Mitchell Partners, L.P. v. AMFI Corp.

Opinion

COURT OF CHANCERY OF THE STATE OF DELAWARE KATHALEEN ST. JUDE MCCORMICK LEONARD L. WILLIAMS JUSTICE CENTER CHANCELLOR 500 N. KING STREET, SUITE 11400 WILMINGTON, DELAWARE 19801-3734

July 3, 2024

R. Bruce McNew Lisa M. Zwally Cooch and Taylor, P.A. Bryan T. Reed The Brandywine Building Greenberg Traurig, LLP 1000 N. West Street, Suite 1500 222 Delaware Avenue, Suite 1600 Wilmington, DE 19801 Wilmington, DE 19801

Re: Mitchell Partners, L.P. v. AMFI Corp. et al., C.A. No. 2020-0985-KSJM (“AMFI I”);

Mitchell Partners, L.P. v. AMFI Corp., C.A. No. 2020-0986-KSJM (“AMFI II”)

Dear Counsel:

This letter resolves the defendants’ motion to dismiss Counts III through V of

the Second Amended Complaint in AMFI I and the motion to strike aspects of that

complaint.1

I. FACTUAL BACKGROUND

I assume the readers’ familiarity with these actions given my prior decisions.2

For the purposes of the defendants’ motion to dismiss Counts III through V, I draw

the facts from the Second Amended Verified Class Action Complaint (the “Second

Amended Complaint”).3

1 C.A. No. 2020-0985-KSJM, Docket (“Dkt.”) 111 (“Defs.’ Mot. to Dismiss and Strike”).

2 See Dkt. 46; Dkt. 67.

3 Dkt. 108 (Sec. Am. Compl.). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 2 of 18

The plaintiff, Mitchell Partners, L.P., is an investment firm that holds shares

in AMFI, Corp., a Delaware corporation.

In August 2020, AMFI disclosed as part of its FY 2019 financial disclosures,

allegedly for the first time, that it had 20,000 outstanding Class B shares in addition

to the known Class A shares. AMFI authorized the Class B shares in 1982 but never

issued any. AMFI did not disclose the existence of the Class B in 1983 when soliciting

stockholder approval for a Class A 300-to-1 reverse stock split (the “Reverse Stock

Split”). And none of the documents disseminated by AMFI over the following 40 years

stated that any Class B shares were either issued or outstanding.

According to Mitchell Partners, AMFI has given conflicting narratives

concerning the shares. AMFI says that the Class B shares were issued in 1983 to

AMFI’s then-wholly owned subsidiary, American Fidelity Life Insurance Company

(“AFL”). But AMFI has also stated that the shares were issued in 1982 to AFL. And

AMFI has stated that the shares are now owned entirely by AFL. But AMFI has also

stated that the shares are owned by AMFI’s subsidiaries, T.B.H. Corp, Little Sabine,

Inc., Dunes Motel, Inc., and Holi Corp. (the “Subsidiary Defendants”).

In the Second Amended Complaint, Mitchell Partners added Counts III

through V and named the Subsidiary Defendants as additional defendants.

In Count III (asserted against AMFI and the Subsidiary Defendants), Mitchell

Partners “seeks a declaratory judgment that no Class B shares of AMFI are issued or

outstanding” because “[n]o valid Board authorization by AMFI’s Board under [8 Del. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 3 of 18

C. § 152] was adopted.”4 Count III makes a claim in the alternative—that if the Class

B shares were validly issued, then only 100 shares were issued and they are owned

by AFL.5

In Count IV (asserted against Jack B. Yancy, Carolyn Pugh, Barbara

Woodbury, Marilyn Hess, and Carol Harrison (the “Director Defendants,” and

together with AMFI and the Subsidiary Defendants, “Defendants”)), Mitchell

Partners claims that “[t]he foregoing conduct constituted breaches of the fiduciary

duties of the [Director] [D]efendants as such occurred during their tenures as officers

and/or directors.”6

In Count V (asserted against all Defendants), pled in the alternative to Counts

III and IV, Mitchell Partners seeks a declaration that if the Class B shares are found

to have been properly issued, then the Reverse Stock Split was invalid, and separately

claims (in the same count) that Woodbury and Hess breached their fiduciary duties

by approving it.7

4 Id. ¶¶ 65–68.

5 Under the alternative theory, Mitchell Partners claims that any transfer constituted

waste. Id. ¶ 70. But Mitchell Partners does not discuss waste in its answering brief, so that theory is waived. Voigt v. Metcalf, 2020 WL 614999, at *8 n.3 (Del. Ch. Feb. 10, 2020). 6 Sec. Am. Compl. ¶ 73.

7 Sec. Am. Compl. ¶¶ 75–79. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 4 of 18

II. ANALYSIS

Defendants moved to dismiss Counts III through V of the Second Amended

Complaint under Court of Chancery Rules 23.1 and 12(b)(6). Defendants also moved

to strike “scurrilous allegations” against the Woodbury Family, who are alleged to

control AMFI, under Rule 12(f).

A. Rule 23.1

Defendants argue that the new counts are derivative and that Mitchell

Partners has not adequately alleged demand futility.8 Mitchell Partners responds

that the new counts are direct but that it adequately alleged demand futility.9

Mitchell Partners focused its arguments on demand futility, and this decision follows

suit.

Under Rule 23.1, stockholder plaintiffs must “allege with particularity the

efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the

directors or comparable authority and the reasons for the plaintiff’s failure to obtain

the action or for not making the effort.”10 Stockholders choosing to allege demand

futility must meet the “heightened pleading requirements,”11 alleging “particularized

factual statements that are essential to the claim.”12 “Plaintiffs are entitled to all

8 Defs.’ Mot. to Dismiss and Strike at 17–21.

9 Sec. Am. Compl. ¶¶ 55–61.

10 Ct. Ch. R. 23.1(a).

11 United Food and Com. Workers Union v. Zuckerberg, 250 A.3d 862, 876 (Del. Ch.

2020), aff’d, 262 A.3d 1034 (Del. 2021). 12 Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 5 of 18

reasonable factual inferences that logically flow from the particularized facts alleged,

but conclusory allegations are not considered as expressly pleaded facts or factual

inferences.”13

In Zuckerberg, the Delaware Supreme Court adopted the “universal test” for

demand futility that blends elements of the two precursor tests: Aronson14 and

Rales.15 When conducting a demand futility analysis under Zuckerberg, Delaware

courts ask, on a director-by-director basis:

(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

(ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

(iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.16

“If the answer to any of the questions is ‘yes’ for at least half of the members

of the demand board, then demand is excused as futile.”17 Although the Zuckerberg

13 Id. at 255.

14 473 A.2d 805 (Del. 1984).

15 634 A.2d 927 (Del. 1993).

16 United Food & Com. Workers Union & Participating Food Indus. Empls. Tri-State

Pension Fund v. Zuckerberg, 262 A.3d 1034, 1059 (Del. 2021) (quoting Zuckerberg, 250 A.3d at 890). 17 Id. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 6 of 18

test displaced the prior tests from Aronson and Rales, cases properly applying

Aronson and Rales remain good law.18

Mitchell Partners did not make a pre-suit demand and so it must plead that

demand was excused. When Mitchell Partners initiated this action, the AMFI Board

compromised five directors—Yancy, Pugh, Woodbury, Hess, and Harrison.19 To

adequately allege demand futility, Mitchell Partners must plead particularized facts

creating reason to doubt that at least three AMFI directors were capable of

impartially considering a demand.20

Here, Mitchell Partners’ strongest argument is under the third prong of

Zuckerberg—that Yancy, Hess, and Harrison lacked independence from the

Subsidiary Defendants, and that the Subsidiary Defendants received a material

benefit from the alleged misconduct that would be the subject of the litigation

demand.

Yancy, Hess, and Harrison are directors of both AMFI and the Subsidiary

Defendants.21 They therefore owe fiduciary obligations to both AMFI and the

18 Id.

19 Sec. Am. Compl. ¶ 10.

20 In re INFOUSA, Inc. S’holders Litig., 953 A.2d 963, 989–90 (Del. Ch. 2007) (“Plaintiffs must show that a majority—or in a case where there are an even number of directors, exactly half—of the board was incapable of considering demand.” (citation omitted)). 21 Sec. Am. Compl. ¶ 57 (stating Yancey is a “director of Sabine, Holi, and T.B.H. and

President of AFL”); id. ¶ 58 (stating Hess is a “director and President of Sabine, Holi, T.B.H., and a director of AFL”); id. ¶ 59 (stating Harrison is a “director of Sabine, Holi, T.B.H., and AFL”). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 7 of 18

Subsidiary Defendants. A dual fiduciary is conflicted for demand purposes where the

dual beneficiaries’ interests are not aligned.22 AMFI and the Subsidiary Defendants’

interests were not aligned for purposes of the challenged transactions. For that

reason, Yancy, Hess, and Harrison face a conflict in exercising their duties as

directors of AMFI that renders demand futile as to those directors.

Analytically, one approach would be to conclude that the lack-of-alignment

discussion eclipses or subsumes the question of whether the benefit was material to

the counterparty—here, the Subsidiary Defendants. To address the issue directly,

the Subsidiary Defendants are alleged to have received Class B shares worth millions

of dollars from the challenged transactions.23 It is reasonably conceivable that this

22 See, e.g., IBEW Local Union 481 Defined Contribution Plan & Tr. v. Winborne, 301

A.3d 596, 618 (Del. Ch. Aug. 24, 2023) (finding director who served as a fiduciary of a party interested in the challenged transaction was not independent from that interested party and thus could not consider demand); In re McDonald’s Corp. S’holder Deriv. Litig., 291 A.3d 652, 687 (Del. Ch. 2023) (“To plead that a director was interested and therefore cannot count toward the requisite majority, a plaintiff can allege facts showing that the director . . . was a dual fiduciary and owed a competing duty of loyalty to an entity that itself stood on the other side of the transaction or received a unique benefit not shared with the stockholders.” (citations omitted)); Cumming v. Edens, 2018 WL 992877, at *13 (Del. Ch. Feb. 20, 2018) (“Plaintiff has raised a reasonable doubt as to whether Malone, as a director of Walker & Dunlop, was disinterested in the Challenged Transactions. Malone was a dual fiduciary here and the interests of the beneficiaries he served (lender vs. borrower) were not aligned. Accordingly, Plaintiff has adequately pled that Malone was ‘interested’ for demand futility purposes.” (citations omitted)). 23 Sec. Am. Compl. ¶¶ 11–14 (alleging TBH owns $6 million worth of Class B shares;

Sabine owns $5 million worth of Class B shares; Dunes owns $2 million worth of Class B shares; Holi owns $7 million worth of Class B shares). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 8 of 18

was material to the Subsidiary Defendants.24 Counts III and IV challenge the

issuance of Class B shares to the Subsidiary Defendants, so Yancy, Hess, and

Harrison are incapable of impartially considering a demand as to those counts. By

the same logic, it is reasonably conceivable that efforts to dilute the Class A through

the Reverse Stock Split was material to the Subsidiary Defendants. Count V

challenges the Reverse Stock Split, which purportedly diluted the Class A shares in

favor of the Class B shares, benefitting the holders of Class B shares. So Yancy, Hess,

and Harrison are incapable of impartially considering a demand as to those counts.

Accordingly, a majority of the AMFI Board cannot consider a demand, and thus

demand is excused.

B. Rule 12(b)(6)

Under Rule 12(b)(6), Defendants advance four arguments. First, they argue

that Mitchell Partners does not have standing to pursue the new counts because it

did not own AMFI stock when the challenged transactions occurred. Second, they

argue that the new counts are time-barred. Third, they argue that the Subsidiary

Defendants are not proper defendants to the new counts. Fourth, they argue that

24 At the motion to dismiss stage, receipt of shares worth at least $2 million is material. That materiality might be later successfully challenged, but for the purposes of this motion, Mitchell Partners has successfully pled that the Subsidiary Defendants received a material personal benefit from the challenged transaction. See also In re Multiplan Corp. S’holder Litig., 268 A.3d 784, 813 (Del. Ch. 2022) (stating that “[a] greater than half-million-dollar payout is presumptively material at the motion to dismiss stage”). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 9 of 18

certain of the Director Defendants should be dismissed from the actions because they

were not on AMFI’s Board when the challenged transactions occurred.

“[T]he governing pleading standard in Delaware to survive a motion to dismiss

is reasonable ‘conceivability.’”25 When considering a motion to dismiss under Rule

12(b)(6), 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.”26 The court, however, need not “accept

conclusory allegations unsupported by specific facts or . . . draw unreasonable

inferences in favor of the non-moving party.”27

1. Contemporaneous Ownership Requirement

Under Section 327 of the DGCL, referred to as the “contemporaneous

ownership requirement,” a stockholder must hold stock at the time of the alleged

wrong to have standing to pursue a derivative claim.28

25 Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 537 (Del.

2011). 26 Id. at 536 (citing Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002)).

27 Price v. E.I. DuPont de Nemours & Co., Inc., 26 A.3d 162, 166 (Del. 2011) (citing

Clinton v. Enter. Rent-A-Car Co., 977 A.2d 892, 895 (Del. 2009)), overruled on other grounds by Ramsey v. Ga. S. Univ. Advanced Dev. Ctr., 189 A.3d 1255 (Del. 2018). 28 8 Del. C. § 327.As the court has observed before, the contemporaneous ownership requirement of Section 327 is not universally beloved. It lacks justification, seems historically rooted in anti-Semitism, and calls out for reexamination. But it is the law, which this court is bound to apply faithfully. See generally SDF Funding LLC v. Fry, 2022 WL 1511594, at *6 (making this same point); J. Travis Laster, Goodbye to the Contemporaneous Ownership Requirement, 33 Del. J. Corp. L. 673, 677–78 C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 10 of 18

Invoking the contemporaneous ownership requirement, Defendants argue that

the Class B stock was issued in July 1982, and Mitchell Partners, therefore, lacks

standing to challenge the Class B issuance because Mitchell Partners did not acquire

its stock until June 1989.29

Mitchell Partners’ response has two parts. First, as a factual matter, Mitchell

Partners alleges that the Class B stock certificates were never issued,30 and the court

must accept this allegation as true under Rule 12(b)(6).

Second, as a legal matter, Mitchell Partners argues that the event relevant to

its standing is the issuance of a stock certificate, not events that occurred before. For

this proposition, Mitchell Partners relies foremost on Maclary v. Pleasant Hills,

Inc.,31 where the plaintiffs brought derivative claims challenging the issuance of 100

(2008) (making the argument that the contemporaneous ownership requirement is a rule without any coherent purpose or justification); Urdan v. WR Cap. P’rs, LLC, 2019 WL 3891720, at *9–10 & n.5 (Del. Ch. Aug. 19, 2019) (collecting authorities criticizing the logic of the contemporaneous ownership requirement); Bamford v. Penfold, L.P., 2020 WL 967942, at *24 n.18 (Del. Ch. Feb. 28, 2020) (collecting more authorities criticizing the logic of the contemporaneous ownership requirement, including Lawrence E. Mitchell, Gentleman’s Agreement: The Antisemitic Origins of Restrictions on Stockholder Litigation, 36 Queen’s L. J. 71, 72 & n.1 (2010), suggesting that the requirement was born from anti-Semitic sentiments). 29 Defs.’ Mot. to Dismiss and Strike at 10.

30 Sec. Am. Compl. ¶ 5 (“The 2019 Financials reported 1,502 ‘Common stock, Class A’

shares outstanding and 20,000 ‘Common stock, Class B’ shares outstanding. No explanation for the sudden appearance of the 20,000 Class B shares in the stockholders’ equity section was provided.”); id. ¶ 29 (“The share certificate purporting to be for Class B shares provided by AMFI in the 220 Action has a number of characteristics indicating it had never been issued.”). 31 109 A.2d 830 (Del. Ch. 1954). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 11 of 18

shares to directors.32 Three years passed between when the board adopted the

resolution authorizing the issuance and when the company issued the stock

certificates.33 The plaintiffs acquired their stock after the board resolution but before

the certificates were issued.34 The defendants pinpointed the date of the harm as

that of board authorization approving the stock issuance and invoked the

contemporaneous ownership requirement to argue that the plaintiffs lacked

standing.35 The plaintiffs responded that the harm was not completed until the stock

certificates were issued, at which time the plaintiffs owned stock.36

Chancellor Seitz made the aim of his standing analysis to construe Section 327

consistent with its “primary purpose,” which is “to discourage a type of strike suit.”37

He observed that the “statute was not passed to prevent the correction of corporate

wrongdoing. It was designed principally to prevent the purchasing of stock to be used

for the purpose of filing a derivative action attacking transactions occurring prior to

such purchase.”38 Accordingly, he found the statute “should not be construed so as to

32 Id. at 832–33.

33 Id.

34 Id.

35 Id.

36 Id. at 833.

37 Id.

38 Id. (citing Rosenthal v. Burry Biscuit Corp., 60 A.2d 106 (Del. Ch. 1948)). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 12 of 18

unduly encourage the camouflaging of transactions and thus prevent reasonable

opportunities to rectify corporate aberrations.”39

Consistent with this purpose, the Chancellor held that the corporation should

not be rewarded for conduct that would make their board actions less discoverable—

such as the delayed issuance of stock certificates. He held that:

[T]here is nothing in the policy behind the statute which would call for a construction favoring its application in situations where inexcusable inaction on the part of corporate personnel might make it less likely that wrongdoing would be discovered. . . . To consider this transaction as having been completed prior to the issuance of the certificates would sanction an application of the statute not required by its language and not fairly required to effectuate its purpose. On the contrary, it would place a premium on corporate conduct which might run counter to desirable standards.40

On this logic, the Chancellor held that “where the issuance of stock is authorized and

where certificates are presumably to be issued therefor at once, and that is the very

action under attack, the transaction is not complete for purposes of applying 8 Del.

C. § 327 until the certificates are issued.”41 Because the certificates were not issued

until after the plaintiffs acquired stock, they had standing to challenge the issuance,

and the Chancellor denied the motion.

39 Id.

40 Id.

41 Id. at 833–34. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 13 of 18

Similar facts are alleged here. Even if the AMFI Board intended to take some

action in connection with the Class B stock in 1982,42 Mitchell Partners disputes that

AMFI issued a stock certificate at that time or ever.43 It is unclear, therefore, when

the allegedly wrongful action had concluded. By the time it was disclosed in August

2020, Mitchell Partners owned stock. The allegations that speak to Mitchell

Partners’ standing are thus the same allegations at the heart of the parties’ dispute.

The court cannot dismiss a complaint based on Defendants’ version of a key, disputed

allegation. The motion to dismiss based on standing is denied.

2. Laches

Defendants argue that the new claims are time-barred because the 1982 Class

B authorization and the 1983 Class A Reverse Stock Split were disclosed as of 1982

and 1983, respectively, and thus Mitchell Partners was on notice of its cause of

action.44 Mitchell Partners alleges otherwise. Based on its Second Amended

Complaint, Mitchell Partners contends that “the earliest any claim could have

accrued” was when “AMFI first claimed [the Class B] shares had been issued,” which

42 Sec. Am. Compl. ¶ 4 (alleging Class B was authorized in 1982).

43 Id. ¶ 7 (“the Registrar and Transfer agent is the only person who has ever been

authorized to issue any AMFI share certificates and she has never issued a Class B Certificate”); id. ¶ 29 (“The share certificate purporting to be for Class B shares provided by AMFI in the 220 Action has a number of characteristics indicating it had never been issued.”). 44 Defs.’ Mot. to Dismiss and Strike at 29–30. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 14 of 18

was in August 2020.45 It filed this action on November 13, 2020, which is within a

year of that financial disclosure.

Although Mitchell Partners’ claims sound in equity, this court draws on

analogous limitations periods when assessing whether equitable claims are time-

barred by laches. Each of the new counts is subject to a three-year analogous statute

of limitations.46 Thus, absent tolling, claims that accrued before November 13, 2017,

are time-barred.

Even accepting Defendants’ narrative as true, Defendants’ theory fails under

tolling principles. According to Second Amended Complaint, AMFI first made its

financial disclosure acknowledging that Class B was issued and outstanding in

August 2020. Prior to that time, Mitchell Partners was not on inquiry notice of the

alleged acts.47 Because Mitchell Partners filed its claims within a year of the public

disclosure, the motion to dismiss as time-barred is denied.

45 Dkt. 115 at 38.

46 Kraft v. WisdomTree Invs., Inc., 145 A.3d 969, 985–88 (Del. Ch. 2016) (declaratory

judgment claim to equitably cancel stock subject to an analogous three-year limitation period); Vichi v. Koninklijke Philips Elecs. NV, 2009 WL 4345724, at *15 (Del. Ch. Dec. 1, 2009) (breach of fiduciary duty claim subject to an analogous three- year limitation period). 47 In re Tyson Foods, Inc., 919 A.2d 563, 584–85 (Del. Ch. 2007) (discussing tolling

principles and inquiry notice) (citing In re Dean Witter P’ship Litig., 1998 WL 442456, at *6 (Del. Ch. July 17, 1998), aff’d, 725 A.2d 441 (Del. 1999) (TABLE)). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 15 of 18

3. Necessary Parties

Defendants argue that the Subsidiary Defendants were included solely

because they are necessary parties,48 and they should be dismissed from the new

counts because they “are not necessary parties to this action pursuant to Court of

Chancery Rule 19.”49

“[I]t is the rule, long settled in this state, that the owner of shares of stock in a

Delaware corporation is an indispensable party to an action to cancel such shares.”50

Because the Subsidiary Defendants are the purported owners of the Class B stock,

and the Second Amended Complaint seeks to cancel that class of stock, those

owners—the Subsidiary Defendants—are necessary parties to this action.

Defendants add that even if the Subsidiary Defendants are necessary parties,

because Mitchell Partners “is not a shareholder of the Subsidiary Defendants, it lacks

standing to assert claims against them, and the Subsidiary Defendants must be

dismissed.”51 But Mitchell Partners is not asserting claims on behalf of the

48 See Dkt. 130 at 41:22–42:2 (4/8/24 Oral Arg. Tr.) (“So I understand the point that

they were included simply because they might be necessary parties. We just don’t believe they’re necessary parties to this case, as we don’t believe there’s merit to [the] allegation” against them). 49 Defs.’ Mot. to Dismiss and Strike at 34. This is a slightly unusual way to invoke Rule 19; usually, a defendant seeks to dismiss a claim because necessary parties cannot be joined. Because the analysis fails, I do not address whether this unorthodox approach is an appropriate one. 50 Hodson v. Hodson Corp., 80 A.2d 180, 181 (Del. Ch. 1951) (citing cases).

51 Defs.’ Mot. to Dismiss at 34–35. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 16 of 18

Subsidiary Defendants, so it need not be a stockholder of the Subsidiary Defendants

in order to bring suit.

Accordingly, Defendants’ arguments fail, and the motion to dismiss on this

ground is denied.

4. Additional Arguments Concerning The Director Defendants

Defendants argue that Pugh, Woodbury, Hess, and Harrison should be

dismissed from Count IV because it challenges events that occurred before they were

directors.52 It is true that directors do not owe fiduciary duties for actions that

occurred before they became fiduciaries.53 But Count IV alleges that the Director

Defendants breached their fiduciary duties by issuing a financial statement in August

2020 that included the Class B shares. The Director Defendants were on the board

at that time, so naming them as defendants is proper.

Defendants also argue that Pugh and Harrison should be dismissed from

Count V because they were not on the board at the time of the Reverse Stock Split.54

52 Defs.’ Mot. to Dismiss and Strike at 33.

53 In re Walt Disney Co., 2004 WL 2050138, at *4 (Del. Ch. Sept. 10, 2004) (“[T]here

is no reason to impose a fiduciary duty upon Ovitz before he obtained fiduciary authority, Ovitz was not a fiduciary before October 1, 1995.”); see In re Nine Sys. Corp. S’holders Litig., 2013 WL 771897, at *7 (Del. Ch. Feb 28, 2013) (“A claim for breach of fiduciary duty ‘must be based on an actual, existing fiduciary relationship between the plaintiff and defendants at the time of the alleged breach.’” (quoting Omnicare, Inc. v. NCS Healthcare, Inc., 809 A.2d 1163, 1169 (Del. Ch. 2002), rev’d on other grounds, 818 A.2d 914 (Del. 2003))). 54 Defs.’ Mot. to Dismiss and Strike at 33–34. C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 17 of 18

Mitchell Partners does not dispute this proposition.55 And it is unclear why they are

included in Count V.

Accordingly, Defendants’ motion to dismiss the additional defendants is

denied, except that Pugh and Harrison are dismissed from Count V.

C. Rule 12(f)

Defendants moved to strike “scurrilous allegations” against the Woodbury

Family, who are alleged to control AMFI.56

On a motion to strike under Rule 12(f), “the Court may order stricken from any

pleading any insufficient defense or any redundant, immaterial, impertinent, or

scandalous matter.”57 “Generally, motions to strike are not favored and are granted

sparingly.”58

Defendants take issue with paragraphs 33(b)–(g) of the Second Amended

Complaint. The allegations in paragraphs 33(d)–(g) are both scandalous and

immaterial.59 But the allegations in paragraphs 33(b)–(c) are neither. Paragraphs

33(b)–(c) describe the historical dealings of AFL—which is AMFI’s wholly owned

subsidiary. The motion to strike is granted as to paragraphs 33(d)–(g) of the Second

55 Voigt, 2020 WL 614999, at *8 n.3.

56 Defs.’ Mot. to Dismiss and Strike at 2, 35–37.

57 Ct. Ch. R. 12(f).

58 Nichols v. Chrysler Gp. LLC, 2010 WL 5549048, at *5 (Del. Ch. Dec. 29, 2010).

59 Sec. Am. Compl. ¶ 33 (d)–(g) (alleging the Woodbury family has a history of corporate malfeasance without any support). C.A. Nos. 2020-0985-KSJM, 2020-0986-KSJM July 3, 2024 Page 18 of 18

Amended Complaint and denied as to paragraphs (b)–(c) of the Second Amended

Complaint.

III. CONCLUSION

For the foregoing reasons, Defendants’ motion to dismiss Counts III through V

is denied, except that Pugh and Harrison are dismissed from Count V. And

Defendants’ motion to partially strike the Second Amended Complaint is granted as

to paragraphs 33(d)–(g) and denied as to paragraphs (b)–(c).

IT IS SO ORDERED.

Sincerely,

/s/ Kathaleen St. Jude McCormick

Chancellor

cc: All counsel of record (by File & ServeXpress)