Acquisition due to their fear of a public loss to
Knauf, it is likewise not reasonably conceivable that the personal give of pushing
for a higher price (i.e. putting their reputations on the line) was not worth the get (in
the form of increased consideration).315 Consequently, it is not reasonably
conceivable that the Non-Scanlon Defendants’ incentives were akilter, nor that they
were interested in the Acquisition. I note that the Amended Complaint is silent with
respect to any individual director’s need for “fire sale” liquidity, nor does the lengthy
resistance to Knauf indicate it is reasonably conceivable.
With regard to Scanlon, the Plaintiffs simply allege that she stood to receive
a more than $36 million “golden parachute” in connection with the Acquisition.316
But I need not address whether Scanlon was interested in the Acquisition; since the
Plaintiffs have not pled facts from which it is reasonably conceivable that a majority
314 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984); accord Chen, 87 A.3d at 671 (“If the decision is made to sell, ‘[a] director who is also a shareholder of his corporation is more likely to have interests that are aligned with the other shareholders of that corporation as it is in his best interest, as a shareholder, to negotiate a transaction that will result in the largest return for all shareholders.’” (quoting Orman v. Cullman, 794 A.2d 5, 27 n.56 (Del. Ch. 2002))). 315 Notwithstanding the Plaintiffs’ allegation that the Defendants owned relatively little USG stock, Am. Compl., ¶ 188, because there was no further threat of reputational harm, they faced only the upside of increased consideration for their USG stock. 316 Id. ¶ 190.
72 of the Board was interested in the Acquisition, it is not reasonably conceivable that
the Acquisition would be subject to entire fairness due to the interestedness of
Scanlon alone.317 Consequently, there can be no pleading-stage inference of
disloyalty in this regard, and the Plaintiffs’ allegations of interestedness are
insufficient to state a non-exculpated claim for breach of fiduciary duty.
2. It is Not Reasonably Conceivable that the Defendants Acted in Bad Faith
Other than pleading lack of independence or interestedness, the Plaintiffs can
survive the Defendants’ Motion to Dismiss by pleading facts supporting a rational
inference that the Defendants acted in bad faith.318 “A director acts in bad faith
where he or she ‘intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his or her duties.’”319 “A demonstration of
bad faith requires acts or omissions taken against the interest of [USG], with
scienter.”320
317 City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr. v. Comstock, 2016 WL 4464156, at *18 (Del. Ch. Aug. 24, 2016) (“If a plaintiff alleging a duty of loyalty breach is unable to plead facts demonstrating that a majority of a board that approved the transaction in dispute was interested and/or lacked independence, the entire fairness standard of review is not applied and the Court respects the business judgment of the board.” (quoting Orman, 794 A.2d at 23)). 318 In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1180 (Del. 2015). 319 van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. Nov. 30, 2017) (quoting In re Answers Corp. S’holder Litig., 2012 WL 1253072, at *7 (Del. Ch. Apr. 11, 2012)). 320 Morrison v. Berry, 2019 WL 7369431, at *14 (Del. Ch. Dec. 31, 2019).
73 a. Omissions in the Proxy Statement
The Plaintiffs suggest that the material non-disclosure of the Board’s view of
intrinsic value (and its consequent “misgivings” about the Acquisition) give rise to
an inference of bad faith. This non-disclosure, of course, permitted the Plaintiffs to
plead around Corwin.
In contrast with the required showing to plead around Corwin, a pleading of
bad faith “requires a pleading of facts with respect to the [maldisclosures] from
which I may reasonably infer breach of the duty of loyalty, and not simply adequate
pleading of a [maldisclosure].”321 An adequate pleading of bad faith must plead that
the maldisclosure was “intentional and constitute[d] more than an error of judgment
or gross negligence.”322 This standard is entirely distinct from the required pleading
to show an uninformed vote under Corwin, which merely requires that the complaint
“when fairly read, supports a rational inference that material facts were not disclosed
or that the disclosed information was otherwise materially misleading.”323 Nowhere
does the standard for pleading a material non-disclosure or materially misleading
disclosure under Corwin refer to, or incorporate, any inquiry regarding knowledge
and purpose of the non-disclosure. The focus is on the stockholder-reader, not the
321 Id. at *18 (Del. Ch. Dec. 31, 2019) (citing Nguyen v. Barrett, 2016 WL 5404095, at *3 (Del. Ch. Sept. 28, 2016)). 322 Id. 323 Morrison v. Berry, 191 A.3d 268, 282 (Del. 2018).
74 drafter. But when analyzing bad faith, the creator is the crux of the analysis, and the
why is the locus of the inquiry.324 Consequently, even if allegations of omissions or
misleading disclosures are sufficient to preclude business judgment review under
Corwin, where the same omissions or misleading disclosures are pled as evincing
bad faith, the pleading is subject to a finer-toothed comb—that of scienter—which
is among our law’s most straightened.325 To plead bad faith based on the non-
disclosure of the Board’s view of USG’s intrinsic value, the Plaintiffs must plead
that the Defendant directors intentionally withheld their view of intrinsic value in
conscious disregard of their fiduciary duties.326
The Plaintiffs’ allegations of bad faith omissions intimate that the Board did
not disclose its view of USG’s intrinsic value so that USG’s stockholders would
approve a transaction that the Board did not believe offered USG’s stockholders fair
value. But as noted, supra, it is not reasonably conceivable that the Board lacked
independence or was interested in the Acquisition, and so there is no reasonable
inference that the disclosure deficiency emanated from extraneous influences or
324 Ironworkers Dist. Council of Philadelphia & Vicinity Ret. & Pension Plan v. Andreotti, 2015 WL 2270673, at *27 n.257 (Del. Ch. May 8, 2015), aff’d 132 A.3d 748 (Del. 2016) (TABLE) (noting the role of motive in determining whether bad faith is adequately pled). 325 Mesirov v. Enbridge Energy Co., Inc., 2018 WL 4182204, at *13 (Del. Ch. Aug. 29, 2018) (“The scienter pleading requirement is among the most difficult in our law to satisfy.” (citing RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 862 (Del. 2015))). 326 van der Fluit v. Yates, 2017 WL 5953514, at *8 (Del. Ch. Nov. 30, 2017).
75 considerations. The Plaintiffs thus must allege bad faith “in the disclosures
themselves.”327
Of course, the Board’s view of intrinsic value—$50.00 as alleged by the
Plaintiffs—is not the same as the $44.00 per share deal price. At the same time, the
Proxy Statement disclosed that “[t]he Board considered that [$44.00 per share] was
more favorable to our stockholders than the potential value that would reasonably
be expected to result from other alternatives available to [USG], including the
continued operation of the [USG] on a standalone basis and other potential
actionable strategic transactions, in light of a number of factors.”328 Thus, as the
Board told it, consideration of whether the deal price was favorable was influenced
by many considerations, including considerations external to the operations of
USG’s business. This is unsurprising to any market observer.
Assuming that the Defendant directors believed intrinsic value to be $50.00,
in isolation their statement that $44.00 is higher than the “reasonably . . . expected”
value of continued operations on a “standalone basis,” appears inconsistent. That
inconsistency tends to disappear in light of the threat of hostile action should the
“standalone” option be pursued; it certainly does not create a reasonable inference
of bad faith.
327 Morrison, 2019 WL 7369431, at *18. 328 Proxy Statement, at 45.
76 Considering the other disclosures in the Proxy Statement, it is not reasonably
conceivable that the Proxy Statement “represents the knowingly-crafted deceit or
knowing indifference to duty that would show bad faith.”329 The Proxy Statement
disclosed that the Board initially approved Scanlon to begin negotiations with USG
within a range of $48.00 to $51.00.330 Thus, it was no secret to USG’s stockholders
that the Board preferred to sell USG for more than $44.00 per share. Moreover, the
Proxy Statement disclosed that the approval of that negotiation range was informed
by the Board’s view of intrinsic value, and that the Board’s view of intrinsic value
was itself informed by information gathered from USG’s management and
bankers.331 Further, notably, the Board’s approval of the negotiating range occurred
after it was obvious that the Withhold Campaign would succeed. At that point,
329 Morrison, 2019 WL 7369431, at *18. 330 Proxy Statement, at 40. 331 Id. at 36 (“Representatives of Goldman Sachs reviewed with the Board the key terms in the revised proposal from Knauf. Goldman Sachs also reviewed changes to certain financial analyses since December 2017, noting that since then there had been an increase in the Company’s 52-week high stock price, as well as an increase in the median and highest analyst target stock prices. The discussion then turned to a review by Goldman Sachs and J.P. Morgan of their preliminary financial analyses and certain inputs that had changed since December 2017 based on market changes and other factors, including the passage of U.S. tax reform.”) (“The Board then discussed with the Company’s senior management and representatives of Jones Day, Goldman Sachs and J.P. Morgan the possible responses to Knauf’s revised proposal and methods to give Knauf additional direction that could cause Knauf to meaningfully improve its proposal to better reflect the Company’s intrinsic value, including the strategy of rejecting Knauf’s offer so that Knauf would further increase its proposal.”) (“The Board authorized Ms. Scanlon to send a written response to Knauf rejecting the current $42.00 proposal, while also providing additional information regarding the elements of the Company’s business plan that the Board believed supported a higher intrinsic value for the Company.”), 37 (“Ms. Scanlon again reiterated that the Board would engage around any bona fide proposal that reflects the Company’s intrinsic value, and offered to have a meeting between the respective financial advisors to discuss the Company’s views on value.”).
77 hostile action absent a negotiated transaction was likely, and the Board’s position
with respect to negotiations needed to be reasonable to avoid such hostile action. In
that context, the only reasonable inference is that the Board’s approval of a $48.00
to $51.00 negotiating range represented its view of a realistic transaction price, not
an overblown opening gambit that risked driving Knauf away, as such a position
could have been catastrophic to a negotiated (rather than hostile) transaction. The
fact that the Board disclosed this range in the Proxy Statement belies any bad faith
attempt to conceal “intrinsic value”; a stockholder reading the Proxy Statement
would be well aware that the directors believed a sale should occur in the $48.00 to
$51.00 range, although the Board was unable to achieve such a price.
Moreover, it is not reasonably conceivable that the directors would have
demonstrated a conscious indifference to their fiduciary duties by not disclosing
their view of intrinsic value, while at the same time disclosing to USG’s stockholders
that the Board had chosen not to make that very disclosure.332 It is near-
inconceivable (and thus not reasonably conceivable) that an independent and
disinterested Board acting disloyally would have professed its bad faith to USG’s
stockholders in the Proxy Statement. While I may infer that the Proxy Statement
332 Id. at 40 (“The Board also authorized Ms. Scanlon to begin negotiations on value within a range of $48.00 and $51.00 per share and discussed the pros and cons of issuing a public statement regarding the Board’s view of intrinsic value, but decided not to issue such a statement.” (emphasis added)).
78 negligently failed to inform USG’s stockholders of the Board’s view of USG’s
intrinsic value, in light of the other disclosures made, it is not reasonably conceivable
that such non-disclosure rises to the level of conscious disregard of duty.
b. Revlon Claim
Finally, the Plaintiffs argue that the sales process was not reasonable, and that
the Defendants failed to comply with duties imposed under Revlon.333 The Plaintiffs
maintain that, even if they have not pled a non-exculpated breach of loyalty, they
may nonetheless survive this Rule 12(b)(6) Motion to Dismiss if they have pled facts
by which I may reasonably infer the Defendant directors have breached their “Revlon
duties.” That is, they assert that a freestanding “Revlon claim” for damages has been
adequately been pled against the Defendant directors. Describing the duties of
directors in way of a control transaction as “Revlon duties,” to my mind, is something
of a misnomer; the fiduciary duties are loyalty and care, in any situation—the
specific situation, however, dictates the actions required for fulfilment of those
duties. Accordingly, where a board decides to sell the company and thus terminate
stockholder ownership, the director’s fiduciary duties mandate that they concentrate
on securing the best price. Put differently, to comply with Revlon, “when a board
engages in a change of control transaction, it must not take actions inconsistent with
333 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).
79 achieving the highest immediate value reasonably attainable.”334 There is no dispute
that the Acquisition constituted a change of control triggering Revlon and that
“Revlon can provide a contextual inquiry about whether the [] Defendants’ choices
were ‘reasonable under the circumstances as a good faith attempt to secure the
highest value reasonably attainable.’”335 The Plaintiffs argue that it follows, that if
it is reasonably conceivable that the Defendants’ actions regarding the Acquisition
were less than reasonable, the Motion to Dismiss must be denied. I disagree.
Revlon “duties” should not be confused with the Revlon standard of review,
applicable principally outside the damages context, under which directors must act
reasonably.336 The Revlon directive that the Defendant directors, having made a
decision to sell, must focus on price, does not alter the Plaintiffs’ pleading burden
here. The Plaintiffs seek only post-closing money damages in this Action. As our
Supreme Court has noted, Revlon “[was] not [a] tool[] designed with post-closing
money damages claims in mind, the standards [it] articulate[s] do not match the gross
negligence standard for director due care liability under Van Gorkom, and with the
prevalence of exculpatory charter provisions, due care liability [itself] is rarely even
334 C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1067 (Del. 2014) (citing Revlon, 506 A.2d at 182). 335 Morrison v. Berry, 2019 WL 7369431, at *15 (Del. Ch. Dec. 31, 2019) (quoting RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 849 (Del. 2015)). 336 For instance, a showing that directors have constructed an unreasonable sales process can support pre-merger injunctive relief. See e.g. In re Del Monte Foods Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011).
80 available.”337 So it is here; under USG’s Charter, the Defendants are exculpated
from damages for all but loyalty breaches.
Consequently, although “Revlon can provide a contextual inquiry about
whether the [] Defendants’ choices were reasonable under the circumstances as a
good faith attempt to secure the highest value reasonably attainable,” the Plaintiffs
still bear the burden to plead a non-exculpated claim.338 Therefore, an allegation
implying that a Defendant failed to satisfy Revlon is insufficient on its own to plead
a non-exculpated breach of the duty of loyalty,339 and a sufficient pleading must
reasonably imply that the directors’ failure to act reasonably to maximize price was
tainted by interestedness or bad faith.340 “In the context of a sale of corporate
control, bad faith is qualitatively different from ‘an inadequate or flawed effort’ to
337 Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015) (citing Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)). 338 Morrison, 2019 WL 7369431, at *15 (quoting RBC, 129 A.3d at 849) (internal quotation marks omitted). 339 See In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *17 (Del. Ch. Dec. 30, 2019) (“In this regard, I have already determined that Plaintiffs have failed to plead viable breach of fiduciary duty claims against the Essendant Board. But that determination was in the context of, and informed by, Essendant’s Section 102(b)(7) charter provision; in other words, the focus was on whether the Complaint contained well-pled allegations of a loyalty breach. There remains a possibility that Plaintiffs have well pled a breach of the Essendant Board’s Revlon duties flowing from the duty of care . . . .” (footnotes omitted)). 340 See Morrison, 2019 WL 7369431, at *15 (“In this context, such a pleading requires the Plaintiff to show that it is reasonably conceivable that the Director Defendants knowingly chose to ignore their duty once a sale process was commenced; to maximize stockholder value.”); In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017) (“In light of the exculpatory provision, to state an actionable Revlon claim, Plaintiff must plead that the Individual Defendants consciously disregarded their duties, ‘knowingly and completely failed to undertake their responsibilities,’ and ‘utterly failed to attempt to obtain the best sale price.’” (quoting Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243–44 (Del. 2009))); Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *16 (Del. Ch. June 21, 2019).
81 obtain the highest value reasonably available for a corporation.”341 Moreover, absent
sufficient allegation of directors’ “improper intent, a plaintiff must point to ‘a
decision [that] lacked any rationally conceivable basis’ associated with maximizing
stockholder value to survive a motion to dismiss.”342
The Plaintiffs set forth copious allegations designed to demonstrate the
unreasonableness of the Board’s sales process. These include that after Knauf’s
successful Withhold Campaign, the Board abandoned USG’s standalone plan and
undertook a sale, that the Board rushed the sale and/or abandoned other bidders, and
that the Board ultimately capitulated to a sale to Knauf at only $44.00 when it had
repeatedly stated that Knauf’s takeover attempts at $42.00 per share undervalued
USG, were opportunistic, and did not compensate all stockholders for USG’s
intrinsic value.
But for the Plaintiffs to adequately plead a non-exculpated breach of duty,
they must not only allege that the Board’s sales process was unreasonable, they must
also allege that the Board’s alleged failure to run a Revlon-compliant sales process
was an “intentional failure or a conscious disregard of the duty to seek the highest
price reasonably available.”343 Importantly, where (as here) there is no adequate
pleading of conflicted interests or lack of independence on the part of the directors,
341 Essendant, 2019 WL 7290944, at *13 (quoting Lyondell, 970 A.2d at 243). 342 Id. (quoting Chen v. Howard-Anderson, 87 A.3d 648, 684 (Del. Ch. 2014)). 343 Id. at *14 (citing Lyondell, 970 A.2d at 243) (emphasis in original).
82 the scienter requirement compels that “a finding of bad faith should be reserved for
situations where ‘the nature of [the director’s] action[s] can in no way be understood
as in the corporate interest.’”344
The Plaintiffs overall gripe is that the Board did not insulate itself from the
pressures of its two largest stockholders and sold at a price less than 5% above an
offer345 the Board had previously stated “substantially undervalues the Company and
is not in the best interest of all of USG’s shareholders.”346 But, as an initial matter,
the Revlon mandate—best price—did not kick in until the Board began negotiating
to sell USG,347 so that an analysis under Revlon excludes the Board’s rejection of
Knauf’s first two offers and its resistance to the Withhold Campaign.
Is it nonetheless reasonably conceivable that the Defendants acted in bad faith
in agreeing to the Acquisition in the aftermath of the Withhold Campaign? The story
painted by the Plaintiffs is that after their defeat, the Defendant directors surrendered
to Knauf, simply asking Knauf to “pay a small ‘obstinance tax’ . . . that allow[ed]
the [B]oard to save face and claim it protected shareholders from a heist.”348
344 Saba, 2017 WL 1201108, at *20 (quoting In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch. May 20, 2016)). 345 $42.00. 346 Am. Compl., ¶ 112. 347 Lyondell, 970 A.2d at 242 (Del. 2009). In any event, there is no reasonable inference that these actions were in bad faith—they were intended to resist an offer that the Board, and Plaintiffs here, agree was too low. 348 Am. Compl., ¶ 157.
83 However, after review of the allegations in the Amended Complaint I find it
not reasonably conceivable that the Defendants intentionally acted outside of the
corporate interest, or intentionally disregarded that interest. After the Withhold
Campaign’s success was a foregone conclusion, the Board authorized negotiations
within a range that includes what the Plaintiffs plead was USG’s actual value. The
Amended Complaint pleads no facts from which I can reasonably infer that the
negotiation process was a sham or that the Board was not actually seeking a higher
price for USG. The Plaintiffs may contend that the Board negotiated poorly, perhaps
unreasonably,349 but that alone is insufficient to plead bad faith.350 “[T]here is a vast
difference between an inadequate or flawed effort to carry out fiduciary duties and
a conscious disregard for those duties.”351
Given the Board’s situation—against the ropes after being trounced by its two
largest stockholders in the Withhold Campaign—the Board sought a sale at a price
above what Knauf had offered. The Board obtained counsel and advice from
financial professionals;352 sought competing bids;353 negotiated for a higher price;354
349 Because a Revlon violation absent bad faith is exculpated from liability, I need not reach, and do not reach, a conclusion as to whether the Defendants’ actions were unreasonable. 350 See Lyondell, 970 A.2d at 243 (“[T]here are no legally prescribed steps that directors must follow to satisfy their Revlon duties. Thus, the directors’ failure to take any specific steps during the sale process could not have demonstrated a conscious disregard of their duties.”); In re Morton’s Rest. Grp., Inc. S’holders Litig., 74 A.3d 656, 676 n.112 (Del. Ch. 2013). 351 Lyondell, 970 A.2d at 243. 352 Am. Compl., ¶ 155. 353 Id. ¶ 152. 354 Id. ¶ 164.
84 and attempted to persuade Knauf that the Board’s view of value was correct.355
These allegations are a far cry from the “extreme set of facts” necessary to support
a reasonable inference that USG’s Board acted in bad faith in its sale process.356
Ultimately, the Plaintiffs are unsatisfied with the price that resulted from the
Defendants’ efforts, but as succinctly explained by Vice Chancellor Slights,
“criticizing the price at which a board agrees to sell a company, without more, does
not a bad a faith claim make.”357
The Revlon reasonableness standard survives as a pleading standard, in a post-
closing action for damages, where a plaintiff alleges liability on the part of a third
party who has aided and abetted directors’ breach of the standard.358 No such
liability is alleged here. In order to avoid dismissal, a pleading from which I can
merely infer an unreasonable sales process is not enough to overcome an exculpatory
clause’s protections; to survive, such pleading must reasonably imply breach of a
non-exculpated duty. Even if (exculpated) directors have failed to conduct a
reasonable sales process, a viable damages claim based on that process requires well-
pled allegations that implicate the Board’s duty of loyalty.359 Because the allegations
355 Id. 356 In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *14 (Del. Ch. Dec. 30, 2019). 357 Id. 358 See Kahn v. Stern, 183 A.3d 715, at *1 n.4 (Del. 2018) (TABLE). 359 In re Saba Software, Inc. S’holder Litig., 2017 WL 1201108, at *20 (Del. Ch. Mar. 31, 2017) (“In light of the exculpatory provision, to state an actionable Revlon claim, Plaintiff must plead that the Individual Defendants consciously disregarded their duties, ‘knowingly and completely failed to undertake their responsibilities,’ and ‘utterly failed to attempt to obtain the best sale
85 here, together with the reasonable inferences therefrom, do not make it reasonably
conceivable that the Board acted in bad faith in the sales process, the Plaintiffs have
not stated a “Revlon” claim upon which relief may be granted.
III. CONCLUSION
The Defendants’ Motion to Dismiss is GRANTED. The parties should submit
a form of order consistent with this Memorandum Opinion.
price.’”); Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., 2019 WL 2564093, at *18 (Del. Ch. June 21, 2019) (“The allegations support a pleadings-stage inference that the Director Defendants breached their duty of care by failing to employ a reasonable process that managed [their financial advisor’s] influence. Whether the Director Defendants’ actions in this regard rose to the level of bad faith or merely state a claim for breach of the duty of care is a close call.”); Morrison v. Berry, 2019 WL 7369431, at *15 (Del. Ch. Dec. 31, 2019) (“More to the point, the Plaintiff must plead facts from which I may reasonably infer that the Director Defendants were aware of these alternatives, understood that they would maximize value, but nonetheless chose instead to act against the interests of the Company and its stockholders.”).
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