Court Opinion

ID: 9955160
Source: CourtListenerOpinion
Date Created: 2024-03-27 19:02:29.470217+00
Date Added: 2024-06-11T08:15:17.961684
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE CARVANA CO.                        )   CONSOLIDATED
STOCKHOLDERS LITIGATION                  )   C.A. No. 2020-0415-KSJM

                          MEMORANDUM OPINION

                          Submitted: December 18, 2023
                            Decided: March 27, 2024

Christine M. Mackintosh, Rebecca A. Musarra, GRANT & EISENHOFER, P.A.,
Wilmington, Delaware; Kimberly A. Evans, Robert Erikson, Irene R. Lax, BLOCK &
LEVITON LLP, Wilmington, Delaware; Jason M. Leviton, Amanda R. Crawford,
BLOCK & LEVITON LLP, Boston, Massachusetts; Ned Weinberger, Mark
Richardson, Jiahui (Rose) Wang, LABATON KELLER SUCHAROW LLP,
Wilmington, Delaware; Domenico Minerva, John Vielandi, LABATON KELLER
SUCHAROW LLP, New York, New York; Counsel for Plaintiffs Anthony Franchi,
Construction Industry and Laborers Joint Pension Trust for Southern Nevada, St.
Paul Electrical Construction Pension Plan, St. Paul Electrical Construction Workers
Supplemental Pension Plan (2014 Restatement), and Retirement Medical Funding
Plan for the St. Paul Electrical Workers.

Joseph R. Slights III, Brad D. Sorrels, Shannon E. German, Leah E. León, WILSON
SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; Counsel for the
Special Litigation Committee of the Board of Directors of Carvana Co.

David E. Ross, Adam D. Gold, R. Garrett Rice, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Brian M. Lutz, GIBSON, DUNN & CRUTCHER LLP, San
Francisco, California; Colin B. Davis, Katie Beaudin, GIBSON, DUNN &
CRUTCHER LLP, Irvine, California; Counsel for Nominal Defendant Carvana Co.

John L. Reed, Ronald N. Brown, III, Peter H. Kyle, Kelly L. Freund, DLA PIPER LLP
(US), Wilmington, Delaware; Counsel for Defendants Ernest Garcia III and Ernest
Garcia II.

McCORMICK, C.
         This case arises from a direct offering made by Carvana Co. (“Carvana” or the

“Company”) in late March 2020.        Controlling stockholders Ernest Garcia II and

Ernest Garcia III (the “Garcias”) participated in the direct offering. Later in 2020,

Garcia II sold over $1 billion of his Carvana shares. The plaintiff-stockholders assert

derivative claims against the Garcias for breach of fiduciary duty, alleging that the

Garcias enriched themselves through the offering by acquiring shares at a depressed

price.

         After the court denied the defendants’ motions to dismiss, the Company formed

a two-person special litigation committee (the “SLC”). The SLC conducted a seven-

month investigation, reviewing over 100,000 documents and interviewing many

witnesses with assistance from advisors. The SLC concluded, in a 170-page report,

that no wrongdoing occurred and that terminating the action was in Carvana’s best

interest. The SLC then moved to dismiss the lawsuit.

         This court evaluates a special litigation committee’s motion to dismiss under

Zapata Corporation v. Maldonado.1 Under Zapata, a special litigation committee has

the burden to show its independence and that it undertook, in good faith, an

investigation of reasonable scope that yielded reasonable bases supporting its

conclusions. The court then applies its own business judgment to determine whether

dismissal is in the best interests of the corporation. This decision finds that the SLC

has met its burden under Zapata and grants the motion to dismiss.

1 430 A.2d 779 (Del. 1981).
I.      FACTUAL BACKGROUND

        The court draws the facts from the record submitted by the SLC and the

plaintiffs (“Plaintiffs”), which includes the SLC report (the “SLC Report”), the 115

exhibits attached to the SLC Report, and the transcripts of the depositions of the two

SLC members and a representative of its financial advisor, Houlihan Lokey, Inc.2

        A.     Carvana

        Carvana is a Delaware corporation that sells used cars. “[F]amous for its

multistory car vending machines,” Carvana runs an e-commerce platform, Carvana

Group LLC, that facilitates the sale of cars across the United States.3 Carvana also

offers financing services and connects buyers with insurance providers.4 Carvana is

the senior corporate entity in the “Up-C” structure between Carvana and Carvana

Group LLC.5

        Garcia II and Garcia III are Carvana’s controlling stockholders.6 Garcia III co-

founded the company in 2012 and is its CEO, President, and Board Chairman.7

Carvana went public through an IPO in 2017.8

2 See C.A. No. 2020-0415-KSJM, Docket (“Dkt.”) 122, Ex. A (“SLC Report”); Dkt. 132,

Ex. A (“Maroone Dep. Tr.”); Dkt. 132, Ex. B (“Parikh Dep. Tr.”); Dkt. 132, Ex. C
(“Taylor Dep. Tr.”).
3 SLC Report at 38.

4 Id.

5 Id. at 40.

6 Id. at 1.

7 Id. at 29.

8 Id.

                                            2
       Carvana experienced growth until the COVID-19 pandemic (the “Pandemic”).9

In response to the Pandemic, Carvana began cutting costs and laying off employees.10

Its stock price suffered.11 The Company also “beg[an] to consider potential capital-

raising opportunities.”12

       B.       The Direct Offering

       On March 15, 2020, representatives of Greenoaks Capital Partners, LLC

(“Greenoaks”), a potential new investor, reached out to Garcia III to discuss acquiring

$300 to $500 million of Carvana preferred stock.13        The Company engaged in

conversations with Greenoaks and existing investors.14 Mike Levin (the Company’s

investor relations lead) contacted “many of Carvana’s largest investors” at the time.15

Lone Pine Capital LLC also expressed interest in an equity raise.16 The Company

had $300 million of debt capacity, so it also considered debt financing.17 “Citi and

9 Id. at 43–47.

10 Id. at 55–56.

11 Id. at 5.
           Carvana’s stock price “dropp[ed] more than 20% from an opening price of
$83.37 on the morning of Monday, March 2, to a closing price of $66.02 on the
afternoon of Friday, March 6.” Id.
12 Id. at 53.

13 Id. at 56–57.

14 Id. at 56–58.

15 Id. at 57.

16 Id. at 60.

17 Id. at 58.

                                          3
Goldman pitched potential structured financing deals[,]” to which the Company did

not respond.18

         As   the   Company   explored   financing   options,   Carvana’s   operational

performance worsened, and its access to capital contracted.19 The Company’s stock

closed at $29.35 on March 20, 2020—40% down from the week prior.20

         On March 24, 2020, the Carvana Board of Directors (the “Board”) met to

discuss a potential deal with Greenoaks. The proposed deal, at that point, consisted

of a convertible preferred stock transaction priced between $45 and $50 per share,

with a coupon of 8.5% to 9%.21 After the meeting, Garcia III told Greenoaks that he

hoped to “[g]et terms finalized ASAP (tonight).”22

         The Board met again on March 25 to discuss the Greenoaks deal and potential

alternatives,23 such as an underwritten public offering or a pro-rata public offering to

existing stockholders.24 The Board determined that neither alternative was a viable

option given time constraints.25 The Board also discussed a stock offering to its

largest stockholders.26

18 Id. at 60.

19 Id. at 60–63.

20 Id. at 63.

21 Id. at 67.

22 Id. at 67–68.

23 Id. at 69.

24 Id.

25 Id.

26 Id. at 70.

                                           4
       Although negotiations with Greenoaks progressed, the Board harbored

concerns that the deal would not close fast enough, and so the Board shifted its focus

to a direct offering (the “Direct Offering”). On March 26, Mark Jenkins (Carvana’s

CFO) presented the Board with a list of 24 investors that management identified as

targets for the Direct Offering.27    After the meeting, management engaged in

conversations with the targeted investors.28

       Multiple investors entered NDAs and expressed interest in the deal.29 Given

this interest, the Board convened and “authorized management to sell up to $600

million in common stock with the stock priced between $35 to $55 per share[.]”30 It

also “agreed that the Garcias would participate in the deal, likely contributing $50

million but in any event limiting their contribution to $75 million at most.”31

       Management then engaged in price negotiations with the targeted investors.

T. Rowe Price Group, Inc. became the anchor investor32 and heavily influenced the

price of the Direct Offering.33 Initially, Carvana sought $50 per share relative to the

$56.55 trading price at the close of market on Thursday, March 26, but T. Rowe Price

27 Id. at 76.

28 Id. at 79.

29 Id. at 79–80.

30 Id. at 80.

31 Id. at 81.

32 Id. at 80–83.

33 Id. at 83.

                                          5
offered $43.50, with an explicit goal of not exceeding $45 per share. 34 Garcia III

pushed for $46 per share, but T. Rowe Price held firm.35

         T. Rowe Price confirmed later that day, on March 26, that it would agree to a

price of $45 per share.36 Tiger Global Management, LLC also agreed to participate

in the deal at $45 per share.37 At the time, Tiger Global thought that the Direct

Offering—which would raise, by their estimate, at least $700 million—would allow

Carvana to survive the Pandemic and beyond.38

         On Friday, March 27, a subset of the Carvana directors met with

management.39       Management informed them that the investors had agreed to

contribute to a capital raise that totaled $800 to $900 million at a price of $45 per

share.40 They decided, however, to limit the Direct Offering to $600 million at $45

per share,41 which represented “an 8.2% discount to the stock’s unaffected trading

price.”42 The Garcias agreed to contribute $50 million.

34 Id.

35 Id.

36 Id. at 83–84.

37 Id. at 84.

38 Id. at 84–85.

39 Id. at 85.

40 Id.

41 Id.

42 Id. at 1.

                                           6
         Carvana announced the Direct Offering on March 30, 2020.43         It was

oversubscribed.     The Garcias’ allocation remained at $50 million, despite the

oversubscription, because “management had committed to investors that the Garcias

would contribute $50 million.”44 Carvana’s CFO attributed this to “the Company

[wanting] to avoid backing away from this commitment for fear that it would be

viewed as a re-trade.”45 The market responded positively to the announcement. 46

Carvana’s stock price closed at $52.38 on March 30.47

         The Company then “complete[d] a public offering of Class A Common Stock at

a price of more than $92 per share, for a total of almost $500 million” on May 18,

2020.48 The price of Carvana stock climbed during the ensuing months.49 Carvana’s

efforts yielded approximately $1 billion in total liquidity.50 By the end of 2020,

Carvana’s stock price closed at $239.54.51

         Section 16(b) of the Securities Exchange Act restricted the Garcias from

realizing profits from their shares purchased through the Direct Offering until

43 Id. at 89.

44 Id. at 88.

45 Id.

46 Id. at 89.

47 Id.

48 Id. at 5.

49 Id. at 92.

50 Id. at 91.

51 Id. at 93.

                                             7
September 30, 2020.52 Garcia II entered a Rule 10b5-1 Trading Plan on June 15,

2020.53 “Between October 30, 2020, and December 31, 2020, Garcia II sold 5,567,979

shares of Class A Common Stock for a total of $1,239,333,468.02.”54 Garcia III did

not sell any stock during this period.55

         C.    The Motions To Dismiss

         Between May 28 and December 3, 2020, three Carvana stockholders filed

separate complaints in this court. The court consolidated the actions, and Plaintiffs

filed a consolidated complaint (the “Complaint”) on August 20, 2021.56

         Plaintiffs alleged that the Garcias breached their fiduciary duties by forcing

the Direct Offering at an artificially low price. Plaintiffs also alleged that the Direct

Offering was not needed in the wake of the Pandemic because Carvana’s “business

model [was] almost tailor-made to profit from social distancing,” Carvana was on

“firm financial footing,” and the Company had no urgent need to raise capital.57

Plaintiffs theorized that the Garcias pushed the Direct Offering through quickly at

an unfair price and by means of an unfair process.58 Plaintiffs initially asserted both

direct (Count I) and derivative (Count II) claims challenging this conduct, but they

52 Id.

53 Id.

54 Id.

55 Id. at 93–94.

56 Dkt. 66.

57 Id. ¶ 6.

58 Id. ¶¶ 5–6, 111–13, 115–16, 135, 137, 140, 142, 152, 154, 156, 158, 176.

                                            8
voluntarily dismissed Count I based on the Delaware Supreme Court’s decision in

Brookfield Asset Management, Inc. v. Rosson.59

      The Garcias and Carvana moved to dismiss the Complaint on October 15, 2021,

under Court of Chancery Rules 23.1, 12(b)(6), and 12(b)(2).60 The court denied the

motions in two separate decisions.61 The court concluded that demand was excused

because Plaintiffs adequately alleged that three of the six Carvana directors were

either interested in the transaction or lacked independence from the Garcias.62 The

court also concluded that Plaintiffs had stated a claim and that the court had personal

jurisdiction over Garcia II.63 Garcia II filed an interlocutory appeal of the court’s

denial of his motion to dismiss for lack of personal jurisdiction.64 The court denied

Garcia II’s application to certify interlocutory appeal on October 3, 2022, and the

Delaware Supreme Court refused the appeal on October 19, 2022.65

59 261 A.3d 1251 (Del. 2021); see also Dkt. 71.

60 Dkt. 72, Nominal Def. Carvana’s Mot. to Dismiss (“Carvana’s Mot. to Dismiss”);

Dkt. 74, Defs. Ernest Garcia III and Ernest Garcia II’s Mot. to Dismiss (“Garcia Defs.’
Mot. to Dismiss”).
61 In re Carvana Co. S’holders Litig., 2022 WL 2352457 (Del. Ch. June 30, 2022)

(“Carvana I”); In re Carvana Co. S’holders Litig., 2022 WL 3923826 (Del. Ch. Aug.
31, 2022) (“Carvana II”).
62 Carvana I at *6–16.

63 Id. at *16–18; Carvana II at *2–7.

64 Dkt. 102.

65 Dkt. 109, Oct. 3, 2022, Order Refusing Certification of Interlocutory Appeal; Garcia

v. Franchi, No. 362, 2022 (Del. Oct. 19, 2022) (ORDER).

                                           9
         D.     The Special Litigation Committee Investigation

         On August 15, 2022, the Company formed the SLC66 and tasked it with

investigating the claims made in the Complaint.67 The Board appointed directors

Michael Maroone and Neha Parikh to the SLC.68

                1.   The SLC Members

         Maroone, who holds a Bachelor of Science degree in small business

management from the University of Colorado Boulder,69 has substantial experience

in the automotive industry.70 Maroone was the CEO and President of Mike Maroone

Automotive Group.71 He then served on the board of directors, as President, and as

Chief Operating Officer at AutoNation, Inc.72 Maroone also has experience serving

on other boards.73 He joined the Board in April 2017.74 Prior to joining the Board,

Maroone did not know any of the other directors or have a personal relationship with

the Garcias.75 Maroone served on the Board when it approved the Direct Offering.76

66 SLC Report at 19.

67 Id. at 6, 19.

68 Id. at 6, 19.

69 Id. at 23.

70 Id. at 22.

71 Id.

72 Id.

73 Id. at 23.

74 Id.

75 Id.

76 Id. at 24.

                                        10
         Parikh, who holds a Master of Business Administration degree from the

Kellogg School of Management at Northwestern University, has served in various

executive capacities.77 When the investigation was underway, she served as the CEO

of Waze Mobile Ltd., “a company that maintains a community-driven navigation

application that helps users solve transportation-related challenges.”78 From 2017 to

2019, Parikh was the President of Hotwire, Inc.79 Parikh also has experience working

in high-level positions in the Expedia Group, Inc.80 She joined the Board in April

2019 and served on the audit committee and compensation and nominating

committee.81 Prior to joining the Board, Parikh did not know any of the other

directors or have a relationship with the Garcias.82 Parikh served on the Board when

it approved the Direct Offering.83

                2.   The SLC Investigation

         On September 27, 2022, the SLC asked the court to stay the action for six

months to allow it to investigate the allegations in the Complaint. 84 On October 3,

77 Id. at 21.

78 Id.

79 Id.

80 Id.

81 Id. at 22.

82 Id.

83 Id. at 24.

84 SLC Report at 20; Dkt. 106.

                                         11
2022, the court stayed the action until April 3, 2023.85 The court then granted a brief

extension until May 5, 2023.86 The investigation lasted a total of seven months.87

       The SLC hired a legal and a financial advisor. Carvana management provided

the SLC with two recommendations for independent counsel to assist its

investigation, and the SLC selected Wilson Sonsini as its counsel.88 The SLC selected

Houlihan Lokey as its financial advisor.89

       The SLC and Wilson Sonsini “met with co-lead counsel for co-lead Plaintiffs

via Zoom to hear Plaintiffs’ perspectives and theories of the case.”90

       Wilson Sonsini and counsel for Plaintiffs negotiated and set the parameters for

the SLC’s document collection.91 The negotiations resulted in a collection of “emails,

text messages, electronically-stored documents, Slack messages, and notes.”92 Wilson

Sonsini        collected   and   reviewed   over   100,000   pages   of   documents.93

Wilson Sonsini reviewed 18,000 documents collected from eighteen custodians.94

The remaining documents included public filings, news articles, pleadings, and

85 SLC Report at 20; Dkt. 110.

86 SLC Report at 20; Dkt. 120.

87 SLC Report at 6–7.

88 Id. at 20.

89 Id. at 28.

90 Id. at 25.

91 Id. at 26–27.

92 Id. at 26.

93 Id. at 7.

94 Id. at 26.

                                            12
documents collected in response to stockholder demands to inspect books and

records.95

       Wilson Sonsini interviewed sixteen witnesses. Among the interviewees were

“the Garcias, all Board members, members of Carvana management involved in the

Offering, the Company’s in-house and outside counsel, and other third parties such

as potential and actual investors in the Company[.]”96

       Houlihan Lokey analyzed the Direct Offering, assessing its price, Carvana’s

financing needs at the time, potential alternatives, and the economic impact of the

Direct Offering on the Garcias’ interests.97

                 3.   The SLC Findings

       The SLC investigation resulted in a 170-page report, which concluded “that

the costs associated with continuing to pursue the Action or any other claims in

connection with the Direct Offering outweigh any benefits[,]” noted that the “claims

against the Garcias for alleged breaches of fiduciary duty lack merit (whether

assessed under the business judgment rule or the entire fairness standard),” and did

not “identify any other potential claims that would be likely to succeed.”98 The SLC

reached this conclusion in light of the litigation costs to the Company, stating that

“[t]he prospects of a monetary recovery against the Garcias and/or Carvana’s other

fiduciaries for any potential claims in connection with the Direct Offering are low and

95 Id. at 26–27.

96 Id. at 27–28.

97 Id. at 28.

98 Id. at 169.

                                          13
are more than offset by the costs associated with continued litigation. Likewise,

pursuing a settlement is not likely to result in a material benefit to the Company.”99

       As to the remaining count of the Complaint for breach of fiduciary duty against

the Garcias, the SLC concluded that “the Garcias likely would be able to present a

strong argument that they were incentivized not to cause the Direct Offering to occur

unless it was truly necessary and/or beneficial to the Company and that they were

incentivized to maximize the price of the Direct Offering.”100 Among other things, the

SLC determined that the “net impact” of the Garcias’ dilution and subsequent stock

purchase was “materially harmful” to their “aggregate economic interest in

Carvana.”101

       The SLC Report asserted reasons why the business judgment standard might

apply in the final analysis but also concluded that the claim would pass entire

fairness scrutiny.

       On process, the SLC concluded that there was no evidence of opportunistic

timing,102 an unengaged, controlled board in the process, 103 and “the investigatory

record [did] not support that Garcia III’s role in [] negotiations led to the terms of the

Direct Offering being any less favorable to Carvana.”104 Concerning Carvana’s use of

99 Id. at 169–70.

100 Id. at 108.

101 Id. at 109.

102 Id. at 116.

103 Id. at 117–20.

104 Id. at 123.

                                           14
outside advisors, the SLC concluded that “the investigatory record reflects that

[Carvana’s advisors] well understood Carvana’s capital needs, was advising the

Company on its options, and was fully informed on the state of play when negotiations

of the Direct Offering ensued.”105 Although the SLC recognized that the Board could

have “done more to manage [Garcia III’s] arguable conflicts[,] . . . appointed a special

committee of independent directors to evaluate alternatives and negotiate with

potential counterparties[,]” or slowed down the process, “none of those protective

measures would have been consistent with the uniquely challenging dynamics facing

the Board at the time.”106 Also, the SLC noted that running a “textbook” process

would have cost the Company significantly more time and opportunity to complete

its capital raise.107 In sum, the SLC concluded that “the [c]ourt likely would find [that]

the process leading to the Direct Offering was fair.”108

          On price, the SLC relied on Houlihan Lokey’s analysis of the implied values,

and that analysis showed that the implied value of Carvana stock “varied widely

depending on which scenario one assumed and whether greater weight was placed on

the revenue multiple or the gross profit multiple.”109 Given this variation, the $45

price fell within the range of fairness.110 The SLC also considered data points,

105 Id. at 123–24.

106 Id. at 125–26.

107 Id. at 126.

108 Id. at 127.

109 Id. at 130.

110 Id.

                                           15
including historical averages, historical performance versus peer groups, analyst

reports, and Carvana’s liquidity outlook.111

          The SLC also considered the size of the offering, noting that outside analysts’

and representatives’ estimates were in line with an offering of $500 million to $700

million.112 In addition, the SLC noted that the Garcias’ $50 million investment in the

Direct Offering was fair because it was expected by many of the investors in the Direct

Offering and was relatively small compared to the Garcias’ pre-offering ownership

percentage.113 The SLC investigated alternative transactions and concluded that

those options—including raising debt—would have been too slow to execute given the

market conditions at the time.114

          The SLC determined “that the Direct Offering’s price was the result of a bona

fide negotiation between Carvana management . . . and the lead investor in the

Offering, T. Rowe[.]”115 The SLC noted the back and forth in the negotiation and that

one of T. Rowe’s funds “passed” on the $45 price because it was too high.116 Together,

these elements also bolstered the process analysis, showing that the price “replicated”

an arm’s length-negotiated price in the absence of any conflict.117

111 Id. at 130–31.

112 Id. at 133–34.

113 Id. at 135–36.

114 Id. at 139.

115 Id. at 131.

116 Id. at 132.

117 Id.

                                            16
       Taking all these considerations into account, the SLC concluded that the Direct

Offering is entirely fair.118

       After considering the transaction under the entire fairness standard, the SLC

also analyzed whether the Garcias could be subject to personal liability for breach of

fiduciary duty.119 The SLC concluded that the evidence showed that Garcia III did

not act in bad faith or with gross negligence.120 The same was true for Garcia II.121

       The SLC considered whether the Company would be able to pursue claims for

breach of fiduciary duty against other Carvana directors and officers in connection

with the Direct Offering, an unjust enrichment claim against the Garcias, and claims

against the Company’s advisors and participants in the Direct Offering.122 The SLC

concluded that none of the Carvana directors—even those alleged to be conflicted (Ira

Platt and Gregory Sullivan)—could be shown to have favored the interests of the

Garcias over the Carvana stockholders, conflicts and personal relationships

notwithstanding.123 The same was true for Carvana management.124

       As for unjust enrichment, the SLC concluded that there was no evidence that

the Garcias were enriched or that the Direct Offering impoverished Carvana or its

118 Id. at 140.

119 Id. at 143.

120 Id. at 143–46.

121 Id. at 146–48.

122 Id. at 96–97.

123 Id. at 150–54.

124 Id. at 155–58.

                                         17
stockholders, so any such claim was deemed likely to fail.125 And the SLC concluded

that no viable aiding and abetting claims existed against any third party. 126

                4.   The SLC Motion

      On May 12, 2023, the SLC moved to terminate the litigation.127 It filed its

opening brief on October 18, 2023.128 The parties completed briefing on December 11,

2023, and the court heard oral argument on December 18, 2023.129

II.   LEGAL ANALYSIS

      Zapata calls for a two-step analysis. In the first step, the court must “review[]

the independence of SLC members and consider[] whether the SLC conducted a good

faith investigation of reasonable scope that yielded reasonable bases supporting its

conclusions.”130 In the second step, the court applies “its own business judgment to

the facts to determine whether the corporation’s best interests would be served by

dismissing the suit.”131

      Zapata motions present an “atypical procedural posture”—a “hybrid between

Court of Chancery Rules 41(a)(2) and 56.”132 “To terminate derivative litigation, the

125 Id. at 159–61.

126 Id. at 161–63.

127 Dkt. 122.

128 Dkt. 132 (“SLC’s Opening Br.”).

129 See Dkt. 134 (“Pls.’ Answering Br.”); Dkt. 138 (“SLC’s Reply Br.”).

130 Diep ex rel. El Pollo Loco Hldgs., Inc. v. Sather, 2021 WL 3236322, at *14 (Del. Ch.

July 30, 2021) (citing London v. Tyrrell, 2010 WL 877528, at *11 (Del. Ch. Mar. 11,
2010)), aff’d, 280 A.3d 133 (Del. 2022).
131 Id. (citing London, 2010 WL 877528, at *11).

132 El Pollo Loco, 280 A.3d at 151.

                                          18
SLC must show, and the court must be satisfied, that no disputed issues of material

fact exist about the independence, good faith, and reasonableness of the SLC’s

investigation and whether the SLC had reasonable bases for its conclusion.”133

          A.    The First Step

          In the first step of Zapata,

                the Court should inquire into the independence and good
                faith of the committee and the bases supporting its
                conclusions. . . . The corporation should have the burden of
                proving independence, good faith and a reasonable
                investigation, rather than presuming independence, good
                faith and reasonableness. If the Court determines either
                that the committee is not independent or has not shown
                reasonable bases for its conclusions, or, if the Court is not
                satisfied for other reasons relating to the process, including
                but not limited to the good faith of the committee, the Court
                shall deny the corporation’s motion.134

The court thus evaluates the independence of the SLC members, along with the

reasonableness of their investigation and their conclusions.

                1.     The SLC Members Were Independent.

          Concerning the independence analysis called for by Zapata, the Delaware

Supreme Court has explained:

                In most challenges to director independence, the court
                must confront the personal and professional relationships
                between those who judge and those being judged. Directors
                have relatives and friends. They have acquaintances who
                may be classmates, professional associates, or business
                contacts. They hold memberships in clubs and other
                organizations and have political affiliations. They own
                property, make financial investments, and have other
                business activities. It is a fact of life that “business dealings

133 Id.

134 Zapata, 430 A.2d at 788–89.

                                               19
             seldom take place between complete strangers” and “it
             would be a strained and artificial rule which required a
             director to be unacquainted or uninvolved with fellow
             directors in order to be regarded as independent.”135

      The SLC “bear[s] the burden of proving that there is no material question of

fact about their independence” because “the situation is typically one in which the

board as a whole is incapable of impartially considering the merits of the suit.”136

Still, “the substantive contours of the independence doctrine” remain unchanged from

the demand futility context.137 “At bottom, the question of independence turns on

whether a director is, for any substantial reason, incapable of making a decision with

only the best interests of the corporation in mind,” and the analysis, therefore, focuses

on “impartiality and objectivity.”138

      Under this inquiry, the court considers the many factors that “[go] beyond

determining whether SLC members are under the ‘domination and control’ of an

interested director,” and includes “lesser affiliations” that can impair independence

135 El Pollo Loco, 280 A.3d at 151–52.

136 El Pollo Loco, 2021 WL 3236322, at *15 (citing London, 2010 WL 877528, at *13).

137 Id. at *15 & n. 216 (quoting London, 2010 WL 877528, at *13 (“[I]t is conceivable

that a court might find a director to be independent in the pre-suit demand context
but not independent in the Zapata context. . . . [I]t is primarily a function of the shift
in the burden of proof from the [p]laintiff to the corporation when the suit moves from
the pre-suit demand zone to the Zapata zone.”)).
138 Id. at *15 (emphasis added) (citing In re Oracle Corp. Deriv. Litig., 824 A.2d 917,

938 (Del. Ch. 2003)).

                                           20
if they “present a material question of fact as to whether the SLC member can make

a totally unbiased decision.”139

       “Given the common personal and professional relationships between board

members, the independence question ‘is a fact-specific determination made in the

context of a particular case.’”140 The analysis calls on the court to determine whether

the director was positioned to “base [the director’s] decision on the merits of the issue

rather than . . . extraneous considerations or influences.” 141 This requires the court

to “ask whether the SLC member would be more willing to risk her reputation than

the   personal   and   professional    relationship   with   the   director   subject   to

investigation.”142 The analysis is thus contextually “tailored”—because the court may

presume that “special litigation committee members are persons of typical

professional sensibilities,” the key inquiry is whether “an unacceptable risk of bias”

is present.143

       Plaintiffs advance four arguments to impugn the SLC members’ independence.

First, they argue that Maroone and Parikh were “improperly influenced” by the SLC’s

outside counsel, Wilson Sonsini.144 Second, they argue that Maroone and Parikh had

139 In re Baker Hughes, a GE Co., Deriv. Litig., 2023 WL 2967780, at *11 (Del. Ch.

Apr. 17, 2023), aff’d, In re Hughes, 2024 WL 371962 (Del. Feb 1. 2024) (TABLE).
  El Pollo Loco, 280 A.3d at 152 (quoting Beam ex rel. Martha Stewart Living
140

Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1049 (Del. 2004)).
141 Id. (quoting Kaplan v. Wyatt, 499 A.2d 1184, 1189 (Del. 1985)).

142 Id (citing Beam, 845 A.2d at 1052).

143 Oracle, 824 A.2d at 941–42, 947.

144 Pls.’ Answering Br. at 18.

                                           21
a personal interest in the investigation due to potential liability in two other Carvana-

related lawsuits.145 Third, they argue that Maroone and Parikh prejudged the merits

of the investigation.146 Finally, they argue that Maroone was both financially and

personally compromised.147

       To start, Plaintiffs argue that the SLC was improperly influenced by outside

counsel. Their sole support for this theory is the fact that Carvana management

recommended Wilson Sonsini.        When the SLC was formed, Carvana’s General

Counsel Paul Breaux presented the SLC with two options for counsel and made it

clear that the SLC could “select[] whatever counsel [it] wish[ed.]”148 Plaintiffs’ story

is that those two firms were hand-picked by management to be interviewed, the SLC

only interviewed those two firms and then hired one of them. According to Plaintiffs,

this sequence of events “raises serious questions about the SLC members’

independence.”149 But this is a bad argument. Accepting a recommendation from

management alone does not evidence a lack of independence of the SLC, and that is

all that happened here.

       Second, Plaintiffs argue that the SLC members were compromised by separate

lawsuits against them. The first, a federal securities lawsuit, involved claims of

145 Id. at 20–21.

146 Id. at 26–28.

147 Id. at 26 n.113.

148 SLC’s Opening Br., Ex. G at ZAP_CVNA_SLC_005169; Parikh Dep. Tr. at 36:8–9.

149 Pls.’ Answering Br. at 18.

                                           22
insider trading and listed Maroone and Parikh as defendants alongside Garcia II.150

The second, filed in this court, involved Brophy claims and listed Maroone and Parikh

as defendants alongside the Garcias and Carvana directors and officers.151 Plaintiffs

argue that the SLC members’ status as investigation targets and defendants in

concurrent litigation raises the possibility that they might not have made a “totally

unbiased decision” when they decided to terminate this litigation.152

      This theory might gain traction in other circumstances. But neither of these

cases impugn the SLC’s independence here because those cases are not related to this

case. The other actions concern events that occurred after the Direct Offering. Also,

in the securities action, Maroone and Parikh are named defendants under a strict

liability theory because they are board members; the complaint does not allege that

they engaged in wrongdoing. Indeed, Maroone was not aware of the securities action

during his deposition.153 It is unclear how an unrelated securities action about events

that occurred after the events scrutinized in the report would compromise the SLC

members. The same is true for the fiduciary action. The complaint in that action

was filed after the SLC Report was released.154

150 See Lead Plaintiffs’ Consol. Complaint for Violations of the Federal Securities

Laws ¶ 415, In re Carvana Co.                   Sec.   Litig.,   No.   2:22-cv-02126-MTL,
(D. Ariz. Feb. 14, 2023), ECF No. 36.
151 See Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949); Schertz v. Garcia, et al.,

C.A. No. 2023-0600-KSJM, Dkt. 1 (Del. Ch. June 7, 2023).
152 London, 2010 WL 877528, at *12.

153 Maroone Dep. Tr. at 237:18–19.   Plaintiffs did not ask Parikh about the securities
action.
154 Schertz v. Garcia, et al., C.A. No. 2023-0600-KSJM, Dkt. 1 (Del. Ch. June 7, 2023).

                                           23
          Third, Plaintiffs argue that the SLC members prejudged the investigation. In

order to establish that an SLC member prejudged the merits, there must be more

than “[m]ere familiarity” with the issue.155 Although operating “with the object of

putting together a report that demonstrates the suit has no merit . . . will create a

material question of fact as to the SLC’s independence,” “simply [being] exposed to or

. . . familiar with a derivative suit . . . may not be enough to create a material

question.”156 An SLC member must have “approved or participated in a substantive

way in the decision to file the motion” in order for the court to find that the merits

were prejudged.157

          Plaintiffs identify two factual bases for arguing that the SLC members

prejudged the investigation. First, both SLC members voted to approve it in March

2020.158 Second, both SLC members “supported or acquiesced to” the motion to

dismiss in the underlying case.159

          The first argument fails under Delaware law. Generally speaking, a director’s

approval of a transaction does not establish the director’s inability to impartially take

action with respect to that transaction at a later time.160

155El Pollo Loco, 280 A.3d at 154 (“Mere familiarity with an issue does not
compromise independence.” (citing Katell v. Morgan Stanley Gp. Inc., 1995 WL
376952, at *10 (Del. Ch. June 15, 1995))).
156 London, 2010 WL 877528, at *15.

157 El Pollo Loco, 280 A.3d at 153.

158 Pls.’ Answering Br. at 27.

159 Id.

160See Kaplan, 499 A.2d at 1189 (“[A] director’s approval of the transaction in
question does not establish a lack of independence.”).

                                            24
      The second argument is stronger, but it too fails.            For this proposition,

Plaintiffs rely on two cases, El Pollo Loco and London, but neither provides

support.161

      El Pollo Loco illustrates that an SLC member’s mere presence on a board when

a motion to dismiss is filed does not create a disabling conflict. There, SLC members

attended the board meeting and discussed the motion. The plaintiffs argued that an

inference of prejudgment should be made because the members “reviewed, analyzed,

and prejudged the merits” of the litigation.162 The court rejected this argument, and

the high court affirmed on appeal. The Delaware Supreme Court explained that the

driving factor is whether SLC members “approved or participated in a substantive

way in the decision to file the motion.”163 Here, both SLC members’ only knowledge

regarding the decision was based on updates received at Board meetings.164 And the

Board did not vote on whether the Company would dismiss the motion.165           The SLC

members did not participate in a substantive way in the decision to file the motion.

      London stands for the proposition that:

              [I]f evidence suggests that the SLC members prejudged the
              merits of the suit based on . . . prior exposure or familiarity,
              and then conducted the investigation with the object of
              putting together a report that demonstrates the suit has no

161 Pls.’ Answering Br. at 26–27 (citing El Pollo Loco, 280 A.3d at 152–55; London,

2010 WL 877528, at *15).
162 El Pollo Loco, 2021 WL 3236322, at *16.

163 El Pollo Loco, 280 A.3d at 153 (emphasis added).

164 SLC’s Reply Br. at 15.

165 SLC’s Opening Br. at 47.

                                            25
             merit, this will create a material question of fact as to the
             SLC’s independence.166

There, the SLC members, through their investigation, admitted that they “attacked .

. . “the merits of [the] plaintiffs’ claims, rather than objectively considering [the]

plaintiffs’ claims.”167 Here, the SLC members did not “attack” the investigation or

even act in a manner resembling an attack.

      Finally, Plaintiffs argue in a footnote that Maroone had disabling financial

conflicts due to having “on several occasions, engaged in business deals with the

Garcias.”168 Specifically, Maroone’s auto dealerships participated in a Carvana pilot

program and Maroone’s dealership leased storage from the Garcias months after the

SLC investigation.169 Plaintiffs do not elaborate on the magnitude of these business

dealings or how they might have affected Maroone. On their face, the allegations do

not seem significant.

      The SLC has demonstrated its independence for the purposes of Zapata.

             2.     The SLC Conducted A Reasonable Investigation In Good
                    Faith.

      In addition to establishing its independence, an SLC must “prove also that it

conducted a reasonable investigation of the matters alleged in the complaint in good

faith.”170 “A good faith investigation is one that is pursued in an unbiased manner

166 London, 2010 WL 877528, at *15.

167 Id. at *16 (emphasis in original)

168 Pls.’ Answering Br. at 26 n.113.

169 Maroone Dep. Tr. at 27:18–28:25.

170 El Pollo Loco, 2021 WL 3236322, at *19 (citing Kaplan, 484 A.2d at 507).

                                          26
and without a predetermined conclusion.”171 The SLC bears the burden of proving

that it “acted in good faith and conducted a thorough investigation.”172 An SLC must

engage in a reasonable investigation, not a “selective investigation[.]”173

        A reasonable SLC investigation should “thoroughly investigate[] the factual

elements underlying” the plaintiffs’ claims and should result in “an in depth inquiry

and . . . [a] well documented report.”174 It should also “investigate all theories of

recovery asserted in the plaintiffs’ complaint” and “explore all relevant facts and

sources of information that bear on the central allegations in the complaint.”175

Further, “[t]o demonstrate that its recommendations are supported by reasonable

bases, the SLC must show that it correctly understood the law relevant to the case.”176

        The SLC investigation lasted seven months and included 100,000 pages of

documents, 16 witness interviews, and nine SLC meetings. These efforts compare

favorably with SLC investigations upheld by this court.177 Plaintiffs, though, attack

171 Baker Hughes, 2023 WL 2967780, at *17 (quoting London, 2020 WL 877528, at

*11).
172 Id. (quoting London, 2020 WL 877528, at *11).

173 El Pollo Loco, 2021 WL 3236322, at *19 (citing Sutherland, 958 A.2d at 244).

174 Id. (quoting Kahn v. Kolberg Kravis Roberts 8 Co., L.P., 23 A.3d 831, 842 (Del.

2011)).
175 Id. (quoting London, 2010 WL 877528, at *17).

176 Id. (quoting London, 2010 WL 877528, at *17).

177Compare with Baker Hughes, 2023 WL 2967780, at *8, *17 (stating that the
investigation lasted nine months and involved reviewing more than 110,000
documents and interviewing 22 witnesses); El Pollo Loco, 2021 WL 3236322, at *12–
13 (stating that the investigation lasted over a year and involved reviewing over
249,000 documents and interviewing 14 witnesses, in addition to reviewing 14
deposition transcripts).

                                          27
the thoroughness and scope of the investigation and the reasonableness of its

conclusions.

                    a.     Thoroughness

      Plaintiffs argue that the SLC members failed to thoroughly investigate

Plaintiffs’ claims in seven ways.

      First, Plaintiffs argue that the SLC members’ conflicts made them “[b]arely

[p]articipate[] in the [i]nvestigation” and rendered them too “passive[.]”178 Plaintiffs

rely on In re Oracle Corp. Derivative Litigation, where this court observed that there

“are dangers posed by investigators who harbor reasons not to pursue the

investigation’s targets with full vigor.”179 In Oracle, however, the court found that

the SLC members had close ties to the targets of the investigation and thus had a

reasonable motivation for their less-than-vigorous performance.180 This decision has

already rejected Plaintiffs’ arguments attacking the independence of Maroone and

Parikh. There is no reason to think that Maroone and Parikh harbored any conflicts

that prompted them to do a less-than-vigorous job.

      Second, Plaintiffs argue that Wilson Sonsini played an outsized role in the

investigation because the SLC members delegated the development of the

investigation plan, identification of document custodians, creation of search terms,

178 Pls.’ Answering Br. at 21–25.

179 Id. at 25–26 (quoting Oracle, 824 A.2d at 941).

180 Oracle, 824 A.2d at 920.

                                          28
and administration of interviews.181 But this level of delegation is in line with

precedent.

          In Baker Hughes, the SLC relied heavily on counsel.        Counsel identified

relevant participants in the underlying transaction, coordinated interviews, and

controlled communications with the financial advisor. The court found that this was

not unreasonable. In fact, the court held that “[t]he SLC’s reliance on experienced

advisors ‘is not only allowed but is evidence [of] good faith and the overall fairness of

the process.’”182

          Similarly, in Carlton Investments v. TLC Beatrice International Holdings, Inc.

“the SLC delegated a large percentage of [the] work to its counsel and their expert

assistants.”183     The counsel “spent over 4000 hours reviewing facts and then

presenting the information,” while the SLC members only spent about “100 hours.”184

Although the “SLC’s counsel performed the vast preponderance of the legal and

factual research required to analyze the eleven claims,” the court still found that the

SLC investigated in good faith.185 The court observed that “[w]hile the directors bear

ultimate responsibility for making informed judgments, good faith reliance by a[n]

181 Pls.’ Answering Br. at 21–22.

182 Baker Hughes, 2023 WL 2967780, at *18 (alteration in original) (quoting In re W.

Nat’l Corp. S’holders Litig., 2000 WL 710192, at *23 n.67 (Del. Ch. May 22, 2000)).
183 1997 WL 305829, at *8 (Del. Ch. May 30, 1997).

184 Id.

185 Id. at *12.

                                            29
SLC on independent, competent counsel to assist the SLC in investigating claims is

legally acceptable, practical, and often necessary.”186

          Here, less delegation occurred than in Baker Hughes and Carlton.         SLC

members met formally nine times and informally many times;187 they participated in

decisions regarding sources of document collection, identification of document

custodians, and what third-party witnesses should be contacted;188 and they attended

the interviews of Garcia III, Garcia II, Mark Jenkins, Paul Breaux, Ira Platt, former

Vice President Dan Quayle, and Gregory Sullivan.189 The record indicates that the

SLC’s level of engagement was sufficient.

          Third, Plaintiffs argue that the SLC members lacked knowledge of the

investigation because they could not remember details of the investigation when

interviewed.190 But memory is a fleeting thing. That is why humans write things

down. And this court has held that, as long as the conclusion is “well documented”

and “supported by facts,” an SLC member’s “lack of recall . . . is not significant.” 191

Here, the report is exhaustive, it is well documented, and it includes the relevant

facts.     So, the SLC members’ lack of memory is not an indication that the

investigation was not performed in good faith.

186 Id.

187 SLC’s Reply Br. at 20.

188 Id.

189 Id. at 22.

190 Pls.’ Answering Br. at 22–24.

191 Teamsters Local 443 Health Servs. & Ins. Plan v. Chou, 2023 WL 7986729, at *30

(Del. Ch. Nov. 17, 2023).

                                          30
          Fourth, Plaintiffs highlight “concerning statements” made by Maroone.192

When interviewed, Maroone explained that he “was concerned about how much time

[the SLC process] would take.”193 He also jokingly stated that he “wasn’t honored” to

join the SLC.194 Additionally, Maroone discussed the role with Breaux, stating that

he had “no staff” and viewed serving on the SLC as “a part-time responsibility.”195

He worried that someone else should take on the role unless “the involvement [was]

minimal and include[d] no personal exposure[.]”196

          Comments of this nature are not helpful to an SLC’s cause. As explained above,

however, Plaintiffs have not shown that Maroone failed to conduct the investigation

in good faith once he committed to the role. Similar arguments were raised in Baker

Hughes. There, the plaintiffs noted that an SLC member “conceded his ‘lack of

enthusiasm’ for the SLC investigation, which he dismissed as ‘an understandable

consequence of serving on an SLC.’”197 Maroone’s lack of enthusiasm for the job was

honest. It was perhaps too honest. However, there is no evidence that it affected his

diligence. It does not render the SLC’s investigation unreasonable or evidence bad

faith.

192 Pls.’ Answering Br. at 24–25.

193 Id.

194 Id. at 25.

195 Maroone Dep. Tr. at 182:6–8.

196 Pls.’ Answering Br. at 25.

197 In re Baker Hughes, a GE Co. Deriv. Litig., C.A. No. 2019-0201-LWW, Dkt. 137 at

5 (Del. Ch. Aug. 25, 2022).

                                            31
      Fifth, Plaintiffs argue that the SLC did not sufficiently engage in witness

interviews. Plaintiffs’ contentions regarding witness interviews are as follows: first,

SLC members did not attend all interviews; second, Mark Walter was interviewed

after the SLC reached its decision; third, the SLC prepared interview summaries

after it made its decision; fourth, SLC members failed to provide specific evidence

that they reviewed interview summaries, and fifth, it is implausible that Maroone

came to his conclusions after only reviewing summaries.198

      Plaintiffs’ contentions regarding the sufficiency of the SLC’s witness interview

process are unpersuasive. To start, the delegation of witness interviews to SLC

counsel does not undermine an investigation’s integrity. Precedent establishes that

such delegation “is not only allowed but is ‘evidence [of] good faith and the overall

fairness of the process.’”199 For instance, in Katell v. Morgan Stanley Group, Inc., the

SLC fully delegated all interviews to counsel yet the court found the investigation

was conducted in good faith.200 Here, the SLC members themselves attended many

key interviews and actively reviewed draft summaries as they were prepared prior to

making their final decision, belying any claim of rubber-stamping the process.201

One or both SLC members attended the interviews of Garcia III, Garcia II, Mark

Jenkins, Paul Breaux, Ira Platt, former Vice President Dan Quayle, and Gregory

198 Pls.’ Answering Br. at 29–32.

199 Baker Hughes, 2023 WL 2967780, at *18 (alteration in original) (quoting W. Nat’l

Corp. S’holders Litig., 2000 WL 710192, at *23 n.67).
200 1995 WL 376952, at *9–10 (Del. Ch. June 15, 1995).

201 SLC’s Reply Br. at 22–23.

                                          32
Sullivan.202 The SLC members also received draft summaries of all interviews, except

Walter’s, on a rolling basis prior to their final decision. Both members testified that

they reviewed these summaries as they were prepared.203

       Plaintiffs’ other arguments regarding the purported evidentiary deficiencies of

the interview summaries and timing are equally unavailing.           The dates on the

finalized summaries reflect administrative wordsmithing, not their initial

preparation and review by the SLC members.204 And although Walter’s interview

postdated the SLC’s decision, his limited role in the investigation and the Direct

Offering makes that timing immaterial.205 Further, Plaintiffs’ implication that the

SLC members did not actually review the summaries is entirely speculative and

contradicted by Maroone’s testimony confirming receipt and consideration of the

drafts.206 In sum, the record amply demonstrates the SLC’s good faith efforts to

thoroughly investigate the allegations through a reasonable interview process.

       Sixth, Plaintiffs take aim at the timing of the release of Houlihan Lokey’s final

report.207   Although the final presentation was dated after the SLC decided to

terminate the litigation and one day before filing its report, this chronology alone

202 Id. at 22.

203 Id. at 23.

204 Id. at 23 n.83.

205 Id. at 23–24.

206 Pls.’ Answering Br. at 31–32.

207 Id. at 53–54.

                                          33
does not indicate a “conclude first, fill-in-details later approach[.]”208 The record

reflects that the SLC reviewed Houlihan Lokey’s analyses and conclusions prior to

moving to terminate the litigation.209 And though Plaintiffs criticize Maroone’s

purported equivocation about reviewing the report, 210 “lack of recall. . . is not

significant.”211    Moreover, Maroone made clear he did review the summaries, with

his only hesitation being the exact date.212 Further, the court pushed the SLC to

conclude its investigation timely so that, in the event it recommended that the

litigation proceed or the court denied any motion to terminate, Plaintiffs’ claims were

not prejudiced by delay.

       Finally, Plaintiffs argue that the SLC should have gathered text messages

from Platt and Sullivan, as well as Garcia II, Garcia III, Breaux, Jenkins, and

Maroone. But the SLC conducted an expansive document collection. It included

emails, electronic documents, Slack messages, and text messages from 18 custodians.

In this context, the SLC’s motion cannot stand or fall on a failure to gather text

messages. Plaintiffs’ critique of the information gathering, as well as their other

criticisms, falls short of raising a material question considering the strength and

thoroughness of the SLC’s investigation into Plaintiffs’ claims.

208 Id. at 33–34.

209 For instance, the March 28 meeting minutes show discussion of Houlihan Lokey’s

analysis, and the firm provided a draft report on April 4, which the SLC discussed on
April 6. SLC’s Reply Br. at 24.
210 Pls.’ Answering Br. at 33–34.

211 Teamsters Local 443 Health Servs., 2023 WL 7986729, at *30.

212 Pls.’ Answering Br. at 33–34.

                                          34
                       b.     Scope

          Plaintiffs argue that the SLC allegedly failed to consider “critical aspects” of

their claims in reaching its conclusions. “If the SLC fails to investigate facts or

sources of information that cut at the heart of plaintiffs’ complaint this will usually

give rise to a material question about the reasonableness and good faith of the SLC’s

investigation.”213 “Where the SLC decides ‘not to explore specific acts of alleged

misconduct,’ it must ‘carefully analyze whether a summary investigation of those

specific acts could shed light on the more serious allegations,’ because a ‘total failure

to explore the less serious allegations in plaintiffs’ complaint may cast doubt on the

reasonableness and good faith of an SLC’s investigation.’”214

          First, Plaintiffs assert that the SLC failed to consider Garcia II’s stock sales,

but that is incorrect. The SLC investigated Garcia II’s stock sales, and the SLC Report

addressed them. The report states that “there is no basis to conclude that Garcia II

could have predicted that Carvana’s stock price would climb as it did in the months

following the Direct Offering.”215 The report also found that “Garcia II did not sell

any shares of the Class A common stock he purchased in the Direct Offering . . .

[i]nstead, the stock sales . . . originated from his LLC units in Carvana Group, LLC,

which Garcia II had held since Carvana’s IPO[.]”216

213 El Pollo Loco, 2021 WL 3236322, at *19 (quoting London, 2010 WL 877528, at

*17).
214 Id. (quoting London, 2010 WL 877528, at *17).

215 SLC Report at 148.

216 Id.

                                             35
         Plaintiffs argue that the SLC Report “glosses over key information regarding

the stock sales”217 and made a “suspicious[]” mistake when it described Garcia II’s

stock sale as one of two million dollars instead of shares.218 In support, Plaintiffs cite

Sutherland v. Sutherland.219      There, the SLC report completely omitted central

information,220 and the SLC member failed to record “several of the most important

interview[] . . . answers”221 or take notes when reviewing ledgers that witnesses found

relevant to the investigation.222 No similar omissions occurred here. Although the

facts may not have been discussed to the extent Plaintiffs wish, they were included

in the SLC Report. Plaintiffs also assert that the SLC members did not investigate

Garcia II’s 10b5-1 trading plan,223 noting that Parikh and Maroone failed to recall

details regarding the plan.224 Yet, the SLC Report addressed the trading plan and

attached the plan for reference.225

         Second, Plaintiffs argue that the SLC did not adequately investigate the

non-ratable benefits the Garcias allegedly received from the Direct Offering.226

217 Pls.’ Answering Br. at 39.

218Id. at 40 (“Maroone acknowledged this was yet another ‘mistake’ at his
deposition.”).
219 958 A.2d 235, 242–43 (Del. Ch. 2008).

220 Id. at 242.

221 Id. at 243.

222 Id. at 243–44.

223 Pls.’ Answering Br. at 38.

224 Id. at 38–39.

225 SLC Report at 93; Ex. 84 (Garcia II’s 10b5-1 Sales Plan).

226 Pls.’ Answering Br. at 41.

                                            36
Plaintiffs argue that “nowhere in the Report or any of the supporting documentation

did the SLC undertake any effort to investigate whether” unaffiliated stockholders

had the ability to purchase shares in the public market at the same price as the Direct

Offering.227 But the report addresses this issue. It includes a Carvana share price

chart and findings from Houlihan Lokey that stated “Carvana’s trading volume on

April 2 and April 3, 2020[,] was over 3 million shares per day, which indicates more

than sufficient liquidity and volume for any non-participating Carvana stockholder

who wanted to purchase additional Carvana Class A common shares to do so on those

days.”228

          In its report, the SLC concluded that “the economic dilution [the Garcias]

suffered from the Direct Offering far outweighed any benefit they received from

participating”229 and that the Garcias were “diluted far more than any other

stockholder on an absolute dollar value basis[.]”230

          Plaintiffs argue that Houlihan Lokey’s analysis supporting these conclusions

was “flawed or otherwise supports Plaintiffs’ claims” for two reasons.231        First,

Houlihan Lokey did not “perform[]” an “analysis of whether” the economic value

earned was “material to the Garcias.”232 However, the Garcias ended up “hundreds

227 Id.

228 SLC Report at 111 n.418.

229 Id. at 109.

230 Id. at 28–29.

231 Pls.’ Answering Br. at 41.

232 Id. at 42.

                                           37
of millions of dollars worse off than they would have been had the Direct Offering not

occurred at all.”233 The suggested analysis was unnecessary. Second, Plaintiffs find

error with the discount calculation Houlihan Lokey used when it performed a

comparison to discounts used in other equity offerings at the same time.234 This

contention was already addressed by John Taylor of Houlihan Lokey in his

deposition.235 Regardless, the dispute is not very meaningful—the implementation

of Plaintiffs’ critiques would change the median discount by less than two percent.236

       Third, Plaintiffs argue that the SLC Report failed to address “two dozen

related-party transactions with Garcia-affiliated entities in 2019 and 2020[.]”237 Yet

the SLC determined that “none of the transactions had a connection to the Direct

233 SLC’s Reply Br. at 29–30 (emphasis in original).

234 Pls.’ Answering Br. at 44.

235SLC’s Opening Br. at 36 (“Taylor testified at length why Houlihan Lokey’s
methodologies were reasonable notwithstanding Plaintiffs’ disagreements with
them.” (citing Taylor Dep. Tr at 202:14–205:5)).
236 SLC’s Reply Br. at 30.  Plaintiffs identify two aspects of Houlihan Lokey’s analysis
that they say support their position. First, Plaintiffs argue that Houlihan Lokey’s
analysis “confirms that Carvana’s liquidity outlook in March 2020 was strong.” Pls.’
Answering Br. at 42. This seems to exaggerate the findings. The report indicates
that “Carvana might have been able to stay alive for twelve months without a cash
infusion—but only if it went into ‘survival mode.’” Id. at 44. Second, Plaintiffs
contend that Houlihan Lokey’s analysis “confirmed that . . . Garcia III steered the
Company into the transaction.” Id. The proof for this serious assertion is that the
report found that “all of the alternatives were reasonable and that none of them
w[ere] impossible” and that there was a lack of assessment regarding whether a lower
equity raise would have been adequate. Id. at 43. In all events, the fact that Plaintiffs
liked aspects of Houlihan Lokey’s report suggests that it gave the SLC a balanced
take on Plaintiffs’ claims.
237 Id. at 47.

                                           38
Offering” and so the investigation into these transactions was not worth the cost.238

From this conclusion, there is no reason to believe these allegations bear on the

fundamental theories of recovery.

      Fourth, Plaintiffs advance that the SLC failed to sufficiently investigate

directors Platt and Sullivan.239     Plaintiffs assert that the SLC Report’s conflict

analysis was detail-free, “eliding” the ties between Platt and the Garcias.240 But the

SLC did investigate the directors and their conflicts and found that although “neither

[were] independent from the Garcias as a matter of law, both acted independently

and loyally to Carvana regarding the Direct Offering.”241 The SLC interviewed both

Platt and Sullivan and made reasonable conclusions as to each, and so this argument

lacks merit.

      In sum, the SLC’s investigation and report adequately considered the

allegations contained in the Complaint and evaluated the facts and law relevant to

those allegations. The SLC has met its burden of establishing that its investigation

was reasonable in scope.

                    c.       Bases

      Plaintiffs contend that the SLC did not have reasonable bases for its

conclusions. Plaintiffs draw comparisons to In re WeWork Litigation where the court

238 SLC’s Opening Br. at 36–37.

239 Pls.’ Answering Br at 48; Carvana I at *8–16.

240 Pls.’ Answering Br at 48.

241 SLC’s Reply Br. at 31.

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found an SLC investigation unreasonable.242 There, “[u]nlike a typical Zapata special

litigation committee, the [SLC] did not investigate the factual allegations of the

Special Committee’s Complaint and offer[ed] no opinion on the merits of the

Company’s claims against SBG and Vision Fund.”243 Plaintiffs argue that “[t]he

deficiencies here are similarly egregious,” but this contestation is based on allegations

that the court has already rejected—Maroone’s “self-serving” and supposedly “false

testimony” and his alleged prejudgment of the claims’ merits. Again, neither set of

allegations moves the needle. Through its investigation and report, the SLC met its

burden and established that its conclusions were the product of a reasonable, good

faith investigation.   None of Plaintiffs’ arguments raise a genuine question of

material fact as to the thoroughness of the investigation, the reasonableness of the

scope of the SLC’s investigation, or the presence of reasonable bases for the SLC’s

conclusions.

      B.       The Second Step

      The court’s “task in the second step is to determine whether the SLC’s

recommended result falls within a range of reasonable outcomes that a disinterested

and independent decision maker for the corporation, not acting under any compulsion

and with the benefit of the information then available, could reasonably accept.”244

242 Pls.’ Answering Br. at 54.

243 In re WeWork Litig., 250 A.3d 976, 997 (Del. Ch. 2020).

244 In re Primedia, Inc. S’holders Litig., 67 A.3d 455, 468 (Del. Ch. 2013); accord Obeid

v. Hogan, 2016 WL 3356851, at *12 n.14 (Del. Ch. June 10, 2016) (collecting cases).
The second step of the Zapata analysis has been described by Delaware courts as “the
essential key,” on the one hand, Zapata, 430 A.2d at 789, and “discretionary” on the

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The court has already probed Plaintiffs’ challenge to the SLC’s investigation and

findings and found that the scope of the investigation and conclusions were

reasonable. That analysis informed the conclusion that the recommended result is

appropriate. At bottom, a disinterested and independent decision-maker for the

Company, not acting under any compulsion and with the benefit of the information

available to the SLC, could reasonably accept the SLC’s recommendation to dismiss

Plaintiffs’ claims.

III.   CONCLUSION

       The SLC’s motion to dismiss is granted.

other. Kaplan, 484 A.2d at 520; accord WeWork, 250 A.3d at 1012–13 (noting that
the second step “permits the court in its discretion to use its own independent
business judgment in determining whether the motion to dismiss should be granted”
(emphasis added) (internal quotation marks omitted)); Sutherland, 658 A.2d at 239
(noting that “the court may nonetheless exercise its own business judgment and deny
the motion to dismiss” (emphasis added)). Given the salutary and “innovative”
nature of the second step, this jurist is inclined to view it as essential. See Obeid,
2016 WL 3356851, at *12.

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