Michelle Altieri v. Kimberly Alexy

• Court: Court of Chancery of Delaware
• Decided: May 22, 2023
• Docket: C.A. No. 2021-0946-KSJM
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MICHELLE ALTIERI, ) ) Plaintiff, ) ) v. ) C.A. No. 2021-0946-KSJM ) KIMBERLY ALEXY, SARA ) ANDREWS, RONALD E. F. CODD, ) ARTHUR W. COVIELLO, JR., ) KEVIN MANDIA, ADRIAN ) MCDERMOTT, VIRAL PATEL, ) ENRIQUE SALEM, ROBERT E. ) SWITZ, and MANDIANT, INC., ) ) Defendants. )

ORDER GRANTING DEFENDANTS’ MOTION TO DISMISS

1. Defendant Kevin Mandia formed Defendant Mandiant, Inc. (the

“Company”) in 2004 to provide incident response services to companies that experience

data security breaches. The Company embarked on a merger and acquisition strategy to

grow the original business. This Order refers to the Company’s original business line as

“Old Mandiant.”

2. The Company combined with FireEye, Inc. on December 30, 2013. The

combined entity initially took the FireEye name but later changed it back to Mandiant.

This Order refers to the FireEye line of business, including goodwill and associated

intangible assets, as the “FireEye Business.” Whereas Old Mandiant focused on incident

response and consulting services, the FireEye Business created products designed to detect and prevent cyberattacks. Combining with FireEye allowed the Company to both “detect[]

attacks” and also “respond[] to attacks[.]”1

3. The Company acquired other businesses in 2016—iSight Partners, which

was in the business of gathering information “about hacker groups and other cybersecurity

risks,”2 and Invotas International Corp., which provided “security automation and

orchestration technology.”3 Also in 2016, Mandia joined the Company’s Board of

Directors (the “Board”) and replaced David DeWalt as CEO.

4. The Company’s revenue increased between 2016 and 2020. During this

period of growth, the FireEye Business was significant to overall business. In 2019 and

2020, the FireEye Business accounted for 62% and 57% of the Company’s overall revenue,

respectively.4 Further, the Company’s Form 10-Q for the fiscal quarter ended June 30,

2021, listed $1 billion in goodwill, approximately $500 million of which is alleged to be

attributable to the FireEye Business.5 The FireEye Business also had a strong social media

presence relative to Mandiant’s other offerings. In 2021, however, the Board projected that

the FireEye Business would decline as a percentage of overall revenue—forecasted down

to 48% in 2022 and 42% in 2023.6

1 C.A. No. 2021-0946-KSJM, Docket (“Dkt.”) 1 (“Compl.”) ¶ 19. 2 Id. ¶ 20. 3 Id. ¶ 21. 4 Id. ¶ 32. 5 Id. ¶ 31; see also FireEye, Inc., Quarterly Report (Form 10-Q) (August 9, 2021) (“Aug. 9 Form 10-Q”). The Complaint incorporates the contents of the August 9 Form 10-Q by reference. See Compl. ¶ 31 n.11. 6 Compl. ¶ 32.

2 5. On May 10, 2021, Mandia sold 150,000 shares in the Company, pursuant to

a trading plan, for $20.06 per share—a total of about $3 million. Mandia had sold no shares

in 2020 and sold only 15,781 shares in 2019.

6. On June 2, 2021, the Company sold the FireEye Business to Symphony

Technology Group (“STG”) for $1.2 billion (the “Sale”). Mandia described the Sale as an

opportunity to let Mandiant “concentrate exclusively on scaling our intelligence and

frontline expertise[.]”7 He stated that the FireEye Business would fare better with STG, as

STG was focused on “fueling innovative market leaders in software and cybersecurity[.]”8

The Company did not seek stockholder approval of the Sale.

7. In reaction to the announcement of the Sale, the Company’s stock dropped

by 17.62%.9 Financial analysts who covered the Company expressed concern about the

Company’s “lower gross margin and stability” absent the FireEye Business, noting that

“the realized price for [the Company’s] product portfolio is less than we would have

expected.”10

8. Plaintiff Michelle Altieri (“Plaintiff”) is a stockholder of the Company. On

November 3, 2021, Plaintiff brought this action challenging the Sale, asserting claims

against the Company and its Board members, Defendants Mandia, Kimberly Alexy, Sara

7 Id. ¶ 25. 8 Id. 9 Id. ¶ 26. 10 Id. ¶¶ 27–28.

3 Andrews, Ronald E. F. Codd, Arthur W. Coviello, Jr., Adrian McDermott, Viral Patel,

Enrique Salem, and Robert E. Switz (together, the “Director Defendants”).

9. The Complaint asserts three causes of action. In Count I, Plaintiff seeks to

void the Sale under 8 Del. C. § 271, arguing that the Sale was a “sale of all or substantially

all” of Mandiant’s assets but that the Board failed to put it to a stockholder vote as required

by Section 271.11 In Count II, Plaintiff claims that the Director Defendants breached their

fiduciary duties by knowingly failing to obtain a stockholder vote as required by Section

271. In Count III, Plaintiff claims that Mandia breached his fiduciary duties to the

Company by trading on material, non-public information ahead of the Sale and by

approving the Sale. On July 29, 2022, Plaintiff withdrew the portion of Count III alleging

a breach of fiduciary duty through stock trading.12 As relief, Plaintiff seeks declaratory

judgment in her favor, an injunction compelling a stockholder vote on the Sale, and

attorneys’ fees.13

10. Defendants have moved to dismiss the Complaint pursuant to Court of

Chancery Rules 12(b)(6) and 23.1.14 The parties briefed the motion and the court heard

oral argument on February 24, 2023.15 Because Defendants’ Rule 12(b)(6) arguments are

dispositive, this Order does not reach the Rule 23.1 arguments.

11 Id. ¶¶ 39–48. 12 See Dkt. 42 (“Pl.’s Answering Br.”) at 28 n.18. 13 See Compl. at 16. 14 See Dkt. 18. 15 Dkts. 54, 55 (Feb. 25, 2023 Hr’g Tr.).

4 11. Under Delaware law, the governing pleading standard to survive a motion to

dismiss under Rule 12(b)(6) is reasonable conceivability.16 When considering such a

motion, the court must “accept all well-pleaded factual allegations in the [c]omplaint as

true . . . , draw all reasonable inferences in favor of the plaintiff, and deny the motion unless

the plaintiff could not recover under any reasonably conceivable set of circumstances

susceptible of proof.”17 The court need not, however, “accept conclusory allegations

unsupported by specific facts or . . . draw unreasonable inferences in favor of the non-

moving party.”18

12. In Count I, Plaintiff claims that the Company breached Section 271, which

requires a stockholder vote on any “[sale], lease or exchange all or substantially all of its

property and assets, including its goodwill and its corporate franchises.”19 Defendants

argue that Count I fails to state a claim because the Sale did not constitute a sale of

“substantially all” the Company’s assets under Section 271.20

13. Under Gimbel v. Signal Companies, Inc.,21 the court must evaluate “the

quantitative and qualitative importance of the transaction at issue” to determine what

16 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537 (Del. 2011). 17 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)). 18 Price v. E.I. du Pont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011), overruled on other grounds by Ramsey v. Georgia S. Univ. Advanced Dev. Ctr., 189 A.3d 1255, 1277 (Del. 2018) (citing Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)). 19 8 Del. C. § 271(a). 20 See Dkt. 18 (“Defs.’ Opening Br.”) at 16. 21 316 A.2d 599 (Del. Ch. 1974); see also Hollinger Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 379 (Del. Ch. 2004) (citing Gimbel, 316 A.2d at 606); Winston v. Mandor, 710 A.2d 5 constitutes “substantially all” of a company’s assets for purposes of Section 271.22 The

purpose of the Gimbel analysis is to determine whether the transaction “struck ‘at the heart

of the corporate existence and purpose,’ in the sense that it involved the ‘destruction of the

means to accomplish the purpose or objects for which the corporation was incorporated

and actually performs.’”23

14. When evaluating quantitative metrics, no one factor is necessarily

dispositive. Courts consider data points such as the revenue generated by the assets sold

as a percentage of total company revenue, the percentage of book value of the sale, the

contribution of the assets sold to the company’s overall EBITDA, and future earnings

potential.24 “[T]he transaction must be viewed in terms of its overall effect on the

corporation, and there is no necessary quantifying percentage.”25

15. When evaluating qualitative metrics, the court focuses on “economic quality

and, at most, on whether the transaction leaves the stockholders with an investment that in

economic terms is qualitatively different than the one that they now possess.”26 For Section

835, 843 (Del. Ch. 1997) (“The Supreme Court has long held that determination of whether there is a sale of substantially all assets so as to trigger [S]ection 271 depends upon the particular qualitative and quantitative characteristics of the transaction at issue.”). 22 Hollinger, 858 A.2d at 379. 23 Id. (quoting Gimbel, 316 A.2d at 606) (internal quotation marks omitted). 24 See Hollinger, 858 A.2d at 379–82. 25 Winston, 710 A.2d at 843. 26 Hollinger, 858 A.2d at 384 (citing Gimbel, 316 A.2d at 606).

6 271 to apply, the sale must be “out of the ordinary and substantially affect[] the existence

and purpose of the corporation[.]”27

16. When considered quantitatively, the Sale does not satisfy the substantially-

all test. The Company’s public filings indicate total assets of approximately $3.245 billion

as of December 2020 and $3.14 billion as of June 30, 2021.28 The Sale, which was for

$1.2 billion, is 37.5% and 38.2% of each figure, respectively.29 These percentages fall short

of the substantially-all threshold from a quantitative perspective.30

17. When considered qualitatively, the Sale does not satisfy the substantially-all

test. Although the FireEye Business was an important aspect of Mandiant, Plaintiff has not

pled that it affects the “existence and purpose” of the Company.31 Mandiant was a

cybersecurity company before the Sale. It is a cybersecurity company after the Sale.

Although selling the FireEye Business may alter course in how the Company operates, the

change is not qualitatively so significant as to “strike a blow” to Mandiant’s “heart.”32

27 Gimbel, 316 A.2d at 606. 28 See Dkt. 18, Defs.’ Ex. 1 at 54 (December 20, 2020 Form 10-K reflecting approximately $3.245 billion at Year End 2020); see also Aug. 9 Form 10-Q at 4 (reflecting total asset value of approximately $3.14 billion). 29 In briefing, Defendants cite web sources purporting to show a market capitalization of over $5.3 billion on June 1, 2021. See Defs.’ Opening Br. at 18, 18 n.8. On this basis, Defendants measure the $1.2 billion Sale as 23% of the Company’s overall value. The link that Defendants cite, however, is no longer operational. For this and other reasons, the court does not rely upon this data for its decision. See id. 30 See Hollinger, 858 A.2d at 377 (“A fair and succinct equivalent to the term ‘substantially all’ would [] be ‘essentially everything.’”). 31 See id. 32 Id. at 385.

7 Although the Sale was out of the ordinary, it does not satisfy the “substantially all” test

from a qualitative perspective.

18. Plaintiff’s position is that the Sale satisfies the substantially-all test because

the FireEye Business accounted for 62% of Company revenue in 2019 and 57% in 2020.33

Plaintiff cites four cases to support her position that these figures, when paired with

qualitative factors, are sufficient.34 All four cases are distinguishable.

19. In the first case, Katz, the court determined that the transaction satisfied the

substantially-all test based primarily on qualitative factors. Quantitatively, the business

line at issue, steel drums, represented only 51% of its remaining assets, 44.9% of its sales

revenue, and 52.4% of its pre-tax net operating income.35 Qualitatively, however, the

challenged transaction constituted an effort by the company to shift its overall business

strategy by “embark[ing] on the manufacture of plastic drums” that “represent[ed] a radical

departure from [the company’s] historically successful line of business, namely steel

drums.”36

20. Katz is distinguishable because the transaction at issue in this case did not

represent a stark departure from the Company’s historic line of business. The Company

was born from the fusion of FireEye with Old Mandiant, which focused on cybersecurity

33 See Pl.’s Answering Br. at 24. 34 See id. at 23 (citing Katz v. Bregman, 431 A.2d 1274, 1275–76 (Del. Ch. 1981); Thorpe v. CERBCO, Inc., 1995 WL 478954, at *9 (Del. Ch. Aug. 9, 1995); B.S.F. Co. v. Phila. Nat’l Bank, 204 A.2d 746, 750 (Del. 1964); Winston, 710 A.2d at 843). 35 Katz, 431 A.2d at 1275. 36 See id. at 1276.

8 services. Mandiant had several businesses prior to the Sale, only one of which was the

FireEye Business. The Sale was not qualitatively transformative for Mandiant.

21. In the next two cases, Thorpe and B.S.F., the court determined that the

challenged transactions satisfied the substantially-all standard based on quantitative

factors. In Thorpe, the Delaware Supreme Court affirmed this court’s holding that a

pipeline services provider’s sale of a subsidiary pipeline services business satisfied the

substantially-all test. The high court reasoned that the subsidiary accounted for 68% of the

company’s overall assets and was the holding company’s “primary income generating

asset[.]”37 The Court of Chancery had held that, if the assets at issue were removed, the

holding company “would have been left with a substantial amount of cash, a small

subsidiary that was about to be liquidated, and a single operating company . . . that was

minimally profitable.”38 In B.S.F., the asset sale falling under Section 271 constituted 75%

of the company’s assets that were its “only substantial income [] producing asset[.]”39

22. Thorpe and B.S.F. are distinguishable because the quantitative metrics on

which Plaintiff relies are much less compelling. Plaintiff rightly notes that the revenue

metrics for the FireEye Business are close to the revenue metrics in Thorpe and B.S.F., but

Plaintiff ignores that the percentage of overall assets attributable to the FireEye Business

is far smaller. The FireEye Business constituted approximately 38% of the Company’s

overall assets compared to 68% and 75% in Thorpe and B.S.F., respectively. Also, by

37 676 A.2d 436, 444 (Del. 1996). 38 Thorpe, 1995 WL 478954, at *9. 39 See B.S.F., 204 A.2d at 112.

9 contrast to both Thorpe and B.S.F., Plaintiff has not pled facts indicating that Mandiant is

unable to generate income in FireEye’s absence; indeed, the Company generated total

revenues of approximately $121.97 million in the fiscal quarter following the Sale.40

23. In the last case, Winston, the court held that it was reasonably conceivable

that a sale satisfied the substantially-all standard based on qualitative and quantitative

factors. There, the court interpreted a corporate certificate of designations entitling holders

of preferred stock to convert their shares into a new security in the event the company

disposed of substantially all of the company’s assets. The court looked to case law

interpreting Section 271 for guidance concerning the substantially-all standard. The

plaintiff alleged that, qualitatively, the sale shifted the company’s primary business from

holding real property to holding real estate-related securities.41 The plaintiff alleged that,

quantitatively, the assets sold were 60% of the company’s net assets.42 Based on these

allegations, the court held that it was reasonably conceivable that the sale was for

substantially all of the company’s assets.43

24. Winston is distinguishable in two ways. For one, the company had shifted

its “primary business” from “the ownership and management of real property” to “the

40 See Defs.’ Opening Br., Ex. 25 at 37 (Form 10-Q for quarter ended September 30, 2021, describing Company revenues). The court may take judicial notice of this revenue figure. See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 n.28 (Del. 2004). 41 Winston, 710 A.2d at 843. 42 Id. 43 Id.

10 holding of real estate[-]related securities and mortgages[.]”44 By contrast, as discussed

above, the Company has not fundamentally changed its core practice in the cybersecurity

space. Moreover, the plaintiff in Winston alleged that the assets at issue constituted 60%

of the company’s net assets.45 Here, the FireEye Business indisputably constituted far less

(approximately 38%) of the Company’s net assets.

25. Another decision of this court, Hollinger, supports dismissal. There, then-

Vice Chancellor Strine held that media company Hollinger International, Inc.’s sale of a

major asset, the “Telegraph Group,” did not satisfy the substantially-all test of Section

271.46 The Telegraph Group was the “single most valuable asset” that the company

possessed, accounting for approximately 56–57% of the company’s overall asset value.47

Qualitatively, the court reasoned that even after the sale of the Telegraph Group,

“stockholders will remain investors in a publication company with profitable operating

assets, a well-regarded tabloid newspaper of good reputation and large circulation, a

prestigious newspaper in Israel, and other valuable assets. While important, the sale of the

Telegraph does not strike a blow to [the company’s] heart.”48 The Vice Chancellor reached

this conclusion even assuming “that the Telegraph Group is the single most valuable asset

that [the company] possesses[.]”49

44 Id. 45 Id. 46 See Hollinger, 858 A.2d at 379. 47 Id. at 379–80. 48 Id. at 385. 49 Id. at 379.

11 26. Here, the court’s analysis is unchanged even crediting Plaintiff’s description

of the FireEye Business as the crown jewel of the Company, much as the Hollinger court

credited the plaintiff’s allegations concerning the Telegraph Group. Post-Sale, Company

investors are still left with an investment in a cybersecurity company, much as investors in

Hollinger International, Inc. retained their investment in a global media company even after

the sale of the Telegraph Group. The elimination of the FireEye Business is similarly

“important,” but “does not strike a blow” to the Company’s heart.50

27. Plaintiff attempts to distinguish Hollinger in several ways. First, Plaintiff

observes that Hollinger was decided not on the pleadings, but rather, on a preliminary

injunction record and thus with the benefit of fact discovery.51 But the factual record did

not drive the outcome of Hollinger, which was resolved as a matter of law. Second,

Plaintiff views Hollinger as an outlier relative to the four cases on which Plaintiff relies.52

But for reasons already discussed, those cases are distinguishable. Third, Plaintiff argues

that the presence of strong qualitative factors weighing in her favor distinguishes Hollinger,

which—unlike here—was not a close call on the qualitative dimension of the Gimbel test.53

But the qualitative analysis does not weigh in Plaintiff’s favor, as discussed above. The

FireEye Business was one part of the Company’s corporate identity, but the Complaint does

50 Id. at 385. 51 See Pl.’s Answering Br. at 24–25. 52 See id. at 25. 53 See id.

12 not support a reasonable inference that the FireEye Business was the “heart” of the

Company’s existence and purpose.54

28. Under the circumstances, Plaintiff has not adequately alleged that the Sale

triggered the voting requirement of Section 271. Count I is dismissed.

29. In Count II, Plaintiff claims that the Director Defendants breached their

fiduciary duties by approving the Sale without obtaining stockholder approval as required

by Section 271. Invoking the Company’s exculpatory charter provision adopted pursuant

to 8 Del. C. § 102(b)(7) and In re Cornerstone Therapeutics Inc., Stockholder Litigation,55

the Director Defendants argue for dismissal of Count II on the basis that Plaintiff was

required, but failed, to plead that they acted in bad faith when approving the Sale.56

30. Because the Sale did not violate Section 271, Plaintiff’s voting rights were

not breached. Therefore, it is not reasonably conceivable that the Director Defendants

acted in bad faith by failing to submit the Sale to a vote. Furthermore, Plaintiff has alleged

no defect in the Sale process itself that would suggest bad faith. Accordingly, Count II is

dismissed.

31. In Count III, Plaintiff seems to assert a claim for breach of the duty or loyalty

or waste against Mandia in connection with the Sale, although Count III is not clearly pled

as such.57 Plaintiff argues that Mandia used the Sale to transform the Company into a

54 Gimbel, 316 A.2d at 606. 55 115 A.3d 1173 (Del. 2015). 56 Defs.’ Opening Br. at 30–39. 57 See Compl. ¶¶ 54–60.

13 vanity project. By pruning out the influence of the FireEye Business, Plaintiff alleges that

Mandia turned the Company into something approximating what he originally founded.58

Plaintiff argues that Mandia did so for his own ego rather than for the benefit of the

Company.

32. This decision need not dilate extensively on the standard for pleading the

claims at issue in Count III, because Plaintiff’s vanity-project theory is wholly conclusory.

It would take a lot of work to list all the allegations relevant to such a claim that are missing

from the Complaint. Suffice it to say, Count III falls way short. It is therefore dismissed.

33. For the foregoing reasons, Defendants’ motion to dismiss is granted in its

entirety. Judgment is entered in favor of Defendants.

/s/ Kathaleen St. J. McCormick Chancellor Kathaleen St. J. McCormick Dated: May 22, 2023

58 See Pl.’s Answering Br. at 6 (describing the Sale as a way for Mandia to “return the Company to his original vision for Old Mandiant”).