In re Zale Corporation Stockholders Litigation

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE

D ONALD F. PARSONS, JR. New Castle County Courthouse VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734

Date Submitted: October 5, 2015 Date Decided: October 29, 2015

Seth D. Rigrodsky, Esq. Michael J. Maimone, Esq. Brian D. Long, Esq. Gregory E. Stuhlman, Esq. Gina M. Serra, Esq. Greenberg Traurig Rigrodsky & Long, P.A. The Nemours Building 2 Righter Parkway, Suite 120 1007 North Orange Street, Suite 1200 Wilmington, DE 19803 Wilmington, DE 19801

Gregory P. Williams, Esq. Bradley R. Aronstam, Esq. J. Scott Pritchard, Esq. Ross Aronstam & Moritz LLP Richards, Layton & Finger, P.A. 100 South West Street, Suite 400 920 North King Street Wilmington, DE 19801 Wilmington, DE 19801

Re: In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP

Dear Counsel:

On October 1, 2015, this Court issued its Memorandum Opinion (the

―Opinion‖)1 denying Defendant Merrill Lynch‘s2 motion to dismiss Plaintiffs‘

1 In re Zale Corp. S’holders Litig., 2015 WL 5853693 (Del. Ch. Oct. 1, 2015). 2 Terms not otherwise defined herein have the same meaning as in the Opinion. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 2

Complaint, which alleged that Merrill Lynch aided and abetted the Director

Defendants‘ breach of their duty of care. On October 5, 2015, Merrill Lynch

timely moved for reargument pursuant to Court of Chancery Rule 59(f) (the

―Motion‖). Plaintiffs opposed the Motion on October 9. For the reasons that

follow, the Motion is granted.

I. Legal Standard

To prevail on a motion for reargument under Rule 59(f), the moving party

must demonstrate that the Court either overlooked a decision or principle of law

that would have controlling effect or misapprehended the facts or the law such that

the outcome of the decision would be different.3 To justify reargument, a

misapprehension of the facts or the law must be both material and outcome-

determinative of the earlier decision.4 Mere disagreement with the Court‘s

3 See, e.g., Preferred Invs., Inc. v. T&H Bail Bonds, 2013 WL 6123176, at *4 (Del. Ch. Nov. 21, 2013); Medek v. Medek, 2009 WL 2225994, at *1 (Del. Ch. July 27, 2009); Reserves Dev. LLC v. Severn Sav. Bank, FSB, 2007 WL 4644708, at *1 (Del. Ch. Dec. 31, 2007). 4 See, e.g., Preferred Invs., 2013 WL 6123176, at *4; Aizupitis v. Atkins, 2010 WL 318264, at *1 (Del. Ch. Jan. 27, 2010); Medek, 2009 WL 2225994, at *1. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 3

resolution of a matter is not sufficient, and the Court will deny a motion for

reargument that does no more than restate a party‘s prior arguments.5

II. The Motion Supports Reconsideration of the Opinion’s Reasoning In the Motion, Merrill Lynch contends that its motion to dismiss should be

granted based on a Delaware Supreme Court decision that was issued on October

2, 2015, one day after I issued the Opinion. The crux of the Motion is that, in

evaluating whether the Director Defendants breached their fiduciary duties, I

applied the Revlon enhanced scrutiny standard of review (―Revlon‖) when I should

have applied the business judgment rule standard of review (―BJR‖). In In re KKR

Financial Holdings LLC Shareholder Litigation, this Court held that, although the

entire fairness standard of review generally would apply to a merger where a

majority of the corporation‘s directors were not independent, BJR applies when the

merger is approved by a majority vote of disinterested, fully informed

stockholders, even if that vote is statutorily required as opposed to voluntarily

5 See, e.g., Preferred Invs., 2013 WL 6123176, at *4; In re Mobilactive Media, LLC, 2013 WL 1900997, at *1 (Del. Ch. May 8, 2013); Brown v. Wiltbank, 2012 WL 5503832, at *1 (Del. Ch. Nov. 14, 2012). In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 4

sought by the directors.6 The Supreme Court affirmed that holding in Corwin v.

KKR Financial Holdings LLC and agreed that the fully informed vote of a majority

of disinterested stockholders also invokes BJR review in cases in which Revlon

otherwise would apply.7

In the Opinion, I found, based on the allegations in the Complaint, that the

Merger was approved by a majority of disinterested stockholders in a fully

informed vote.8 Despite acknowledging the strength of the reasoning in KKR, I

declined to follow this Court‘s holding in that case because I interpreted the

Supreme Court‘s decision in Gantler v. Stephens9 as ―holding that an enhanced

standard of review cannot be pared down to the business judgment rule as a result

of a statutorily required stockholder vote, even one rendered by a fully informed,

disinterested majority of stockholders.‖10 As Merrill Lynch notes, however, the

6 101 A.3d 980, 1001 (Del. Ch. 2014), aff’d sub nom., Corwin v. KKR Fin. Hldgs. LLC, – A.3d –, 2015 WL 5772262 (Del. Oct. 2, 2015). 7 2015 WL 5772262, at *3 (―[T]he Chancellor‘s analysis of the effect of the uncoerced, informed stockholder vote is outcome-determinative, even if Revlon applied to the merger.‖). 8 Zale, 2015 WL 5853693, at *9-10. 9 965 A.2d 695 (Del. 2009). 10 Zale, 2015 WL 5853693, at *10. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 5

Supreme Court in Corwin interpreted Gantler ―as a narrow decision focused on

defining a specific legal term, ‗ratification,‘ and not on the question of what

standard of review applies if a transaction not subject to the entire fairness standard

is approved by an informed, voluntary vote of disinterested stockholders.‖11

I therefore grant Merrill Lynch‘s motion for reargument as to my

interpretation of Gantler because, in the Opinion, I misapprehended the law

regarding the cleansing effect of a fully informed, statutorily required vote by a

disinterested majority of stockholders in the circumstances of the Zale case. This

misapprehension was both material and potentially outcome-determinative as to

Merrill Lynch‘s aiding and abetting liability because I incorrectly applied Revlon

rather than BJR when I reviewed the Complaint to determine whether it adequately

alleged that the Director Defendants breached their fiduciary duties.

III. BJR Is the Appropriate Standard In the Opinion, I concluded, under Revlon, that it was reasonably

conceivable that the Director Defendants breached their fiduciary duty of care and

that Merrill Lynch aided and abetted that breach.12 Merrill Lynch argues that BJR

11 2015 WL 5772262, at *5. 12 Zale, 2015 WL 5853693, at *18-20, *22. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 6

rather than Revlon should apply because: (1) the Supreme Court held that the fully

informed vote of a disinterested majority of stockholders invokes BJR review in

cases in which Revlon otherwise would apply; and (2) I held that the Merger was

approved by a majority of disinterested stockholders in a fully informed vote.

Plaintiffs oppose the Motion and contend that, even under Corwin, BJR

should not apply in this case because a majority of the Zale stockholders approving

the Merger were not disinterested and the vote was not fully informed. I explicitly

addressed in the Opinion, however, the grounds on which Plaintiffs base these

arguments. Specifically, I concluded that Plaintiffs failed to allege adequately that

Golden Gate was interested as to the Merger or that the Proxy materially was

deficient. Because Plaintiffs fail to highlight a decision or principle of law or a

fact that I overlooked or misapprehended in the Opinion that would justify

reargument on this point, their opposition represents a mere disagreement with the

Opinion that does no more than restate their prior arguments. I decline, therefore,

to revisit those arguments and agree with Merrill Lynch that BJR is the appropriate

standard of review based on my previous determination that Plaintiffs had failed to

allege facts from which one conceivably could infer that the Merger was not

approved by a disinterested majority of Zale‘s stockholders in a fully informed

vote. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 7

IV. The Motion Supports Dismissal of the Complaint

A. The standard for a breach of the duty of care is gross negligence, not waste Having granted in part Merrill Lynch‘s motion for reargument and decided

that BJR is the appropriate standard of review, my final task is to determine

whether the Opinion‘s conclusion as to Merrill Lynch‘s motion to dismiss should

change. As an initial matter, I must ascertain whether: (1) the cleansing effect of

the stockholder vote requires Plaintiffs to state a claim for waste regarding the

Director Defendants‘ actions in order to defeat Merrill Lynch‘s motion to dismiss;

or (2) whether Plaintiffs may rebut the BJR presumption as to the Director

Defendants‘ duty of care and defeat Merrill Lynch‘s motion to dismiss by showing

that it is reasonably conceivable that the Director Defendants‘ actions were grossly

negligent.

Merrill Lynch argues that ―[u]nder the business judgment rule, plaintiffs

must ‗show that the board‘s decision cannot be attributed to any rational business

purpose—which, in effect, is the standard for waste under Delaware law.‘‖ 13

Further, in KKR, Chancellor Bouchard stated, ―the legal effect of a fully-informed

13 Merrill Lynch‘s Mot. ¶ 8 (quoting Calma on Behalf of Citrix Sys., Inc. v. Templeton, 114 A.3d 563, 577 (Del. Ch. 2015)). In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 8

stockholder vote of a transaction with a non-controlling stockholder is that the

business judgment rule applies and insulates the transaction from all attacks other

than on the grounds of waste.‖14

In Corwin, however, although the Supreme Court generally affirmed KKR,

the Court also suggested that ―the gross negligence standard for director due care

liability under Van Gorkom‖ is the proper standard for evaluating ―post-closing

money damages claims.‖15 While the Court in Corwin quotes KKR and a law

review article for the proposition that a fully informed majority vote of

disinterested stockholders insulates directors from all claims except waste in the

explanatory parentheticals of two footnotes,16 the Court itself does not hold that

anywhere in its opinion. And, in In re TIBCO Software, Inc. Stockholders

Litigation, which was issued after Corwin, Chancellor Bouchard, the author of

KKR, denied a motion to dismiss after finding it reasonably conceivable that the

directors had breached their duty of care by acting in a grossly negligent manner,

14 101 A.3d at 1001. 15 2015 WL 5772262, at *6. 16 See id. at *4 nn.13 & 19 (quoting KKR, 101 A.3d at 1001; and William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1317-18 (2001)). In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 9

despite the absence of any indication that the merger was not approved by a

majority of disinterested stockholders in a fully informed vote.17

Based on the language in Corwin and the approach taken by this Court in

TIBCO, I conclude that when reviewing a board of directors‘ actions during a

merger process after the merger has been approved by a majority of disinterested

stockholders in a fully informed vote, the standard for finding a breach of the duty

of care under BJR is gross negligence. Thus, although I concluded in the Opinion

that it was reasonably conceivable that the Director Defendants breached their duty

of care under a Revlon reasonableness standard, I have reexamined in the context

of the pending Motion the Director Defendants‘ actions to determine whether it is

reasonably conceivable that they were grossly negligent.18 If it is reasonably

conceivable that the Director Defendants breached their duty of care by acting in a

grossly negligent manner, then my conclusion in the Opinion as to Merrill Lynch‘s

17 2015 WL 6155894 (Del. Ch. Oct. 20, 2015). 18 As I noted in Zale, ―[t]he threshold for finding a breach of the duty of care in the Revlon reasonableness context is lower than in the business judgment rule context . . . [which] is predicated upon concepts of gross negligence.‖ 2015 WL 5853693, at *19 n.106 (citing In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 192 (Del. Ch. 2007); and McMullin v. Beran, 765 A.2d 910, 921 (Del. 2000)). In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 10

aiding and abetting liability would not change. If, however, it is not reasonably

conceivable that the Director Defendants were grossly negligent, then there would

be no predicate fiduciary duty breach for Merrill Lynch to have aided and abetted,

and Merrill Lynch‘s motion to dismiss would be granted.

B. It is not reasonably conceivable that the Director Defendants were grossly negligent To support an inference of gross negligence, ―the decision has to be so

grossly off-the-mark as to amount to reckless indifference or a gross abuse of

discretion.‖19 Delaware law instructs that the core inquiry in this regard is whether

there was a real effort to be informed and exercise judgment.20 ―Judicial inquiry

into whether directors have exercised ‗due care‘ in the decision-making context . . .

involves an examination of whether the directors informed themselves, before

‗making a business decision, of all material information reasonably available to

19 Solash v. Telex Corp., 1988 WL 3587, at *9 (Del. Ch. 1988) (internal citations omitted). 20 In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 968 (Del. Ch. 1996) (―Where a director in fact exercises a good faith effort to be informed and to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty of attention.‖). In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 11

them.‘‖21 ―In the context of a motion to dismiss, then-Vice Chancellor Strine

explained that gross negligence ‗requires the articulation of facts that suggest

a wide disparity between the process the directors used . . . and [a process] which

would have been rational.‘‖22

In TIBCO, this Court found it reasonably conceivable that the target‘s board

was grossly negligent in the context of a merger price that potentially was

depressed due to an error in several capitalization tables as to the number of

outstanding target company shares.23 Although the target‘s financial advisor

notified the board of the error, it did not notify the board that the acquirer had

relied on the erroneous number of shares in making its bid. After learning of the

error, the board met several times to ―assess and respond to the situation‖—just as

the Director Defendants did after learning of Merrill Lynch‘s presentation to

Signet—but the board did not inquire further with their financial advisor to

21 R. FRANKLIN BALOTTI & JESSE A. FINKELSTEIN, THE DELAWARE LAW OF CORPORATIONS & BUSINESS ORGANIZATIONS § 4.15 at 4-105 (3d ed. 2013) (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). 22 TIBCO, 2015 WL 6155894, at *23 (emphasis in original) (quoting Guttman v. Huang, 823 A.2d 492, 508 n.39 (Del. Ch. 2003)). 23 TIBCO, 2015 WL 6155894, at *23-24. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 12

determine if the acquirer had relied on the erroneous share count in making its

bid.24 Thus, Chancellor Bouchard stated:

One rationally would expect, for example, the Board to press [its financial advisor], which was responsible for negotiating with potential bidders and interacted directly with [the acquirer], for a complete explanation concerning the circumstances of the share count error (e.g., what caused it, who was responsible, etc.) and for whatever information it could provide concerning [the acquirer‘s] understanding of the share count error. . . . [T]he failure to make such basic inquiries does raise litigable questions over whether the Board acted in a grossly negligent manner and thus failed to satisfy its duty of care during the period between the discovery of the share count error and closing of the Merger.25 Although the board in TIBCO was exculpated from monetary liability for a breach

of the duty of care due to the 102(b)(7) provision in its charter, the Court found it

reasonably conceivable that the financial advisor aided and abetted the board‘s

duty of care breach by withholding the acquirer‘s reliance on the erroneous share

count in order to increase the odds of the merger being consummated, thereby

earning a significantly larger fee for its services.26

24 Id. at *23. 25 Id. 26 Id. at *24-26. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 13

In this case, I noted in the Opinion that ―[a]rguably, the Board‘s actions as to

Merrill Lynch in this case constitute a breach of the duty of care under a gross

negligence standard as well.‖27 Interestingly, in their opposition to the Motion,

Plaintiffs made no argument that the Director Defendants breached their duty of

care under a gross negligence standard. Unlike the Court in TIBCO, I conclude

that it is not reasonably conceivable that the Zale Director Defendants breached

their duty of care by acting in a grossly negligent manner as to their engagement of

Merrill Lynch.

My finding of reasonable conceivability as to the Director Defendants‘ duty

of care breach in the Opinion was based on Plaintiffs‘ allegations that the Director

Defendants, in examining whether Merrill Lynch would be an appropriate financial

advisor, did no more than: (1) consider internally the possibility that Merrill Lynch

may be conflicted; and (2) rely, without question, on Merrill Lynch‘s

representations that it had ―limited prior relationships [with Signet] and no

conflicts.‖28 ―Because of the central role played by investment banks in the

evaluation, exploration, selection, and implementation of strategic alternatives,

27 Zale, 2015 WL 5853693, at *19 n.106. 28 Id. at *19. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 14

directors must act reasonably to identify and consider the implications of the

investment banker‘s compensation structure, relationships, and potential

conflicts.‖29 Whereas in TIBCO the Court focused on the board‘s duty to

investigate and inquire further after the disclosure of the share count error, the

focus of the inquiry in this case was on whether the Director Defendants

discharged their duty of care when they first engaged Merrill Lynch.

The key issues in evaluating a duty of care claim under the gross negligence

standard are ―whether there was a real effort to be informed and exercise

judgment‖30 and ―whether the directors informed themselves . . . of all material

information reasonably available to them.‖31 The conduct of Merrill Lynch in this

case is troubling, and it was disclosed only belatedly to the Zale Board. I noted in

the Opinion that it is reasonable to expect directors to take additional steps to

obtain information material to the evaluation of their financial advisors‘

independence, such as by ―negotiating for representations and warranties in the

engagement letter as well as asking probing questions to determine what sorts of

29 In re Rural Metro Corp., 88 A.3d 54, 90 (Del. Ch. 2014). 30 Caremark, 698 A.2d at 968. 31 BALOTTI & FINKELSTEIN, supra note 21 § 4.15 at 4-105. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 15

past interactions the advisor has had with known potential buyers.‖32 Based on

Merrill Lynch‘s conduct, I am not inclined to modify that statement. In addition,

had Merrill Lynch disclosed the Signet presentation to the Board up front, it would

have better served the Zale stockholders and probably still could have obtained the

engagement.

In any event, I referenced the additional steps mentioned above in the Revlon

context addressed in the Opinion. Applying a gross negligence standard, I do not

find it reasonably conceivable that the Director Defendants‘ conduct amounted to

―reckless indifference or a gross abuse of discretion‖ or that the facts ―suggest

a wide disparity between the process the directors used . . . and [a process] which

would have been rational.‘‖33 I conclude, therefore, that the Complaint fails to

allege adequately that the Director Defendants breached their duty of care under a

gross negligence standard. Because there is no basis for a predicate fiduciary duty

breach, the Complaint also fails to allege that Merrill Lynch aided and abetted such

a breach.

32 Id. 33 See supra notes 19-22 and accompanying text. In re Zale Corporation Stockholders Litigation Civil Action No. 9388-VCP October 29, 2015 Page 16

V. Conclusion For the foregoing reasons, the Motion is granted. Accordingly, I have

reconsidered my Opinion in the context of this request for reargument. The

Complaint provides no basis for a showing of waste. Assuming that under Corwin

the gross negligence standard for a duty of care breach under BJR would apply,

Plaintiffs have not alleged sufficient facts to make it reasonably conceivable that

the Director Defendants breached their duty of care. As a result, I dismiss the

Complaint with prejudice as to the aiding and abetting claim against Merrill Lynch.

The Opinion is hereby amended in a manner consistent with this Letter Opinion.

IT IS SO ORDERED.

Sincerely,

/s/ Donald F. Parsons, Jr.

Donald F. Parsons, Jr. Vice Chancellor

DFP/ptp