Jeffrey I. Tilden v. John E. Cunningham, IV (Blucora, Inc., Nominal Defendant)
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFFREY I. TILDEN, derivatively on : behalf of Blucora, Inc., :
:
Plaintiff, :
:
v. : C.A. No. 2017-0837-JRS :
JOHN E. CUNNINGHAM, IV; : DAVID H.S. CHUNG; LANCE DUNN; : STEVEN W. HOOPER; ELIZABETH J. : HUEBNER; ANDREW M. SNYDER; : CHRISTOPHER WALTERS; MARY : ZAPPONE; WILLIAM J. RUCKELSHAUS; : GEORGE ALLEN; GCA ADVISORS, LLC, : a Delaware Limited Liability Company : (known at all relevant times as GCA : SAVVIAN ADVISORS, LLC); and : CAMBRIDGE INFORMATION GROUP, : INC., a Maryland corporation, and its wholly : owned and controlled subsidiary, : CAMBRIDGE INFORMATION GROUP I : LLC, a Delaware limited liability company, :
:
Defendants, :
:
and :
:
BLUCORA, INC., a Delaware corporation, :
:
Nominal Defendant. :
MEMORANDUM OPINION
Date Submitted: July 11, 2018 Date Decided: October 26, 2018
Chad J. Toms, Esquire and Kaan Ekiner, Esquire of Whiteford, Taylor & Preston LLC, Wilmington, Delaware; Ian S. Birk, Esquire of Keller Rodrback, L.L.P., Seattle, Washington; Chelsey L. Mam, Esquire and David M. Simmonds, Esquire of Gordon Tilden Thomas & Cordell, Seattle, Washington, Attorneys for Plaintiff Jeffrey I. Tilden.
A. Thompson Bayliss, Esquire, Michael A. Barlow, Esquire and Daniel J. McBride, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware and Daniel J. Dunne, Esquire of Orrick, Herrington & Sutcliffe LLP, Seattle, Washington, Attorneys for Defendants John E. Cunningham, IV, David H.S. Chung, Lance Dunn, Steve W. Hooper, Elizabeth J. Huebner, Christopher Walters, and Mary Zappone.
D. McKinley Measley, Esquire and Lauren Neal Bennett, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Christopher B. Durbin, Esquire and Jeff Lombard, of Cooley LLP, Seattle, Washington, Attorneys for Defendant William J. Ruckelshaus.
Rudolf Koch, Esquire and Diana M. Joskowicz, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Paul H. Beattie, Esquire of Rimon P.C., Seattle, Washington, Attorneys for Defendant GCA Advisors, LLC.
Garrett B. Moritz, Esquire and R. Garrett Rice, Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and Peter L. Simmons, Esquire and Michael P. Sternheim, Esquire of Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York, Attorneys for Defendants Cambridge Information Group, Inc., Cambridge Information Group I, LLC, Andrew M. Snyder and George Allen.
Bradley D. Sorrels, Esquire, Lori W. Will, Esquire and Andrew D. Berni, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Wilmington, Delaware and Barry M. Kaplan, Esquire and Gregory L. Watts, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Seattle, Washington, Attorneys for Nominal Defendant Blucora, Inc.
SLIGHTS, Vice Chancellor
Ignoring a Delaware forum selection clause in the bylaws of the Delaware
company whose interests he purports to represent, the plaintiff in this stockholder
derivative action has adopted an ill-fated “anywhere but Delaware” litigation
strategy. As either attorney or named plaintiff, he filed derivative claims against
certain directors of the Nominal Defendant, Blucora, Inc., first in the Superior Court
of King County, Washington, and then, in expanded form, in the Superior Court of
California in San Francisco. Both courts pointed to the forum selection bylaw and
determined that Plaintiff’s case belonged in Delaware. Apparently wanting to avoid
the third strike, Plaintiff has finally landed here—where he should have been all
along—bringing the same claims he unsuccessfully attempted to prosecute
elsewhere.
Plaintiff challenges three unrelated transactions authorized by Blucora’s
board of directors (the “Board”) at various times beginning in 2013 through 2015:
two separate Blucora acquisitions (the so-called “Monoprice” and “HD Vest”
transactions) and certain Blucora stock repurchases that allegedly facilitated
favorable stock trades by Blucora insiders. As for the acquisitions, Plaintiff contends
that the Board members in place at the time of the transactions violated their
fiduciary duties by failing to heed clear indicators that the transactions were
overpriced and would fail to deliver any value for the Company. While Plaintiff
now seeks to recast his Monoprice and HD Vest claims, even a cursory review of
the operative pleading reveals that these derivative claims are pled as failures of
oversight, “possibly the most difficult theory in corporation law upon which [he]
might hope to win a judgment.”1 As for the claims relating to Blucora’s stock
repurchases, Plaintiff couches these transactions as corporate waste and then invokes
the seminal Brophy v. Cities Serv. Co.2 to allege that certain Blucora insiders
breached their fiduciary duties by exploiting nonpublic information when trading
Blucora stock in the wake of the wasteful repurchases. These claims, also derivative,
require well-pled facts that allow a reasonable inference of intentional misconduct.
Against this backdrop, the specific claims raised in the Verified Derivative
First Amended Complaint (the “FAC”)3 comprise six counts:
Count I, against Director Defendants John Cunningham, David Chung, Lance Dunn, Steven Hooper, Elizabeth Huebner, Andrew Snyder, Christopher Walters, Mary Zappone and William Ruckelshaus “for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty in connection with the Company’s [October 13, 2015] acquisition of HD Vest”4;
1 Stone ex. rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 372 (Del. 2006) (citing In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 968 (Del. Ch. 1996)). 2 Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).
3 D.I. 2.
4 FAC ¶ 142.
Count II, against GCA Advisors, LLC (“GCA”)5 “for monetary damage and other injury to Blucora resulting from . . . GCA’s aiding and abetting the breach of fiduciary duties by [Director Defendants] Cunningham, Chung, Dunn, Hooper, Huebner, Snyder, Walters, Zappone and Ruckelshaus in connection with the Company’s [October 13, 2015] acquisition of HD Vest”6;
Count III, against Director Defendants Andrew Snyder, John Cunningham, Elizabeth Huebner, Steven Hooper, David Chung, Lance Dunn and William Ruckelshaus “for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty” 7 by disregarding “observable red flags”8 “in connection with the Company’s [August 22, 2013] acquisition of Monoprice”9;
Count IV, against Director Defendants Andrew Snyder, John Cunningham, David Chung, Lance Dunn, Steven Hooper, Elizabeth Huebner and William Ruckelshaus “for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty in connection with the Company’s share repurchases in December 2013 and throughout 2014,”10 and [Director Defendant] Christopher Walters “for monetary damage and other injury to Blucora resulting from his breach of the duty of loyalty in connection with the Company’s share repurchases from May 13, 2014 through December 2014”11;
5 GCA was known at all relevant times as “GCA Savvian Advisors, LLC.” FAC ¶ 12.
6 FAC ¶ 144.
7 FAC ¶ 147.
8 FAC ¶ 57.
9 FAC ¶ 147.
10 FAC ¶ 149.
11 FAC ¶ 150.
Count V, against Director Defendant Andrew Snyder, his two companies, Cambridge Information Group, Inc. (“CIG”) and Cambridge Information Group I, LLC (“CIG I”), and Defendant George Allen “for the full amounts of ill-gotten gains obtained through sales of Blucora shares while in possession of material nonpublic information” from November 2013 through January 201412; and
Count VI, where the plaintiff seeks “[t]he imposition . . . of substantive and verifiable corporate governance reforms” on Blucora.13
Defendants have moved to dismiss the FAC on the grounds that Plaintiff has
failed to plead demand futility under Court of Chancery Rule 23.1 and failed to state
viable claims under Court of Chancery Rule 12(b)(6).14 I agree on both fronts.
Plaintiff has failed to plead particularized facts to raise a reasonable doubt that a
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JEFFREY I. TILDEN, derivatively on : behalf of Blucora, Inc., :
:
Plaintiff, :
:
v. : C.A. No. 2017-0837-JRS :
JOHN E. CUNNINGHAM, IV; : DAVID H.S. CHUNG; LANCE DUNN; : STEVEN W. HOOPER; ELIZABETH J. : HUEBNER; ANDREW M. SNYDER; : CHRISTOPHER WALTERS; MARY : ZAPPONE; WILLIAM J. RUCKELSHAUS; : GEORGE ALLEN; GCA ADVISORS, LLC, : a Delaware Limited Liability Company : (known at all relevant times as GCA : SAVVIAN ADVISORS, LLC); and : CAMBRIDGE INFORMATION GROUP, : INC., a Maryland corporation, and its wholly : owned and controlled subsidiary, : CAMBRIDGE INFORMATION GROUP I : LLC, a Delaware limited liability company, :
:
Defendants, :
:
and :
:
BLUCORA, INC., a Delaware corporation, :
:
Nominal Defendant. :
MEMORANDUM OPINION
Date Submitted: July 11, 2018 Date Decided: October 26, 2018
Chad J. Toms, Esquire and Kaan Ekiner, Esquire of Whiteford, Taylor & Preston LLC, Wilmington, Delaware; Ian S. Birk, Esquire of Keller Rodrback, L.L.P., Seattle, Washington; Chelsey L. Mam, Esquire and David M. Simmonds, Esquire of Gordon Tilden Thomas & Cordell, Seattle, Washington, Attorneys for Plaintiff Jeffrey I. Tilden.
A. Thompson Bayliss, Esquire, Michael A. Barlow, Esquire and Daniel J. McBride, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware and Daniel J. Dunne, Esquire of Orrick, Herrington & Sutcliffe LLP, Seattle, Washington, Attorneys for Defendants John E. Cunningham, IV, David H.S. Chung, Lance Dunn, Steve W. Hooper, Elizabeth J. Huebner, Christopher Walters, and Mary Zappone.
D. McKinley Measley, Esquire and Lauren Neal Bennett, Esquire of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware and Christopher B. Durbin, Esquire and Jeff Lombard, of Cooley LLP, Seattle, Washington, Attorneys for Defendant William J. Ruckelshaus.
Rudolf Koch, Esquire and Diana M. Joskowicz, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Paul H. Beattie, Esquire of Rimon P.C., Seattle, Washington, Attorneys for Defendant GCA Advisors, LLC.
Garrett B. Moritz, Esquire and R. Garrett Rice, Esquire of Ross Aronstam & Moritz LLP, Wilmington, Delaware and Peter L. Simmons, Esquire and Michael P. Sternheim, Esquire of Fried, Frank, Harris, Shriver & Jacobson LLP, New York, New York, Attorneys for Defendants Cambridge Information Group, Inc., Cambridge Information Group I, LLC, Andrew M. Snyder and George Allen.
Bradley D. Sorrels, Esquire, Lori W. Will, Esquire and Andrew D. Berni, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Wilmington, Delaware and Barry M. Kaplan, Esquire and Gregory L. Watts, Esquire of Wilson Sonsini Goodrich & Rosati, P.C., Seattle, Washington, Attorneys for Nominal Defendant Blucora, Inc.
SLIGHTS, Vice Chancellor
Ignoring a Delaware forum selection clause in the bylaws of the Delaware
company whose interests he purports to represent, the plaintiff in this stockholder
derivative action has adopted an ill-fated “anywhere but Delaware” litigation
strategy. As either attorney or named plaintiff, he filed derivative claims against
certain directors of the Nominal Defendant, Blucora, Inc., first in the Superior Court
of King County, Washington, and then, in expanded form, in the Superior Court of
California in San Francisco. Both courts pointed to the forum selection bylaw and
determined that Plaintiff’s case belonged in Delaware. Apparently wanting to avoid
the third strike, Plaintiff has finally landed here—where he should have been all
along—bringing the same claims he unsuccessfully attempted to prosecute
elsewhere.
Plaintiff challenges three unrelated transactions authorized by Blucora’s
board of directors (the “Board”) at various times beginning in 2013 through 2015:
two separate Blucora acquisitions (the so-called “Monoprice” and “HD Vest”
transactions) and certain Blucora stock repurchases that allegedly facilitated
favorable stock trades by Blucora insiders. As for the acquisitions, Plaintiff contends
that the Board members in place at the time of the transactions violated their
fiduciary duties by failing to heed clear indicators that the transactions were
overpriced and would fail to deliver any value for the Company. While Plaintiff
now seeks to recast his Monoprice and HD Vest claims, even a cursory review of
the operative pleading reveals that these derivative claims are pled as failures of
oversight, “possibly the most difficult theory in corporation law upon which [he]
might hope to win a judgment.”1 As for the claims relating to Blucora’s stock
repurchases, Plaintiff couches these transactions as corporate waste and then invokes
the seminal Brophy v. Cities Serv. Co.2 to allege that certain Blucora insiders
breached their fiduciary duties by exploiting nonpublic information when trading
Blucora stock in the wake of the wasteful repurchases. These claims, also derivative,
require well-pled facts that allow a reasonable inference of intentional misconduct.
Against this backdrop, the specific claims raised in the Verified Derivative
First Amended Complaint (the “FAC”)3 comprise six counts:
Count I, against Director Defendants John Cunningham, David Chung, Lance Dunn, Steven Hooper, Elizabeth Huebner, Andrew Snyder, Christopher Walters, Mary Zappone and William Ruckelshaus “for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty in connection with the Company’s [October 13, 2015] acquisition of HD Vest”4;
1 Stone ex. rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 372 (Del. 2006) (citing In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 968 (Del. Ch. 1996)). 2 Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).
3 D.I. 2.
4 FAC ¶ 142.
Count II, against GCA Advisors, LLC (“GCA”)5 “for monetary damage and other injury to Blucora resulting from . . . GCA’s aiding and abetting the breach of fiduciary duties by [Director Defendants] Cunningham, Chung, Dunn, Hooper, Huebner, Snyder, Walters, Zappone and Ruckelshaus in connection with the Company’s [October 13, 2015] acquisition of HD Vest”6;
Count III, against Director Defendants Andrew Snyder, John Cunningham, Elizabeth Huebner, Steven Hooper, David Chung, Lance Dunn and William Ruckelshaus “for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty” 7 by disregarding “observable red flags”8 “in connection with the Company’s [August 22, 2013] acquisition of Monoprice”9;
Count IV, against Director Defendants Andrew Snyder, John Cunningham, David Chung, Lance Dunn, Steven Hooper, Elizabeth Huebner and William Ruckelshaus “for monetary damage and other injury to Blucora resulting from their breaches of the duty of loyalty in connection with the Company’s share repurchases in December 2013 and throughout 2014,”10 and [Director Defendant] Christopher Walters “for monetary damage and other injury to Blucora resulting from his breach of the duty of loyalty in connection with the Company’s share repurchases from May 13, 2014 through December 2014”11;
5 GCA was known at all relevant times as “GCA Savvian Advisors, LLC.” FAC ¶ 12.
6 FAC ¶ 144.
7 FAC ¶ 147.
8 FAC ¶ 57.
9 FAC ¶ 147.
10 FAC ¶ 149.
11 FAC ¶ 150.
Count V, against Director Defendant Andrew Snyder, his two companies, Cambridge Information Group, Inc. (“CIG”) and Cambridge Information Group I, LLC (“CIG I”), and Defendant George Allen “for the full amounts of ill-gotten gains obtained through sales of Blucora shares while in possession of material nonpublic information” from November 2013 through January 201412; and
Count VI, where the plaintiff seeks “[t]he imposition . . . of substantive and verifiable corporate governance reforms” on Blucora.13
Defendants have moved to dismiss the FAC on the grounds that Plaintiff has
failed to plead demand futility under Court of Chancery Rule 23.1 and failed to state
viable claims under Court of Chancery Rule 12(b)(6).14 I agree on both fronts.
Plaintiff has failed to plead particularized facts to raise a reasonable doubt that a
majority of the members of the Board in place when he filed the FAC (the “Demand
Board”) could have impartially exercised their business judgment when considering
a pre-suit demand.15 Even if he had pled demand futility, Plaintiff has failed to state
12 FAC ¶¶ 68, 152.
13 FAC ¶ 154.
14 See Def. Blucora’s Mot. to Dismiss (D.I. 26); Def. GCA’s Mot. to Dismiss (D.I. 29); Director Defs.’ Mot. to Dismiss the FAC (D.I. 33); Defs. CIG, Snyder and Allen’s Mot. to Dismiss Count V (D.I. 34). Certain Defendants also filed a Motion to Disqualify Plaintiff as the shareholder representative. See Certain Defs.’ Mot. to Disqualify Tilden as Representative Pl. (“Mot. to Disqualify Tilden”) (D.I. 31). For reasons explained below, I need not and decline to decide that Motion. 15 Harris v. Carter, 582 A.2d 222, 228 (Del. Ch. 1990) (Allen, C.) (holding that demand futility is determined by an assessment of the board as comprised at the time the complaint is filed).
claims upon which relief may be granted. Several of the claims are barred by laches.
Even if timely, the claims fail on the merits, either because the FAC fails to plead a
viable oversight claim or because the claims cannot pass through the
Section 102(b)(7) exculpatory provision in Blucora’s certificate of incorporation.16
As for the aiding and abetting claim against GCA, that fails because the underlying
breach of fiduciary duty claims fail. Accordingly, the Motions to Dismiss must be
granted.
I. BACKGROUND
I draw the facts from the allegations in the FAC, documents incorporated by
reference or integral to that pleading and judicially noticeable facts. 17 In resolving
the four Motions to Dismiss, I have accepted as true the FAC’s well-pled factual
allegations and have drawn all reasonable inferences in Plaintiff’s favor.
16 8 Del. C. § 102(b)(7).
17 See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (quoting In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del. 1995)) (noting that on a motion to dismiss, the court may consider documents that are “incorporated by reference” or “integral” to the complaint); D.R.E. 201–02 (codifying Delaware’s judicial notice doctrine). See also Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016) (noting that where, as here, the nominal defendant has produced documents in response to a demand for books and records under 8 Del. C. § 220 on the condition that such documents be deemed incorporated by reference in any complaint that might later be filed, it was appropriate for the court to consider the documents in their entirety as opposed to only the portions “cherry-picked” by the plaintiff).
A. The Parties and Relevant Non-Parties
As noted, Plaintiff challenges three discrete transactions approved by three
different compositions of the Board. The FAC individually names nine former and
current members of the Board (the “Director Defendants”). Of the nine Director
Defendants, only three served on the Demand Board. Given the importance of these
distinctions to the demand futility analysis, I specify which of the individual
defendants have been named in which count(s) of the FAC and set the Demand
Board apart from the other Director Defendants.
1. The Plaintiff
Plaintiff, Jeffrey Tilden, has been a Blucora shareholder at all times relevant
to the FAC.18 He alleges he is an attorney and named partner at Gordon Tilden
Thomas & Cordell LLP, one of the law firms representing him in this action. 19 He
also alleges “[h]e is serving as the representative plaintiff in order to protect the
claims asserted herein from even arguable statute of limitations defenses.”20
18 FAC ¶ 1; Opening Br. in Supp. of Nominal Def. Blucora, Inc.’s Mot. to Dismiss Pursuant to R. 23.1 (“Def. Blucora’s Opening Br.”) 5. 19 FAC ¶ 96.
20 Id. These allegations serve as the basis for certain Defendants’ Motion to Disqualify Tilden as both shareholder plaintiff representative and non-Delaware counsel. Those Defendants correctly argue that allowing a shareholder plaintiff to prosecute a derivative action when that plaintiff is affiliated as partner with the law firm purporting to act as plaintiff’s lead counsel violates “[t]he prohibition against a plaintiff class representative serving as counsel for the class. . . .” Abrams v. Sachnoff & Weaver, Ltd., 2007 WL 1017356, at *4 (Del. Apr. 4, 2007) (TABLE). See Del. Lawyers’ R. Prof’l
According to his lawyers, Plaintiff will step aside to make room for another
representative plaintiff as soon as a Blucora stockholder willing to assume that role
comes forward.
2. The Entity Defendants
Nominal Defendant, Blucora, is a publicly traded Delaware corporation
headquartered in Irving, Texas.21 Blucora operated an e-commerce business through
2016 and an internet search and content business until 2017.22 Blucora now provides
technology-enabled financial solutions through tax preparation and wealth
management businesses.23
Conduct 1.7(a) (“a lawyer shall not represent a client if the representation involves a conflict of interest. A concurrent conflict of interest exists if . . . there is a significant risk that the representation of one or more clients will be materially limited . . . by a personal interest of the lawyer.”); In re Fuqua Indus., Inc. S’holder Litig., 2006 WL 2640967, at *8 (Del. Ch. Sept. 7, 2006) (“There is an inherent conflict of interest when one person serves simultaneously as class representative and as attorney for the class.”) (quoting Goodrich v. E.F. Hutton Gp., Inc., 1993 WL 94456, at *2 (Del. Ch. Mar. 24, 1993) (in turn citing Emerald P’rs v. Berlin, 564 A.2d 670, 676–80 (Del. Ch. 1989))). While there is no doubt that Tilden’s role as representative counsel and representative plaintiff presents a disqualifying conflict under Delaware law, I need not adjudicate the conflict or the Motion to Disqualify because I am satisfied that the FAC must be dismissed with prejudice. 21 FAC ¶ 14.
22 Def. Blucora’s Opening Br. 3.
23 Id.
Defendant, GCA, is a Delaware limited liability company that Blucora
retained as its financial advisor to identify acquisition opportunities.24 GCA advised
the Company on the HD Vest acquisition and ultimately delivered a fairness opinion
that endorsed the transaction.25
Defendant, CIG, is a Maryland corporation; Defendant, CIG I, is a Delaware
limited liability company. “CIG, directly or through CIG I, became a shareholder
of Blucora in 2010 or 2011.”26 A stockholder agreement between Blucora and CIG
granted CIG the right to designate an “Investor Representative” to serve as a member
of the Blucora Board.
3. The Director Defendants, Non-Party Directors and Non-Director Individual Defendant
Director Defendant, Andrew Snyder, served as CIG’s Board designee from
August 2011 through May 25, 2017.27 He served as Chairman of Blucora’s Mergers
& Acquisitions Committee (“M&A Committee”) from August 2013 until its
dissolution in June 2016. Plaintiff alleges Snyder failed to fulfill his director
oversight duties in bad faith by approving the HD Vest (Count I) and Monoprice
24 FAC ¶ 12.
25 FAC ¶ 36.
26 FAC ¶ 13.
27 FAC ¶¶ 7, 13.
(Count III) acquisitions, breached his fiduciary duty of loyalty in connection with
the share repurchases (Count IV)28 and engaged in insider trading in the midst of the
challenged share repurchases (Count V).29
Director Defendant, John Cunningham, served on the Board from July 1998
until February 28, 2017.30 Cunningham became Chairman of the Board in January
2011.31 He is named in Counts I (HD Vest), III (Monoprice) and IV (share
repurchases).
Director Defendant, William Ruckelshaus, served on the Board from May
2007 until March 31, 2016.32 He also served as the Company’s President and Chief
Executive Officer beginning in November 2010.33 He is named in Counts I
(HD Vest), III (Monoprice) and IV (share repurchases).
Director Defendant, David Chung, served on the Board from May 2013
through February 28, 2017.34 Director Defendant, Steven Hooper, served on the
28 See FAC ¶¶ 142, 147, 149.
29 FAC ¶¶ 68, 152.
30 FAC ¶ 2.
31 Id.
32 FAC ¶ 10.
33 Id.
34 FAC ¶ 3.
Board from April 2011 until June 1, 2017.35 And Director Defendant, Elizabeth
Huebner, served on the Board from May 2009 through August 10, 2017.36 Each are
named in Counts I (HD Vest), III (Monoprice) and IV (share repurchases).
The Demand Board:
Director Defendant, Lance Dunn, has served on the Board since August
2012.37 At all times relevant to Plaintiff’s allegations, Dunn served as a member of
the Board’s Audit and Nominating and Corporate Governance committees.38 He is
named in Counts I (HD Vest), III (Monoprice) and IV (share repurchases).
Director Defendant, Christopher Walters, has served on the Board since May
2014.39 He has been a member of the Board’s M&A, Nominating and Corporate
Governance and Compensation committees.40 He is named in Counts I (HD Vest)
and IV (share repurchases).
35 FAC ¶ 5.
36 FAC ¶ 6.
37 FAC ¶ 4.
38 FAC ¶ 106.
39 FAC ¶ 8.
40 FAC ¶ 116.
Director Defendant, Mary Zappone, has served on the Board since March
2015.41 She has served as a member of the Board’s Nominating and Corporate
Governance and Compensation committees.42 She is named only in Count I
(HD Vest).
Non-parties, William Atwell, John Clendening and H. McIntyre Gardner
began serving on the Board as of March 1, 2017.43 Non-parties, Steven Aldrich and
Georganne Proctor, joined the Board after May 25, 2017.44 Proctor serves as Chair
of Blucora’s Audit Committee.45
The Non-Director Individual Defendant:
Defendant, George Allen, was an independent contractor retained by Blucora
in October 2011 to assist with the Company’s merger and acquisition activity.46
Allen subsequently served as Blucora’s Executive Vice-President for Corporate
41 FAC ¶ 9.
42 FAC ¶ 123.
43 FAC ¶ 100.
44 Id. As discussed below, May 2017 is significant, by Plaintiff’s lights, because that is when the Board announced in a public filing that Plaintiff’s claims, pending in California at that time, “are without merit.” According to Plaintiff, this announcement reveals that the Demand Board is unfit to consider a stockholder demand to pursue the claims. 45 FAC ¶ 132.
46 FAC ¶ 11. Allen has consented to personal jurisdiction in Delaware for purposes of this litigation.
Development from May 2012 through July 2015, when he led the Company’s
“corporate development team tasked with finding additional acquisition
opportunities.”47 Allen left Blucora in July 2015 to serve as CIG’s Chief Investment
Officer.48 Plaintiff alleges (in Count V) that Allen, CIG, CIG I and Snyder engaged
in an insider trading scheme as the Board was authorizing the challenged share
repurchases.49
B. The Monoprice Acquisition
On August 22, 2013, Blucora closed on a $182.9 million all-cash acquisition
of Monoprice, an online retailer of consumer electronics and accessories.50
According to Plaintiff, Blucora “expended a significant percentage of its cash, as
well as cash equivalents and short-term investments available-for-sale, a substantial
portion of which was comprised of borrowed funds” to acquire a failing company.51
The M&A Committee identified Monoprice as a potential target after
reviewing financial and marketing materials in which Monoprice identified itself as
47 Id.
48 Id.
49 FAC ¶¶ 68, 152.
50 FAC ¶ 48.
51 See FAC ¶¶ 49–50, 55, 59–60.
a company with “a unique and defensible market position.”52 The Board then
conducted a competitive analysis of Monoprice, which identified competition from
Amazon as a primary impediment to the success of the transaction.53 As further
diligence, the Board instructed Blucora’s corporate development team to advise the
M&A Committee on Monoprice-specifics, including its deteriorating online
conversion rates,54 and then sent Allen to China, in his capacity as Blucora VP for
Corporate Development, to evaluate Monoprice’s manufacturing facilities.55 Upon
his return, Allen prepared a thirty-page report in which he noted his observations of
poor working conditions, very old equipment, disorganized business processes and
an overall sense that the Monoprice team in China was “a bit out of [its] league.”56
Even though several negative aspects of the transaction were identified during
its due diligence, on July 30, 2013, the M&A Committee “informed th[e] Board that
the . . . Committee . . . had reviewed and thoroughly considered the proposed terms
of the Stock Purchase Agreement [“SPA”] and . . . unanimously recommended that
52 FAC ¶ 56.
53 FAC ¶ 58.
54 FAC ¶ 59.
55 FAC ¶ 60.
56 Id.; see also Jan. 31, 2018 Transmittal Aff. of Lori Will in Supp. of Nominal Def. Blucora, Inc.’s Mot. to Dismiss (“Jan. 31 Will Aff.”), Ex. F (Monoprice Site Visit Report, dated July 22, 2013) (D.I. 27).
the Board authorize and approve the [deal] . . . .”57 The Board followed the M&A
Committee’s recommendation, approved the acquisition on July 30, 2013, disclosed
the SPA to the market the following day and closed the transaction on August 22,
2013, with a final purchase price of $182.9 million.58
Monoprice did not perform well post-closing. Within the first year, Blucora
fired Monoprice’s President and wrote-down $62.6 million of its investment.59 Two
years after closing, Blucora began shopping Monoprice “with the goal of completing
a divestiture in the first half of 2016.”60 By September 2016, Monoprice remained
for sale and Blucora had written off $146.4 million of the Monoprice purchase.61 All
the while, Monoprice continued to miss revenue forecasts.62 According to Plaintiff,
the Board would have seen this disaster coming had it only bothered to look. The
failure to look, it is alleged, constituted bad faith.63
57 FAC ¶ 64; see also Jan. 31 Will Aff., Ex. D (Board Mins. dated July 30, 2013).
58 FAC ¶¶ 48, 62.
59 FAC ¶¶ 49–51.
60 FAC ¶ 51.
61 Id.
62 FAC ¶ 66.
63 Pl.’s Answer to Blucora’s R. 23.1 Mot. to Dismiss (“Pl.’s Blucora Answering Br.”) 39– 40 (D.I. 45) (citing FAC ¶¶ 48–67).
On November 14, 2016, Blucora announced a definitive agreement to sell
Monoprice for $40 million cash, substantially less than the $182.9 million price it
paid just three years earlier.64 The $142 million delta between what Blucora paid
and ultimately received for Monoprice is not the only alleged loss. According to
Plaintiff, the ill-conceived transaction also depleted Blucora’s much needed cash and
forced it to take on substantial debt to fund its operations.65
C. Blucora Share Repurchases and Alleged Insider Trading
Blucora initiated a share repurchase program in February 2013.66 The Board’s
repurchase authorization included a price ceiling of $20 per share and limited the
total size of any authorization to $50 million.67 On November 14, 2013, the Board
unanimously adopted a resolution that eliminated “the maximum price per share
limitation . . . .”68 A month later, with the price ceiling removed, Blucora
64 FAC ¶¶ 52–54. Plaintiff alleges the $40 million sale price included Target Net Working Capital (“NWC”) of $26 million, which is $10.8 million more than the Target NWC to which Blucora agreed when it acquired Monoprice in 2013. The net result, according to Plaintiff, is that the actual sale price was $29.2 million. Id. 65 FAC ¶¶ 53–56.
66 FAC ¶¶ 84–85.
67 FAC ¶¶ 84, 90.
68 FAC ¶ 84.
repurchased $6.4 million of its shares at an average price of $28.66. 69 This was
substantially more than the Board had ever authorized for share repurchases.70
Blucora’s share repurchases continued apace through the following May,
when the Board increased Blucora’s repurchase authorization from $50 million to
$85 million.71 Following the increase, during 2014, Blucora repurchased an
additional $38.6 million of its shares at an average cost of $16.85,72 bringing the
December 2013 through 2014 repurchase total to more than $45 million.73 Plaintiff
alleges Blucora’s “unprecedented share repurchases” served no valid corporate
purpose and occurred during a time when Blucora was especially cash-strapped.74
In this regard, Plaintiff points to the Company’s $322 million debt and “dwindling
available cash” as of December 2013.75
Around the time the Board eliminated the authorization price ceiling, Snyder
notified Blucora’s General Counsel/Compliance Officer of his intent to sell a portion
69 FAC ¶ 85.
70 FAC ¶ 83.
71 FAC ¶ 90.
72 Id.
73 FAC ¶ 92.
74 FAC ¶ 91.
75 See FAC ¶¶ 85, 93.
of CIG’s Blucora holdings.76 On November 20, 2013, through CIG I, Snyder sold
1,006,093 Blucora shares for $28.50 per share.77 The next day CIG I exercised a
warrant it was issued in 2011 to purchase one million shares at a strike price of
$9.62.78 Allen allegedly entered a Rule 10b5-1 plan that same day.79 He then sold
27,000 shares between December 26, 2013 and January 2, 2014, at share prices
ranging from $28.33 to $29.52.80
Plaintiff alleges the insider trades were part of a plan to exploit Blucora’s
share repurchases as a means to boost Blucora’s share price just in time for Snyder,
CIG, CIG I and Allen to sell their Blucora shares.81 As pled, this scheme was
motivated by Monoprice’s underperformance, information known to Snyder, Allen
and the other Board members, but not disclosed to the market until February 11,
76 FAC ¶ 76.
77 FAC ¶ 68.
78 FAC ¶ 77. The warrant’s $9.62 strike price, exercised at a time when the shares traded between $28.82 and $29.61, amounted to CIG’s recognition of approximately $20,000,000 in ordinary income. 79 FAC ¶ 69. SEC Rule 10b5-1 plans provide a safe harbor for insider share sales, provided the insider is not trading on material nonpublic information. 80 Id.
FAC ¶¶ 70, 81; see also Pl.’s Answer to CIG Defs., Snyder and Allen’s Mot. to Dismiss 81
Count V 30 (D.I. 48).
2014.82 According to Plaintiff, “[b]y year-end 2014, Blucora’s stock price had fallen
to less than half the price at which CIG had sold [its] 1,006,093 shares . . . .”83
D. The HD Vest Acquisition
In 2015, Blucora was looking to realign its business.84 To this end, it launched
a six-month process with its financial advisor, GCA, to identify potential acquisition
targets.85 At the time, Blucora’s business focused on Internet Search, e-commerce
(Monoprice) and online tax filing software businesses.86 If Blucora and GCA could
find the right acquisition opportunity, Blucora was prepared to divest its Internet
Search and Monoprice businesses to facilitate the realignment.87
By letter dated April 17, 2015, GCA confirmed discussions with Allen
regarding GCA’s engagement “to assist with target identification and potential
execution of a buyside transaction.”88 The engagement agreement confirmed an
82 FAC ¶ 73.
83 Id.
84 FAC ¶¶ 22, 51; Oral Arg. on Defs.’ Mots. to Dismiss & Mot. to Disqualify Tilden Tr. (“Oral Arg. Tr.”) 50:1–2 (July 11, 2018) (D.I. 79). 85 FAC ¶ 12; Oral Arg. Tr. 50:7–14.
86 Jan. 31 Will Aff., Ex. A (Blucora Form 10-Q dated Oct. 26, 2017) at 6; Oral Arg. Tr. 49:16–20. 87 FAC ¶ 51; Pl.’s Blucora Answering Br. 6; Oral Arg. Tr. 52:4–7.
88 FAC ¶ 22.
initial term of three months that would be extended automatically for an additional
three months if GCA had not yet located a suitable opportunity.89 GCA’s fee
structure comprised: (1) a fixed $25,000 monthly retainer; (2) five transaction fee
tiers ranging, on the low end, from a $1,700,000 fee for consummation of a
transaction valued at $200,000,000 or less, up to a $4,250,000 fee for consummation
of a transaction valued at $500,000,000 or more; and (3) a $500,000 flat fee for the
delivery of a fairness opinion (to be credited against any transaction fee payable to
GCA).90
By June 2015, GCA had identified HD Vest, a “leading independent broker-
dealer providing wealth management and advisory solutions for tax professionals,”91
as a potential target.92 Soon after, GCA presented the Board with an initial
“valuation overview” of HD Vest based on selected comparable transactions.93
GCA’s overview applied a range of “Transaction Multiples” to value HD Vest from
$360 million to $495 million.94 As the HD Vest negotiations progressed, GCA
89 Id.
90 FAC ¶¶ 23–24.
91 See Jan. 31 Will Aff., Ex. I (“Blucora Form 8-K dated Oct. 14, 2015”) at Ex. 99.1.
92 See FAC ¶ 41.
93 FAC ¶¶ 36, 41.
94 FAC ¶ 41.
determined that HD Vest would not accept less than $600 million.95 GCA conveyed
this view to Blucora, as reflected in an email from Ruckelshaus to certain other
Director Defendants.96
On October 13, 2015, following weeks of negotiations and due diligence, the
Board held a twenty-five minute meeting to review and discuss a twenty-nine page
GCA presentation and separate fairness opinion in which GCA concluded that the
HD Vest acquisition, now priced at $580 million, was “fair, from a financial point
of view, to Blucora.”97 The following day, Blucora publicly announced that it had
entered into a merger agreement with HD Vest and would explore the divestiture of
Monoprice.98
Plaintiff alleges the Board improperly incentivized GCA to pursue and then
recommend the HD Vest acquisition through the five-tier fee structure.99 The Board
then failed properly to scrutinize GCA’s work and ultimately allowed a flawed
95 FAC ¶ 42.
96 Id. (Ruckelshaus emailed Snyder, Chung and Walters: “I believe there is a good chance [the private equity firm] walks if we re-price below $600M. (This is also the view of our bankers based on their interactions.)”). 97 FAC ¶¶ 28, 36. See also Blucora Form 8-K dated Oct. 14, 2015 at Ex. 99.1.
98 See FAC ¶ 51; Blucora Form 8-K dated Oct. 14, 2015 at Ex. 99.1.
99 FAC ¶ 31.
fairness opinion to stand untested.100 The result of this failure, according to Plaintiff,
is that the Board caused Blucora to pay far more for HD Vest than it was worth.
E. Procedural Posture
Despite Blucora’s clear Delaware forum selection bylaw, on March 5, 2015,
Plaintiff’s law firm filed a derivative complaint on behalf of another plaintiff,
Remigius Shatas, against Snyder and CIG for insider trading in the Superior Court
of King County, Washington.101 Citing Blucora’s forum selection bylaw, the
Company moved to dismiss the Washington Complaint for improper venue. The
trial court enforced the bylaw and dismissed the complaint. Shatas appealed.102 The
Washington Court of Appeals reversed and remanded with directions that the trial
court first determine whether Snyder and CIG were subject to personal jurisdiction
100 FAC ¶¶ 41–43.
101 See FAC ¶ 16 (“Section 2.16 of Blucora’s Amended and Restated Bylaws designates “a state or federal court located within the state of Delaware” as “the sole and exclusive forum for . . . any derivative action . . . .”); Def. Blucora’s Opening Br. 12. See also Jan. 31 Will Aff., Ex. F (“Washington Complaint”). 102 See Shatas v. Snyder, 2015 WL 12804487 (Wash. Super. Ct. May 18, 2015) (dismissing the first derivative action), rev’d, 2016 WL 6084113 (Wash. Ct. App. Oct. 17, 2016).
in Delaware before enforcing the Delaware forum selection bylaw.103 Following
remand, the parties agreed to a stipulated dismissal without prejudice.104
Plaintiff’s law firm filed a second derivative action in San Francisco on
December 12, 2016.105 While that action was pending, Blucora filed its quarterly
Form 10-Q on May 4, 2017, in which it stated, “[t]he Company believes that the
plaintiffs’ claims [in the California action] are without merit and will vigorously
defend this lawsuit.”106 Soon after, the California court dismissed Tilden’s
complaint (by now he was the representative plaintiff) on the ground that Tilden’s
claims were “subject to Blucora’s Forum Bylaw designating the state of Delaware
as the sole and exclusive forum for actions of this nature.”107 The FAC is the third
rendition of Plaintiff’s “identical derivative claims.”108
103 Id. The appellate court’s focus was on whether Delaware was actually an available alternative forum given possible personal jurisdictional defenses that might have been available to certain of the defendants. 104 Def. Blucora’s Opening Br. 13.
FAC ¶ 20; see also Def. Blucora’s Opening Br. 14; Jan. 31 Will Aff., Ex. M (“California 105
Complaint”). 106 FAC ¶ 101; Jan. 31 Will Aff., Ex. Q (“May 2017 Form 10-Q”) at 19–20.
107 FAC ¶ 100 n.34 & Ex. A.
108 See FAC ¶¶ 16, 20.
While the appeal in Washington was pending, Plaintiff demanded and
obtained certain books and records from Blucora under 8 Del. C. § 220.109 On
July 28, 2017, Plaintiff made an additional demand and Blucora produced more
documents.110 Plaintiff commenced this derivative action on November 22, 2017.
On January 31, 2018, the Director Defendants, GCA, CIG, CIG I and Allen filed
separate motions to dismiss the FAC.
II. ANALYSIS
Before reaching the merits of Plaintiff’s claims, the Court must first determine
whether Plaintiff has met his burden to plead particularized facts that support a
finding of demand futility as to a majority of the Demand Board. As explained
below, he has not. Although the analysis could end there, for the sake of
completeness, I have elected to take up Defendants’ arguments that Plaintiff has
failed to state any viable claims. Here again, Defendants are correct. Plaintiff has
failed to state claims upon which relief may be granted.
A. Demand Is Not Excused
“[A] cardinal precept of the General Corporation Law of the State of Delaware
is that directors, rather than shareholders, manage the business and affairs of the
109 FAC ¶ 19.
110 FAC ¶ 20.
corporation.”111 Each of Plaintiff’s claims allege harm suffered by Blucora. As
such, the parties agree that the claims are derivative.112 Because stockholder
derivative suits “by [their] very nature . . . impinge on the managerial freedom of
directors,”113 our law requires that a stockholder satisfy the threshold demand
requirements of Court of Chancery Rule 23.1 before he may assume control of a
claim belonging to the corporation. To do so, the plaintiff must demand that the
board of directors pursue the claim or, alternatively, demonstrate that a demand on
the board would be futile such that the demand requirement should be excused.114
Plaintiff acknowledges he made no pre-suit demand.115 Accordingly,
Rule 23.1 places a heightened burden on Plaintiff to plead demand futility by
meeting “stringent requirements of factual particularity that differ substantially from
the permissive notice pleadings” embodied in Court of Chancery Rule 8 and
111 Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000) (citing 8 Del. C. § 141(a)). 112 Pl.’s Blucora Answering Br. 16 (citing Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993)). 113 Aronson, 473 A.2d at 811.
114 Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1044 (Del. 2004). 115 FAC ¶ 98.
facilitated by Court of Chancery Rule 12(b)(6)’s reasonable conceivability
standard.116
This Court employs one of two tests when determining whether demand upon
the board would be futile. The first applies when a plaintiff challenges a decision of
the board of directors to take affirmative action.117 The second, established in Rales
v. Blasband,118 applies where, as here, a plaintiff challenges board inaction or
challenges action taken by less than a majority of the board.119 Under the Rales test,
the court “must determine whether or not the particularized factual allegations of a
derivative stockholder complaint create a reasonable doubt that, as of the time the
complaint is filed, the board of directors could have properly exercised its
independent and disinterested business judgment in responding to a demand.”120
116 Brehm, 746 A.2d at 254.
117 Aronson, 473 A.2d at 814.
118 Rales, 634 A.2d at 934.
119 See Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (“The [Rales] test applies where the subject of a derivative suit is not a business decision of the Board but rather a violation of the Board’s oversight duties.”); Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 56–57 (Del. Ch. 2015) (explaining that Rales applies where “a derivative plaintiff challenges a decision approved by . . . less than half of the directors who would have considered a demand”). 120 Rales, 634 A.2d at 934.
The following chart, set forth in Blucora’s Opening Brief,121 depicts the
distinction and overlap between the Director Defendants and the Demand Board:
Director Defendants Demand Board John E. Cunningham
David H.S. Chung Steven W. Hooper Elizabeth J. Huebner Andrew M. Snyder William J. Ruckelshaus
Lance Dunn Lance Dunn Christopher Walters Christopher Walters Mary Zappone Mary Zappone William Atwell Steven Aldrich H. McIntyre Gardner Georganne C. Proctor John S. Clendening
Of the eight member Demand Board, five joined after the three transactions
at issue were consummated and seven are considered independent under NASDAQ
listing rules.122 For purposes of demand futility, therefore, the Court will focus on
121 Def. Blucora’s Opening Br. 4.
122 See Jan. 31 Will Aff., Ex. B (Blucora Schedule 14A dated Apr. 20, 2017) at 15. Only one Demand Board member, Dunn, was a member of the Board at the time of the
Aldrich, Atwell, Clendening, Gardner and Proctor, the five Demand Board members
who indisputably joined the Board after any challenged conduct occurred. Given
Plaintiff’s tacit acknowledgement that these Demand Board members do not face a
“substantial likelihood of liability” on any of Plaintiff’s claims,123 the Court’s
function is to determine whether they face other conflicts that would disable them
from impartially considering a demand.124 I address each director in turn.
1. Aldrich
Plaintiff does not question the independence or disinterestedness of Aldrich
who joined the board on June 1, 2017,125 after any challenged conduct occurred and
after the Board publicly expressed its view of the merits of Plaintiff’s California
Monoprice acquisition and the 2013 share repurchases; two Demand Board members, Dunn and Walters, were Board members at the time of the 2014 share purchases; and three Demand Board members, Dunn, Walters and Zappone, were Board members at the time of the HD Vest acquisition. 123 See In re Citigroup Inc. S’holders Deriv. Litig., 964 A.2d 106, 121 (Del. Ch. 2009)
(noting that a plaintiff can plead demand futility under Rales when he pleads particularized facts that reveal a director engaged in conduct “so egregious on its face that . . . a substantial likelihood of director liability . . . exists.”). 124 See In re Ezcorp, Inc. Consulting Agmt. Deriv. Litig., 2016 WL 301245, at *34 (Del.
Ch. Jan. 25, 2016) (“To determine whether the Board could properly consider a demand, a court counts heads.”); In re infoUSA, Inc., 953 A.2d 963, 983 (Del. Ch. 2007) (“Successful derivative plaintiffs . . . focus intensely upon individual director's conflicts of interest . . . .”). 125 See FAC ¶ 99 n.32. See also Def. Blucora’s Opening Br. 21; Pl.’s Blucora Answering Br. 13.
claims. Aldrich is indisputably fit, therefore, to consider a pre-suit demand under
Rales.
2. Atwell and Gardner
Non-party Directors Atwell and Gardner were appointed to the Board on
February 28, 2017.126 Plaintiff’s only proffered basis to argue that Atwell and
Gardner could not impartially consider a pre-suit demand is that they were directors
when Blucora filed its quarterly Form 10-Q with the SEC on May 4, 2017. In that
filing, the Board stated its belief that the claims brought in the California Action
were “without merit” and announced its intent to “vigorously defend” the lawsuit.127
According to Plaintiff, this disclosure reveals that the Board had improperly
prejudged the merits of his claims, thereby rendering them incapable of impartially
considering any demand he might have made prior to initiating this litigation.
This court rejected Plaintiff’s “prejudgment” demand excusal argument in
Highland Legacy Ltd. v. Singer.128 There, a derivative plaintiff argued the
company’s statement in a Form 8-K—that “[the company] believes . . . these
lawsuits have no merit and intends to vigorously defend these lawsuits”—evidenced
126 Jan. 31 Will. Aff., Ex. P (Blucora Form 8-K dated Feb. 28, 2017) at 1.
127 FAC ¶ 101; May 2017 Form 10-Q at 19–20.
128 Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *6 (Del. Ch. Mar. 17, 2006).
the board’s inability to consider a demand to prosecute those claims.129 Vice
Chancellor Lamb unequivocally rejected the argument:
The bare allegation that a company publicly announced that it believed the litigation lacked merit cannot by itself reach the heightened pleading standard of Rule 23.1. Public statements about the merits (or lack thereof) of derivative litigation are routinely made in SEC filings. It would be unreasonable for this court to conclude that a board made up of a majority of independent directors could not be asked to pursue this litigation simply because the company expressed a belief in a public filing that the claims in a series of related litigations were unfounded.130
Plaintiff maintains that Singer is somehow distinguishable because “Blucora
board members met regularly with outside counsel to receive updates and discuss
[litigation] strategy.”131 If anything, this would suggest that the Board was informed
when it publicly disclosed its view of the California claims. In any event, the fact
that the Board received legal advice from the company’s outside counsel does not
alter its ability impartially to assess the merits of pending legal claims, and does not
in any way undermine the rationale of the holding in Singer. Independent and
129 Id.
130 Id. See also Kops v. Hassell, 2016 WL 7011569, at *2-3 (Del. Ch. Nov. 30, 2016) (holding that a company’s proclamation of “innocence” in a New York Times advertisement did not constitute “de facto demand rejection” when the complaint failed to plead particularized facts that the board had improperly determined its position pre-suit). But cf. Biondi v. Scrushy, 820 A.2d 1148, 1166 (Del. Ch. 2003) (finding that a special committee’s “publicly and prematurely issued statements exculpating one of the key company insiders whose conduct is supposed to be impartially investigated,” while the investigation was underway, undermined the court’s confidence in the special litigation committee’s process). 131 FAC ¶ 100; Pl.’s Blucora Answering Br. 20–21.
disinterested directors are presumed to be fit to evaluate impartially the merits of a
demand to pursue legal claims.132 That the Board assessed the merits of the claims
after they were filed in California but before receiving a demand, without more,
cannot overcome this presumption.133
3. Clendening
Non-party Director Clendening became a director and Blucora’s President and
Chief Executive Officer on April 4, 2016.134 Plaintiff proffers two reasons why
Clendening is not fit to consider a pre-suit demand. First, he argues Clendening was
on the Board when Blucora issued the Form 10-Q in which the Board improperly
prejudged Plaintiff’s claims. I have already rejected this fact as a basis to plead
demand futility. Next, Plaintiff alleges that “[i]t is against Clendening’s immediate
personal financial interests to in any way prolong the life of claims” that may depress
Blucora’s stock price because Clendening is a Blucora stockholder and a party to a
132 See Beam, 845 A.2d at 1046 n.8, 1048–49.
133 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (“The [business judgment] rule posits a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by the courts unless it cannot be ‘attributed to any rational business purpose.’”) (citing Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). Plaintiff’s bald speculation that the retirements of Snyder and Cooper from the Board a few weeks after the filing of the Form 10Q supports an inference that these Board members pushed their colleagues to issue the public statement as a condition of their retirement, to put it mildly, falls well short of the particularized facts required to plead demand futility. See Pl.’s Blucora Answering Br. 21. 134 FAC ¶¶ 135, 137.
Rule 10b5-1 stock trading plan that allows him to sell “up to 213,100 shares” of
Blucora stock between February and May 2018.135 This states no basis to challenge
Clendening’s fitness under Rales.
“Speculation on motives for undertaking corporate action are wholly
insufficient to establish a case of demand excusal.”136 Plaintiff’s purely speculative
belief that Clendening would be unable to exercise his otherwise independent
business judgment in considering a demand simply because he would fear that the
litigation might depress the value of his Blucora stockholdings falls far short of the
mark. This is particularly so given that Plaintiff has not even attempted to plead that
these holdings are material to Clendening.137 Indeed, nearly every director of every
publicly traded company owns stock in the company, some more than others. If it
were enough to plead director interestedness merely by alleging that the director’s
holdings might be devalued as a result of derivative litigation, it is difficult to
135 FAC ¶ 137.
136 Grobow, 539 A.2d at 188.
137 See Freedman v. Adams, 2012 WL 1345638, at *6 (Del. Ch. Mar. 30, 2012)
(“‘Directorial interest . . . exists where a corporate decision will have a materially detrimental impact on a director, but not on the corporation or stockholders.’ Generally, the interest at issue must be material to the director, and materiality is assessed based upon the individual director’s economic circumstances.”) (quoting Rales, 634 A.2d at 936) (emphasis supplied).
imagine how a plaintiff would not carry his heightened burden to plead demand
futility in nearly every derivative case. That is not our law.
4. Proctor
Proctor joined the Board on June 1, 2017.138 Prior to joining the Board, she
was a member of SunEdison, Inc.’s board of directors and chaired its audit
committee.139 Plaintiff alleges Proctor is involved in litigation in the United States
District Court for the Southern District of New York arising from her board service
at SunEdison.140 According to Plaintiff, SunEdison “collapsed” in 2016 and Proctor
“is an individually-named defendant in a multitude of resulting shareholder and
ERISA litigation” where the company’s D&O coverage may be inadequate to cover
the liability.141 This, according to Plaintiff, renders Proctor unable impartially to
consider a demand because the Defendants face similar liability on similar claims
here.142
Plaintiff’s allegation that Proctor faces a “situational conflict,” given her
liability exposure in unrelated litigation, is not novel. In Guttman v. Huang, then-
138 See Jan. 31 Will Aff., Ex. O (Blucora Form 8-K dated June 5, 2017).
139 FAC ¶ 132.
140 FAC ¶ 133.
141 Id.
142 FAC ¶¶ 133–34.
Vice Chancellor Strine observed that “directors can be compromised for purposes of
considering a demand if they face a significant likelihood of liability relating to the
subject matter of the complaint.”143 Because the directors in Guttman were not
named defendants in the supposedly related federal securities litigation, the court
ultimately determined that demand was not excused.144 In Pfeiffer v. Toll, the court
found demand was futile because a majority of the demand board faced a significant
likelihood of liability in companion federal securities litigation.145 Under those
circumstances, the court was satisfied that if “the Company pressed forward with its
rights of action against the defendants in [the Delaware] case, then the Company’s
efforts would undercut or even compromise the defense of the federal securities
action.”146
This case bears no resemblance to Guttman or Pfeiffer. First, the SunEdison
litigation is not parallel litigation or even related to this derivative litigation. Nothing
the defendants say or do here will “undercut or even compromise” the defense of the
SunEdison case, or vice versa. Second, and more importantly, the FAC says nothing
143 Guttman v. Huang, 823 A.2d 492, 503 (Del. Ch. 2003) (emphasis supplied).
144 Id. at 504.
145 Pfeiffer v. Toll, 989 A.2d 683, 690 (Del. Ch. 2010) (involving companion litigation that had survived a motion to dismiss), abrogated on other grounds by Kahn v. Kolberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011). 146 Id.
of (much less allege with any particularity) how Proctor’s defenses in the SunEdison
litigation could render her unable to exercise her disinterested business judgment
regarding a demand on Blucora. Given that Plaintiff has failed to plead any specifics
regarding how Proctor faces legal jeopardy, the FAC’s speculative allegations of a
situational conflict are inadequate to disqualify her from considering a demand.147
*****
The FAC raises no reasonable doubt that at least five of the eight members of
the Demand Board are disinterested, independent and fully capable of impartially
exercising their business judgment when considering a pre-suit demand.
Accordingly, Plaintiff has failed to carry his burden of pleading that demand is
excused and the FAC must be dismissed for this reason alone. Even though the
analysis could end here, for the sake of completeness, and given that the named
Defendants have argued separately and strenuously that Plaintiff has failed to state
viable claims against them, I take up those arguments as well.
147 See Rattner v. Bidzos, 2003 WL 22284323, at *14 (Del. Ch. Sept. 30, 2003) (considering whether the existence of pending federal securities actions might render directors unable impartially to consider a demand, the court observed that “[t]he only particularized facts contained in the Amended Complaint regarding the federal securities class action lawsuits are that such suits were filed and are pending in the Northern District of California,” and then held that such “conclusory and cryptic allegations” concerning a companion federal securities action left “far too much to the imagination” and were insufficient to support demand excusal under Rule 23.1).
B. The FAC Fails to State Viable Claims
Under Court of Chancery Rule 12(b)(6), dismissal is appropriate only if the
plaintiff would be unable to recover under “any reasonably conceivable set of
circumstances susceptible of proof” based on the facts pled in the complaint.148
In considering a motion to dismiss, the court must accept as true all well-pled
allegations in the complaint and draw all reasonable inferences from those facts in
Plaintiff’s favor.149
As explained below, several of Plaintiff’s claims are time-barred. Even if
timely, none of the claims as pled are viable as a matter of law. These are separate
grounds for dismissal.
1. Laches
Defendants argue that Counts III, IV and V, which arise from the Monoprice
acquisition, share repurchases and alleged insider trading, are barred by laches.
I agree.
“Laches is an equitable defense born from the longstanding maxim equity aids
the vigilant, not those who slumber on their rights.”150 It is “generally defined as an
148 In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)). 149 Id.
150 Reid v. Spazio, 970 A.2d 176, 182 (Del. 2009); Adams v. Jankouskas, 452 A.2d 148, 157 (Del. 1982).
unreasonable delay by the plaintiff in bringing suit after the plaintiff learned of an
infringement of his rights, thereby resulting in material prejudice to the
defendant.”151 To invoke laches at the pleadings stage, Defendants must
demonstrate on the face of the operative pleading that: (a) Plaintiff had knowledge
of his rights; (b) Plaintiff unreasonably delayed in bringing suit to vindicate those
rights; and (c) the delay resulted in injury or prejudice to the Defendants.152
Although statutes of limitations generally do not govern in equity,153 because
equity follows the law, “a party's failure to file within the analogous period of
limitations will be given great weight in deciding whether the claims are barred by
laches.”154 This is especially so where, as here, a plaintiff brings equitable and legal
claims seeking only legal relief. In such circumstances, “when claims are barred by
a controlling statute of limitations, a court of equity need not engage in a traditional
laches analysis.”155
151 Reid, 970 A.2d at 182.
152 Akrout v. Jarkoy, 2018 WL 3361401, at *8 (Del. Ch. July 10, 2018) (citing Homestore, Inc. v. Tafeen, 888 A.2d 204, 210 (Del. 2005)). 153 In re Dean Witter P’ship Litig., 1998 WL 442456, at *3 (Del. Ch. July 17, 1998).
154 CMS Inv. Hldgs., LLC v. Castle, 2016 WL 4411328, at *2 (Del. Ch. Aug. 19, 2016) (quoting Adams, 452 A.2d at 157). 155 State ex rel. Brady v. Pettinaro Enters., 870 A.2d 513, 527 (Del. Ch. 2005). See also Kraft v. WisdomTree, Invs., Inc., 2016 WL 4141112, at *10–11 (Del. Ch. Aug. 3, 2016) (holding that this court “will bar claims [seeking purely legal remedies] outside the limitations period absent tolling or extraordinary circumstances,” even in the absence of demonstrable prejudice); In re Sirius XM S’holder Litig., 2013 WL 5411268, at *4 (Del.
Under 10 Del. C. § 8106, a three-year limitations period applies to claims
sounding in breach of fiduciary duty.156 That statute begins to run upon accrual of
the claim. And, “[t]he law in Delaware is crystal clear that a claim accrues as soon
as the wrongful act occurs.”157 While our courts will toll the limitation period under
certain circumstances,158 “[m]ere ignorance of the facts by a plaintiff, where there
has been no . . . concealment, is no obstacle to operation of the statute [of
limitations.]”159 Here, Blucora is a public company that filed mandated public
disclosures (e.g., Form 10-Qs and Form 10-Ks). Plaintiff knew of or easily could
have discovered the facts giving rise to his Monoprice, stock repurchase and Brophy
claims at the time of the challenged transactions and well within the limitations
period. Indeed, Plaintiff, either through his law firm or directly as plaintiff,
attempted to litigate his claims in Washington and California within the three-year
Ch. Sept. 27, 2013) (explaining that defendants are implicitly prejudiced by the late-filing plaintiff, who had the fair opportunity to file within the period set by the applicable statute of limitations). 156 10 Del. C. § 8106(a); In re Tyson Foods, Inc. Consol. S’holder Litig., 919 A.2d 563, 584 (Del. Ch. 2007). 157 Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 1594085, at *18 (Del. Ch. July 29, 2005). 158 Halpern v. Barran, 313 A.2d 139, 143 (Del. Ch. 1973) (“Where there has been fraudulent concealment from a plaintiff, the statute is suspended until his rights are discovered or until they could have been discovered by the exercise of reasonable diligence.”) (citing Giordano v. Czerwinski, 216 A.2d 874 (Del. 1966)). 159 Dean Witter, 1998 WL 442456, at *5 (citing Halpern, 313 A.2d at 143).
limitations period. Having ignored Blucora’s Delaware forum selection bylaw,
however, his attempts to litigate in the improper fora met predictably negative case-
dispositive outcomes.
After the Washington Court of Appeals remanded the jurisdictional question,
the parties agreed to a tolling agreement from September 14, 2016 to December 31,
2016. The practical effect of this agreement is that the statute of limitations for
fiduciary claims connected to the Monoprice acquisition, that began to run on
August 22, 2013 (the date the deal closed), was tolled from September 2016 to
December 2016. This, in turn, would have extended the three-year limitations period
to May 31, 2017. Because the FAC was filed on November 22, 2017, this claim is
time-barred.
As for the claims arising from Board decisions relating to Blucora’s share
repurchases—the removal of the $20 per share price ceiling on November 14,
2013160 and the May 2014 decision to increase the number of shares that could be
repurchased161—the latest possible date that the statute of limitations could have run
was in May 2017. Likewise, Allen and Snyder’s challenged stock sales occurred in
160 FAC ¶ 84; Pl.’s Blucora Answering Br. 5.
161 FAC ¶ 90.
late-2013 and early-2014 and, as such, any Brophy claim against them expired in
early-2017, well before Plaintiff’s November 2017 filing.162
Lest there be any doubt that a full-blown laches analysis (including prejudice)
might justify a different result, the consequences of Plaintiff’s deliberate litigation
tactics expose the actual prejudice. Plaintiff chose to file actions in Washington and
California where, combined, he asserted the same claims he eventually was forced
to bring here.163 He gambled and lost, not once but twice. And he forced Defendants
to defend in the wrong fora every step of the way. This amounts to prejudice. Under
these circumstances, “[t]here is nothing unreasonable about enforcing the forum
selection clause against [Plaintiff] because any harm [he] has suffered is entirely
self-inflicted.”164
162 AIG, 965 A.2d at 800, 811 (applying the three-year limitation period to a Brophy claim seeking to disgorge the alleged inside traders’ profits). 163 See Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934, 955 n.96 (Del. Ch. 2015) (stockholders presumed to be on notice of, and impliedly assent to, the corporation’s bylaws as may be amended). 164 Carlyle Inv. Mgmt. L.L.C. v. Nat’l Indus. Gp. (Hldg.), 2012 WL 4847089, at *11 (Del. Ch. Oct. 11, 2012), aff’d, 67 A.3d 373 (Del. 2013). See also BioVeris Corp. v. Meso Scale Diagnostics, LLC, 2017 WL 5035530, at *12 (Del. Ch. Nov. 2, 2017) (“[a] party cannot rely on a suit knowingly filed in the wrong forum as a basis for avoiding the application of laches.”) (citation omitted); CMS Inv. Hldg., 2016 WL 4411328, at *3 (“Having chosen to disregard that [forum selection] clause . . . [plaintiffs] cannot now present the Colorado State Action as a basis for avoiding application of laches.”); Huffington v. T.C. Gp., LLC, 2012 WL 1415930, at *10 (Del. Super. Apr. 18, 2012) (declining to apply Delaware’s savings statute when the plaintiff “decided to pay no heed to [an enforceable] forum selection clause” and instead “chose a strategy that backfired.”).
2. The FAC Fails Adequately to Plead Bad Faith
Plaintiff acknowledges that, in light of the Section 102(b)(7) provision in
Blucora’s certificate of incorporation, he must well-plead a breach of the duty of
loyalty against the Director Defendants to state a viable claim.165 Because none of
the Director Defendants were interested in the challenged transactions, Plaintiff is
obliged to plead bad faith.166 As Vice Chancellor Glasscock astutely observed in In
re Chelsea Therapeutics Int’l Ltd. S’holders Litig., “bad faith is similar to the much
older fiduciary prohibition of waste, and like waste, is a rara avis [rare bird].”167
165 Pl.’s Blucora Answering Br. 27. Plaintiff disputes Blucora’s characterization of his claims challenging the Monoprice and HD Vest acquisitions as Caremark claims. See Pl.’s Blucora Answering Br. 26, 38 (“Plaintiff’s allegations . . . are based on [a] lack of good faith in approving the HD Vest acquisition.”). His adamant disagreement is curious, however, when considered against his allegation that the Director Defendants are personally liable for their “conscious disregard and failure of oversight and good faith in connection with the HD Vest acquisition, the Monoprice acquisition, and the Company’s share repurchases.” FAC ¶ 107 (emphasis supplied). See also FAC ¶¶ 117, 124. Notwithstanding Plaintiff’s attempt to distance his claims from Caremark, the essence of his claim is that the Director Defendants acted in bad faith, in breach of their duty of loyalty, by failing to see purported red flags that would have alerted them that the Monoprice and HD Vest acquisitions would result in “corporate trauma” to Blucora. See Stone, 911 A.2d at 370 (holding that “because a showing of bad faith conduct, in the sense described in Disney and Caremark, is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty,” and “Caremark articulates the necessary conditions predicate for director oversight liability,” namely a “conscious[] fail[ure] to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”). 166 In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1179–80 (Del. 2015). 167 In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1 (Del. Ch. May 20, 2016).
Salient examples of bad faith conduct include circumstances where fiduciaries
intentionally break the law, “intentionally act[] with a purpose other than that of
advancing the best interests of the corporation” and “intentionally fail[] to act in the
face of a known duty to act, demonstrating a conscious disregard [of] duties.”168 As
our Supreme Court explained in Disney, to state a claim for bad faith such that a
corporate fiduciary will be stripped of the presumption of good faith, the plaintiff
must well-plead an “intentional dereliction of duty” or “conscious disregard for
one’s responsibilities,” both of which reflect conduct “more culpable than simple
inattention or failure to be informed of all facts material to the decision.”169 Stated
differently, and perhaps more simply, to plead a claim for bad faith in the oversight
context, a plaintiff must plead facts that allow a reasonable inference that the director
acted with “scienter,” a state of mind that “requires [not only] proof that a director
acted inconsistent[ly] with his fiduciary duties,” but also “most importantly, that the
director knew he was so acting.”170 In determining whether scienter has been well-
168 In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006).
169 Id. at 66.
170 In re Massey Energy Co., 2011 WL 2176479, at *22 (Del. Ch. May 31, 2011) (emphasis in original). See also Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 240 (Del. 2009) (holding that to plead bad faith the plaintiff must well-plead that “the directors knew that they were not discharging their fiduciary obligations.”); Reiter ex rel. Capital One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *7 (Del. Ch. Oct. 18, 2016) (“The need to demonstrate scienter to establish liability under an oversight theory follows not only from Caremark
pled, our courts must be mindful that Delaware law does not “subject directors, even
expert directors, to personal liability for failure to predict the future and to properly
evaluate business risk.”171
(a) The HD Vest Acquisition – Counts I and II
Plaintiff does not allege the Director Defendants consciously approved an
inflated acquisition price for HD Vest. Instead, he alleges that the Board’s reliance
itself, but from the existence of charter provisions exculpating directors from liability for breaches of the duty of care that have become ubiquitous in corporate America.”). 171 In re Goldman Sachs Gp., Inc. S’holder Litig., 2011 WL 4826104, at *23 (Del. Ch.
Oct. 12, 2011). See also Oklahoma Firefighters Pension & Ret. Sys. v. Corbat, 2017 WL 6452240, at *18 (Del. Ch. Dec. 18, 2017) (“The Plaintiffs' theory appears to be that the Defendants' oversight failures caused Banamex to engage in a business venture that generated large losses because of fraud by the party on the other side. Put differently, Banamex made a risky business decision that turned out poorly for the company. That suggests a failure to monitor or properly limit business risk, a theory of director liability that this Court has never definitively accepted. Indeed, evaluation of risk is a core function of the exercise of business judgment.”); Asbestos Workers Local 42 Pension Fund v. Bammann, 2015 WL 2455469, at *14 (Del. Ch. May 22, 2015) (“It is not entirely clear under what circumstances a stockholder derivative plaintiff can prevail against the directors on a theory of oversight liability for failure to monitor business risk under Delaware law; the Plaintiff cites no examples where such an action has successfully been maintained. Business risk is the very stuff of which corporate decisions are constituted. Where, as here, the allegations are that the level of risk being undertaken by management was reported to the board, and the board acted (or failed to act) in a way that, in hindsight, proved costly to the corporation, and which the derivative plaintiff, with the benefit of that hindsight, brands wrongful, it is difficult to see how successful maintenance of that derivative action can be consistent with this jurisdiction's model of corporate governance . . . .”); Citigroup, 964 A.2d at 131 (“To impose oversight liability on directors for failure to monitor ‘excessive’ risk would involve courts in conducting hindsight evaluations of decisions at the heart of the business judgment of directors.”). Accord, Houseman v. Sagerman, 2014 WL 1600724, at *7 (Del. Ch. Apr. 16, 2014) (holding that the existence of “some process” will bar a finding of bad faith); Lyondell, 970 A.2d at 243 (alleging that “the directors failed to do all that they should have under the circumstances” fails to state a loyalty claim).
upon the work of its financial advisor, GCA, reflects an “intentional dereliction of
duty” and “conscious disregard of red flags.”172 Specifically, it is alleged that the
“structure of the fee agreement gave GCA every incentive to keep a transaction
within its highest level value tier (greater than $500,000,000) in order to maximize
its fee.”173 According to Plaintiff, mindful of these incentives, the Board acted in
bad faith by not more carefully scrutinizing GCA’s valuation work throughout the
engagement, including during the infamous 25-minute “sham” meeting on
October 13, 2015, when the Board received GCA’s fairness opinion and the
allegedly “manipulated” HD Vest valuation.174 Plaintiff’s hindsight critique of the
Board fails on multiple grounds.
First, GCA’s fee for delivery of a fairness opinion was not contingent; it was
a $500,000 flat fee that would be credited against the overall transaction fee.175
Second, Plaintiff’s conclusory allegations regarding the so-called sham Board
meeting ignores the full scope of the Board’s process and the many other instances
where the Board considered the bona fides of the HD Vest acquisition.176 Third,
172 Pl.’s Blucora Answering Br. 28.
173 FAC ¶ 31.
174 See Pl.’s Blucora Answering Br. 29–34.
175 FAC ¶¶ 23–24.
176 See, e.g., Apr. 9 Supplemental Transmittal Aff. of Lori Will in Supp. of Reply Br. in Further Supp. of Nominal Def. Blucora, Inc.’s Mot. to Dismiss, Ex. EE (Board Mins. dated
Plaintiff’s attack on GCA’s work rather deliberately focuses on only one of the
several methodologies GCA employed to value HD Vest and then speculates that
GCA must have revised its analysis to inflate its valuation and thereby earn a higher
fee.177 Of course, Plaintiff pleads no non-conclusory facts to support this allegation.
Finally, Plaintiff fails to plead any facts that would allow a reasonable inference that
the Board actually knew GCA had manipulated its financial analysis, even assuming
he had well-pled that such manipulation had occurred.178 The bottom line is Plaintiff
would have the Court second-guess the Board’s informed decision to acquire
HD Vest even though he has pled no facts to suggest that the Board had any interest
Oct. 8, 2015); Jan. 31 Will Aff., Ex. T (Board Mins. dated Oct. 13, 2015) (providing that written materials were provided in advance and the final status of the negotiations were discussed at the meeting). 177 FAC ¶¶ 41–43 (citing GCA’s June 2015 initial HD Vest “Valuation Overview,” which was based on selected comparable transactions, in support of the speculation that any difference between the “Overview” and the final deal price must have been the result of GCA manipulation). 178 See In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *12 (Del. Ch. Jan. 31, 2013) (“For purposes of stating a duty of loyalty claim, what the Defendant Directors should have known is substantively less culpable, for liability purposes, than what they actually knew.”) (emphasis in original); Lenois v. Lawal, 2017 WL 5289611, at *18 (Del. Ch. Nov. 7, 2017) (rejecting the claim that the board acted in bad faith where plaintiff had failed to well-plead that directors knew the financial advisor’s opinions were false).
in the transaction other than pursuing the best interests of Blucora stockholders.179
Our fiduciary duty law does not work that way.180
As for the aiding and abetting claim against GCA, I reject Plaintiff’s
proposition that the Court may infer that a financial advisor knowingly participated
in a breach of fiduciary duty merely because the advisor negotiated a fee structure
that incented it to assist its client in reaching the goal of a consummated transaction.
Nor is an inference of knowing participation supported simply because the advisor
revised its analysis during the course of its engagement in a manner that is supportive
of a proposed transaction.181 In any event, having determined that Plaintiff has failed
179 See Citigroup, 964 A.2d at 128 (rejecting plaintiff’s invitation “to engage in the exact kind of judicial second-guessing that is proscribed by the business judgment rule,” noting that “[i]n any business decision that turns out poorly there will likely be signs that one could point to and argue are evidence that the decision was wrong.”). I note that Plaintiff has not pled waste. If he had, the claim would fail. He has pled no facts that would support an inference that the HD Vest transaction was “so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” Glazer v. Zapata Corp., 658 A.2d 176, 183 (Del. Ch. 1993). 180 Citigroup, 964 A.2d at 126 (“[J]udicial second guessing is what the business judgment rule was designed to prevent[.]”). See also Lyondell, 970 A.2d at 243 (“[A]n extreme set of facts [is] required to sustain a disloyalty claim premised on the notion that disinterested directors were intentionally disregarding their duties.”) (internal quotations and citations omitted); Houseman, 2014 WL 1600724, at *7 (holding that the existence of “some process” will generally bar a finding of bad faith). 181 Malpiede v. Townson, 780 A.2d 1075, 1095 n.78 (Del. 2001) (affirming this court’s finding that no allegation indicated that the alleged aider and abettor knowingly participated in a fiduciary breach) (citing Greenfield v. Tele-Commc’ns, 1989 WL 48738, at *3 (Del. Ch. May 10, 1989) (“[S]ome facts must be alleged that would tend to establish, at a minimum, knowledge by the third party that the fiduciary was endeavoring to breach his duty . . . .”)).
to plead a non-exculpated fiduciary breach with respect to the HD Vest acquisition,
the claim that GCA aided and abetted that breach fails as a matter of law.182
(b) The Monoprice Acquisition – Count III
Plaintiff’s claim with respect to the Monoprice acquisition is more of the same
improper second-guessing of the Board’s acquisition strategy that animated his
claim regarding HD Vest. Here again, Plaintiff alleges the Board recognized its duty
of “oversight” when considering the Monoprice acquisition but did “little by way of
due diligence,” and “inexplicably disregarded” warnings and “red flags.”183 The
FAC, and documents incorporated by reference, tell a different story. Specifically,
the FAC alleges, among other steps, that the Board: (a) created the M&A Committee
to identify acquisition targets and work with management to conduct due
diligence184; (b) sent Allen to visit and evaluate Monoprice’s facilities185; (c) enlisted
an “internal corporate development team” to assess the transaction and assist in the
review of sales metrics, website traffic and conversion rates186; and (d) analyzed with
182 See In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014)
(holding that an aiding and abetting claim “may be summarily dismissed based upon the failure of the breach of fiduciary duty claims against the director defendants.”), aff’d sub nom., Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). 183 FAC ¶¶ 54–60.
184 FAC ¶¶ 59–61.
185 FAC ¶ 60.
186 FAC ¶ 59.
management the benefits and risks of the transaction, including the competitive risk
posed by Amazon.187 At best, Plaintiff has alleged that perhaps the Board members
“failed to do all that they should have under the circumstances.”188 This is a far cry
from bad faith.189 “Good faith, not a good result, is what is required of the board.”190
187 FAC ¶ 58.
188 Lyondell, 970 A.2d at 243.
189 See City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 59 (Del. 2017) (holding that plaintiffs had improperly “conflate[d] the bad outcome . . . with the actions of the board”); Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1051 (Del. Ch. 1996) (“The business outcome of an investment project that is unaffected by director self-interest or bad faith, cannot itself be an occasion for director liability.”); Quadrant Structured Prods. Co. v. Vertin, 2014 WL 5465535, at *5 (Del. Ch. Oct. 28, 2014) (“Directors, not courts, are charged with weighing the costs and benefits of risk and making a decision about how much risk the firm should assume . . . .”). 190 Reiter, 2016 WL 6081823, at *14 (citing Goldman Sachs, 2011 WL 4826104, at *23).
The purported “red flags”—the Amazon risk, the “deteriorating conversion” issue, and Monoprice’s sketchy manufacturing facility in China—were, as Plaintiff concedes, all considered by the Board in its evaluation of the acquisition. See FAC ¶¶ 58–60. That the Board did not find these issues to be of such concern as to justify passing on the Monoprice acquisition does not a Caremark or bad faith claim make. See In re Zale Corp. S’holders Litig., 2015 WL 5853693, at *15 (Del. Ch. Oct. 1, 2015), as amended, 2015 WL 6551418 (Del. Ch. Oct. 29, 2015) (holding that where “the Board specifically considered” the risks and alternatives cited by Plaintiff, “it cannot be said that they acted in bad faith.”); Citigroup, 964 A.2d at 128 (noting that “[i]n any business decision that turns out poorly there will likely be signs that one could point to and argue are evidence that the decision was wrong.”); Corbat, 2017 WL 6452240, at *18 (holding that failure to properly limit business risk is not recognized as a theory of director liability); Bammann, 2015 WL 2455469, at *14 (same).
(c) The Stock Repurchases – Count IV
It is difficult to discern exactly what claim Plaintiff intends to state with
respect to the Blucora stock repurchases. Whether cast as “waste” or simply
“irrational,” however, the FAC contains no facts suggesting that the Director
Defendants lacked independence, were motivated by self-interest or consciously
disregarded any known duty when they approved the repurchases. While Plaintiff
alleges that the stock repurchases served “no rational business purpose” and “were
contrary to common sense,”191 without well-pled allegations that the Director
Defendants were conflicted or that the transactions were illegal, Plaintiff’s hindsight
criticisms amount to nothing more than conclusory allegations that question how the
Board decided to allocate Blucora’s cash.192
As the Director Defendants correctly argue, “[i]f, when, and how much stock
to repurchase are precisely the types of decisions that are subject to the business
judgement rule and protected against judicial second-guessing.”193 And, while the
191 FAC ¶¶ 85, 90.
192 See Frank v. Arnelle, 1998 WL 668649, at *6 (Del. Ch. Sept. 16, 1998) (enumerating several legitimate business reasons why a board might authorize a company to repurchase stock). 193 Opening Br. in Supp. of Director Defs.’ Mot. to Dismiss 22 (citing Lyondell, 970 A.2d at 243–44) (D.I. 33).
Plaintiff makes a cursory reference to waste,194 the FAC’s allegations fall well short
of satisfying the “extreme test”195 for waste that requires Plaintiff to plead that the
market-priced repurchases196 were “so one sided that no business person of ordinary,
sound judgment could conclude that the corporation has received adequate
consideration.”197
(d) The Brophy Claims – Count V
In Delaware, the general rule is that “corporate officers and directors may
purchase and sell the corporation’s stock at will, without any liability to the
corporation.”198 Our law recognizes an exception to this rule, and that an insider’s
trade may be deemed a breach of the fiduciary duty of loyalty, when: (1) “the
corporate fiduciary possessed material, nonpublic information”; and (2) “the
corporate fiduciary used that information improperly by making trades because she
194 FAC ¶ 87.
195 Zucker v. Andreessen, 2012 WL 2366448, at *8 (Del. Ch. June 21, 2012).
196 FAC ¶¶ 85, 90.
197 Glazer, 658 A.2d at 183. See Citigroup, 964 A.2d at 137 (rejecting waste claim in connection with stock repurchases); In re Countrywide Corp. S’holders Litig., 2009 WL 846019, at *8 (Del. Ch. Mar. 31, 2009) (same); Chrysogelos v. London, 1992 WL 58516, at *5 (Del. Ch. Mar. 25, 1992) (repurchases at 25% premium above market were not waste). 198 Tuckman v. Aerosonic Corp., 1982 WL 17810, at *11 (Del. Ch. May 20, 1982).
was motivated, in whole or in part, by the substance of that information.”199 For the
reasons explained below, Plaintiff’s Brophy claims against the CIG Defendants,
Snyder and Allen fail as a matter of prima facie pleading.
First, Plaintiff has not alleged what material, nonpublic information Snyder
and Allen possessed that the market did not. On November 5, 2013, Blucora released
its 3Q13 earnings results and provided guidance for 4Q13. The challenged sales
occurred promptly thereafter. Plaintiff’s allegation that because they were on the
Board and in management, respectively, Snyder and Allen must have obtained some
additional material, nonpublic information regarding Monoprice’s 4Q13 financial
performance following Blucora’s public guidance is wholly conclusory and
insufficient to support an insider trading claim.200
Second, Plaintiff has failed to well-plead scienter. Specifically, he has failed
to plead facts to support a reasonable inference that “each sale by each individual
defendant was entered into and completed on the basis of, and because of, adverse
199 In re Oracle Corp., 867 A.2d 904, 934 (Del. Ch. 2004), aff’d, 872 A.2d 960 (Del. 2005) (clarifying the elements a plaintiff must show to prevail on a Brophy claim). 200 See Rattner, 2003 WL 22284323, at *10 (holding that to plead defendants possessed information by “virtue of their positions,” a complaint must allege “the precise roles that [the defendants] played at the [c]ompany and the information that would have come to their attention in those roles.”). Plaintiff’s conclusory allegations that Snyder and Allen knew that the Monoprice acquisition would fail do not support a Brophy claim for the same reasons they fail to state bad faith claims and for the additional reason that the risks were disclosed to the market in connection with the Board’s recommendation of the transaction to stockholders. Jan. 31 Will Aff., Ex. Z (Blucora Form 10-Q dated Nov. 5, 2013) at 52.
material non-public information.”201 In this regard, “[n]o inference can be drawn
from th[e] simple fact” that defendants “engaged in trades shortly after [the company
engaged in a transaction or released financial information].”202 Nor can the Court
infer scienter based only on the size of the trades.203 Pled facts, not speculation, must
support a finding of scienter. Yet Plaintiff rests his Brophy claims on nothing more
than a hunch that Snyder and Allen engaged in “improper” trades. That is
insufficient as a matter of law.204
III. CONCLUSION
Based on the foregoing, I am satisfied Plaintiff has failed adequately to plead
demand excusal and, in any event, has failed to plead viable claims upon which relief
may be granted. Accordingly, the Motions to Dismiss the FAC with prejudice must
be GRANTED.
IT IS SO ORDERED.
201 Rattner, 2003 WL 22284323, at *11 (emphasis supplied). See also Guttman, 823 A.2d at 505 (noting that insider trading claims in Delaware “depend importantly on proof that the selling defendants acted with scienter.”). 202 Guttman, 823 A.2d at 497, 503–04.
203 Id. at 504.
204 See Rattner, 2003 WL 22284323, at *12.
Jeffrey I. Tilden v. John E. Cunningham, IV (Blucora, Inc., Nominal Defendant) (Jeffrey I. Tilden v. John E. Cunningham, IV (Blucora, Inc., Nominal Defendant)) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.