Court Opinion

ID: 4351858
Source: CourtListenerOpinion
Date Created: 2018-12-19 15:04:25.705112+00
Date Added: 2024-06-11T14:37:43.225685
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MELVYN KLEIN,                              )
                                           )
            Plaintiff,                     )
                                           )
      v.                                   )   C.A. No. 2017-0862-AGB
                                           )
H.I.G. CAPITAL, L.L.C.; H.I.G.             )
SURGERY CENTERS, LLC; H.I.G.               )
BAYSIDE DEBT & LBO FUND II;                )
BCPE SEMINOLE HOLDINGS LP;                 )
BAIN CAPITAL INVESTORS, LLC;               )
BAIN CAPITAL PRIVATE EQUITY,               )
LP; MICHAEL DOYLE; MATTHEW                 )
LOZOW; ADAM FEINSTEIN;                     )
TERESA DELUCA; and BRENT                   )
TURNER,                                    )
                                           )
            Defendants,                    )
                                           )
      and                                  )
                                           )
SURGERY PARTNERS, INC.,                    )
                                           )
            Nominal Defendant.             )

                           MEMORANDUM OPINION

                         Date Submitted: September 13, 2018
                          Date Decided: December 19, 2018

Kurt M. Heyman and Melissa N. Donimirski, HEYMAN ENERIO GATTUSO &
HIRZEL LLP, Wilmington, Delaware; Jason M. Leviton and Joel A. Fleming,
BLOCK & LEVITON LLP, Boston, Massachusetts, Attorneys for Plaintiff.
Stephen C. Norman and Jaclyn C. Levy, POTTER ANDERSON & CORROON
LLP, Wilmington, Delaware; David B. Hennes, Martin J. Crisp, and Paul S. Kellogg,
ROPES & GRAY LLP, New York, New York, Attorneys for Nominal Defendant
Surgery Partners, Inc. and Defendant Michael Doyle.
Elena C. Norman and Benjamin M. Potts, YOUNG CONAWAY STARGATT &
TAYLOR, LLP, Wilmington, Delaware, Attorneys for Defendants H.I.G. Bayside
Debt & LBO Fund II, H.I.G. Capital, LLC, and H.I.G. Surgery Centers, LLC.
David E. Ross and S. Michael Sirkin, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Yosef J. Riemer, P.C., Devora W. Allon, and Alexandra
Strang, KIRKLAND & ELLIS LLP, New York, New York, Attorneys for
Defendants Bain Capital Investors, LLC, Bain Capital Private Equity, LP, and
BCPE Seminole Holdings LP.

BOUCHARD, C.
      In May 2017, Surgery Partners, Inc. and its controlling stockholder (HIG)

simultaneously entered into three interrelated transactions. First, Surgery Partners

agreed to purchase National Surgical Healthcare from a third party. Second, HIG

agreed to sell its 54% common stock stake in Surgery Partners to an affiliate of Bain

Capital Private Equity, LP for a per-share price that reflected a premium over the

market price at the time. Third, Surgery Partners agreed to issue to Bain shares of a

newly created class of Series A preferred stock that voted with its common stock,

paid a 10% dividend, and contained other allegedly attractive terms, including a

conversion feature that already was “near” or “in” the money.

      Critically, each of the three transactions was conditioned on the others. This

meant that the sale of HIG’s control position to Bain would not happen unless Bain

was satisfied with the terms of the Series A preferred stock. This created a dynamic

whereby HIG allegedly was incentivized to provide Bain favorable terms on the

Series A preferred stock in order to maximize the price at which HIG could liquidate

and exit its investment in Surgery Partners.

      In December 2017, a few months after the three transactions closed, a

stockholder plaintiff (Melvyn Klein) filed this action challenging the fairness of the

Series A preferred stock issuance to Bain. His complaint focuses on the incentives

HIG and Bain had to “scratch each other’s back” and criticizes the process

surrounding the deal negotiations, including that (i) Bain used the same counsel and

                                          1
accounting advisor as Surgery Partners during the negotiations, (ii) Surgery Partners

did not utilize a special committee to exclude HIG’s representative on the board from

negotiations concerning the Series A preferred stock despite the conflict HIG faced

with respect to selling its control position to Bain, (iii) no stockholder other than

HIG had any say in approving any of the transactions, and (iv) Surgery Partners’

financial advisor did not provide a fairness opinion concerning the consideration

paid for the Series A preferred stock and stood to benefit from the transactions by

providing financing for Surgery Partners’ acquisition of National Surgical

Healthcare in addition to receiving an advisory fee on the deal.

      Klein’s complaint asserts eight claims. Four of them are pled as direct claims

and the other four are pled as derivative claims. The legal theories underlying each

of the direct claims mirror the derivative claims. Defendants have moved to dismiss

all of the claims under Court of Chancery Rule 23.1 for failure to make a demand on

Surgery Partners’ board before filing suit and under Court of Chancery Rule 12(b)(6)

for failure to state a claim for relief. For the reasons explained below, the court

concludes that six of the claims must be dismissed but that the other two will survive.

      Three subsidiary conclusions drive this result.        First, the court rejects

plaintiff’s contention that his admittedly derivative claims fall within the paradigm

                                          2
our Supreme Court recognized in Gentile v. Rossette1 for asserting claims “dually”

as both direct and derivative claims, thus all of the direct claims must be dismissed.

Second, plaintiff has pled sufficient particularized facts to raise a reasonable doubt

about the independence and disinterestedness of a majority of the directors on

Surgery Partners’ board when the complaint was filed, thus plaintiff is excused for

failing to make a demand on the board. Third, the complaint states derivative claims

for (i) breach of fiduciary duty against HIG as Surgery Partners’ controlling

stockholder on the theory that it received a unique benefit and was conflicted in

connection with the transactions, thereby presumptively triggering entire fairness

review of the Series A preferred stock transaction, and (ii) aiding and abetting a

breach of fiduciary duty against Bain. The reasoning for these conclusions follows.

I.       BACKGROUND
         The facts recited herein are based on facts pled in the Verified Class Action

and Derivative Complaint (the “Complaint”) and documents incorporated therein.2

Any additional facts are either not subject to reasonable dispute or are subject to

judicial notice.

1
    906 A.2d 91 (Del. 2006).
2
  See Winshall v. Viacom Int’l, Inc., 76 A.3d 808, 818 (Del. 2013) (“[P]laintiff may not
reference certain documents outside the complaint and at the same time prevent the court
from considering those documents’ actual terms” in connection with a motion to dismiss)
(citations and internal quotation marks omitted).
                                           3
          A.      The Parties
          Nominal Defendant Surgery Partners, Inc. (“Surgery Partners” or the

“Company”) is a Delaware corporation headquartered in Nashville, Tennessee that

provides surgical services across twenty-nine states. The Company is publicly

listed, and its shares trade on NASDAQ. Plaintiff Melvyn Klein alleges he has been

a stockholder of the Company since at least October 1, 2015.3

          Defendant H.I.G. Capital, LLC, a Delaware limited liability company, is a

private investment management firm that focuses on private equity, venture capital,

debit/credit, real estate, and public equity investments. Defendants H.I.G. Surgery

Centers, LLC and H.I.G. Bayside Debt & LBO Fund II are Delaware entities

affiliated with and managed by H.I.G. Capital, LLC. For simplicity, these three

entities will be referred to collectively as “HIG.”        HIG owned 54.2% of the

Company’s outstanding common stock as of April 17, 2017.4

          Defendant Bain Capital Private Equity, LP, a Delaware limited partnership, is

an investment advisory firm focused on advising on private equity investments,

including leveraged acquisitions and recapitalizations, investments in growth

companies, turnarounds, and traditional buyouts.           The Complaint names as

defendants two other entities affiliated with Bain Capital Private Equity, LP: BCPE

3
    Compl. ¶ 6.
4
    Id. ¶ 23.
                                            4
Seminole Holdings LP and Bain Capital Investors, LLC. For simplicity, these three

entities will be referred to collectively as “Bain.”

          The individual defendants (the “Director Defendants”) consist of the five

members of the Company’s board of directors (the “Board”) when the three

transactions described below were entered into on May 9, 2017: Teresa DeLuca,

Michael Doyle, Adam Feinstein, Matthew Lozow, and Brent Turner.5 Doyle has

been a director of Surgery Partners since August 2012 and served as its Chief

Executive Officer from April 2015 through September 7, 2017.6 He continued to

serve on the Board after stepping down as CEO.7 Turner has served as a director of

Surgery Partners since December 2015 and as the President of Acadia Healthcare

Company since 2011.8 Lozow is a Managing Director of H.I.G. Capital and was a

director of Surgery Partners from April 2015 through August 31, 2017.9 Feinstein

and DeLuca have been directors of Surgery Partners since August 2015 and

September 2016, respectively.10

5
    Id. ¶ 24.
6
    Id. ¶ 13.
7
    Id.
8
    Id. ¶ 14.
9
    Id. ¶ 15.
10
     Id. ¶¶ 16-17.
                                           5
          B.       Approval of the Transactions
          On May 3, 2007, Christopher Laitala, a former Managing Director of H.I.G.

Capital and the Chairman of the Board of Surgery Partners at the time, “abruptly”

resigned from the Board.11 Less than one week later, on May 9, the Board—then

consisting of Doyle, Lozow, Feinstein, DeLuca, and Turner—approved and the

Company simultaneously entered into three transactions (the “Transactions”).12

          In the first transaction, Surgery Partners agreed to acquire National Surgical

Healthcare from a third party (Irving Place Capital) for approximately $760 million

(the “NSH Acquisition”).13 In the second transaction, HIG agreed to sell all of its

common shares of Surgery Partners to Bain at a price of $19 per share in cash for a

total purchase price of approximately $502.7 million (the “HIG Share Sale”).14 In

the third transaction, Surgery Partners agreed to issue and sell to Bain 310,000 shares

of a newly created class of Series A preferred stock of the Company (the “Preferred

Stock”) at a price of $1,000 per share, for a total price of $310 million (the “Bain

Share Issuance”).15

11
     Id. ¶ 19.
12
     Id. ¶¶ 1, 33, 38.
13
     Id. ¶ 1(a).
14
     Id. ¶ 1(b).
15
     Id. ¶ 1(c).
                                             6
           The Transactions were interrelated and dependent on each other.

Specifically, the NSH Acquisition was conditioned on the completion of both the

Bain Share Issuance and the HIG Share Sale, and the HIG Share Sale was

conditioned on the Bain Share Issuance.16

           The Preferred Stock accrues dividends at a rate of 10%, compounding

quarterly, and is convertible into common stock at a price of $19 per share.17 The

Preferred Stock is senior to the Company’s common stock and its holders vote with

the common stockholders together as a single class.18 As long as Bain retains 50%

of the shares of the Preferred Stock issued in the Bain Share Issuance, its affirmative

vote is required before the Company can pay dividends other than dividends on the

Preferred Stock; enter into a recapitalization, share exchange, or merger; increase its

indebtedness; or modify any provision of the Company’s organizational documents

that would adversely affect the powers of the Preferred Stock, among other things.19

The Preferred Stock, together with the common stock Bain acquired from HIG,

represents approximately 66% of the voting power of all classes of capital stock of

the Company.20

16
     Id. ¶¶ 36-37.
17
     Id. ¶ 1(c).
18
     Id. ¶ 34.
19
     Id.
20
     Id.
                                          7
           According to the Complaint, the implied call option provided by the

convertible feature of the Preferred Stock already was “near the money/in the

money” when the Transactions were announced.21 On May 9, 2017, the date the

Board approved the Transactions, shares of Surgery Partners closed at $18.20 per

share.22 The next day, when the Transactions were announced, the shares closed at

$20.95 per share.23 The Complaint alleges that the dividend rate on the Preferred

Stock was “extraordinarily favorable,” as the Company had issued $400 million of

senior unsecured notes in March 2016 with an interest rate of 8.875%.24

           No special committee was appointed to negotiate or approve the

Transactions.25 The Company’s public filings state that all three Transactions were

approved by the Board, without mentioning that any of the five directors on the

Board at that time had abstained from voting.26       Despite this lack of public

disclosure, HIG and the Director Defendants contend—and plaintiff does not object

to the court considering for purposes of the pending motions—that one of the

directors who was affiliated with HIG (Lozow) abstained from voting on the

21
     Id. ¶ 1(c) (internal quotation marks omitted).
22
     Id.
23
     Id.
24
     Id. ¶ 5.
25
     Id. ¶ 40.
26
     Id. ¶ 38.
                                                8
Transactions.27 The public stockholders were not asked to vote on the Transactions,

which HIG approved by written consent as the Company’s majority stockholder.28

          The Complaint alleges that various firms that provided advice on the

Transactions had conflicts of interest. Ropes & Gray LLP, which was Bain’s long-

time counsel, advised both Surgery Partners and Bain on the Transactions.29

Allegedly in recognition of this conflict, Bain also engaged Kirkland & Ellis LLP as

its counsel.30 PwC LLP represented both Bain and Surgery Partners as an accounting

advisor with respect to the Transactions.31 Jefferies LLC served as the Company’s

exclusive financial advisor, but it did not issue a fairness opinion and stood to benefit

from the Transactions by providing financing for the NSH Acquisition and earning

fees for arranging a $1.29 billion senior credit term loan and a $75 million revolving

credit facility.32

27
     HIG Defs.’ Opening Br. 4 n.7; Dir. Defs.’ Opening Br. 42 n.15; Pl.’s Opp’n Br. 9 n.22.
28
     Compl. ¶ 4.
29
     Id. ¶¶ 4, 43.
30
     Id. ¶ 45.
31
     Id. ¶ 4.
32
     Id. ¶ 42.
                                              9
          C.     Events after the Transactions Were Approved
          During a May 10, 2017 earnings call, an analyst expressed puzzlement over

the Company’s decision to finance the NSH Acquisition through the Bain Share

Issuance rather than issuing common stock, asking:

          did you guys contemplate issuing equity, just straight out equity? Or
          did Irving—did the buyers not want equity? Or was it just because of
          the competitive nature that you had to pay cash? I’m just curious, again,
          going back to the deleveraging or the opportunity that arose that could
          have led to a deleveraging.33

Doyle provided a “rambling response,” stating, in relevant part, that:
          the competitive nature of the transaction and the certainty of outcome
          from our perspective and from the other side’s perspective or—again,
          there’s a lot of things that come into play, and it was a pretty
          complicated process with, as you take a look at us bringing in a new
          long-term partner in Bain Capital Private Equity, replacing H.I.G.,
          putting in a preferred and acquiring a company.34

          The Transactions closed on August 31, 2017. Upon the closing, Lozow

resigned from the Board and two Managing Directors of Bain were elected as

directors: Christopher Gordon and T. Devin O’Reilly.35 After the closing, Bain held

approximately 65.7% of the Company’s outstanding voting stock, and publicly

described itself as “the controlling stockholder of [Surgery Partners].”36

33
     Id. ¶ 48.
34
     Id. ¶ 49.
35
     Id. ¶¶ 21-22, 50.
36
     Id. ¶ 28.
                                             10
           On September 7, 2017, the Company announced that Doyle would be stepping

down as CEO, but would remain on the Board.37 Doyle and the Company entered

into a consulting services agreement under which Doyle consulted for six months in

exchange for a total fee of $275,000.38          Doyle also entered into a severance

agreement under which he received, among other things, his salary through the date

of his resignation, $550,000 in cash severance to be paid over a twelve month period,

a pro-rata portion of the bonus he would have earned in 2017, and COBRA

premiums for a year.39

           Clifford Adlerz replaced Doyle as CEO of Surgery Partners on September 7,

2017.40 Adlerz, who previously provided consulting services to Bain, became a

member of the Board on October 30, 2017.41

II.        PROCEDURAL HISTORY
           On December 4, 2017, Klein filed this action.42 The Complaint contains eight

claims. Counts I-IV are pled as direct claims and Counts V-VIII are pled as

37
     Id. ¶ 50.
38
     Id. ¶ 51.
39
     Id.
40
     Id. ¶ 50.
41
     Id. ¶ 20.
42
   Before filing suit, Klein made a demand under 8 Del. C. § 220 to inspect books and
records concerning the Transactions, but he declined to pursue a Section 220 action and
filed this action instead after the Company rejected the demand and refused to produce any
documents. See Dir. Defs.’ Opening Br. 10 n.4; see also Pl.’s Opp’n Br. 9 n.22.
                                            11
derivative claims. The legal theories underlying each of the four direct claims mirror

each of the four derivative claims.

         Counts I and V assert claims for breach of fiduciary duty against the Director

Defendants for “entering into the Transactions without ensuring that the Bain Capital

Share Issuance was entirely fair.”43 Counts II and VI assert claims for breach of

fiduciary duty against Bain and HIG as an alleged control group “[a]t the time the

Transactions were agreed to” for “entering into the Bain Capital Share Issuance, a

conflicted transaction that was not entirely fair.”44 Counts III and VII assert, in the

alternative to the breach of fiduciary duty claims asserted against HIG in Counts II

and VI, respectively, claims for breach of fiduciary duty against HIG as “the sole

controlling stockholder” for “causing the Company to enter into the Bain Capital

Share Issuance, a conflicted transaction that was not entirely fair.”45 Counts IV and

VIII assert, in the alternative to the breach of fiduciary duty claims asserted against

Bain in Counts II and VI, respectively, that Bain aided and abetted breaches of

fiduciary duty by HIG and the Director Defendants.46

         On March 5, 2018, defendants filed their opening briefs in support of motions

they had filed several months earlier to dismiss the Complaint under Court of

43
     Compl. ¶¶ 66 (Count I), 84 (Count V).
44
     Id. ¶¶ 69-70 (Count II), 87-88 (Count VI).
45
     Id. ¶¶ 73-74 (Count III), 91-92 (Count VII).
46
     Id. ¶¶ 77-80 (Count IV), 95-97 (Count VIII).
                                              12
Chancery Rules 12(b)(6) and 23.1.          On April 17, 2018, plaintiff voluntarily

dismissed DeLuca and Feinstein from this action without prejudice.47 On September

17, 2018, a few days after oral argument on the pending motions, the court entered

an order approving a stipulation the parties had filed to dismiss Lozow and Turner

from this action with prejudice only as to the plaintiff in this action.48

III.      ANALYSIS
         The standard for deciding a motion to dismiss under Court of Chancery Rule

12(b)(6) is well-settled:

         (i) all well-pleaded factual allegations are accepted as true; (ii) even
         vague allegations are “well-pleaded” if they give the opposing party
         notice of the claim; (iii) the Court must draw all reasonable inferences
         in favor of the non-moving party; and [iv] dismissal is inappropriate
         unless the plaintiff would not be entitled to recover under any
         reasonably conceivable set of circumstances susceptible of proof.49

         Under Court of Chancery Rule 23.1, a derivative claim will be dismissed for

lack of standing unless plaintiffs either “(1) make a pre-suit demand by presenting

the allegations to the corporation’s directors, requesting that they bring suit, and

47
     Dkt. 32.
48
     Dkt. 46.
49
  Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal quotation marks
omitted).
                                           13
showing that they wrongfully refused to do so, or (2) plead facts showing that

demand upon the board would have been futile.”50

          As the above recitation of his claims demonstrates, Klein does not challenge

the NSH Acquisition, which involved the Company’s acquisition of a healthcare

business from a third party. Nor does he directly challenge the HIG Share Sale, in

the sense of seeking any relief concerning the transfer to Bain of HIG’s majority

ownership of common stock in Surgery Partners. Rather, the Complaint focuses on

the Bain Share Issuance.51 More specifically, the gravamen of the Complaint is that

Bain paid less than fair value to the Company to acquire the Preferred Stock and that

HIG “had a strong economic motivation to make the terms of the Bain Capital Share

Issuance appealing to Bain Capital because Bain Capital would, rationally, be

willing to pay more for HIG’s common stock as the terms of the Bain Capital Share

Issuance became more favorable.”52

          The following analysis of the eight claims in the Complaint proceeds in three

parts. The court begins by determining whether Counts I-IV properly can be brought

as direct claims, or whether they are purely derivative claims. The court next

50
  In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009) (citing
Stone v. Ritter, 911 A.2d 362, 366-67 (Del. 2006)).
51
   See Compl. ¶ 66 (alleging that defendants violated their fiduciary duties by “entering
into the Transactions without ensuring that the Bain Capital Share Issuance was entirely
fair”); see also id. ¶¶ 70, 74, 84, 88, 92 (same).
52
     Id. ¶ 27.
                                            14
considers whether demand would be futile with respect to the derivative claims

(Counts V-VIII) and then, after finding that demand would be futile in this case,

analyzes defendants’ arguments for dismissal under Rule 12(b)(6) for failure to state

a claim for relief.

           A.    Counts I-IV of the Complaint Must Be Dismissed Because They
                 Cannot Be Brought as Direct Claims.
           To determine whether a claim is direct or derivative, the court must consider

“(1) who suffered the alleged harm (the corporation or the suing stockholders,

individually); and (2) who would receive the benefit of any recovery or other remedy

(the corporation or the stockholders, individually)?”53 “In the typical corporate

overpayment case, a claim against the corporation’s fiduciaries for redress is

regarded as exclusively derivative, irrespective of whether the currency or form of

overpayment is cash or the corporation’s stock.”54 This is because “any dilution in

value of the corporation’s stock is merely the unavoidable result . . . of the reduction

in the value of the entire corporate entity, of which each share of equity represents

an equal fraction.”55

           Klein’s claims are a classic form of an “overpayment” claim. He disputes the

fairness of the consideration paid for the Preferred Stock given its terms, in particular

53
     Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004).
54
     Gentile, 906 A.2d at 99.
55
     Id.
                                             15
its dividend rate and the implied call option value of its conversion feature. The

Complaint alleges, for example, that “the Preferred Stock had significant option

value because the conversion price was already lower than the trading price. Yet

Bain Capital also got an extraordinarily favorable dividend rate of 10%.”56 Such

claims are quintessentially derivative.57 Indeed, Klein does not contend that his

claims are not derivative,58 he just argues that they also can be brought as direct

claims under the “transactional paradigm” recognized in Gentile v. Rosette.59

         In Gentile, our Supreme Court recognized “a species of corporate

overpayment claim” that can be both direct and derivative in nature:

         A breach of fiduciary duty claim having this dual character arises
         where: (1) a stockholder having majority or effective control causes
         the corporation to issue “excessive” shares of its stock in exchange for
         assets of the controlling stockholder that have a lesser value; and (2)
         the exchange causes an increase in the percentage of the outstanding
         shares owned by the controlling stockholder, and a corresponding
         decrease in the share percentage owned by the public (minority)
         shareholders. Because the means used to achieve that result is an
         overpayment (or “over-issuance”) of shares to the controlling
         stockholder, the corporation is harmed and has a claim to compel the
         restoration of the value of the overpayment. That claim, by definition,
         is derivative.
         But, the public (or minority) stockholders also have a separate, and
         direct, claim arising out of that same transaction. Because the shares

56
     Compl. ¶ 5; see also id. ¶ 47.
57
  See Gentile, 906 A.2d at 99 (“Normally, claims of corporate overpayment are treated as
causing harm solely to the corporation and, thus, are regarded as derivative.”).
58
     Tr. 82 (Sept. 13, 2018).
59
     906 A.2d at 99.
                                           16
         representing the “overpayment” embody both economic value and
         voting power, the end result of this type of transaction is an improper
         transfer—or expropriation—of economic value and voting power from
         the public shareholders to the majority or controlling stockholder. For
         that reason, the harm resulting from the overpayment is not confined to
         an equal dilution of the economic value and voting power of each of the
         corporation’s outstanding shares. A separate harm also results: an
         extraction from the public shareholders, and a redistribution to the
         controlling shareholder, of a portion of the economic value and voting
         power embodied in the minority interest. As a consequence, the public
         shareholders are harmed, uniquely and individually, to the same extent
         that the controlling shareholder is (correspondingly) benefited.60

In short, the harm Gentile seeks to remedy arises “when a controlling stockholder,

with sufficient power to manipulate the corporate processes, engineers a dilutive

transaction whereby that stockholder receives an exclusive benefit of increased

equity ownership and voting power for inadequate consideration.”61

         Significantly, our Supreme Court recently construed the Gentile doctrine

narrowly in El Paso Pipeline GP Co., L.L.C. v. Brinckerhoff.62 In that case, a limited

partner argued that its claim, which alleged overpayments by the partnership to the

controlling general partner, fell within the Gentile framework because the

overpayments diluted the minority limited partners’ economic interests but

60
     Id. at 99-100 (internal footnotes omitted).
61
     Feldman v. Cutaia, 956 A.2d 644, 657 (Del. Ch. 2007), aff’d, 951 A.2d 727 (Del. 2008).
62
     152 A.3d 1248 (Del. 2016).
                                               17
concededly were “not coupled with any voting rights dilution.”63 The Supreme

Court refused to apply Gentile in that circumstance, explaining:

         Gentile concerned a controlling shareholder and transactions that
         resulted in an improper transfer of both economic value and voting
         power from the minority stockholders to the controlling stockholder.
         [Plaintiff’s] claim does not satisfy the unique circumstances presented
         by the Gentile species of corporate overpayment claims.64

The Court further explained, “[w]e decline the invitation to further expand the

universe of claims that can be asserted ‘dually’ to hold here that the extraction of

solely economic value from the minority by a controlling stockholder constitutes

direct injury.”65       To do so, the Court reasoned, “would deviate from the

Tooley framework and largely swallow the rule that claims of corporate

overpayment are derivative.”66 In a concurrence, Chief Justice Strine went further

and suggested that Gentile should be overruled, at least in certain respects.67

         The Supreme Court’s ruling in El Paso was not made lightly. To the contrary,

the ruling resulted in the reversal of a $171 million judgment for damages because

63
     Id. at 1252-53, 1264.
64
     Id. at 1263-64 (emphasis in original) (internal quotation marks and citations omitted).
65
     Id. at 1264.
66
     Id. (internal quotation marks and citations omitted).
67
  See id. at 1266 (Strine, C.J., concurring) (“Gentile cannot be reconciled with the strong
weight of our precedent and it ought to be overruled, to the extent that it allows for a direct
claim in the dilution context when the issuance of stock does not involve subjecting an
entity whose voting power was held by a diversified group of public equity holders to the
control of a particular interest.”).
                                               18
it ensured that plaintiff’s standing to maintain a derivative claim was extinguished

when the limited partnership was acquired in a merger “after the trial was completed

and before any judicial ruling on the merits” in what the high court described as a

“troubling case.”68

         In the wake of El Paso, this court has exercised caution in applying the Gentile

framework, commenting in one case that “[w]hether Gentile is still good law is

debatable”69 and finding in another that “Gentile must be limited to its facts.”70

“Whatever the ultimate fate of the Gentile paradigm may be, the current state of the

law for the doctrine to apply is that (i) there must be a controlling stockholder or

control group; and (ii) the challenged transaction must result ‘in an improper transfer

of both economic value and voting power from the minority stockholders to the

controlling stockholder.’”71

         Defendants make a number of arguments against the application of Gentile in

this case, one of which focuses on the structural reality that HIG’s ownership interest

or voting power was not increased through issuance of the Preferred Stock to Bain

68
     Id. at 1250-52.
69
  ACP Master, Ltd. v. Sprint Corp., 2017 WL 3421142, at *26 n.206 (Del. Ch. July 21,
2017), aff’d, 2018 WL 1905256 (Del. Apr. 23, 2018).
70
  Sciabacucchi v. Liberty Broadband Corp., 2018 WL 3599997, at *10 (Del. Ch. July 26,
2018).
71
  Almond v. Glenhill Advisors LLC, 2018 WL 3954733, at *24 (Del. Ch. Aug. 17, 2018)
(quoting El Paso, 152 A.3d at 1263-64) (emphasis in original).
                                            19
and that Bain “was not a stockholder—much less a controlling stockholder—of the

Company prior to the Preferred Share Issuance.”72 In other words, according to

defendants, Gentile should not apply here because there was no expropriation of

either voting power or economic value by the controlling stockholder (HIG) that was

in place when the Transactions were approved.

           Relying on Gatz v. Ponsoldt,73 Klein responds that the court should consider

the substance of the Transactions irrespective of their form. In Gatz, our Supreme

Court applied Gentile to hold that minority stockholders of Regency Affiliates, Inc.

could bring direct claims against its directors, its prior controlling stockholder, and

its new majority stockholder where “the direct beneficiary of any alleged

expropriation of . . . voting power and economic value” arising from a

recapitalization was a third party that owned no Regency stock before the

recapitalization.74 The Supreme Court reasoned that “[l]ooking through the form of

the transaction to its substance, it becomes apparent that the Recapitalization is

properly analyzed as two separate transactions that [the controlling stockholder], by

creative timing and coordination, caused simultaneously to be rolled into one.”75

The first transaction “was a [Gentile] expropriation of voting power and economic

72
     Dir. Defs.’ Opening Br. 18
73
     925 A.2d 1265, 1279-80 (Del. 2007).
74
     Id. at 1279.
75
     Id.
                                            20
value from the public shareholders by and to the controlling shareholder” and the

second “was a transfer of the benefits of that expropriation by the controlling

shareholder to the third party.”76 Plaintiff argues that, similar to Gatz, the substance

of the deal challenged in this case is that HIG expropriated voting power and

economic value from the Company’s minority stockholders that it transferred to

Bain as part of a series of interrelated Transactions.

           Even if the court were to ignore the form of the Transactions here and treat

Bain as if it were the Company’s controlling stockholder before it acquired the

Preferred Stock, Klein’s claims nevertheless would not fit within the Gentile

framework in my view, particularly in light of the Supreme Court’s recent El Paso

decision. As previously mentioned, that decision expresses caution in applying

Gentile so as not to “expand the universe of claims that can be asserted ‘dually’” and

makes clear that, to trigger Gentile, there must be a transfer of “both economic value

and voting power from the minority stockholders to the controlling stockholder.”77

           Here, if one assumes for the sake of argument that the Transactions were

sequenced so that Bain acquired HIG’s common shares of Surgery Partners before

it acquired the Preferred Stock, there would not have been a transfer of economic

value of the nature contemplated in the Gentile line of cases. To be sure, this

76
     Id.
77
     El Paso, 152 A.3d at 1263-64.
                                            21
hypothetical scenario would have resulted in a dilution of the minority stockholders’

voting power. This is because the Preferred Stock votes with the common as a single

class and the net effect of the Bain Share Issuance in the hypothetical is that Bain’s

voting power would have increased from approximately 54% to approximately 66%

of all classes of the Company’s capital stock, thereby diluting the voting power of

the minority stockholders commensurately.

         But, and this is the critical point, the minority stockholders would not have

been diluted similarly in this scenario as an economic matter because they retained

the same percentage of the Company’s shares of common stock after the Preferred

Stock was issued as they had before. Thus, there would not have been the type of

transfer of economic value normally contemplated in a Gentile claim: a “dilutive

stock issuance to a controlling stockholder.”78 Indeed, all else being equal, the

minority stockholders’ aggregate percentage of the Company’s common stock

would not be reduced until such time, if ever, that the Preferred Stock is converted

into common stock—an event that is not alleged to have occurred.79

78
     Sciabacucchi, 2018 WL 3599997, at *10.
79
   The fact that the Preferred Stock has not been converted distinguishes this case from
Vice Chancellor Noble’s decision in In re Nine Sys. Corp. S’holders Litig., 2014 WL
4383127, at *23-26 (Del. Ch. Sept. 4, 2014). There, the court applied Gentile to a
recapitalization that resulted in the issuance of convertible preferred stock to two members
of a control group. Unlike here, the preferred shares in Nine Systems had been converted
into common shares that were cashed out in a merger before the lawsuit was filed, resulting
in a dilution of the economic rights of the minority common stockholders so that they
received a lower percentage of the merger consideration. Id. at *20. On appeal, the
                                            22
         In this case, unlike in Gentile, the economic harm that allegedly occurred

came not from the issuance of shares of stock to a controller that resulted in an

expropriation of economic value from the minority stockholders by diluting their

aggregate ownership percentage, but from the issuance of a different type of

security (the Preferred Stock) whose terms allegedly should have commanded a

higher price than was paid. As noted above, the core grievance in the Complaint is

that Bain “got an extraordinarily favorable dividend rate of 10%” even though “the

Preferred Stock had significant option value because the conversion price was

already lower than the trading price.”80 In other words, the Complaint pleads that

Bain paid the Company too little for the Preferred Stock given its favorable terms.

The benefit of any recovery to remedy this alleged harm logically would go to the

Company rather than any specific stockholder(s) and thus the underlying legal

theory is plainly derivative in nature.81

Supreme Court did not independently analyze the Gentile issues. In a short order of
affirmance issued one year before its El Paso decision, the Supreme Court simply stated
that, “[i]n this case, the Court of Chancery had to apply a challenging body of law in a
hotly contested matter,” noting that the trial court had “addressed three times whether the
plaintiffs’ central claim was direct or derivative under Gentile.” Fuchs v. Wren Hldgs.,
LLC, 129 A.3d 882, 882 & n.1 (TABLE) (Del. 2015).
80
     Compl. ¶ 5; see also id. ¶ 47.
81
  See Tooley, 845 A.2d at 1033 (stating that whether a claim is direct or derivative turns
on “who would receive the benefit of any recovery”).
                                            23
       In sum, the Gentile framework does not fit the facts pled in this case. In

keeping with our Supreme Court’s recent teachings, therefore, I decline to expand

that doctrine’s reach to treat Counts I-IV of the Complaint as dual claims in order to

avoid further erosion of the Tooley framework for distinguishing between direct and

derivative claims.82 Accordingly, Counts I-IV must be dismissed. The court turns

next to consider whether Klein has pled facts showing that making a demand on the

Board would have been futile with respect to his parallel derivative claims.

       B.     Klein Has Adequately Pled Demand Futility for his Derivative
              Claims.
       “Making a pre-suit demand is futile when the directors upon whom the

demand would be made ‘are incapable of making an impartial decision regarding

82
   Given the court’s conclusion that plaintiff’s claims are exclusively derivative, it is
unnecessary to address defendants’ argument that the requirements of Rule 23.1 should be
applied to Counts I-IV even if those claims were found to be dual in nature based on recent
Court of Chancery decisions that have advocated this approach. See Chester Cty. Emps.’
Ret. Fund v. New Residential Inv. Corp., 2016 WL 5865004, at *8 (Del. Ch. Oct. 7, 2016)
(“Even assuming the claims here are dual-natured, as Plaintiff argues, I find that conducting
a Rule 23.1 demand analysis for claims that a corporation overpaid for a third-party’s assets
with stock best harmonizes the case law.”); Calesa Assocs., L.P. v. Am. Capital, Ltd., 2016
WL 770251, at *8-9 (Del. Ch. Feb. 29, 2016) (suggesting that the idea that a dual-natured
claim should be addressed under the Rule 23.1 standard is “self-evidently reasonable and
efficient” but failing to apply it as neither party argued that doing so would be appropriate);
In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 132 A.3d 67, 113 (Del. Ch. 2015)
(“Classifying the claim as derivative for purposes of this stage of the litigation serves the
policy goal of screening for meritless claims through a combination of the demand doctrine
and the heightened pleading standards of Rule 23.1. These standards weed out weak claims
while permitting strong claims involving breaches of the duty of loyalty to survive.”), rev’d
on other grounds, El Paso Pipeline, 152 A.3d 1248.
                                              24
such litigation.’”83 Klein did not make a demand on the Board, so he must allege

with particularity that his failure to do so should be excused.84 “In this analysis, I

accept as true [Klein’s] particularized allegations of fact and draw all reasonable

inferences that logically flow from those allegations in [Klein’s] favor.”85

          Delaware law has two tests for determining whether demand is excused: the

test articulated in Aronson v. Lewis86 and the test articulated in Rales v. Blasband.87

The Aronson test applies when “a decision of the board of directors is being

challenged in the derivative suit.”88 The Rales test, in contrast, applies when “the

board that would be considering the demand did not make a business decision which

is being challenged in the derivative suit.”89 Rales identified three examples of

scenarios where this could arise:

          (1) where a business decision was made by the board of a company, but
          a majority of the directors making the decision have been replaced; (2)
          where the subject of the derivative suit is not a business decision of the
          board; and (3) where . . . the decision being challenged was made by
          the board of a different corporation.90

83
   Carr v. New Enter. Assocs., Inc., 2018 WL 1472336, at *12 (Del. Ch. Mar. 26, 2018)
(citing Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993)).
84
     Ch. Ct. R. 23.1.
85
     Carr, 2018 WL 1472336, at *12 (citations omitted).
86
     473 A.2d 805 (Del. 1984).
87
     634 A.2d 927 (Del. 1993).
88
     Id. at 933.
89
     Id. at 933-34.
90
     Id. at 934 (citations omitted).
                                             25
       In this case, both parties agree that Aronson applies. This is the correct test

because Klein is challenging a board action—the Board’s approval of the

Transactions—and four out of five of the directors on the Board at that time (Doyle,

Feinstein, Turner, and DeLuca) comprised four out of seven members of the Board

when this action was filed (the “Demand Board”).

       Under Aronson, “to show demand futility, [Klein] must provide particularized

factual allegations that raise a reasonable doubt that (1) the directors are disinterested

and independent [or] (2) the challenged transaction was otherwise the product of a

valid exercise of business judgment.”91 Under the first prong:

       Disinterested means that directors can neither appear on both sides of a
       transaction nor expect to derive any personal financial benefit from it
       in the sense of self-dealing, as opposed to a benefit which devolves
       upon the corporation or all stockholders generally. Independence
       means that a director’s decision is based on the corporate merits of the
       subject before the board rather than extraneous considerations or
       influences.92

With respect to the second prong, this court has explained that the plaintiff must

“plead particularized facts sufficient to raise (1) a reason to doubt that the action was

91
  In re Citigroup Inc., 964 A.2d at 120 (second alteration in original) (citation and internal
quotation marks omitted).
92
  In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 821 (Del. Ch. 2005)
(Lamb, V.C.) (internal quotation marks omitted).
                                             26
taken honestly and in good faith or (2) a reason to doubt that the board was

adequately informed in making the decision.”93

         The Demand Board consisted of the following seven members: Adlerz,

DeLuca, Doyle, Feinstein, Gordon, O’Reilly, and Turner.94 Thus, to establish

demand futility under Aronson, Klein must impugn the ability of at least half (i.e.,

four) of the Demand Board directors to have considered a demand impartially.95

         Klein concedes that DeLuca and Feinstein were disinterested and

independent.96 Defendants do not argue that Adlerz, Gordon, and O’Reilly were

independent,97 and the Complaint’s allegations raise a reasonable doubt about their

independence. This is because, when the Complaint was filed, Gordon and O’Reilly

were Managing Directors of Bain and Adlerz was the CEO of Surgery Partners.98

Thus, the result here turns on the sufficiency of the allegations concerning one of the

remaining two directors: Doyle and Turner. If Klein has alleged particularized facts

93
 Lenois v. Lawal, 2017 WL 5289611, at *10 (Del. Ch. Nov. 7, 2017) (quoting In re J.P.
Morgan Chase, 906 A.2d at 824)).
94
     Compl. ¶ 29.
95
  See Beneville v. York, 769 A.2d 80, 82 (Del. Ch. 2000) (Strine, V.C.) (stating that the
“central question is whether there is a sufficient number of impartial directors who can
cause the corporation to act favorably on a demand”).
96
     Pl.’s Opp’n Br. 32.
97
  Tr. 6, 29 (Sept. 13, 2018) (defense counsel acknowledging that demand futility turns on
Turner and Doyle).
98
     Compl. ¶¶ 20-22.
                                           27
to raise a reasonable doubt that either one was not disinterested or independent when

this action was filed, then demand would be excused. In my opinion, Klein has done

so with respect to Doyle.99

            When the Complaint was filed in December 2017, Doyle, who had been the

Company’s CEO less than three months earlier, was in the middle of a six-month

consulting services agreement with the Company that paid him $275,000 or

approximately $45,833 per month.100 This amount was more, on a monthly basis,

than Doyle’s base salary as Surgery Partners’ CEO for 2016, which was $450,000

per year or approximately $37,500 per month.101

            This court has found that a “consulting agreement suggests a lack of

independence” for purposes of examining demand futility.102 In Orman v. Cullman,

Chancellor Chandler found it “reasonable to infer that $75,000 would be material”

to the director in question and that he would be “beholden to the controlling

shareholders for future renewals of his consulting contract.”103 Similarly here, it is

reasonable to infer that a Bain-controlled Surgery Partners could have chosen to

99
   Given the court’s findings concerning Doyle’s lack of independence for demand futility
purposes, it is unnecessary to consider whether the facts pled in the Complaint are sufficient
to raise a reasonable doubt about Turner’s disinterestedness or independence.
100
      Compl. ¶ 51.
101
      Id. ¶ 51 n.10.
102
      Orman v. Cullman, 794 A.2d 5, 30 (Del. Ch. 2002).
103
      Id.
                                             28
renew Doyle’s consulting contract, impairing his ability to act independently of

Bain.104 This is especially true because the consulting agreement at issue paid Doyle

more on a monthly basis than his former salary as CEO.105

       This inference is further supported by NASDAQ and NYSE rules providing,

with certain exceptions not relevant here, that a person shall not be considered

independent if that person received $120,000 or more in consulting fees during any

twelve-month period within the three preceding years.106 It is true, as defendants

point out, that exchange listing rules do “not operate as a surrogate for[] this Court’s

104
   Defendants assert it “[s]eems unlikely” that the Company would have renewed Doyle’s
consulting agreement since he had just been replaced as CEO of the Company. Tr. 37
(Sept. 13, 2018). Doyle’s replacement as CEO, however, did not prevent the Company
from entering into a consulting agreement with Doyle in the first place and the court must
“draw all reasonable inferences that logically flow” from the particularized allegations of
the Complaint in plaintiff’s favor at the pleadings stage. Carr, 2018 WL 1472336, at *12.
105
    In questioning the materiality to Doyle of these consulting fees, defendants ask the court
to consider certain information not found in the Complaint, i.e., Doyle’s total 2016
compensation and the amount of his stockholdings in the Company as reported in certain
public filings of the Company. See Dir. Defs.’ Opening Br. 28-29. The court declines to
do so because the information in question is being offered for its truth and the sources of
the information are not incorporated into the Complaint. See Vanderbilt Income and
Growth Assocs., L.L.C. v. Arvida/JMB Managers, Inc., 691 A.2d 609, 612-13 (Del. 1996)
(“The exceptions to the general Rule 12(b)(6) prohibition against considering documents
outside of the pleadings are usually limited to two situations. The first exception is when
the document is integral to plaintiff’s claim and incorporated into the complaint. The
second exception is when the document is not being relied upon to prove the truth of its
contents.”) (internal citations omitted). Even if the court could consider this information
at the pleadings stage, its probative value for assessing Doyle’s financial circumstances is
open to question. Neither source, for example, would shed light on the net value of his
stockholdings if they were liquidated or on the liabilities side of his net worth.
106
  See NASDAQ Stock Market Rules § 5605(a)(2)(B); NYSE Corporate Governance Rule
303A.02(b)(ii).
                                             29
analysis of independence under Delaware law for demand futility purposes.”107 As

Chief Justice Strine explained in Sandys v. Pincus, however, exchange rules are

relevant for determining independence under Rule 23.1 and it would create

“cognitive dissonance” for our jurisprudence to ignore them:

      We agree with the Court of Chancery that the Delaware independence
      standard is context specific and does not perfectly marry with the
      standards of the stock exchange in all cases, but the criteria NASDAQ
      has articulated as bearing on independence are relevant under Delaware
      law and likely influenced by our law.

                                       *****

      The bottom line under the NASDAQ rules is that a director is not
      independent if she has a “relationship which, in the opinion of the
      Company’s board of directors, would interfere with the exercise of
      independent judgment in carrying out the responsibilities of a director.”
      The NASDAQ rules’ focus on whether directors can act independently
      of the company or its managers has important relevance to whether they
      are independent for purpose of Delaware law.108

This court similarly has noted that “[t]he fact that a director qualifies as independent

for purposes of a governing listing standard is therefore a helpful fact which, all else

equal, makes it more likely that the director is independent for purposes of Delaware

law” and that the “opposite is likewise true.”109

107
   Dir. Defs.’ Reply Br. 20 (quoting Teamsters Union 25 Health Servs. & Ins. Plan v.
Baiera, 119 A.3d 44, 61 (Del. Ch. 2015)).
108
    152 A.3d 124, 131-33 (Del. 2016) (quoting NASDAQ Marketplace Rule 5606(a)(2))
(internal citations omitted).
109
   In re EZCORP Consulting Agreement Deriv. Litig., 2016 WL 301245, at *36 (Del. Ch.
Jan. 25, 2016); see also In re MFW S’holders Litig., 67 A.3d 496, 510 (Del. Ch. 2013)
(“[T]he NYSE rules governing director independence were influenced by experience in
                                          30
      Given that the fees being paid to Doyle under his consulting services

agreement with the Company exceeded (in monthly terms) his prior salary as the

Company’s CEO and that those fees were significantly higher than the NASDAQ

independence threshold discussed above, and given that a Bain-controlled Surgery

Partners could have chosen to renew the agreement, the court concludes that Klein

has pled sufficient facts to raise a reasonable doubt concerning Doyle’s

independence from Surgery Partners and its controller Bain when the Complaint was

filed. This lack of independence also extends to the claims against HIG because

those claims are intertwined with the claims against Bain and the Director

Defendants. As the Complaint explains, consummation of the Bain Share Issuance

was conditioned on effectuation of the HIG Share Sale and vice versa. Thus, HIG

was motivated to make the terms of the Bain Share Issuance appealing to Bain so

that HIG could maximize the value it could realize in selling its control position in

Surgery Partners to Bain.

      Additionally, insofar as the claims against HIG are concerned, this court has

found that “past relationships and payments have supported a reasonable inference

of ‘owingness’ sufficient to create a reasonable doubt about the director’s ability to

Delaware and other states and were the subject of intensive study by expert parties. They
cover many of the key factors that tend to bear on independence . . . and they are a useful
source for this court to consider when assessing an argument that a director lacks
independence.”) (Strine, C.), aff’d sub nom., Kahn v. M & F Worldwide Corp., 88 A.3d
635 (Del. 2014).
                                            31
be impartial.”110 Relatedly, NASDAQ and NYSE guidelines provide for a three-

year cooling-off period before a former officer of a corporation can be considered

independent of that corporation.111 The concerns underlying these authorities have

salience here, where Doyle served as the CEO of an HIG-controlled Surgery Partners

until only a few months before the Complaint was filed, and where, as of the same

date, Doyle was continuing to receive substantial severance and other forms of

payments from his tenure as Surgery Partners’ CEO.112

         For the reasons explained above, Klein has pled sufficient particularized facts

to raise a reasonable doubt concerning the independence of a majority of the

directors on the Demand Board. Thus, his failure to make a demand is excused.

         C.    Defendants’ Motion to Dismiss under Court of Chancery Rule
               12(b)(6) Must Be Granted in Part and Denied in Part.
         In this section, the court considers defendants’ various arguments for

dismissal of Counts V-VIII under Court of Chancery Rule 12(b)(6) for failure to

state a claim for relief. As noted above, two of these claims (Counts VII and VIII)

110
      EZCORP, 2016 WL 301245, at *42 (citation omitted).
111
  See NASDAQ Stock Market Rules § 5605(a)(2)(A); NYSE Corporate Governance Rule
303A.02(b)(i).
112
   Compl. ¶ 51. See also EZCORP, 2016 WL 301245, at *42 (finding that a reasonable
doubt was raised as to a former CEO’s independence where he continued to receive
compensation pursuant to a consulting agreement and was not independent under the
NASDAQ standards).
                                           32
are pled in the alternative to Count VI. Thus, the court begins by analyzing Count

VI and then turns to the remaining claims.

                1.     The Complaint Fails to Plead Facts to Support a Reasonable
                       Inference that Bain Was Part of a Control Group.
         In Count VI, Klein asserts a derivative claim for breach of fiduciary duty

against Bain and HIG on the theory that together they “were effectively controlling

stockholders of the Company” or, in other words, that they were part of a control

group.113 Klein devotes one paragraph of his brief attempting to explain the basis

for such a claim, which he admits is “novel.”114           Drawing from this court’s

observation that “Delaware corporate decisions consistently have looked to who

wields control in substance and have imposed the risk of fiduciary liability on that

person,” Klein poses a hypothetical: “If—and to the extent that—the HIG Share

Sale was negotiated first, then, in substance, control—and all economic exposure to

Surgery Partners—passed to Bain and it would be appropriate to impose

concomitant fiduciary liability upon Bain.”115

         To say that Count VI is novel is an understatement. It is not alleged that Bain

owned any stock of Surgery Partners until the Transactions closed and thus, by

113
      Compl. ¶ 87.
114
      Pl.’s Opp’n Br. 51.
115
   Id. 51-52 (quoting EZCORP, 2016 WL 301245, at *9) (internal quotation marks
omitted).
                                           33
definition, Bain could not have been part of a “group” of Company stockholders

when the Transactions were negotiated. More generally, the Complaint is devoid of

any allegations that Bain was a party to any agreement or arrangement that controlled

the votes of any shares of the Company’s stock held by HIG,116 or that Bain

otherwise took any action to exercise control over the directors of Surgery Partners

before the parties entered into the Transactions.117 The most that reasonably can be

inferred from the Complaint’s allegations about Bain’s status before the

Transactions were entered into is that Bain had the potential to later exercise control

over the Company. But the “potential to exercise control” is not enough to impose

fiduciary obligations.118 Accordingly, Count VI fails to state a claim for relief.

116
    See In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, *24 (proving a “control
group” requires a plaintiff to prove that a group of stockholders was “connected in some
legally significant way—e.g., by contract, common ownership, agreement, or other
arrangement—to work together toward a shared goal.”) (internal quotation marks and
citations omitted).
117
   See In re Morton’s Restaurant Grp., Inc. S’holder Litig., 74 A.3d 656, 664-65 (Del. Ch.
2013) (Strine, C.) (to plead control by a minority stockholder, a plaintiff must allege facts
showing “actual domination and control over . . . [the] directors” that “must be so potent
that independent directors . . . cannot freely exercise their judgment” for fear of retribution)
(internal quotation marks omitted).
118
   In re Sea-Land Corp. S’holders Litig., 1987 WL 11283, at *5 (Del. Ch. May 22, 1987)
(reasoning that the “potential ability to exercise control is not equivalent to the actual
exercise of that ability,” and only actual control over the board’s decision-making process
suffices to impose fiduciary duties) (emphasis omitted); Gilbert v. El Paso Co., 490 A.2d
1050, 1055-56 (Del. Ch. 1984) (“Plaintiffs’ contention that Burlington occupied a fiduciary
role because of its potential for control is subject to the same infirmity as its contract
argument. . . . State law claims of breach of contract and breach of fiduciary relationship
must subsist on the actuality of a specific legal relationship, not in its potential.”), aff’d,
575 A.3d 1131 (Del. 1990).
                                              34
                2.    The Complaint States a Claim against HIG for Breach of
                      Fiduciary Duty as the Company’s Controlling Stockholder.
         In Count VII, Klein asserts, in the alternative to Count VI, a derivative claim

against HIG as the Company’s sole controlling stockholder for causing the Company

to enter into the Bain Share Issuance. The disposition of defendants’ motion to

dismiss this claim under Rule 12(b)(6) turns on what standard of review applies to

the claim.

         “Delaware has three tiers of review for evaluating director decision-making:

the business judgment rule, enhanced scrutiny, and entire fairness.”119 At one end

of the spectrum, “Delaware’s default standard of review is the business judgment

rule, a principle of non-review that ‘reflects and promotes the role of the board of

directors as the proper body to manage the business and affairs of the

corporation.’”120 Under the business judgment rule, the court presumes that “the

directors of a corporation acted on an informed basis, in good faith and in the honest

belief that the action taken was in the best interests of the company.”121 “Only when

119
   In re PLX Tech. Inc. S’holders Litig., 2018 WL 5018535, at *30 (Del. Ch. Oct. 16, 2018)
(quoting Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 457 (Del. Ch. 2011)).
120
   Id. at *31 (quoting In re Trados Inc. S’holder Litig. (Trados I), 2009 WL 2225958, at
*6 (Del. Ch. July 24, 2009)).
121
      Aronson, 473 A.2d at 812.
                                           35
a decision lacks any rationally conceivable basis will a court infer bad faith and a

breach of duty.”122

         At the other end of the spectrum, “Delaware’s most onerous standard” is entire

fairness.123 “Once entire fairness applies, the defendants must establish ‘to the

court’s satisfaction that the transaction was the product of both fair dealing and fair

price.’”124 Importantly, “controlling stockholders are not automatically subject to

entire fairness review when a controlled corporation effectuates a transaction.

Rather, the controller also must engage in a conflicted transaction for entire fairness

to apply.”125      As this court has discussed many times, conflicted transactions

involving controlling stockholders come in many forms, such as where a controller

stands on both sides of a transaction and “where the controller gets a unique benefit

by extracting something uniquely valuable to the controller.”126

122
      In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 34 (Del. Ch. 2014).
123
      In re Trados Inc. S’holder Litig. (Trados II), 73 A.3d 17, 44 (Del. Ch. 2013).
124
  PLX Tech., 2018 WL 5018535, at *30 (quoting Cinerama, Inc. v. Technicolor, Inc., 663
A.2d 1156, 1163 (Del. 1995)).
125
   IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *6 (Del. Ch. Dec. 11,
2017) (internal quotation marks and citation omitted).
126
   Id. (internal quotation marks and citation omitted); see also EZCORP, 2016 WL 301245,
at *11-15 (collecting cases and stating that “the entire fairness framework governs any
transaction between a controller and the controlled corporation in which the controller
receives a non-ratable benefit”); In re Crimson Exploration Inc. S’holder Litig., 2014 WL
5449419, at *12-13 (Del. Ch. Oct. 24, 2014) (“The second variety of controller transactions
implicating entire fairness review involves situations where the controller does not stand
on both sides of the transaction, but nonetheless receives different consideration or derives
some unique benefit from the transaction not shared with the common stockholders.”).
                                               36
         The latter scenario is relevant here. Defendants contend that the Complaint

fails to allege sufficient facts to support the inference that HIG received a unique or

“non-ratable” benefit warranting entire fairness review and that the Transactions

thus should be subject to business judgment review. I disagree.

         According to the Complaint, HIG secured for itself as part of the Transactions

a price of $19 per share in cash to sell all of its common stock of Surgery Partners—

representing a 54% stake in the Company—when the most recent closing market

price of the Company’s shares was $18.20 per share.127 The HIG Share Sale thus

yielded HIG a premium for its shares of approximately 4% above the per share

market price, equating to a total premium of approximately $20 million.128 The

transaction was “non-ratable.” No other stockholder of the Company was afforded

the opportunity to participate in the transaction. From these facts, it is reasonable to

infer that the HIG Share Sale afforded HIG a unique and valuable opportunity to

liquidate its control stake in one shot at an attractive price to a qualified buyer.129

The inference that the HIG Share Sale had unique value to, and posed a conflict for,

127
      Compl. ¶ 1.
128
      Tr. 68 (Sept. 13, 2018).
129
   See N.J. Carpenters Pension Fund v. infoGROUP, Inc., 2011 WL 4825888, at *3, *10
(Del. Ch. Sept. 20, 2011) (indicating that for a controller, “selling his shares into the market
was not an attractive option, as selling such a large number of shares would exert downward
pressure on the share price” and finding that this alleged illiquidity permitted an inference
that the controller obtained liquidity as a unique benefit in a merger).
                                              37
HIG is bolstered by the fact that HIG’s representative on the Board at the time

(Lozow) abstained from voting on the Transactions.

      Critically, the HIG Share Sale and the Bain Share Issuance were dependent

on each other and neither could have occurred without HIG’s blessing. More

specifically, with respect to the Bain Share Issuance that is the focus of Klein’s

claims, HIG’s approval as the Company’s majority stockholder was essential to

amend the Company’s certificate of incorporation to issue the Preferred Stock on the

terms proposed.130 The interrelated nature of the Transactions and the need for

HIG’s approval thus created a dynamic in which Bain was incentivized to make the

terms of its acquisition of HIG’s control stake in the Company as attractive as

possible to HIG to obtain its consent to the Bain Share Issuance.

      In sum, the facts pled in the Complaint are sufficient in my view to subject

the Bain Share Issuance to entire fairness review for purposes of this motion due to

the conflict posed to HIG as the Company’s controlling stockholder with respect to

another aspect of the Transactions (i.e., the HIG Share Sale) that was integral to and

inseparable from the Bain Share Issuance. Accordingly, defendants’ contention that

130
    See Compl. ¶ 40 (indicating that HIG approved the Transactions); see also Surgery
Partners Form 8-K (May 11, 2017) (reflecting that HIG voted to amend the certificate of
incorporation to issue the Preferred Stock under the Bain Share Issuance). The court takes
judicial notice of the information in this Form 8-K, which is quoted in the Complaint (see,
e.g., Compl. ¶ 33) and integral to Klein’s allegations. See Vanderbilt Income, 691 A.2d at
612-13.
                                            38
Count VI should be dismissed on the ground that the claim is governed by the

business judgment rule fails.

      “The possibility that the entire fairness standard of review may apply tends to

preclude the Court from granting a motion to dismiss under Rule 12(b)(6) unless the

alleged controlling stockholder is able to show, conclusively, that the challenged

transaction was entirely fair based solely on the allegations of the complaint and the

documents integral to it.”131 HIG has not done so. Nor could HIG do so given

numerous facts alleged in the Complaint that raise litigable issues concerning the

fairness of the Bain Share Issuance as an integral part of the Transactions.

      As to the process, for example, the Complaint alleges that the Transactions

were negotiated without using a special committee, from which it reasonably could

be inferred that HIG’s Board representative (Lozow) participated in the negotiations

before abstaining from voting on the Transactions; that the same law firm and

accounting advisor represented both Bain and Surgery Partners in connection with

the Transactions; that the Company’s financial advisor did not issue a fairness

opinion concerning the Preferred Stock and was conflicted because it provided

financing for the NSH Acquisition; and that the Transactions were not subject to a

  Hamilton P’rs, L.P. v. Highland Capital Mgmt., L.P., 2014 WL 1813340, at *12 (Del.
131

Ch. May 7, 2014).
                                         39
majority-of-the-minority stockholder vote or any form of stockholder consideration

other than approval by HIG.132

         And as to price, Klein asserts that the dividend rate for the Preferred Stock

(10% compounded quarterly) was high when compared to the 8.875% rate on $400

million of senior unsecured notes Surgery Partners issued in March 2016 and to the

less than 6% yield of the iShares U.S. Preferred Stock ETF.133 Klein further asserts

that the dividend rate was particularly rich when considered as part of a package of

other favorable terms for the Preferred Stock, including (i) voting rights, (ii) a

conversion feature that immediately was “near” or “in” the money, (iii) the right to

elect two directors to the Company’s Board voting as a separate class, (iv) a PIK

feature, (v) veto rights over various transactions, and (vi) a liquidation preference.134

         For the reasons explained above, Count VI of the Complaint states a claim for

breach of fiduciary duty against HIG as the Company’s controlling stockholder.

132
      Compl. ¶¶ 4, 40, 42-43, 46.
133
   The iShares U.S. Preferred Stock ETF seeks investment results that correspond
generally to the price and yield performance of the S&P U.S. Preferred Stock Index. Pl.’s
Opp’n Br. 45 n.149.
134
      Compl. ¶¶ 5, 34, 47; Tr. 18 (Sept. 13, 2018) (explaining PIK feature of dividend).
                                              40
                 3.    The Complaint States a Claim against Bain for Aiding and
                       Abetting a Breach of Fiduciary Duty.
          In Count VIII, Klein asserts, in the alternative to Count VI, a derivative claim

against Bain for aiding and abetting HIG’s breach of fiduciary duty.135 To state such

a claim:

          the complaint must allege facts that satisfy the four elements of an
          aiding and abetting claim: (1) the existence of a fiduciary relationship,
          (2) a breach of the fiduciary’s duty, . . . (3) knowing participation in
          that breach by the defendants, and (4) damages proximately caused by
          the breach.136
          The first two and the fourth elements are satisfied for the reasons discussed in

the previous section, i.e., the well-pled allegations of the Complaint state a claim for

breach of fiduciary duty against HIG as the Company’s controlling stockholder that,

if proven, could support a claim for damages if the consideration the Company

received for the Preferred Stock was not fair. The only element in contention is

whether it is reasonably conceivable from the allegations in the Complaint that Bain

“knowingly participated in that breach.”137

135
   Count VIII also asserts in conclusory fashion that Bain was unjustly enriched. Compl.
¶ 98. Klein waived this theory of relief by failing to respond in his opposition brief to
Bain’s argument in favor of dismissal of that aspect of Count VIII. See Forsythe v. ESC
Fund Mgmt. Co. (U.S.), Inc., 2007 WL 2982247, at *11 (Del. Ch. Oct. 9, 2007) (“The
plaintiffs have waived these claims by failing to brief them in their opposition to the motion
to dismiss.”).
136
  Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (internal quotation marks
omitted).
137
      Id. at 1097.
                                             41
      There is no single template for pleading the “knowing participation” element

of an aiding and abetting claim. To the contrary, this element can be inferred from

a variety of circumstances:

      For example, knowing participation may be inferred where the terms of
      the transaction are so egregious or the magnitude of the side deals is so
      excessive as to be inherently wrongful. In addition, the Court may infer
      knowing participation if it appears that the defendant may have used
      knowledge of the breach to gain a bargaining advantage in the
      negotiations. The plaintiff’s burden of pleading knowing participation
      may also be met through direct factual allegations supporting a theory
      that the defendant sought to induce the breach of fiduciary duty, such
      as through the offer of side payments intended as incentives for the
      fiduciaries to ignore their duties. And . . . a bidder may be liable to the
      target’s stockholders if the bidder attempts to exploit conflicts of
      interest in the board or conspires with the board to breach a fiduciary
      duty.138
      Here, the core fact pled in the Complaint that undercuts the suggestion that

the Bain Share Issuance was the product of arm’s-length bargaining is that it was

conditioned on the approval of the HIG Share Sale. This requirement placed HIG

in a conflicted position where its interest in obtaining the highest price possible for

its majority stake in Surgery Partners was directly in tension with its fiduciary

obligation to ensure that the Company—from which HIG was about to exit—

received fair consideration for the Preferred Stock. As a necessary signatory to the

contracts to implement the Transactions, which were cross-conditioned on each

138
    Morgan v. Cash, 2010 WL 2803746, at *4 (Del. Ch. July 16, 2010) (Strine, V.C.)
(internal quotation marks and citations omitted).
                                          42
other, Bain was in a prime position to exploit HIG’s conflict of interest to obtain an

unfair bargaining advantage in the setting of the terms of the Preferred Stock.

         A number of facts pled in the Complaint calling into question the fairness of

the process, moreover, support a reasonable inference that Bain may have knowingly

exploited HIG’s conflict to its advantage. To repeat, these include the alleged facts

that (i) Bain used the same counsel and accounting advisor as the Company during

the negotiations, (ii) the Board did not utilize a special committee to exclude HIG’s

representative on the Board (Lozow) from participating in the negotiations

concerning the Bain Share Issuance despite the conflict that transaction presented to

HIG with respect to selling its control position to Bain, (iii) no stockholder other

than HIG would have any say in approving any of the Transactions, and (iv) the

Company’s financial advisor would not provide a fairness opinion concerning the

consideration paid for the Preferred Stock.139

         Based on the foregoing, the court finds that the Complaint’s allegations are

sufficient to plead a reasonably conceivable claim that Bain knowingly participated

in a breach of fiduciary duty. Thus, Count VIII states a claim against Bain for aiding

and abetting a breach of fiduciary duty by HIG.

139
      Compl. ¶¶ 4, 40, 42-43, 46.
                                           43
                4.    The Complaint Fails to State a Claim for Breach of Fiduciary
                      Duty Against Doyle.
         As initially pled, Count V of the Complaint asserted that the five Director

Defendants breached their fiduciary duties by approving the Transactions without

ensuring that the Bain Share Issuance was entirely fair. Four of the five directors

(DeLuca, Feinstein, Lozow, and Turner) have since been dismissed from this

action,140 leaving Doyle as the only remaining Director Defendant.

         Surgery Partners’ certificate of incorporation contains a provision exculpating

its directors for breaches of the duty of care, as is permitted under 8 Del. C. §

102(b)(7).141 Thus, to plead a non-exculpated claim for breach of fiduciary duty

against Doyle, the Complaint must plead “facts supporting a rational inference that

[he] harbored self-interest adverse to the stockholders’ interests, acted to advance

the self-interest of an interested party from whom [he] could not be presumed to act

independently, or acted in bad faith.”142

         The Complaint does not assert that Doyle acted in bad faith or that he was

personally interested in the Transactions. Rather, the Complaint asserts that Doyle

140
      Dkt. 32, 46.
141
   Dkt. 44, Ex. A, Art. VI (exculpating the Company’s directors “[t]o the fullest extent that
the [Delaware General Corporation Law] or any other law of the State of Delaware . . .
permits”).
142
   In re Cornerstone Therapeutics Inc., S’holder Litig., 115 A.3d 1173, 1179-80 (Del.
2015).
                                             44
acted to advance the self-interest of HIG when he approved the Transactions. The

contention is theoretically plausible given that Doyle was the CEO of Surgery

Partners when the Transactions were negotiated and he may have been motivated to

curry favor with HIG or Bain to maintain his position as CEO, but there simply are

no facts alleged in the Complaint specific to Doyle that indicate that he advanced

HIG’s self-interest as plaintiff theorizes. Accordingly, Count V will be dismissed

as to Doyle, but with prejudice to the named plaintiff only in the same manner that

Lozow and Turner were dismissed.

IV.   CONCLUSION
      For the reasons explained above, defendants’ motion to dismiss is GRANTED

in part and DENIED in part. Counts I-IV, VI, and the unjust enrichment aspect of

Count VIII are dismissed with prejudice, and Count V is dismissed in the manner

set forth above. Count VII and the aiding and abetting aspect of Count VIII both

survive. Counsel are directed to confer and to submit an implementing order within

ten business days.

      IT IS SO ORDERED.

                                        45