Zutrau v. Jansing and ICE Systems, Inc.
This text of Zutrau v. Jansing and ICE Systems, Inc. (Zutrau v. Jansing and ICE Systems, Inc.) is published on Counsel Stack Legal Research, covering Court of Chancery of Delaware primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LEILANI ZUTRAU individually and on behalf of ICE SYSTEMS, INC.,
Plaintiff,
v. C.A. No. 7457-VCP
JOHN C. JANSING,
Defendant,
and
ICE SYSTEMS, INC.
Nominal Defendant.
OPINION
Submitted: November 21, 2013 Decided: July 31, 2014
Stephen B. Brauerman, Esq., Vanessa R. Tiradentes, Esq., Sara E. Bussiere, Esq., BAYARD, P.A., Wilmington, Delaware; Attorneys for Plaintiff Leilani Zutrau.
Kurt M. Heyman, Esq., Melissa N. Donimirski, Esq., PROCTOR HEYMAN LLP, Wilmington, Delaware; Attorneys for Defendant John C. Jansing.
PARSONS, Vice Chancellor. This is an action by a former employee and minority stockholder of a private
Delaware corporation specializing in proxy servicing against the president, sole director,
and majority stockholder of that corporation. The defendant hired the plaintiff to start
working for the company as a controller sometime in 2000 or 2001 and, in 2004, granted
the plaintiff a minority equity interest in the company and promoted her to treasurer and,
later, executive vice president. Beginning in 2004, the plaintiff and defendant were the
sole stockholders of the company, which earns an average of $3 million in revenues per
year. Due to differences in management philosophies, among other factors, the defendant
fired the plaintiff in 2007.
In 2009, the plaintiff commenced litigation against the defendant in the state of
New York, asserting direct claims challenging her termination and derivative claims
challenging numerous actions taken by the defendant in the course of running the
company. In 2011, the New York court dismissed the plaintiff‘s derivative claims
without prejudice, holding that they would need to be brought in a separate action.
In 2012, the plaintiff commenced this action, effectively reasserting her derivative
claims. Shortly thereafter, the defendant executed a reverse stock split in which he
cashed out the plaintiff‘s shares. The plaintiff subsequently amended her complaint to
add claims challenging the propriety of the reverse stock split, including direct claims for
breach of fiduciary duty, violation of Section 155 of the Delaware General Corporation
Law (―DGCL‖), and equitable fraud.
Although the plaintiff is no longer a stockholder of the company, the defendant
has expressly waived any objection to the plaintiff litigating her derivative claims for
1 purposes of valuing her interest in the company at the time of the reverse stock split. Any
derivative claims that were outstanding at the time of the reverse stock split, therefore,
may be treated as corporate assets that should be accounted for when valuing the
company.
This Opinion constitutes my post-trial findings of fact and conclusions of law in
this matter. In terms of the merits, I begin my analysis with the plaintiff‘s claim for
equitable fraud based on her allegation that the defendant promised her that she would
remain a stockholder of the company and benefit from its success until it could be sold, at
which time she would share pro rata in the resulting proceeds. Plaintiff failed to
demonstrate a false representation in connection with that claim, however, because she
adduced no evidence that the defendant‘s alleged promises were false when made. She
therefore failed to prove a claim for equitable fraud.
The plaintiff‘s derivative claims seemingly challenge virtually every decision the
defendant made and actions he took, no matter how picayune, in running the company
after the plaintiff‘s termination. The plaintiff failed to prove many of her claims, but did
demonstrate that the defendant breached his fiduciary duties to the company by paying
himself excessive compensation, by charging certain personal expenses to his company-
issued credit card, and by causing the company to pay interest on sums that he withdrew
from its credit line for his own purposes.
I then turn to the plaintiff‘s claims that the defendant breached his fiduciary duties
and violated Section 155 of the DGCL by effecting the reverse stock split. Initially, I
reject the plaintiff‘s contention that the defendant effected the reverse stock split for the
2 purpose of depriving her of derivative standing based on a failure of proof. I do hold,
however, that the reverse stock split was implemented at an unfair price, in breach of
Jansing‘s fiduciary duties and Section 155. I reach this conclusion because the valuation
on which the defendant relied to value the plaintiff‘s shares did not take into account his
pre-existing breaches of fiduciary duty and their impact on the fair value of the company.
As a remedy, I award the plaintiff the fair value of her shares.
In that regard, I determine that two adjustments must be made to the valuation that
the defendant used to estimate properly the company‘s fair value. First, the monetary
value of the meritorious derivative claims that the company had against the defendant at
the time of the reverse stock split should be treated as a non-operating corporate asset and
added to the value of the company. Second, because the valuation relied on a discounted
cash flow analysis, which, in turn, used the company‘s historical performance to project
its future performance, a normalizing adjustment is required to the historical data to
remove expenses incurred as a result of the defendant‘s excessive compensation during
the relevant period, so that the future projections are not artificially suppressed as a result
of that self dealing.
Finally, I consider a counterclaim asserted by the defendant in this action. The
court presiding over the New York litigation ultimately issued a post-trial opinion in
which it awarded the plaintiff $60,307 for the amount remaining in her capital account at
the company. The defendant argues that this award should be setoff from any amount he
is held to owe the plaintiff in connection with the reverse stock split, because the baseline
valuation of the plaintiff‘s shares for purposes of the reverse stock split already included
3 the value remaining in her capital account. I reject this counterclaim as barred by
collateral estoppel, because the same factual argument was made by the defendant to the
New York court and ultimately was rejected by that court.
I. BACKGROUND1
A. The Parties
Nominal Defendant, ICE Systems, Inc. (―ICE‖ or the ―Company‖), is a Delaware
corporation that specializes in proxy services. It is one of only two companies in the
United States that provides substantive third party proxy processing to trust institutions,
such as banks, that hold shares on behalf of beneficial owners.
Defendant, John Jansing, is the President and sole director of ICE. Before the
reverse stock split that is contested by the plaintiff in this action (the ―Reverse Stock
Split‖), Jansing was the majority stockholder of ICE, holding 78% of the shares of the
Company. He now purports to be ICE‘s sole stockholder.
Plaintiff, Leilani Zutrau, is a former ICE employee. Zutrau served as ICE‘s
controller and, at various points during her tenure with the Company, held the position of
ICE‘s Treasurer and oversaw the Company‘s sales and marketing functions. Before the
Reverse Stock Split, Zutrau was a minority stockholder of ICE, holding 22% of the
shares in the Company.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
LEILANI ZUTRAU individually and on behalf of ICE SYSTEMS, INC.,
Plaintiff,
v. C.A. No. 7457-VCP
JOHN C. JANSING,
Defendant,
and
ICE SYSTEMS, INC.
Nominal Defendant.
OPINION
Submitted: November 21, 2013 Decided: July 31, 2014
Stephen B. Brauerman, Esq., Vanessa R. Tiradentes, Esq., Sara E. Bussiere, Esq., BAYARD, P.A., Wilmington, Delaware; Attorneys for Plaintiff Leilani Zutrau.
Kurt M. Heyman, Esq., Melissa N. Donimirski, Esq., PROCTOR HEYMAN LLP, Wilmington, Delaware; Attorneys for Defendant John C. Jansing.
PARSONS, Vice Chancellor. This is an action by a former employee and minority stockholder of a private
Delaware corporation specializing in proxy servicing against the president, sole director,
and majority stockholder of that corporation. The defendant hired the plaintiff to start
working for the company as a controller sometime in 2000 or 2001 and, in 2004, granted
the plaintiff a minority equity interest in the company and promoted her to treasurer and,
later, executive vice president. Beginning in 2004, the plaintiff and defendant were the
sole stockholders of the company, which earns an average of $3 million in revenues per
year. Due to differences in management philosophies, among other factors, the defendant
fired the plaintiff in 2007.
In 2009, the plaintiff commenced litigation against the defendant in the state of
New York, asserting direct claims challenging her termination and derivative claims
challenging numerous actions taken by the defendant in the course of running the
company. In 2011, the New York court dismissed the plaintiff‘s derivative claims
without prejudice, holding that they would need to be brought in a separate action.
In 2012, the plaintiff commenced this action, effectively reasserting her derivative
claims. Shortly thereafter, the defendant executed a reverse stock split in which he
cashed out the plaintiff‘s shares. The plaintiff subsequently amended her complaint to
add claims challenging the propriety of the reverse stock split, including direct claims for
breach of fiduciary duty, violation of Section 155 of the Delaware General Corporation
Law (―DGCL‖), and equitable fraud.
Although the plaintiff is no longer a stockholder of the company, the defendant
has expressly waived any objection to the plaintiff litigating her derivative claims for
1 purposes of valuing her interest in the company at the time of the reverse stock split. Any
derivative claims that were outstanding at the time of the reverse stock split, therefore,
may be treated as corporate assets that should be accounted for when valuing the
company.
This Opinion constitutes my post-trial findings of fact and conclusions of law in
this matter. In terms of the merits, I begin my analysis with the plaintiff‘s claim for
equitable fraud based on her allegation that the defendant promised her that she would
remain a stockholder of the company and benefit from its success until it could be sold, at
which time she would share pro rata in the resulting proceeds. Plaintiff failed to
demonstrate a false representation in connection with that claim, however, because she
adduced no evidence that the defendant‘s alleged promises were false when made. She
therefore failed to prove a claim for equitable fraud.
The plaintiff‘s derivative claims seemingly challenge virtually every decision the
defendant made and actions he took, no matter how picayune, in running the company
after the plaintiff‘s termination. The plaintiff failed to prove many of her claims, but did
demonstrate that the defendant breached his fiduciary duties to the company by paying
himself excessive compensation, by charging certain personal expenses to his company-
issued credit card, and by causing the company to pay interest on sums that he withdrew
from its credit line for his own purposes.
I then turn to the plaintiff‘s claims that the defendant breached his fiduciary duties
and violated Section 155 of the DGCL by effecting the reverse stock split. Initially, I
reject the plaintiff‘s contention that the defendant effected the reverse stock split for the
2 purpose of depriving her of derivative standing based on a failure of proof. I do hold,
however, that the reverse stock split was implemented at an unfair price, in breach of
Jansing‘s fiduciary duties and Section 155. I reach this conclusion because the valuation
on which the defendant relied to value the plaintiff‘s shares did not take into account his
pre-existing breaches of fiduciary duty and their impact on the fair value of the company.
As a remedy, I award the plaintiff the fair value of her shares.
In that regard, I determine that two adjustments must be made to the valuation that
the defendant used to estimate properly the company‘s fair value. First, the monetary
value of the meritorious derivative claims that the company had against the defendant at
the time of the reverse stock split should be treated as a non-operating corporate asset and
added to the value of the company. Second, because the valuation relied on a discounted
cash flow analysis, which, in turn, used the company‘s historical performance to project
its future performance, a normalizing adjustment is required to the historical data to
remove expenses incurred as a result of the defendant‘s excessive compensation during
the relevant period, so that the future projections are not artificially suppressed as a result
of that self dealing.
Finally, I consider a counterclaim asserted by the defendant in this action. The
court presiding over the New York litigation ultimately issued a post-trial opinion in
which it awarded the plaintiff $60,307 for the amount remaining in her capital account at
the company. The defendant argues that this award should be setoff from any amount he
is held to owe the plaintiff in connection with the reverse stock split, because the baseline
valuation of the plaintiff‘s shares for purposes of the reverse stock split already included
3 the value remaining in her capital account. I reject this counterclaim as barred by
collateral estoppel, because the same factual argument was made by the defendant to the
New York court and ultimately was rejected by that court.
I. BACKGROUND1
A. The Parties
Nominal Defendant, ICE Systems, Inc. (―ICE‖ or the ―Company‖), is a Delaware
corporation that specializes in proxy services. It is one of only two companies in the
United States that provides substantive third party proxy processing to trust institutions,
such as banks, that hold shares on behalf of beneficial owners.
Defendant, John Jansing, is the President and sole director of ICE. Before the
reverse stock split that is contested by the plaintiff in this action (the ―Reverse Stock
Split‖), Jansing was the majority stockholder of ICE, holding 78% of the shares of the
Company. He now purports to be ICE‘s sole stockholder.
Plaintiff, Leilani Zutrau, is a former ICE employee. Zutrau served as ICE‘s
controller and, at various points during her tenure with the Company, held the position of
ICE‘s Treasurer and oversaw the Company‘s sales and marketing functions. Before the
Reverse Stock Split, Zutrau was a minority stockholder of ICE, holding 22% of the
shares in the Company.
1 Unless otherwise noted, this background is drawn from the stipulated facts section of the parties‘ First Amended Pre-Trial Stipulation and Order (D.I. No. 177) and from alleged facts admitted in Jansing‘s Answer to the Third Amended and Supplemental Verified Complaint (D.I. No. 129).
4 B. Facts
1. History and business of ICE
ICE was formed as an S corporation under the laws of New York in 1990. In its
early years, ICE‘s principal business activity was providing ballot processing services to
trade associations, unions, and public advocacy groups. Jansing acquired an interest in
ICE in 1993, becoming one of four equal stockholders in the Company. Although each
of the four stockholders initially were employed by ICE, the three stockholders other than
Jansing left their positions with the Company in the mid-to-late nineties.2 In that same
time frame, ICE ceased providing ballot processing services, instead becoming active in
the proxy services business. Consistent with that change in its business focus, ICE began
operating under the name ―Proxytrust.‖3
Since entering the proxy services segment, ICE‘s principal business activity has
been providing proxy processing services to trust institutions, typically banks, that hold
shares on behalf of individual beneficial owners.4 ICE serves as an outsourcing solution
for these institutions to print, distribute, and tabulate proxies in conjunction with
corporate votes initiated by the issuing corporations, or issuers, for any shares that the
bank is holding in trust.5 Thus, ICE serves as an intermediary between beneficial owners
2 Tr. 445-46 (Jansing). References in this form are to the trial transcript. Where the identity of the testifying witness is not apparent from context, it is indicated parenthetically after the page citation. 3 Id. at 446. 4 Tr. 6-7 (Zutrau); Tr. 448 (Jansing). 5 Tr. 448 (Jansing).
5 of shares and publicly traded corporations, but its direct clients are the trust institutions or
banks utilized by those beneficial owners. As of 2012, ICE was providing third-party
proxy processing to 176 client banks in the United States. Those clients collectively
represented over 850,000 beneficial owners.6 In any given year, ICE generally processes
proxies from over 5,000 corporations.7
ICE communicates with its bank and trust clients through ―data feeds‖ established
with several trust system providers. A ―data feed‖ allows for a two-way transfer of
electronic data between ICE and a trust system provider.8 Trust system providers process
data for banks, including beneficial share owner data that ICE needs to perform the work
that it is contracted to do.9 The data feeds are the lifeline of the Company. To serve its
clients and process the data obtained from those feeds, ICE has developed proprietary
information processing software.10 ICE incurs costs to establish and maintain data feeds,
but those feeds are of no use to ICE if it does not have bank or trust clients using the
particular data feed.11
6 Id. at 448-49. 7 Id. 8 Id. at 460. 9 Id. at 460-62. 10 Id. at 457-58. 11 Id. at 462-64.
6 Although ICE‘s direct clients are trust institutions, issuers are required under
securities regulations to reimburse those institutions for the costs of distributing proxies.12
Thus, ICE ultimately is paid by the issuers. Because of this arrangement, many of the
fees that ICE can charge its clients are regulated by the New York Stock Exchange
(―NYSE‖) with oversight from the Securities Exchange Commission (―SEC‖).13
ICE is one of only two companies that provide third-party proxy processing to
trust institutions holding shares on behalf of beneficial owners. The other company
operating in that space, and ICE‘s only direct competitor, is Broadridge Financial
Solutions, Inc. (―Broadridge‖). 14 Broadridge, however, dominates the market. It is much
larger than ICE, controls over 99% of the market in which ICE operates, and is an
aggressive competitor.15 Among other things, Broadridge provides a wider array of
services than ICE does, including services outside of the proxy services sector. In
addition, Broadridge offers various services to its clients for free in order to maintain or
attract their proxy services business.16 This has caused ICE to purchase similar services
from third parties and offer them to its clients for free, including, for example, tax
reporting services from Commerce Clearing House (―CCH‖).17
12 Tr. 82-83 (Zutrau). 13 Tr. 454-55 (Jansing). 14 Tr. 6-7 (Zutrau). 15 Id.; Tr. 449-50 (Jansing). 16 Tr. 449-50 (Jansing). 17 Id. at 452-53.
7 The proxy services market is highly saturated. Thus, there are very few new or
unclaimed clients in the market. That means ICE and Broadridge effectively are engaged
in a ―zero sum game.‖18
2. Zutrau becomes involved with ICE
By 2000, Jansing was the President and sole Director of ICE. In its first ten years
of operations, the Company had accumulated over $1 million in debt, which Jansing had
guaranteed personally. In 1999, Jansing contracted to sell ICE and its assets to Anne O.
Faulk and Boardvote.com, Inc. for $1,425,000. The transaction never closed, however,
and instead devolved into litigation.
Following the failed transaction, Jansing retained an individual named Morton
Berger as a consultant to help organize the Company and assist with various finance,
human resource, and general and administrative tasks.19 In May of 2000, Berger enlisted
Zutrau to help with some of the financial aspects of his consulting work for ICE.20
Berger and Zutrau were acquainted because Berger served as a director of a company for
which Zutrau previously had worked.21 While she was working at ICE in a consultative
capacity, Zutrau purportedly caught Berger engaging in certain financial improprieties,
18 Id. at 456. 19 Tr. 467 (Jansing). 20 Tr. 9-10 (Zutrau). 21 Id. at 9. 8 including improperly charging expenses to ICE. Subsequently, Jansing refused to do
business with Berger.22
At ICE, Zutrau was tasked, among other things, with organizing financial records
and managing the Company‘s accounts payable and accounts receivable. 23 She also had
an assignment pertaining to SunGard, a trust systems provider that was ICE‘s largest
business partner and source for client data. In June 2000, Sungard threatened to cancel a
joint venture contract with ICE that involved revenue sharing between ICE and SunGard.
Sungard had threatened cancellation based on ICE‘s delinquency in making the payments
called for under the agreement.24 Zutrau reviewed ICE‘s books and worked with Sungard
to resolve those issues. In the course of doing so, Zutrau discovered that ICE actually
had overpaid SunGard in the past.25 Based on Zutrau‘s discovery, SunGard waived its
claim against ICE for delinquent payments.26
Pleased with the work that Zutrau had done, Jansing made her a full-time job
offer, essentially to serve as ICE‘s controller, which she accepted.27 Zutrau formally was
given the title ―controller‖ sometime in 2002 or 2003.28
22 Tr. 469 (Jansing). 23 Tr. 9-10 (Zutrau). 24 Id. at 10. 25 Id. at 151-52. 26 Tr. 475-76 (Jansing). 27 Tr. 19 (Zutrau); Tr. 469-70 (Jansing). 28 Tr. 134 (Zutrau).
9 According to Zutrau, in the spring of 2001, after she had become a full-time ICE
employee, Jansing also offered her equity in the Company. 29 Specifically, Zutrau alleges
that Jansing told her that he needed the help of someone with her accounting and
financial skills to turn the Company around and promised her an equity stake in ICE if
she would commit herself to rehabilitating the Company until it became profitable and
could be sold.30 Jansing purportedly further represented to Zutrau that she would share in
the proceeds of the eventual sale of the Company in accordance with the percentage of
her equity ownership and that, until such a sale occurred, they both would benefit from
their efforts in line with the success of the Company.31
Jansing acknowledges having conversations with Zutrau about the possibility of
her obtaining equity in the Company, but maintains that they were informal and non-
specific. According to Jansing, Zutrau approached him about obtaining equity in the
Company.32 When she first broached the subject, he explained that granting her equity at
that time would be difficult because of the Company‘s three other stockholders.33
Jansing admits, however, that he thought Zutrau had done good work and told her that he
29 Id. at 17. 30 Id. at 18. 31 Id. 32 Tr. 477 (Jansing). 33 Id. 10 would consider her request, stating something along the lines of ―[i]f we can ever get
around to it, I‘ll see what I can do.‖34
After her initial discussion with Jansing about equity, Zutrau worked hard to
improve the operations of the Company. She continued to serve as its controller, in
which role she, among other things, maintained and improved ICE‘s financial and
accounting records, issued statements and invoices, and was responsible for the
Company‘s accounts payable and receivable.35 Before Zutrau started working at ICE, the
Company had no reliable accounting system to track and collect receivables. 36 Zutrau
researched software solutions to rectify that problem and discovered a software system
called Sage, which was capable of managing ICE‘s receivables and interfacing with the
Company‘s proprietary system. During Zutrau‘s employment at ICE, the Company
purchased and installed the Sage software system, which it still uses today. 37 Zutrau also
assisted in the Company‘s sales and marketing efforts by helping to produce professional
marketing materials and by enrolling the Company in a number of industry conferences
each year, some of which she attended personally. 38
34 Id. at 477-78. 35 Tr. at 19 (Zutrau). 36 Id. at 38-39. 37 Id. 38 Id. at 35-36 (Zutrau); Tr. 485–86 (Jansing).
11 In addition to her work efforts, Zutrau loaned money to ICE on a number of
occasions, even before she had acquired an equity interest.39 Around the time Zutrau
began working for ICE, the Company had maxed out its available credit lines. 40 Zutrau
then periodically and voluntarily would make unsecured, interest free loans to the
Company to help cover operating expenses. ICE repaid those loans when it had
sufficient funds available.41 In total, during her tenure at ICE, Zutrau loaned the
Company approximately $400,000,42 but all of those loans were repaid.43
In early 2003, Jansing had discussions with another ICE employee, Jeff Berg, the
Company‘s IT specialist, about the possibility of granting him equity. 44 Zutrau strongly
opposed that possibility and wrote a lengthy letter to Jansing in February 2003 expressing
her view that Berg was not as deserving as she was.45 In the letter, Zutrau stated that
Berg ―put[s] in less time than me, and hasn‘t yet made a commitment to work above and
39 Tr. 16-17 (Zutrau). 40 Id. at 16. 41 Id. at 16-17, 315; JX 309 at 535. 42 See JX 309. 43 Tr. 315 (Zutrau). 44 Tr. 478 (Jansing). 45 JX 533. At trial, Zutrau denied being opposed to Berg receiving equity in the Company. Tr. 166-67. The clear import of her letter to Jansing, however, belies her testimony in that regard. I also credit Jansing‘s testimony that Zutrau orally advised him of her opposition to Berg receiving stock. Tr. 478.
12 beyond the normal work responsibilities.‖46 The letter also noted that ―although [Zutrau]
gave without having a formal arrangement,‖ she had stuck to the parties‘ ―original
understanding‖ and had ―been working for equity of some sort.‖47 Ultimately, Berg
chose not to accept any equity in the Company, instead opting to receive a higher
salary.48
3. Zutrau becomes a stockholder of ICE
In late 2003, Zutrau followed up with Jansing about receiving stock in the
Company. Jansing responded that he would grant her equity, but that the other three
stockholders would need to be bought out for that to occur.49 Jansing then retained
corporate governance attorneys (―ICE‘s Counsel‖) on behalf of ICE to issue stock to
Zutrau, buy out the three non-participating stockholders, and reorganize ICE.
Because there were still other stockholders in addition to Jansing, and to legitimize
the transfer of stock to Zutrau, ICE‘s Counsel recommended that the Company adopt a
Stock Incentive Plan (the ―Plan‖) as a vehicle to grant Zutrau stock. The Plan was
implemented in December 2003.50 In April 2004, before any equity had been issued
under the Plan, ICE‘s Counsel prepared a Restricted Stock Agreement (―RSA‖) to
46 JX 533. 47 Id. 48 Tr. 478-79 (Jansing). 49 Tr. 22-23 (Zutrau). 50 JX 24.
13 formalize the terms of the stock issuance to Zutrau.51 Zutrau reviewed the RSA and
discussed its terms with ICE‘s Counsel before it was executed on April 23, 2004. 52
Pursuant to the RSA, Zutrau received 36 shares of common stock in ICE, which
fully vested on May 22, 2004. Among other things, the RSA contained an integration
clause, which stated that ―[t]his Agreement together with the Plan contain the entire
agreement and understanding of the parties relating to the subject matter hereof, and
supersede[s] all prior agreements, understandings, representations, warranties and
covenants of any kind between the parties with respect to this subject matter.‖53
On May 25, 2004, ICE was reorganized and reincorporated in Delaware, and the
original ICE Systems, Inc., the New York S corporation (―ICE NY‖), was dissolved. In
connection with the reorganization, the three non-participating stockholders were bought
out with funds lent to the Company by Zutrau.54 Zutrau‘s recently issued shares in ICE
NY were converted to a 22% equity stake in ICE, the newly formed Delaware S
corporation. Following the reorganization, Jansing owned the remaining 78% of ICE‘s
stock.
Around the time of the reorganization, Jansing reiterated his promise that,
together, he and Zutrau would improve ICE so that it could be sold and they could share
51 JX 472; Tr. 29-30 (Zutrau). 52 Tr. 29-30 (Zutrau). 53 JX 472 § 10. 54 Tr. 24 (Zutrau).
14 the resulting proceeds.55 Zutrau further alleges that Jansing told her at that time that he
did not want her to incur tax liabilities in connection with her equity ownership.56
4. ICE’s operations after Zutrau became a stockholder
After the reorganization and issuance of stock to Zutrau, Jansing remained ICE‘s
President and sole director.57 On August 4, 2004, Jansing executed a Unanimous Written
Consent (the ―Consent‖), as the sole director, that (1) abolished the Plan and (2) elected
Zutrau to serve as ICE‘s Treasurer. Zutrau‘s responsibilities as Treasurer were similar to
her responsibilities as ICE‘s controller and included overseeing ICE‘s books and records
and making sure that they were kept in order.58
Both before and after the reorganization, ICE operated on a fairly informal basis.
The Company had no written budget and did not have its books audited.59 ICE also had
no written policy regarding business or travel expenses,60 which Jansing and certain other
employees charged directly to Company credit cards.61 Instead, ICE had an informal
55 Id. at 24, 27, 30-31. 56 Id. at 24-25, 30-31. In an S corporation, by contrast to a C corporation, the stockholders, not the corporation itself, are liable for the taxes on the corporation‘s net earnings. 26 U.S.C.A. § 1363 (2005) (―The taxable income of an S corporation shall be computed in the same manner as in the case of an individual . . . .‖). 57 Tr. 481-82 (Jansing); JX 196 ¶ 2. 58 Tr. 135-36 (Zutrau). 59 Tr. 195-97 (Zutrau). 60 Id. at 192-93; Tr. 482 (Jansing). 61 Tr. 586-87 (Jansing).
15 policy that employees should be mindful of their expenditures and generally avoid
expensive meals and lodging.62 Zutrau typically reviewed business expenses charged by
Company employees as well as other payments made by the Company when she entered
them into ICE‘s accounting system.63 If Zutrau found any charges or payments that she
considered to be inappropriate, such as charges or payments for personal or non-business
expenses, she brought them to Jansing‘s attention.64 In that regard, during her tenure at
ICE, Zutrau prompted Jansing to reimburse ICE for a number of personal expenses he
had charged to his Company credit card.65 For his part, Jansing maintains that those
expenses were negligible and amounted to no more than a few thousand dollars.66
Similarly, ICE lacked a formal policy on compensation.67 Zutrau provided some
input on that topic,68 but Jansing made the ultimate determination regarding how much to
pay employees, including himself and Zutrau, both in salary and bonuses.69
After becoming a stockholder, Zutrau continued to make periodic loans to the
Company and, in addition, used her creditworthiness to benefit ICE on several occasions.
62 Tr. 192-93 (Zutrau); Tr. 482-83 (Jansing). 63 Tr. 37, 341 (Zutrau). 64 Id. at 37. 65 Id. at 37-38. 66 Tr. 483-84. 67 Tr. 191 (Zutrau); Tr. 484 (Jansing). 68 Tr. 191 (Zutrau). 69 Id.; Tr. 485 (Jansing).
16 In December 2004, Jansing and Zutrau signed as co-guarantors on ICE‘s new five-year
office lease, which commenced in early 2005.70 In that same month, Zutrau signed for
and co-guaranteed, with Jansing, an auto loan in the Company‘s name for a truck to be
used by Jansing.71 In February 2007, Zutrau obtained and, together with Jansing, co-
guaranteed a $250,000 business line of credit for ICE with Citibank, N.A. (the ―Credit
Line‖).72 The funding made available to ICE from the Credit Line obviated the need for
Zutrau to make personal loans to the Company.73 In each of these instances, however,
Zutrau‘s creditworthiness facilitated the Company‘s actions because Jansing had poor
personal credit.74
In early 2005, Jansing hired an individual named Walter Lotspeich to serve as a
―relationship manager.‖75 In that sales and marketing role, Lotspeich was responsible
both for maintaining ICE‘s existing business relationships and for attempting to establish
new ones. Jansing previously had interacted with Lotspeich in various business settings,
including as an employee of one of ICE‘s clients, and had developed a good working
relationship with him.76 Each party to this dispute alleges that the other party was
70 JX 36. 71 Tr. 32 (Zutrau); Tr. 496 (Jansing). 72 Tr. 32, 52 (Zutrau); Tr. 500 (Jansing). 73 Tr. 52 (Zutrau). 74 Id. at 33-34; Tr. 496, 572-73 (Jansing). 75 Tr. 36-37 (Zutrau). 76 Tr. 514-16 (Jansing).
17 concerned that Jansing and Lotspeich‘s pre-existing relationship would hinder Jansing‘s
ability to supervise Lotspeich effectively, and insisted that Zutrau serve as his direct
supervisor.77 Regardless of who, in fact, proposed that arrangement, in February of 2005,
Zutrau‘s job duties were expanded to include supervising Lotspeich and overseeing the
sales and marketing functions of the Company. As part of that division of duties, Jansing
and Zutrau agreed that Jansing would focus on the Company‘s internal operations.78
Around that time, Zutrau also was given the title of ―executive vice president.‖79
When Zutrau became more involved in the Company‘s marketing efforts, she
helped organize an annual golf outing that ICE hosted for marketing purposes.80 She also
assisted in various giveaways and other marketing efforts, such as creating promotional
ICE gear.81 In 2005 and 2006, the Company added approximately eighty new clients and
successfully negotiated contracts with additional business partners. Zutrau signed on a
few additional clients herself, but Lotspeich primarily was responsible for making sales
presentations to and signing new clients.82 In early to mid-2007, ICE was pursuing
77 Tr. 213, 216-17 (Zutrau); Tr. 517-18 (Jansing). 78 Tr. 216-17 (Zutrau); Tr. 518 (Jansing). 79 Tr. 134 (Zutrau); Tr. 481 (Jansing). 80 Tr. 300-01 (Zutrau); JX 554, 618, 621, 622. 81 Tr. 493 (Jansing). 82 Tr. 222-23 (Zutrau); Tr. 520-21 (Jansing).
18 several banks in an effort to switch them from Broadridge to ICE, including M&I,
Investors Bank & Trust, US Bank, LaSalle Bank, Mitsubishi Trust, and Mizuho Trust.83
Between 2000 and 2006, the Company had grown significantly larger and more
successful. In 2000, ICE‘s gross revenues were $652,000 and the Company had over $1
million in long term debt.84 By 2006, gross revenues had risen to approximately $2.6
million and the Company had paid off nearly all of its long term debt.85 Moreover, by the
end of 2006, the Company had been profitable for two consecutive years.86 As ICE grew
more successful, Jansing‘s and Zutrau‘s compensation also increased. In 2000, Zutrau
and Jansing were compensated at the annual rates of $75,000 and $85,000, respectively.
By 2006, Zutrau and Jansing‘s base annual salaries had grown to $180,000 and
$200,000.87 Moreover, in that year, Zutrau and Jansing collectively received more than
$1 million from ICE in total compensation, distributions, and benefits.
5. Companies express interest in acquiring ICE
Due to its success, ICE received expressions of interest from a few potential
acquirers in 2006. In January of that year, Jansing and Zutrau met with the CEO and
another senior executive from Institutional Shareholder Services (―ISS‖), which
specializes in providing proxy voting recommendations to trust institutions based on their
83 Tr. 224-27 (Zutrau); Tr. 537-39 (Jansing); JX 293 at 22. 84 JX 8. 85 JX 293 Exs. 5.0, 5.1. 86 Id. Ex. 5.1. 87 JX 518.
19 preferred investment strategies.88 Although the discussions were informal, the ISS
executives expressed interest in the possibility of partnering with or acquiring ICE.89
Jansing ultimately decided not to pursue a transaction with ISS, instead adopting a ―wait
and see‖ approach.90
In November 2006, ICE also received an expression of interest from
Computershare Limited (―Computershare‖), a multinational company that engaged in
limited proxy distribution activities in the United States.91 Computershare expressed
interest in acquiring ICE so that it could leverage ICE‘s business and technology to
expand its operations in the U.S. proxy services sector. From November 2006 through
May 2007, Jansing and Zutrau participated in discussions with Computershare regarding
a potential acquisition.92 Contemporaneous notes taken by Zutrau as well as notes
emailed to Jansing and Zutrau by a Computershare representative indicate that, at a
meeting held in late February or early March of 2007, the parties discussed the possibility
of Computershare acquiring all of the equity in ICE for up to $25 million in total
consideration, consisting of $8 million in cash upfront with a potential $17 million earn-
88 Tr. 40-42 (Zutrau). 89 Id. at 41. 90 Id. at 43-44. 91 Id. at 44; Zutrau Del. Dep. 189; Paul Conn Dep. 7. 92 Tr. 45-46 (Zutrau). 20 out.93 Computershare never made a firm offer to acquire the Company, however, and
discussions between ICE and Computershare terminated without a deal being reached.94
6. Zutrau is Terminated from ICE
Despite Zutrau‘s contributions to the Company, Jansing testified that a negative
side of her involvement emerged in the 2004–2007 timeframe. According to Jansing,
Zutrau did not get along well with the Company‘s other employees and had an abrasive
management style that regularly brought her into conflict with the people under her. 95
For example, on one occasion, Zutrau insisted that Jansing write up an employee for
insubordination, which he did, to his later regret.96 The employee subsequently resigned
because she felt Zutrau had targeted her unfairly.97 Zutrau also had a tendency to
micromanage the employees who reported to her. Ultimately, that caused Lotspeich to
93 JX 480, 481; see also Tr. 46-48 (Zutrau). 94 Tr. 524 (Jansing). Zutrau claims that in late May or early June 2007, Garet Hill, a consultant who had been retained by Computershare, made a verbal final offer to Jansing on behalf of Computershare to acquire the Company for $25 million. Tr. 236-37. There is no documentary evidence that such an offer was made, however, and Zutrau admits that she was not present when the purported offer was communicated to Jansing and that Jansing did not discuss the details of the offer with her. Rather, she alleges only that Jansing told her that some kind of an offer had been made. Id. at 237-38. Jansing, Hill, and Paul Conn, a Computershare executive who participated in the negotiations with ICE, however, all testified that Computershare never made a final offer to acquire ICE. Tr. 524 (Jansing); Hill Dep. 45-46, 64; Conn Dep. 132-33. Having considered the available evidence, I find that no such ―final‖ or firm offer was ever made. 95 Tr. 512-13. 96 Id. at 513-14. 97 Id. at 514.
21 threaten to leave the Company, citing a desire for greater autonomy, among other
things.98
Zutrau‘s management style also conflicted with that of Jansing, who gave priority
to employee morale. Although Jansing had the final say, he and Zutrau clashed over a
variety of issues such as whether certain employees should be required to clock in and
out.99 They also had disagreements regarding the salary and bonuses employees should
receive, with Jansing generally wanting to pay employees more. 100 Zutrau‘s supervision
of Lotspeich became another source of tension between her and Jansing. After Lotspeich
was placed under Zutrau‘s supervision, she attempted to restrict any direct
communication between Lotspeich and Jansing, apparently concerned that such
communications would undermine her authority.101 Indeed, if Zutrau discovered
Lotspeich and Jansing communicating without her knowledge, even about non-work-
related matters such as a sporting event, she became irate and proceeded to chastise one
or both of them.102
By June of 2007, Jansing had concluded that Zutrau was a ―toxic element in the
office‖ and resolved to terminate her.103 Shortly before that, Zutrau had been diagnosed
98 Lotspeich Dep. 60-61; Tr. 209-12 (Zutrau); JX 512. 99 Tr. 529 (Jansing); Lotspeich Dep. 72-76. 100 Tr. 485 (Jansing). 101 See id. at 517, 519-20; JX 476, 544, 545, 547. 102 See Tr. 519-20 (Jansing); JX 476, 544. 103 Tr. 529, 567 (Jansing).
22 with metastatic cancer, for which she was scheduled to go on medical leave sometime in
mid-June.104 Zutrau had postponed her medical leave until the end of June, however, to
help prepare for an internal financial audit of the Company, which one of the Company‘s
clients had requested.105 Jansing was aware of Zutrau‘s diagnosis as well as her intention
to take a medical leave of absence.106
On June 19, 2007, Jansing removed Zutrau‘s name and signatory power from all
Company bank accounts, a credit card account, and a retirement benefits administration
account, but left Zutrau‘s name as a co-guarantor on the Credit Line. On that same day,
Jansing withdrew the full $250,000 available on the Company‘s Credit Line and placed it
in his personal Citibank account. Jansing testified that his banker at Citibank advised
him to hold that amount in his personal account until a new credit line could be
approved.107 According to Zutrau, however, Jansing made it impossible, by doing so, for
Zutrau to remove herself as a guarantor on the Credit Line.108 The Company made the
interest payments on the Credit Line after Jansing‘s withdrawal.
104 Tr. 86 (Zutrau). 105 Id. 106 At trial, Jansing denied knowing about Zutrau‘s planned medical leave, Tr. 570- 71, but I consider that testimony unreliable. In a prior deposition in the related New York Action, Jansing admitted that Zutrau requested to be able to take time off to deal with her medical condition and stated that he approved that request. Jansing N.Y. Dep. 133-34. 107 Tr. 500-01. 108 Tr. 87-88.
23 On June 20, 2007, Jansing officially terminated Zutrau without giving her any
prior notice. Rather, when Zutrau arrived at the Company, she discovered that the locks
had been changed.109 Although she attempted to speak with Jansing over the phone, he
did not take or return her call.110 Instead, Jansing faxed Zutrau a formal termination letter
sometime that day.111 He also did not provide Zutrau with any severance pay and
cancelled her healthcare coverage.112
On June 22, 2007, Jansing made a $271,000 down payment, including closing
costs, on a new home in Southampton, New York.113 The amount of the down payment
is similar to the amount Jansing withdrew from the Credit Line and placed into his
Citibank account two days earlier, but Zutrau failed to prove that the two transactions
were related. The funds for the down payment came from Jansing‘s personal bank
account at United States Trust, not his Citibank account.114 After he had withdrawn the
funds from the Credit Line, Jansing maintained the balance in his Citibank account at
109 Tr. 80 (Zutrau). 110 Tr. 569 (Jansing). 111 Id. at 567-68; JX 94. 112 Tr. 585 (Jansing). 113 Id. at 509-12 (Jansing); JX 341, 482. 114 Tr. 509-12 (Jansing); JX 482.
24 approximately $250,000, and at all times greater than $240,000, until he used the funds in
that account to repay the balance on the Credit Line on November 27, 2007.115
Citibank records subpoenaed by Zutrau indicate that Jansing did not apply for a
new credit line with Citibank in or after June 2007.116 Rather, Jansing applied for an
extension of the existing Credit Line in October 2008.117 Citibank approved that
application in December 2008 and expanded the Credit Line to $500,000. By that time,
Zutrau had been removed as a co-guarantor.118
7. ICE’s operations after Zutrau’s termination
Following Zutrau‘s termination, Jansing hired Eric Henriksen to perform many of
the day-to-day bookkeeping functions for which Zutrau had been responsible, including
paying bills, tracking collections, and invoicing.119 Jansing also began to rely on Maurice
Kalaygian, Jansing‘s personal accountant, to serve as the Company‘s tax accountant.120
Jansing did not appoint a replacement Treasurer.121
115 JX 692; Tr. 502-03 (Jansing). Jansing apparently intended to keep the amount in the Citibank account above $250,000 until the Credit Line was repaid, and the handful of times the amount in that account dipped below $250,000 resulted from poor bank management on his part. Tr. 502-03 (Jansing). 116 See JX 221. 117 JX 221 at 30-32. 118 Tr. 250 (Zutrau); Tr. 502 (Jansing). 119 Tr. 582-83 (Jansing). 120 Id. at 583-84. 121 Id. at 585-86.
25 ICE encountered some accounting difficulties after Zutrau‘s termination. First,
ICE experienced significant problems with the Sage accounting software it had been
using. Among other things, those problems threatened the integrity of ICE‘s historical
accounting data and prevented the Company from keeping its accounting records up-to-
date.122 ICE retained an outside computer consultant, Exeplex, to assess these problems
and make recommendations for how to resolve them. Exeplex ultimately recommended
that the Company take several actions, including catching up on previously released Sage
upgrades, which it did.123 The Company also paid for Henriksen to receive formal
training in Sage.124 In addition, the record shows that Zutrau had experienced difficulties
with Sage during her time at ICE, due at least in part to ICE‘s failure regularly to update
its software.125
Second, Jansing and Henriksen initially had trouble determining how to generate
the Sungard revenue sharing reports. Zutrau previously had been responsible for that
function and there were no written procedures in place as to how to generate the
reports.126 At one point, Henriksen asked Zutrau to help with the Sungard account.
Zutrau offered to provide assistance, but only if she would be compensated. Jansing and
122 Id. at 529-32; JX 653, 654. 123 Tr. 531-32 (Jansing); JX 653, 654. 124 Tr. 531 (Jansing). 125 JX 612. 126 Tr. 533 (Jansing).
26 Henriksen, with assistance from Exeplex, eventually resolved the issues related to
Sungard independently.127
In most other respects, ICE‘s operations remained similar to how they had been
before Zutrau‘s termination. As ICE‘s sole director, president, and majority stockholder,
Jansing continued to have the authority to make all major decisions on behalf of the
Company, including compensation and bonus decisions for himself and ICE‘s
employees.128 ICE continued to engage in various marketing activities begun while
Zutrau was with ICE, such as the annual golf outing, and Lotspeich remained the primary
driver behind the Company‘s direct sales efforts.129 Although Lotspeich pursued the
bank leads ICE had identified in the first half of 2007, his efforts did not produce any
additional clients.130 Certain of the targeted banks were acquired by other banks during
that same timeframe.131
Following Zutrau‘s termination, ICE had further contact with Computershare and
ISS. About a month after the termination, Hil sent Jansing an email referencing ongoing
strategic discussions between Computershare and ICE and telling Jansing to ―let me
know if you need a buyer for the 20% equity position,‖ an apparent reference to Zutrau‘s
127 Id. 128 Id. at 485. 129 Id. at 520, 537-39; JX 202, 364, 378, 668. 130 Tr. 537-39 (Jansing); JX 650. 131 Tr. 226-27 (Zutrau); Tr. 538-39 (Jansing); JX 643, 674.
27 minority stake.132 Later, in March 2008, Zutrau approached Computershare to gauge
their interest in acquiring her equity in ICE.133 Computershare expressed some interest
initially and took steps toward executing a non-disclosure agreement.134 According to
Zutrau, Computershare contacted Jansing at some point during their discussions and then
abruptly ceased its discussions with her.135 Shortly thereafter, Zutrau alleges that Jansing,
through counsel, offered her $150,000 for her shares in ICE.136 Jansing denies ever
making such an offer.137
In 2009, ISS again approached Jansing about acquiring ICE. After preliminary
due diligence, ISS submitted a non-binding indication of interest in acquiring ICE for
132 JX 100. At trial, Jansing claimed that this statement referred to earlier conversations regarding Computershare purchasing an unrelated minority stake in ICE. Tr. 525-27 (Jansing). Based on the timing and phrasing of the email, however, I find that it was more likely a reference to Zutrau‘s equity position. See Tr. 49-52 (Zutrau). 133 Tr. 242 (Zutrau). 134 Id. at 127; JX 127. In an internal Computershare email dated March 25, 2006, Conn wrote ―[w]e might be able to pick this up [i.e., Zutrau‘s shares] for circa $500K or $500K-$1M (vs $4M+ If you assumed we‘d had any interest in paying $20-25M for the whole company, which we didn‘t. We thought it was worth approx $10M).‖ JX 127. 135 Tr. 242, 127. 136 Id. at 243. 137 Tr. 528.
28 $2.5 million, with a maximum earnout potential of $4 million. 138 But ISS terminated
those discussions after its parent company was acquired.139
In terms of overall performance, ICE has experienced slight growth since 2006,
with gross revenues for the past several years averaging at or just under $3 million per
year.140 ICE‘s most profitable year on record was 2009, when revenues spiked due to
certain non-recurring business and the Company became more current on its receivables
resulting in a net profit of nearly $1 million.141 From 2010 to 2012, the last year for
which the parties provided financial information, ICE recorded an overall net loss of
approximately $200,000 and operated at a loss in two of those three years.142
The parties dispute the reasons for ICE‘s recent lack of profitability. Zutrau
blames it on, among other things, mismanagement, wasteful spending, and
overcompensation of Jansing and ICE employees, citing overall net increases in payroll,
fringe benefit, and travel and entertainment expenses.143 Jansing attributes the increases
in ICE‘s payroll and fringe expenses to its expanded staff, which has grown by three or
four employees since 2006 and currently stands at thirteen,144 and to ever increasing
138 JX 375. 139 Tr. 49 (Zutrau). 140 JX 293 Ex. 5.1. 141 Id.; see Tr. 539-40 (Jansing). 142 JX 293 Ex. 5.1. 143 See id.; Tr. 94-96, 106-09 (Zutrau). 144 See Tr. 108, 318 (Zutrau); Tr. 449 (Jansing).
29 healthcare costs.145 Jansing also dismisses as insignificant the travel and entertainment
expenses that Zutrau questions. Instead, he emphasizes that ICE‘s bottom line also has
suffered due to increased competition from Broadridge, which has forced ICE to pay for
and provide additional free services to its clients.146
In her complaint, Zutrau challenges, among other things, a wide array of the
decisions Jansing made and actions he took in running the Company after her
termination, claiming they constituted breaches of his fiduciary duties. To avoid
unnecessary repetition, I defer until the analysis portion of this Opinion many of the other
facts pertinent to the specific acts and decisions that Zutrau disputes.
8. The New York Action
In March of 2008, Zutrau sent a formal request to inspect books and records of
ICE. Following Jansing‘s refusal to comply with that request, Zutrau commenced a
books and records action against Jansing and the Company in the Supreme Court of the
State of New York for the County of Suffolk (the ―New York Court‖). On August 1,
2008, the New York Court ordered Jansing to produce ICE‘s responsive books and
records to Zutrau.147
In September 2009, Zutrau filed another complaint against Jansing and ICE with
the New York Court, broadly asserting: (1) direct claims challenging her termination; and
(2) derivative claims based on numerous actions taken by Jansing in the course of
145 Tr. 534-35. 146 Id. at 449-54, 534-35. 147 JX 140.
30 running the Company (the ―New York Action‖).148 One of the direct claims Zutrau
brought against Jansing was for breach of an alleged oral agreement to employ her until
the Company could be sold.
In October 2011, the New York Court issued an opinion on Jansing and ICE‘s
motion for summary judgment.149 In that opinion, the New York Court dismissed
Zutrau‘s derivative claims without prejudice, holding that they needed to be brought in a
separate action.150 Zutrau later reasserted those derivative claims and others in this
action. The New York Court also granted summary judgment in favor of Jansing on
Zutrau‘s breach of contract claim, based on the integration clause in the RSA.151
The remaining claims in the New York Action were tried in July and September
2012. In its post-trial opinion, issued in March 2013, the New York Court entered
judgment against Zutrau on all but one of her remaining claims.152 The one claim on
which the court ruled in Zutrau‘s favor was a claim for $60,307 that remained in Zutrau‘s
accumulated capital account at ICE.153 In its opinion, the New York Court made several
other findings and rulings that are relevant to this action, including that the bonuses
Jansing received in the years following Zutrau‘s departure were not, as Zutrau claimed,
148 JX 672. 149 Zutrau v. Ice Sys., Inc., 2011 WL 5137152 (N.Y. Sup. Ct. Oct. 28, 2011). 150 Id. at *4. 151 Id. at *3-4. 152 Zutrau v. Ice Sys., Inc., 2013 WL 1189213 (N.Y. Sup. Ct. Mar. 20, 2013). 153 Id. at *8.
31 disguised stockholder distributions as to which she was entitled to receive her pro rata
share.154 The New York Court further held that any challenges to the amounts of the
bonuses themselves would need to be pursued as derivative claims in this action.155 The
court also held that a pro rata share of the stockholder distributions that ICE actually did
make after Zutrau‘s termination had been credited properly to Zutrau‘s accumulated
capital account. As a result, the Court awarded to Zutrau as damages the approximately
$60,307 that remained in that account.156
9. The Reverse Stock Split
In December 2011, after the New York Court had dismissed the derivative claims
without prejudice and before the commencement of this action, Jansing retained Farrell
Fritz, P.C. as counsel to advise him regarding how to accomplish a reverse stock split.157
On January 13, 2012, Jansing, through counsel, engaged Duff & Phelps, LLC for the
purpose of ―estimating [the] Fair Value of 100 percent of the Shareholders‘ Equity of ICE
Systems as of a current date to be provided by [Farrell Fritz].‖158
On June 11, 2012, after the filing of this action and shortly before his answer was
due, Jansing filed an amendment to ICE‘s Certificate of Incorporation (―COI‖) purporting
to effect a reverse stock split of all outstanding shares of the Company‘s common stock
154 Id. at *6. 155 Id. at *7. 156 Id. at *6-8. 157 JX 496. 158 JX 497.
32 (the ―Reverse Stock Split‖), thereby eliminating Zutrau‘s ownership interest in ICE.
Jansing relied on a Duff & Phelps report dated June 11, 2012 as the basis for valuing
Zutrau‘s 22% interest in the Company. Duff & Phelps estimated the fair market value of
100% of the equity in the Company as of June 5, 2012 as being $2,217,233.159 Thus, in
connection with the Reverse Stock Split, ICE valued Zutrau‘s approximately 22% interest
at $495,779, reflecting her pro rata share of the Duff & Phelps valuation with no
minority discount. ICE sent Zutrau a check for that amount, but she never deposited it.160
Of relevance to this action, the New York Court, in its post-trial opinion, rejected
for lack of evidence an argument by Jansing that the $60,307 left in Zutrau‘s accumulated
capital account already had been incorporated into ICE‘s valuation of Zutrau‘s equity
interest for purposes of the Reverse Stock Split.161 On that basis, the Court awarded
Zutrau $60,307 in damages, notwithstanding the $495,779 that had been tendered to her
in connection with the Reverse Stock Split.
C. Procedural History
On April 25, 2012, Zutrau commenced this litigation by filing a verified complaint
against Jansing in which she effectively reasserted the derivative claims that had been
severed from the New York Action. Those claims challenged the manner in which
Jansing ran the Company following her termination. Zutrau subsequently amended her
complaint.
159 JX 500 at 8. 160 JX 501; Tr. 131 (Jansing). 161 Zutrau, 2013 WL 1189213, at *8.
33 On June 19, 2012, following the Reverse Stock Split, Jansing moved to dismiss
Zutrau‘s amended complaint on the grounds that Zutrau lacked standing to pursue her
derivative claims because she no longer owned ICE stock. On August 3, 2012, Zutrau
filed a second amended and supplemental complaint that addressed the Reverse Stock
Split. The new pleading asserted derivative and direct claims for breach of fiduciary duty
and direct claims for failure to pay fair value for Zutrau‘s cashed-out stock under 8 Del.
C. § 155 and for equitable fraud and negligent misrepresentation.
On September 21, 2012, Jansing moved to dismiss the second amended and
supplemental complaint for failure to state a claim and on res judicata and collateral
estoppel grounds.162 In a Memorandum Opinion issued on March 18, 2013, I held that
Jansing had failed to show that dismissal of any of the claims asserted by Zutrau was
warranted and denied Jansing‘s motion in its entirety.163
On April 2, 2013, Jansing filed his answer to the second amended and
supplemental complaint. In that pleading, Jansing also asserted two verified
counterclaims, the first of which he later withdrew. The remaining counterclaim sought a
162 In his reply brief in support of the motion to dismiss, Jansing raised several additional arguments against Zutrau‘s equitable fraud and negligent misrepresentation claims, including that they constituted an impermissible ―bootstrap‖ of the breach of contract claim she asserted in the New York Action and ―face[d] serious laches and statute of limitations obstacles.‖ Def.‘s Reply Br. in Supp. of the Mot. to Dismiss Pl.‘s Second Am. Compl. 6-8. Because those arguments had not been addressed in Jansing‘s opening brief, however, I deemed them to be waived for purposes of his motion to dismiss. Zutrau v. Jansing, 2013 WL 1092817, at *6 (Del. Ch. Mar. 18, 2013). 163 Zutrau, 2013 WL 1092817, at *6.
34 setoff of the $60,307 in damages awarded in the New York Action against any amount
awarded to Zutrau in connection with the Reverse Stock Split.
On May 15, 2013, Zutrau filed her third amended and supplemental verified
complaint (the ―Complaint‖), adding claims challenging the amount of Jansing‘s
compensation.
In a pre-trial conference held on July 25, 2013, the Court heard argument on two
motions to compel filed by Zutrau as well as a motion in limine by Jansing to exclude the
amended report of Zutrau‘s valuation expert, Roy D‘Souza. The Court ordered Jansing
to produce his personal tax returns in response to Zutrau‘s second motion to compel, but
reserved decision on the remaining motions and asked the parties to address any issues
that remained outstanding in post-trial briefing.
From July 31 to August 2, 2013, I presided over a three-day trial in this action.
After extensive post-trial briefing, counsel presented their final arguments on November
21, 2013. This Opinion constitutes my post-trial findings of fact and conclusions of law
in this matter.
D. Parties’ Contentions
Zutrau asserts numerous claims against Jansing related to his conduct in running
the Company after her termination and his execution of the Reverse Stock Split. As to
Jansing‘s conduct in running the Company, Zutrau has asserted a derivative claim for
breach of fiduciary duty, challenging a broad array of Jansing‘s actions and decisions.
Specifically, Zutrau claims that Jansing breached his fiduciary duties by, among other
things, failing to replace her with someone who could provide competent financial
35 oversight of the Company, paying unreasonable compensation to himself and his
employees, causing ICE to pay for his personal expenditures, and wasting ICE‘s
corporate assets.
Regarding the Reverse Stock Split, Zutrau brought a direct claim for breach of
fiduciary duty, asserting that Jansing executed the Reverse Stock Split for the improper
purpose of depriving her of derivative standing, thereby rendering the Reverse Stock
Split invalid. Alternatively, Zutrau alleges that the Reverse Stock Split was executed at
an unfair and inadequate price, in breach of Jansing‘s fiduciary duties and in violation of
8 Del. C. § 155. Zutrau also argues that Jansing is liable for equitable fraud because he
previously had represented to her that she would retain her equity in ICE until the
Company could be sold, at which time she would share in the profits of the sale on a pro
rata basis.164 As a remedy for Jansing‘s alleged breaches of fiduciary duty and equitable
fraud, Zutrau seeks rescission of the Reverse Stock Split and dissolution of the Company.
Alternatively, Zutrau requests that the Court award money damages to her and to ICE as
compensation for Jansing‘s wrongful conduct.
In his defense, Jansing contends that most of Zutrau‘s claims regarding his
running of ICE after her termination challenge disinterested business decisions and,
therefore, are protected by the business judgment rule and by the Company‘s exculpatory
164 The Complaint characterizes Zutrau‘s fraud claim as being one for ―Equitable Fraud / Negligent Misrepresentation.‖ Compl. 22. Zutrau, however, made no reference to her claim for negligent misrepresentation at all in her post-trial briefs. Thus, she has waived that aspect of her fraud claim. Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999) (―Issues not briefed are deemed waived.‖).
36 charter provisions adopted pursuant to 8 Del. C. § 102(b)(7). For other decisions that
Zutrau challenges, Jansing alleges that he relied in good faith upon the advice of experts
and is thus shielded from liability under 8 Del. C. § 141(e). As to Zutrau‘s challenge to
his compensation, Jansing avers that the compensation he received at the Company was
reasonable, as confirmed by the analysis and report submitted by his compensation
expert. Jansing attempts to brush off Zutrau‘s remaining claims that he caused the
Company to pay for his personal expenditures as largely unsubstantiated and, in any
event, involving amounts that are de minimis.
As to the Reverse Stock Split, Jansing claims that he initiated it as a means of
bringing closure to the contentious relationship between the parties and not to deprive
Zutrau of derivative standing. In that regard, Jansing emphasizes that he has not objected
to Zutrau litigating the derivative claims for the purpose of determining her pro rata
share of the value of those claims at the time of the Reverse Stock Split. He
acknowledges that those claims could entitle Zutrau to additional consideration. Jansing
also contends that the Duff & Phelps report fairly valued the equity of the Company, has
not been rebutted effectively, and provided an appropriate basis for valuing Zutrau‘s
interest. In addition, Jansing urges this Court to reject Zutrau‘s claims for equitable fraud
because the facts are not as Zutrau alleges, Zutrau failed to prove the elements of
equitable fraud, and the fraud claim is barred by the statute of limitations and the doctrine
of laches.
Jansing also asserts that the $60,307 left in Zutrau‘s accumulated capital account,
which the New York Court awarded to Zutrau as damages, already had been incorporated
37 into ICE‘s valuation of Zutrau‘s equity interest for purposes of the Reverse Stock Split.
Thus, in a counterclaim, Jansing seeks a setoff of the $60,307 from any amount awarded
to Zutrau in connection with the Reverse Stock Split.165
II. ANALYSIS
In this analysis, I first consider Zutrau‘s claim against Jansing for equitable fraud.
I then address Zutrau‘s derivative claim for breach of fiduciary duty based on Jansing‘s
conduct in running the Company following her termination. Next, I examine Zutrau‘s
claims challenging the validity and fairness of the Reverse Stock Split. Finally, I address
the appropriate relief for any wrong Zutrau has established and Jansing‘s counterclaim
for a monetary setoff from any amount awarded to Zutrau in connection with the Reverse
Stock Split.
A. Equitable Fraud
In Delaware, the elements of common law fraud are as follows: ―(1) a false
representation, usually one of fact, made by the defendant; (2) the defendant‘s knowledge
or belief that the representation was false, or was made with reckless indifference to the
truth; (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiff's
action or inaction taken in justifiable reliance upon the representation; and (5) damage to
165 In response, Zutrau has alleged that, but for improper and self-interested accounting by Jansing and his accountant, her accumulated capital account would have contained an additional $118,461. Thus, Zutrau denies that Jansing is entitled to deduct the New York Court‘s award of $60,307 from any amounts that she is owed in connection with the Reverse Stock Split.
38 the plaintiff as a result of such reliance.‖166 The elements of equitable fraud are the same
as those of common law fraud, except that ―there is no requirement that the defendant
have known or believed its statement to be false or to have made the statement in reckless
disregard of the truth.‖167 In contrast to common law fraud, however, ―equitable fraud
can only be applied in those cases in which one of the two fundamental sources of equity
jurisdiction exist: (1) an equitable right founded upon a special relationship over which
equity takes jurisdiction, or (2) where equity affords its special remedies, e.g., ‗rescission,
or cancellation; where it is sought to reform a contract . . . or to have a constructive trust
decreed.‘‖168
Zutrau alleges that Jansing committed equitable fraud by making false promises to
her in conversations between the two in 2001, when he offered her equity in ICE, and in
2004, around the time she received that equity. According to Zutrau, in 2001, Jansing
promised her that if she would dedicate herself to rehabilitating the Company until it was
profitable and could be sold, he would grant her equity and, together, the parties would:
(1) benefit from their efforts in line with the success of the Company; and (2) remain
stockholders of the Company until the sale of ICE to a third party, at which point they
would share in the sale proceeds according to their respective percentages of equity
166 Zirn v. VLI Corp., 681 A.2d 1050, 1060 (Del. 1996) (citing Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992)) (emphasis omitted). 167 Id. (citing Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983)). 168 U.S. W., Inc. v. Time Warner Inc., 1996 WL 307445, at *26 (Del. Ch. June 6, 1996) (citing 37 Am. Jur. 2d Fraud and Deceit § 220 (1968)).
39 ownership. Jansing allegedly reiterated those two promises in 2004, when Zutrau was
granted stock in the Company.
Zutrau avers that those promises were later broken and proven false when Jansing
effected the purported Reverse Stock Split in June of 2012 and froze out her shares,
because after that she could no longer benefit from the success of the Company through
distributions or otherwise and would be unable to share in the proceeds of a sale of the
Company to a third party. Zutrau claims that she relied to her detriment on Jansing‘s
false promises by investing herself completely in the Company and foregoing other
opportunities. On that basis, she contends that Jansing is liable for equitable fraud for the
false promises that he made to her.
Jansing contests the factual underpinnings of Zutrau‘s equitable fraud claim,
denying, for example, that he made the promises that she claims he did. Even if Jansing
did make those promises, however, Zutrau has failed to prove a claim of equitable fraud.
As an initial matter, Zutrau‘s fraud claim appears to be an impermissible attempt to
―bootstrap‖ the breach of contract claim she asserted in the New York Action. There,
Zutrau alleged that she and Jansing had entered into an oral agreement based on a
promise he made to her in 2001, and reiterated in 2004, that he would employ her for as
long as she owned stock in ICE.169 The New York Court ultimately dismissed Zutrau‘s
breach of contract claim based on the integration clause in the RSA.170 Based on the
169 Zutrau v. Ice Sys., Inc., 2011 WL 5137152, at *3 (N.Y. Sup. Ct. Oct. 28, 2011). 170 Id. at *4.
40 timing and nature of the promises that Zutrau challenges in her equitable fraud claim
here, it is reasonable to infer that they were part of the same alleged oral agreement that
she asserted in the New York Action.171 The law is clear, however, that a party who has
asserted a breach of contract claim may not ―bootstrap‖ that claim into a claim of fraud,
merely by asserting that the promises underlying the contract were made fraudulently. 172
Even if, however, the representations at issue here are treated as distinct from
those underlying the breach of contract claim asserted in the New York Action, Zutrau
still has failed to prove a claim of equitable fraud. Specifically, Zutrau has failed to
prove that Jansing made a false representation that would support a fraud claim because
the representations that she challenges were exclusively promises as to future conduct,
and Zutrau has neither claimed nor submitted any convincing evidence indicating that
Jansing did not intend to perform those promises when they were made.173
171 In any event, Zutrau has not asserted a breach of contract claim in this action. 172 See Iotex Commc’ns, Inc. v. Defries, 1998 WL 914265, at *6 (Del. Ch. Dec. 21, 1998) (―[A] claim for breach of contract . . . . cannot be ‗bootstrapped‘ into a fraud claim merely by adding the words ‗fraudulently induced‘ or alleging that the contracting parties never intended to perform.‖). See also Grunstein v. Silva, 2009 WL 4698541, at *6 (Del. Ch. Dec. 8, 2009); BAE Sys. N. Am. Inc. v. Lockheed Martin Corp., 2004 WL 1739522, at *8 (Del. Ch. Aug. 3, 2004). 173 For purposes of this analysis, I assume without deciding that Zutrau‘s equitable fraud claim could qualify as being within one of the two sources of equity jurisdiction discussed supra in the text accompanying note 168.
41 ―To support a claim for fraud, the putative misrepresentation must concern either a
past or contemporaneous fact or a future event that falsely implies an existing fact.‖174 In
general, therefore, ―statements which are merely promissory in nature and expressions as
to what will happen in the future are not actionable as fraud.‖175 As an exception to this
general rule, Courts have held that an unfulfilled promise of future performance can
support a claim for fraud if, ―at the time the promise was made, the speaker had no
intention of performing.‖176 That is because a promise is regarded as a representation of
a promisor‘s intention or state of mind, and a ―knowing misrepresentation of one‘s
intention or state of mind is a misrepresentation of an existing fact.‖177 Thus, a
promisor‘s intention not to perform at the time a promise is made is a necessary factual
predicate to that promise qualifying as a false representation for purposes of fraud. In
that regard, I also note that, although scienter is not an element of equitable fraud, a
174 Winner Acceptance Corp. v. Return on Capital Corp., 2008 WL 5352063, at *7 (Del. Ch. Dec. 23, 2008) (citing Berdel, Inc. v. Berman Real Estate Mgmt., Inc., 1997 WL 793088, at *8 (Del. Ch. Dec. 15, 1997)). 175 Grunstein, 2009 WL 4698541, at *13 (quoting Outdoor Techs., Inc. v. Allfirst Fin., Inc., 2001 WL 541472, at *4 (Del. Super. Apr. 12, 2001)) (internal quotation marks omitted). 176 Id. (citing Winner Acceptance Corp., 2008 WL 5352063, at *7). 177 Id. (quoting Stevanov v. O’Connor, 2009 WL 1059640, at *12 n.66 (Del. Ch. Apr. 21, 2009)).
42 plaintiff alleging equitable fraud nonetheless bears the burden of demonstrating that the
defendant made an actionable false representation.178
Here, there can be no genuine dispute that the representations Zutrau cites in
support of her equitable fraud claim were promises of future conduct. Indeed, in her own
post-trial briefing, Zutrau characterizes those representations as promises.179 Moreover,
the promises related to future conduct by Jansing because, according to Zutrau, they
represented commitments by him to share the success of the Company with her over time
and to allow her to remain an ICE stockholder until the Company could be sold to a third
party at some future date. Thus, in order for those promises to qualify as false
representations for purposes of fraud, including equitable fraud, Jansing must have made
those promises with the contemporaneous intent not to perform them.
Zutrau, however, adduced no evidence that Jansing did not intend to keep the
disputed promises at the time that he made them. Indeed, when she was asked about this
subject at trial, Zutrau admitted that she was not claiming that Jansing never intended to
keep his alleged promises and that she did not see evidence of an intent by him to break
178 Cf. Winner Acceptance Corp. v. Return on Capital Corp., 2008 WL 5352063, at *9 n.56 (Del. Ch. Dec. 23, 2008) (Court‘s holding dealt only with a common law fraud claim). 179 See Pl.‘s Opening Br. 50 (―Jansing committed equitable fraud by falsely promising Ms. Zutrau that the parties would jointly (i) benefit from ICE‘s success through distributions from its revenue stream once it became profitable, and (ii) remain stockholders of the company until the sale of ICE to a third party . . . .‖) (emphasis added).
43 those promises until after her termination.180 Moreover, the evidence of Jansing‘s
conduct before he terminated Zutrau comports with an original intent by Jansing to keep
the alleged promises. In that regard, I note that between 2001 and 2007, Jansing granted
Zutrau equity, paid her a generous and steadily increasing salary, and promoted her on
several occasions. Although Zutrau claims that Jansing ultimately violated the alleged
promises by executing the Reverse Stock Split, ―a party‘s failure to keep a promise does
not prove the promise was false when made.‖181
Thus, Zutrau has failed to prove that when Jansing made the promises she
challenges as fraudulent, he intended not to keep those promises. The alleged promises,
therefore, are not actionable false representations for purposes of fraud. On that basis, I
find in favor of Jansing and against Zutrau on her claim for equitable fraud.
B. Standards Applicable to Breach of Fiduciary Duty Claims
Zutrau has asserted both direct and derivative breach of fiduciary duty claims
against Jansing, as ICE‘s sole director. The starting point in analyzing breach of
fiduciary duty claims ―is with the well-established presumption of the business judgment
rule, which reflects and promotes the role of the board of directors, and not the Court, as
the appropriate body to manage the business and affairs of the corporation.‖182 The
business judgment rule ―is a presumption that in making a business decision the directors
180 Tr. 178-79 (Zutrau). 181 Grunstein, 2009 WL 4698541, at *13 (quoting Berdel, Inc. v. Berman Real Estate Mgmt., Inc., 1997 WL 793088, at *8 (Del. Ch. Dec. 15, 1997)). 182 Wayne Cty. Employees’ Ret. Sys. v. Corti, 2009 WL 2219260, at *10 (Del. Ch. July 24, 2009), aff’d, 996 A.2d 795 (Del. 2010) (citing 8 Del. C. § 141(a)).
44 of a corporation acted on an informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the company.‖183 Where the business judgment
presumption is applicable, a director-approved decision will be upheld unless it cannot be
―attributed to any rational business purpose.‖184 The burden is on the plaintiff to
establish facts rebutting the presumption by ―showing that the board breached either its
fiduciary duty of due care or its fiduciary duty of loyalty.‖185 If that showing is made,
then the burden shifts to the defendant ―to demonstrate that the transaction complained of
was entirely fair to the stockholders.‖186
The fiduciary duty of care is a process-oriented duty that requires the directors of a
Delaware corporation to ―consider all material information reasonably available in
making business decisions.‖187 Duty of care violations are actionable only if the directors
acted with gross negligence, which is ―conduct that constitutes reckless indifference or
actions that are without the bounds of reason.‖188
183 Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 184 In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (Del. 2006) (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). 185 Ryan v. Gifford, 918 A.2d 341, 357 (Del. Ch. 2007). 186 Williams v. Geier, 671 A.2d 1368, 1378 (Del. 1996). 187 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 747 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006) (quoting Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000)) (internal quotation marks omitted). 188 McPadden v. Sidhu, 964 A.2d 1262, 1274 (Del. Ch. 2008).
45 The fiduciary duty of loyalty, in essence, ―mandates that the best interest of the
corporation and its shareholders takes precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by the stockholders
generally.‖189 Classic examples that implicate the duty of loyalty are ―when a fiduciary
either appears on both sides of a transaction or receives a personal benefit not shared by
all shareholders.‖190 The duty of loyalty also precludes directors from acting in bad faith,
which may be shown, among other examples that might be cited, ―where the fiduciary
intentionally acts with a purpose other than that of advancing the best interests of the
corporation, where the fiduciary acts with the intent to violate applicable positive law, or
where the fiduciary intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties.‖191
If a plaintiff fails to rebut the business judgment presumption by showing a breach
of the duties of care or loyalty, she will not be entitled to any remedy unless the
challenged transaction constitutes waste.192 To recover on a claim of waste, a plaintiff
must prove that the relevant exchange was ―so one sided that no business person of
ordinary, sound judgment could conclude that the corporation has received adequate
189 Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). 190 In re Walt Disney Co. Deriv. Litig., 907 A.2d at 749 (citing Cede & Co. v. Technicolor, Inc., 634 A.2d at 362). 191 Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006) (citing In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006)). 192 In re Walt Disney Co. Deriv. Litig., 906 A.2d at 73-74 (citing In re J.P. Stevens & Co. S’holders Litig., 542 A.2d 770, 780 (Del. Ch. 1988)).
46 consideration.‖193 Thus, a claim of waste will lie ―only in the rare, unconscionable case
where directors irrationally squander or give away corporate assets.‖194
I also note that ICE‘s COI includes an exculpatory provision adopted pursuant to 8
Del. C. § 102(b)(7). Such a provision prohibits the recovery of monetary damages from
directors for a successful shareholder claim that is based solely upon establishing a
violation of the duty of care.195 A provision adopted under Section 102(b)(7) does not,
however, eliminate a director‘s fiduciary duty of care, as a court still may grant injunctive
relief for a violation of that duty.196
C. Derivative Claims for Breach of Fiduciary Duty
In her derivative claims against Jansing for breach of his fiduciary duties, Zutrau
challenges a wide array of decisions he made and actions he took while running the
Company after her termination. As a threshold matter, I note that one possible
consequence of the Reverse Stock Split, assuming it was valid, would be that Zutrau
technically would lack standing to bring her derivative claims on behalf of ICE because
she no longer would qualify as an ICE stockholder.197 Under those circumstances,
193 Id. (quoting Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000)) (internal quotations omitted). 194 Id. 195 Emerald P’rs v. Berlin, 787 A.2d 85, 91 (Del. 2001). 196 In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 752 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006) (citing Malpiede v. Townson, 780 A.2d 1075, 1095 (Del. 2001)). 197 See 8 Del. C. § 327; Ct. Ch. R. 23.1; Parfi Hldg. AB v. Mirror Image Internet, Inc., 954 A.2d 911, 935 (Del. Ch. 2008) (―a plaintiff, bringing a derivative suit on 47 however, the derivative claims would qualify as corporate assets which would be relevant
to determining the fair value of Zutrau‘s shares at the time of the Reverse Stock Split.198
In addition to challenging the validity of the Reverse Stock Split, Zutrau questions, in the
alternative, the adequacy of the consideration she received in the Reverse Stock Split.
Zutrau‘s standing to pursue her derivative claims, however, is not at issue in this
case. Jansing has waived any objection to Zutrau litigating her derivative claims in the
context of valuing her interest in ICE in connection with the Reverse Stock Split.199
Thus, Jansing‘s liability for any derivative claims that existed at the time of the Reverse
Stock Split will be relevant to assessing the damages in this action, whether or not the
Reverse Stock Split ultimately is upheld as a valid corporate action. On that premise, I
next evaluate the merits of the derivative claims Zutrau has asserted against Jansing.
Zutrau‘s derivative breach of fiduciary duty claims fall into several different
categories. Specifically, Zutrau alleges that Jansing breached his fiduciary duties by
engaging in the following five categories of misconduct: (1) failing to replace Zutrau
behalf of a corporation, must be a stockholder of the corporation at the time he commences the suit and must maintain that status throughout the course of the litigation.‖) (quoting Heit v. Tenneco, Inc., 319 F. Supp. 884, 886 (D. Del. 1970)) (internal quotation marks omitted); Lewis v. Anderson, 477 A.2d 1040, 1049 (Del. 1984) (―A plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing to continue a derivative suit.‖). 198 See Bomarko, Inc. v. Int’l Telecharge, Inc., 1994 WL 198726, at *3 (Del. Ch. May 16, 1994) (holding, in the appraisal context, that derivative ―breach of fiduciary duty claims . . . are corporate assets that may be included in the determination of fair value.‖) (citing Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142-44 (Del. 1989)). 199 Def.‘s Opening Post-trial Br. 58.
48 with anyone who could provide competent financial oversight of the Company; (2)
paying himself unreasonable compensation; (3) causing ICE to pay for his personal
expenditures; (4) paying unreasonable compensation, fringe benefits, and remuneration to
ICE employees; and (5) wasting ICE‘s assets. I address these claims in approximately
reverse order. First, I examine the fourth and fifth categories of alleged misconduct, for
which Zutrau does not allege direct self-dealing by Jansing. Then, I turn to the second
and third categories of alleged misconduct, which do involve self-dealing by Jansing.
Finally, I address the first category of alleged wrongdoing. Central to the latter claim is
Zutrau‘s assertion that Jansing terminated her and failed to appoint an adequate
replacement in order to facilitate all of his other breaches of fiduciary duty. Because that
claim depends to some extent on the strength of her more specific claims, I find it helpful
to consider it last.
1. Zutrau’s claim that Jansing paid unreasonable compensation to ICE employees
Zutrau alleges that Jansing breached his fiduciary duties by paying unreasonable
compensation to ICE employees following her termination. Among other things, she
complains that Jansing began paying larger salaries and bonuses to certain employees.
Zutrau‘s former co-worker, Berg, who received a bonus of $7,500 in 2006,200 began
receiving larger annual bonuses thereafter including a bonus of $30,000 in 2011. 201 In
addition, after Zutrau‘s termination, Henriksen and one other ICE employee who
200 JX 329 at ICE010119. 201 JX 409.
49 previously had received only minor bonuses began receiving annual bonuses in the range
of $20,000-$25,000.202 Zutrau also complains that ICE has no formal policy on
employee bonuses and that Jansing determines bonus awards solely through the exercise
of his discretion.
In addition to challenging employee bonuses, Zutrau disputes various fringe
benefits that Jansing has awarded to ICE employees. In that regard, Zutrau objects to
ICE‘s payment of vehicle expenses for Lotspeich and another sales employee,203 as well
as social club expenses for Lotspeich.204 Zutrau also complains that Jansing has caused
ICE to award employees holiday gifts that have included $500 gift cards and i-Pads.205 In
general, she argues that Jansing‘s lavish and excessive spending on Company employees
for increases in ICE‘s payroll and fringe expenses have caused ICE‘s bottom line to
suffer.206 Similarly, to the extent that ICE‘s increased fringe expenses are due to
increased healthcare costs, Zutrau contends Jansing should have reduced the healthcare
coverage that ICE offers its employees.
202 Compare JX 329 at ICE010126, with JX 409. 203 Jansing Del. Dep. 141-43. 204 Jansing N.Y. Dep., vol. 2, 412-13; JX 372. 205 Henriksen Del. Dep. 101-02; Pollino Del. Dep. 28-30. 206 Zutrau also has alleged that certain of the perks and benefits given to ICE employees were not accounted for properly for tax purposes. Pl.‘s Opening Br. 24-25, 40-41. Zutrau did not provide any expert testimony or cite to any tax laws or regulations in support of that argument, however. Thus, I reject Zutrau‘s allegation that the disputed tax treatment was improper for lack of proof.
50 As the sole director of ICE, Jansing‘s decisions regarding what level of
compensation and benefits to provide to ICE employees are entitled to the presumption of
the business judgment rule. Thus, Zutrau bears the burden of demonstrating that
Jansing‘s decisions breached his fiduciary duties of loyalty or care, or constituted waste.
She has failed to do so.
As to the duty of loyalty, Zutrau argues that Jansing‘s decisions regarding
employee compensation were made in bad faith and were indirectly self-interested. She
alleges that Jansing intentionally overpaid ICE employees in order to deprive Zutrau of
any return on her investment, ostensibly so that she would be forced to sell her shares to
him at an unfair price.207 The only evidence that Zutrau offers to support this theory is
her testimony that, in the past, Jansing had interfered with her negotiations with
Computershare and offered her a lowball price of $150,000 for her shares, which Jansing
denies. Even if I accept Zutrau‘s testimony on the Computershare negotiations, however,
it is insufficient to support her theory that Jansing intentionally overpaid ICE employees
to deprive her of a return. At the time of the challenged compensation decisions, Jansing
was the majority stockholder of ICE, owning 78% of its shares compared to Zutrau‘s
22% equity stake. Thus, any unnecessary reduction in ICE‘s profits would have
207 At various points in her testimony and in her post-trial briefs, Zutrau also insinuates that Jansing may have overpaid ICE employees in order to elicit favorable testimony from them in the New York Action. Tr. 319-20 (Zutrau); Pl.‘s Opening Br. 26. In support of this accusation, Zutrau cites only the fact that ICE‘s overall payroll and fringe expenses increased during the same timeframe as the New York Action. This minimal evidence, however, fails to support a reasonable inference that Jansing acted for the purposes Zutrau alleges.
51 negatively impacted Jansing‘s return, and the value of his stake in the Company, nearly
four times as much as it would Zutrau‘s. Under these circumstances, I find that, more
likely than not, Jansing would not intentionally have overpaid ICE employees in order to
diminish the value of the Company and place additional pressure on Zutrau to sell her
shares. Thus, Zutrau has failed to demonstrate that Jansing‘s employee compensation
decisions were a breach of his duty of loyalty.
Regarding the duty of care, the only legally cognizable claim that Zutrau asserted
with respect to Jansing‘s employee compensation decisions challenged his process for
determining employee bonuses.208 Jansing described the criteria he used to determine
whether to give employee bonuses as including: ―[p]erformance; attitude; behavior;
contributions . . . on a professional level, on a business level. You know, just generally
their contribution from a performance standpoint.‖209 When asked how he measured
performance, and whether he relied on any objective factors to do so, Jansing answered:
―[n]o, there are no real – there‘s no policy, and I don‘t have anything written, . . . it‘s just
generally I go from year to year. And I look back on the year and make a determination
based on what‘s transpired and work off that.‖210 Zutrau asserts that the relatively
208 Zutrau generally averred that the level of compensation and benefits Jansing provided to ICE employees was excessive and not in the economic best interests of the Company. As this Court previously has noted, however, ―merely alleging that Defendants made poor business decisions does not rebut the business judgment rule or state a claim for breach of the duty of care.‖ TVI Corp. v. Gallagher, 2013 WL 5809271, at *13 (Del. Ch. Oct. 28, 2013). 209 Jansing Del. Dep. 164. 210 Id.
52 imprecise and subjective process Jansing used for making bonus determinations and the
lack of a formal policy amounted to a breach of his duty of care.
As previously noted, to demonstrate a breach of the duty of care, a plaintiff must
demonstrate that a director defendant was grossly negligent in, for example, failing to
inform himself of reasonably available material information before making a challenged
corporate decision. Delaware courts have long recognized that there is ―no single
blueprint‖211 for satisfying the duty of care and that ―[e]xactly what the law requires
varies according to the nature and importance of the considered transaction.‖ 212 For a
micro-cap company such as ICE, which employs only thirteen people, I do not consider it
unreasonable, and certainly not grossly negligent, for the chief executive to base annual
employee bonuses upon his qualitative assessment of each employee‘s performance,
attitude, behavior, and professional contributions for the preceding year. The mere lack
of a formal written policy does not render such a decision-making process unreasonable.
For these reasons, Zutrau has failed to prove her claim that Jansing breached his fiduciary
duty of care in connection with awarding employee bonuses after Zutrau was terminated.
Finally, I hold that Zutrau has not shown that the compensation and benefits
Jansing awarded to ICE employees constituted corporate waste. There was a significant
increase in aggregate payroll and fringe benefit expenses at ICE between 2006 and 2012,
211 Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1286 (Del. 1989). 212 Blackmore P’rs, L.P. v. Link Energy LLC, 2005 WL 2709639, at *8 (Del. Ch. Oct. 14, 2005) (citing Citron v. Steego Corp., 1988 WL 94738 (Del. Ch. Sept. 9, 1988)).
53 although the precise magnitude of that increase is disputed. Jansing credibly testified,
however, that a significant portion of that increase was due to the addition of new staff
and increasing healthcare costs. Those types of standard operating costs associated with
running a business almost by definition do not qualify as waste. Nevertheless, Zutrau
also complains about specific examples of what she considers to be lavish and excessive
spending, including ICE making employee vehicle payments, paying employee social
club dues, and giving employees holiday gifts. But, each of these categories of
expenditures can be attributed to a rational business purpose, including, respectively,
enabling ICE salespeople to travel to conferences and visit prospective clients, providing
an environment for ICE salespeople to meet with prospective clients, and improving
employee morale and loyalty. None of these expenditures comes close to qualifying as
―irrationally squander[ing] or giv[ing] away corporate assets,‖213 as would be required to
establish a claim for waste.
Thus, Zutrau has failed to prove that Jansing‘s decisions regarding employee
compensation breached his fiduciary duties. I next consider Zutrau‘s claim that Jansing
wasted ICE‘s corporate assets through various other, non-compensation related
expenditures.
2. Zutrau’s claim that Jansing wasted ICE’s corporate assets
As previously noted, the traditional test for waste is whether the disputed
exchange was ―so one sided that no business person of ordinary, sound judgment could
213 Brehm v. Eisner, 746 A.2d 244, 263 (Del. 2000).
54 conclude that the corporation has received adequate consideration.‖214 This stringent
standard ―is a corollary of the proposition that where business judgment presumptions are
applicable, the board‘s decision will be upheld unless it cannot be ‗attributed to any
rational business purpose.‘‖215
Zutrau challenges as wasteful numerous actions and decisions Jansing made while
running the Company from 2007 to 2012. Among other things, Zutrau takes issue with
Jansing‘s decision to upgrade ICE‘s Sage accounting software, his making of a loan on
behalf of ICE to a business acquaintance, his alleged overpayment of vendors, and other
miscellaneous expenditures that he caused ICE to incur. None of these criticisms suffices
to prove a waste claim.
In 2007, after the Company had experienced several technical malfunctions related
to its Sage accounting software, Jansing, on the advice of outside consultants, caused ICE
to pay for the system to be upgraded. The upgrades and related training cost the
Company approximately $60,000.216 Zutrau alleges that she was able to use the software
effectively before the upgrades and that acquiring them was a waste of ICE‘s corporate
assets.217 Because the record shows that ICE experienced disruptive malfunctions of the
Sage system, including some during Zutrau‘s tenure and that Jansing relied on an outside
214 In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 74 (quoting Brehm v. Eisner, 746 A.2d at 263) (internal quotation marks omitted). 215 Id. (quoting Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971)). 216 Tr. 532 (Jansing). 217 Tr. 102-05 (Zutrau).
55 consultant in responding to those problems, I find that the upgrades had a rational
business purpose and do not constitute waste.
As to the loan made on behalf of ICE to a business acquaintance, sometime in
2009, Jansing made a phone call to Ray Unger, the President of Accutech, an ICE
business partner. In that phone call, Unger revealed that he did not expect his company
to be able to make payroll the following day.218 Jansing responded by offering Unger a
loan from ICE, which Unger accepted. The loan, executed that day, was for $200,000; it
was unsecured and had no specified repayment date.219 Zutrau challenges the loan as
irrational and a waste of ICE‘s resources. The loan, however, was repaid with interest.
Moreover, Jansing credibly testified that part of his reason for making the loan was his
concern that if Accutech failed, it would negatively impact ICE‘s business.220 In those
circumstances, I find that the loan was not so one-sided as to be irrational, and did not
amount to waste.
Zutrau also claims that Jansing wastefully caused ICE to overpay certain vendors.
Specifically, she asserts that he over-estimated amounts owing to a firm known as
Infovisa, and caused ICE to pay them $32,000 instead of $23,000, an alleged
overpayment of $9,000. She also avers that, in 2009, Jansing caused ICE to overpay
vendor Commerce Clearing House (―CCH‖) by $57,000, paying more than double what
218 Tr. 540 (Jansing). 219 Id. at 541-42. 220 Id. at 542.
56 contractually was required. Zutrau, however, has offered no competent evidence in
support of her allegations that these expenditures meet the stringent test for waste. As to
Infovisa, she merely has compared the amounts that company charged during her tenure
at ICE with what it charged in later years. For her claim that Jansing overpaid CCH,
Zutrau relies almost exclusively on her own deposition testimony. 221 Jansing offered
undisputed testimony that ICE needed to increase the services it obtained from vendors
such as CCH sometime after Zutrau left to meet competition from Broadridge.222 Zutrau
asserts that, even so, ICE was overpaying for CCH‘s services. But, that allegation is
insufficient to support a waste claim for which a claimant must show that virtually no
consideration was received in the relevant exchange. Thus, Zutrau failed to establish
waste as to Jansing‘s alleged overpayment of vendors.
Finally, Zutrau challenges as wasteful a large number of miscellaneous
expenditures, including, but not limited to, spending on company outings for ICE
employees, office supplies, and an apparently large supply of gummy bear snacks for the
office. Having reviewed the record and considered the briefing and arguments of both
sides, I conclude that none of Zutrau‘s complaints about these miscellaneous
expenditures provide a basis for a finding of waste.
221 See Pl.‘s Opening Br. 24. In the circumstances of Zutrau‘s limited knowledge as to the rationale for payments after her termination, the value of her testimony on this issue is limited. 222 See Tr. 452-54.
57 3. Zutrau’s claim that Jansing paid himself unreasonable compensation
Zutrau alleges that Jansing also breached his fiduciary duties by paying himself
unreasonable bonuses from ICE during the six years from 2007 to 2012. It is uncontested
that, during that timeframe, Jansing was responsible for determining his own
compensation at ICE, as he had been before Zutrau‘s termination. In each of the years in
question, Jansing earned a base salary of $200,000. He also awarded himself a bonus of
over $100,000 in five of those years. Specifically, the bonus income Jansing received
from ICE is as follows: $432,000 in 2007; no bonus in 2008; $275,000 in 2009; $172,000
in 2010; $272,866 in 2011; and $180,172 in 2012. Thus, from 2007 to 2012, Jansing
received, in the aggregate, approximately $1.3 million in bonus compensation. His total
compensation from both salary and bonuses was approximately $2.5 million during that
period.
―Like any other interested transaction, directoral self-compensation decisions lie
outside the business judgment rule‘s presumptive protection, so that, where properly
challenged, the receipt of self-determined benefits is subject to an affirmative showing
that the compensation arrangements are fair to the corporation.‖223 Thus, ―self-interested
compensation decisions made without independent protections are subject to the same
entire fairness review as any other interested transaction.‖224 Under this heightened
223 Telxon Corp. v. Meyerson, 802 A.2d 257, 265 (Del. 2002). 224 Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 745 (Del. Ch. 2007).
58 standard of review, the defendant must demonstrate to the court‘s satisfaction and subject
to its exacting scrutiny that the challenged transaction is entirely fair to stockholders. 225
The concept of entire fairness has two basic components: fair dealing and fair
price.226 Fair dealing ―concerns how the board action was initiated, structured,
negotiated, and timed.‖227 Fair price ―relates to the economic and financial
considerations of the [transaction.]‖228 The two aspects of entire fairness are not
independent, however. Rather, ―the fair dealing prong informs the court as to the fairness
of the price obtained through the process. The court does not focus on the components
individually, but determines the entire fairness based on all aspects of the entire
transaction.‖229
a. Fair dealing
The only record evidence on the process utilized by Jansing to award himself
bonuses are his answers to a handful of questions posed at depositions in the New York
Action and in this action. Based on that limited evidence, Jansing has failed to
demonstrate that he undertook any meaningful process to ensure that the amount of his
bonus awards would be reasonable and fair to the Company or its minority stockholder.
225 See Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 42 n.9 (Del. 1994); Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). 226 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). 227 In re Digex Inc. S’holders Litig., 789 A.2d 1176, 1207 (Del. Ch. 2000). 228 Weinberger v. UOP, Inc., 457 A.2d at 711. 229 Valeant Pharm. Int’l v. Jerney, 921 A.2d at 746.
59 On March 21, 2011, in his deposition in the New York Action, Jansing was asked
how he determined his annual bonus for 2010. He answered as follows:
[T]he way that we do our year end financial management . . . is we try to pay as many bills as we can, try to clear up as much as we possibly can, get as much money as we possibly can, pay bonuses to employees, try to legitimately come up with expenses for the business, and after that, if there's money left over, . . . I will take a bonus. So I wait until everything else is accomplished until I determine what my bonus is.230
When Jansing was pressed further on how he determined the amount of any bonus he
received, he replied ―I just take whatever is . . . appropriate at that point. There is no real
formula or process.‖231
On April 29, 2013, in Jansing‘s deposition in this action, the following exchange
occurred during questioning as to his 2012 bonus:
Q. Do you think it‘s appropriate to give yourself a six- figure bonus when ICE lost money?
A. Yes.
Q. Why?
A. I thought we did a great job as a company, and I was responsible for its operations. And this was all during a time when we were going through litigation and were distracted, and we still managed to do a lot of good things. And, you know, as far as – you‘re asking me about my bonus and employees‘ bonuses or just mine?
Q. Just right now asking about yours.
230 Jansing N.Y. Dep. 317. 231 Id. at 318 (emphasis added).
60 A. Okay. If I could have, I would have paid myself more.
Q. Why didn't you?
A. I just decided that was the amount that I would take. Whatever that amount was.232
Jansing has submitted no evidence of any independent review of his bonus
determinations, and has not identified any objective criteria, formula, or procedure used
to ensure that the amount of his bonuses was reasonable. Rather, his statements under
oath indicate that he merely waited to see if the Company had cash left over at the end of
the year, without regard to whether the Company had turned a profit or to the rights of the
minority stockholder, Zutrau, and, if there was cash left over, he would award himself
some discretionary amount as a bonus, on a seemingly arbitrary basis. The process that
Jansing employed lacks any semblance of fairness.
In defense of his method for determining his bonuses, Jansing makes two
arguments, neither of which is persuasive. First, Jansing asserts that it would be
unreasonable to expect a Company with ICE‘s size and ownership structure to use an
independent compensation committee. Second, Jansing contends that the procedural
fairness of his bonus determinations for the years in question is supported by the fact he
never has had a formal process for determining the amount of his bonuses, including
during Zutrau‘s tenure with the Company.
The first argument is a red herring. Even if it would be unreasonable to expect a
Company such as ICE to use an independent compensation committee, that would not
232 Jansing Del. Dep. 196-97.
61 excuse Jansing‘s complete and total failure to adopt any meaningful procedure for
ensuring that his self-interested bonus awards were fair to ICE and its minority
stockholder. Jansing‘s second argument is equally unavailing. A wholly unconstrained
process for executing self-interested transactions does not amount to fair dealing simply
because it comports with a defendant‘s past practices.
For all of these reasons, I conclude that Jansing‘s bonus awards were not the result
of an adequate and fair process.
b. Fair price
Having concluded that Jansing‘s bonuses during the 2007-2012 timeframe were
the product of an unfair process, I proceed to consider whether the amount of those
bonuses was fair. As this Court previously has noted:
The court‘s finding that . . . [an interested] board used an unfair process to authorize the bonuses does not end the court‘s inquiry because it is possible that the pricing terms were so fair as to render the transaction entirely fair. Nevertheless, where the pricing terms of a transaction that is the product of an unfair process cannot be justified by reference to reliable markets or by comparison to substantial and dependable precedent transactions, the burden of persuading the court of the fairness of the terms will be exceptionally difficult. Relatedly, where an entire fairness review is required in such a case of pricing terms that, if negotiated and approved at arm‘s-length, would involve a broad exercise of discretion or judgment by the directors, common sense suggests that proof of fair price will generally require a showing that the terms of the transaction fit comfortably within the narrow range of that discretion, not at its outer boundaries.233
233 Valeant Pharm. Int’l v. Jerney, 921 A.2d at 748-49.
62 Among the factors a Court may consider in determining whether salary is
reasonable are whether it bears a reasonable relation to salary received in the past and
how the amount of the challenged salary compares to other salaries paid by the
employer.234 Thus, I consider the amount of salary and bonuses that Jansing and Zutrau
received in the three years preceding Zutrau‘s termination to be a useful starting point in
this analysis.
During those three years, Jansing was the President and sole director of ICE and
Zutrau was its Treasurer and Vice President. As President, Jansing ultimately was
responsible for all of ICE‘s major operational decisions and effectively acted as the
Company‘s CEO. Jansing received a base salary of $200,000 in each of the three years
from 2004 to 2006.235 Zutrau‘s annual salary was $140,000 in 2004 and 2005, and
$180,000 in 2006.236 As for bonuses, in 2004, bonuses of $120,000 were awarded to
Jansing and Zutrau; in 2005, Jansing received no bonus and Zutrau received $100,000;
and in 2006, Jansing and Zutrau received bonuses of $378,000 and $211,000,
respectively.237 Thus, in the three years preceding Zutrau‘s termination, substantial
234 Wilderman v. Wilderman, 315 A.2d 610, 615 (Del. Ch. 1974). 235 JX 518. 236 Id. 237 Id. Although the sums of $378,000 and $211,000 were paid as bonuses through payroll to Jansing and Zutrau, respectively, in 2007, Zutrau maintains that only she received a bonus that year. Specifically, she claims that $100,000 of the amount she received was actually a bonus, and that the remaining amounts that were paid to herself and Jansing were actually disguised shareholder distributions, awarded to them to cover their shareholder tax liability and issued through payroll 63 bonuses had been awarded to ICE‘s officers, with Jansing and Zutrau each receiving
average bonuses of approximately $166,000 and $144,000, respectively. As Jansing‘s
bonuses were only slightly larger than Zutrau‘s in those three years, despite his more
senior position, I consider those bonus awards to be presumptively fair. The average size
of Jansing‘s annual bonus in the six years from 2007-2012, however, was approximately
$222,000, significantly larger than his previous bonuses. Moreover, even if the size of
Jansing‘s average annual bonus had not increased after Zutrau‘s termination, Jansing still
would bear the burden of proving that the same level of bonus compensation was justified
and entirely fair in those later years.
so they could be written off by ICE as compensation expenses. See Tr. 54-55. I reject this argument as barred by collateral estoppel or issue preclusion.
Zutrau made precisely this same argument to the New York Court. She claimed that the bonuses Jansing awarded himself from 2007-2012 were also disguised shareholder distributions, in which she was entitled to share on a pro rata basis. JX 439 at 32-33. In rejecting that claim, the New York Court held as follows: ―Maurice Kalaygian, Jansing‘s personal accountant and a CPA, testified that it is not an acceptable accounting practice to make shareholder distributions through payroll. He also testified that ICE paid shareholder distributions in 2010 and 2011, but not before 2010. The court credits Kalaygian's testimony over contradictory testimony by [Zutrau], who is not an accountant and has no formal training in accounting. Moreover, the documentary evidence supports the defendants‘ view that the bonuses were not shareholder distributions.‖ Zutrau v. Ice Sys., Inc., 2013 WL 1189213, at *8 (N.Y. Sup. Ct. Mar. 20, 2013). I therefore consider this factual issue to have been resolved conclusively in the New York Action and I will not revisit that issue here. See Sanders v. Malik, 711 A.2d 32, 33 (Del. 1998) (―The doctrine of collateral estoppel essentially prohibits a party who has litigated one cause of action from relitigating in a second cause of action matters of fact that were, or necessarily must have been, determined in the first action.‖).
64 Jansing, who has remained ICE‘s President and sole director throughout the
relevant time period, has not identified any change in his business responsibilities at ICE
that would justify an increase in his compensation. Rather, to support the fairness of the
amount of his bonus awards, Jansing relies almost exclusively on the report and
testimony of his expert witness on compensation, Priya Kapila, who conducted a market-
based assessment of Jansing‘s compensation levels.238
To determine what level of compensation would be reasonable for Jansing, Kapila
first compared ICE‘s financial performance (as a proxy for Jansing‘s performance as
President) with the financial performance of a peer group of six companies (the ―Peer
Group‖).239 The companies in the Peer Group are similar in size to ICE (reporting one-
half to two times ICE‘s annual revenues) and their operations include data processing
services (defined by having a Standard Industry Classification (―SIC‖) code of 7374, as
does ICE).240 Kapila concluded that ICE performed in the 90th percentile compared to the
Peer Group in the first three years under consideration (2007-2009), and in the 50th
percentile in the last three years (2010-2012).241 Using those percentiles, Kapila then
compared Jansing‘s total compensation for each year, including total cash compensation
(i.e., salary and bonuses), long-term incentives, and ―perks,‖ to market compensation
238 See Tr. 758-83; JX 509. 239 Tr. 759-61; JX 509 at 4-7. 240 JX 509 at 4-7. 241 Id.
65 survey data for CEOs. She collected the market data from five different sources.242
Assuming that Jansing received perks of approximately $3,000 per year, Kapila
concluded that his aggregate total compensation for the six years in question, which she
calculated to be $2,550,038, was reasonable under the circumstances and could have been
higher by $248,503 and still been reasonable.243
Zutrau presented the report and testimony of a rebuttal expert on compensation,
Thomas Tilghman. Tilghman highlighted a number of problems with Kapila‘s analysis
that he contends render unreliable her conclusion that Jansing‘s compensation during the
relevant period was reasonable.244 Most significantly, Tilghman identified problems with
the Peer Group and with the survey compensation data utilized by Kapila in her report.
As to the Peer Group, Tilghman asserted that six companies is significantly below
the number that typically is recommended for a peer group analysis and opined that it is
not a sufficient sample size to make meaningful comparisons to ICE.245 At trial, Kapila
conceded that WorldatWork, the professional organization of compensation experts that
sets guidelines for compensation analyses, suggests that a peer group survey should
include at least twelve or more companies.246 Tilghman also observed that, although the
companies in the Peer Group use the same SIC code in government reporting as ICE
242 Tr. 761-63; JX 509 at 7-13. 243 JX 509 at 7-13. 244 See Tr. 784-90; JX 510. 245 JX 510 at 6. 246 Tr. 777.
66 does, they do not appear to be genuinely comparable.247 In that regard, public filings of
the companies in the Peer Group indicate that only one of them provides proxy services,
while three are in the business of credit card or other payment processing and two operate
in the healthcare industry.248 Finally, the overall performance of the supposedly
comparable companies was markedly poor for the years in question, with at least half of
the companies having had negative income in each year and with even the 75th percentile
income levels being negative in three of the six years.249
Based on the Peer Group‘s small sample size, lack of comparability with ICE, and
notably poor performance during the relevant timeframe, I find that the Peer Group does
not provide an effective gauge of ICE‘s performance for the years in question. Yet,
Kapila used the Peer Group to justify her conclusion that Jansing was entitled to receive
compensation in the 90th percentile for three of the six years she analyzed. If the Peer
Group benchmarks are disregarded and Jansing‘s compensation is compared instead to,
for example, the 50th percentile of the compensation survey data, his compensation
appears to have been unreasonable.250 Specifically, assuming Jansing was entitled to the
50th percentile compensation levels that Kapila included in her report, reasonable
247 JX 510 at 6. 248 See id. Ex. 4. 249 See JX 509 at 5-7. 250 See id. at 11-12.
67 aggregate compensation for Jansing for the years from 2007-2012 would be $2,057,983.
That would imply that Jansing overpaid himself by approximately $500,000. 251
In addition to identifying problems with the Peer Group, Tilghman objected to
Kapila‘s use of broad based compensation surveys to derive reasonable compensation
figures for Jansing.252 In that regard, Tilghman noted that at least two of the five survey
sources relied upon by Kapila collect information primarily from publically traded
companies that are substantially larger than ICE.253 The category comprised of the
smallest companies for which one of those sources collects information consists of
companies earning under $1 billion or employing fewer than 1,000 full time employees—
revenue and employment statistics that dwarf ICE‘s.254 Although Kapila attempted to fit
the data she collected to a company of ICE‘s size through regression calculations,
Tilghman credibly averred that such calculations can lead to skewed results for
companies whose size is far different from the mean for the relevant data sample.255
Tilghman also asserted that the industry classifications for several of the survey sources,
including classifications such as ―professional services‖ or ―services,‖ were too broad to
251 Id. 252 Tr. 787-89; JX 510 at 4-6. 253 JX 510 at 5. 254 Id. 255 Id. The highest annual revenue ICE achieved in the 2007-2012 period was approximately $3.7 million. See JX 500 Schedule 3b. Similarly, the most employees ICE had in that timeframe was thirteen. Tr. 449 (Jansing).
68 reflect accurately the niche industry within which ICE operates.256 I found Tilghman to
be a competent and reliable witness and agree that the considerations he identified limit
the probative value of the compensation statistics upon which Kapila relied.
For the foregoing reasons, I conclude that Jansing failed to prove that the bonus
compensation he received from 2007-2012 was at a fair price to the Company.
c. Jansing’s bonuses were not entirely fair
Because Jansing‘s bonus awards from 2007-2012 were the result of an unfair
process and Jansing failed to prove the fairness of the amount of those bonuses, I hold
that those bonuses were not entirely fair and that Jansing‘s payment of those bonuses to
himself constituted a breach of his duty of loyalty. The remaining question, therefore, is
what remedy to provide for that breach. ―When a transaction does not meet the entire
fairness standard, the Court of Chancery may fashion any form of equitable and monetary
relief as may be appropriate.‖257 Although rescission frequently is granted where self-
dealing transactions are found not to be entirely fair, ―where an officer-director has fixed
his or her own compensation, our courts have recognized a right to recover under a theory
of quantum meruit.‖258
Although Jansing failed to demonstrate that the full amount of the bonuses he
awarded himself from 2007 to 2012 was reasonable, I recognize that, before Zutrau‘s
256 Tr. 788; JX 510 at 5. 257 Julian v. E. States Const. Serv., Inc., 2008 WL 2673300, at *19 (Del. Ch. July 8, 2008). 258 Technicorp Int’l II, Inc. v. Johnston, 1997 WL 538671 (Del. Ch. Aug. 25, 1997); see also Wilderman v. Wilderman, 315 A.2d 610, 614-16 (Del. Ch. 1974).
69 termination, Jansing and Zutrau both received bonuses that constituted a significant
portion of their total compensation as officers. In addition, Jansing has not increased his
baseline salary, even for cost of living adjustments, since at least 2004. Overall,
however, ICE was not as profitable from 2007 to 2012 as it had been in the preceding
three years, due mainly to its mediocre performance since 2010. On the other hand, the
Company has increased in size since 2007 and it experienced its most profitable year
under Jansing‘s leadership in 2009. Based on these factors, and in consideration of all of
the other facts and circumstances relevant to Jansing‘s performance, I conclude that
Jansing was entitled to receive annual bonus compensation from 2007 to 2012 at
approximately 75% of the rate he previously had been receiving, which would equate to
about 56% of the rate of bonus compensation that he actually awarded himself from
2007-2012. Thus, for purposes of determining appropriate damages for this claim, I
consider it useful to quantify the amount of excess compensation that Jansing received,
which would be 44% of the bonus compensation that he awarded himself each year in the
2007-2012 timeframe. The amount of excess compensation year-to-year based on
Jansing‘s bonus compensation, therefore, would be as follows: $190,080 for 2007;
$121,000 for 2009; $75,680 for 2010; $120,061.04 for 2011; and $79,275.68 for 2012.259
259 For the sake of completeness, I have stated here the putative amount associated with Jansing‘s excess compensation in 2012. For the reasons stated infra in note 363, however, this amount ultimately was not relevant to any remedy the Court is awarding Zutrau.
70 4. Zutrau’s claim that Jansing caused ICE to pay for personal expenditures
Zutrau claims that Jansing breached his fiduciary duties after her termination by
causing ICE to pay for various personal expenditures. Most significantly, she alleges
that, on numerous occasions, he improperly charged personal expenses to his company-
issued American Express (―Amex‖) card. She also alleges that Jansing improperly
caused the Company to pay for several other personal expenses. I first address the claim
relating to Jansing‘s use of his Amex card.
a. The personal expenditures Jansing allegedly improperly charged to his Amex card
Zutrau challenges $50,992.42 in allegedly improper expenses that Jansing charged
to his Amex card from 2007 to 2012 (the ―Amex charges‖), including meal, travel,
vehicle, mailing, and other miscellaneous charges, some as low as $5.99. 260 It is
undisputed that, both before and after Zutrau‘s termination, Jansing used his Amex card
predominantly to pay for business expenses. The $50,992.42 in expenses that Zutrau
challenges are out of a total of over $1 million in expenses that were charged to Jansing‘s
Amex card during the relevant period. Zutrau also complains about Jansing‘s use of his
Amex card‘s ―rewards points‖ to pay for personal expenditures. Specifically, she alleges
that he improperly used 1,391,770 rewards points that, according to Zutrau, have an
approximate value of $.01 each, for a total value of $13,917.70.261
260 JX 507 Ex. B. 261 Tr. 315.
71 As to the rewards points, Jansing does not dispute that he redeemed them for
personal expenditures. Rather, he avers that his use of the rewards points did not cost the
Company any money and should be treated as a de minimis perk. Zutrau admits that
Jansing‘s use of the rewards points did not require any cash outlays by the Company.262
She asserts, however, that they could have been used for other purposes, such as
purchasing office supplies.263 ICE had no formal policy on rewards points,264 but no
evidence has been offered to suggest that Jansing‘s use of the rewards points was
inconsistent with past practices at ICE or with general industry custom. Here, where the
alleged market value of the rewards points accumulated on Jansing‘s Amex card was
approximately $2,300 per year, or just over 1% of his base salary of $200,000 (the
fairness of which is not disputed), I find Jansing‘s use of them to be a de minimis perk
rather than a breach of his fiduciary duties. At trial, Jansing provided uncontroverted
testimony that he used rewards points to pay for $5,976.70 of the Amex charges that
Zutrau challenges.265 Thus, the value of the remaining charges for which Jansing could
be held liable is $45,015.72.
262 Tr. 316. 263 Tr. 362; see Tr. 601 (Jansing). 264 Tr. 601 (Jansing). 265 See Tr. 551-52 (Jansing); Def.‘s Demonstrative Ex. (―DDX‖) 1. Zutrau has objected to DDX 1 and I refer to it only for limited noncontroversial purposes, including to the extent it reflects uncontroverted testimony or admissions by Jansing.
72 Jansing avers that a substantial majority of the remaining Amex charges were for
business expenses, but admits that some were for personal expenses and did not get
reimbursed because Jansing considered them to be negligible.266 In that regard, Jansing
admitted that $4,134.26 of the Amex charges were personal, as reflected in a
demonstrative that he presented at trial.267 Jansing also admitted that an additional
$5,065.54 of the Amex charges were combined-purpose travel expenses.268 This
category of expenses included travel expenses for trips that Jansing took with his
daughter and visits to his relatives, including during the holidays. 269 Although Jansing
claims that he also did work on these trips,270 I find that the charges were predominantly
personal expenses for which ICE should not have been charged. Thus, at least $9,199.80
of the Amex charges were for personal expenses.
266 Tr. 484. 267 See Tr. 551-53; DDX 1. In DDX 1, one purchase for $216.74 from Hertz Car Rental on February 15, 2009 was described as ―Personal‖ but not included in the calculation of ―Total Personal Expenses,‖ which were listed as having a value of $3,917.52. I take the description of the $216.74 expense as ―Personal‖ in DDX 1 as an admission and note that Jansing also previously described that expense as personal in a deposition. Jansing N.Y. Dep. 566. Thus, I consider its exclusion from the ―Total Personal Expenses‖ to be an oversight and deem Jansing‘s admitted ―Total Personal Expenses‖ to be $4,134.26. 268 See Tr. 551-53; DDX 1. 269 Id.; Jansing NY Dep. 554-55. 270 Tr. 552-53.
73 Of the remaining $35,815.92 in Amex charges, $7,943.60 relate to maintenance
and repair of Jansing‘s Company vehicle, a truck.271 The record indicates that the truck
was purchased for business purposes, including to facilitate transportation of business
materials, and provided ICE with a tax benefit.272 Although Zutrau alleges that Jansing
used this truck primarily as his personal vehicle, I am satisfied that maintenance and
repair of the truck was a business expense.
Thus, $27,872.32 of the Amex charges remain in dispute. Apart from $1,473.38
in charges for which Jansing cannot recall the purpose, Jansing generally has averred that
all of the remaining charges were for business expenses.273 Based on her review of the
Amex card statements, Zutrau stated her opinion at trial that each of these expenses was
most likely personal or otherwise not a proper business expense, but she admitted that the
information available from the credit card statements does not provide definitive proof
one way or another.274 Because neither side has submitted convincing evidence as to the
nature of these expenses, whether Jansing‘s charging of them to the Amex card should be
treated as a breach of his fiduciary duties will depend upon who bears the burden of
proof.
As the decision of whether or not to charge an expense to the Company card is a
business decision, it is, by default, entitled to the presumption of the business judgment
271 See Tr. 551-52 (Jansing); DDX 1. 272 See Tr. 202-03 (Zutrau); JX 539. 273 See Tr. 549-51; DDX 1. 274 Tr. 101, 272-75.
74 rule.275 Nonetheless, Zutrau makes two arguments for shifting the burden to account for
the Amex charges to Jansing in the circumstances here.
First, citing Technicorp Int’l II, Inc. v. Johnston,276 Zutrau argues that, because
there are undisputed instances where Jansing used corporate funds to pay for personal
expenditures, Jansing should bear the burden of demonstrating that the remaining charges
she challenges were incurred for a proper business purpose. I do not read Technicorp as
supporting Zutrau‘s position. In Technicorp, the plaintiffs made a ―prima facie showing‖
that the two individual defendants had diverted over $11 million away from one of the
plaintiff companies while it was under the exclusive control of the defendants.277 Under
those circumstances, the Court stated that the defendants ―have the burden of showing
that they dealt properly with corporate funds and other assets entrusted to their care‖ and
―have a duty to account for their disposition of those funds, i.e., to establish the purpose,
amount, and propriety of the disbursements.‖278 Here, Zutrau has not made a prima facie
showing that any of the remaining Amex charges were incurred improperly; rather, her
challenges to those charges are based on speculation and are not supported by substantial
evidence.279
275 See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 276 2000 WL 713750 (Del. Ch. May 31, 2000). 277 Id. at *15. 278 Id. at *16. 279 See Tr. 101, 272-75 (Zutrau).
75 Another case that arguably supports Plaintiff‘s first argument for shifting the
burden is Carlson v. Hallinan, but it, too, is not controlling under these facts.280 In
Carlson, in response to evidence submitted by the plaintiff that the defendant directors
systematically were diverting corporate assets to benefit other entities they owned, and
failing to keep track of those expenditures, the Court concluded that an accounting was
necessary ―to determine the extent of the misallocation of expenses and the damages
resulting therefrom.‖281 Although ICE‘s lack of formal expense reporting is far less than
ideal, I find that the relatively minimal nature of the personal expenses that Jansing has
been shown to have charged to the Company over a span of six years is not sufficient to
warrant shifting the burden of proof to him.282
Second, Zutrau renews her first motion to compel and argues that a shifting of the
burden of proof is appropriate as a sanction for Jansing‘s failure to comply with his
discovery obligations. By way of background, on February 27, 2013, Zutrau served
Jansing with her Third Request for the Production of Documents (the ―Third Request for
Production‖),283 in which she requested, among other things, approximately eighty-five
merchant receipts for various purchases charged to Jansing‘s Amex card from 2007 to
280 925 A.2d 506 (Del. Ch. 2006). 281 Id. at 537. 282 See Sutherland v. Sutherland, 2010 WL 1838968, at *16 (Del. Ch. May 3, 2010) (rejecting plaintiff‘s attempt to ―have the Court impose an affirmative duty on fiduciaries to come forward and explain the allocation of company funds at the behest of any inquiring shareholder‖). 283 Pl.‘s Mot. to Compel Ex. C (D.I. No. 112).
76 2012. On April 4, 2013, Jansing responded to the Third Request for Production. He
objected to Zutrau‘s requests for receipts, among other requests, on the grounds that they
were unduly burdensome, duplicative, and unnecessary,284 and refused to produce the
receipts.
Zutrau filed a motion to compel production of withheld documents responsive to
the Third Request for Production on May 1, 2013, the last day of fact discovery. 285 I
heard argument on that motion in conjunction with the pre-trial conference on July 25,
2013, less than a week before the commencement of trial. Due to the limited time
remaining before trial, I determined that ordering production of the multitude of
documents requested by Zutrau‘s motion would not be practical, but took the motion
under advisement and granted Zutrau leave to pursue certain burden shifting arguments
originally raised in her motion in post-trial briefing.
Zutrau now argues that, based on Jansing‘s failure to produce the receipts she
requested in her Third Request for Production, the burden should be shifted to him to
prove that all of the challenged Amex charges were proper business expenses. At the
outset, I conclude that such wholesale burden-shifting would be inappropriate. Only
nineteen of the receipts that Zutrau requested in her Third Request for Production
actually correspond to any of the over 300 Amex charges that she questions in this
284 Id. Ex. D. 285 Pl.‘s Mot. to Compel; First Am. Case Scheduling Order (D.I. No. 94).
77 action.286 Moreover, of the nineteen receipts that are relevant to Zutrau‘s claims, twelve
relate to purchases that were made using rewards points.287 Thus, only seven of the
numerous receipts Zutrau requested correspond to Amex charges that she challenges in
this action that were not redeemed with rewards points. Those charges were for the
following transactions: (1) $150 to the Golf Shop Inc. on July 30, 2007; (2) $1004.50 to
PC Richard & Sons on September 28, 2008; (3) $902.96 to PC Richard & Son on March
10, 2010; (4) $456 to the Southampton Inn on November 12, 2010; (5) $963.87 to the
Southampton Inn on November 17, 2010; (6) $651.73 to Best Buy Co. on December 1,
2010; and (7) $1,060.00 to Bissinger‘s Web Catalog on May 5, 2011. 288 The total
amount of these seven charges is $5,189.06.
As to these seven charges for which receipts were requested, I hold that burden-
shifting is appropriate. Court of Chancery Rule 26(b)(1) provides that parties may obtain
discovery of any non-privileged matter which ―is relevant to the subject matter involved
in the pending action, whether it relates to the claim or defense of the party seeking
discovery or to the claim or defense of any other party‖ and appears ―reasonably
calculated to lead to the discovery of admissible evidence.‖ In her Third Request for
286 Compare Pl.‘s Mot. to Compel Ex. C, with JX 507 Ex. B. 287 Compare Pl.‘s Mot. to Compel Ex. C, with JX 507 Ex. B, and DDX 1. The twelve purchases that were made with rewards points include one purchase of $136.95 from Frontgate Catalog Household on September 3, 2009 that initially was charged to the Amex card and later backed out using rewards points. See supra note 265 & accompanying text. 288 See supra note 286.
78 Production, Zutrau requested receipts for the seven disputed charges enumerated above. I
find her requests for those receipts were reasonably calculated to lead to the discovery of
admissible evidence. Jansing‘s objections that the receipts were duplicative and
unnecessary in light of the Amex statements, which provide only general information as
to the date and amount of the purchases and the relevant vendors, is unpersuasive. I also
reject Jansing‘s objection that production of the receipts would have been overly
burdensome. The receipts relevant to the Amex charges were kept in ICE‘s records along
with the Amex statements.289
Thus, Jansing should have provided Zutrau with at least the seven requested
receipts now at issue. Under these circumstances, I consider shifting the burden of proof
as to the seven underlying purchases to be an appropriate equitable sanction for Jansing‘s
failure to comply with his discovery obligations. As to those seven purchases, I therefore
conclude that Jansing has the burden ―to account for [his] disposition of those funds, i.e.,
to establish the purpose, amount, and propriety of the disbursements.‖290
Jansing has failed to meet this burden. To prove the propriety of the contested
Amex charges, Jansing relies almost entirely upon the demonstrative exhibit he presented
at trial, which lists the challenged Amex charges and the purported business purposes for
the charges that Jansing asserts were proper.291 A demonstrative exhibit is not
289 Henriksen N.Y. Dep. 74. 290 Technicorp Int’l II, Inc. v. Johnston, 2000 WL 713750, at *16 (Del. Ch. May 31, 2000). 291 See DDX 1.
79 substantive evidence, however, and Jansing provided no particularized testimony as to
the contested charges or documentation to support the business purposes listed on the
demonstrative. Thus, Jansing has failed to meet his burden as to those charges and will
be deemed to have improperly charged the Company for an additional $5,189.06.
Jansing‘s use of his Amex card to make the remaining contested purchases,
totaling $22,683.26, is protected by the business judgment rule. As to these, Zutrau has
presented no substantive evidence sufficient to overcome the business judgment
presumption. Jansing is presumed, therefore, to have made those purchases in
accordance with his fiduciary duties. In sum, I conclude that Jansing improperly charged
the Company for $14,388.86 out of the $50,992.42 in purchases that Zutrau challenges.
To that extent, Jansing breached his duty of loyalty.
b. Zutrau’s remaining claims that Jansing improperly caused ICE to pay for personal expenditures
In addition to challenging Jansing‘s use of his Amex card, Zutrau claims that
Jansing improperly caused ICE to pay for several other personal expenses, including
interest on funds that he withdrew from the Credit Line as well as various personal tax,
legal, and accounting expenses.292
292 Earlier in this litigation, Zutrau questioned the propriety of annual charitable contributions that Jansing caused ICE to make to the Jansing Cook Foundation, a charitable trust of which he is a trustee. See Tr. 93-94 (Zutrau); JX 507 Ex. C. Zutrau did not address those contributions in her post-trial briefing, however. I, therefore, consider any claims based upon them to be waived. See Emerald P’rs v. Berlin, 726 A.2d 1215, 1224 (Del. 1999).
80 Most significantly, Zutrau questions Jansing‘s withdrawal of $250,000 from the
Credit Line on June 19, 2007, the day before her termination, and placement of that
money in his personal Citibank account. At various times over the course of this
litigation, Zutrau has suggested that Jansing withdrew the money to help him make the
$271,000 down payment he made on his new home in Southampton, New York, two days
after she was fired. The amount and timing of the down payment is suspicious. The
record developed at trial, however, shows that Jansing used separate funds to make that
down payment and kept the available balance in his Citibank account at approximately
$250,000 until he later used the funds from that account to repay the principle balance on
the Credit Line on November 27, 2007.
Nonetheless, it is undisputed that Jansing caused ICE to pay the interest on the
Credit Line during the five months that the borrowed sum of $250,000 was in his
personal account. The total interest that ICE paid on the Credit Line as a result of
Jansing‘s withdrawal was $9,919.52.293 Jansing argues that he should not be liable for
this amount, because he withdrew the balance of the Credit Line in reliance on his
banker‘s advice that he should keep those funds in his personal account until such time as
ICE could obtain a new credit line. I do not find Jansing‘s testimony regarding his
reliance on his banker‘s advice to be exculpatory, however, because Jansing never
applied for a new credit line. Rather, in October 2008, approximately one year after he
293 See JX 484; JX 346 at ISI 001819 (Interest Paid/Payable).
81 repaid the balance on the Credit Line and about a year and a half after Zutrau‘s
termination, Jansing applied for an extension of the existing Credit Line.
Thus, Jansing has articulated no legitimate business justification for his
withdrawal of the $250,000. Rather, the evidence suggests that Jansing took the
challenged actions to facilitate his own efforts to keep the Credit Line in place without
having to confront the possibility that Zutrau would remove her name as co-guarantor
and create a risk that ICE would lose the Credit Line. The record indicates that if Zutrau
had withdrawn her guarantee immediately, there was a material risk that the Credit Line
would be revoked. In that regard, Jansing has admitted that, due to his poor credit, ICE
would not have been able to obtain the Credit Line in the first place without the benefit of
Zutrau‘s creditworthiness.294 I also note that, in connection with Zutrau‘s termination,
Jansing removed Zutrau‘s name and signatory power from all Company bank accounts, a
credit card account, and a retirement benefits administration account, but conspicuously
left Zutrau‘s name on the Credit Line as a co-guarantor until sometime after he repaid the
$250,000 he had withdrawn.
In these circumstances, I find that Jansing intentionally withdrew $250,000 from
the Credit Line so that ICE‘s minority stockholder, Zutrau, would have no choice but to
remain financially responsible for that amount as a co-guarantor. Thus, Jansing also
acted to serve his own purposes in terms of his efforts to sever his ties with Zutrau
without giving her any notice and without having to negotiate with her about matters such
294 Tr. 572-73; see also Tr. 33-34 (Zutrau).
82 as her guarantee on the Credit Line, and not to further any legitimate business purpose of
ICE. Jansing‘s conduct amounted to a breach of his duty of loyalty, which warrants
holding him liable for the interest that ICE paid on that withdrawal. Although Jansing
claims that he repaid a portion of the interest,295 he adduced no credible evidence as to the
amount of any such repayment. Therefore, I find that the Company has a legitimate
claim against Jansing for the full amount of the interest that it paid, or $9,919.52.
Zutrau also alleges that, in December of 2007, Jansing caused ICE to pay $12,315
of his personal income taxes and wrote it off as an expense of ICE. As to this claim, I
credit Kalaygian‘s trial testimony that the $12,315 constituted ICE‘s portion of the taxes
due on Jansing‘s income, not Jansing‘s own tax liability.296
In addition, Zutrau claims that Jansing improperly used ICE‘s corporate funds to
pay for personal legal and accounting work and caused ICE to reimburse him for various
out of pocket expenses that were personal in nature. Zutrau failed to pursue these claims
at trial, however, and proffered no probative evidence in support of them or any related
damages. Thus, she has failed to prove this aspect of her claims for inappropriate
payment of personal expenditures.
5. Zutrau’s claim that Jansing failed to replace Zutrau with someone who could provide oversight
Zutrau claims that Jansing breached his duties of care and loyalty by choosing to
keep the position of Treasurer vacant after her termination and by failing to replace her
295 Tr. 508-09 (Jansing). 296 Tr. 691.
83 with anyone who could provide competent financial oversight of the Company, all so that
he could use ICE‘s assets for his own personal benefit and engage in unchecked self-
dealing. In that regard, Zutrau criticizes Jansing‘s appointment of Henriksen to serve as
Controller and his retention of Kalaygian to assist with the Company‘s financials. She
alleges that they were unable to fill the oversight void left by her termination because
both Henriksen and Kalaygian are unqualified for their positions and are beholden to
Jansing.
Jansing‘s business decision not to appoint a new Treasurer and, instead, to hire
Henriksen and Kalaygian to replace Zutrau and perform most of the functions that she
previously performed at ICE is entitled to the presumption of the business judgment
rule.297 Thus, the burden is on Zutrau to prove that Jansing breached his fiduciary duties
in making that decision. Zutrau has failed to do so.
As to the duty of loyalty, I find that Zutrau‘s claim that Jansing failed to replace
her with people competent to provide oversight in order to facilitate his own self-dealing
fails, as a matter of fact and law, because Zutrau—who was a minority stockholder and
officer, but not a director of ICE, like Jansing—never had the authority to oversee or
prevent the few instances of inappropriate self-dealing by Jansing that she has proven.298
The two examples of self dealing by Jansing that have been shown in the six year period
297 See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984). 298 See JX 196 ¶ 2 (Stipulation by Zutrau in the New York Action, stating: ―My work at ICE was at all times under the control of Jansing, who was the Company‘s majority owner, President, and sole Director.‖).
84 following Zutrau‘s termination are: (1) that Jansing paid himself excessive compensation;
and (2) that Jansing improperly charged certain personal expenses to his Amex card.299
As to the first example, Jansing always has been responsible for setting employee
compensation at ICE, including his own, and Zutrau adduced no evidence that she ever
had the authority to overrule those determinations.300 As Zutrau averred in a stipulation
in the New York Action, ―Jansing set the compensation for all Company employees,
including raises and bonuses, and I had no authority to do so.‖301 Turning to the second
example, although it is undisputed that Zutrau successfully had prompted Jansing to
reimburse the Company for certain personal expenses charged to his Amex card in the
past, she would not have had the authority to overrule him if Jansing insisted that a given
charge be treated as a business expense.302 Furthermore, even if Zutrau‘s questioning of
Jansing‘s Amex charges may have inconvenienced or annoyed him, I find it implausible
that Jansing would have fired Zutrau and appointed Henriksen and Kalaygian as her
replacements to facilitate his ability to charge his personal expenses more freely to the
Company. Therefore, Zutrau has failed to prove a breach of the duty of loyalty in
connection with this claim.
299 I also concluded that Jansing‘s withdrawal of $250,000 from the Credit Line was done in bad faith in that Jansing sought to serve his own interests rather than the best interests of ICE. That action, however, was not self-dealing in the traditional sense. In any event, Zutrau at no time had the authority to prevent Jansing from making such a unilateral withdrawal. Id. 300 Tr. 485 (Jansing). 301 JX 196 ¶ 5. 302 See id. ¶ 2.
85 As to the duty of care, Zutrau has neither alleged nor presented evidence
suggesting that Jansing failed to inform himself properly before deciding to terminate her
and hire her replacements, nor has she proven any other deficiencies in Jansing‘s
decision-making process that would support a claim for breach of that duty. Thus, Zutrau
has failed to demonstrate that Jansing breached his duty of care by terminating her
employment and replacing her with Henriksen and Kalaygian.
I also note that to the extent that Zutrau‘s claim can be interpreted as challenging
Jansing‘s own failure to exercise proper oversight over the Company, she has not
proffered evidence of the type of ―sustained or systematic failure‖ needed to succeed on
such a claim.303
Having addressed the merits of each of Zutrau‘s derivative claims against Jansing
for breach of his fiduciary duties, I now turn to her direct claims challenging the Reverse
D. Claims Challenging the Reverse Stock Split
Sections 242 and 155 of the DGCL authorize a corporation to effect a reverse
stock split via a charter amendment that may result in stockholders with fractional
interests being cashed out of the corporation.304 Section 242 provides that a corporation
may amend its COI to ―subdivid[e] or combin[e] the outstanding shares of any class . . .
303 Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006) (quoting In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996)). 304 See Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 455 (Del. Ch. 2011).
86 of shares into a greater or lesser number of outstanding shares,‖305 which may result in
some stockholders getting fractional interests. Under Section 155 of the DGCL, if a
corporation effects a transaction that results in fractional interests, it may opt to
compensate stockholders in lieu of issuing fractional shares, in which case it must ―pay in
cash the fair value of fractions of a share as of the time when those entitled to receive
such fractions are determined.‖306
On June 11, 2012, Jansing filed an amendment to ICE‘s COI and thereby effecting
the Reverse Stock Split, at a ratio of one share for every 62.5 outstanding shares. 307 The
amendment to the COI provided that, following the split, any stockholders holding less
than one share of ICE stock would be cashed out in lieu of receiving fractional shares.
As a result of the Reverse Stock Split, Jansing‘s 125 shares of ICE stock (representing
about 78% of the outstanding equity) were converted into two shares, and Zutrau‘s 36
shares of ICE stock (representing about 22% of the outstanding equity) were converted
into .576 shares.308 In connection with the Reverse Stock Split, Jansing notified Zutrau
by letter that she was no longer a stockholder of ICE and provided her with a check for
$495,778.81, which Jansing described as ―the fair value for your fractional shares.‖309
Zutrau never deposited the check.
305 8 Del. C. § 242(a)(3). 306 8 Del. C. § 155. 307 JX 681. 308 See id.; JX 501. 309 JX 501. 87 Zutrau challenges the Reverse Stock Split on two principal grounds. First, she
argues that Jansing effected the Reverse Stock Split for the sole purpose of depriving her
of standing to pursue her derivative claims, in breach of his fiduciary duties. Second, she
contends that she received inadequate consideration for her fractional shares, in breach of
Jansing‘s fiduciary duties as well as the ―fair value‖ requirement of Section 155. By way
of relief as to both grounds, Zutrau seeks to have the Reverse Stock Split rescinded and to
be reinstated as an ICE stockholder.
When, as here, ―a controlling stockholder uses a reverse split to freeze out
minority stockholders without any procedural protections, the transaction will be
reviewed for entire fairness with the burden of proof on the defendant fiduciaries.‖310
This is because ―[a] reverse split under those circumstances is the functional equivalent
of a cash-out merger.‖311 As previously noted,312 ―[t]he concept of fairness has two basic
aspects: fair dealing and fair price.‖313 I address both of Zutrau‘s challenges to the
Reverse Stock Split in the context of analyzing the transaction‘s entire fairness.
1. Fair dealing
For purposes of assessing fair dealing, a brief review of the factual background
leading up to the Reverse Stock Split is necessary. Zutrau was terminated from ICE in
June 2007. In the first half of 2008, she commenced a books and records action against
310 Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 460 (Del. Ch. 2011). 311 Id. (internal quotation marks omitted). 312 See supra notes 226-229 and accompanying text. 313 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983).
88 Jansing and ICE in the New York Court. On August 1, 2008, the New York Court
ordered Jansing to produce ICE‘s books and records.
In September 2009, Zutrau commenced the New York Action by filing a
complaint against Jansing and ICE, asserting, among other things, derivative claims
challenging numerous actions taken by Jansing in the course of running the Company. In
October 2011, the New York Court issued an opinion that, among other things, dismissed
Zutrau‘s derivative claims without prejudice, holding that they could not be pursued in
New York but could be asserted in a separate action.314
In December 2011, before the commencement of this action, Jansing retained
Farrell Fritz, P.C. as counsel to advise him regarding how to accomplish a reverse stock
split. On January 13, 2012, Jansing, through counsel, engaged Duff & Phelps for the
purpose of ―estimating [the] Fair Value of 100 percent of the Shareholders‘ Equity of ICE
Systems as of a current date to be provided by [Farrell Fritz].‖315
On April 25, 2012, Zutrau commenced this litigation by filing a verified complaint
against Jansing in which she effectively reasserted the derivative claims that had been
dismissed from the New York Action. Jansing was served on May 11, 2012, and later
requested a 30-day extension to file a responsive pleading. The Court granted a 20-day
extension, giving Jansing until June 20, 2012 to respond to the Complaint.316
314 Zutrau v. Ice Sys., Inc., 2011 WL 5137152, at *4 (N.Y. Sup. Ct. Oct. 28, 2011). 315 JX 497. 316 D.I. No. 10.
89 On June 11, 2012, Duff & Phelps issued a valuation report, estimating the fair
market value of 100% of the equity in the Company as of June 5, 2012 as being
$2,217,233. That same day, Jansing filed the amendment to ICE‘s COI that implemented
the Reverse Stock Split. Jansing utilized the Duff & Phelps report to value Zutrau‘s 22%
interest in the Company at $495,779, which reflects her pro rata share of the Duff &
Phelps valuation with no minority discount.
Recognizing that it is ultimately Jansing‘s burden to demonstrate entire fairness, I
pause initially to consider Zutrau‘s main challenge to the validity of the Reverse Stock
Split. Based on its timing, Zutrau argues that it is self-apparent that Jansing effectuated
the Reverse Stock Split ―for the sole, fraudulent, and faithless purpose of eliminating
Plaintiff‘s standing to maintain the derivative claims originally brought in the New York
action and re-filed in Delaware on April 25, 2012.‖317 In support of that view, Zutrau
asserts that Jansing has not ―offer[ed] any conceivable, legitimate business purpose that
would justify his approval of the Reverse Stock Split, other than to deprive Plaintiff of
derivative standing.‖318 Based on my review of the record developed at trial, I disagree
with Zutrau and find that depriving Zutrau of derivative standing was not a primary
motivation for the Reverse Stock Split. This finding is informed by three primary
considerations.
317 Pl.‘s Opening Br. 30. 318 Id. at 31.
90 First, Jansing has articulated a credible business justification for the Reverse Stock
Split. By the time of the Reverse Stock Split in June 2012, the parties had been
embroiled in contentious litigation for over four years in two different states. Jansing
testified that people in the industry in which ICE operates were aware of the litigation
between ICE‘s stockholders and that it was a cause for concern among some of ICE‘s
clients.319 After ―years of withering litigation,‖ Jansing claimed that his decision to
implement the Reverse Stock Split was motivated by ―the desire to have everybody get
on with their lives‖ and to ―mov[e] the company forward and hav[e] everybody go on
their separate ways.‖320 Based on the contentiousness I have observed in this litigation
and the parties‘ sharply divergent concepts of how the Company should be run, I accept
Jansing‘s testimony that the primary purpose of the Reverse Stock Split was to bring an
end to the turbulent relationship between the parties and to allow both of them and the
Company to move on.
Second, although the timing of the Reverse Stock Split on its face is suspicious,
the process that led to it began before the filing of this action. Specifically, Jansing
engaged both Farrell Fritz and Duff & Phelps after the New York Court‘s decision to
sever the derivative claims, but before Zutrau filed her complaint in Delaware. At that
time, there were no outstanding derivative claims against Jansing and it was unclear when
319 Tr. 547. 320 Id. at 546-47.
91 or whether Zutrau would reassert those claims.321 Jansing testified that the Reverse Stock
Split was the culmination of a process being led by Farrell Fritz, and that the timing was
unrelated to the filing of the derivative claims in this action.322 That may be an
overstatement, but, in any event, I find that Jansing would have implemented the Reverse
Stock Split whether or not Zutrau filed this action.
Third, and most significantly, while Jansing previously has argued that Zutrau
lacks standing to assert her derivative claims independently of the other claims in this
action, he consistently has stated that he has no objection to Zutrau effectively litigating
her derivative claims for purposes of valuing her interest in ICE in connection with the
Reverse Stock Split.323 In that regard, Jansing has suggested that Zutrau would be
entitled, as additional consideration, to 22% of the value (based on her percentage equity
ownership) of any derivative claims that ICE had against Jansing at the time of the
Reverse Stock Split.324 This approximates, at least in part, the monetary relief that Zutrau
could have obtained if she still had standing to assert the derivative claims.
For the foregoing reasons, I conclude that Jansing did not implement the Reverse
Stock Split for the sole or primary purpose of depriving Zutrau of derivative standing.
That fact alone, however, does not establish fair dealing, and other factors undermine the
fairness of the process that culminated in the Reverse Stock Split. For one thing, Jansing
321 Id. at 661-62 (Jansing). 322 Id. at 658-59. 323 Def.‘s Opening Br. 58; see Tr. 549, 661-62. 324 Def.‘s Opening Br. 58.
92 failed to implement any procedural protections in connection with the Reverse Stock
Split, other than retaining his own (and ICE‘s) legal counsel and investment advisor. He
did not, for example, form a special committee or otherwise arrange for anyone to
bargain on behalf of or with the minority stockholder. Indeed, it does not appear that
Zutrau was consulted about the Reverse Stock Split at any time before its execution.
Furthermore, although Jansing relied on a contemporaneous valuation of the Company in
determining the fair value of Zutrau‘s shares, that valuation was produced by a valuation
consulting firm, Duff & Phelps, that essentially was working for Jansing and knew that
its valuation was to be used for purposes of a transaction by which Jansing, through ICE,
would buy out ICE‘s minority stockholder.325 For all of these reasons, I conclude that
Jansing failed to prove that the Reverse Stock Split was the product of fair dealing.326
2. Fair price / Fair value
As recently clarified by this Court in Reis v. Hazelett Strip-Casting Corp.,327 the
fair price standard of entire fairness and the fair value standard applicable to
compensation for fractional interests under Section 155(2) of the DGCL call for
equivalent economic inquiries.328 For both, the appropriate test, as in the appraisal
325 Tr. 735 (D‘Almeida). 326 See Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 460 (Del. Ch. 2011) (finding lack of fair dealing where majority shareholder effected reverse stock split without procedural protections and without engaging in good faith negotiations with minority shareholders). 327 28 A.3d 442. 328 See id. at 461-64.
93 context, is whether the ―minority stockholder shall receive the substantial equivalent in
value of what he had before.‖329 In assessing the value of the shares that were held
before the relevant transaction, the Court must consider ―all relevant factors,‖ including
―assets, market value, earnings, future prospects, and any other elements that affect the
intrinsic or inherent value of a company‘s stock.‖330
a. The Duff & Phelps report
Jansing used the Duff & Phelps valuation report as his basis for valuing Zutrau‘s
shares. I therefore begin my analysis of fair price by assessing the merits of that report.
Jaime D‘Almeida, a Director at Duff & Phelps, was the principal author of the Duff &
Phelps report and was called by Jansing as an expert witness at trial. Duff & Phelps
utilized three valuation methods in valuing ICE: the discounted cash flow (DCF) method,
the comparable companies method, and the comparable transactions method.331 The DCF
method produced a fair market valuation for ICE of $2,217,233; the comparable
companies method produced a valuation of $2,012,003; and the comparable transactions
method produced a valuation of $1,328,965.332 Duff & Phelps ultimately concluded that,
due to ICE‘s lack of similarity to the most comparable companies that could be
identified, the comparable companies and comparable transactions valuation methods did
329 Id. at 462 (quoting Sterling v. Mayflower Hotel Corp., 93 A.2d 107 (Del. 1952)). 330 Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). 331 Tr. 723-24 (D‘Almeida); JX 500 Schedule 1. 332 JX 500 Schedule 1.
94 not produce reliable estimates of ICE‘s value.333 It therefore assigned a 100% weight to
the results of the DCF method, which produced the highest valuation of the three
methods utilized.334
As an initial matter, I concur with Duff & Phelps that the DCF method should be
given exclusive weight in valuing ICE. The utility of a comparable, or market-based,
approach to valuation ―depends on actually having companies that are sufficiently
comparable that their trading multiples provide a relevant insight into the subject
company‘s own growth prospects.‖335 In that regard ―[r]eliance on a comparable
companies or comparable transactions approach is improper where the purported
‗comparables‘ involve significantly different products or services than the company
whose appraisal is at issue, or vastly different multiples.‖336 Because ICE operates in
what is effectively a two player market, and its direct competitor is significantly larger
and has a 99% market share, the comparable companies and transactions methods are not
likely to yield reliable estimates of ICE‘s value.
By contrast, the DCF method provides an effective way to measure ICE‘s fair
market value. Delaware Courts frequently have applied the DCF method in valuing
333 Tr. 727-28 (D‘Almeida). 334 Id. at 729; JX 500 at 38. 335 In re Orchard Enters., Inc., 2012 WL 2923305, at *10 (Del. Ch. July 18, 2012), aff’d, 2013 WL 1282001 (Del. 2013) (ORDER). 336 Id.
95 companies and have described it as ―in theory the single best technique to estimate the
value of an economic asset.‖337 As this Court has noted,
[t]he basic premise underlying the DCF methodology is that the value of a company is equal to the value of its projected future cash flows, discounted at the opportunity cost of capital. Put simply, the DCF method involves three basic components: (i) cash flow projections; (ii) a terminal value; and (iii) a discount rate.338
Setting aside for the moment the existence of Jansing‘s fiduciary breaches and the impact
of those breaches on the fair value of Zutrau‘s shares at the time of the Reverse Stock
Split, I consider first whether the Duff & Phelps DCF analysis can be regarded as an
accurate estimate of ICE‘s value in light of its historical performance up to that point.
In June of 2012, when the Duff & Phelps report was done, management of ICE did
not have any projections for ICE‘s future performance.339 Duff & Phelps, therefore,
independently analyzed ICE‘s historical performance from fiscal year 2007 through the
first half of 2012 (the ―historical period‖) to project future cash flows for the remainder
of 2012 through to fiscal year 2014.340 Duff & Phelps used ICE‘s average revenues
during the historical period as its revenue baseline. To assess ICE‘s expected rate of
revenue growth, Duff & Phelps looked to the forecasted growth rate of the ―transaction
publishing‖ segment of the ―strategic document outsourcing industry,‖ which is the
337 Cede & Co. v. Technicolor, Inc., 1990 WL 161084, at *7 (Del. Ch. Oct. 19, 1990). 338 In re Orchard Enterprises, Inc., 2012 WL 2923305, at *10. 339 JX 500 at 30. 340 Id.; Tr. 724 (D‘Almeida).
96 business segment in which Duff & Phelps concluded ICE operates.341 The strategic
document outsourcing industry ―is comprised of service providers that assist companies
in customer and investor communications through document processing and scanning and
high volume transaction printing.‖342 The core competencies of transaction publishing
include ―transaction documents, transpromo document production, content versioning,
and response analysis.‖343 The forecasted growth rate of the transaction publishing
segment between 2010 and 2015 was 1.6 percent.344 In light of ICE‘s ―first mover
advantage‖ in the proxy processing space, however, Duff & Phelps concluded that a
higher revenue growth rate of 2.1 percent was appropriate. That rate equaled the
forecasted long-term U.S. inflation rate.345
Duff & Phelps projected that ICE‘s operating expenses would remain constant as a
percentage of sales, based on the average operating expenses as a percentage of sales
during the historical period. Duff & Phelps made three normalizing adjustments in order
to remove non-operating or non-recurring expenses from ICE‘s projected future
expenses.346 Specifically, Duff & Phelps removed from expenses the cost of Jansing‘s
annual charitable contributions, certain non-recurring bank fees, and legal costs that it
341 JX 500 at 20. 342 Id. 343 Id. 344 Id. at 21. 345 Id. at 30-31; Tr. 724 (D‘Almeida). 346 Tr. 724-25 (D‘Almeida); JX 500 at 31.
97 determined most likely would be non-recurring.347 Although ICE is an S corporation and
such corporations are not taxed at the entity level, Duff & Phelps, following this Court‘s
practice in Delaware Open MRI Radiology Associates, P.A. v. Kessler,348 estimated an
―equivalent, hypothetical ‗pre-dividend‘ S corporation tax rate‖349 of 28.8 percent, which
it applied to ICE‘s projected operating cash flows.350
To determine the applicable discount rate to apply to future cash flows, Duff &
Phelps used the well-established Capital Asset Pricing Model (CAPM), which measures
the required rate of return of equity capital based on the relative risk of the investment, as
well as the time value of money.351
Based on that approach, Duff & Phelps calculated a cost of capital, and thus a
discount rate, of 12.9 percent. Discounting its free cash flow projections for the latter
half of 2012, 2013, and 2014, Duff & Phelps calculated the present value of the free cash
347 Tr. 724-25 (D‘Almeida); JX 500 at 31. 348 898 A.2d 290, 336-30 (Del. Ch. 2006). 349 Id. at 330. 350 JX 500 at 32-33. This hypothetical rate is the corporate tax rate that a C corporation would have to have in order to achieve the same amount of income available after dividends as the S corporation. See Delaware Open MRI Radiology Assoc., P.A., 898 A.2d at 330. In calculating this rate, Duff & Phelps assumed that ICE‘s shareholders are taxed at a personal tax rate of 39.5%, accounting for Federal and New York state personal tax rates. JX 500 at 33. 351 Tr. 725-26 (D‘Almeida); JX 500 at 28. Because ICE‘s capital structure is 100 percent equity, Duff & Phelps did not need to estimate the required return on debt. JX 500 at 28. For a more detailed description of the CAPM calculation, see In re Orchard Enters., Inc., 2012 WL 2923305, at *18 (Del. Ch. July 18, 2012) (citing Richard A. Brealey, Stewart C. Myers & Franklin Allen, Principles of Corporate Finance 214 (9th ed. 2008)).
98 flows from those years to be $309,029, $159,267, and $144,011, respectively, for a total
of $612,307.352
To calculate the terminal value, Duff & Phelps used the Gordon Growth Model.353
The terminal year cash flow was then capitalized using a rate calculated by subtracting
the long-term expected growth rate of 2.1 percent from the CAPM discount rate of 12.9
percent. The present value of the capitalized terminal year cash flow was calculated to be
$1,359,397.354
The total present value of the free cash flows from the projection years and the
terminal period, i.e., ICE‘s ―enterprise value,‖ was thus $1,971,704.355 To this, Duff &
Phelps added ICE‘s non-operating assets, including $100,000 in outstanding investments
and $145,527 in funds that were owed to the Company by Jansing.356 Accounting for
fractional dollar amounts, this led to a total fair market valuation for ICE of $2,217,233,
which is the number on which Jansing relied in valuing Zutrau‘s shares.357
Having reviewed the Duff & Phelps report in detail, I conclude that it accords with
valuation practices endorsed by Delaware Courts and provides an appropriate baseline
352 JX 500. Schedule 1. The estimated present value of the free cash flows for the second half of 2012 were elevated, because ICE collects most of its revenues in the second half of the year. Id. at 23. 353 JX 500 at 33. 354 Id. Schedule 1. 355 Id. 356 Id. at 34; Tr. 726 (D‘Almeida). 357 JX 500 Schedule 1.
99 estimate of the fair market value of ICE, not accounting for Jansing‘s fiduciary breaches
or the effect of those breaches on the financial performance of the Company. In other
words, if one were to assume that, at the time of the Reverse Stock Split, the Company
had no outstanding derivative claims and that ICE‘s financial performance during the
historical period reflected the performance of a company whose principals were acting in
accord with their fiduciary duties, the Duff & Phelps report appropriately would reflect
the fair value of the Company. In that regard, I note that Plaintiff‘s own valuation and
damages expert, Roy D‘Souza, used the Duff & Phelps valuation as his baseline
valuation for the Company in calculating damages and stated that he would have no
objection to that valuation were it not for Jansing‘s fiduciary breaches.358
Apart from noting its failure to account for Jansing‘s breaches of fiduciary duty,
Zutrau raised only two objections to the Duff & Phelps report, neither of which is
persuasive. First, she argues that the report uses an unreasonably low growth rate to
project ICE‘s future revenues, on the grounds that the growth rate Duff & Phelps used
was garnered from statistical industry data sources only remotely related to ICE. The
transaction publishing segment of the strategic document outsourcing industry may not
precisely correspond to the proxy services sector in which ICE operates. Nevertheless, I
find that it is closely related enough to serve as a useful reference point in estimating
ICE‘s growth rate. Moreover, Duff & Phelps ultimately assumed that ICE could be
expected to grow at a rate that is above the forecasted growth rate for the transaction
358 See Tr. 426-27; D‘Souza Dep. 33-34.
100 publishing segment (1.6 percent) and equivalent to the forecasted long-term U.S. inflation
rate (2.1 percent). Given the highly competitive and saturated nature of the market in
which ICE operates, I conclude that Jansing has shown by a preponderance of the
evidence that a higher growth rate would not be justified.
Second, Zutrau contends that the Duff & Phelps valuation does not ―faithfully
respect the third-party interest ICE received.‖359 Although ICE engaged in several
acquisition discussions with ISS and Computershare in the past, most of those
discussions failed to result in any firm offer to acquire ICE. The one documented
acquisition offer that ICE received, namely, ISS‘s non-binding offer in 2009 to acquire
the Company for $2.5 million, with a maximum earnout potential of $4 million, does not
differ from the Duff & Phelps valuation so significantly as to throw its reliability into
question.
Thus, I find that the Duff & Phelps report provides a methodologically sound
valuation of the Company as of the time of the Reverse Stock Split, except for the fact
that it does not account for the existence of Jansing‘s breaches of fiduciary duty or the
impact of those breaches on the performance of the Company. That exclusion is
significant, however, and, as a result of it, the Duff & Phelps valuation ultimately fails to
capture the fair value of ICE at the time of the Reverse Stock Split. I next consider how
properly accounting for Jansing‘s breaches of fiduciary duty would impact the valuation
of the Company.
359 Pl.‘s Opening Br. 49.
101 b. The effect of Jansing’s fiduciary breaches on the valuation
I find that Jansing‘s breaches of fiduciary duty require that the Duff & Phelps DCF
valuation be modified in two ways to arrive at the fair value of the Company at the time
of the Reverse Stock Split.
First, the monetary value of the outstanding breach of fiduciary duty claims
against Jansing must be added. This Court has determined that Jansing breached his
fiduciary duties to the Company in the time period between Zutrau‘s termination in June
2007 and the Reverse Stock Split in June 2012. The Company therefore had claims
against him for those breaches at the time of the Reverse Stock Split. As this Court has
acknowledged in other contexts,360 and as Jansing has expressly conceded,361 those
claims can be thought of as non-operating corporate assets the value of which should be
added to that of the Company in determining fair value.
The Company had a claim against Jansing for personal expenses that he charged to
his Company-issued Amex card that had a value of $15,000.362 The Company also had a
claim against Jansing for $9,919.52 in interest that he improperly caused the Company to
pay on the Credit Line after he withdrew the full balance of that line and placed it in his
360 See supra note 198. 361 Def.‘s Opening Br. 60-61. 362 This value reflects the $14,388.86 in personal expenses Jansing improperly charged to the Company during the period from June 2007 to June 2012 rounded to $15,000 to account for the addition of a reasonable amount of prejudgment interest. Because the individual expenditures were relatively small and numerous and spanned a period of several years, it is impracticable to compute a precise interest figure.
102 personal bank account. The value of that claim is $9,919.52 plus pre-judgment interest at
the legal rate of 5.75% from November 27, 2007, the date the Credit Line was repaid,
until June 11, 2012. Lastly, the Company had valid claims against Jansing, as of June 11,
2012, for paying himself excessive compensation in the following amounts: $190,080 in
2007; $121,000 in 2009; $75,680 in 2010; and $120,061.04 in 2011.363 The collective
value of these claims is $506,821.04 plus pre-judgment interest on those claims through
June 11, 2012.364 The value of each of the foregoing claims must be added to the Duff &
Phelps valuation as a non-operating asset for it to reflect the fair value of the Company at
the time of the Reverse Stock Split.
A second modification to the Duff & Phelps valuation is also required. Duff &
Phelps‘ cash flow projections for ICE were based on the revenues and expenses of the
363 As discussed supra, Plaintiff presented evidence regarding an alleged excessive bonus at the end of 2012. Using the same rationale as applied for the years from 2007 through 2011, the amount of the excess bonus for the calendar year 2012 would have been $79,275.68. I have not used that figure, however, in determining the appropriate remedy in this action for at least two reasons. First, the wrong evidently did not occur until December 2012 or later. Thus, that bonus could not have formed the basis of a derivative claim ICE would have had as of June 11, 2012, immediately before the Reverse Stock Split. Thus, that purported claim could not have given rise to the equivalent of a non-operating corporate asset. And second, based on the way in which Duff & Phelps projected expenses for 2012 in its DCF analysis, only the excess bonuses for the period ending before December 31, 2011 would have been relevant. 364 To compute the pre-judgment interest on the excess bonus payments, I direct the parties to apply an interest rate of 5.75%, which was the legal rate of interest during most of the relevant period, compounded quarterly to each of the four excess bonus amounts from December 31 of the year corresponding to each bonus. Thus, for example, the interest on the excess bonus of $121,000 in 2009 will be computed from December 31, 2009 to June 11, 2012.
103 Company during the historical period. As to expenses specifically, Duff & Phelps
projected that ICE‘s operating expenses would remain constant as a percentage of sales,
based on the average operating expenses as a percentage of sales during the historical
period (2007 to 2011). Payroll expenses during the historical period, however, were
improperly inflated as a result of Jansing‘s self-payment of excessive bonuses. Thus,
projecting that same level of inflated payroll expenses is, in effect, valuing the Company
on the presumption of improper self-dealing continuing into the future. The fair value of
the Company, however, is its going concern value without such self-dealing. For this
reason, a normalizing adjustment is required to the Duff & Phelps model, removing the
expenses attributable to Jansing‘s receipt of excessive compensation from the historical
payroll expenses that served as the basis for projecting ICE‘s payroll expenses into the
future.365 At trial, D‘Almeida acknowledged that such an adjustment would be
appropriate if the Court concluded that Jansing paid himself excessive compensation.366
Accepting at face value the payroll expenses attributable to Jansing‘s
compensation, Duff & Phelps calculated payroll expenses during the historical period to
be, on average, 49.5% of revenues. If the excessive bonus compensation is removed,
however, average payroll expenses as a percentage of revenues during the historical
period decreases to approximately 46%. When that lowered percentage is projected into
365 Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 472 (Del. Ch. 2011) (―Delaware law on fair value . . . empower[s] a court to make normalizing adjustments to account for expenses that reflect controller self-dealing when the plaintiff/petitioner provides an adequate evidentiary basis for the adjustment.‖). 366 Tr. 755-56 (D‘Almeida).
104 the future, it produces a corresponding and significant increase in the projected free cash
flows for the years 2012 to 2014 and the terminal period. I will direct Jansing,
presumably with the assistance of Duff & Phelps, to compute the present value of those
normalized cash flows for 2012, 2013, and 2014 and for the terminal period, and to share
those figures with Zutrau‘s counsel before submitting them to the Court. The sum of
those amounts will be the fair enterprise value of ICE. To calculate the total fair market
value of ICE, its non-operating assets must be added to the enterprise value, including
$100,000 for ICE‘s investments, $145,527 for funds owed to the Company by Jansing,
and the value of the derivative claims, inclusive of pre-judgment interest on those claims
through June 11, 2012, as described above.
As the Duff & Phelps report did not account for Jansing‘s breaches of fiduciary
duty, the Duff & Phelps valuation did not reflect the fair value of the Company, and the
Reverse Stock Split was executed at an unfair price. I therefore conclude that that
transaction was not entirely fair to Zutrau, as ICE‘s minority stockholder. In that respect,
the Reverse Stock Split did not comply with 8 Del. C. § 155(b) and the price for Zutrau‘s
fractional shares must be recalculated in accordance with this Opinion.
Finally, I note that I have considered and reject as unpersuasive Zutrau‘s expert‘s
proposed valuations of the Company.367 D‘Souza modeled three ―but-for‖ scenarios,
which he referred to as the ―less conservative‖ scenario, the ―conservative‖ scenario, and
367 JX 293.
105 the ―extremely conservative‖ scenario.368 Under these scenarios, he estimated that the
Company would have had a fair market value of $20,100,000, $18,300,000, and
$7,300,000, respectively, but-for Jansing‘s breaches of fiduciary duty.369 Each of the but-
for scenarios analyzed by D‘Souza, however, relied on highly unjustified assumptions.
D‘Souza‘s two more liberal valuations are based on the premise that, but for Jansing‘s
fiduciary breaches, the Company would have successfully signed one or more of the large
banking clients with whom ICE had been having discussions before Zutrau‘s termination,
leading to dramatically increased revenues in every year since.370 I find, however, that
this premise is unsupported by the evidence and not related to any breach that has been
proven. D‘Souza‘s alternative, ―very conservative‖ estimate is equally unavailing. That
valuation essentially attributes all increases in numerous of ICE‘s expense categories
since 2006 to Jansing‘s alleged fiduciary breaches, and makes several other unwarranted
assumptions.371 Zutrau failed to prove many of the claims for breach of fiduciary duties
that underlie her expert‘s report. Thus, I reject the report of her damages expert as a
method for ascertaining the effect of Jansing‘s fiduciary breaches on the value of the
368 Id. at 36. 369 Id. 370 Id. at 20-26; Tr. 409-10 (D‘Souza). 371 JX 293 at 26-28.
106 c. Remedy
―In determining damages, the powers of the Court of Chancery are very broad in
fashioning equitable and monetary relief under the entire fairness standard as may be
appropriate, including rescissory damages.‖372 Among the factors a Court will consider
in determining an appropriate remedy is whether there is evidence of ―fraud,
misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and
palpable overreaching.‖373
Under the facts of this case, I consider an award of fair value to be the appropriate
remedy. Contrary to Zutrau‘s assertions, I have found that Jansing did not execute the
Reverse Stock Split to deprive her of derivative standing. Moreover, Jansing relied on a
credible and largely independent valuation in determining the value of Zutrau‘s shares.
In that regard, Zutrau has not shown that Jansing acted with a conscious intent to deprive
her of the fair value of her shares, or deny her access to the benefits of pending corporate
opportunities. The Reverse Stock Split was a self-interested transaction that I ultimately
have concluded was achieved at an unfair price. It was not, however, the result of
deliberate misconduct, fraud, or gross and palpable overreaching. In light of all relevant
factors, therefore, I conclude that an award of fair value to Zutrau on the basis described
in this Opinion will provide the appropriate remedy in this dispute. Zutrau also is entitled
372 Int’l Telecharge, Inc. v. Bomarko, Inc., 766 A.2d 437, 440 (Del. 2000). 373 Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983).
107 to prejudgment interest at the legal rate on the adjusted fair value of her fractional shares
compounded quarterly from June 11, 2012 determined in accordance with this Opinion.
In reaching this conclusion, I also reject Zutrau‘s claim for rescission of the
Reverse Stock Split and dissolution of ICE. Rescission is an equitable remedy and for
the reasons discussed above, I am convinced that the equities attendant to Jansing‘s
implementation of the Reverse Stock Split do not warrant undoing that transaction.374
E. Jansing’s Counterclaim Asserting that the New York Judgment Should be Deducted from Amount Owed to Zutrau
In its post-trial decision, the New York Court determined that Zutrau was entitled
to a judgment of $60,307, representing the positive balance of her ICE capital account.
Jansing asserts a counterclaim in this action, arguing that the amount of the judgment in
the New York Action should be setoff from any amounts owed to Zutrau in connection
374 In connection with her claim for rescission, Zutrau also sought an order from the Court to dissolve ICE. Because I reject Zutrau‘s claim for rescission, she no longer is an ICE stockholder and lacks standing to bring a dissolution action against the Company. Even assuming, however, that she could bring such a claim, I reject it on the merits. As Zutrau recognized in her post-trial briefing, ―for a court to order a dissolution or liquidation of a solvent corporation, the proponents must show a failure of corporate purpose, a fraudulent disregard of the minority‘s rights, or some other fact which indicates an imminent danger of great loss resulting from fraudulent or absolute mismanagement.‖ Pl.‘s Opening Br. 56 (quoting Warshaw v. Calhoun, 221 A.2d 487, 491 (Del. 1966)). Moreover, ―[t]he Court exercises this power to dissolve a solvent corporation with great restraint and only upon a strong showing.‖ Id. (quoting Carlson v. Hallinan, 925 A.2d 506, 543 (Del. Ch. 2006)). Zutrau has failed to show that any of the factors specified in Warshaw are present here. In addition, Zutrau has made no showing, let alone a strong showing, that there are any reasonable grounds to dissolve ICE, a solvent corporation. Therefore, I also deny with prejudice Zutrau‘s claim that ICE should be dissolved.
108 with the Reverse Stock Split, because the amount remaining in her capital account
effectively was included already in the initial $495,788.81 valuation of her fractional
shares. I reject this counterclaim as barred by collateral estoppel.
―The doctrine of collateral estoppel essentially prohibits a party who has litigated
one cause of action from relitigating in a second cause of action matters of fact that were,
or necessarily must have been, determined in the first action.‖375 Collateral estoppel
applies if: (1) the same issue is presented in both actions; (2) the issue was litigated and
decided in the first action; and (3) the determination was essential to the prior
judgment.376
By the time of trial in the New York Action, Jansing had effected the Reverse
Stock Split and issued Zutrau a check for $495,788.81. In arguing in the New York
Action against Zutrau‘s claim that she was entitled to the $60,307 in her ICE capital
account, Jansing made the same factual argument that he now advances in this Court,
namely, that the $60,307 already was included in the amount tendered to Zutrau in
connection with the Reverse Stock Split. In rejecting that argument, the New York Court
held as follows:
The record reveals that the plaintiff received a check in June 2012 for $495,778.71, which represented the value of her ICE stock. Although Jansing testified that he believed the $60,307 was included in that amount, he presented no evidence of how the $495,778.71 was computed. Accordingly, the court finds
375 Sanders v. Malik, 711 A.2d 32, 33 (Del. 1998) 376 Id. at 33-34.
109 that the plaintiff is entitled to a judgment in the amount of $60,307.377
In other words, the Court held that Jansing had failed to meet his burden of proof
to show that the amount tendered to Zutrau in connection with the Reverse Stock Split
included the amount remaining in her capital account and decided that factual issue
adversely to him. That decision appears to have been necessary to the New York Court‘s
judgment. The court presumably would not have awarded Zutrau $60,307 in damages if
it had accepted Jansing‘s argument that that amount already had been tendered to her. I
therefore deny Jansing‘s counterclaim for an offset in the amount of $60,307.
F. Costs
Under Court of Chancery Rule 54(d), costs ―shall be allowed as of course to the
prevailing party unless the court otherwise directs.‖378 Under Rule 54(d), the
―prevailing‖ party is a party who successfully prevails on the merits of the main issue or
the party who prevailed on most of her claims.379 Courts interpret the term ―prevailing‖
to mean that a party need not be successful on all claims, but rather must succeed on a
377 Zutrau v. Ice Sys., Inc., 2013 WL 1189213, at *8 (N.Y. Sup. Ct. Mar. 20, 2013). 378 For the purposes of Rule 54(d), costs include ―expenses necessarily incurred in the assertion of a right in court, such as court filing fees, fees associated with service of process or costs covered by statute. . . . [I]tems such as computerized legal research, transcripts, or photocopying are not recoverable.‖ See FGC Hldgs. Ltd. v. Teltronics, Inc., 2007 WL 241384, at *17 (Del. Ch. Jan. 22, 2007). 379 See id; Brandin v. Gottlieb, 2000 WL 1005954, at *27.
110 general majority of claims.380 Because Zutrau succeeded on important aspects of several
of her claims, I award Zutrau her costs under Rule 54(d).
III. CONCLUSION
For the reasons stated in this Opinion, I reach the following conclusions.
Count I of the Complaint asserts a derivative claim for breach of fiduciary duty
against Jansing, challenging his running of the Company after Zutrau‘s termination.
Although Zutrau ultimately failed to demonstrate a basis for asserting derivative standing
in this case, the merits of her derivative breach of fiduciary duty claims were nonetheless
relevant to her remaining claims based on the impact the value of those derivative claims
might have on the fair value of ICE at the time of the Reverse Stock Split. As to the
merits of the derivative claims, Zutrau succeeded in demonstrating that Jansing breached
his fiduciary duties to ICE by causing ICE to pay interest on amounts that he withdrew
from ICE‘s Credit Line and placed into his personal bank account, by charging certain
personal expenses to his Company-issued credit card, and by paying himself excess
compensation. Zutrau did not prove any other breaches of fiduciary duty in connection
with Count I.
Count II of the Complaint asserts a direct claim for breach of fiduciary duty
against Jansing, alleging that he effected the Reverse Stock Split for the improper
purpose of depriving Zutrau of derivative standing and at an inadequate price. Count III
similarly asserts that Jansing violated 8 Del. C. § 155 by failing to provide fair value for
380 See FGC Hldgs., 2007 WL 241384, at *17.
111 Zutrau‘s fractional shares in the Reverse Stock Split. I deny Zutrau‘s claim that Jansing
executed the Reverse Stock Split for the bad faith purpose of depriving her of derivative
standing and dismiss that aspect of Count II with prejudice. I further hold that the
Reverse Stock Split was not entirely fair and violated 8 Del. C. § 155, because the Duff &
Phelps valuation that Jansing relied upon in valuing Zutrau‘s shares did not account for
Jansing‘s pre-existing breaches of fiduciary duty and therefore did not provide Zutrau
with the fair value of her shares. As a remedy, Zutrau is entitled to receive that fair
value.
As detailed in this Opinion and in the Order being entered concurrently with it,
estimating the fair value of ICE at the time of the Reverse Stock Split requires making
two modifications to the Duff & Phelps valuation. First, a normalizing adjustment to the
payroll expenses during the historical period must be made to eliminate the effect of
expenses attributable to Jansing‘s excess compensation on the projections for years 2012
to 2014 and the Terminal Year. Second, the value of the breach of fiduciary duty claims
that ICE had against Jansing at the time of the Reverse Stock Split, including
prejudgment interest, must be added to the value of the Company. Zutrau is entitled to
22% of the value of that revised fair value of the Company, plus pre and post-judgment
interest at the legal rate, compounded quarterly.
I also hold that Zutrau failed to prove the claim asserted in Count IV of the
Complaint for equitable fraud and negligent misrepresentation against Jansing. In terms
of relief, I deny Zutrau‘s request for rescission of the Reverse Stock Split and for
dissolution of ICE based on Jansing‘s breaches of fiduciary duty and other alleged
112 misconduct. Finally, I deny and will dismiss with prejudice Jansing‘s counterclaim for a
setoff of the judgment awarded to Zutrau in the New York Action against any relief she
obtains in this action.
The parties shall cooperate in implementing the procedure set forth in the
accompanying Order to prepare and submit promptly an appropriate form of final
judgment and order.
Related
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