Court Opinion

ID: 4655916
Source: CourtListenerOpinion
Date Created: 2021-01-29 17:03:02.75945+00
Date Added: 2024-06-11T08:00:32.029318
License: Public Domain

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

                                       January 29, 2021

     Richard P. Rollo, Esquire                    Brad D. Sorrels, Esquire
     Travis S. Hunter, Esquire                    Andrew D. Cordo, Esquire
     Sarah A. Clark, Esquire                      Daniyal M. Iqbal, Esquire
     Robert B. Greco, Esquire                     Wilson Sonsini Goodrich & Rosati, P.C.
     Angela Lam, Esquire                          222 Delaware Avenue, Suite 800
     Richards, Layton & Finger, P.A.              Wilmington, DE 19801
     920 N. King Street
     Wilmington, DE 19801                         David J. Teklits, Esquire
                                                  Alexandra M. Cumings, Esquire
     A. Thompson Bayliss, Esquire                 Morris, Nichols, Arsht & Tunnell LLP
     Adam K. Schulman, Esquire                    1201 N. Market Street, 16th Floor
     Abrams & Bayliss LLP                         Wilmington, DE 19801
     20 Montchanin Road, Suite 200
     Wilmington, DE 19807

                   Re:   Riskin v. Burns et al., C.A. No. 2019-0570-KSJM

      Dear Counsel:

            The plaintiff has filed an application for certification of interlocutory appeal

      on the following issue raised by my December 31, 2020 Memorandum Opinion:

      Can a company’s issuance of convertible preferred stock to a controlling

      stockholder, pre-conversion, constitute economic dilution sufficient to support a
C.A. No. 2019-0570-KSJM
January 29, 2021
Page 2 of 6

direct claim under Gentile v. Rossette, 906 A.2d 91 (Del. 2006). 1 For the reasons

discussed below, I am denying the application.

         Delaware Supreme Court Rule 42 establishes the factors that this court must

consider when determining whether to certify an interlocutory appeal. Rule 42

permits certification when “the order of the trial court decides a substantial issue of

material importance that merits appellate review before a final judgment.” 2 If the

“substantial issue” requirement is met, this court will then analyze whether “there

are substantial benefits that will outweigh the certain costs that accompany an

interlocutory appeal.”3

         “The ‘substantial issue’ requirement is met when an interlocutory order

decides a main question of law which relates to the merits of the case, and not to

collateral matters.” 4 A Rule 12(b)(6) motion to dismiss is a merits-based motion and

is substantial in that respect, thus warranting a review of the Rule 42(b)(iii) factors.

1
  C.A. No. 2019-0570-KSJM, Docket (“Dkt.”) 94, Mem. Op. at 30–36. For convenience,
this letter opinion uses the defined terms provided in the Memorandum Opinion.
2
    Supr. Ct. R. 42(b)(i).
3
    Supr. Ct. R. 42(b)(ii).
4
 Sprint Nextel Corp. v. iPCS, Inc., 2008 WL 2861717, at *1 (Del. Ch. July 22, 2008);
accord. Castaldo v. Pittsburgh-Des Moines Steel Co., 301 A.2d 87, 87 (Del. 1973);
TowerHill Wealth Mgmt., LLC v. Bander Fam. P’ship, L.P., 2008 WL 4615865, at *2 (Del.
Ch. Oct. 9, 2008).
C.A. No. 2019-0570-KSJM
January 29, 2021
Page 3 of 6

         Of the Rule 42(b)(iii) factors, the plaintiff argues that two support his

application: factor “B” concerning whether the “decisions of the trial courts are

conflicting upon the question of law,”5 and factor “H” concerning whether the

“[r]eview of the interlocutory order may serve considerations of justice.” 6

         Factor “B” supports the plaintiff’s application. In the Memorandum Opinion,

I relied on Reith and Klein for the proposition that the challenged preferred stock

issuance did not conform to the transactional paradigm necessary to support a claim

under Gentile. 7 The plaintiff contends that these cases and my ruling stand in

conflict with a number of authorities.8 I do not view the plaintiff’s authorities as

standing in direct conflict with my ruling.9 They were all decided before El Paso

Pipeline GP Co. v. Brinckerhoff, 10 which implicitly abrogated aspects of our law.11

5
    Supr. Ct. R. 42(b)(iii)(B).
6
    Supr. Ct. R. 42(b)(iii)(H).
7
    Mem. Op. at 33–36.
8
    See id. at 32–36; Dkt. 98, Pls.’ Appl. for Interlocutory Appeal ¶¶ 12–20.
9
  See Dkt. 100, Defs.’ Opp’n to Pl.’s Appl. for Certification of an Interlocutory Appeal
(“Defs.’ Opp’n”) ¶¶ 9–14.
10
     152 A.3d 1248, 1251 (Del. 2016).
11
   See Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *10 (Del. Ch.
July 26, 2018) (observing that “El Paso . . . implicitly rejected the reasoning of decisions
such as . . . Nine Systems, which had extended Gentile to any dilutive issuance approved
by a conflicted board”); In re TerraForm Power, Inc. S’holders Litig., 2020 WL 6375859,
at *14 n.185 (Del. Ch. Oct. 30, 2020) (citing Sciabacucchi for the same proposition)
[hereinafter TerraForm I].
C.A. No. 2019-0570-KSJM
January 29, 2021
Page 4 of 6

I acknowledge, however, that the Gentile doctrine is in flux and that our law could

benefit from clarity concerning its continuing vitality.12 This factor, therefore, tips

in the plaintiff’s favor.

           Factor “H” similarly supports the plaintiff’s application. On this point, I am

persuaded by Vice Chancellor Glasscock’s recent decision certifying interlocutory

appeal in TerraForm.13 Because I cannot improve upon his words, I direct readers

to that letter opinion. 14 To quote a portion:

                 [I]n light of case law questioning the continued vitality
                 of Gentile at the trial court level, and in light of criticism
                 at the Supreme Court level, I find it in the interest of justice
                 that the matter be available for review by the Supreme
                 Court at this Motion to Dismiss stage. 15

The Vice Chancellor further observed that even if the appeal was unsuccessful, the

appeal would still serve the interests of justice “by clarifying an area of law that

appears to be in a state of flux.”16

12
   See TerraForm I, 2020 WL 6375859, at *13–14 (“Gentile has been much discussed, and
often distinguished, in the case law . . . . Post-Gentile, Delaware courts have struggled to
define the boundaries of dual-natured claims. . . . Gentile’s limited application to controller
transactions [is] not forgone or obvious.” (formatting altered)).
13
  In re TerraForm Power, Inc. S’holders Litig., 2020 WL 6889189 (Del. Ch. Nov. 24,
2020) [hereinafter TerraForm II].
14
   Id.; see also Terraform I, 2020 WL 6375859, at *15 (denying motion to dismiss and
discussing the “unsatisfying” aspects of this area of our law).
15
     TerraForm II, 2020 WL 6889189, at *1.
16
     Id.
C.A. No. 2019-0570-KSJM
January 29, 2021
Page 5 of 6

       Although the plaintiff’s two factors weigh in favor of certification, the

defendants make persuasive arguments against this outcome. They observe, and

rightly so, that the procedural posture of this action does not support interlocutory

appeal. In TerraForm, the Gentile claim supplied the plaintiff’s only basis for

standing and thus the appeal had the potential to end the litigation. By contrast, in

this case, I have concluded that the plaintiff may pursue his derivative claims for

breach of fiduciary duty as to the challenged financing. At most, a successful

interlocutory appeal would add back overlapping direct claims for the same alleged

breaches of fiduciary duties.17 Further complicating matters, this case is already

proceeding piecemeal. The defendants’ dismissal motions are not fully resolved,

and I have granted the parties leave to submit supplemental briefs as to what issues

remain.18 Put simply, this a messy case on which it would be difficult to neatly tee

up resolution of an issue related to an evolving area of law.

       For these reasons, I find that the benefits of an interlocutory appeal do not

outweigh the costs, and thus this is not the “rare exception” where interlocutory

17
  See Supr. Ct. R. 42(b)(iii)(G) (“[I]n deciding whether to certify an interlocutory appeal,
the trial court should consider whether . . . [r]eview of the interlocutory order may terminate
the litigation . . . .”).
18
  See Dkt. 97, Letter from the Honorable Kathaleen St. J. McCormick Requesting
Supplemental Briefing on Outstanding Issues Raised by Defs.’ Mot. to Dismiss.
C.A. No. 2019-0570-KSJM
January 29, 2021
Page 6 of 6

appeal is warranted.19      Despite the interesting issue it raised, the plaintiff’s

application is DENIED.

                                         Sincerely,

                                         /s/ Kathaleen St. Jude McCormick

                                         Kathaleen St. Jude McCormick
                                         Vice Chancellor

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

19
     See TerraForm II, 2020 WL 6889189, at *1.