Court Opinion

ID: 4537802
Source: CourtListenerOpinion
Date Created: 2020-05-29 17:04:05.15705+00
Date Added: 2024-06-11T12:43:11.606127
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

GALLAGHER INDUSTRIES, LLC,              )
                                        )
                 Plaintiff,             )
                                        )
      v.                                ) C.A. No. 2018-0106-SG
                                        )
WILLIAM M. ADDY and JOSEPH E.           )
EASTIN,                                 )
                                        )
                 Defendants.            )

                       MEMORANDUM OPINION

                     Date Submitted: February 20, 2020
                       Date Decided: May 29, 2020

Jon Abramczyk, John DiTomo, Matthew Clark, and A. Gage Whirley, of MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware, Attorneys for
Plaintiff.

Peter Walsh, Kevin Shannon, and Callan Jackson, of POTTER ANDERSON &
CORROON LLP, Wilmington, Delaware; OF COUNSEL: Tammy Wood and Brent
Hockaday, of BELL NUNNALLY & MARTIN LLP, Dallas, Texas, Attorneys for
Defendants.

GLASSCOCK, Vice Chancellor
      This post-trial Memorandum Opinion involves a cash-out merger by a

controller of a privately-held company, ISN Software Corporation (“ISN” or the

“Company”). The Plaintiff, an LLC involved in private equity, acquired stock in

ISN in late December 2012 by exchanging its interest in ranchland. No cash changed

hands. The merger followed less than three weeks later.

      At the time of the merger, ISN provided the Plaintiff with a check for the

merger price of its stock, notice of its appraisal rights, and scant details regarding

how the Company had set its value for the merger. The Plaintiff, I find after trial,

had ample evidence that the merger was unfair, and its interest undervalued.

Nonetheless, it cashed the check tendered for its shares, waiving appraisal, and did

not bring a breach of fiduciary duty claim during the statutory tort limitations period.

I conclude, based on the trial record and reasonable inferences therefrom, that the

Plaintiff made a business decision in 2013 that the litigation game was not worth its

candle; it was content with the merger price rather than the uncertainties of an

appraisal action, and was unwilling to invest the considerable cost and effort

involved in a fiduciary tort action, even with the benefit of the entire fairness

standard it would have enjoyed.

      Meanwhile, two other stockholders sought appraisal rights. The Plaintiff was

well aware of this consolidated case; it underwent rather extensive discovery as a

non-party in that action. The results of the appraisal were eye-catching—the merger

                                           1
consideration implied the value of ISN as $138 million. After the appraisal trial, I

found the fair value to be $357 million. ISN appealed. The Supreme Court affirmed

on October 30, 2017. At that point, according to one of the Plaintiff’s principals, the

matter of a fiduciary duty suit became “very real.” In other words, the Plaintiff knew

of fiduciary duty claims as of the time they accrued, when it received notice of the

merger. It sat on its rights for five years, based on a business decision that it was not

worth pursuing appraisal or tort damages, given the costs and risks involved. Once

the efforts of the appraisal plaintiffs removed all doubt of the quantum of damages

available, however, the Plaintiff brought this suit, alleging that the incomplete and

misleading disclosure it had received from ISN was in violation of fiduciary duties,

and seeking a quasi-appraisal recovery.

      It is clear that the merger process and price were unfair to the stockholders

and that the disclosures were materially inadequate. Such was, or should have been,

cognizable by the Plaintiff based upon information it had at the time of the merger.

Breach of fiduciary duty is a tort, and suits in equity based on tort are, generally

speaking, barred by laches no later than the running of the analogous statute of

limitations, three years after the action accrues. The Plaintiff argues that it could not

have understood the nature of its claim until the Supreme Court’s affirmance of the

appraisal decision, and it makes less extreme claims that the limitation period was

tolled sufficiently to allow this matter to go forward. After consideration of this

                                           2
matter on a full record, however, I find the Plaintiff’s tolling argument unavailing,

and that the statute of limitations ran in early 2016. Accordingly, the Plaintiff’s

claim is barred by laches, and I find for the Defendants. My reasoning is below.

                                     I. BACKGROUND1

          This is a post-trial Memorandum Opinion. The trial took place over two days

on October 8 and 9, 2019. The parties submitted 286 joint exhibits and lodged two

depositions. The following facts were stipulated or proved by a preponderance of

evidence at trial.

          A. The Parties

          Plaintiff Gallagher Industries, LLC (“Gallagher”) is a private equity firm with

total investments of approximately $25 million.2 Non-party Charles Gallagher

founded Gallagher and still indirectly controls it through family trusts.3

          Non-Party ISN is a privately held Delaware corporation that provides “a

subscription-based online contractor management database called ISNetworld.”4

1
  Citations to Joint Trial Exhibits (“JX”) are expressed as JX __, at __. Citations in the form “Tr.”
refer to the trial transcript. The parties submitted a Joint Statement of Facts (“JSOF”) containing
both undisputed facts as well as “Additional Record Facts” from each party regarding disputed
facts, a format I found useful. Joint Statement of Facts, D.I. 94. To avoid confusion, I cite directly
to the JSOF only for undisputed facts. Where factual matters are disputed and weighing evidence
is required, I cite directly to the record.
2
    JSOF, ¶ 8.
3
Id. ¶ 9. I refer to Gallagher Industries, LLC as “Gallagher,” and Charles Gallagher as “Mr.
Gallagher” to distinguish them.
4
Id. ¶ 2.

                                                  3
           Defendant William “Bill” Addy is the founder and executive chairman of

ISN.5 Formerly ISN’s CEO, Addy remains the Company’s executive chairman, a

member of the ISN board of directors (the “Board”), and ISN’s controlling

stockholder.6

           Defendant Joseph E. Eastin is currently CEO and a director of ISN.7 He

formerly served as President.8

           Non-party Thomas C. Loftus is the President of Gallagher, where he has

worked since 1998.9

           B. Factual Background

                 1. ISN Company History

           ISN provides a “contractor management database” that connects contractors

and business owners.10        It generates revenue selling subscriptions to both the

contractors and the business owners.11 It works chiefly in the oil and gas industry,

but serves clients all over the world.12 ISN has more than 500 employees.13 Its

5
Id. ¶ 11.
6
Id.
7
    Id. ¶ 12.
8
Id.
9
    Id. ¶ 10.
10
Id. ¶ 2.
11
Id.
12
     Id.
13
Id. ¶ 3.

                                           4
Board consists of two directors: Defendants Addy and Eastin, both of whom own

substantial stakes in the Company.14 Addy is a controlling stockholder.15

           In 2011, ISN had one outside stockholder: Ad-Venture Capital Partners, L.P.

(“Ad-Venture”), a company controlled by Defendant Addy’s brother, Brian Addy.16

Extensive litigation experience has demonstrated to me that the relationship between

the brothers Bill and Brian Addy is contentious.17 Ad-Venture owned 900 shares of

ISN.18 Wanting to value its shares for the purpose of a sale to Polaris Venture

Partners (“Polaris”), Ad-Venture filed a books and records action under 8 Del. C. §

220 (the “220 Action”) on June 28, 2011.19 ISN contested the 220 Action.20

           On June 30, 2011, just after the 220 Action commenced, ISN received a

valuation it had requested from Peter J. Phalon of Waterview Advisors, Inc. (the

“Phalon Valuation”).21 The Phalon Valuation created five-year revenue projections

for the Company out to 2016, which were based on discussions with Addy.22 Based

14
Id. ¶¶ 3, 11–12.
15
     See id. ¶¶ 5, 12.
16
Id. ¶ 4.
17
  E.g. Tr. 11:17–24 (Addy) (testifying “it’s no secret there was friction between myself and my
brother . . . he had sued me for emotional distress. He had sued the company a couple of times.”).
18
     JSOF, ¶ 16.
19
Id.
20
     See id. ¶¶ 17–18.
21
Id. ¶ 22.
22
     Tr. 92:17–93:14 (Addy).

                                                5
on these projections, the Phalon Valuation valued ISN as of June 30, 2011, at $127

million.23

          On October 31, 2011, while the 220 Action was ongoing, the Board met for

thirty minutes, and after that meeting, Addy wrote a letter that he distributed to the

ISN stockholders (a letter referred to in prior proceedings of this court, and here, as

the “Halloween Letter”).24 At the time of the Halloween Letter, Ad-Venture was the

only unaffiliated ISN stockholder.25 In other words, the Halloween Letter was in

essence written to Ad-Venture.26 The Halloween Letter reads, in full:

          Dear Shareholders:

          I am writing to advise you of a significant change in strategy for ISN
          Software Corporation. As you may have seen in our most recent
          submission of revenue figures to INC Magazine, ISN’s growth rate has
          slowed substantially. In fact, our reported 25% growth rate from 2009
          to 2010 is our slowest reported growth rate in the history of the
          company. It appears that 2011 growth will be roughly the same as
          2010. After a number of years of successfully exploiting our niche, we
          expect slower contractor addition growth rates for the foreseeable
          future.

          In light of this forecast and in an effort to increase long-term
          shareholder returns, the ISN board of directors has authorized
23
     JX 37, at 5.
24
  JSOF, ¶¶ 28–30; JX 39, at 1 (October 31, 2011 Board minutes indicating meeting was conducted
from “9 am to 9:30 am”). The parties embraced the Halloween Letter moniker, resulting in much
wordplay at trial. E.g. Tr. 437:17–20 (“So I like to think of the Halloween letter as trying to spook
Ad-Venture, not the data; isn’t that right?”), 459:4–8 (“And to the extent Gallagher was spooked
by the Halloween letter, could they look at the financials that they were actually sent to put
themselves at ease?”).
25
     See JX 40, at 2.
26
     Tr. 10:22–11:4 (Addy).

                                                 6
management to pursue two new and complimentary strategic thrusts,
namely, acquisition of businesses and acquisition of real estate.

Business acquisitions will concentrate on businesses where:
 1) There is potential to sell additional services to our existing
 customer base, and/or
 2) There is potential to leverage ISN experience in SAAS business
 practices.

We will solicit business acquisition opportunities and may also invest
in private equity funds that have the potential to increase our access to
acquisition deal flow.

Real estate acquisitions (including new construction) are expected to
fall into two categories:
  1) Operations Support including office buildings, parking lots, data
  centers and ancillary support facilities.
  2) Business Development Support including hunting ranches, ski
  homes, beach properties and city central condominiums. Ownership
  of these types of Business Development Support properties is
  common among the owner and contractor customers we serve. We
  expect these properties to be used for customer meetings,
  entertainment, management retreats, travel accommodation and,
  subject to company guidelines, employee personal use.

Real estate acquisitions are initially contemplated to be no leverage/low
leverage deal structures that can be used as loan collateral in the event
funds are needed for business acquisitions. In light of current economic
conditions, our expectation is that real estate acquisitions, when
eventually liquidated, will achieve attractive returns on investment as
well as facilitating near-term support for operations and business
development.

We will explore for acquisition opportunities in both the US and
abroad. Leading these efforts will immediately become a primary duty
for me.

Thank you for your continued support.

Sincerely,
                                   7
           /s/ William M. Addy
           Chairman and CEO27

The “significant change in strategy” identified in the Halloween Letter was one of

three other major topics discussed at the thirty-minute board meeting.28 From trial

testimony, it appears that this “change in strategy” first arose in 2009 and was in fact

largely promulgated to help leverage a buyout of Ad-Venture shares.29 ISN wanted

such a buyout in order to prevent those shares from being sold to third parties.30

           Although the Defendants purported to investigate several of the opportunities

outlined in the Halloween Letter, with a single limited exception, it ultimately

pursued none.31 In addition, Addy testified (in a separate action) that he never

informed ISN senior management about these “significant change[s] in strategy” for

the Company.32

           As the Defendants themselves testified, the Halloween Letter portrayed

declining growth at ISN.33 While the Company’s growth rates were declining, it

27
     JX 40, at 2–3.
28
     JX 39, at 1–2.
29
     Tr. 416:2–420:20 (Eastin).
30
Id.
31
  See JX 39, at 2; JX 257; JX 181; JX 156; Tr. 10:9–11, 17:8–18 (Addy), 355:7–356:3, 442:19–
443:14 (Eastin). ISN invested in a private equity fund in January 2012. Tr. 17:6–14 (Addy).
32
     JX 211, at 852:3–6; see also Tr. 442:4–445:8 (Eastin).
33
     Tr. 437:9–13 (Eastin).

                                                  8
continued to add the same numbers of new clients, expand its revenues through price

increases, improve its margins, and exceed its stretch budget. 34 In other words,

business was good; in fact, business was good enough that Addy’s and Eastin’s

compensation more than doubled from 2009 to 2011.35 2012 followed on this

growth and became what Addy described as ISN’s “best year ever.”36

          In April 2012, following the 220 Action, ISN produced certain books and

records (the “220 Production”).37 Although ISN possessed the Phalon Valuation

during the entirety of the 220 Action, it did not include it in the 220 Production.38

ISN did include the Halloween Letter in the 220 Production.39

                   2. Gallagher Obtains ISN Stock

          In general, Loftus was responsible for Gallagher’s business, and Mr.

Gallagher—though he had final authority on decisions—relied on Loftus to conduct

the business.40 A Gallagher affiliate owned four “ranch properties”41 (the “Ranch

34
  Tr. 8:9–22, 58:23–59:8, 63:9–13, 72:14–17 (Addy), 391:5–6, 401:5–403:21, 413:22–414:11,
432:15–438:3 (Eastin); JX 95, at 4; JX 53, at 2; JX 39, at 1; JX 52, at 2.
35
     Tr. 431:13–432:14 (Eastin); JX 155, at 49–50.
36
     Tr. 63:14–17, 76:24–77:10 (Addy).
37
     JSOF, ¶¶ 17–18.
38
Id. ¶¶ 23–24. Addy testified at trial that disclosure was not required under the terms of the
agreement reached as a result of the 220 Action. See Tr. 48:6–7 (Addy).
39
     JSOF, ¶ 33.
40
     See Tr. 140:6–10, 146:2–11 (Loftus), 288:3–22 (Gallagher).
41
     Apparently, these are multi-acre residential lots. See Tr. 99:6–13 (Loftus), 277:5–8 (Gallagher).

                                                   9
Properties”) it wished to sell.42 These Ranch Properties were illiquid assets, and

Gallagher’s main goal in selling them for the affiliate was to obtain a certain dollar

amount to protect the affiliate’s interest, rather than achieve the highest price

available.43 Ad-Venture’s controller, Brian Addy, approached Gallagher in 2012

about acquiring the Ranch Properties in exchange for shares of ISN stock.44 Loftus

negotiated with Brian Addy regarding the exchange.45 As a part of the exchange,

Gallagher and Ad-Venture entered a “Minimum Proceeds Agreement,” which

obliged Ad-Venture to pay Gallagher the difference between the value of the ISN

shares and $5.2 million if Gallagher disposed of the shares for less than that

amount.46

          During negotiations, Brian Addy told Loftus that he had a valuation of ISN

supporting a value for the Company of $425 million.47 The two discussed valuations

ranging from $275 million to $500 million.48         During negotiations, Gallagher

received two actual valuations.49 The first, prepared by Ad-Venture, valued ISN at

42
     JSOF, ¶ 52.
43
     Tr. 140:15–18, 147:7–148:10 (Loftus).
44
     JSOF, ¶ 52.
45
Id. ¶ 53.
46
     JX 87, Ex. D, Minimum Proceeds Agreement.
47
     JSOF, ¶ 54; JX 61.
48
     Tr. 142:12–15 (Loftus).
49
     JSOF, ¶¶ 55–56.

                                             10
$395 million.50 The second, prepared by an independent valuation firm, valued ISN

at $450 million.51 Loftus expressed some skepticism of these, given that they were

produced by Ad-Venture or at Ad-Venture’s direction.52

          Gallagher did not perform its own official valuation, as there were no

company projections.53 As part of his presentation of the deal to Mr. Gallagher,

though, Loftus included a page titled “Valuation,” which assigned an equity value

to ISN of $285 million.54 Loftus did not, however, provide Mr. Gallagher with the

valuations he had received from Ad-Venture.55

          To facilitate the transaction, Gallagher (through Ad-Venture) submitted due

diligence requests to ISN, and the parties entered a non-disclosure agreement.56 As

a part of due diligence, ISN produced the Halloween Letter, but it did not produce

the Phalon Valuation.57 Then, at Gallagher’s request, ISN supplemented its due

diligence production with additional documents.58 ISN did not, however, produce

50
Id. ¶ 55; JX 55.
51
     JSOF, ¶ 56; JX 59.
52
     Tr. 155:22–156:14 (Loftus).
53
     See id. at 151:16–24 (Loftus).
54
     JX 80, at 5.
55
     Tr. 291:1–23 (Gallagher).
56
     JSOF, ¶¶ 61–63.
57
Id. ¶¶ 64–65.
58
Id. ¶¶ 66–68.

                                           11
information beyond what it had produced to Ad-Venture in the 220 Action.59 Loftus

described the relationship between Gallagher and ISN as “adversarial.”60

          In November 2012, Loftus and Addy corresponded briefly about the due

diligence and the Halloween Letter.61 Ultimately, Gallagher agreed to exchange the

Ranch Properties for 155 ISN shares.62 The exchange of the Ranch Properties for

155 ISN shares (the “Exchange Transaction”) closed on December 20, 2012.63

                    3. ISN Conducts a Merger and Makes Disclosures

          In January 2013, ISN discussed conducting a cash-out merger (the “Merger”)

of the shares owned by Polaris and Gallagher under 8 Del. C. § 251.64 The purpose

of the Merger was to reduce the total number of shareholders so that ISN could move

closer toward converting to an S-Corporation, which would be beneficial for tax

purposes.65 As long as Ad-Venture, Polaris, and Gallagher held shares, ISN would

not qualify for S-corporation treatment.66 However, ISN decided not to cash out all

three because of risks associated with that size of Merger, including the possibility

59
     Tr. 18:19–21, 19:3-11 (Addy), 100:19–103:7 (Loftus); JX 69, at 4.
60
     Tr. 100:13–101:2 (Loftus).
61
     JX 73, at 1.
62
     JSOF, ¶¶ 87–90.
63
Id. ¶ 91.
64
Id. ¶ 103; JX 92 at 7–10; JX 97.
65
     JSOF, ¶ 121; JX 92, at 6.
66
     JSOF, ¶ 122.

                                                12
of a negative result in an appraisal proceeding.67 It was Addy’s intent that Ad-

venture, run by his brother, not be cashed-out.68 Ad-Venture, nonetheless, had

statutory appraisal rights under the Merger contemplated.

          To prepare for the Merger, ISN retained prominent Delaware counsel (“ISN

Delaware Counsel”) to advise on Delaware law.69 ISN Delaware Counsel attended

a January 9, 2013 board meeting, where the Board resolved to approve the Merger.70

The Board did not retain a financial advisor or obtain a fairness opinion in

connection with the Merger.71

          Addy set the Merger consideration at $38,317 per share (the “Merger

Consideration”), and Eastin agreed to the amount.72 This per share price valued the

Company at $138 million.73 To reach this determination, the Board started with the

Phalon Valuation from 2011 and made various adjustments by hand on a piece of

paper.74 The Defendants testified they made these adjustments by comparing the

Phalon Valuation against the Company’s 2012 performance.75 However, Addy’s

67
     JX 92, at 5–6.
68
     See Tr. 135:18–136:9, 160:16–161:17 (Loftus).
69
     See JX 92.
70
     JSOF, ¶¶ 104, 107.
71
Id. ¶¶ 111–12.
72
Id. ¶ 129; Tr. 29:23–30:2 (Addy).
73
     Tr. 116:7–12 (Loftus).
74
     JSOF, ¶ 130; JX 91; Tr. 49:8–22 (Addy).
75
     Tr. 30:3–32:22, 94:8–95:16 (Addy).

                                               13
adjustments are not compatible with this testimony; they fail to account for the fact

that actual revenue in 2011 and 2012, as well as projected revenue in 2013, were all

substantially higher than projected in the Phalon Valuation.76 In fact, the Company’s

projected revenue for 2013 already exceeded the revenue that the Phalon Valuation

projected for the end of its five-year period in 2016.77 In the notice ISN would send

the next week, it provided neither the projections it relied on to calculate the Merger

Consideration nor the mismatch between actual performance and these projections.78

         Following discussions about the Company’s desire to move toward S-

corporation status at the January 9 board meeting, ISN executed the Merger, with

Addy signing on behalf of Sub Inc., Eastin signing on behalf of ISN, and Addy and

Eastin providing majority shareholder approval through a written consent.79

         On January 16, 2013, ISN notified the shareholders of the Merger and their

appraisal rights in connection with the Merger (the “Notice”).80 ISN supplemented

the Notice with disclosure documents, which included all documents produced

during Gallagher’s due diligence, as well as 24 pages of additional financial

76
  Compare JX 37, at 49 (Phalon Valuation) with JX 76 (historical revenues for 2011 and 2012
and projected 2013 budget) and JX 91 (Addy’s adjustments); see also Tr. 94:8–95:16 (Addy),
390:8–394:19, 399:1–4 (Eastin); JX 76; JX 101, at 423.
77
     Compare JX 76 (2013 budget) with JX 37 (Phalon Valuation).
78
     Tr. 51:10–52:4, 89:23–90:5, 95:9–16 (Addy), 369:7–13, 370:8–18, 413:6–17 (Eastin).
79
     JSOF, ¶¶ 108–109; JX 97.
80
     JSOF, ¶ 138; JX 98.

                                               14
information (the “Supplemental Documentation”).81                     These additional pages

provided only minimal forward-looking finances, focusing chiefly on the

Company’s historical financial information for 2005 through projected 2013.82 The

Notice identified Gallagher and Polaris as the stockholders eligible for appraisal.83

The Notice also purported to inform the stockholders how ISN calculated the Merger

consideration, thusly:

          In establishing the consideration provided to the holders of the
          Common Stock in the Merger, the board of directors of the Company
          considered a variety of factors, including the Supplemental
          Documentation (as defined below) enclosed with this Notice and the
          financial condition of the Company as reflected therein. The board of
          directors of the Company established such consideration based on those
          factors and such other considerations as the board in its judgment
          deemed appropriate.84

At trial, Addy testified that to understand how ISN arrived at the Merger

Consideration, one would use the Phalon Valuation, his adjustments to it, and the

January 9 board meeting minutes.85 None of these three items were provided with

81
     JSOF, ¶ 140; JX 101.
82
     Tr. 342:14–21, 376:9–377:11 (Eastin); see also JX 101, at 429.
83
     JSOF, ¶ 142.
84
Id. ¶ 141; JX 97, at 7.
85
     Tr. 50:2–24 (Addy). Addy later confirmed this for the purpose of ISN’s audit. JX 162, at 1.

                                                 15
the Supplemental Documentation.86                The Supplemental Documentation did,

however, include the Halloween Letter.87

           Along with providing the Notice to Gallagher, ISN included a check for

$5,939,135, which represented the value of Gallagher’s 155 ISN shares at the

Merger price.88 The Notice stated: “upon cashing or negotiating the enclosed check,

Gallagher will be treated by the company as having waived any appraisal rights to

which it may otherwise be entitled.”89

                  4. Gallagher Reviews the Notice and Accepts the Merger
                  Consideration

           Gallagher received the Notice, Supplemental Documentation, and the check

for the Merger on January 17, 2013.90 After Loftus received the Notice from ISN,

he provided it to Gallagher’s counsel at Moye White, where two attorneys spent over

an hour reviewing the materials, then conducted a call with Loftus.91 Loftus himself

reviewed the Supplemental Documentation provided with the Notice.92 Based on

his review, he conducted informal calculations and came up with a range of $250

86
     Tr. 32:6–8, 51:10–18 (Addy), 369:7–13, 370:8–18 (Eastin).
87
     JX 101, at 178–79.
88
     JSOF, ¶ 143.
89
Id.
90
     Id. ¶ 222.
91
  Tr. 181:6–14 (Loftus); JX 111, at 2 (time records from Moye White indicating review and phone
call with Loftus).
92
     Tr. 118:10–16 (Loftus).

                                               16
million to $350 million for ISN’s value.93 Loftus testified he questioned his analysis

because ISN’s insiders had determined a lower value, and he presumed they had

better information.94 He also testified, however, that the delta between his rough

calculations and ISN’s assigned value were sufficiently large to raise “concerns”

about the fairness of the ISN valuation.95              Ultimately, however, he “assumed

[Gallagher] could trust the process and the management team,” and so he did not

contact ISN with questions.96

          Loftus emailed Mr. Gallagher, attaching the Notice, at 2:20 p.m. that same

day, January 17.97 Final authority to accept the Merger Consideration or seek

appraisal sat with Mr. Gallagher.98 Loftus did not share with Mr. Gallagher his

informal calculations based on the ISN financials that roughly valued the Company

at $250 million to $350 million.99 He did share with Mr. Gallagher, however, his

93
Id. at 120:3–121:8, 149:5–153:5, 198:6–199:10, 200:19–201:23 (Loftus).
94
Id. at 149:5–153:5, 198:6–199:10, 200:19–201:23 (Loftus). Loftus testified that the Halloween
Letter led him to conclude the lower valuation might be due to the slowing growth and directional
changes described in that letter. Id. at 108:1–20, 119:10–15, 205:3–19 (Loftus). However, he also
observed that the balance sheets did not reflect a change in strategy toward real estate or business
acquisitions. Id. at 174:12–175:1 (Loftus).
95
Id. at 206:22–207:7 (Loftus).
96
Id. at 202:20–203:2 (Loftus). Part of Loftus’s unwillingness to reach out to ISN was based on
his previous adversarial encounters with Addy when Gallagher was conducting diligence prior to
acquiring the stock. Id. at 203:3–15 (Loftus).
97
     JSOF, ¶ 223; JX 102.
98
     JSOF, ¶ 249.
99
     Tr. 201:4–202:7 (Loftus).

                                                17
confusion about the basis for ISN’s valuation, as well as the potential that ISN’s

growth was slowing, based on the Halloween Letter, with the result that ISN’s

valuation might overvalue or undervalue the Company.100

          Mr. Gallagher agreed with Loftus’s decision not to inquire further with ISN

because, he testified, he believed ISN had a legal duty to give Gallagher fair value

for its shares.101 However, rather than “simply trust defendants,” Mr. Gallagher

asked Loftus to review the materials provided and give him a “view as to the

fairness” and enough information to make a decision.102 Loftus told Gallagher that

ISN’s assigned value “might be low,” and as a result, Gallagher might be “leaving

money on the table” if it accepted the Merger Consideration.103 After discussing the

Halloween Letter, Mr. Gallagher felt that ISN might be experiencing “a very

significant decline,” including “almost a collapse of their earnings.”104

          The Notice provided Gallagher twenty days to decide whether to accept the

Merger Consideration or seek appraisal.105 In making the decision, Gallagher’s

“number one goal” was to ensure the Gallagher affiliate whose Ranch Properties had

100
      Tr. 196:24–201:23 (Loftus), 300:10-301:20 (Gallagher).
101
Id. at 308:3–309:2 (Gallagher).
102
Id. at 265:9–15 (Loftus), 327:18–22 (Gallagher).
103
Id. at 311:20–312:4 (Gallagher), 269:7–14 (Loftus).
104
Id. at 305:10–306:2 (Gallagher).
105
      JX 98, at 3.

                                                 18
been exchanged for the ISN shares was “taken care of.”106                   The Merger

Consideration was sufficient to achieve that goal.107 In fact, the $5.9 million cash-

out significantly exceeded the $5.2 million called for in the Minimum Proceeds

Agreement.108 Thus, accepting the Merger Consideration satisfied Gallagher’s

investment goals and avoided a risk-laden and potentially costly appraisal action.109

          Based on these factors, Mr. Gallagher made the decision on the spot.110 Late

in the afternoon of January 17—the same day it received the Notice, Supplemental

Documentation, and Merger Consideration—Gallagher deposited the check.111 Ad-

venture, by contrast, made the decision to seek an appraisal of it stock.112 Mr.

Gallagher testified that at the time he accepted the Merger Consideration, he was

aware that Ad-Venture would seek appraisal.113

106
      Tr. 214:3–215:12 (Loftus).
107
Id. at 214:24–215:3 (Loftus).
108
      See JX 87, Ex. D, Minimum Proceeds Agreement.
109
      Tr. 213:5–8, 215:13–216:24 (Loftus).
110
Id. at 321:23–322:9 (Gallagher).
111
   JSOF, ¶ 287; JX 105–106. Mr. Gallagher decided to distribute the Merger consideration to
Gallagher’s owners pro rata. JSOF, ¶ 288.
112
      See JSOF, ¶ 292.
113
      Tr. 324:2–7 (Gallagher).

                                             19
                   5. Ad-Venture and Polaris Seek Appraisal

            Following the Merger, both Ad-Venture and Polaris petitioned this Court for

appraisal of the fair value of their shares (the “Appraisal Action”).114 During the

course of the litigation, ISN maintained that it had paid fair value in the Merger.115

On September 19, 2013, as a part of the Appraisal Action, ISN subpoenaed

Gallagher, seeking both document production and testimony.116 Gallagher was

served with the subpoena on September 23, 2013.117 Gallagher retained Moye White

to assist in responding.118

            On October 10, 2013, ISN Delaware Counsel emailed Moye White regarding

a deposition, and Moye White responded on October 21.119 Thereafter, Gallagher

produced more than 1,800 pages of documents and a privilege log.120 Moye White

again communicated with ISN Delaware Counsel on January 24 and 28, 2014,

regarding Gallagher’s deposition.121 The attorneys continued to communicate up

until Loftus was deposed as Gallagher’s representative on February 10, 2014.122 At

114
      JSOF, ¶ 292.
115
      JX 261, at 7; JX 188, at 73; JX 195, at 3.
116
      JSOF, ¶ 304.
117
Id.
118
      Id. ¶ 305.
119
Id. ¶¶ 307–308.
120
Id. ¶ 306.
121
Id. ¶ 309.
122
Id. ¶¶ 310–13.

                                                   20
his deposition, Loftus provided testimony regarding, among other things, his rough

valuations that calculated ISN’s value at around twice the Merger Consideration.123

He also testified at his deposition that he thought the Merger Consideration was too

low.124

          During the Appraisal Action, Ad-Venture and Polaris moved to compel

documents from ISN twice, the first time on October 1, 2013, and the second on

March 4, 2014.125 These motions to compel were resolved by a special discovery

master, who publicly filed a report on April 10, 2014.126 Loftus testified that he did

not know about the motions to compel until his deposition because he was not

“monitoring th[e] case.”127 Both motions to compel alleged disclosure violations by

ISN.128

123
      Tr. 221:22–222:17 (Loftus); JX 145, at 30.
124
   JX 145, at 29. This included testimony regarding supporting factors, such as high contractor
growth rates. JX 145, at 29, 31.
125
      JSOF, ¶¶ 326–28.
126
Id. ¶ 329; JX 153.
127
      Tr. 253:18–20, 254:7–9, 257:24–258:6 (Loftus).
128
    Neither motion to compel disclosed that the Phalon Valuation was based on materials not
included with the Supplemental Documentation. See JX 133; JX 148. However, the first motion
to compel states that “when the ISN board set the Merger consideration, it appears as if all it did
was make a number of its own ‘adjustments’ to a valuation study that was commissioned over two
years ago. . .” JX 133, at 2; see also JX 133, at 6 (“it appears that . . . the ISN board simply dusted
off the 2011 Valuation and made a number of its own adjustments. . .”). The Motion to Compel
also stated that the “2011 Valuation” (i.e. the Phalon Valuation) was not conducted consistent with
Delaware law. JX 133, at 3 n.1. The second Motion to Compel made these same types of
statements. See JX 148, at 3, 12–14.

                                                   21
          On October 2, 2015, the parties in the Appraisal Action identified their trial

witnesses.129 In October and early November 2015, Loftus, Brian Addy, Moye

White, and Ad-Venture’s counsel conducted various communications with one

another centered on the Appraisal Action.130 Loftus held a call with Mr. Gallagher

relating to an “ISN Update.”131 The parties in the Appraisal Action identified Loftus

as a trial witness, and Loftus contacted lawyers at Moye White and at Ad-Venture’s

counsel to discuss the implications.132 Ultimately, however, neither Loftus nor

anyone from Gallagher testified at trial in the Appraisal Action.133

          On January 29, 2016, Ad-Venture’s counsel sent Moye White the public

versions of the pre-trial briefs in the Appraisal Action.134 Moye White forwarded

these briefs to Loftus.135 Counsel at Moye White testified he glanced at them, and

Loftus testified that he did not read them.136 However, Moye White counsel billed

129
      JSOF, ¶ 343.
130
Id. ¶¶ 343–47.
131
Id. ¶ 348.
132
    Tr. 222:22–224:13, 225:11–21. Counsel at Moye White billed 1.2 hours for each of two calls,
one on October 9, 2015, and the second on November 3, 2015. JX 192, at 2; JX 197, at 2. The
billing entry described the call as a “call with client regarding . . . strategic issues relating to
lawsuit.” JX 197, at 2.
133
      JSOF, ¶ 349.
134
Id. ¶¶ 362–63; JXs 199–202.
135
      JSOF, ¶ 364.
136
      Jones Dep., at 73:9–74:8; Tr. 131:16–21 (Loftus).

                                                 22
1.5 hours to “[r]eview pre-trial briefs as filed [in the] Delaware appraisal action.”137

On February 1, 2016, Loftus emailed the pre-trial briefs to Mike Kennedy (the broker

for the original exchange transaction) and K.C. Gallagher (Gallagher’s then-

president).138 That same day, Loftus scheduled a call with Moye White regarding

“ISN.”139

          The Appraisal Action pre-trial briefs contained allegations such as “conflicted

[ISN] board set the merger price by making ‘back of the envelope’ adjustments to a

stale valuation commissioned years earlier,” and “[t]he record now shows that none

of th[e] statements [in the Halloween Letter] were true when made and were

certainly not true by 2012, when provided to Polaris and Gallagher,” and “the

Supplemental Documentation did not contain . . . the 2011 Phalon Valuation, the

adjustments that Bill Addy made to the 2011 Phalon Valuation to set the Merger

Consideration, or the January 9, 2013 minutes (which presented the Board’s reasons

for the Merger and the Merger Consideration).”140 As Loftus testified, several

arguments and claims in the pre-trial briefs for the Appraisal Action essentially

mirror Gallagher’s claims in this litigation.141

137
      JX 210, at 2.
138
      JSOF, ¶¶ 365–66.
139
Id. ¶ 367.
140
      JX 199, at 8, 37, 43–44.
141
      Tr. 237:2–23, 243:20–244:23 (Loftus).

                                              23
          Months later, in November 2016, Brian Addy scheduled a call with Loftus to

“update [Loftus] on the ISN litigation.”142 They held the call on December 13,

2016.143

          The parties in the Appraisal Action submitted vastly disparate values: ISN

valued the Company at $106 million; Ad-Venture valued the Company at $645

million; Polaris valued the Company at $820 million.144 I determined the fair value

of ISN was $357 million, or $98,783 per share.145 After this Court entered judgment

on January 9, 2017, ISN appealed, and the Supreme Court of Delaware affirmed on

October 30, 2017.146 ISN paid Ad-Venture and Polaris the amount mandated by the

Court in the appraisal action on December 13, 2017, and the Court entered a final

order discharging the supersedeas bond on December 18, 2017.147

                   6. Gallagher Sues the Defendants for Breach of Fiduciary Duty

          On December 15, 2017, Moye White sent Loftus copies of this Court’s

opinion in the Appraisal Action as well as the Supreme Court’s Order affirming that

opinion.148 Loftus and Mr. Gallagher testified at trial that they first became aware

142
      JSOF, ¶ 369; JX 220.
143
      JSOF, ¶ 370; JX 224.
144
      JSOF, ¶ 293.
145
Id. ¶ 294.
146
Id. ¶¶ 296–97.
147
Id. ¶ 299.
148
Id. ¶ 386.

                                             24
of the facts supporting Gallagher’s claim in the present action when they read the

opinion in the Appraisal Action and the Supreme Court’s order affirming that

opinion.149 Loftus also testified that even had he read the pre-trial briefs or this

Court’s appraisal opinion (he testified he read neither at the time), he would not have

been aware of the facts supporting the current claim because of the inconclusive

nature of the parties’ allegations and of trial court opinions on appeal.150 Once the

Supreme Court affirmed, Loftus testified that ISN’s wrongdoing seemed “very real”

and he began “paying closer attention.”151 Gallagher filed this present action on

February 14, 2018, alleging that the Defendants breached their fiduciary duties by

providing false and misleading disclosures regarding the Merger.152

          C. Procedural History

          The Plaintiff filed a Petition for Breach of Fiduciary Duty (the “Complaint”)

on February 14, 2018.153 The Defendants answered on April 10, 2018.154 The next

day, the Defendants moved for summary judgment.155 I held argument on the

149
      Tr. 263:2–7 (Loftus), 283:23–284:6 (Gallagher).
150
Id. at 235:12–236:11, 237:24–238:22, 250:3–9 (Loftus).
151
Id. at 238:7–22 (Loftus); Loftus Dep., at 204:22–205:5.
152
      JSOF, ¶¶ 1, 387.
153
      Verified Petition for Breach of Fiduciary Duty, D.I. 1.
154
      Defs.’ Answer to Pl.’s Verified Compl., D.I. 9.
155
      Defs.’ Mot. for Summ. J., D.I. 12.

                                                  25
Motion for Summary Judgment on October 5, 2018.156 I denied the motion and

ordered the parties to develop the factual record on several issues.157 After the

parties conducted additional discovery, I held a two-day trial on October 8 and 9,

2019.158 The parties gave post-trial arguments on February 20, 2020.159 I considered

the matter fully submitted at that time.

                                      II. ANALYSIS

          The Plaintiff brings a claim for a breach of fiduciary duty by way of disclosure

infirmities against the Defendants. It attempts to isolate this claim from an unfair

price and process claim to avoid application of laches. Although the Defendants

strenuously deny a breach of duty in way of the disclosures, their central defense is

that the Plaintiff’s claim is time-barred. The situation presents a tension where

equity is concerned: I am presented with Defendant fiduciaries, on the one hand,

who have breached their fiduciary duties in connection with a squeeze-out of

minority stockholders by a corporate controller; and on the other hand, with a

Plaintiff that slept on its rights for a half-decade while red flags not only were raised

but snapped crisply in the breeze. To resolve this, I examine both the claim and the

156
      D.I. 35.
157
   Oral Argument on Defs.’ Mot. for Summ. J. and the Court’s Ruling held on October 5, 2018,
D.I. 37 (“October 5, 2019 Ruling”).
158
      D.I. 83.
159
      D.I. 104.

                                             26
defense; because it is apparent that the Plaintiff knew it had a claim when it accrued,

I find for the Defendants. Gallagher had ample reason to know the Merger was

unfair, but the consideration tendered met its main goal of sufficient value for the

Ranch Properties it had just exchanged for its ISN shares. Gallagher accepted the

consideration, then waited five years to bring its claim, until after the lengthy

Appraisal Action conducted by its fellow stockholders verified the significantly

higher value of its shares. It declined to pursue its rights until all risk concerning the

quantum of damages had been resolved by others. As such, its claim is time-barred.

Accordingly, I need not resolve the fiduciary claims. For completeness’ sake,

however, I briefly address the record on fiduciary duty, first.

          A. The Defendants Breached their Fiduciary Duties Regarding the Merger

          Defendants Addy and Eastin, as directors of a Delaware corporation, owed

fiduciary duties of care and loyalty to the corporation and its stockholders.160 Addy

additionally owed fiduciary duties as the controlling stockholder.161 Where, as here,

a self-interested fiduciary cashes out the minority, the process employed must be

entirely fair to the minority. Also included in the Defendants’ fiduciary duties is the

160
      See Stone ex rel. AmSouth Bancorp. v. Ritter, 911 A.2d 362, 370 (Del. 2006).
161
    eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1, 26 (Del. Ch. 2010) (“[C]ontrolling
stockholders are fiduciaries of their corporations’ minority stockholders.” (citing Ivanhoe Partners
v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987))).

                                                 27
duty to disclose all material information when requesting stockholder action.162

“Material,” in this context, means “a substantial likelihood that the undisclosed

information would significantly alter the total mix of information already

provided.”163      In the merger context, the company must disclose sufficient

information for a stockholder to understand the value of the interest for which she is

asked to accept cash or pursue appraisal.

       A director’s duty of disclosure, I note, acquires particular importance in a

private company’s cash-out merger because stockholders of such companies lack

recourse to publicly-filed audited financial statements that could assist in evaluating

the offer.164    Regardless of the situation, however, when a company asks its

stockholders to choose between accepting consideration and seeking appraisal, it

162
    Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) (“[T]he term ‘duty of candor’ does not import a
unique or special rule of disclosure. It represents nothing more than the well-recognized
proposition that directors of Delaware corporations are under a fiduciary duty to disclose fully and
fairly all material information within the board’s control when it seeks shareholder action.”); see
also Pfeffer v. Redstone, 965 A.2d 676, 685 (Del. 2009) (“To state a claim for breach of the
fiduciary duty of disclosure on the basis of a false statement or representation, a plaintiff must
identify (1) a material statement or representation in a communication contemplating stockholder
action (2) that is false.” (quoting O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 920 (Del.
Ch. 1999))); Berger v. Pubco Corp., 976 A.2d 132, 138 (Del. 2009); Glassman v. Unocal Expl.
Corp., 777 A.2d 242, 248 (Del. 2001).
163
    In re United Capital Corp., S’holders Litig., 2017 WL 389520, at *3 (Del. Ch. Jan. 4, 2017)
(internal quotation omitted); Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1174 (Del. 2000).
164
   See Wacht v. Cont’l Hosts, Ltd., 1986 WL 4492, at *1–2 (Del. Ch. Apr. 11, 1986); see also
Berger v. Pubco Corp., 2008 WL 2224107, at *3 (Del. Ch. May 30, 2008), rev’d on other grounds,
976 A.2d 132 (Del. 2009).

                                                28
must provide all information material to the stockholders’ decision to sell or seek

fair value in the courts.165

         Here, the Defendants decided to cash out some of the minority stockholders.

They created a valuation for that purpose by a cursory and inaccurate update of a

stale valuation. That process was not fair to the minority. Through that process,

they arrived at a price that wildly understated the value of ISN. That price,

obviously, was unfair.166 In asking the stockholders to agree to that price, they made

disclosures that were inadequate to the decision, as well.

         The Defendants failed to disclose key documents that showed the basis for

and the methods underlying their determination of the Merger Consideration based

on a Company value of $138 million. In a situation such as this, where information

is not readily available, and the minority stockholders must rely on management’s

calculations and determine whether to trust management, ISN’s method of

calculating the merger price becomes material.167 Where, as here, the Defendants’

165
      Berger, 2008 WL 2224107, at *3.
166
   The cash-out price implied a corporate fair value of $138 million; I found fair value to be $357
million. Valuation is as much art as science, and I have no illusion that in fulfilling my statutory
duty to determine fair value, I reached the “actual” or “intrinsic” value of ISN. Having said that,
the disparity of a statutory value over two-and-a-half times the cash-out value makes it clear to me
that the price was vastly low, and unfair.
167
     See Berger, 2008 WL 2224107, at *3 (“Where . . . a minority shareholder needs to decide only
whether to accept the merger consideration or to seek appraisal, the question is partially one of
trust: can the minority shareholder trust that the price offered is good enough, or does it likely
undervalue the Company so significantly that appraisal is a worthwhile endeavor? . . . [W]here so
little information is available about the Company, such a disclosure [about the method of
                                                29
method of valuation was haphazard and based on admittedly stale projections, the

materiality of the valuation process is heightened.168 But the Defendants did not

provide the Phalon Valuation on which they based their calculations.169 They did

not provide the adjustments that Addy made to the Phalon Valuation to arrive at a

value of $138 million.170 Nor did they provide the January 9 board minutes that gave

an overview of the Merger Consideration calculation.171 At trial, the Defendants

testified that these three documents—which were undisclosed to stockholders in the

Notice—provided a complete picture of how they calculated the Merger

Consideration.172 I need not decide what disclosures would be required here to

comply with a duty of candor to note that the disclosures actually made were

materially incomplete. Fatal to the Plaintiff’s pursuit of its claims here, however, is

that the breaches of duty were apparent to it when it received the Notice.

calculating the merger price] would significantly change the landscape with respect to the decision
of whether or not to trust the price offered by the parent.”).
168
   Wacht v. Cont’l Hosts, Ltd., 1994 WL 525222, at *3 (Del. Ch. Sept. 16, 1994) (“[I]t appears
that [defendant] simply arrived at [the merger price] rather haphazardly. . . A shareholder, in
determining whether to seek appraisal or accept the terms of the Merger, would surely deem
information regarding how the merger price was determined to be material.”)
169
      Tr. 32:6–8, 51:10–18 (Addy), 369:7–13, 370:8–18 (Eastin).
170
Id.
171
      Id.
172
Id. at 50:2–15 (Addy).

                                                30
       B. The Plaintiff was on Inquiry Notice of the Defendants’ Fiduciary
       Breaches, Including the Disclosure Violations

               1. Legal Standards for Notice of Claims and Important Dates

       As noted, Addy and Eastin’s viable defense to their breach of fiduciary duty

is that Gallagher was on notice of their malfeasance when it received the Merger

Notice, and that it improperly sat on its rights. Gallagher, they note, waited five

years to file suit, until after the Supreme Court affirmed this Court’s Opinion in the

Appraisal Action, which reduced litigation risk regarding damages to zero. In

response, Gallagher contends that while it knew it had appraisal rights, and while it

knew it had a breach of fiduciary duty claim for entire fairness, it could not have

known that the Defendants breached their fiduciary duties by providing inadequate

disclosures—the claim Gallagher brings here—until after it received copies from its

counsel of the Supreme Court’s affirmation of the Appraisal Action in December

2017.173

173
    See Pl. Gallagher Industries, LLC’s Answering Post-Trial Br., D.I. 102 (“Pl.’s Answering Br.”),
at 24 (“Gallagher . . . did not know that they had been misled by the directors until December 2017,
when Gallagher first saw the opinions in the Appraisal Litigation.”), 26 (“The evidence at trial
established that Gallagher did not know that the Notice was false and misleading until December
15, 2017, when Gallagher first learned of the decisions in the Appraisal Litigation.”). Gallagher
asserts that nothing in the Appraisal Action could have given it inquiry notice because it had no
duty to monitor the litigation, did not monitor it, and even if it had, any facts it encountered would
have remained contested and thus speculative. Id. at 42–52. Gallagher hedges this statement by
arguing that “the earliest possible date” of inquiry notice was when its counsel received the pre-
trial briefs from the Appraisal Action in January 2016. Id. at 26.

                                                 31
          This Court of equity applies the legal statute of limitations absent “unusual or

mitigating circumstances.”174 The statute of limitations for a breach of fiduciary

duty claim is three years.175 It begins to run when a plaintiff’s claim accrues, not

when the effects are felt.176 Thus, the statute of limitations begins to run “even if the

plaintiff is unaware of the cause of action or the harm.”177 The limitations period,

however, may be tolled in case of one of the following: an inherently unknowable

injury, fraudulent concealment, or equitable tolling.178 The Plaintiff relies on the

second two tolling rubrics here.

          Fraudulent concealment requires a plaintiff to “allege an affirmative act of

‘actual artifice’ by the defendant that either prevented the plaintiff from gaining

knowledge of material facts or led the plaintiff away from the truth.”179 Equitable

tolling suspends the limitations period “while a plaintiff . . . reasonably relie[s] upon

174
   Atlantis Plastics Corp. v. Sammons, 558 A.2d 1062, 1064 (Del. Ch. 1989); see also U.S.
Cellular Inv. Co. of Allentown v. Bell Atlantic Mobile Sys., Inc., 677 A.2d 497, 502 (Del. 1996).
The parties agree that the equitable doctrine of laches typically incorporates the statute of
limitations by analogy, and that the applicable statute of limitations is the proper analysis here.
See Pl. Gallagher Industries, LLC’s Opening Post-Trial Br., D.I. 97 (“Pl.’s Opening Br.”), at 35
n.106; Defs.’ Opening Post-Trial Br., D.I. 96 (“Defs.’ Opening Br.”), at 35–36.
175
Smith & H. v. Mcgee, 2006 WL 3000363, at *3 (Del. Ch. Oct. 16, 2006); In re Tyson Foods, Inc.,
919 A.2d 563, 584 (Del. Ch. 2007) (citing 10 Del. C. § 8106).
176
   Sunrise Ventures, LLC v. Rehoboth Canal Ventures, LLC, 2010 WL 363845, at *6 (Del. Ch.
Jan. 27, 2010), aff’d, 7 A.3d 485 (Del. 2010) (TABLE) (citing In re Coca-Cola Enters., Inc., 2007
WL 3122370, at *5 (Del. Ch. Oct. 17, 2007)).
177
   In re Tyson Foods, 919 A.2d at 584 (citing Isaacson, Stolper & Co. v. Artisan’s Sav. Bank, 330
A.2d 130, 132 (Del. 1974)).
178
Id. at 584–85.
179
Id. at 585 (quoting Ewing v. Beck, 520 A.2d 653, 667 (Del. 1987)).

                                                 32
the competence and good faith of a fiduciary.”180 However, while plaintiffs “are

entitled to rely on the ‘competence and good faith of a fiduciary,’ . . . they are not

entitled to ignore red flags.”181 Even the “trusting plaintiff still must be reasonably

attentive to his interests.”182

          Where tolling occurs, it lasts until a plaintiff is put on “inquiry notice” by

“facts that ought to make [it] suspect wrongdoing.”183 A plaintiff need not be aware

of “all of the aspects of the alleged wrongful conduct.”184 Notice of such facts, or

“red flags,” requires a plaintiff to “diligently investigate and to file within the

limitations period as measured from that time.”185 Once a plaintiff is put on inquiry

notice, she is deemed to be on notice of “everything to which such inquiry might

have led.”186 In in re Primedia, Inc. Stockholders Litigation,187 this Court outlined

a two-step analysis to determine inquiry notice: first, the plaintiff must encounter

180
      Forman v. CentrifyHealth, Inc., 2019 WL 1810947, at *8 (Del. Ch. Apr. 25, 2019).
181
   In re Primedia, Inc. S’holders Litig., 2013 WL 6797114, at *13 (Del. Ch. Dec. 20, 2013)
(quoting Weiss v. Swanson, 948 A.2d 433, 451 (Del. Ch. 2008)).
182
Id. (quoting In re Dean Witter P’ship Litig., 1998 WL 442456, at *8 (Del. Ch. July 17, 1998),
aff’d, 725 A.2d 441 (Del. 1999)).
183
   Pomeranz v. Museum Partners, L.P., 2005 WL 217039, at *13 (Del. Ch. Jan. 24, 2005)
(emphasis added).
184
      Dean Witter, 1998 WL 442456, at *7.
185
   Pomeranz, 2005 WL 217039, at *13; In re Primedia, 2013 WL 6797114, at *13 (“Stockholders
must exercise ‘reasonable diligence’ when monitoring corporate filings for potential claims.”
(quoting Weiss, 948 A.2d at 452)).
186
      Pomeranz, 2005 WL 217039, at *13.
187
      2013 WL 6797114 (Del. Ch. Dec. 20, 2013).

                                                33
facts that reasonably should arouse suspicion; second, these facts must lead to an

investigation capable of producing facts sufficient to allow the plaintiff to file a

complaint capable of surviving a motion to dismiss.188

          The salient question, therefore, is when Gallagher was put on inquiry notice

that it had a breach of fiduciary duty claim against the Defendants for inadequate

disclosures. Several important dates frame this analysis:

      • January 17, 2013: Gallagher received the Notice, Supplemental
        Documentation, and Merger Consideration.189
      • September 23, 2013: ISN served a subpoena on Gallagher in the
        Appraisal Action.190
      • October 1, 2013: Ad-Venture and Polaris filed their first motion to
        compel discovery from ISN.191
      • February 10, 2014: Loftus sat for a deposition as Gallagher’s
        representative.192
      • March 4, 2014: Ad-Venture and Polaris filed their second motion to
        compel discovery from ISN.193
      • April 10, 2014: The special discovery master in the Appraisal Action
        filed a public report.194
      • January 29, 2016: Moye White received public versions of the pre-
        trial briefs in the Appraisal Action and forwarded them to Loftus.195

188
      Id. at *13–14.
189
      JSOF, ¶ 222.
190
      Id. ¶ 304.
191
      Id. ¶¶ 326–28.
192
      Tr. 221:22–222:17 (Loftus).
193
      JSOF, ¶¶ 326–28.
194
      Id. ¶ 329; JX 153.
195
      JSOF, ¶¶ 362–63; JXs 199–202.

                                           34
      • August 11, 2016: This Court issued an Opinion setting the fair value at
        $357 million.196
      • October 30, 2017: The Supreme Court affirmed the Opinion.197
      • December 13, 2017: Gallagher received copies of the Supreme Court
        Opinion affirming the fair value of ISN.198
      • February 14, 2018: Gallagher filed the Complaint in this action.199

Given the three-year limitation, the question is whether any event prior to February

14, 2015 put Gallagher on inquiry notice. This would include (1) Gallagher’s receipt

of the Notice, Merger Consideration, and Supplemental Documentation; (2) the

subpoenas and Loftus’s deposition in the Appraisal Action, and (3) the two motions

to compel and the results from the special discovery master in the Appraisal Action.

                   2. Gallagher was on Inquiry Notice on January 17, 2013

          Receipt      of    the Notice,   Merger   Consideration,   and    Supplemental

Documentation on January 17, 2013 should have (and did) raise a “red flag”

regarding disclosure violations. On that date, Gallagher knew it was working in an

information vacuum. As Loftus acknowledged at trial, he did not believe the

Defendants provided enough information for him to conduct a proper valuation, and

he expressed concern to Mr. Gallagher regarding this lack of information.200 He

196
      JSOF, ¶ 294; JX 219.
197
      JSOF, ¶¶ 296–97.
198
      Id. ¶ 386.
199
      Id. ¶¶ 1, 387.
200
      Tr. 196:8–18 (Loftus).

                                              35
testified that the dearth of information was, in his experience, unprecedented.201

Only weeks before the merger, when Gallagher had been negotiating the purchase

of ISN stock, Ad-Venture had offered estimates of ISN’s value in the range of $395

million to $450 million, although Loftus had expressed some skepticism, given Ad-

Venture’s motive to inflate the price.202 After receiving the Notice, Loftus’s own

rough “ballpark” calculations provided values as high as $250 million to $350

million.203 Nonetheless, he testified that without being provided projections or

methods of valuation, Gallagher decided it was “going to trust management, at the

end of the day, because management must know their business way better than we

do.”204 At the same time, the disparity of values raised concerns for Loftus that the

Defendants’ valuation “might be low” and Gallagher might be “leaving money on

the table.”205 In other words, Gallagher suspected it was being wronged, and knew

it had not been provided the information to find out if this was so. That was a red

flag that reasonably ought to have alerted it to the possibility that the Merger was

unfair, and the disclosures were inadequate, and thus alerted it of potential entire

fairness and disclosure-based claims.

201
      Id.
202
   JSOF, ¶¶ 55–56, JX 55; JX 59; Tr. 155:22–156:14 (Loftus) (noting skepticism of valuations
because they were produced by or at behest of the seller).
203
      Tr. 120:3–121:8, 149:5–153:5, 198:6–199:10, 200:19–201:23 (Loftus).
204
      Id. at 150:5–7 (Loftus).
205
      Id. at 311:20–312:4 (Gallagher), 269:7–14 (Loftus).

                                                 36
          Throughout post-trial briefing, Gallagher makes a “hoist Defendants on their

own petard” argument with a certain equitable appeal. Gallagher notes that the

Defendants maintain that the Notice was proper, and that Addy testified that it was

neither misleading nor deficient.206 Consequently, Gallagher argues, from Addy’s

own mouth came the proof that the Notice did not appear deficient, and Gallagher

could have had no way to know it had a potential claim for a disclosure violation.207

The problem with this argument is that, for the reasons detailed above, there was in

fact sufficient reason for Gallagher to be aware of a claim.

          I have found that Gallagher was alerted by the Notice to potential disclosure

inadequacies. Gallagher had an obligation to diligently investigate and was on

notice of everything to which such an investigation would have led.208                 Had

Gallagher investigated, it would not have run into a dead end. On January 17, 2013,

it knew that it was being cashed out in a controlled transaction without any

procedural safeguards. Because of this, it certainly could have filed an entire fairness

claim that would survive a motion to dismiss. Discovery in such a claim would have

made concrete the apparent disclosure violations, just as discovery in the Appraisal

Action demonstrated those same violations. In sum, because of the red flag present

206
      See, e.g., Pl.’s Answering Br., at 23, 25.
207
      See id.
208
   Pomeranz v. Museum Partners, L.P., 2005 WL 217039, at *13 (Del. Ch. Jan. 24, 2005); In re
Primedia, Inc. S’holders Litig., 2013 WL 6797114, at *13 (Del. Ch. Dec. 20, 2013).

                                                   37
on January 17, 2013 regarding possible disclosure violations, I find that Gallagher

was on inquiry notice as of that date.209

       Having received the Merger Consideration it knew might be unfair, but

frustrated by an inability to verify whether it was unfair because of insufficient

information, Gallagher should have been aware of the potential for price/process and

disclosure claims. No tolling of the limitation period applies.

               3. Gallagher had Additional Reason to Inquire and Pursue its Claims
               Prior to April 10, 2014

       Other ISN stockholders pursued a timely appraisal claim. I note that the

progress of this Appraisal Action provided Gallagher with further inquiry notice.

Gallagher states that would-be plaintiffs do not have a duty to monitor litigation and

scour court filings looking for claims, but that is true only “absent any reason to

209
    Gallagher does not deny that it was aware of a potential claim that the merger was unfair at the
time it received ISN’s Notice; its contention is that it was unaware of a potential disclosure claim.
See Pl.’s Answering Br., at 1–2. Where a squeezed-out stockholder in a controller transaction has
evidence that the transaction is unfair in regard to price, and it cannot reconcile that evidence with
disclosed information from the company seeking its acceptance of the deal price, it is on notice of
a disclosure violation. I find Gallagher’s argument—that it had notice of an entire fairness claim,
but not a disclosure claim—an artificial and immaterial distinction on these facts. I note that, even
if there had been no suspicious facts regarding inadequate disclosures (which I find there were),
Gallagher would still presumably have been on inquiry notice because it was on notice of the price
and process claim, which on these facts is all that the inadequate disclosures are alleged to have
masked. Our case law does not require, as Gallagher argues, that the red flag relate precisely to
the claim ultimately litigated, if the claim arose from the incident serving as the red flag. See In
re Tyson Foods, Inc. 919 A.2d 563, 593–94 (Del. Ch. 2007) (finding plaintiff on inquiry notice of
breach of fiduciary duty claim regarding related-party transactions but not for fiduciary duty claim
based on other discrete related-party transactions). If a plaintiff has “facts that ought to make [it]
suspect wrongdoing,” then the plaintiff is on notice of “everything to which such inquiry might
have led.” Pomeranz, 2005 WL217039, at *13.
                                                 38
think [it has] been injured.”210 Here, Gallagher suspected it might be leaving a great

deal of money on the table—perhaps as much as half what it was owed. The only

two other outside shareholders—faced with the same facts—sought appraisal.

          This is not a situation where Gallagher would have to scour court filings trying

to flush out information about speculative wrongdoing. If it wanted to investigate

the injury it already suspected, it knew exactly where to look and exactly who to ask

for that information. In fact, it hardly needed to investigate at all: Gallagher itself

was subpoenaed, produced documents, sat for a deposition, and discussed the case

with counsel. When the injury it already suspected was so closely intertwined with

the ongoing litigation, and where Gallagher itself was thrust into discovery in that

litigation, monitoring the litigation, I find, falls under its obligation to “diligently

investigate.”211 Having looked at ISN’s financials, considered the possibility that

the Merger Consideration was severely undervalued, and speculated about what the

Defendants knew that they were not telling Gallagher, one would imagine the

Appraisal Action would be the first place a diligent investigation would lead. Even

casual attention to the public filings would have revealed further red flags to notify

Gallagher of the facts underlying this litigation.

210
      Carsanaro v. Bloodhound Techs., Inc., 65 A.3d 618, 646 (Del. Ch. 2013).
211
      In re Primedia, 2013 WL 6797114, at *13.

                                                 39
          Because Gallagher was on notice of a potential breach of fiduciary duty claim,

it cannot rely upon the fraudulent concealment rubric to toll the limitations period.

Neither can the concept of equitable tolling aid Gallagher here. Equitable tolling

halts the running of the limitations period “while a plaintiff has reasonably relied

upon the competence and good faith of a fiduciary.”212 This the Plaintiff argues that

it did, testifying that it decided “to trust management, at the end of the day, because

management must know their business way better than we do.”213 Such trust,

however, does not entitle plaintiffs “to ignore red flags.”214 Here, the Plaintiff was

squeezed out at what it had ample reason to believe was an unfair price, without

disclosure of the means to understand how the Defendants set that price. Even the

“trusting plaintiff still must be reasonably attentive to his interests.”215 Gallagher

leans entirely on the first principle of equitable tolling—trusting the good faith of

fiduciaries—and ignores the second, reasonable reliance. Given the red flags that

ought to have made it suspicious at several different dates and in several different

ways that the disclosures it received from the Defendants were inadequate and

misleading, I find it was not entitled to this reliance and was not “reasonably

212
      Forman v. CentrifyHealth, Inc., 2019 WL 1810947, at *8 (Del. Ch. Apr. 25, 2019).
213
      Tr. 150:5–7 (Loftus).
214
  In re Primedia, 2013 WL 6797114, at *13 (quoting Weiss v. Swanson, 948 A.2d 433, 451 (Del.
Ch. 2008)).
215
      Id. (quoting In re Dean Witter P’ship Litig., 1998 WL 442456, at *8 (Del. Ch. July 17, 1998)).

                                                 40
attentive to [its] interests.”216 Had it investigated based on the red flags, it would

have timely discovered the facts that underlie a complaint made five years after its

injury accrued.

            That it did not bolsters my belief that Gallagher was well aware of the

existence of its claim from the time it received the Merger Notice. What changed in

the intervening five years was not its understanding of the claim, but the

attractiveness of the litigation given the result of the Appraisal Action. Gallagher’s

claim is barred by laches.

                                     III. CONCLUSION

            The Plaintiff’s claim for breach of fiduciary duty is dismissed as time-barred.

An appropriate Order is attached.

216
      Id.

                                              41
   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

GALLAGHER INDUSTRIES, LLC,                  )
                                            )
                   Plaintiff,               )
                                            )
       v.                                   ) C.A. No. 2018-0106-SG
                                            )
WILLIAM M. ADDY and JOSEPH E.               )
EASTIN,                                     )
                                            )
                   Defendants.              )

                                    ORDER

      AND NOW, this 29th day of May, 2020, for the reasons set forth

contemporaneously in the attached Memorandum Opinion dated May 29, 2020, the

Plaintiff’s claims against Defendants for breach of fiduciary duty and aiding and

abetting the breach of fiduciary duty are hereby DISMISSED.

      IT IS SO ORDERED.

                                            /s/ Sam Glasscock III

                                            Vice Chancellor

                                       42