Jeran Binning v. Naren Gursahaney

• Court: Court of Chancery of Delaware
• Decided: May 6, 2016
• Docket: 10586-VCMR
• Status: Published

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE

TAMIKA R. M ONTGOMERY-REEVES New Castle County Courthouse VICE CHANCELLOR 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734

Date Submitted: February 17, 2016 Date Decided: May 6, 2016

Blake A. Bennett, Esquire Brock E. Czeschin, Esquire Cooch and Taylor, P.A. A. Jacob Werrett, Esquire The Brandywine Building Sarah A. Clark, Esquire 1000 West Street, 10th Floor Richards, Layton & Finger, P.A. P.O. Box 1680 One Rodney Square Wilmington, DE 19801 920 North King Street Wilmington, DE 19801 Stephen P. Lamb, Esquire Daniel A. Mason, Esquire Paul, Weiss, Rifkind, Wharton & Garrison LLP 500 Delaware Avenue, Suite 200 P.O. Box 32 Wilmington, DE 19899-0032

RE: Jeran Binning v. Naren Gursahaney, et al. Civil Action No. 10586-VCMR

Dear Counsel:

This Letter Opinion addresses the defendants’ motions to dismiss the

plaintiff’s Verified First Amended Stockholder Derivative Complaint. For the

reasons stated herein, the defendants’ motions are granted. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 2 of 15

I. BACKGROUND

A. Facts Plaintiff Jeran Binning, a stockholder of Nominal Defendant The ADT

Corporation (“ADT” or the “Company”)1 since September 2012, challenges a

series of decisions made by the Company’s board of directors (the “Board”) for the

alleged purpose of appeasing an activist investor, Defendant Keith A. Meister, and

avoiding a proxy contest. Soon after ADT’s stock began trading publicly in

October 2012, Meister, through his investment management firm Defendant

Corvex Management LP (“Corvex”), purchased around five percent of the

Company’s outstanding stock.2 Meister immediately began lobbying the Board to

further leverage ADT’s capital structure by issuing debt securities to fund stock

repurchases. According to Binning, the Board capitulated under Meister’s threat of

a proxy contest.

Further, Binning contends that Meister obtained a seat on the Board and

approval of additional debt offerings and stock repurchases by again threatening a

1 ADT is a Delaware corporation that provides electronic security, interactive home and business automation, and monitoring services to individuals and small businesses. ADT was a subsidiary of Tyco International until it was spun off as an independent, publicly traded company in September 2012. 2 Corvex is a Delaware limited partnership controlled by Meister. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 3 of 15

proxy contest if the Board resisted. Then, in November 2013, the Board approved

an allegedly overpriced repurchase of over $450 million in Company stock directly

from Corvex, netting the investment firm around $60 million in profits. In January

2014, the public learned of ADT’s revenue shortfalls, diminishing customer base,

and increased advertising and service costs, each contributing to a single-day,

seventeen percent stock price reduction.

On August 1, 2014, Walter E. Ryan, Jr., another ADT stockholder, filed a

complaint challenging the Board’s decisions enumerated above. On April 28,

2015, in Ryan v. Gursahaney, this Court dismissed Ryan’s complaint under Court

of Chancery Rule 23.1, noting that Ryan had failed to make a pre-suit demand and

holding that pre-suit demand was not excused.3 On January 27, 2015, Binning

filed an initial complaint challenging the same Board decisions and, in response to

Defendants’ motions to dismiss, filed an amended complaint the following June

(the “Complaint”). Binning’s Complaint largely mirrors the operative complaint in

Ryan.4

3 See Ryan v. Gursahaney, 2015 WL 1915911 (Del. Ch. Apr. 28, 2015), aff’d, 128 A.3d 991 (Del. 2015) (TABLE). 4 Id. at 4. I address those alleged differences in Section II.B.3 infra. For a more fulsome statement of the relevant facts, see Ryan, 2015 WL 1915911, at *2-4. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 4 of 15

B. Additional Parties Defendant Naren Gursahaney has been ADT’s President and CEO and a

member of the Board since September 2012. Defendant Kathryn Mikells was

ADT’s Senior Vice President and CFO from September 2012 to May 2013.

Defendant Bruce Gordon is the Chairman of the Board, and Defendants Timothy

Donahue, Thomas Colligan, Bridgette Heller, Kathleen Hyle, Robert Dutkowsky,

and Meister are all current or former Board members. Collectively, I refer to

Corvex, Meister, Gursahaney, Mikells, Gordon, Donahue, Colligan, Heller, Hyle,

and Dutkowsky as “Defendants.”

C. Parties’ Contentions Defendants argue that the Complaint should be dismissed (1) for failure to

make a demand on the Board or to plead adequately that such a demand would be

futile, (2) because stare decisis compels dismissal pursuant to Ryan, (3) because

Ryan collaterally estops Binning from relitigating demand futility, and (4) for

failure to state a claim pursuant to Court of Chancery Rule 12(b)(6). Binning

responds that, notwithstanding Ryan, any pre-suit demand would have been futile

and the Complaint adequately alleges breach of fiduciary duty, aiding and abetting,

and unjust enrichment claims. Binning also contends that stare decisis and

collateral estoppel do not apply under these circumstances. Because I conclude Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 5 of 15

that Defendants’ motions to dismiss under Rule 23.1 should be granted, I need not

consider the parties’ arguments regarding Rule 12(b)(6).

II. ANALYSIS

A. Legal Standard Rule 23.1 provides that a stockholder may not bring an action derivatively

on behalf of the nominal defendant corporation unless the stockholder (1) made a

demand on the corporation to initiate litigation that the corporation’s board

wrongfully refused or (2) pled particularized facts creating a reasonable doubt that

either “[(a)] the directors are disinterested and independent or [(b)] the challenged

transaction was otherwise the product of a valid exercise of business judgment.”5

The Rule 23.1 demand requirement embodies the principle that a derivative cause

of action belongs to a corporation, which is managed by the corporation’s board,6

and allows the “corporation the opportunity to rectify an alleged wrong without

litigation.”7

5 Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1020 (Del. 2015) (internal quotation marks omitted) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000)); accord Ct. Ch. R. 23.1. 6 White v. Panic, 783 A.2d 543, 546 (Del. 2001). 7 Aronson, 473 A.2d at 809. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 6 of 15

B. Binning Has Failed To Distinguish His Complaint from This Court’s Decision in Ryan Sufficiently To Avoid Dismissal 1. This Court dismissed the Ryan plaintiff’s complaint under Rule 23.1 As mentioned above, this Court dismissed another ADT stockholder’s

claims based on the same Board action in Ryan. Ryan, the plaintiff in that case,

did not make a pre-suit demand on the Board, but pled that such demand would

have been futile because “(1) the Board was not disinterested and independent with

respect to the decisions relating to the Standstill Agreement, the Stock Repurchase

Program, and the Corvex Repurchase; and (2) the Complaint’s allegations as to

those transactions are sufficient to rebut the protection of the business judgment

rule.”8 Ryan contended that demand would have been futile on both bases because

the Board’s “sole or primary motivation was entrenchment.”9

The Court rejected Ryan’s entrenchment argument, finding that “the

particularized facts do not support a reasonable inference that the [Board]

8 Ryan, 2015 WL 1915911, at *5. 9 Id. at *6 (citing Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988), overruled on other grounds by Brehm, 746 A.2d 244). Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 7 of 15

perceived an actual ‘threat’ of removal and [was] motivated to avoid it” 10 and

holding as follows:

Plaintiff’s argument as to the futility of demand [under the first prong of Aronson v. Lewis] relies heavily on his contention that the Director Defendants were driven by a desire to entrench themselves. In that regard, Plaintiff contends that the Complaint contains particularized allegations that the Director Defendants believed themselves to be vulnerable to removal by Corvex, and that the primary reason they agreed to the Standstill Agreement, the Stock Repurchase Program, and the Corvex Repurchase was to avoid this possibility. The non-conclusory allegations in the Complaint, however, do not raise a reasonable doubt as to the Director Defendants’ disinterestedness or independence based on this entrenchment theory . . . . ....

Under the second prong of the Aronson test, demand may be excused as futile if the complaint creates a reasonable doubt that the challenged transaction was otherwise the product of a valid exercise of business judgment. The presumption of the business judgment rule can be rebutted if the particularized facts raise a reasonable doubt that the informational component of the directors’ decisionmaking process, measured by concepts of gross negligence, included consideration of all material reasonably available. A plaintiff seeking to establish

10 Id. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 8 of 15

demand futility under Aronson’s second prong bears a heavy burden. Here, Plaintiff failed to carry it.11

Thus, the Court concluded that the plaintiff had failed “to plead adequately that

demand was excused,” and “[b]ecause such a failure requires dismissal of the

Complaint in its entirety,” the Court did not address the defendants’ arguments

regarding dismissal under Rule 12(b)(6).12

2. Binning’s Complaint largely repeats the allegations and arguments that this Court dismissed in Ryan Binning also did not make a pre-suit demand on the Board. Instead, Binning

contends that his Complaint should not be dismissed because any such demand

would have been futile. To support that position, however, Binning pleads a nearly

identical set of factual allegations and legal arguments as the plaintiff did in Ryan.

Specifically, Binning contends that demand would have been futile because a

majority of the Board (1) was not disinterested because it acted with an

entrenchment motive in acceding to Corvex’s demands and (2) did not validly

exercise its business judgment because it acted with an entrenchment motive,

11 Id. at *6, *8 (footnotes omitted) (internal quotation marks omitted) (citing White, 783 A.2d at 551; Brehm, 746 A.2d at 256 (quoting and citing Aronson, 473 A.2d at 812, 814)). 12 Id. at *5. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 9 of 15

failed to be reasonably informed in taking the challenged actions, and violated

certain Board resolutions in taking the challenged actions.13

In Ryan, this Court considered and rejected the vast majority of the same

demand futility arguments that Binning makes here. The Delaware Supreme Court

affirmed this Court’s decision in Ryan.14 The principle of stare decisis, therefore,

counsels that Binning’s Complaint should be dismissed absent a sufficient factual

or legal distinction from Ryan.15 And, even if stare decisis did not apply, I have

reviewed Ryan and its cited authority and agree with that decision’s conclusions.

As such, to the extent that Binning’s allegations and arguments overlap with those

addressed by this Court in Ryan, I reject them as bases on which demand would

have been futile. Binning’s Complaint, however, includes certain allegations and

arguments that were not addressed in Ryan. I address those differences infra to 13 See Pl.’s Answering Br. 24-50. 14 See Ryan v. Gursahaney, 128 A.3d 991 (Del. 2015) (TABLE). 15 La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 335 (Del. Ch. 2012) (“When any other derivative plaintiff faces a Rule 23.1 motion [after a previous Rule 23.1 dismissal] involving the same transaction, the plaintiff must distinguish the new complaint or explain how the prior court erred such that the outcome of the motion would be different.”), rev’d on other grounds, 74 A.3d 612 (Del. 2013); see also Kohls v. Kenetech Corp., 791 A.2d 763, 770 (Del. Ch. 2000) (“[B]ecause the Kohls fail to distinguish their claims, either factually or legally, from those [dismissed in a prior action . . . [n]ormal respect for the principle of stare decisis . . . require[s] that I dismiss this complaint.”), aff’d, 794 A.2d 1160 (Del. 2002). Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 10 of 15

determine whether Binning has distinguished his Complaint sufficiently to avoid

application of stare decisis or alter this Court’s conclusion in Ryan.16

3. The distinctions between the Complaint and Ryan are insufficient to avoid dismissal Binning includes certain factual allegations and legal arguments in his

Complaint that are absent from Ryan. In particular, the Complaint alleges the

following: (1) an additional director served on the Board at the time Binning filed

his Complaint;17 (2) Mikells was named as a defendant in this case;18 (3) the Board,

in December 2012, extended the deadline by which stockholders could nominate

directors for election at the next stockholder meeting;19 (4) the SEC began

investigating the challenged transactions;20 (5) ADT issued a materially misleading

proxy statement;21 (6) the Board’s Nominating and Governance Committee did not

meet separately from the full Board to approve the stock repurchase from Corvex 16 The parties also briefed arguments pertaining to collateral estoppel. ADT Opening Br. 35-38; Pl.’s Answering Br. 54. Because I find that the Complaint should be dismissed on principles of stare decisis and based on this Court’s reasoning in Ryan, I decline to address whether collateral estoppel otherwise applies. 17 Compl. ¶ 137. 18 Id. ¶ 16. 19 Id. ¶¶ 59-60. 20 Id. ¶¶ 128-29. 21 Id. ¶ 141. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 11 of 15

as a related-party transaction;22 and (7) there were discrepancies between ADT’s

responses to various stockholders’ Section 220 demands.23 These distinctions,

however, are insufficient to plead demand futility.

First, the fact that the Board consisted of one additional independent director

when Binning filed his Complaint suggests that the Board had become more

disinterested and independent since Ryan filed his complaint. That indicates that a

pre-suit demand here would have been even less futile than in Ryan and, therefore,

weighs against a finding of demand futility here.

Second, adding Mikells as a defendant has no bearing on the demand futility

analysis. Mikells is a former CFO of ADT and left the Company in May 2013,

well before the buyback of Corvex’s ADT shares. Additionally, the demand

futility inquiry focuses on whether the Board was disinterested or independent, and

Mikells never served on the Board.

Third, Binning argues that the Board’s December 2012 extension of the

deadline by which stockholders could nominate directors for election at the

following stockholder meeting suggests that it perceived an actual threat to their

22 Id. ¶ 144. 23 Id. ¶¶ 34-35. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 12 of 15

positions.24 The Board, therefore, allegedly acted to entrench themselves instead

of in the stockholders’ best interests.25 This Court held in Ryan, however, that the

Board did not perceive an “‘actual threat’ of removal” because the complaint failed

to adequately allege an “actual struggle.”26 The new allegation that the Board

extended the deadline for stockholders to propose a competing slate, without more,

is insufficient to alter the Ryan Court’s conclusion that no actual threat existed.27

Fourth, Binning describes the SEC’s investigation into ADT as a “critical”

fact that was not alleged in Ryan.28 Yet, Binning does not even attempt to explain

how the SEC investigation would support a finding that demand on the Board

24 Compl. ¶¶ 59-60; Pl.’s Answering Br. 58. 25 Oral Arg. Tr. 23. 26 Ryan, 2015 WL 1915911, at *7. In Ryan, the Court found that the complaint did not allege an “actual threat” because Corvex did not, for example, “initiate[] a proxy contest or other public campaign to remove one or more ADT directors,” or even take “any preliminary steps to prepare for such an endeavor.” Id. at *6. As such, the Court held that any threat Meister or Corvex posed to the Board was “‘too speculative to raise a reasonable doubt of director disinterest’ under the first prong of Aronson.” Id. at *6-7 (quoting Grobow, 639 A.2d at 188). 27 Essentially, Binning’s argument is that extending the deadline to nominate a competing slate of directors for election at the following stockholders meeting increased the amount of time the Board had to negotiate the standstill. Oral Arg. Tr. 9. This argument, however, is tenuous at best and does not overcome Ryan’s “actual (as opposed to possible or theoretical) ‘struggle for corporate control’” standard. Ryan, 2015 WL 1915911, at *7 (quoting Grobow, 539 A.2d at 188). 28 Pl.’s Answering Br. 57-59. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 13 of 15

would have been futile. I also note that the United States District Court for the

Southern District of Florida dismissed the complaint on which the SEC

investigation was based for failure “to allege any actionable misstatement or

scienter.”29 And, the SEC has since concluded its investigation and “do[es] not

intend to recommend an enforcement action by the Commission against [ADT].”30

Fifth, Binning alleges that the proxy statement ADT issued in connection

with its 2013 annual meeting was materially misleading. Binning presumably

made this allegation to convince the Court that demand would have been futile

because the Board faced a substantial likelihood of personal liability for potential

disclosure violations.31 Interestingly, the Complaint fails to even assert a claim

against the Board concerning that allegedly misleading proxy. Regardless, there is

no basis in the Complaint’s allegations for me to conclude that the Board faced a

29 ADT Opening Br. 32; accord Transmittal Aff. of Daniel A. Mason in Supp. of the ADT Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss the Am. Compl. Ex. 8 at 35, 38-39, 56-57, 59-62 (order granting defendants’ motion to dismiss the federal securities complaint). 30 See Feb. 16, 2016 Letter from the SEC to ADT, Docket Item No. 54. 31 Aronson, 473 A.2d at 815 (noting that a board may be found to lack disinterestedness or independence when it faces a substantial likelihood of liability for approving a questioned transaction); see Compl. ¶ 141 (including the allegation regarding the materially misleading proxy in the section of the Complaint titled “Demand Was Also Excused Because a Majority of ADT’s Board Lacks Disinterestedness or Independence”). Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 14 of 15

substantial likelihood of liability such that the allegedly misleading proxy had any

bearing on the Board’s disinterestedness or independence as to Binning’s claims.

Sixth, the fact that the Board’s Nominating and Governance Committee did

not meet separately does not “support[] the inference that the Board acted

disloyally in approving the Corvex repurchase.”32 Binning relies on Telxon Corp.

v. Bogomolny to support that argument, but, in that case, the inference of disloyalty

resulted from the allegation that “there were no minutes kept of the meetings of the

Telxon board committees.”33 By contrast, the Complaint quotes the minutes from

the Board meeting during which, “[a]fter consideration and discussion, the

members of the Nominating and Governance Committee of the Board approved the

proposed repurchase as a related party transaction.”34 Hence, no such inference of

disloyalty can be made in this case.

Seventh, and finally, Binning alleges that there were discrepancies between

ADT’s responses to Ryan’s and Binning’s Section 220 demands. Binning

complains that because Ryan received more documents in his Section 220 demand

32 Pl.’s Answering Br. 44. 33 792 A.2d 964, 975 (Del. Ch. 2001). 34 Compl. ¶ 144. Binning v. Gursahaney C.A. No. 10586-VCMR May 6, 2016 Page 15 of 15

than he did, dismissal of his Complaint would be “inequitable.”35 Binning,

however, does not contend that Ryan failed to utilize those additional documents

adequately, or that the Court in Ryan failed to consider those documents. In

addition, the one item Binning alleges he received that Ryan did not receive—i.e.,

the written consent adopting the December 2012 bylaw amendment extending the

time for stockholders to submit a competing slate of directors for election at the

following stockholders meeting—does not affect the Court’s demand futility

analysis, as discussed supra.

III. CONCLUSION For the reasons stated above, Binning has failed to plead sufficiently that

demand would have been futile. Thus, Defendants’ motions to dismiss are granted,

and the Complaint is dismissed under Rule 23.1.

IT IS SO ORDERED.

Sincerely,

/s/ Tamika Montgomery-Reeves

Vice Chancellor

TMR/jp

35 Pl.’s Answering Br. 59.