Robert A. Davidow v. LRN Corporation

• Court: Court of Chancery of Delaware
• Decided: February 25, 2020
• Docket: C.A. No. 2019-0150-MTZ
• Status: Published

Opinion

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

ROBERT A. DAVIDOW, ) ) Plaintiff, ) v. ) ) C.A. No. 2019-0150-MTZ LRN CORPORATION, DOV ) SEIDMAN, LEE FELDMAN AND ) MATS LEDERHAUSEN, ) ) Defendants. )

MEMORANDUM OPINION Date Submitted: November 5, 2019 Date Decided: February 25, 2020

Stephen D. Dargitz, Kevin H. Davenport, and Jason W. Rigby, PRICKETT, JONES, & ELLIOTT, P.A., Wilmington, Delaware, Attorneys for Plaintiff Robert A. Davidow. Kevin G. Abrams, J. Peter Shindel, and April M. Kirby, ABRAMS & BAYLISS LLP, Wilmington, Delaware; James E. Brandt and Blair Connelly, LATHAM & WATKINS, LLP, New York, New York, Attorneys for Defendants LRN Corporation, Dov Seidman, Lee Feldman, and Mats Lederhausen.

ZURN, Vice Chancellor. A corporation that advises firms on ethics and compliance launched a self-

tender offer. The plaintiff, who tendered all his shares in that offer, now alleges that

the defendant corporation, its founder and chairman, and two additional directors

breached their fiduciary duties by launching a coercive self-tender at an unfair price

of $1.35 per share, providing inadequate disclosures, and authorizing the self-tender

notwithstanding the directors’ interestedness. The self-tender was allegedly part of

a scheme to increase the founder’s control over the company by excising outstanding

stockholders at an unfair price before completing an undisclosed sales process that

was underway at the time of the self-tender. Through that sales process, the

individual defendants received a windfall when they cashed out at $7.00 per share,

and the founder secured other benefits for himself. The defendants moved to dismiss

for failure to state a claim. I deny the motion to dismiss with respect to the individual

defendants, but grant the motion to dismiss with respect to the defendant corporation.

I. BACKGROUND

On February 25, 2019, Plaintiff Robert A. Davidow filed a Verified Complaint

(the “Complaint”) pursuant to Court of Chancery Rule 23, individually and on behalf

of all stockholders who tendered in the subject self-tender (the “Class”).1

Defendants in this action are LRN Corporation (“LRN” or the “Company”), and its

1 Docket Item (“D.I.”) 1 [hereinafter “Compl.”]. Defendants have not challenged Plaintiff’s class allegations.

1 directors Dov Seidman, Lee Feldman, and Mats Lederhausen (collectively, the

“Individual Defendants,” and together with LRN, “Defendants”). On April 23, 2019,

Defendants moved to dismiss for failure to state a claim (the “Motion”).2 I heard

argument on November 5.3

I draw the following facts from Plaintiff’s Complaint and certain documents

integral to it.4 LRN is a Delaware corporation that provides advisory services in

ethics and compliance. As of October 6, 2017, LRN had 39,705,818 shares of

common stock issued and outstanding and had 6,020,000 shares of stock issuable

upon the exercise of stock options. Seidman founded LRN and has been its chief

executive officer and chairman of its board of directors since 1993. Lederhausen

has been a director since 2012, and Feldman has been a director since 2000. Feldman

is a former partner of an LRN stockholder, Softbank Capital Partners, which held

LRN shares until 2011. The Individual Defendants have not disclosed the number

of LRN shares they hold personally.

2 D.I. 12. 3 D.I. 27. 4 See generally Compl. On this Motion, I consider the Offer to Purchase, Introductory Letter, Cover Letter, Letter of Transmittal, and Merger Notice, attached as exhibits to Defendants’ opening brief, because they are integral to the Complaint. In re Gardner Denver, Inc. S’holders Litig., 2014 WL 715705, at *2 (Del. Ch. Feb. 21, 2014). Accordingly, considering those documents does not convert Defendants’ Motion to a motion for summary judgment.

2 Historically, the Company has given its stockholders only minimal and

selective disclosures. LRN has not held an annual stockholders’ meeting for many

years. LRN has not provided proxy statements, timely notices of major transactions,

or quarterly financial reports. Accordingly, stockholders have not elected directors

or received disclosures that are typically provided by a proxy statement, including

information about director and officer compensation and the number of shares held

by directors and officers. LRN has provided stockholders with annual financial

statements, but not until nearly one year after the fiscal year-end, and those

statements were meager.5 LRN’s common stock has never been publicly traded or

registered with the SEC.

Plaintiff also alleges a history of granting stock options and buying stock at

arbitrary prices and with inadequate disclosures to benefit LRN’s board members

and their affiliates. These transactions enabled LRN to “pick[] off hundreds of

thousands of additional shares from its shareholders at an unfair price” 6 and

significantly increase Seidman’s voting power. Defendants never disclosed

Seidman’s holdings.

5 For example, LRN sent stockholders 2012’s financial statements on October 4, 2013, 2013’s financial statements on November 4, 2015, and 2014’s financial statements on December 7, 2016. The notes to these statements provided little information beyond basic performance, and failed to disclose the number of shares owned by LRN’s directors and officers or their compensation. The statements also did not disclose complete information on conflicted transactions. 6 Compl. ¶ 22.

3 For example, LRN disclosed in 2010’s financial statements that its board

repriced 2,733,507 stock options granted to “various employees across the

Company” from $3.43 to $2.67 in February 2010.7 Less than one year later, in

January 2011, LRN agreed to repurchase common and converted preferred stock at

different prices from two LRN stockholders, one of which was affiliated with

Feldman.8 In that transaction, LRN purchased over 12.5 million shares of common

stock at an average of $3.38 per share, and specifically bought from Feldman’s

affiliate at an average of $3.14 per share.9 Shortly thereafter, in November 2011,

7 Id. ¶ 15. LRN did not disclose how the board arrived at $2.67, or whether any valuation was performed in setting that price. LRN also did not disclose which LRN employees were granted the options, or whether Seidman held such options. LRN only informed stockholders that this “modification” increased LRN’s compensation expense for 2010 by $414,275.00. 8 LRN entered into a Share Purchase Agreement with SOFTBANK Capital Advisor Fund L.P., SOFTBANK Capital L.P., and SOFTBANK Capital Partners L.P. (collectively, “Softbank”) and Polaris Venture Partners IV L.P., and Polaris Venture Partners Entrepreneurs’ Fund IV L.P to repurchase shares at prices above $2.67 per share. At that time, Feldman was a partner of Softbank. 9 Under the Share Purchase Agreement, LRN repurchased Softbank’s 1,500,000 shares of common stock at $2.33 per share and then converted Softbank’s 1,479,762 shares of Series A Convertible Preferred Stock into 4,439,286 shares of common stock, repurchasing that converted stock for $3.42 per share. In addition, LRN converted 2,022,654 shares of Polaris’s Series A-1 Convertible Preferred Stock into 6,590,205 shares of common stock, then repurchased that converted stock for $3.59 per share. LRN amended the Share Purchase Agreement five times between June 2011 and September 2011. LRN did not promptly disclose the Share Purchase Agreement; how the parties negotiated the Share Purchase Agreement; the reason the parties entered the Share Purchase Agreement; the reason the repurchased share prices differed; how the Company determined the repurchase prices; or whether the Company obtained a fairness opinion on the repurchases. LRN also failed to provide adequate disclosures regarding Feldman’s involvement in the transaction and the five amendments.

4 LRN initiated a self-tender offer for up to 4 million shares of common stock for

$2.00 per share. Defendants only disclosed that LRN’s “most recent third party

appraisal . . . , which was conducted for tax and accounting purposes used in the

issuance of the Company’s options, valued our Common Stock at $2.59 per share as

of October 31, 2009[;]”10 and that “$2.00 per share reflects the amount that we

believe is reasonable and appropriate.”11 In the accompanying letter of transmittal,

Defendants included boilerplate release language.

Then, in December 2013, LRN repurchased 808,834 shares for $0.62 per

share.12 LRN’s performance could not have precipitated the meager purchase price.

To the contrary, LRN performed well enough to donate to Seidman’s charitable

organization and pay off approximately $12 million of the Company’s $30 million

long-term debt in 2013. And in 2014, LRN was able to pay off its long-term debt

with a single $13.57 million payment.

10 Id. ¶ 19. LRN did not disclose who performed the appraisal, how it was conducted, or what information and methodologies the appraiser relied on. 11 Id. ¶18. But LRN failed to disclose why the Board determined the $2.00 price—which reflected a 22.8% discount from $2.59—was “reasonable and appropriate” in light of the 2009 appraisal, especially considering that just months after the 2009 appraisal LRN repriced options at $2.67 per share and that shortly before the 2011 Self-Tender LRN repurchased shares from Feldman’s company at approximately $3.14 per share. 12 The purchase totaled roughly $500,000. LRN disclosed no other information about the 2013 stock repurchase.

5 In this murky context, the multi-step scheme alleged in this case began with

an undisclosed grant of “spring-loaded” stock options to the Individual Defendants

and other insiders (the “2017 Options”). According to LRN’s 2015 financial

statements, LRN had approximately 3.8 million stock options outstanding and no

options left to grant under the Company’s Amended and Restated 2000 Stock Option

Plan. But between the end of 2015 and October 2017, LRN issued 2.2 million

options, a 58% increase to the 2015 amount, without ever disclosing any information

about the grants. These 2017 Options represented nearly 5% of LRN’s fully diluted

equity.

To price the 2017 Options, LRN obtained an appraisal on May 31, 2017,

which valued LRN stock at $1.35 per share (the “Appraisal”). Plaintiff alleges that

Defendants issued the 2017 Options on the May Appraisal date. Defendants never

disclosed whether all of LRN’s outstanding options had been repriced at the

Appraisal price of $1.35 per share.

Defendants intentionally timed the Appraisal and the 2017 Options. When

the Appraisal was conducted, LRN expected to receive over $20 million in cash

payments for “non-recurring events outside the ordinary course of business.”13

Indeed, LRN received that sum in August and September 2017. Defendants

intentionally excluded the $20 million from the Appraisal to reduce the option price,

13 Id. ¶¶ 27, 32.

6 spring-loading the 2017 Options. In this way, the Individual Defendants set the stage

for the self-tender offer and subsequent sale at issue by obtaining the Appraisal

(which omitted an extraordinary cash infusion) and issuing themselves the 2017

Options (based on that Appraisal) in secret.

The next step was to increase Seidman’s control through the self-tender offer

(the “2017 Self-Tender”), which was paid for with the Company’s $20 million cash

infusion and justified by the Appraisal. The Individual Defendants allegedly

initiated the 2017 Self-Tender to reduce the number of shares outstanding and

increase the amount of consideration they would receive in the subsequent and

anticipated sale of the Company.

On October 6, 2017, Defendants launched the 2017 Self-Tender to acquire up

to 7,407,407 shares of common stock, or up to $10 million worth of shares, for $1.35

per share. Defendants sent an Offer to Purchase (“OTP”) to LRN stockholders. The

OTP repeatedly stated that the purpose of the 2017 Self-Tender was to provide

stockholders with liquidity. The OTP disclosed that “[i]n August and September

2017, we received certain one-time lump sum payments of over $20.0 million in the

aggregate as the result of certain non-recurring events outside the ordinary course of

business.”14 Defendants disclosed their determination that LRN had “no strategic or

operational need to retain this cash within LRN,” and that “in recognition of your

14 D.I. 12, Ex. 1 at 2.

7 support and also that a number of you have expressed an interest in obtaining

liquidity, the LRN board decided to allocate a portion of these funds to provide you

an opportunity to sell your shares.”15 Defendants did not disclose any information

about how or why LRN received this $20 million, who paid it and why, what LRN

sold or did in exchange for it, or how or why it was outside the ordinary course of

business. The $20 million was allegedly material to LRN, which had $46.9 million

in total assets and $43.4 million in revenue in 2015.

Plaintiff alleges that when Defendants commenced the 2017 Self-Tender, they

had already began discussing a strategic process to sell the Company at a price higher

than $1.35 per share, and had either received or expected to receive offers from

potential buyers at higher prices. Defendants did not disclose this information to

stockholders. But the OTP warned stockholders that if they did not tender, it was

“possible you would have to hold your Common Stock for a long period of time

without receiving any cash or other payment for them. It is possible that you may

never receive cash or other payment for your Common Stock if you do not take the

Offer.”16 It further stated, “[F]rom time to time we may evaluate or consider

pursuing strategic alternatives, including but not limited to a sale of the Company.”17

15 See id. Ex. 3 at 1, Ex. 4 at 1. 16 Compl. ¶ 24. 17 Id.

8 Defendants disclosed that $1.35 per share “is not a determination of the fair

market value of your shares,” but “reflects the amount that we believe is reasonable

and appropriate for each of the Aggregate Shares in light of the purposes of the

Offer.”18 The OTP stated that the “current fair market value of your shares or the

value of those shares in the future could be worth substantially more, particularly to

a potential strategic buyer or investor, or substantially less than $1.35 per share.”19

The OTP disclosed that the $1.35 per share price was based on the May 2017

Appraisal, and further disclosed that the Company relied on the Appraisal “in the

issuance of the Company’s options.”20 This was the first time stockholders learned

of the Appraisal and that additional options, i.e. the 2017 Options, had been granted.

The OTP explained that the $20 million lump sum payment was intentionally

excluded from the Appraisal. That was the only information disclosed about the

Appraisal. Defendants did not disclose who performed the Appraisal, what standard

of value was used, what valuation methodologies or inputs were used, what

information was relied on, or whether management provided any financial

projections to the supposed appraiser.

18 Id. ¶ 28. 19 Id. ¶ 26. 20 Id. ¶ 29.

9 As to the OTP’s statement that the Appraisal was used in issuance of stock

options, the stockholders had previously understood that LRN had not granted

options since 2009. The 2015 financial statements, which were the most recent

financial statements provided to stockholders before the 2017 Self-Tender, stated

that there were 3,811,707 shares of stock issuable upon the exercise of options. The

OTP states that there were 6,020,000 shares of stock issuable upon the exercise of

options. The OTP does not explain this difference. And the OTP does not disclose

whether the Appraisal was used for the additional purpose of repricing existing stock

options or for some other option-related reason.

Other than the Appraisal, the OTP provided scant information to use in

assessing the offer price. The OTP did not provide current or recent information

about LRN’s performance. Plaintiff alleges that the 2017 Self-Tender was

purposefully timed to avoid providing stockholders with current and accurate

statements from 2016: Defendants did not include audited financial statements for

2016 purportedly because those statements were not finished by the October 6, 2017

OTP.

The OTP only provided audited financial statements from 2014 and 2015 for

stockholders to use in deciding whether to tender their shares in October 2017. The

OTP also provided a draft, two-paged unaudited balance sheet and statement of

operations for LRN as of the year ended December 31, 2016 and eight months ended

10 August 31, 2017. But the OTP instructed stockholders not to rely on those draft

statements “as being representative of our results of operation or financial condition

for those periods or as an indicator of our future results of operations or financial

condition.”21 The OTP did not contextualize or fully explain the brief financial

information provided, and selectively disclosed financial events.22 The OTP

instructed stockholders to rely “only on the information contained in the [OTP] and

in the Letter of Transmittal.”23

The OTP disclosed that, if successful, it would cause Seidman to own more

than 50% of LRN’s stock:

Assuming we consummate the purchase of all Aggregate Shares in this Offer, Mr. Seidman will beneficially own more than 50% of our voting stock. As a result, these persons will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. The interests of our officers and directors, when acting in their capacity as stockholders, may lead them to:  vote for the election of directors who agree with the incumbent officers’ or directors’ preferred corporate policy; or  oppose or support significant corporate transactions when these transactions further their interests as incumbent officers or directors, even if these interests diverge from their interests as stockholders per se and thus from the interests of other stockholders.24 21 Id. ¶ 34. 22 Negative information like the loss of a customer was explained, but positive information like the $20 million lump payment was not explained. 23 Id. ¶ 23. 24 Id. ¶ 36.

11 The OTP did not disclose how many shares or what percentage of outstanding shares

Seidman, or the other Individual Defendants, owned.

The OTP provided for proration of repurchased shares if more than 7,407,407

shares were tendered. Defendants told stockholders that the Company would

repurchase the first 25,000 shares that any stockholder tendered, but that if more

than 7,407,407 total shares were tendered, all excess shares would be prorated.

Nonetheless, Defendants “reserve[d] the right, in [their] sole discretion, to purchase

more than 7,407,407 shares of Common Stock pursuant to the Offer.”25

Finally, as with LRN’s self-tender in 2011, Defendants included boilerplate

release language, allegedly to discourage stockholders from holding them

accountable, in the 2017 Self-Tender’s letter of transmittal.

The 2017 Self-Tender closed on November 17, 2017. Stockholders tendered

9,092,278 shares, representing roughly 23% of LRN’s 39,705,818 issued and

outstanding shares.26 The board did not prorate and instead accepted all tendered

shares. Plaintiff held 211,502 shares of LRN common stock and tendered all of

25 D.I. 12, Ex. 1 at i. 26 The OTP provided two charts purporting to predict the percentage of outstanding equity LRN would purchase. The charts disclosed that the 2017 Self-Tender would repurchase a maximum of 11.4% of LRN’s total equity, disclosed as including treasury stock. The charts did not directly disclose how much of LRN’s total outstanding equity would be purchased in the 2017 Self-Tender of 7,407,407 shares, which was 18.7%. Due to the decision not to prorate, the 9,092,278 shares repurchased equaled 22.8% of LRN’s outstanding equity.

12 those shares in the 2017 Self-Tender. Because the board did not prorate, all of

Plaintiff’s shares were cashed out.

Neither the Individual Defendants nor LRN’s other officers participated in the

2017 Self-Tender. To the contrary, the 2017 Self-Tender materially increased the

value of the Individual Defendants’ undisclosed LRN holdings and their equity stake

in the Company. After the 2017 Self-Tender, Seidman had near-total control over

LRN.

Approximately one year later, Defendants completed the final step in their

alleged scheme to squeeze out LRN stockholders for the Individual Defendants’

financial benefit. On November 27, 2018, LRN informed its remaining stockholders

that it had agreed to be acquired by Leeds Equity Partners (“Leeds”) for

approximately $255 million, or $7.00 per share (the “Merger” or “Leeds

Transaction”). Seidman, as LRN’s controlling stockholder, approved the Merger by

written consent. He used his control to negotiate other unique personal benefits

through the Merger, including a spin-off of an LRN business to a company he

completely controlled, and the right to sit as chairman and appoint two additional

members to LRN’s post-close board. Seidman is expected to appoint Lederhausen

to one of those positions.

Plaintiff alleges that the Leeds Transaction was underway at the time

Defendants initiated the 2017 Self-Tender. But according to the Leeds Transaction

13 merger notice sent to stockholders (the “Merger Notice”), “[i]n the spring of 2018,

without soliciting or approaching any potential buyers, the Company received

expressions of interest from potential buyers.”27 LRN claims it engaged GCA

Advisors, LLC on April 6 to “respond to the expressions of interest and to explore

the Company’s strategic options.”28 Plaintiff alleges that Defendants purposefully

drafted the Merger Notice to conceal material facts concerning the timing of the sale

process because they knew stockholders who tendered only a portion of their shares

in the 2017 Self-Tender would receive the Merger Notice. Defendants disclosed

very little information about the Merger, allegedly in an effort to keep stockholders

who tendered in the 2017 Self-Tender in the dark.

Defendants provided Leeds with greater, more detailed, and more current

financial information about the Company’s historical and projected performance

than they provided to stockholders in the 2017 Self-Tender. For the Merger, LRN

was valued at $255 million, resulting in payment of $7.00 per share. As controlling

stockholder, Seidman received a majority of the Merger consideration. The Merger

Notice disclosed that Seidman was cashing out over 80% of his shares and rolling

the remainder into the post-close company. The rollover value of Seidman’s shares

27 Compl. ¶ 42 (alteration in original). 28 Id.

14 was $32 million, which means he received approximately $128 million in cash for

his other LRN shares.

The Individual Defendants also cashed out their shares in the Merger at a

higher price than offered in the 2017 Self-Tender. As alleged, the Individual

Defendants reaped the benefits of the unfair 2017 Self-Tender by first increasing

their equity stake and control over the Company, and then consummating the Merger

at $7.00 per share, thereby obtaining millions of dollars of additional consideration

at the expense of the Class.

II. ANALYSIS

Plaintiff claims that the 2017 Self-Tender was coercive, that material

information relating to the transaction was inadequately disclosed, that the

Individual Defendants breached their fiduciary duties, and that the 2017 Self-Tender

was not entirely fair. Count I alleges that the Individual Defendants breached their

fiduciary duties by issuing a materially misleading and incomplete OTP and related

documents in connection with the 2017 Self-Tender. Count II alleges that the

Individual Defendants breached their fiduciary duties by launching a coercive tender

offer. Count III alleges that the Individual Defendants breached their fiduciary

duties by conducting a self-interested and unfair 2017 Self-Tender. On behalf of all

stockholders who tendered, Plaintiff seeks damages or other equitable relief from

15 the Individual Defendants, asking that they disgorge their profits and alleged ill-

gotten gains. Defendants have moved to dismiss for failure to state a claim.

The standard for dismissal pursuant to Rule 12(b)(6) for failure to state a claim

upon which relief can be granted is well established.29 In considering this motion, I

must accept as true all well pleaded facts and inferences that can reasonably be

drawn therefrom. “[D]ismissal is inappropriate unless the ‘plaintiff would not be

entitled to recover under any reasonably conceivable set of circumstances

susceptible of proof.’”30 A motion to dismiss will be granted only if “it appears with

reasonable certainty that the plaintiff could not prevail on any set of facts that can

be inferred from the pleading.”31 That determination is generally limited to the

factual allegations contained in the complaint and documents integral thereto.32

“By its very nature and form, a tender offer is normally regarded as a

voluntary transaction.”33 But self-tenders have “built-in conflicts of interest between

the fiduciaries responsible for conducting the offer and the stockholders to whom

the offer is directed.”34 “The interest of the corporate offeror (qua buyer) is to pay

29 Feldman v. Cutaia, 2006 WL 920420, at *7 (Del. Ch. Apr. 5, 2006). 30 Savor, Inc. v. FMR Corp., 812 A.2d 894, 897 (Del. 2002) (quoting Kofron v. Amoco Chems. Corp., 441 A.2d 226, 227 (Del. 1982)). 31 Feldman, 2006 WL 920420, at *7. 32 In re Gardner Denver, Inc., 2014 WL 715705, at *2; Feldman, 2006 WL 920420, at *7. 33 Eisenberg v. Chi. Milwaukee Corp., 537 A.2d at 1051, 1056 (Del. Ch. 1987). 34 Id. at 1057.

16 the lowest price possible; the interest of the stockholders (qua sellers) is to receive

as high a price as possible.”35 In such circumstances, “[t]he directors are acting both

as the representatives of the corporate offeror and as fiduciaries for the shareholder-

offerees. That dual role necessarily gives rise to a potential conflict of the directors,

which calls for procedural protections for the stockholders whose interests may not

be adequately represented.”36

When self-tendering, directors must structure the offer non-coercively and

disclose all material facts.37

[A] tender offer—particularly one made by a corporation for its own shares—may be voluntary in appearance and form but involuntary as a matter of reality and substance. Thus far two classes of situations have arisen that have been found to deprive a tender offer of its voluntary character: (i) cases involving materially false or misleading disclosures made to shareholders in connection with the offer . . . and (ii) cases where the offer, by reason of its terms or the circumstances under which it is made, is wrongfully coercive.38

“The standard applicable to the plaintiff’s claim of inequitable coercion is whether

the defendants have taken actions that operate inequitably to induce the

35 Id. 36 Id. 37 Pfeffer v. Redstone, 2008 WL 308450, at *7 (Del. Ch. Feb. 1, 2008), aff’d, 965 A.2d 676 (Del. 2009). 38 Eisenberg, 537 A.2d at 1056; see also Solomon v. Pathe Commc’ns Corp., 672 A.2d 35, 39–40 (Del. 1996).

17 [stockholders] to tender their shares for reasons unrelated to the economic merits of

the offer.”39

Delaware does not apply entire fairness where there is a voluntary, non-

coercive offer by the corporation to acquire its own shares.40 But entire fairness

applies where the self-tender is coercive or where the company’s directors are

interested or lack independence in approving the transaction.41 Such circumstances

support a claim for the individual defendants’ breach of the duty of loyalty in

deciding to launch the self-tender.42

Accepting Plaintiff’s allegations as true, I conclude he has pled facts sufficient

to state a claim that the Individual Defendants breached their duties of disclosure in

relation to the 2017 Self-Tender. As alleged, those disclosure deficiencies, as well

as structural components of the 2017 Self-Tender, rendered it coercive. Because

Plaintiff has successfully alleged that the 2017 Self-Tender was coercive and that

39 Eisenberg, 537 A.2d at 1061 (citing Ivanhoe P’rs v. Newmont Mining Corp., 533 A.2d 585, 605 (Del. Ch.), aff’d 535 A.2d 1334 (Del. 1987)); accord Gradient OC Master, Ltd. v. NBC Univ., Inc., 930 A.2d 104, 119 (Del. Ch. 2007) (“[A] shareholder is actionably coerced when he is forced into ‘a choice between a new position and a compromised position’ for reasons other than those related to the economic merits of the decision.” (quoting In re Gen. Motors Class H S’holders Litig., 734 A.2d 611, 621 (Del. Ch. 1999))). 40 Pfeffer, 2008 WL 308450, at *7. 41 Id.; Feldman, 2006 WL 920420, at *6. 42 See Solomon, 672 A.2d at 39–40; Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at *6; In re Limited, Inc., 2002 WL 537692, at *7 (Del. Ch. Mar. 27, 2002); Eisenberg, 537 A.2d at 1056.

18 the Individual Defendants are interested in the transaction, the 2017 Self-Tender is

subject to entire fairness review.

A. Plaintiff Has Pled That Individual Defendants Breached Their Duties Of Disclosure In Connection With The 2017 Self-Tender. Here, Plaintiff alleges the Individual Defendants intentionally concealed

material facts from stockholders concerning LRN’s value, the prospect of a sale,

LRN’s recent performance, the Appraisal, the receipt of $20 million outside the

ordinary course of business, and spring-loaded 2017 Options issued to insiders.

Plaintiff further contends that the 2017 Self-Tender’s stated purpose, to share the

benefit of the extraordinary lump sum in a liquidity event, was materially

misleading. Plaintiff alleges that complete and accurate information was reasonably

available to Defendants, and therefore should have been disclosed in the OTP.

Plaintiff has stated a claim for breach of the Individual Defendants’ duty of

disclosure, and the alleged disclosure deficiencies support a claim that the 2017 Self-

Tender was coercive.

“Corporate directors owe a fiduciary duty to their stockholders to disclose all

facts material to the transaction in an atmosphere of entire candor.”43 “[W]hen

fiduciaries undertake to describe events, they must do so in a balanced and accurate

43 Eisenberg, 537 A.2d at 1057 (citing Smith v. Van Gorkom, 488 A.2d 858, 890 (Del. 1985), and Lynch v. Vickers Energy Corp., 383 A.2d 278, 281 (Del. 1977)).

19 fashion, which does not create a materially misleading impression.”44 “Where a

corporation tenders for its own shares, the exacting duty of disclosure imposed upon

corporate fiduciaries is even ‘more onerous’ than in a contested offer. That is

because in a self-tender, the disclosures are unilateral and not counterbalanced by

opposing points of view.”45 “A related reason for requiring the strictest possible

standard of disclosure is that corporate self-tenders, by their very nature, involve

built-in conflicts of interest . . . .”46

“Corporate fiduciaries can breach their duty of disclosure under Delaware

law . . . by making a materially false statement, by omitting a material fact, or by

making a partial disclosure that is materially misleading.”47 Where defendants

44 Pfeffer, 2008 WL 308450, at *13 (quoting Clements v. Rogers, 790 A.2d 1222, 1240 (Del. Ch. 2001)). 45 Eisenberg, 537 A.2d at 1057 (quoting Blanchette v. Providence & Worcester Co., 428 F. Supp. 347, 356 (D. Del. 1977)). 46 Id. 47 Pfeffer, 2008 WL 308450, at *8 (omission in original) (quoting O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 916 (Del. Ch. 1999)). The standards for each type of breach vary slightly. In Redstone, Vice Chancellor Lamb analyzed Plaintiff’s specific allegations as to each type of disclosure breach. See id. at *8–13. Plaintiff has pled that the disclosures in the offering materials were deficient in numerous respects. Thus, as in Feldman and Eisenberg, I do not apply a particular standard at this juncture, but instead ask only whether the Individual Defendants failed to disclose all facts material to the tender offer. See Feldman, 2006 WL 920420, at *8; Eisenberg, 537 A.2d at 1057–61. Whether that failure should be categorized as a materially false statement, omission, or partial, misleading disclosure will be developed through discovery and need not be determined at this stage.

20 inadequately disclose all material information related to a self-tender, the self-tender

is coercive.48 Our Court requires

[a] showing of substantial likelihood that under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information available.49

As the Delaware Supreme Court stated in Loudon v. Archer–Daniels–Midland Co.,

“[a] claim based on disclosure violations must provide some basis for a court to infer

that the alleged violations were material.”50 Materiality allegations “need not be

pleaded with particularity,” as plaintiffs need only provide “some factual basis . . .

from which the Court can infer materiality of an identified omitted fact.” 51 This

inquiry is fact-intensive, and the Court should deny a motion to dismiss when

developing the factual record may be necessary to make a materiality

determination.52

48 Eisenberg, 537 A.2d at 1056–1057; see also Solomon, 672 A.2d at 39–40. 49 Eisenberg, 537 A.2d at 1057 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)); accord TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). 50 700 A.2d 135, 146 (Del. 1997); accord Pfeffer, 2008 WL 308450, at *8. 51 Loudon, 700 A.2d at 146. 52 See, e.g., McMullin v. Beran, 765 A.2d 910, 926 (Del. 2000) (reversing order granting defendants’ motion to dismiss because “[w]hen a complaint alleges disclosure violations, courts are required to decide a mixed question of fact and law” and because “[i]n the specific context of this case, an answer to the complaint, discovery and a trial may all be necessary to develop a complete factual record before deciding [materiality] . . . as a matter of law”); Wells Fargo & Co. v. First Interstate Bancorp., 1996 WL 32169, at *10 (Del. 21 Plaintiff has alleged three categories of deficient information that, in

Eisenberg v. Chicago Milwaukee Corporation, were material at the motion to

dismiss stage: offer purpose, price fairness, and director interestedness.53 First,

Eisenberg held that stockholder offerees “are entitled to an accurate, candid

presentation of why the self-tender offer is being made.”54 Where, considering the

offering materials as a whole, the stated purpose of the offer is materially misleading

or where the stated purpose can give more than one inaccurate impression, the

plaintiff alleges a claim for breach of the duty of disclosure.55 Here, Plaintiff has

successfully alleged that the OTP’s disclosures relating to the “liquidity” purpose

“served not to enlighten but to obscure the real reasons motivating the Offer.”56

Plaintiff alleges that the true purpose was to squeeze out LRN stockholders and buy

Seidman control, and ultimately enable the Individual Defendants to cash out at a

Ch. Jan. 18, 1996) (declining to rule that an omission was immaterial as a matter of law because “[a] question of materiality is difficult to treat as a question of law on a motion to dismiss,” and “[i]n fact, issues of materiality are generally held to be mixed questions of law and fact, but predominantly questions of fact” and “are matters that in many instances require a rich factual context to responsibly decide” (citing TSC Indus., 426 U.S. at 450 )); Branson v. Exide Elecs. Corp., 1994 WL 164084, at *3 (Del. Apr. 25, 1994) (TABLE) (finding that questions of materiality “generally cannot be resolved on a motion to dismiss, but rather . . . must be determined after the development of an evidentiary record”). 53 537 A.2d at 1058–61. 54 Id. at 1059 (citing Blanchette, 428 F. Supp. at 354–55). 55 Id. at 1058–59. 56 Id. at 1059.

22 higher value in an undisclosed forthcoming transaction. At this stage, I accept as

these allegations as true.

Defendants’ alleged obfuscation of the 2017 Self-Tender’s true purpose also

colors their inadequate disclosures of the $20 million lump sum and LRN’s

financials. It is reasonably conceivable that the Individual Defendants concealed

information about LRN’s financials and about the $20 million payment to bolster

the stated purpose of sharing found money in a liquidity event. The OTP did not

provide sufficient financials to allow stockholders to determine whether LRN was

in a position to provide stockholders with liquidity at that time. The OTP instructed

stockholders to rely solely on the limited and dated information therein; failed to

provide reliable information about LRN’s performance; included two pages of stale

financial information that stockholders were directed not to rely on; and included

disclaimers that ultimately forced stockholders to rely on financial statements from

2014 and 2015.

While the OTP disclosed the cash injection and that it was excluded from the

Appraisal, the OTP did not disclose how or why the Company acquired those funds.

As alleged, LRN obtained the $20 million for the sole purpose of completing the

2017 Self-Tender, as one of multiple steps to squeeze out LRN stockholders at a

meager price. The disclosure deficiencies regarding the $20 million and LRN’s

23 financials are material as alleged because they supported, or made more credible, the

misleading stated purpose for the 2017 Self-Tender.

Second, Plaintiff contends that the $1.35 offer price is unfair and that the

disclosures relating to that price were intended to, and did, obscure that fact. “If that

were the case, the disclosures would clearly be defective. Shareholders are entitled

to be informed of information in the fiduciaries’ possession that is material to the

fairness of the price.”57 Accepting Plaintiff’s allegations as true, the OTP fell short.

Defendants explicitly stated that the price was not a determination of “fair market

value” and that the shares could be worth “substantially more” or “substantially less”

than $1.35.58 Defendants disclosed their belief that the offer price was “reasonable

and appropriate,”59 while at the same time making no recommendation on whether

stockholders should tender and abstaining from tendering themselves.60 The OTP

failed to disclose material facts to explain those conclusions.61

57 Id. (citations omitted) (citing Kahn v. U.S. Sugar Corp., 1985 WL 4449, at *14 (Del. Ch. Dec. 10, 1985); Joseph v. Shell Oil Co., 482 A.2d 335, 342 (Del. Ch. 1984); Lynch, 383 A.2d at 281). 58 D.I. 12, Ex. 1 at 2. 59 Compl. ¶ 28. 60 See Eisenberg, 537 A.2d at 1055, 1059–60 (permitting disclosure claim to proceed where “[a]lthough the Offer to Purchase disclosed the opinion of . . . the Board of Directors that the $55 offering price was fair, that document also admonished that neither CMC nor its directors were making any recommendation as to whether or not the Preferred shareholders should tender”). 61 See Frank v. Arnelle, 1998 WL 668649, at *6 (Del. Ch. Sept. 16, 1998), aff’d, 725 A.2d 441 (Del. 1999); Eisenberg, 537 A.2d at 1060.

24 Had the foregoing facts been disclosed, shareholders would have been given a more even-handed presentation of the economic merits of the Offer. The need for such a presentation would appear even more essential, because the directors had concluded that the Offer was [“reasonable and appropriate”], yet decided not to recommend that their shareholders tender into it.62

The OTP disclosed only that the $1.25 share price was based on the May 2017

Appraisal. But the OTP did not disclose the basis or methodology for the valuation

other than the exclusion of the $20 million lump sum. This, too, went unexplained.

The OTP disclosed the Appraisal was conducted for tax purposes and was used in

issuance of stock options. When stockholders received the OTP, they were unaware

that Defendants had recently issued the 2017 Options. Rather, stockholders believed

that LRN had not granted options since 2008. The OTP did not reconcile this belief

and the 2017 Options, rendering the OTP’s Appraisal statements misleading.

Finally, the OTP did not adequately disclose that the Individual Defendants

were interested in the 2017 Self-Tender.63 As this Court stated in Eisenberg, “an

issuer making a tender offer for its own shares is the most inside of insiders and the

62 Eisenberg, 537 A.2d at 1060; see Compl. ¶ 28. In Eisenberg, the directors disclosed their belief that the price was “fair.” 537 A.2d at 1059. While the facts of this case differ, I do not find the Defendants’ determination that the price was “reasonable and appropriate” to be a means of circumventing fiduciaries’ onerous duty of disclosure in the self-tender context. Eisenberg does not stand for the proposition that fiduciaries must disclose all material facts related to price when they determine the price is “fair.” Rather, Eisenberg stands for the proposition that when fiduciaries speak, they must do so completely and candidly, and that their duty is even more exacting when facing the inherent conflicts created in a self-tender. 63 Eisenberg, 537 A.2d at 1060–61.

25 insider par excellence.”64 “In the instant case the [Individual Defendants] were not

only in a sense insiders but in their capacity as officers and directors of [LRN] were

fiduciaries for the stockholders.”65 Taking as true that the Individual Defendants

were interested in the 2017 Self-Tender, they faced “the heavy responsibility of

advising the stockholders fully and impartially about the advantages and

disadvantages of the tender, especially in view of the personal interest which the

[Individual Defendants] had in the success of the offer.”66

The OTP disclosed that the transaction would give Seidman a controlling

position in the Company, that LRN’s directors and officers were not tendering, and

that the board and management may pursue transactions in the future under which

their interests may diverge from those of the remaining stockholders. But in light of

Plaintiff’s theory of the case, these disclosures were misleading and incomplete.

Plaintiff has alleged that the Individual Defendants owned a significant amount of

LRN stock and options, including the 2017 Options, which they desired to cash out

in the pending Leeds Transaction. The OTP failed to disclose the number of shares

and options held by the Individual Defendants, and most importantly failed to

64 Id. at 1057 (internal quotation marks omitted) (quoting Blanchette, 428 F. Supp. at 356). In Section II(C), infra, I conclude Plaintiff has pled the Individual Defendants were interested in the 2017 Self-Tender. 65 Id. (quoting Blanchette, 428 F. Supp. at 356). 66 Id. (quoting Blanchette, 428 F. Supp. at 356).

26 disclose that they would not tender in the offer because they planned to sell in the

Leeds Transaction at a much higher price. The 2017 Self-Tender would make that

transaction more lucrative for the Individual Defendants. The LRN “shareholders

were entitled to know that certain of their fiduciaries had a self-interest that was

arguably in conflict with their own, and the omission of the fact was material.”67 As

alleged, the Individual Defendants failed to discharge their disclosure

responsibilities as interested fiduciaries.

Defendants contend that they had no duty to disclose the alleged secret

strategic sales process because it was immaterial as a matter of law. 68 In support,

Defendants point out Plaintiff has not pled that the purported strategic process was

“anything more than preliminary,”69 and argue it was immaterial because

“[i]nformation about a possible merger or similar transaction generally becomes

material when there is an ‘agree[ment] on the price and structure of the

transaction.’”70 Further, Defendants contend that Plaintiff’s alleged timeline is

contradicted by the Merger Notice.

67 Id. at 1061. 68 D.I. 12 at 23–30. Id. at 27 (quoting In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *58 (Del. 69

Ch. Sept. 4, 2014) (subsequent history omitted)). 70 Id. at 26 (alteration in original) (quoting In re Nine Sys., 2014 WL 4383127, at *57).

27 Defendants correctly state the law on this point. But without the benefit of

discovery, Defendants’ materiality arguments are premature. “A question of

materiality is difficult to treat as a question of law on a motion to dismiss.”71 Plaintiff

alleges that, when Defendants commenced the 2017 Self-Tender, they were in the

midst of discussing a strategic process and had received an offer. The details of

those discussions and the offer are unknown at this stage, precisely because Plaintiff

alleges Defendants purposefully withheld this information from stockholders.

Nonetheless, at this stage, I can reasonably infer from Plaintiff’s allegations that the

process was more than preliminary. Whatever level of interest prospective buyer(s)

demonstrated was sufficiently concrete to inspire Defendants to take measures to

reap additional benefits for themselves, to stockholders’ detriment. That offer or

overture materialized in the Leeds Transaction. As for the conflicting Merger

Notice, when Plaintiff was cashed out in the 2017 Self-Tender, his access to LRN’s

information became even more restricted. The Merger Notice was Plaintiff’s only

source of information regarding the Leeds Transaction, and, consistent with his

theory of the 2017 Self-Tender, Plaintiff alleges that it too contains materially false

and misleading information.

71 Wells Fargo & Co., 1996 WL 32169, at *10 (declining to rule that an omission was immaterial as a matter of law and noting that “[i]n fact, issues of materiality are generally held to be mixed questions of law and fact, but predominantly questions of fact”).

28 Plaintiff has alleged material omissions related to the undisclosed strategic

process. Plaintiff alleges that Defendants historically wronged stockholders;

intended to squeeze out stockholders at an unfair price through the 2017 Options,

Appraisal, and 2017 Self-Tender; and intended to take as many of the benefits from

the Leeds Transaction as they could. Considering those allegations, the identified

omissions likely would have altered the “total mix” of information available when

considering the 2017 Self-Tender and likely “would have assumed actual

significance in the deliberations of the reasonable shareholder.”72 At a minimum,

Plaintiff’s theory of the case leads to the conclusion that determining whether

Defendants’ identified omissions are “immaterial” is fact-intensive and should be

developed through discovery.73 “[T]he court will not dismiss the plaintiff’s

disclosure claims at this early stage of the litigation, before the basic facts relating

to the challenged transactions . . . are established of record.”74

And as I have found, Plaintiff has adequately alleged that the omitted

information of purpose, the source of funds, the reasonableness of the offer, and

72 Eisenberg, 537 A.2d at 1057 (quoting Rosenblatt, 493 A.2d at 944); see also TSC Indus., 426 U.S. at 449. 73 See McMullin, 765 A.2d at 926; Wells Fargo & Co., 1996 WL 32169, at *10; Branson, 1994 WL 164084, at *3. 74 Feldman, 2006 WL 920420, at *8.

29 interestedness were material under Eisenberg.75 At the motion to dismiss stage, I

need not determine whether each disclosure deficiency, alone, is sufficient to find a

75 Defendants also contend that they had no duty to disclose additional information about the Appraisal or LRN’s recent performance, citing a number of cases that found appraisals for tax purposes immaterial. D.I. 12 at 30–36. Those cases are inapposite here. For example, Defendants cite Frank v. Arnelle for the proposition that “Delaware courts do not require mandatory disclosure of valuation opinions prepared in connection with a board’s approval of a self-tender offer.” Frank, 1998 WL 668649, at *6. But Defendants omit the context for that statement. Chancellor Chandler went on to explain that “it is settled under our decisional law that where a board is not obligated to offer or pay a fair price, absent any materially misleading disclosures, it is neither required to disclose to its stockholders the pricing methodology nor an investment bank fairness opinion, including valuations.” Id. (emphasis added). In that case, he found that “the terms of the Offer to Purchase would have made it clear to a reasonable stockholder that the auction price range was market driven” and that there were no disclosure violations that triggered the board’s duty to offer a fair price. Id. Further, Frank was decided at the summary judgment stage, after the parties developed the record as to materiality. With regard to additional information about LRN’s performance, Defendants argue Plaintiff has failed to demonstrate why “the additional granularity he seeks is anything more than helpful or cumulative to the information already disclosed,” D.I. 12 at 34 (quoting Dent v. Ramtron Int’l Corp., 2014 WL 2931180, at *12 (Del. Ch. June 30, 2014)), or why he needs such immaterial “soft information.” Id. at 31 (quoting Olenik v. Lodzinski, 208 A.3d 704, 720 n.79 (Del. 2019)). To the contrary, Plaintiff has pled why he needed that information in considering the “total mix” when deciding to tender. See Eisenberg, 537 A.2d at 1057, 1059–60. Further, Defendants claim that Plaintiff’s disclosure claim is based, at least in part, on information that did not exist, and contend “Plaintiff does not allege that more current or more accurate financial information even existed.” D.I. 12 at 30 (citing In re JCC Hldg. Co., Inc., 843 A.2d 713, 721 (Del. Ch. 2003) (“Under Delaware law, there is no obligation on the part of a board to disclose information that simply does not exist . . . .”)). I disagree. By pointing out the paucity and age of the financials stockholders were given, and by alleging the 2017 Self-Tender and OTP were timed to precede formal preparation of the 2016 financials, Plaintiff has pled Defendants had more current and complete financial information that could have been provided to stockholders. Finally, Defendants claim they had no duty to disclose additional details regarding the one-time, $20 million payment, claiming they had no duty to provide stockholder with an “avalanche of trivial information.” Id. at 36 (quoting In re Gen. Motors (Hughes) S’holder Litig., 2005 WL 1089021, at *13 (Del. Ch. May 4, 2005), aff’d, 897 A.2d 162 30 breach. Rather, I look at the disclosure allegations collectively. 76 “All of those

disclosure items, when taken together and considered against the background of the

transaction, clearly demonstrate that the defendants have not met their disclosure

obligations under Delaware law.”77 Defendants’ arguments do not disturb that

conclusion.

Those material inadequacies are sufficient for Count I to state a claim.

Furthermore, those inadequacies mandate denying the Motion on Count II because

“actionable coercion may inhere in either the disclosures or in the terms of the offer

itself.”78 Despite Defendants’ contentions that they prudently and cautiously made

disclosures in the OTP, reading those disclosures collectively under the

circumstances alleged, they were designed to induce stockholders to tender.79 Those

disclosures rendered the 2017 Self-Tender “voluntary in appearance and form but

involuntary as a matter of reality and substance.”80 Accordingly, the OTP’s

(Del. 2006)). Plaintiff has pled that further information about the $20 million cash injection would have altered the total mix of information available in deciding whether to tender. Ultimately, under the alleged circumstances, I follow Eisenberg’s mandate holding Defendants to their more exacting duty of disclosure that required them to disclose all facts necessary for the stockholder to understand the $1.35 price and the 2017 Self-Tender’s purpose, including information about the Appraisal and the one-time, $20 million payment. 76 Eisenberg, 537 A.2d at 1058 (citing Joseph, 482 A.2d at 343). 77 Id. (citing Joseph, 482 A.2d at 343). 78 Id. at 1056 n.7. 79 Id. at 1062. 80 Id. at 1056.

31 materially incomplete disclosures mandate that I deny the Motion to dismiss Counts

I and II with respect to the Individual Defendants.

B. Plaintiff Has Pled The 2017 Self-Tender Was Structurally Coercive. Although Defendants’ disclosure deficiencies are sufficient to state a claim

for a coercive self-tender, Plaintiff has also stated a coercion claim by alleging that

2017 Self-Tender was structurally coercive. The Court has found actionable

coercion where the plaintiff “is forced into a choice between a new position and a

compromised position,”81 and where, under the circumstances, stockholders may

have perceived, “not unreasonably, that unless they tender, they may not realize any

return on or value for their investment in the foreseeable future.”82

As alleged, four aspects of the 2017 Self-Tender’ terms and circumstances

contributed to Plaintiff’s reasonable belief that he would receive little or no return

on his LRN investment unless he tendered, ultimately forcing Plaintiff to choose

between being cashed out at a low price or remaining a stockholder in a controlled

company with a troubled transactional history and bleak prospects for a future

liquidity event.83

81 Gradient OC Master, Ltd., 930 A.2d at 119 (internal quotation marks omitted) (quoting In re Gen. Motors Class H S’holders Litig., 734 A.2d at 621). 82 Eisenberg, 537 A.2d at 1061. 83 See id.

32 First, Plaintiff has alleged that the Company’s dealings with its stockholders

preceding the 2017 Self-Tender, including its history of executing transactions with

inadequate disclosures at arbitrary and declining prices, rendered the 2017 Self-

Tender coercive. LRN is a private company, so there was no market-based exit for

stockholders or market price to test the offer price’s adequacy. The Company had

not held stockholder meetings to give stockholders a vote on corporate matters,

including director elections and certificate amendments; provided only limited and

stale financial information; and failed to provide notice of potentially conflicted

transactions. In this context, the Company also repeatedly granted cheap options

and repurchased shares at arbitrary and declining prices, despite improving

performance. It is reasonably conceivable that stockholders were “coerced into

accepting the unfair $1.35 per share because of Defendants’ prior conduct of offering

less and less in tender offers while having no basis for the prices.”84

Second, the OTP framed the 2017 Self-Tender as the last opportunity for

stockholders to avoid a total loss on their investment. Defendants presented the 2017

Self-Tender as a fleeting liquidity event, made possible by an unexplained $20

million cash injection outside the ordinary course. The OTP warned stockholders

there was no market for LRN stock and that the 2017 Self-Tender may provide the

only exit for some time. And the OTP warned stockholders that the post-close

84 Compl. ¶ 3.

33 controller, directors, and officers would not hesitate to pursue their own interests in

the future, even if they diverged from the stockholders’ interests. Defendants’

disclosure was consistent with the Company’s history of entering transactions in an

effort to increase the Individual Defendants’ equity stake over time. In view of

LRN’s historic transactions, lack of a market for LRN stock, and the OTP’s

statement that stockholders might “never receive cash or other payment for your

Common Stock if you do not take the Offer,”85 it is reasonably conceivable that LRN

stockholders tendered to achieve a measure of liquidity with respect to their

investment, even at an inadequate price. As alleged, LRN stockholders were

wrongfully coerced to tender for reasons unrelated to the economic merits of the

transaction.

Third, the Individual Defendants structured the 2017 Self-Tender so that the

shares that did not tender would be worth less or exposed to greater risk. 86 This

Court has found wrongful coercion in such cases.87 Defendants disclosed that, after

the 2017 Self-Tender, Seidman would have near total control over LRN and that the

interests of LRN’s directors and officers “may lead them to . . . oppose or support

85 Id. ¶ 24. 86 See, e.g., Gradient OC Master, Ltd., 930 A.2d at 119, 121, 126; AC Acqs. Corp. v. Anderson, Clayton & Co., 519 A.2d 103, 113–14 (Del. Ch. 1986); Eisenberg, 537 A.2d at 1061–62; Kahn, 1985 WL 4449, at *3–4. 87 See, e.g., Gradient OC Master, Ltd., 930 A.2d at 119, 121, 126; AC Acqs. Corp., 519 A.2d at 113–14; Eisenberg, 537 A.2d at 1061–62; Kahn, 1985 WL 4449, at *3–4.

34 significant corporate transactions when these transactions further their interests as

incumbent officers or directors, even if these interests diverge from their interests as

stockholders per se and thus from the interests of other stockholders.”88 This forced

stockholders to face a coercive choice:89 either tender at an unexplained price, or

risk retaining their interest in a company controlled by a self-interested fiduciary.

Finally, Plaintiff has alleged that the 2017 Self-Tender’s proration plan was

coercive under the circumstances. The OTP provided for proration of repurchased

shares if more than 7,407,407 shares were tendered. Facing proration, LRN

stockholders tendered more shares in order to receive the greatest possible return in

what Defendants represented as a fleeting, one-time liquidity event: the 2017 Self-

Tender was oversubscribed. The board did not prorate and instead accepted all

9,092,278 tendered shares. Defendants disclosed their right to do so; the OTP stated

that LRN reserved the right to purchase a greater number of shares. While proration

of this kind may be a valid exercise of business judgment in ordinary circumstances,

88 Compl. ¶ 36. 89 See Gradient OC Master, Ltd., 930 A.2d at 119 (“Keeping the shareholders in the ‘same’ position, then, does not require an ‘identical’ position, economic or otherwise. Instead, a shareholder is actionably coerced when he is forced into ‘a choice between a new position and a compromised position’ for reasons other than those related to the economic merits of the decision. (quoting In re Gen. Motors Class H S’holders Litig., 734 A.2d at 621)); see also AC Acqs. Corp., 519 A.2d at 114; Eisenberg, 537 A.2d at 1061–62.

35 Plaintiff’s allegations render the 2017 Self-Tender’s proration term suspicious.90 By

choosing not to prorate, Defendants were able to buy out a greater percentage of

LRN’s outstanding shares, bolstering Seidman’s control and increasing the

Individual Defendants’ equity in the Company. Under the totality of circumstances

alleged, it is reasonably conceivable LRN’s intended proration coerced stockholders

to tender more shares than they otherwise would have because proration could

reduce the number of shares actually repurchased.91

The 2017 Self-Tender allowed Seidman to extract control for himself;

subjected non-tendering stockholders to the risk of becoming minority stockholders

under Seidman, who disclosed his and his fellow fiduciaries’ divergent interests;

subjected stockholders to the risk that any future liquidity opportunity would be

worse, as supported by LRN’s history of similar transactions, or perhaps even

nonexistent; and squeezed more shares out of each tendering stockholder by

invoking proration but accepting all tendered shares. Given those circumstances,

LRN stockholders may have perceived, not unreasonably, that unless they tendered,

they would not realize any return on or value for their investment in the foreseeable

future. “In that sense the offer does have coercive aspects. And the coercion may

90 See Eisenberg, 537 A.2d at 1061 (“If these were the only relevant circumstances (and if proper disclosure was made of all material facts), the Court would have difficulty concluding, at least on this preliminary record, that the Offer is inequitably coercive.”). 91 See id. at 1056 (noting that a tender offer may be “voluntary in appearance and form but involuntary as a matter of reality and substance”).

36 be attributed, at least to some extent, to acts of the directors . . . .” 92 Plaintiff has

adequately pled that the 2017 Self-Tender was structurally coercive, and the Motion

to dismiss the Individual Defendants is denied with respect to Count II.93

C. The 2017 Self-Tender Is Subject To Entire Fairness Review; Plaintiff Has Pled Non-Exculpated Claims. In this context, there are two clear avenues to trigger entire fairness review:

pleading that the defendant directors structured a coercive self-tender, or pleading

that the defendant directors were interested in the transaction.94 Defendants seek to

avoid such review by contending Plaintiff has not shown the 2017 Self-Tender was

involuntary and, therefore, Defendants owed no duty of fairness. As explained,

Plaintiff has pled the 2017 Self-Tender was coercive; therefore, it will be reviewed

under entire fairness.95

The Court also applies entire fairness if the plaintiff adequately pleads that the

directors approved or structured the tender offer in a way that puts their own interests

above those of the stockholders.96 In Feldman v. Cutaia, this Court refused to

dismiss an entire fairness challenge to a self-tender offer in which the directors were

92 Id. at 1061. 93 These grounds are sufficient to deny the Motion to dismiss Count II. Other grounds may exist to support a finding of wrongful structural coercion, but I need not reach those grounds today. 94 See Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at *6. 95 See Pfeffer, 2008 WL 308450, at *7. 96 See id.; Feldman, 2006 WL 920420, at *6.

37 alleged to have received “a financial benefit not equally shared by the company’s

stockholders.”97 There, the self-tender’s structure was suspect when coupled with

the other circumstances surrounding the transaction, “suggest[ing] that the

individual director defendants placed their own interests above those of the

[company’s] stockholders.”98

The same holds true here. Plaintiff has alleged that the Individual Defendants

wanted to increase their personal benefit from selling the Company via a series of

steps that included buying out LRN stockholders at a low price. The Individual

Defendants’ spring-loaded 2017 Options preceded the 2017 Self-Tender. At the

time of the 2017 Self-Tender, the Individual Directors “own[ed] a significant

percentage of [LRN’s] voting stock.”99 They reduced the total outstanding shares

through the 2017 Self-Tender, allegedly knowing that a strategic process was

underway in which LRN either received or expected to receive offers above $1.35

per share. To receive “a disproportionate benefit from the [Leeds Transaction] than

97 2006 WL 920420, at *6. The complaint in Feldman included allegations that the pricing of the exchange offer was “severely inflated” ($10 per share for a stock that never traded above $4) to allow the directors, holding 89% of the company’s otherwise underwater options and warrants, to improperly enrich themselves. Id. at *4. These allegations led the court to conclude that the complaint adequately alleged that the individual director defendants were interested in the transaction. Id. at *6. 98 Id. 99 D.I. 12, Ex. 1 at 29.

38 they would otherwise have been entitled to,”100 the Individual Defendants structured

the 2017 Self-Tender to eliminate 23% of outstanding shares at a low price, on

coercive terms, and with misleading disclosures, before selling their shares at $7.00

in the Merger. By approving the 2017 Self-Tender, the Individual Defendants

increased their equity stake in LRN, and thereby received millions of additional

consideration in the Merger that otherwise would have gone to LRN stockholders.101

Plaintiff has adequately alleged that the Individual Defendants were interested in the

2017 Self-Tender, such that it should be reviewed under entire fairness.102

Further, the 2017 Self-Tender eliminated enough shares to gift Seidman free

control. Seidman allegedly approved the 2017 Self-Tender to bolster his control

over LRN, which he then wielded by approving the Merger, and related personal

benefits, by written consent. These benefits included an asset spinoff, retaining his

position as chairman, and securing two additional seats on the post-close board. It

is reasonably conceivable that granting Seidman control also ensured he had the sole

power to keep both Feldman and Lederhausen on the board; as alleged, Seidman

100 Feldman, 2006 WL 920420, at *6. 101 Id. The exact amount of their gain must be determined by discovery because the Individual Defendants withheld information about their stock holdings. 102 Eisenberg, 537 A.2d at 1060–61. Plaintiff also alleges that the Individual Defendants were interested in the 2017 Self-Tender because they attempted to purchase a personal release of potential fiduciary duty claims in the letter of transmittal. Because Plaintiff has adequately alleged other grounds to support an inference that the Individual Defendants were interested in the 2017 Self-Tender, I need not reach this issue today.

39 planned to retain Lederhausen. Feldman and Lederhausen approved the 2017 Self-

Tender and used LRN’s money to buy Seidman control.103 These circumstances,

together with the additional Merger compensation the 2017 Self-Tender enabled

each Individual Defendant to receive, support a claim that the Individual Defendants

put their own interests above the stockholders’ in approving and structuring the 2017

Self-Tender, such that the 2017 Self-Tender is subject to entire fairness.104

Having triggered entire fairness, Plaintiff has adequately alleged that the 2017

Self-Tender was the product of an unfair process and resulted in an unfair price. As

evidence of unfair process, Plaintiff points to the OTP disclosures, which as

discussed, were materially misleading, false, and incomplete. The Individual

Defendants failed to adequately disclose the extent of their interest in the transaction

and failed to enact safeguards to ensure the 2017 Self-Tender was otherwise fair to

LRN stockholders.105 Additionally, the timing was unfair as it was initiated just as

LRN planned an undisclosed strategic sale process for a higher price, and before

103 See In re Limited, Inc., 2002 WL 537692, at *7 (holding actions of corporation’s directors in unanimously approving a self-tender offer, which allegedly benefitted corporation’s chief executive officer without a corresponding benefit to corporation, gave rise to cause of action by stockholders for breach of duty of loyalty, where directors were either interested or lacked independence). 104 Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at *6; In re Limited, Inc., 2002 WL 537692, at *7. 105 See, e.g., Feldman, 2006 WL 920420, at *8; Eisenberg, 537 A.2d at 1060–61.

40 LRN finalized its financial statements for 2016. Plaintiff has alleged the Individual

Defendants engaged in an unfair process.

Plaintiff has also alleged that the Individual Defendants launched the 2017

Self-Tender at an unfair price. In a non-coercive tender offer, the company has no

duty to pay fair price.106 But where the Court finds coercion or director

interestedness, as alleged here, the Court must look to the adequacy of the price.107

Plaintiff has pled $1.25 was unfair. The inadequacy of this price is supported by

LRN’s history of arbitrary pricing; its foundation in the questionable Appraisal and

incomplete and outdated financials; and the Merger’s price of $7.00 per share.

Further, the Individual Defendants failed to retain an advisor or obtain a fairness

opinion or independent valuation for the Self-Tender. Defendants’ failure to

adequately disclose why or how they chose the tender offer price suggests they had

an improper motive to set the price below fair value.108

As alleged, the Individual Defendants’ choice to structure the 2017 Self-

Tender for their benefit amounts to a non-exculpated breach of the duty of loyalty

106 See, e.g., Solomon, 672 A.2d at 39–40. 107 See, e.g., id. at 39–40; Pfeffer, 2008 WL 308450, at *7; Feldman, 2006 WL 920420, at *6. 108 See Feldman, 2006 WL 920420, at *6. While Defendants argue that Plaintiff’s claim must be dismissed because the OTP stated that $1.35 was not a determination of fair value, D.I. 12 at 42–44, that is insufficient to overcome the allegations that the Individual Defendants were conflicted and that the disclosure that $1.35 was a “reasonable and appropriate” price was misleading and incomplete.

41 that is subject to entire fairness review.109 Contrary to Defendants’ augment,110 an

exculpatory provision pursuant to Section 102(b)(7) cannot be grounds for dismissal

at the pleading stage.111 The Motion to dismiss the Individual Defendants is denied

with respect to Count III.112

D. LRN Must Be Dismissed.

Plaintiff does not bring Counts I, II, and III against LRN. Plaintiff brings

those claims against the Individual Defendants only. Where no claim is advanced

109 See Feldman, 2006 WL 920420, at *6; In re Limited, Inc., 2002 WL 537692, at *7, *10 n.65. 110 D.I. 12 at 44 (citing D.I. 12, Ex. 7 at 3, and then citing In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d 1173, 1179–80 (Del. 2015), and Emerald P’rs v. Berlin, 787 A.2d 85, 91 & n.35 (Del. 2001)). 111 See In re Limited, Inc., 2002 WL 537692, at *7 (holding that, where the plaintiff alleged interestedness, directors’ approval of self-tender offer gave rise to cause of action for breach of duty of loyalty); id. at *10 n.65 (“Defendants . . . have also sought to invoke the exculpatory charter provision adopted under the authority of 8 Del. C. § 102(b)(7). To the extent that a duty of loyalty claim is implicated, that provision, of course, is inapplicable. Malpiede v. Townson, 780 A.2d 1075, 1094–95 (Del. 2001). In addition, as to those defendants about whom there is no question as to their disinterestedness and independence, I am reluctant to evaluate the § 102(b)(7) defense at this stage.”). 112 See Orman v. Cullen, 794 A.2d 5, 20 n.36 (Del. Ch. 2002) (ruling that if entire fairness applies to a transaction, that conclusion “normally will preclude dismissal of a complaint on a Rule 12(b)(6) motion to dismiss” and that “[a] determination of whether the defendant has met [the entire fairness] burden will normally be impossible by examining only the documents the Court is free to consider on a motion to dismiss”).

42 against a named defendant, dismissal is required.113 Plaintiff does not seek any relief

from LRN.114 Accordingly, the Motion is granted on all counts with respect to LRN.

III. CONCLUSION

For the foregoing reasons, the Motion is DENIED with respect to the

Individual Defendants and GRANTED with respect to LRN. The parties shall

submit an order implementing this decision.

113 See Lechliter v. Del. Dep’t of Nat. Res. Div. of Parks & Recreation, 2015 WL 7720277, at *2 n.17 (Del. Ch. Nov. 30, 2015). 114 See Compl. at 31–32 (“Prayer for Relief”).