Court Opinion

ID: 4614255
Source: CourtListenerOpinion
Date Created: 2020-11-20 21:04:49.109021+00
Date Added: 2024-06-11T07:54:44.911528
License: Public Domain

COURT OF CHANCERY
                                        OF THE
                                  STATE OF DELAWARE

MORGAN T. ZURN                                                   LEONARD L. WILLIAMS JUSTICE CENTER
VICE CHANCELLOR                                                    500 N. KING STREET, SUITE 11400
                                                                  WILMINGTON, DELAWARE 19801-3734

                                      November 20, 2020

    Blake A. Bennett, Esquire                        Raymond J. DiCamillo, Esquire
    Cooch & Taylor, P.A.                             Richards, Layton & Finger, P.A.
    1000 West Street, 10th Floor                     920 North King Street
    Wilmington, DE 19801                             Wilmington, DE 19801

    Eric Lopez Schnabel, Esquire
    Dorsey & Whitney (Delaware) LLP
    300 Delaware Avenue, Suite 1010
    Wilmington, DE 19801

         RE:       Mark Gottlieb, et al., v. Jonathan Duskin, et al.,
                   Civil Action No. 2019-0639-MTZ

Dear Counsel,

         I write regarding the motion to dismiss the Verified Class Action Complaint1

(the “Motion”) filed by Defendants Jonathan Duskin, Seth R. Johnson, Keri L. Jones,

Kent A. Kleeberger, William F. Sharpe, III, Joel Waller, and Laura Weil

(collectively, the “Director Defendants”).2 I heard argument on the Motion on

February 13, 2020.3 On May 27, I issued a partial ruling, holding that Plaintiff Mark

1
    Docket Item (“D.I.”) 1 [hereinafter “Compl.”].
2
    D.I. 17, 18.
3
    D.I. 42.
Mark Gottlieb, et al., v. Jonathan Duskin, et al.,
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Gottlieb had pled facts sufficient to trigger enhanced scrutiny under Unocal Corp.

v. Mesa Petroleum Co.4 and that Plaintiff’s claims, as pled, are derivative and not

direct.5

         To fully resolve the Motion, I asked the parties to submit supplemental

briefing on two issues: (1) whether Plaintiff, having forwent demand, adequately

pled facts demonstrating that demand is futile under Court of Chancery Rule 23.1,

and (2) whether Unocal scrutiny is appropriate as Plaintiff primarily seeks money

damages rather than injunctive relief.6 The parties submitted supplemental briefing

by August 24.7 This letter completes my ruling on the Motion. I conclude that

Plaintiff has failed to demonstrate that demand is futile under Rule 23.1. Therefore,

the Complaint must be dismissed in its entirety, and I need not reach the question of

whether Unocal scrutiny is appropriate for a post-closing damages action.

4
    493 A.2d 946 (Del. 1985).
5
  See D.I. 47. Defendants B. Riley FBR, Inc. and B. Riley Financial, Inc. (together, the “B.
Riley Defendants”) also moved to dismiss pursuant to Rule 12(b)(6). See D.I. 19, 20. Their
motion was not the subject of my partial ruling and remained pending during the resolution
of the Director Defendants’ Motion. In view of my determination that Plaintiff’s claims
are derivative in nature, the B. Riley Defendants joined the Director Defendants’ arguments
set forth in supplemental briefing. See D.I. 49. Accordingly, this letter decision resolves
the Director Defendants’ Motion, as well as the B. Riley Defendants’ motion to dismiss.
6
    See D.I. 47.
7
    See D.I. 48, 49, 51, 52.
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          I.        BACKGROUND8

          The parties are familiar with the facts as alleged in the Complaint, which I

related at length in my partial bench ruling.9 Generally, the Complaint alleges that

the Director Defendants breached their fiduciary duties to Christopher & Banks (the

“Company”) “by engaging in [a] scheme to reject the $0.80 per share Offer for the

Company by trying to bully the offeror to go away, and then when that failed[,] by

commissioning the investment banker to prepare an analysis which was patently

flawed and which made no sense, giving the Company values which it could not

have had the analysis been done in good faith.”10 It also alleges that the Director

Defendants “failed in bad faith to fully inform themselves, and then negotiate with

the Offeror to obtain a better bid.”11 Plaintiff broadly contends that the Director

Defendants did so to “entrench[] themselves at the expense of the Company’s

shareholders.”12

8
    I draw the pertinent facts from the Complaint.
9
    See D.I. 47.
10
     Compl. ¶ 71.
11
     Id. ¶ 72.
12
     Id. ¶ 64(a).
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           Each of the Director Defendants served on the Board from the time of the

transaction though the May 14, 2019 filing of the Complaint.13 Assuming his claims

were direct rather than derivative, Plaintiff did not make a pre-suit demand on the

Company’s board of directors (the “Board”) prior to filing this action. Nor does the

Complaint explicitly allege that demand is futile.

           The Complaint provides a handful of allegations with respect to each of the

Director Defendants.14 Most of the Complaint’s director-specific allegations are

aimed at Jonathan Duskin.15 Duskin has served on the Board since 2016. The

Complaint describes Duskin’s current and former roles in the industry and his

allegedly “poor financial record” at other companies.16 In addition, Duskin is the

current CEO of Macellum Capital Management (“Macellum”).                     Macellum’s

“affiliate” is the Company’s largest stockholder, owning 12.7% of its stock.17

           Plaintiff alleges that Duskin “had been having conversations with” the offeror,

Justin Yoshimura, “throughout th[e] year,” was Yoshimura’s first point of contact

13
     See id. ¶¶ 22–28.
14
     See id.
15
     See id. ¶¶ 22, 37, 38, 76(d).
16
     Id. ¶ 22.
17
     Id.
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with respect to the bid,18 and “arranged the retention of B. Riley, and was the initial

contact with them.”19 Plaintiff further alleges that Yoshimura outbid the Company

in a bankruptcy asset auction in 2018, which “may have created some ill will with

defendant Duskin who is (as noted)” affiliated with “Christopher & Banks’ largest

shareholder.”20 Plaintiff stops short of alleging that Duskin was interested in the

transaction or lacked independence with respect to it; rather, Count I requests that

“[t]he Board should explore whether director Duskin has a conflict of interest and,

if so, exclude him from further deliberations as to the Company’s strategic

alternatives.”21

           The Complaint’s allegations with respect to the remaining Director

Defendants are sparse. Plaintiff recites each director’s Board tenure and general

industry experience, but does not allege any interest in or connection to Duskin or

the challenged transaction.

18
     Id. ¶ 37.
19
     Id. ¶ 38.
20
     Id.
21
     Id. ¶ 76(d).
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           Paragraph 23: Seth Johnson has served on the Board since 2016 as
            “Macellum’s designated board nominee” and has current and former
            experience in the industry.22 The Complaint does not allege any direct
            connection between Johnson and Duskin, nor does it allege if or how
            Macellum influenced the challenged Board actions.
           Paragraphs 24 and 37: Keri Jones has been the CEO of the Company since
            March 2018 and has held other positions in the industry. Yoshimura’s
            email offering the $0.80 “stalking horse bid” indicated he was “bullish on
            [Jones] and her turnaround plans.”23
           Paragraph 25: Kent Kleeberger has served on the Board since 2016 and as
            its Chair since January 2017. He has an extensive professional history
            including service as an “independent consultant to certain private equity
            firms.”24
           Paragraph 26: William Sharpe has served on the Board since May 2012,
            and has extensive experience, including serving as a partner at an
            investment banking firm and working for other entities that “provide[]
            advice on mergers and acquisitions, restructuring, and public and private
            capital raising to the middle market.”25 Plaintiff also alleges that “[t]he
            Company state[ed] in its 2019 Proxy: ‘Mr. Sharpe brings considerable
            business, investment banking and corporate experience to our Board, given
            his more than 15 years as an investment banker.’”26

22
     Id. ¶ 23.
23
     Id. ¶ 37.
24
     Id. ¶ 25 (emphasis omitted).
25
     Id. ¶ 26 (emphasis omitted).
26
     Id. (emphasis omitted).
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           Paragraphs 27, 33, and 35: Joel Waller served on the Board from January
            2017 through June 2019. In addition to other industry experience, “Waller
            previously served as the Company’s President, from December 2011
            through November 2012, and as the Company’s interim CEO from
            February 2012 through November 2012.”27 While serving as the
            Company’s President and CEO in March 2017, he detailed the Company’s
            struggle to successfully implement its long-term turnaround plan. And in
            March 2018, Waller stated that the Company was confident that it would
            realize the benefits of its turnaround plan that year.
           Paragraph 28: Laura Weil served on the Board from 2016 through June
            2019, and has an extensive professional history, but has not been employed
            by the Company.

          II.    ANALYSIS

          From these allegations, I assess whether Plaintiff has standing to pursue the

derivative Complaint under Court of Chancery Rule 23.1.               A stockholder’s

derivative claim may proceed only “if (i) the stockholder demanded that the directors

pursue the corporate claim and they wrongfully refused to do so or (ii) demand is

excused because the directors are incapable of making an impartial decision

regarding the litigation.”28 Rule 23.1 requires a stockholder asserting a derivative

claim to “allege with particularity the efforts, if any, made by the plaintiff to obtain

the action the plaintiff desires from the directors or comparable authority and the

27
     Id. ¶ 27.
28
 United Food & Com. Workers Union v. Zuckerberg, 2020 WL 6266162, at *7 (Del. Ch.
Oct. 26, 2020) (citing Ainscow v. Sanitary Co. of Am., 180 A. 614, 615 (Del. Ch. 1935)).
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reasons for the plaintiff’s failure to obtain the action or for not making the effort.”29

It imposes “stringent requirements of factual particularity that differ substantially

from . . . permissive notice pleadings,”30 and the Court will not accept conclusory

allegations as true.31

         Where the plaintiff does not make a pre-suit demand, “the complaint must

plead with particularity facts showing that a demand upon the board would have

been futile.”32 The “operative question” is “whether demand is excused because the

directors are incapable of making an impartial decision regarding whether to institute

such litigation.”33 Viewing the constellation of allegations holistically, “the demand

futility analysis asks whether the board of directors as constituted when the lawsuit

was filed could exercise disinterested and independent judgment regarding a

29
     Ct. Ch. R. 23.1(a).
30
     Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).
31
     Zuckerberg, 2020 WL 6266162, at *8.
32
  In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 120 (Del. Ch. 2009) (citing
Ch. Ct. R. 23.1(a), and also citing Stone v. Ritter, 911 A.2d 362, 367 n.9, and Brehm, 746
A.2d at 254); see also Wood v. Baum, 953 A.2d 136, 140 (Del. 2008) (noting that in the
absence of a pre-suit demand “plaintiff must establish demand futility”).
33
  Zuckerberg, 2020 WL 6266162, at *8 (internal quotation marks omitted) (quoting Stone,
911 A.2d at 367).
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demand.”34 When making this assessment, “a court counts heads,” and “[i]f the

board lacks a majority of directors who could exercise independent and disinterested

judgment regarding a demand, then demand is futile.”35

         The Delaware Supreme Court has established two tests for determining

whether directors can exercise independent and disinterested judgment regarding a

demand:36 Aronson v. Lewis37 and Rales v. Blasband.38 “The crux of the Court’s

inquiry is that set out by our Supreme Court in Rales v. Blasband: whether the

majority of the board, as it exists at the time the complaint is filed, is capable of

considering the demand in light of the circumstances.”39 “The Rales test requires

that the plaintiff allege particularized facts establishing a reason to doubt that the

board of directors could have properly exercised its independent and disinterested

34
   Id. (citing In re infoUSA, Inc. S’holders Litig., 953 A.2d 963, 985 (Del. Ch. 2007), and
also citing In re Oracle Corp. Deriv. Litig., 2018 WL 1381331, at *18 (Del. Ch.
Mar. 19, 2018)).
35
  Id. (citing In re EZCORP Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at
*34 (Del. Ch. Jan. 25, 2016)).
36
     See Wood, 953 A.2d at 140.
37
     473 A.2d 805 (Del. 1984).
38
     634 A.2d 927 (Del. 1993).
39
  Ryan v. Armstrong, 2017 WL 2062902, at *10 (Del. Ch. May 15, 2017) (footnote
omitted) (citing Rales, 634 A.2d at 934, and also citing In re infoUSA, Inc., 953 A.2d at
985–90), aff’d, 176 A.3d 1274 (Del. 2017).
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business judgment in responding to a demand.”40 Although preceded by Aronson,

Delaware law has evolved to recognize Rales as the “general”41 and “overarching

test for futility.”42

         Aronson has been regarded as Rales’s narrower and circumstance-specific

sister test, “appl[ying] to claims involving a contested transaction i.e., where it is

alleged that the directors made a conscious business decision in breach of their

fiduciary duties”43 and “[a]ddressing a situation in which the same directors who

would consider a demand had made the challenged decision.”44 Aronson requires

that the plaintiff allege particularized facts creating a reason to 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.45 In this case, all

Director Defendants sat on the Board both at the time of the challenged transaction

and when Plaintiff filed this action in May 2019. Aronson’s test is the traditional

40
  Wood, 953 A.2d at 140 (internal quotation marks omitted) (quoting Rales, 634 A.2d at
934).
41
     Zuckerberg, 2020 WL 6266162, at *18 & n.20 (collecting cases).
42
     Ryan, 2017 WL 2062902, at *11.
43
     Wood, 953 A.2d at 140.
44
     Zuckerberg, 2020 WL 6266162, at *11.
45
     Wood, 953 A.2d at 140 (citing Aronson, 473 A.2d at 814).
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choice, as “the suit involves a challenge to action of the directors who themselves

would evaluate the demand.”46

         Consistent with this Court’s decision to “decline[] automatic excusal

theories[] in favor of individual director-by-director analysis based on the

particularized allegations of the Complaint,”47 “demand is not futile simply because

enhanced scrutiny applies.”48             As Vice Chancellor Glasscock stated in

Ryan v. Armstrong, “the presence of a narrowly pled Unocal claim . . . does not

operate to excuse demand per se,” “although of course specific pleadings that a

majority of directors were motivated primarily by entrenchment or other non-

corporate considerations will show demand futility.”49 The plaintiff’s claims must

be dismissed under Rule 23.1 “unless the Complaint demonstrates demand would be

futile, consistent with the analyses set out in Rales and Aronson v. Lewis, regardless

of whether the underlying facts state a claim under Unocal.”50

46
   Ryan, 2017 WL 2062902, at *14 (citing Aronson, 473 A.2d at 814, and also citing
In re infoUSA, Inc., 953 A.2d at 986).
47
     Id. at *13 & n.138 (collecting cases).
48
     Zuckerberg, 2020 WL 6266162, at *12 (citing Ryan, 2017 WL 2062902, at *13–14).
49
     2017 WL 2062902, at *13 (emphasis added).
50
     Id. at *14 (footnote omitted).
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           That said, where, as here, the complaint “alleges entrenchment as the

Defendants[’] motive in the challenged transaction,” “[a]ddressing such an

allegation under Aronson is a rather awkward fit.”51 And Aronson’s continued

viability in view of Rales’s more streamlined inquiry and intervening developments

in the law has recently been called into question.52 “The Aronson test must be

understood in the context of the overarching test for demand futility laid out

in Rales: could the directors bring business judgment to bear on the demand?”53

Because both tests fundamentally address this question, Aronson and Rales inform

each other and will almost certainly yield the same outcome when applied, and in

fact, this Court has recognized the significant analytical overlap of these tests.54

51
     Id.
52
   See Zuckerberg, 2020 WL 6266162, at *16 (“Viewed on its own terms, Aronson is no
longer a functional test. Delaware decisions have managed to continue applying it only by
emphasizing the overarching question of a substantial likelihood of liability, incorporating
the implications of exculpation, and de-emphasizing the role of the standard of review.
The foundational premise of the decision, which relied on the standard of review for the
challenged decision as a proxy for whether directors face a substantial likelihood of
liability, no longer endures. Fortunately, a viable alternative [, Rales,] exists.”).
53
     Ryan, 2017 WL 2062902, at *14 (footnote omitted) (collecting cases).
54
   See, e.g., Guttman v. Huang, 823 A.2d 492, 500 (Del. Ch. 2003) (“[T]he differences
between the Rales and the Aronson tests in the circumstances of this case are only subtly
different, because the policy justification for each test points the court toward a similar
analysis.”); see also Zuckerberg, 2020 WL 6266162, at *18–19 & n.20 (recognizing that
general principles of demand futility set forth in Aronson are considered and applied,
perhaps more efficiently, under Rales); Ryan, 2017 WL 2062902, at *14 & n.143 (stating
that Aronson is contextualized by Rales and collecting cases); id. at *10–18 (specifically
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         Accordingly, I look to general principles of demand futility articulated by this

Court under Aronson and its progeny, while keeping in mind Rales’s broader

inquiry: I consider whether Plaintiff pled particularized facts showing that the

Director Defendants face a substantial likelihood of liability such that they would

have been incapable of exercising their independent business judgment in

considering a demand.55

                A.    Plaintiff Has Failed To Show Futility Under Aronson Prong
                      One.

         Under Aronson’s first prong, the Court considers “director compliance with

the duty of loyalty: if the directors made the underlying decision under the influence

of self-interest, or dependent on a third party, they have breached a duty of loyalty,

and are liable for loss caused thereby.”56 Thus, I assess whether the Complaint

pleads particularized facts sufficient to raise a reasonable doubt as to the

disinterestedness or independence of at least half of the Director Defendants, such

applying Aronson to determine whether demand was futile in an entrenchment case, but
doing so in view of Rales’s broader question and principles).
55
   See, e.g., Zuckerberg, 2020 WL 6266162, at *18–19 & n.20; Ryan, 2017 WL 2062902,
at *10–18; Guttman, 823 A.2d at 500. Even if Aronson is no longer viable, my analysis
would be nearly identical to, and bear the same outcome as, a futility analysis under Rales.
56
     Ryan, 2017 WL 2062902, at *14.
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that the Director Defendants would face a substantial likelihood of liability.57 Thus,

on a “director-by-director basis” the Court asks

        (i) whether the director received a material personal benefit from the
        alleged misconduct that is the subject of the litigation demand, (ii)
        whether the director would face a substantial likelihood of liability on
        any of the claims that are the subject of the litigation demand, and (iii)
        whether the director lacks independence from someone who received a
        material personal benefit from the alleged misconduct that is the subject
        of the litigation demand or who would face a substantial likelihood of
        liability on any of the claims that are the subject of the litigation
        demand.58

If the Complaint adequately alleges that the Director Defendants were conflicted

with respect to Yoshimura’s bid, “there is a reasonable doubt whether those directors

can exercise their business judgment on a demand to sue themselves.”59

         The allegations with respect to each of the Director Defendants are scant at

best. Drawing all inferences in Plaintiff’s favor, the Complaint only alleges that

Duskin might have a conflict of interest because of a prior experience that “may have

created some ill will” with Yoshimura.60 The Complaint does not explain how this

57
   Id. at *15; see also Zuckerberg, 2020 WL 6266162, at *15 (“[A] plaintiff seeking to
show that a director faces a substantial likelihood of liability for having approved a
transaction, no matter what standard of review applies, must plead particularized facts
providing a reason to believe that the individual director was self-interested, beholden to
an interested party, or acted in bad faith.”).
58
     Zuckerberg, 2020 WL 6266162, at *19.
59
     Ryan, 2017 WL 2062902, at *14.
60
     Compl. ¶ 38; see also id. ¶ 76(d).
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potential ill will renders Duskin incapable of acting in accordance with his fiduciary

duties.

           Plaintiff offers no particularized allegations to establish that any other

Director Defendant, let alone the majority, was interested in the transaction or

beholden to Duskin.           Instead, Plaintiff offers a conclusory and collective

entrenchment theory, contending that the Director Defendants fended off the

Yoshimura bid to preserve their positions, in view of Yoshimura’s harsh words about

the Board and management.61 Plaintiff does not allege the Director Defendants’

positions were material to them; does not allege any Director except Duskin had any

animus towards Yoshimura; and does not allege their discretion was sterilized by

Duskin’s potential interest in fending off the bid.62

           “This is quintessential conclusive pleading of a mere threat of liability.”63

“The Complaint is bare of the type of director-specific pleading” that shows a breach

of loyalty and that “if true, create[s] a reasonable doubt that a substantial likelihood

61
  See id. ¶ 37 (“From our conversations throughout this year, I think we are in agreement
that CBK possesses many underutilized assets, ranging from a loyal and engaged customer
base to a platform that is able to succeed in tertiary malls. However[,] it goes without being
said that under the current Board of Directors, the company has underperformed even its
peers in every metric.”).
62
     See Ryan, 2017 WL 2062902, at *15.
63
     Id.
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of liability would cause a majority of directors to face liability, disabling their

exercise of business judgment and excusing demand.”64 Because I cannot find from

the facts alleged that the majority of the Director Defendants faces a disabling

interest or lacks independence with respect to the demand eschewed by Plaintiff,

Plaintiff has failed to plead facts demonstrating futility under Aronson’s first

prong.65

                 B.       Plaintiff Has Failed To Show Futility Under Aronson Prong
                          Two.

           Plaintiff’s futility arguments focus on Aronson prong two: a “safety valve to

permit suit where the majority of directors are otherwise disinterested and

independent but the complaint meets a heightened pleading standard of particularity

and the threat of liability to the directors required to act on the demand is sufficiently

substantial to cast a reasonable doubt over their impartiality.”66 I must assess

whether the pleadings create a reasonable doubt that the decision was otherwise not

the product of business judgment, such that it is reasonable to infer that the Director

Defendants acted in bad faith and would therefore face a substantial likelihood of

64
     Id.
65
     See id. at *15–16.
66
     Id. at *17 (internal quotation marks omitted) (quoting Guttman, 823 A.2d at 500).
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liability,67 and “excuses demand where the facts pled disclose that rare case where a

transaction may be so egregious on its face that board approval cannot meet the test

of business judgment.”68 “[A] plaintiff carries a heavy burden in satisfying the

second prong of Aronson,”69 and must plead “particularized facts . . . such that it is

difficult to conceive that a director could have satisfied his or her fiduciary duties.”70

If the Complaint demonstrates that Plaintiff has met this heavy burden with respect

to at least half of the Director Defendants, “[s]uch directors are disabled from

considering a demand to sue themselves, and demand would be futile.”71

          Plaintiff’s allegations are insufficient to demonstrate that at least half of the

Director Defendants could be found to have acted in bad faith and face a substantial

likelihood of liability. “This is simply a mirror image of the contentions addressed

with respect to Aronson’s first prong.”72 Plaintiff only alleges that Duskin may have

67
  See id. (“In order for demand to be excused under the second prong of Aronson where,
as here, the Defendants are exculpated from liability for the duty of care, the Plaintiff must
plead facts raising an inference that the action complained of was taken in bad faith.”).
68
     Id. (internal quotation marks omitted) (quoting Aronson, 473 A.2d at 815).
69
  Id. (internal quotation marks omitted) (quoting White v. Panic, 783 A.2d 543, 551 (Del.
2001)).
70
  Id. (internal quotation marks omitted) (quoting Chester Cty. Empls.’ Ret. Fund v. New
Residential Inv. Corp., 2016 WL 5865004, at *9 (Del. Ch. Oct. 7, 2016)).
71
     Id. at *14.
72
     Id. at *18.
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harbored some animus toward Yoshimura that impacted his decision to reject the

bid. And reading the Complaint in the light most favorable to Plaintiff, he suggests,

but does not explicitly claim, that the remaining Director Defendants followed

Duskin’s lead by approving defensive measures and likewise rejecting the bid.

Plaintiff offers no allegations regarding the Director Defendants’ compensation and

financial circumstances, or anything else to suggest that the Director Defendants,

other than Duskin, would have a non-corporate motive in approving the transaction.

Nor does the Complaint give rise to the reasonable inference that Duskin’s influence

“was so powerful as to sterilize the other directors’ discretion or that such directors

were beholden to him.”73 In view of these shortcomings, the Complaint fails to

allege particularized facts to permit an inference that the majority of the Director

Defendants acted with bad faith such that they face a substantial likelihood of

liability.74

           In the absence of particularized pleadings for each Director Defendant,

Plaintiff alleges generally that the Director Defendants took defensive measures to

fend off an allegedly hostile bid, not for the benefit of the Company, but for

entrenchment. But Plaintiff’s conclusory allegation that the Director Defendants

73
     Id.
74
     Id.
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were collectively motivated by entrenchment is insufficient “to excuse demand

per se.”75 Plaintiff must offer “specific pleadings that a majority of directors were

motivated primarily by entrenchment or other non-corporate considerations.”76

          I previously held that “[a]s in Ryan, Plaintiff’s allegations of an entrenchment

motive are thin:”          “Plaintiff conclusorily alleges that the director defendants

entrenched themselves at the expense of the company shareholders.”77 However,

the Complaint is silent as to each individual Director Defendant's “motivations,

interests, and actions beyond its broad conclusory allegations” and “lacks

particularized factual allegations to permit me to infer that the majority of the Board

acted solely or primarily to entrench themselves.”78

          In the absence of particularized allegations that entrenchment primarily

motived the decisionmakers such they acted in bad faith, Plaintiff contends that the

transaction itself is so disloyal and in bad faith that it satisfies Aronson’s second

prong.79 Plaintiff asserts this case “smack[s]” of disloyalty,80 such that this is a “rare

 Id. at *13; see also id. at *17 (finding that a “conclusory pleading” of an entrenchment
75

motive “is insufficient under Rule 23.1”).
76
     Id. at *13; see also id. at *17 (applying this principle).
77
     D.I. 47 at 21–22.
78
     Ryan, 2017 WL 2062902, at *17.
79
     See D.I. 51 at 13–15.
80
     Id. at 13.
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November 20, 2020
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case” where the challenged decisions are “so egregious”81 that they are “inexplicable

other than bad faith” and therefore it is “difficult to conceive that a director could

have satisfied his or her fiduciary duties.”82 But Plaintiff’s allegations do not support

this conclusion.

          In fact, although the challenged actions can be fairly characterized as

defensive, the Complaint also repeatedly references the Company’s long-term

adherence to its turnaround plan.83 Plaintiff alleges that the plan failed time and

again, but the Board and management nonetheless remained optimistic about its

promise.84 And in March 2018, Waller announced the Director Defendants’ belief

that they “expect[d] the benefit of [the turnaround plan] to be largely realized in

2018.”85

          In November, Yoshimura approached Duskin with an “overture”86 to “a

stalking horse bid to acquire the company for at least ~$.80, which represents a ~33%

81
     Ryan, 2017 WL 2062902, at *17 (quoting Aronson, 473 A.2d at 815).
82
  Id. at *17 (internal quotation marks omitted) (quoting Chester Cty. Empls.’ Ret. Fund,
2016 WL 5865004, at *9); id. at *18 (“An action inexplicable other than bad faith is
sufficiently likely to imply liability that demand on directors taking such action is futile.”).
83
     See Compl. ¶¶ 4, 7, 35, 37, 39.
84
     See id. ¶¶ 7, 35, 37, 39.
85
     Id. ¶ 35.
86
     Id. ¶ 39.
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premium to today’s closing price.”87 Yoshimura ultimately engaged Duskin, his

alleged foe, to kick off a sales process. Yoshimura and the Director Defendants

reacted by enacting a number of defensive measures. Those included allegedly

inflating projections and commissioning a “sham” report from B. Riley in order to

fend off and rationalize rejecting the premium bid.88 In doing so, the Director

Defendants—who have not been alleged to be interested or lack independence in

this transaction—opted to stay the course in favor of the turnaround plan.

          Even if the Director Defendants defended and rejected the bid for

entrenchment purposes such that those actions (if supported by sufficient pleadings)

would give rise to liability, the decision to reject the bid and stay the course on the

turnaround plan is not so egregious as to be inexplicable other than by bad faith. To

the contrary, staying the course could likely have had a legitimate business

purpose.89 As Aronson teaches, absent “rare” and “egregious” circumstances, “the

87
     Id. ¶ 37.
88
     Id. ¶¶ 12, 39, 43.
89
  See Ryan, 2017 WL 2062902, at *18 (“It is a truism that defensive actions may be loyal
actions if reasonable. They may also be loyal—although subject to injunctive relief—if
unreasonable. They may be loyal even though adopted in a grossly negligent way.”
(emphasis in original)).
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November 20, 2020
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mere threat of personal liability for approving a questioned transaction, standing

alone, is insufficient.”90

         In defending his scant allegations, Plaintiff contends that the fact that they

have triggered Unocal enhanced scrutiny means they are sufficient to excuse

demand under Aronson’s second prong.91 Boiled down, Plaintiff believes the

standard of review, set on notice pleading standards, should dictate the outcome of

the futility analysis under Rule 23.1’s more onerous pleading standard.

         The challenged conduct narrowly creates an inference sufficient to

trigger Unocal’s enhanced scrutiny, but as explained, those are “not the only

reasonable inferences that may be drawn from the timeline present here.”92

Plaintiff’s bare-bones Unocal claim does not automatically translate into a non-

exculpated duty of loyalty claim, and is not enough to satisfy the second prong of

Aronson. The fact that a plaintiff has alleged the existence of defensive measures

90
     Aronson, 473 A.2d at 815.
91
     See D.I. 51 at 12–16.
92
   D.I. 47 at 27–28; see Ryan, 2017 WL 2062902, at *18 n.180 (considering in an Aronson
prong two analysis that, although the challenged action triggered Unocal scrutiny, “the
rationale of the [challenged action] was not completely devoid of support,” as plaintiff
alleged facts that also suggested a rational business purpose).
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triggering Unocal enhanced scrutiny does not amount to a per se determination that

the transaction is inexplicable other than by bad faith.93

          In conclusion, the facts as pled do not support “an inference that the actions

taken by the directors, even if defensive, are inexplicable other than as bad faith.” 94

Accordingly, the Complaint does not give rise to a reasonable inference that the

Defendant Directors face a substantial likelihood of bad-faith liability. Plaintiff has

failed to satisfy the second prong of Aronson.

          III.   CONCLUSION

          The Director Defendants’ Motion, joined by the B. Riley Defendants, is

GRANTED, and the Complaint is DISMISSED in its entirety for failure to satisfy

Rule 23.1.95 The parties shall submit an implementing order within twenty days of

this decision.

                                                       Sincerely,

                                                       /s/ Morgan T. Zurn

                                                       Vice Chancellor

93
  See Ryan, 2017 WL 2062902, at *17–18; accord Zuckerberg, 2020 WL 6266162, at *15,
*16 (noting that the applicable standard of review is not outcome-determinative for
purposes of a futility analysis).
94
     Ryan, 2017 WL 2062902, at *18.
95
     See id. at *2.
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