Opinion ID: 6496143
Heading Depth: 1
Heading Rank: 4

Heading: board discusions

Text: The Board received the following updates: 77 See, e.g., In re Aerojet Rocketdyne Holdings, Inc., 2022 WL 2180240, at  (Del. Ch. June 16, 2022) (“‘A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.’ ‘Because it lacks a body and mind, a corporation only can act through human agents.’ Under Delaware law, a company’s directors are the corporate agents charged with managing the business and affairs of the corporation.” (quoting Trs. of Dartmouth Coll. v. Woodward, 17 U.S. 518, 636 (1819); Prairie Cap. III, L.P. v. Double E Holding Corp., 132 A.3d 35, 60 (Del. Ch. 2015)) (citing 8 Del. C. § 141(a))); Quickturn Design Sys., Inc. v. Shapiro, 721 A.2d 1281, 1291 (Del. 1998) (“One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation.” (citing 8 Del. C. § 141(a))). 78 In contrast to the weight given to these minutes by the Majority, Diep’s counsel’s transmittal letter to this Court states that “neither party included these minutes in the Record for this appeal.” Diep’s Letter, Apr. 4. 18 .... (c) Edith R. Austin, Vice President, Legal concerning pending litigation. The meeting was adjourned at 5:45 p.m. Pacific Daylight Time on October 31, 2016. Appellees have argued that “[t]he minutes contain no indication that any member of the Board was asked to approve the filing of the 2016 [Motion.]”79 But if any conclusion from these minutes is to be drawn, it should be that these minutes, along with Floyd’s testimony, suggest that the Board discussed the 2016 Motion and approved of its filing. Moreover, it does not matter whether Floyd or Lynton read the 2016 Motion.80 Given that it is completely reasonable to conclude that they authorized the filing, they 79 SLC Letter in Resp. to Diep’s Letter, Apr. 5, 2022. 80 The SLC’s counsel was asked during oral argument before this Court whether determining if Floyd or Lynton read the briefs was even relevant. The Court: Is this even the question that’s relevant, I would ask, and that is, a lawyer has taken a position on behalf of a client that may be seen as having prejudged claims that the client has had to review later on? I’m not sure whether she read the brief is even relevant. Mr. Offenhartz: Well, Your Honor, I think it is because, well, I think the issue we’re grappling with is, did the brief, and we respectfully think that if they didn’t read it, it would not cause them to prejudge anything, but what we’re really looking at is, were Ms. Lynton or Mr. Floyd prejudging their investigation before they started? Did the existence of the motion to dismiss cause them to prejudge anything? I mean, I think that’s ultimately the test. I don’t think, and in fact the Delaware cases are clear, they don’t want a box, if you do “X” you’re out, it’s got to look at the totality of circumstances. The Court: Doesn’t a motion have to be authorized by a client? Mr. Offenhartz: Well, Your Honor, yes, but a motion to dismiss, even if authorized by the client, it doesn’t mean that these two individuals reviewed it, absorbed it, necessarily got into the minutia of it, and adopted it and made it their own. . . . Oral Argument video at 35:17, https://livestream.com/delawaresupremecourt/events/10198585/videos/230258828. 19 should have known what they were authorizing. The SLC bears the burden of establishing its independence which, in this case, includes establishing that they did not prejudge the merits of serious insider trading claims they previously challenged in a direct and substantive way when the Company battled with Diep for six months over the dismissal motion. The SLC cannot satisfy that burden simply by claiming ignorance about the Company’s and the Board’s prior involvement in litigating those claims. Giving the SLC a pass on what I believe is a credible factual challenge to their independence because they claim ignorance of the arguments made on the Company’s behalf would not create the right incentives. Determining whether an SLC is independent is a fact-intensive inquiry. In London v. Tyrrell,81 the Court of Chancery stated that “[w]hen SLC members are simply exposed to or become familiar with a derivative suit before the SLC is formed this may not be enough to create a material question of fact as to the SLC’s independence.” 82 But a question of fact as to the SLC’s independence may be raised “if evidence suggests that the SLC members prejudged the merits of the suit based on that prior exposure or familiarity, and then conducted the investigation with the object of putting together a report that demonstrates the suit has no merit.”83 Similarly, if the potential conflicts of interest or divided loyalties, when considered as a whole, raise a question of fact as to an SLC 81 London v. Tyrrell, 2010 WL 877528 (Del. Ch. Mar. 11, 2010). 82 Id. at . 83 Id. (emphasis added). 20 member’s independence, then the moving party has not borne its burden of showing the absence of any possible issue of fact material to the independence of the SLC.84 Here, Floyd’s testimony confirms that the directors discussed the 2016 Motion, that he did not recall anyone objecting, and that he did not object to the filing. Further, the 2016 Motion challenged the core arguments set forth in the complaint. EPL, as a nominal defendant, affirmatively joined the 2016 Motion pursuant to Rule 23.1 and, in fact, took the lead in challenging the “heart” of Diep’s core allegations. EPL was hardly acting in a neutral capacity. In my view, the SLC failed to show there was an absence of a material issue of fact as to the independence of Floyd and Lynton. Furthermore, a side-by-side comparison of the assertions in the 2016 Motion and the SLC’s motion to dismiss illustrates the similarities between the 2016 Motion and the SLC Motion: 2016 Motion to Dismiss SLC Motion to Dismiss “Neither the timing nor “[T]he timing of the Block amounts of stock sold were Trade . . . does not suggest an suspicious. Three directors ulterior motive, but instead and a large stockholder sold supports the notion that TPP only a fraction of their [EPL] was liquidating a longholdings. They did so at their standing investment at each first opportunity to sell after available opportunity.”86 the expiration of lockup 84 Lewis, 502 A.2d at 967 (After listing the circumstances which lead the Court of Chancery to question a committee member’s independence, the court stated that “[t]hese potential conflicts of interest or divided loyalties, when considered as a whole, raise a question of fact as to whether Terry Sanford could act independently. This is not to say that he actually acted improperly, but [the court] find[s] that the moving party has not borne its burden of showing the absence of any possible issue of fact material to the issue of the independence of Mr. Sanford.” (citing Warsaw v. Calhoun, 213 A.2d 539, 541–42 (Del. Ch. 1965), aff’d, 221 A.2d 487 (Del. 1966))). 86 A1663 (SLC’s Opening Br. Supp. Mot. to Dismiss at 59) (emphasis added). 21 agreements and other trading restrictions.”85 “[T]he timing of the Block Trade—during the first open trading window following the “It is hardly suspicious that November 19, 2014 secondary corporate insiders would take offering . . . supports the advantage of the first liquidity notion that TPP was opportunity after an IPO.”87 liquidating a long-standing investment at each available opportunity.”88 “[I]n advance of the Block Trade, the Company accurately disclosed that Q2 2015 [same-store sales] would likely be below market expectations.”90 “The alleged non-public information was disclosed.”89 “The SLC determined that (i) TPP did not possess material, nonpublic information, and (ii) TPP was not motivated, in whole or in part, to sell EPL shares by the allegedly material, nonpublic information at issue.”91 85 A127 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 7) (emphasis added). 87 A169 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 49). 88 A1663 (SLC’s Opening Br. Supp. Mot. to Dismiss at 59). The “secondary offering” refers to the second opportunity that TPP had to sell its shares. 89 A161 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 41). 90 A1664 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 60). Stated another way, “in recognition of the Company’s early Q2 2015 performance in comparison to market expectations, the TPP Directors supported the decision to disclose the softness in sales despite the Company’s prior practice of only providing full-year guidance, which likewise cuts against a claim that TPP was seeking to trade on undisclosed information.” Id. 91 A1637 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 33). 22 “The intra- quarter performance and forecasting “The undisclosed intra- data available to the TPP quarter results were Directors at the time of the immaterial.” 92 Block Trade was not material under Delaware law.”93 The SLC cites four cases,94 namely, Kaplan v. Wyatt,95 Katell v. Morgan Stanley Group, Inc.,96 and Kindt v. Lund,97 as well as the United States District Court for the Southern District of New York case, Strougo ex rel. The Brazil Fund, Inc. v. Padegs.98 Only three address the independence of the committee members and only one does so in the context of the members’ participation in a prior motion to dismiss.99 92 A165 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 45). 93 A1657 (Defs.’ Br. Supp. Mot. to Stay or Dismiss at 53). 94 The Majority cites two other cases, namely, Scalisi v. Grills, 501 F. Supp. 2d 356 (E.D.N.Y. 2007) and Mills v. Esmark, Inc., 544 F. Supp. 1275 (N.D. Ill. 1982). These decisions do not analyze the prior motion to dismiss in any substantive way. In addition, Scalisi applies Maryland law, and appears to apply a different standard. In Scalisi, the parties disagreed as to what the appropriate standard was under Maryland law. Without making a determination as to which standard was correct, it appears that the court applied a combination of the two suggestions. First, the court applied a standard set forth by the New York Court of Appeals that limited the courts review to “an analysis of the adequacy or appropriateness of the investigation and to an inquiry into the independence of the committee members.” Scalisi, 501 F. Supp. 2d at 361. Second, the court took an “additional step set forth in Zapata” and also considered whether the court was satisfied with the SLC’s conclusions. Id. at 362. The Scalisi court did not expressly apply Zapata’s first prong, which includes the heightened independence standard discussed herein. Thus, the limited inquiry into the independence of the SLC in Scalisi is unavailing. The relevant discussion in Mills is contained in a footnote that merely mentions that the two SLC members earlier moved to dismiss plaintiffs’ original complaint and that the motion, made on Rule 23.1 grounds, “did not manifest any prejudgment of the merits of this case.” Mills, 544 F. Supp. at 1283 n.5. 95 Kaplan, 484 A.2d 501. 96 Katell, 1995 WL 376952. 97 2003 WL 21453879 (Del. Ch. May 30, 2003). 98 27 F. Supp. 2d 442 (S.D.N.Y. 1998). 99 The plaintiff in Kindt did not challenge the independences of the SLC. 23 The SLC in Kaplan consisted of two members, Marshall and Holliday. Neither Marshall nor Holliday were named as defendants in the lawsuit. The plaintiff did not challenge the independence of Holliday, who died after filing the SLC’s report. Instead, plaintiff focused primarily on the claimed independence of Marshall, who was a director at the time of the events complained of, and the SLC’s legal counsel. The plaintiff articulated seventeen different reasons as to why the motion to dismiss brought by the SLC should be denied.100 The main thrust of plaintiff’s issue with the independence of Marshall was that he was a director who approved of the transaction complained of (even though he was not a named defendant in the action), and that Marshall, along with members of his family, owned stock in companies that had done business with Coastal over the years.101 Without addressing each reason identified by plaintiff, the Court of Chancery stated that it was “convinced” there were no material facts in dispute, and found that the SLC operated independently. In Katell, the SLC was comprised of one member, a partnership, CIGNA LCF, which was also a defendant in the lawsuit. CIGNA LCF was the only general partner that purportedly did not stand to benefit from the transaction, and therefore, it was authorized by the general partners, and a vote of a majority of the limited partners, to review the merits 100 The Court of Chancery counted “seventeen in number.” Kaplan, 484 A.2d at 517. 101 Id. at 512–13. The specifics of plaintiff’s argument against Marshall regarding his stock ownership are as follows: Marshall, along with members of his family, owned a 9% shareholder interest in a company that had done business with Coastal over the years. Marshall was also a 50% owner of a company (Petco) which acted or had acted as a general partner of limited partnerships in oil and gas exploration programs, of which Coastal had participated in. Finally, Petco owned 38% of a company (IRC), in which plaintiff argued made Marshall, as 50% owner of Petco, a 19% owner of IRC. Coastal and IRC “engaged in past transactions.” Id. at 513. 24 of the derivative lawsuit. As the only special committee member, CIGNA LCF appointed three employees of its parent corporation, CIGNA, to conduct the business of the SLC. All three employees were part of CIGNA’s investment division, and none had been directly involved in CIGNA LCF prior to serving on the SLC. Although the three employees of CIGNA acted as the SLC, the court determined that it was CIGNA LCF’s independence, not the three employees’ independence, that should be the focus of the analysis.102 Plaintiffs argued that CIGNA LCF was not only a defendant, but it had, as general partner, approved the challenged transactions. However, the Court of Chancery held that “the undisputed facts put forth by [d]efendants conclusively support CIGNA LCF’s independence.” Specifically, the court noted that an overwhelming majority of the limited partners approved of CIGNA LCF’s appointment as the special committee. Further, CIGNA LCF was in the same economic position as the limited partners during both transactions, and CIGNA LCF did not stand to benefit from the transactions at the expense of the partnership. Finally, the SLC cites Strougo ex rel. The Brazil Fund, Inc. Procedurally, this case is arguably the most analogous to the situation presented here. Without making a prior demand on the board, Strougo filed his complaint, and the directors moved for dismissal, arguing, among other things, that Strougo failed to state a claim and failed to make a presuit demand on the board. The court denied the motion against the directors (except for one outside director), and pre-suit demand was held to be excused. The nominal The court stated that the three CIGNA employees “cannot make CIGNA LCF independent if it 102 would not otherwise meet the test for independence.” Katell, 1995 WL 376952, at . 25 defendant’s motion to stay all proceedings for three months to permit the SLC to investigate allegations of the lawsuit was granted.103 The SLC was comprised of two members—one original defendant who was dismissed (DaCosta), and a new director who was added over a year after the complaint was filed.104 After the SLC investigation, the defendants moved to terminate and dismiss the action based upon the report of the SLC. The court considered plaintiffs argument that DaCosta was not independent because he had been named as a defendant and had moved to dismiss the complaint. The plaintiffs cited a portion of the defendants’ brief in support of that motion to dismiss in an attempt to demonstrate DaCosta’s prejudgment. The court rejected that argument by simply stating that a motion to dismiss is designed to test the legal sufficiency of the complaint.105 There was no discussion or analysis of the substance of the prior motion beyond that. A motion to dismiss, in and of itself, is not necessarily disqualifying. Rather, the court should examine the substance of the motion, including the nature of the allegations against the directors and whether the corporation has elected to take an active role in the litigation. If the motion to dismiss was authorized by the SLC member or members and challenges the very core issues that the SLC is subsequently charged with investigating, that may be enough to create an issue of fact as to their independence. This requires a case- 103 Strougo ex rel. The Brazil Fund, Inc., 27 F. Supp. 2d at 444. 104 See Strougo ex rel. Brazil Fund, Inc. v. Padegs, 1 F. Supp. 2d 276, 278 (S.D.N.Y. 1998). 105 Strougo ex rel. The Brazil Fund, Inc., 27 F. Supp. 2d at 449. 26 by-case determination, and the SLC bears the burden on this issue.106 I do not think the SLC has met its burden. Finally, I mention two other points. First, I do not think that London changed the standard for determining the independence of an SLC member. I note that the Court of Chancery stated that the SLC Report was “not a ‘combative attack’ on Plaintiff’s claims[,]”107 and, therefore, did not create a material fact as to Floyd or Lynton’s independence. That should not be a new standard in evaluating the independence of SLC members who have previously participated in moving to dismiss claims they are charged with investigating. The standard, rather, is still that they must be “above reproach.” Second, the SLC process is not necessarily unavailable where an entire Board is named in a lawsuit, and then moves to dismiss it. But that is not this case. Here, Lynton and Floyd had a role in authorizing a motion to dismiss claims involving loyalty issues.108 Not only that, the Company under their managerial direction, took an active role and even the lead role, in challenging the merits of the claims. The thorny issues regarding Floyd’s 106 In Beam, our Court observed that this procedural fact could be outcome determinative. See Beam, 845 A.2d at 1055 (“We need not decide whether the substantive standard of independence in an SLC case differs from that in a presuit demand case. As a practical matter, the procedural distinction relating to the diametrically-opposed burdens and the availability of discovery into independence may be outcome-determinative on the issue of independence.”). 107 Diep v. Sather, 2021 WL 3236322, at 16 (Del. Ch. July 30, 2021). 108 The Majority acknowledges that an important aspect of a board’s managerial decision-making role is whether to initiate, or refrain from initiating, litigation on the corporation’s behalf. Maj. Op. at 30. Yet the Majority contends that this Board merely attended a board meeting when that motion was discussed. Maj. Op. at 38. In fact, its decision is premised on that tenuous conclusion. That conclusion is inconsistent with the record, with the role of the board, and with the fact that the SLC bears the burden on the independence issue. After all, this was not a decision about where to hold the next board meeting. It was a decision about what position the Company should be asserting in court regarding serious loyalty claims asserted against other directors and officers. 27 and Lynton’s independence could have been avoided. As pointed out by Diep, EPL could have formed an SLC as soon as Diep filed the Complaint in 2016. EPL, as nominal defendant, could have avoided taking a position on the merits of the substantive issues. EPL also could have selected or added different directors who were not on the Board when the 2016 Motion was filed, as it did with Babb. In sum, Diep raised serious loyalty challenges including directors and officers of the Company—challenges centered on insider trading and disclosure claims that survived an initial motion to dismiss. If the SLC process is to have any sanctity and credibility in dismissing claims simply by having a committee investigate them, the SLC’s independence must be above reproach.109 Because there is a legitimate factual issue as to Floyd’s and Lynton’s independence, I respectfully DISSENT. 109 See Balotti, supra note 46, § 13.17 (“One of the obvious purposes for forming a special litigation committee is to promote confidence in the integrity of corporate decision making by vesting the company’s power to respond to accusations of serious misconduct by high officials in an impartial group of independent directors. By forming a committee whose fairness and objectivity cannot be reasonably questioned, giving them the resources to retain advisors, and granting them the freedom to do a thorough investigation and to pursue claims against wrongdoers, the company can assuage concern among its stockholders and retain, through the SLC, control over any claims belonging to the Company itself.” (citing Biondi, 820 A.2d at 1156)). The Majority’s questioning of the “above reproach” standard is unfortunate in that, at best, it avoids an opportunity to provide more clear guidance for those involved in the SLC process, and at worst, lowers the “independence” bar as it applies to an already anomalous and unusual procedure whereby defendants can free themselves of serious claims merely by appointing a committee. 28