IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JIM GILBERT and BARRETT ) O’DONNELL, Individually and On ) Behalf of All Others Similarly Situated, ) ) Plaintiffs, ) ) v. ) C.A. No. 2018-0453-SG ) ) EZRA PERLMAN, DAVID A. JONES, ) JR., FRANCISCO PARTNERS IV, L.P., ) FRANCISCO PARTNERS IV-A, L.P., ) FP HEALTHCARE HOLDINGS, INC., ) FP HEALTHCARE MERGER SUB ) CORPORATION, and CHRYSALIS ) VENTURES II, L.P., ) ) Defendants. )
MEMORANDUM OPINION
Date Submitted: January 23, 2020 Date Decided: April 29, 2020
Seth D. Rigrodsky, Brian D. Long, and Gina M Serra, of RIGRODSKY & LONG, P.A., Wilmington, Delaware; OF COUNSEL: Richard A. Maniskas, of RM LAW, P.C., Berwyn, Pennsylvania, Attorneys for Plaintiffs.
Rudolf Koch, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Deborah S. Birnbach and Morgan R. Mordecai, of GOODWIN PROCTER LLP, Attorneys for Defendants.
GLASSCOCK, Vice Chancellor Fiduciaries are those who have ownership or control of property belonging,
equitably, to others. These legal-versus-beneficial interests notably create agency
problems, and require that fiduciaries be bound by certain duties, imposed in equity,
to remain faithful to those to whom these duties run; in the corporate context, the
entity they serve and its owners, the stockholders. Typically, corporate fiduciaries—
directors and officers—accept their duties explicitly, in that they agree to undertake
the roles in which those duties arise. Identifying them as fiduciaries, therefore, is
straightforward.
Corporate controllers are stockholders who, through control of the majority of
the voting shares (or otherwise) can seize the corporate machinery and turn it to their
own benefit. When they do so, they control the entity; the property, in part, of the
minority stockholders. In that sense, when they employ that control they too are
fiduciaries. Unlike with directors and officers, however, controlling stockholders
have duties imposed upon them. They are not volunteers. Moreover, like other
stockholders, they are also the beneficiaries of the traditional fiduciary duties owed
stockholders, and like other stockholders they may vote their stock, and take other
actions with respect to the entity, in their own self-interest free of fiduciary strictures,
so long as they do not employ the corporate machinery itself. This incomplete
disquisition is by way of saying that the extent of the application of fiduciary duties upon stockholders alleged to have acted as controllers does not always lend itself to
a straightforward analysis.
The instant matter involves a controlled entity, Connecture, Inc.
(“Connecture” or the “Company”), taken private in a cash-out merger with its
majority stockholder, Defendant Francisco Partners.1 According to the Plaintiff
stockholders, the merger price and process were unfair. Francisco Partners, a
corporate controller, stood on both sides of the transaction, and entire fairness is the
standard of review that Francisco Partners must satisfy here.2
Two minority stockholders, Defendants Chrysalis Ventures II, L.P.
(“Chrysalis”) and an individual, David A. Jones, Jr., agreed with Francisco Partners
to roll over their interest in Connecture as part of the merger. The Plaintiffs allege
that Chrysalis and Jones were a part of a control group with Francisco Partners, and
are thus also controllers and charged with fiduciary duties as well. Chrysalis and
Jones have moved to dismiss under Rule 12(b)(6), maintaining that they were not
acting as corporate fiduciaries in deciding to roll over their interests, but simply
stockholders acting in their own interests. For reasons laid out below, I determine
that Chrysalis and Jones did not constitute a “control group” with Francisco Partners,
which, I note again, had voting control of Connecture without the help of Chrysalis
1 Francisco Partners, as described below, is a shorthand term for a group of related parties. 2 Absent a defense under which it may shift or ameliorate this burden.
2 or Jones. Accordingly, neither Chrysalis nor Jones owed fiduciary duties to the
minority on that basis, and Chrysalis and Jones’ Motion to Dismiss Count I of the
Complaint must be granted. In addition, the Plaintiffs allege that Jones, a director
of Connecture, breached his duty of loyalty in that role as well. Jones has moved to
dismiss that claim; I find that consideration of that motion may benefit from
supplemental briefing, and I therefore defer consideration of that portion of his
Motion to Dismiss.
My reasoning is below.
I. BACKGROUND3
A. The Parties
Non-party Connecture is a Delaware corporation headquartered in Brookfield,
Wisconsin.4 Connecture provides “web-based information systems used to create
health insurance marketplaces.”5
Plaintiffs Jim Gilbert and Barrett O’Donnell were at all relevant times prior to
the going-private transaction owners of Connecture common stock.6
3 I draw all facts from the Plaintiff’s Verified Class Action Compl., Docket Item (“D.I.”) 1 (“Compl.”) and documents incorporated therein. See in re Morton’s Rest. Grp., Inc. S’holder Litig., 74 A.3d 656, 658–59 (Del. Ch. 2013) (permitting consideration of documents incorporated into complaint in motion to dismiss). As discussed further below, all well-pled facts are considered true for the sake of this motion. 4 Compl., ¶ 19. 5 Id. 6 Id. ¶¶ 9–10.
3 Defendants Francisco Partners IV, L.P. and Francisco Partners IV-A, L.P. (the
“FP Investors”) are Cayman Islands exempted limited partnerships based in San
Francisco.7 The FP Investors were parties to the transactions at issue.8 The FP
Investors are controlled by a general partner, Francisco Partners GP IV, L.P., also a
Cayman Islands exempted limited partnership.9 Francisco Partners GP IV, L.P. is,
in turn, controlled by its general partner, Francisco Partners GP IV Management
Limited, a Cayman Islands exempted company.10 I refer to these entities collectively
as “Francisco Partners.”
Defendants FP Healthcare Holdings, Inc. and FP Healthcare Merger Sub
Corporation (collectively “FP Healthcare”) are Delaware corporations controlled by
FP Investors and created for the purposes of the transaction.11
Defendant Ezra Perlman served on the Connecture board of directors (the
“Board”) since 2016 as Francisco Partners’ designee.12 Perlman is co-president of
Francisco Partners.13
7 Id. ¶ 11. 8 Id. 9 Id. 10 Id. 11 Id. ¶¶ 2, 12. 12 Id. ¶ 13. 13 Id.
4 Defendant Chrysalis is a Delaware limited partnership headquartered in
Kentucky.14 It is a private investment partnership controlled by its general partner,
Chrysalis Partners II, LLC, a Delaware limited liability company.15
Defendant Jones served as Chairman of the Connecture Board since 2011.16
Jones “is an affiliate of, and has a financial interest in, Chrysalis.”17 Jones serves on
an investment committee of Chrysalis’ general partner Chrysalis Partners II, LLC.18
That committee makes “[i]nvestment and voting decisions with respect to the shares
held by Chrysalis.”19
Non-parties A. John Ansay, Vickie Capps, Paul Kusserow, Kraig McEwen,
Jeffery Surges, and Russel Thomas were directors on Connecture’s Board.20
B. Factual Background
1. FP Investors and Chrysalis Acquire a Stake in Connecture
Connecture was established in 1999.21 It is an online health insurance
marketplace that connects health insurance consumers with providers.22 In
14 Id. ¶¶ 1, 15. 15 Id. ¶ 15. 16 Id. ¶ 16. 17 Id. 18 Id. ¶ 15. 19 Id. 20 Id. ¶¶ 20–25. 21 Id. ¶ 33. 22 Id. ¶ 34.
5 November 2015, the Board sought to raise capital through a private placement
offering.23 In response, in February 2016, Francisco Partners made an offer to
purchase securities through this private placement.24 The Board formed a committee
(the “First Committee”), and the First Committee and the Board approved the offer
at a February 19 board meeting.25 At this board meeting, Defendant Jones informed
the Board that Chrysalis wished to participate in the offering as well.26 Pursuant to
this private placement offering, on March 11, 2016, FP Investors and Chrysalis
purchased $52 million of newly created Series A Preferred Stock.27 On an as-
converted basis, the Series A Preferred Stock represented 34% ownership of the
Company.28 After the financing closed, FP Investors began purchasing shares on
the market, and by December 31, 2016, it beneficially owned 43% of the Company
on an as-converted basis.29
23 Id. ¶ 35. 24 Id. 25 Id. 26 Id. ¶ 36. As noted, Jones was an affiliate of Chrysalis, which owned just over 18% of Connecture common stock. Id. 27 Id. ¶ 37. The Preferred Stock had a stated value of $1,000 per share and a conversion price into common stock of $4.50, convertible into the number of common stock equal to the stated value. Id. The Preferred stock earned dividends of 7.5% annually. Id. Under an investor rights agreement that was part of the financing deal, Francisco Partners gained the right to designate a member of the Board. Id. ¶ 38. It designated Perlman. Id. 28 Id. ¶ 38. 29 Id. ¶ 40.
6 In January 2017, the Company decided to conduct another round of
financing.30 It created another special committee (the “Second Committee”).31
Francisco Partners submitted an offer, and this offer also contemplated an additional
investment by Chrysalis.32 On March 7, 2017, FP Investors and Chrysalis purchased
$17.5 million of Series B Preferred Stock.33 The Board also increased its size by
one seat, and FP Investors designated the additional seat.34 When the second round
of financing closed, on an as-converted basis, FP Investors owned 56% of the
Company, and Chrysalis owned 11%.35
The Company’s 10-K, dated March 31, 2017, recognized the influence several
of the Defendants had gained over the Company:
Collectively, as of March 10, 2017, our directors, executive officers, and their affiliated entities beneficially owned approximately 68% of our outstanding capital stock . . . if they act together, [they] could exert substantial influence over matters requiring approval by our stockholders . . . which may further discourage, delay or prevent a third party from making a significant equity investment in us, or could discourage, delay, or prevent transactions involving a change in control,
30 Id. ¶ 41. 31 Id. 32 Id. 33 Id. ¶ 42. The Series B Preferred Stock had a conversion price of $1.91 and annual dividends of 15%. Id. Under this second round of financing, FP Investors contracted for Board designation rights proportionate to its ownership percentage of the Company on an as-converted basis. Id. ¶ 43. The Complaint states this designation right was “rounded up to the nearest whole director.” Id. 34 Id. ¶ 43. 35 Id.
7 including transactions in which our stockholders might otherwise receive a premium for their shares over the then-current market price.36
2. The Company Receives a Solicitation
In May 2017, a strategic party (“Party A”) offered to acquire a portion of
Connecture’s business.37 When the Board rejected the proposal, Party A entered a
confidentiality agreement with the Company to investigate an interest in acquiring
the entire Company.38 In July 2017, Party A offered to buy the entire Company in
cash for $1 to $2 per share.39 The Board constituted a special committee (the “Third
Committee”) to review the offer and other strategic alternatives.40
In August 2017, the Third Committee’s financial advisor presented possible
strategic and financial alternatives to the Board, and, at the Board’s direction,
contacted these potential acquirers.41 This resulted in interest from seven potential
acquirers, who entered into confidentiality agreements with the Company.42
Ultimately, none submitted an indication of interest.43 The financial advisor also
36 Id. ¶ 61. 37 Id. ¶ 46. 38 Id. 39 Id. ¶ 47. 40 Id. The Complaint states that the Third Committee was not authorized to select its own financial advisor. Id. 41 Id. ¶ 48. 42 Id. 43 Id.
8 contacted Francisco Partners and Chrysalis, but they expressed no interest in
acquiring the Company at that time.44 In late August, Party A withdrew its
proposal.45
3. The Company Delists its Shares on NASDAQ and FP Investors Makes an Offer
Around the time the second financing offer closed, NASDAQ had informed
the Company that it was out of compliance with two listing requirements.46 The
Company faced delisting if it did not comply with these listing requirements by
October 31, 2017 and November 27, 2017, respectively.47 With the first deadline
approaching, on October 17, the Board decided to delist the Company.48 Connecture
common stock ceased trading on NASDAQ on October 30, 2017, and began trading
the next day on the OTCQX US Market.49 At the time the Board decided to delist,
Connecture stock traded at $0.60 per share; within two weeks—by November 1—it
had dropped to $0.17 per share.50
44 Id. ¶¶ 48–49. 45 Id. ¶ 50. 46 Id. ¶ 51. The Company was not maintaining NASDAQ’s minimum $15 million market value and $1 per share requirements. Id. 47 Id. 48 Id. 49 Id. 50 Id.
9 On November 13, 2017, FP Investors made an offer on behalf of the
Defendants to acquire all the Company’s outstanding stock for $0.30 per share (the
“Transaction”).51 The Complaint alleges that “[i]n accordance with their earlier,
agreed to plan, FP Investors’ proposal assumed that all of the Company’s
outstanding preferred stock (including Chrysalis’ preferred stock) would be rolled
over into a newly formed acquisition vehicle.”52 This offer was not conditioned on
the approval of a majority of the minority stockholders or the approval of an
independent special committee.53
4. A New Special Committee Negotiates and Approves the Transaction
After the offer from FP Investors, the Third Committee received notice of
possible conflicts for its financial and legal advisors, so it retained new legal counsel
and a new financial advisor.54 However, its former legal and financial advisors
remained heavily involved, attending meetings, negotiating, and managing certain
portions of the transaction process.55 At the end of November, the Board met,
reviewed the offer, and constituted a new special committee to continue negotiations
51 Id. ¶ 52. 52 Id. 53 Id. ¶ 53. Nothing in the Proxy indicates that either the Third or Fourth Committees requested or attempted to negotiate for this provision. Id. ¶ 94. 54 Id. ¶¶ 54–56. 55 Id.
10 (the “Fourth Committee”).56 The Fourth Committee engaged the same legal and
financial advisors as the Third Committee.57
In early December 2017, Francisco Partners declined to consider a financing
alternative to its share buyout proposal.58 The Fourth Committee met with its
financial advisor, Houlihan Lokey, Inc. (“Houlihan Lokey”), on December 15, and
discussed tax issues, including the Company’s net operating losses that were likely
to make its effective tax rate 0%.59 According to the 14D-9, Houlihan Lokey also
discussed at that meeting the “importance of Chrysalis’ support for the Proposed
Transaction given its ownership of approximately 11% of the Company’s
outstanding capital stock and the importance of Chrysalis and Francisco Partners
agreeing on the terms of the rollover of Chrysalis’ Preferred Stock into the acquiring
entity.”60 The Fourth Committee decided on a counteroffer of $0.52 per share, but
when it made the proposal later that week, Francisco Partners refused.61
56 Id. ¶ 57. The Complaint alleges that each member of the Fourth Committee lacked independence from the proposed acquirers. Id. ¶¶ 58–59. 57 Id. ¶ 59. 58 Id. ¶ 60. 59 Id. ¶ 62. 60 Id. ¶ 63. 61 Id. ¶ 64.
11 On December 17 and 18, the Fourth Committee discussed potential acquirers
for the sake of a pre-signing market check or a post-signing go-shop period.62 The
Fourth Committee ultimately decided to forego a pre-signing market check in
exchange for an extended post-signing go shop period.63
On December 22, according to the 14D-9, Chrysalis communicated to the
Fourth Committee that it “would be willing to consider including its shares of
Common Stock in the rollover” if doing so would “help the [Fourth Committee]
negotiate a higher price for the Non-Rolling Stockholders.”64 The Fourth Committee
and Francisco Partners both agreed.65 On December 29, Francisco Partners agreed
to a one-time increase of its offer from $0.30 to $0.35 per share.66 The Fourth
Committee did not use the Company’s net operating losses (potentially worth an
62 Id. ¶ 65. 63 Id. 64 Id. ¶ 66. 65 Id. 66 Id. ¶ 67. The Plaintiffs, in the Complaint, make a somewhat confusing allegation: they contend that now that Chrysalis was rolling over its common stock, Francisco Partners ought to have “disburse[d] this consideration to Connecture’s minority stockholders.” Id. ¶¶ 67, 101. Thus, the Complaint concludes that because Chrysalis’ shares were worth $1,202,148.60 at $0.30 per share, and the $0.05 offer increase only increased the total capital going to minority shareholders by $780,753.70, this meant Francisco Partners was reducing its aggregate purchase price for all outstanding shares and that it therefore “shortchanged” the minority stockholders out of $420,000 by increasing its offer, despite the resulting increase in value to the Plaintiffs’ purported class. Id. I did not find this the most pellucid theory, either in the Complaint or at oral argument.
12 aggregate $199 million) as a negotiating tool.67 Instead, the Fourth Committee
decided to accept the offer that same day.68 A few days later, two Chrysalis members
who owned Connecture common stock—one of them Chairman of the Board
Jones—asked to participate in the equity rollover, and Francisco Partners agreed.69
On January 4, 2018, the Fourth Committee met to review the transaction.70
The Complaint alleges that in delivering its fairness opinion, Houlihan Lokey used
several “objectively improper assumptions and adjustments” to drive down the
perceived value of the Company.71 The Fourth Committee recommended the
Transaction, and the Board approved the merger agreement (the “Merger
Agreement”) the same day.72
5. The Minority Stockholders Vote Against the Transaction
Another financial advisor contacted third parties following execution of the
Merger Agreement, but no higher bidders emerged.73 FP Investors and Chrysalis
67 Id. ¶ 68. The Complaint alleges that these net operating losses could be used against future projected earnings, although earnings appeared to have been negative at the time of the negotiations. See id. ¶¶ 69, 104. 68 Id. ¶ 70. 69 Id. ¶ 71. 70 Id. ¶ 72. 71 Id. ¶¶ 73–76. Specifically, the Complaint alleges that Houlihan Lokey failed to account for the value of future anticipated cash flows, the value of the net operating losses, the proper companies for its selected company analysis, and the wrong revenue multiples. Id. 72 Id. ¶ 77. 73 Id. ¶ 78.
13 entered a voting agreement (the “Voting Agreement”) with the Company that
committed them to vote their shares—representing approximately 68% of the
Company’s stock—in favor of the Transaction.74 On April 24, 2018, the Transaction
received an underwhelming 9.9% approval from the Company’s unaffiliated
minority stockholders.75 The merger took place on April 25, 2018.76 According to
the Proxy, under Securities and Exchange Commission (SEC) rules, all the
Defendants in this Action are defined as “Purchaser Filing Parties.”77 Because of
this status, each was “required to express its position as to the fairness of the
proposed Merger to the Company’s unaffiliated security holders.”78
C. Procedural History
The Plaintiffs filed their class action complaint (the “Complaint”) on June 25,
2018.79 Defendants Perlman and Francisco Partners answered the Complaint on
October 19, 2018.80 Defendants Jones and Chrysalis moved to dismiss the
74 Id. ¶ 88. A provision of the Voting Agreement permitted FP Investors, Chrysalis, and others in the agreement to vote in favor of a superior proposal only if such proposal “would result in the preferred stock being redeemed in accordance with its terms.” Id. ¶ 109. 75 Id. ¶ 79. 76 Id. ¶ 80. Several directors continued to serve on the Board, including Jones, McEwen, Perlman, and Surges. Id. ¶ 81. Francisco Partners’ Vice President, Rozkin, joined the Board. Id. Management remained unchanged. Id. 77 Id. ¶ 83. 78 Id. (internal citations omitted). 79 Compl. 80 Answer to Pl.’s Verified Compl., D.I. 17.
14 Complaint as to allegations against them.81 After the parties finished briefing, I
heard argument on January 23, 2020, and I considered the matter fully submitted at
that time.
II. ANALYSIS
The Plaintiffs bring a claim for breach of fiduciary duty against the parties
they define as the “Buyout Group,” which includes Defendants FP Investors, FP
Healthcare, Perlman, Chrysalis, and Jones.82 The Plaintiffs allege that these
Defendants “worked together as one cohesive controlling stockholder unit to take
the Company private in a transaction that was . . . unfair to the Company’s minority
stockholders.”83 The Plaintiffs allege that as a controlling stockholder group each
of these Defendants owed fiduciary duties to the Company’s stockholders. 84 The
Plaintiffs bring an additional breach of fiduciary duty claim against Defendants
Perlman and Jones for violating their duties as directors on the Connecture Board.85
Defendants Chrysalis and Jones (the “Moving Defendants”) moved to dismiss
this action under Chancery Court Rule 12(b)(6). In considering such a motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are well-pleaded if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences
81 Mot. to Dismiss the Verified Class Action Compl., D.I. 20. 82 Compl. ¶¶ 110–18. 83 Id. ¶ 111. 84 Id. ¶ 113. 85 Id. ¶¶ 119–25.
15 in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.86
However, I do not need to accept “conclusory allegations unsupported by specific
fact” as true, nor must I “draw unreasonable inferences” in the Plaintiffs’ favor.87 I
may consider facts in documents incorporated into the Complaint.88
A. The Complaint does not Adequately Allege that Chrysalis and Jones are Controlling Stockholders
1. Legal Standards Regarding Controlling Stockholders and Control Groups
Under Delaware law, “controlling stockholders are fiduciaries of their
corporations’ minority stockholders.”89 That is, where a stockholder may control
the corporate machinery to benefit itself, as by exercising voting control, it is a
potential fiduciary. Where in fact it exerts such control, a controlling stockholder is
bound by Delaware’s common law fiduciary duties of loyalty and care. Conversely,
stockholders who control only their own shares, and cannot exert corporate control,
are owed fiduciary duties; they themselves are not obligated to act in the corporate
86 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotations omitted). 87 Thermopylae Capital Partners, L.P. v. Simbol, Inc., 2016 WL 368170, at *9 (Del. Ch. Jan. 29, 2016) (quoting Price v. E.I. duPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011)). 88 See in re Morton’s Rest. Grp., Inc. S’holder Litig., 74 A.3d 656, 658–59 (Del. Ch. 2013); In re Martha Stewart Living Omnimedia, Inc. S’holder Litig., 2017 WL 3568089, at *3 (Del. Ch. Aug. 18, 2017). 89 eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 26 (Del. Ch. 2010) (citing Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)).
16 interest. As our Supreme Court has noted, “a stockholder that owns less than half of
a corporation’s shares will generally not be deemed to be a controlling stockholder,
with concomitant fiduciary responsibilities.”90 A stockholder with a minority stake
will only be deemed a controller if she actually “exercise[s] control over the business
affairs of the corporation.”91
It is also possible under Delaware law for several minority stockholders to
band together to form a “control group.”92 In this situation, though none are
individually controllers, because they act in consort to exercise collective control,
the stockholders in the group owe fiduciary duties.93 To demonstrate the existence
of a control group, it is insufficient to identify a group of stockholders that merely
shares parallel interests.94 To form a control group, the stockholders must be
“connected in some legally significant way—e.g., by contract, common ownership,
agreement, or other arrangement—to work together toward a shared goal.”95 By
90 Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005). 91 Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994) (quoting Ivanhoe, 535 A.2d at 1344). 92 Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009); see also In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *24 (Del. Ch. Sept. 4, 2014), aff’d sub nom. Fuchs v. Wren Hldgs., LLC, 129 A.3d 882 (Del. 2015) (TABLE) (noting that establishing control group is difficult showing). 93 Dubroff, 2009 WL 1478697, at *3. 94 See id.; van der Fluit v. Yates, 2017 WL 5953514, at *5 (Del. Ch. Nov. 30, 2017). 95 See Dubroff, 2009 WL 1478697, at *3.
17 pooling resources in a plan by which they control the corporation, they become
fiduciaries.
A control group, as generally understood, consists entirely of stockholders
who, on their own, could not exercise control.96 However, it is possible to conceive
of a theoretical situation where, as with Aesop’s lion freed from his constraints by
the gnawing of a mouse, a stockholder with voting control might nonetheless be
needful of aid from a minority stockholder to complete a control scheme, and might
be willing, in order to get it, to cede some if its advantage to such a minority
stockholder. In Almond v. Glenhill Advisors LLC,97 this Court contemplated (in a
post-trial opinion) this possibility; there, Chancellor Bouchard noted the conditions
under which the minority stockholder might be bound as a fiduciary.98 Were
minority stockholders to form a control group with an independently-controlling
stockholder, and if the independently-controlling stockholder agreed “to share with
other stockholders, or to impose limitations on, its own control power (such as
through a voting agreement) for some perceived advantage as part of a legally
significant relationship with the other stockholders,” the control group might all be
96 See Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *25–26 (Del. Ch. Aug. 17, 2018), aff’d Almond v. Glenhill Advisors, LLC, 224 A.3d 200 (Del. 2019) (TABLE) (“the court is aware of [no case] where the analysis for determining the existence of a control group has been applied to glom on to a preexisting controlling stockholder additional stockholders to give them the status of a ‘control group’”); see also Dubroff, 2009 WL 1478697, at *3. 97 2018 WL 3954733 (Del. Ch. Aug. 17, 2018). 98 Id. at *26.
18 fiduciaries.99 In other words, the independently-controlling stockholder “would
have to agree to limit its ability to act in its own self-interest as a controller in some
material way” in order for the entire group to constitute fiduciaries.100 To my mind,
the key attribute of the Glenhill analysis is the ability, via participation in the group,
of the minority stockholders themselves to contribute to control of the corporate
machinery. The analysis thus begins with the perceived need of the controller. To
create a control group, a controller must go beyond merely permitting participation
by other stockholders in the transaction. Instead, the minority-holder’s participation
must be material to the controller’s scheme to exercise control of the entity, leading
to the controller ceding some of its control power to the minority-holders. In this
way, the minority stockholders involved wield their own levers of power as part of
the group; this control of the corporate machinery makes them fiduciaries. Glenhill,
I note, does not suggest that a voting agreement, without more, is sufficient to
demonstrate a control group in these circumstances. As conceived by the Chancellor
there, only if the controlling stockholder shares or materially limits its own control
power through an arrangement (such as a voting agreement) could a control group
potentially be found.101
99 Id. 100 Id. 101 Id.
19 I adopt the sensible analysis from Glenhill to this pleading-stage review. In
my view, where a controlling stockholder takes an action joined by minority
stockholders, the latter can be deemed members of a control group, and thus
fiduciaries, where two conditions exist. There must be an arrangement between the
controller and the minority stockholders to act in consort to accomplish the corporate
action, and the controller must perceive a need to include the minority holders to
accomplish the goal, so that it has ceded some material attribute of its control to
achieve their assistance.102 In order to survive a motion to dismiss, a plaintiff
advancing this unusual theory must plead facts that permit a reasonable inference
that these conditions exist.
The Plaintiffs’ first count for breach of fiduciary duty against Chrysalis and
Jones—the Defendants who have moved to dismiss here—relies on the allegation
that these two Defendants were part of a controlling stockholder group in the
Transaction.103 If Chrysalis and Jones are not part of a control group, then they do
not owe fiduciary duties as controllers, and this count for breach of fiduciary duty
must be dismissed.104
102 I note that, as with most equitable analyses, this is a template for consideration, not a determinative test. 103 Compl., ¶ 111. 104 Jones owes fiduciary duties as a director, and the Plaintiffs bring a separate count against him for breach of these duties, discussed below in section II.B.
20 At the time of the Transaction, Chrysalis’ and Jones’ ownership stakes were
approximately 11% and 0.02% respectively.105 There can be no serious argument—
and the Plaintiffs make none—that they independently exercised control. Francisco
Partners, by contrast, through FP Investors, had a 56% ownership stake and so was
independently a controller of Connecture (Francisco Partners has not moved to
dismiss).106 In order to successfully argue that Chrysalis and Jones were fiduciaries
as members of a control group, therefore, the Plaintiffs must adequately allege that
Chrysalis, Jones, and Francisco Partners were “connected in some legally significant
way,”107 and that Francisco Partners agreed “to share . . . or to impose limitations
on, its own control power (such as through a voting agreement) for some perceived
advantage as part of [that] legally significant relationship” with Chrysalis and
Jones.108 This would allow the inference that the latter wielded some control of the
corporate machinery, and thus bore a fiduciary obligation to the entity and the
minority.
105 See Compl., ¶¶ 43 (alleging Chrysalis beneficially owned 11% of stock), 71 (alleging Jones’ beneficially owned 57,696 common shares, equal to approximately a 0.02% ownership stake). 106 Id. ¶¶ 43 (alleging 56% ownership), 45 (“As Connecture’s majority stockholder, Francisco Partners had the power to remove and replace a majority of the Board’s directors.”). 107 See Dubroff, 2009 WL 1478697, at *3. 108 Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *26 (Del. Ch. Aug. 17, 2018).
21 2. The Plaintiffs do not Adequately Allege that Chrysalis and Jones were Part of a Control Group
The Plaintiffs rely on three allegations to show a control group. First, the
Plaintiffs point out that the SEC defined Chrysalis and Jones—along with other
purchasers—as “Purchaser Filing Parties.”109 This status meant the SEC considered
them “affiliates” of the Company, and therefore required them to “express [their]
position as to the fairness of the proposed Merger to the Company’s ‘unaffiliated
security holders.’”110 The SEC defines “affiliate” as “a person that directly or
indirectly through one or more intermediaries controls, is controlled by, or is under
common control with such issuer.”111 The SEC defines “control” as “the possession,
direct or indirect, of the power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting securities, by
contract, or otherwise.”112 To my mind, this SEC determination is not dispositive of
the common-law issue of control before me. To withstand the Motion to Dismiss,
the Plaintiffs must plead non-conclusory facts that, taken as true, permit the
reasonable inference that the Moving Defendants were part of a control group.
109 Compl., ¶ 83. 110 Id. 111 17 C.F.R. § 240.13e-3(a)(1). 112 17 C.F.R. § 230.405; 17 C.F.R. § 240.12b-2.
22 Second, the Plaintiffs argue that the Voting Agreement shows a legally
significant relationship. FP Investors and Chrysalis (but not Jones) entered the
Voting Agreement with Connecture, obliging them to vote their shares in favor of
the Transaction.113 The Plaintiffs argue this shows that at least Chrysalis and FP
Investors were contractually bound to act toward a shared goal of taking the
Company private through the Transaction.
Third, the Plaintiffs point to the coordinated actions, prior to the
contemplation of the going-private transaction, taken by Francisco Partners,
Chrysalis (and, to a much lesser extent, Jones). FP Investors and Chrysalis
participated exclusively together in two separate private placements, through which
they obtained a collective 68% ownership stake.114 Having acquired this stake, they
entered the Voting Agreement.115 Per the complaint, Jones helped “facilitate”
Chrysalis’ participation, and he then added his shares to the equity rollover just prior
to the Transaction’s close, effectively (per the Plaintiffs) making Jones himself a
member of the affiliated group.116
The allegations described above show coordinated efforts and contractual
obligations that may permit the reasonable inference that Chrysalis, Jones, and
113 Compl. ¶ 88. 114 Id. ¶¶ 35–38, 41–43, 85–86. 115 Id. ¶ 88. 116 Id. ¶¶ 36, 87.
23 Francisco Partners had more than mere parallel investing interests.117 However,
reaching this inference is merely the first step in the Glenhill analysis I have adopted
here. Francisco Partners, as 56% owner, could have closed the Transaction and
taken the Company private entirely on its own. It did not need the participation of
other minority stockholders to achieve this goal. To demonstrate a control group,
the Plaintiffs must point to Francisco Partners’ sharing or material self-limiting of
its control powers, to obtain participation of the Moving Defendants for Francisco
Partners’ perceived self-advantage. The Complaint fails to allege such action.
The Plaintiffs only note that by permitting Chrysalis (and Jones) to join the
equity rollover, “Francisco Partners agreed to dilute its proportionate stake in [the
post-Transaction company]. This concession, which enabled Francisco Partners to
garner the support of Chrysalis . . . and Jones . . . was a self-imposed limitation on
Francisco Partners’ self-interest.”118 But this cannot satisfy the analysis employed
in Glenhill. If it could, every time minority stockholders, without the power to
117 In their briefing, the Plaintiffs rely heavily on In re Hansen Med., Inc. S’holders Litig., 2018 WL 3025525 (Del. Ch. June 18, 2018). In that case, this Court correctly noted that the analysis of whether a control group is present is “a fact-intensive inquiry” often requiring evidence that makes it “particularly difficult to ascertain at the motion to dismiss stage. . .” Id. at *5–6. The Plaintiffs argue that the history of cooperation, the Voting Agreement, and the SEC’s identification of the Defendants as “affiliates” clears this low hurdle described in Hansen Med. See Pl.’s Answering Br. in Opp’n to Defs. David A. Jones, Jr. and Chrysalis Ventures II, L.P.’s Mot. to Dismiss the Verified Class Action Compl., D.I. 34 (“Pl.’s Answering Br.”), at 19–25. Hansen Med., however, lacked the defining feature here—an independently-controlling stockholder—that, for reasons explained herein, requires a modified analysis. 118 Pl.’s Answering Br., at 21–22.
24 control the corporation, participated in a transaction along with a controller, the
controller’s interest would be diluted, and the stockholders would be tagged as
controlling fiduciaries. This is not Delaware law. Demonstrating a control group
under the Glenhill rationale would require Francisco Partners not just to agree to
dilute its self-interest, but to “agree to limit . . . its ability to act in its own self-interest
as a controller in some material way.”119 Put another way, if the Plaintiffs could
have pled that Francisco Partners needed something material in way of its take-
private scheme, and was accordingly willing to give up some material part of its
control attributes to Chrysalis and Jones to get it, they may have adequately made
the allegation that a control group existed here. The Complaint, however, points to
neither quid nor quo—it describes nothing Francisco Partners needed or ceded to the
Moving Defendants, other than the bare right to roll over shares. Again, that is
insufficient. I cannot reasonably infer the sharing of control power by Francisco
Partners from the allegations in the Complaint.
In conclusion, I find that to the extent the Complaint makes allegations of a
“legally significant relationship” between Francisco Partners, Chrysalis, and Jones,
via the Voting Agreement, it fails to allege facts allowing the inference that
Francisco Partners, an independently-controlling stockholder, shared or limited its
119 Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *26 (Del. Ch. Aug. 17, 2018) (emphasis added).
25 control power with the Moving Defendants in a material way, in order to obtain their
necessary participation in the transaction.120
Accordingly, I cannot find that Chrysalis and Jones were members of a control
group. The Moving Defendants are not controlling stockholders and do not owe
fiduciary duties concomitant with that status.121 They were free to sell or roll over
their equity as they saw fit as investors.122 Count I of the Complaint is therefore
dismissed against Chrysalis and Jones.
B. Consideration of the Plaintiffs’ Allegations that Jones Breached his Fiduciary Duties as a Director May Benefit from Supplemental Briefing
The Plaintiffs separately allege that Jones breached his fiduciary duties in his
capacity as the Chairman of Connecture’s Board. Jones benefits from an
exculpatory provision in Connecture’s charter under 8 Del C. § 102(b)(7) that shields
him from liability for violations of his duty of care.123 Therefore, to survive the
Motion to Dismiss in this post-closing damages action, the Plaintiffs must plead a
120 Glenhill itself emphasized that a control group containing both minority and independently- controlling stockholders represented an unlikely scenario: “Given that the controller already is the proverbial 800-pound gorilla imbued with fiduciary obligations to guard against acting ‘selfishly to the detriment of the corporation’s minority stockholders,’ it is not readily apparent why this scenario would arise.” Id. Wherever it may arise, it is not here. 121 Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005). 122 Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) (“it is well established law that nothing precludes . . . a stockholder from acting in its own self-interest.”). 123 Transmittal Aff. of Deborah S. Birnbach in Support of David A. Jones, Jr. and Chrysalis Ventures II, L.P.’s Opening Br. in Support of their Mot. to Dismiss the Verified Class Action Compl., D.I. 30 (“Birnbach Aff.”), Ex. 5, Sixth Am. And Restated Certificate of Incorporation of Connecture, Inc., at Art. VII.
26 non-exculpated claim, which requires sufficiently alleging Jones was either self-
interested, lacked independence, or acted in bad faith.124
The Plaintiffs’ allegations largely involve Jones’ association with Chrysalis,
which they argued was itself a member of the control group. For the reasons
explained above, however, I have found that Chrysalis was not a controller and did
not owe fiduciary duties in the Transaction. Accordingly, it might be helpful to the
Court to have supplemental briefing disclosing the Plaintiffs’ theory against Jones
in light of that finding. I give the parties the option of supplementing their
arguments, therefore.
III. CONCLUSION
Defendants Chrysalis and Jones’ Motion to Dismiss the claims against them
in Count I of the Complaint is granted. An appropriate form of order is attached.
I reserve decision on Jones’ Motion to Dismiss the Plaintiffs’ claims against
him for breach of his duty of loyalty as a director. The Parties should inform me
124 In re Cornerstone Therapeutics Inc, S’holder Litig., 115 A.3d 1173, 1175–76 (Del. 2015) (“A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct”); In re Essendant, Inc. S’holder Litig., 2019 WL 7290944, at *7 (Del. Ch. Dec. 30, 2019) (“given [defendant’s] exculpatory charter provision, in order to survive the . . . Board’s Motion to Dismiss, the Complaint must state valid, non- exculpated claims.”); Nguyen v. Barrett, 2016 WL 5404095, at *3 (Del. Ch. Sept. 28, 2016) (“[W]hen asserting a . . . claim for damages against directors post-close, a plaintiff must allege facts making it reasonably conceivable that there has been a non-exculpated breach of fiduciary duty by the board. . .” (citing Chen v. Howard, 87 A.3d 648, 691 (Del. Ch. 2014))).
27 within one week whether they wish to submit limited supplemental briefing on the
issue, and, if so, on what schedule.
28 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
JIM GILBERT and BARRETT ) O’DONNELL, Individually and On ) Behalf of All Others Similarly Situated, ) ) Plaintiffs, ) ) v. ) C.A. No. 2018-0453-SG ) ) EZRA PERLMAN, DAVID A. JONES, ) JR., FRANCISCO PARTNERS IV, L.P., ) FRANCISCO PARTNERS IV-A, L.P., ) FP HEALTHCARE HOLDINGS, INC., ) FP HEALTHCARE MERGER SUB ) CORPORATION, and CHRYSALIS ) VENTURES II, L.P., ) ) Defendants. )
ORDER
AND NOW, this 29th day of April, 2020, for the reasons set forth
contemporaneously in the attached Memorandum Opinion dated April 29, 2020, IT
IS HEREBY ORDERED that Defendants Chrysalis and Jones’ Motion to Dismiss
Count I of the Complaint is GRANTED.
IT IS SO ORDERED.
/s/ Sam Glasscock III
Vice Chancellor