Paul-Emile Berteau v. David E. Glazek ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PAUL-EMILE BERTEAU, for himself and )
derivatively on behalf of Nominal Defendant
)
TURNING POINT BRANDS, INC., )
)
Plaintiff, )
)
v. ) C.A. No. 2020-0873-PAF
)
DAVID E. GLAZEK, LAWRENCE S. WEXLER, )
GREGORY H.A. BAXTER, H.C. CHARLES )
DIAO, ASHLEY DAVIS FRUSHONE, PEGGY )
HWAN HEBARD, ARNOLD ZIMMERMAN, )
STANDARD GENERAL L.P., and STANDARD )
GENERAL GP LLC, )
)
Defendants, )
)
and )
)
TURNING POINT BRANDS, INC., )
)
Nominal Defendant. )
MEMORANDUM OPINION
Date Submitted: March 23, 2021
Date Decided: June 30, 2021
Neal C. Belgam, Robert K. Beste, Michael C. Wagner, SMITH, KATZENSTEIN
& JENKINS LLP, Wilmington, Delaware; Peter B. Andrews, Craig Springer,
ANDREWS & SPRINGER LLC, Wilmington, Delaware; Jeremy Friedman, David
Tejtel, FRIEDMAN, OSTER & TEJTEL, LLP, New York, New York; Attorneys
for Plaintiff Paul-Emile Berteau.
John M. Seaman, Matthew L. Miller, Christopher F. Cannataro, ABRAMS &
BAYLISS LLP, Wilmington, Delaware; Attorneys for Defendants Gregory H.A.
Baxter, H.C. Charles Diao, David E. Glazek, Lawrence S. Wexler, Arnold
Zimmerman, and Nominal Defendant Turning Point Brands, Inc.
David A. Dorey, Brandon W. McCune, BLANK ROME LLP, Wilmington,
Delaware; Barry H. Genkin, BLANK ROME LLP, Philadelphia, Pennsylvania;
Attorneys for Defendants Ashley Davis Frushone and Peggy Hwan Hebard.
Blake Rohrbacher, Christian C.F. Roberts, RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Attorneys for Defendants Standard General L.P. and
Standard General GP LLC.
FIORAVANTI, Vice Chancellor
This case concerns a controlling stockholder transaction. Standard General,
L.P. (“Standard General”) was the controller of a publicly traded holding company
(“SDI”). SDI held the majority of the common stock of a publicly traded operating
company, Turning Point Brands, Inc. (“TPB” or the “Company”). TPB’s stock was
SDI’s only material asset, and TPB’s stock traded at a significant premium to that of
SDI. To eliminate inefficiencies arising from SDI’s existence as an intermediate
public company, TPB acquired SDI (the “SDI Buyout”). The SDI Buyout was a
forward triangular merger through which TPB paid 0.97 shares of TPB common
stock for every TPB share owned by SDI. TPB appointed a Special Committee to
negotiate the merger with SDI, but it did not condition the SDI Buyout on a majority-
of-the-minority approval by TPB’s minority stockholders.
Through his stockholder derivative complaint in this action, Plaintiff alleges
that TPB’s board of directors breached their fiduciary duties to TPB because the SDI
Buyout was not entirely fair to TPB’s stockholders. Plaintiff further alleges that
Standard General and Standard General GP LLC, Standard General’s general partner
and controller, breached their fiduciary duties as controlling stockholders by forcing
TPB to conduct the SDI Buyout. Defendants have moved to dismiss the complaint
under Court of Chancery Rules 12(b)(6) and 23.1.
This Opinion resolves the motions to dismiss.
I. FACTUAL BACKGROUND
The following facts are taken from Plaintiff’s Verified Complaint (the
“Complaint” or “Compl.”) and the exhibits incorporated by reference therein,
including documents that were produced in response to a demand to inspect TPB’s
corporate books and records pursuant to 8 Del. C. § 220. 1
A. TPB’s Corporate Structure
TPB is a Delaware corporation that develops, manufactures, markets, and
distributes nicotine products, smokeless tobacco products, and smoking
accessories.2 In 2016, TPB completed an initial public offering of its common stock,
which trades on the New York Stock Exchange under the symbol “TPB.”3
Standard General is a Delaware limited partnership engaged in the business
of managing hedge funds. Defendant Standard General GP LLC (“SGGP”) is
Standard General’s general partner, and non-party Soohyung Kim is Standard
1
The parties agreed that the documents produced to the Plaintiff in response to the 220
demand are incorporated by reference to the Complaint. Director Defs.’ Opening Br. 8. In
addition, the Complaint incorporates by reference the Form S-4 recommending that SDI’s
stockholders approve the SDI Buyout (the “Form S-4”). The Form S-4 is attached as
Exhibit B to the Special Committee Defendants’ Opening Brief, and the Merger Agreement
is attached as Annex A to the Form S-4. The Merger Agreement required TPB and SDI to
“cooperate and jointly prepare” the Form S-4. Merger Agreement § 5.1(a) (requiring TPB
and SDI to cooperate and jointly prepare the Registration Statement); id. at A-43 (defining
“Registration Statement” as “the registration statement on Form S-4 . . . to be filed with
the SEC by TPB”).
2
Compl. ¶ 27.
3
Id.
2
General’s co-founder and managing partner. The Complaint alleges that Kim
controls SGGP and that SGGP controls Standard General.4 This Opinion refers to
Standard General and SGGP collectively as the “Standard General Defendants.”
Plaintiff alleges that Standard General was a “principal stockholder of TPB’s pre-
IPO predecessor” and that Standard General has controlled TPB “at all relevant
times.”5
According to the Complaint, Standard General acquired SDI, a publicly traded
shell company, 6 to hold a controlling stake in TPB. In 2017, Standard General
contributed approximately 52% of TPB’s stock to SDI in exchange for
approximately 89% of SDI’s common stock. Standard General also contributed two
other assets to SDI, an insurance business (“Maidstone Insurance”) and an outdoor
advertising business (the “Billboard Business”). 7 Standard General and SDI have
the same New York City address. 8
SDI remained as the intermediate holding company for Standard General’s
TPB stock until the SDI Buyout. Prior to the SDI Buyout, Standard General held a
4
Id. ¶ 26.
5
Id. ¶¶ 27, 30.
6
The shell company was originally named Special Diversified Opportunities, Inc. It later
changed its name to Standard Diversified, Inc. For ease of reference, this Opinion uses the
term SDI when discussing the entity at all times.
7
Compl. ¶ 46.
8
Compare Form S-4 at 7, with id. at 144.
3
majority stake in SDI, including over 75% of SDI’s outstanding, publicly traded
Class A common stock and more than 80% of SDI’s outstanding Class B super-
voting stock, which was not publicly traded. 9 At that time, SDI held a majority of
TPB’s common stock, which was SDI’s primary asset.
The TPB board of directors comprises the same seven directors both when it
approved the SDI Buyout and when Plaintiff filed his complaint: Defendants David
E. Glazek, Gregory H.A. Baxter, Arnold Zimmerman, Lawrence S. Wexler, H.C.
Charles Diao, Ashley Davis Frushone, and Peggy Hwan Hebard. Glazek and Diao
joined the TPB board in 2012, and Wexler, Zimmerman, and Baxter joined the board
at least two years prior to the 2016 IPO. 10 Hebard and Frushone were both appointed
to the board on September 26, 2018.11 Glazek and Zimmerman are two of three
members of the TPB board’s Compensation Committee, and Glazek serves as its
Chairman. 12
Glazek, Baxter, Zimmerman, Wexler, and Diao are collectively referred to
herein as the “Director Defendants.” Glazek is the Chairman of TPB’s board of
9
Compl. ¶ 28.
10
Id. ¶ 30.
11
Id. ¶¶ 22-23.
12
Id. ¶ 25.
4
directors. 13 Glazek is a partner at Standard General, 14 and the Form S-4 discloses
that his responsibilities include “helping companies that Standard General controls
or influences with operational, transactional, and financing needs.” 15 Glazek was
“formerly an investment banker at Lazard Freres & Co., where he focused on
mergers and acquisitions and corporate restructurings.” 16
Glazek, Baxter, and Zimmerman were SDI Directors at the time of the SDI
Buyout.17 Baxter was SDI’s Chief Executive Officer.18 Wexler is TPB’s President
and Chief Executive Officer.19 Plaintiff alleges that Diao has been friends with the
founder of Standard General, Soohyung Kim, since 2004 and that they served
together on the board of directors of a company named Media General, Inc. 20
13
Id. ¶ 18.
14
Id.
15
Form S-4 at 92.
16
Id.
17
Defendants note that the Complaint incorrectly alleges that Wexler was an SDI director
and that Baxter was TPB’s CEO at Paragraphs 172 and 173 of the Complaint, and that their
correct positions are set forth at Paragraphs 19 and 20 of the Complaint. Director Defs.’
Opening Br. 53 n.152. Plaintiff does not dispute that the Complaint was incorrect in this
respect and, in his Answering Brief, does not contend that Wexler was an SDI Director or
that Baxter was TPB’s CEO. See, e.g., Pl.’s Answering Br. 48–50.
18
Compl. ¶ 20.
19
Id. ¶ 19.
20
Id. ¶ 21.
5
Plaintiff alleges that Glazek, Zimmerman, Baxter, Wexler, and Diao were
conflicted and are incapable of causing the Company to pursue the claims asserted
in this derivative action.21
B. SDI Proposes a Merger and TPB Forms the Special Committee.
TPB’s holding company structure was inefficient. According to the
Complaint, the holding company structure caused SDI’s common stock to trade at a
significant discount relative to the value of its primary asset—TPB stock—and, in
turn, caused TPB’s stock to suffer decreased trading liquidity and reduced public
float. SDI’s ownership of TPB generated administrative, managerial, and legal
costs. By late 2019, SDI’s ownership of a majority of TPB’s common stock was
SDI’s only meaningful asset. The Complaint alleges that the Billboard Business was
generating comparatively immaterial profit and, by November 6, 2019, Maidstone
Insurance was to be conveyed to New York insurance regulators for insolvency.
In November 2019, unnamed SDI representatives initiated informal
conversations with TPB management and members of the TPB board about a
potential merger between TPB and SDI. 22 On November 14, 2019, SDI delivered a
term sheet (the “First Term Sheet”) to TPB outlining proposed terms for the SDI
Buyout. The First Term Sheet contemplated a tax-free Subchapter A Reorganization
21
Id. ¶¶ 170-75.
22
Compl. ¶¶ 56–57 (quoting Form S-4 at 41).
6
under the Internal Revenue Code. SDI proposed a two-step transaction. The first
step was to divest SDI of its comparatively immaterial, non-TPB assets. The second
step called for TPB or a wholly owned subsidiary of TPB to acquire SDI in a stock-
for-stock merger “based on an exchange ratio to be determined.”23
On November 15, 2019, the TPB board met and established a Special
Committee to evaluate the proposed transaction with SDI. The purpose of the
Special Committee was to insulate negotiations between TPB and SDI from Glazek,
Baxter, and Zimmerman.24 Diao recused himself from service on the Special
Committee, citing an “immaterial position in SDI stock.” 25 The Special Committee
thus consisted of Defendants Frushone and Hebard (collectively, the “Special
Committee Defendants”). TPB’s board of directors delegated broad powers to the
Special Committee, including the power to say “no” to SDI and Standard General,
the power to hire independent legal and financial advisors, and the power to examine
and pursue alternative transactions.26
23
Id. ¶¶ 60–62.
24
Cannataro Aff. Ex. 2 at TPB_Berteau_000277 (forming the Special Committee “due to
the existence of potential conflicts of interest of Messrs. Baxter, Glazek, and
Zimmerman”).
25
Id. (“Mr. Diao noted that he had an immaterial position in SDI stock; while not
disqualifying to serve as a special committee member, he nevertheless recused himself
from consideration.”).
26
Compl. ¶ 64.
7
At the November 15, 2019 meeting of TPB’s board of directors, attorneys at
Lathrop GPM, LLP (“Lathrop”) advised TPB’s full board regarding the formation
of the special committee. Lathrop then served as the Special Committee’s counsel
and as the Company’s transactional counsel in the SDI Buyout.27 Plaintiff alleges
that TPB management appears to have chosen Lathrop as the Special Committee’s
counsel even before it was formed. 28
C. The First Term Sheet and the Special Committee’s Initial Meetings
On November 18, 2019, both SDI and TPB publicly announced that SDI
sought to “pursue” a merger with TPB. 29 TPB’s press release stated that TPB had
“formed a Special Committee of Independent Directors to engage in discussions
with SDI.”30
The Special Committee first met on November 25, 2019. The minutes of the
November 25 meeting reflect that Lathrop directed and guided the discussions. The
meeting began with Lathrop “present[ing] an overview of its role and responsibilities
in any SDI transaction,” although further information regarding Lathrop’s authority,
role, and responsibilities has been redacted from the minutes on the basis of attorney-
Id. ¶¶ 66–67. The Complaint clarifies that the attorneys present at the November 2019
27
meeting were affiliated with Gray, Plant, Mooty, Mooty & Bennett P.A. before that firm’s
merger with Lathrop Gage LLP in January 2020. Id. ¶ 66 n.1.
28
Id. ¶¶ 67–70.
29
Id. ¶¶ 71–74.
30
Id. ¶ 72.
8
client privilege. 31 The November 25 meeting minutes reflect that the Lathrop
attorneys broadly advised the Special Committee, including regarding “a memo on
the Committee’s fiduciary duties and the committee process,” “the need to hire legal
and financial advisors,” “the importance of doing appropriate due diligence on SDI,”
“an overview of what a typical transaction would look like,” “an overview of the
stockholder approval process and SEC review of the overall review [sic] of the
transaction from a Delaware law perspective,” and “the S-4 registration process and
SEC review of same . . . and an overall transaction process timeline previously
circulated.”32 There is no indication in the November 25 meeting minutes that the
Special Committee members selected Lathrop as its counsel. Plaintiff alleges that
the Special Committee did not engage in any inquiry regarding Lathrop’s status as
the Special Committee’s counsel during this meeting or at any time thereafter.33
On December 12, 2019, the Special Committee retained Duff & Phelps LLP
(“Duff & Phelps”) as an “independent financial advisor to the Special Committee to
provide an Opinion . . . from a financial point of view, to the stockholders of the
Company of the Exchange Ratio . . . in the contemplated transaction.” 34 Plaintiff
31
Cannataro Aff. Ex. 4.
32
Id. at TPB_Berteau_000290-91.
33
Compl. ¶ 79 (“Rather, the S-4 and the 220 Production both show that Frushrone [sic]
and Hebard never questioned, at the November 25 meeting or at any other time, Lathrop’s
seemingly established status as the Special Committee’s counsel.”).
34
Compl. ¶ 83.
9
contends that Duff & Phelps’s mandate was both too broad and too narrow.
According to Plaintiff, Duff & Phelps’s mandate was overbroad because it was
retained to evaluate the financial fairness to all of TPB’s stockholders, including
Standard General and SDI, but it was also too narrow because Duff & Phelps was
not permitted to consider alternative forms of merger consideration, including the
possibility of incorporating cash consideration payable to TPB’s stockholders.35
On the other side of the transaction, SDI’s Board formed a single-member
special committee to negotiate with TPB. 36 SDI’s special committee retained
Young, Conaway, Stargatt & Taylor LLP and Houlihan Lokey Capital, Inc. as its
legal and financial advisors, respectively.
On January 9, 2020, the Special Committee met again.37 The minutes of the
January 9 meeting mention discussion of “a variety of matters, including
engagement of advisors and corresponding budgets, due diligence process and
overall timing.”38 A Lathrop attorney “asked for input on the timeline previously
circulated” before the November 25 meeting, and Duff & Phelps noted that it had
35
Id. ¶¶ 84 –86. Plaintiff alleges that “Subchapter A reorganizations permit a stock-cash
mix of merger negotiations without impacting the transaction’s tax-free status.” Id. ¶ 86.
36
Form S-4 at 42.
The Complaint alleges that the Special Committee meeting occurred on January 8, 2020,
37
Compl. ¶ 88, but the meeting minutes reflect that it was held on January 9, 2020. Cannataro
Aff. Ex. 5; see also Director Defs.’ Opening Br. 13 n.32 (clarifying the same).
38
Cannataro Aff. Ex. 5.
10
begun reviewing comparable publicly available transactions. The January 9 meeting
minutes state, without identifying any actor or speaker, that “[i]t was noted that no
formal proposal had been made by [SDI] or its advisors in follow up to the initial
indication of interest” and that “[i]t was resolved” that an attorney from Lathrop
would “reach out to SDI’s counsel to determine next steps.”39 According to the
minutes, the meeting was “called to order at approximately 3:00 Eastern Standard
Time” and that it was “adjourned at approximately 2:30 Eastern Standard Time,”
half an hour before the meeting purportedly began. 40
D. The Second Term Sheet and the Special Committee’s Analysis of
the Exchange Ratio
On January 22, 2020, SDI delivered a second term sheet to the Special
Committee (the “Second Term Sheet”). The Second Term Sheet was more specific
than the First Term Sheet. The Second Term Sheet provided for a 1:1 stock-for-
stock exchange ratio and that TPB would assume all of SDI’s debt.41
On January 28, 2020, the Special Committee met with its counsel. The Form
S-4 discloses that, the prior day, the Special Committee “engaged the law firm of
Blank Rome LLP . . . to advise the TPB special committee on aspects of Delaware
39
Id.
40
Id.
41
Cannataro Aff. Ex. 6; see id. Ex. 9 at TPB_Berteau_000311 (indicating that SDI had
$23.8 million in debt as of June 30, 2019); id. Ex. 11 at TPB_Berteau_000325 (calculating
SDI’s net liabilities to be $9.7 million as of January 31, 2020).
11
law applicable to the potential transaction with SDI.” 42 The minutes of the January
28 meeting state that the Special Committee and its counsel discussed the Second
Term Sheet, along with “the application of Kahn vs. M & F Worldwide Corp.
(‘MFW’) and Delaware decisions refining the principle [sic] holding of MFW,” and
then discussed “Delaware law process, timing and next steps regarding the [Second
Term Sheet] and follow up on same.”43
On January 30, 2020, the Special Committee met with its counsel and Duff &
Phelps to again discuss the Second Term Sheet. The minutes of the January 30
meeting indicate that the Special Committee discussed “the exchange ratio and the
potential to negotiate expense reimbursement for the Company.” 44 Blank Rome
“updated the Committee on their research into Delaware law relative to the Company
obtaining a ‘majority of the minority’ stockholder vote as a precondition to the SDI
Proposal.” 45
The January 30 meeting also included a Duff & Phelps analysis of the Second
Term Sheet. In a slide entitled “SDI Valuation Discount,” Duff & Phelps reported
that SDI’s stock was trading at a significant discount relative to that of TPB. 46 Duff
42
Form S-4 at 42.
43
Cannataro Aff. Ex. 7.
44
Id. Ex. 8.
45
Id.
46
Id. Ex. 9 at TPB_Berteau_000315.
12
& Phelps indicated that, using November 15, 2019 as the date for SDI’s unaffected
share price, SDI’s stock traded at a 30.2% discount to TPB’s stock. Duff & Phelps
further calculated the implied valuation discount based upon the 5-day, 10-day, 30-
day, 90-day, and 180-day unaffected volume weighted average prices of TPB and
SDI stock. The resulting discounts ranged from 17% to 29.8%. The Form S-4
presents a Duff & Phelps historical trading analysis that discloses a range of the
discount in dollar values between January 1, 2018 and November 15, 2019, but does
not present the percentage discount based on the volume weighted average prices
that Duff & Phelps presented at the January 30 meeting. 47
E. The Third Term Sheet and the Majority-of-the-Minority Vote
Proposal
The Complaint alleges that the Special Committee, “between January 28 and
February 6, 2020, demanded that the SDI buyout be conditioned on the affirmative
vote of a majority of TPB’s minority stockholders.” 48 The Form S-4 states that, on
February 6, 2020, the SDI special committee sent a revised non-binding term sheet
(the “Third Term Sheet”) to “Lathrop and Blank Rome, on behalf [of] the TPB
47
Form S-4 at 56 (“Duff & Phelps noted that for the period from January 1, 2018 to
November 15, 2019, the aggregate discount ranged between a low of $4.6 million and a
high of $193.6 million.”).
48
Compl. ¶ 103.
13
special committee.”49 The “primary change” in the Third Term Sheet “was to
provide that in addition to the approval of the stockholders of both TPB and SDI, the
consummation of the transaction would be subject to the approval of the holders of
the majority of outstanding shares of TPB Common Stock not beneficially owned
by SDI or any officer of TPB.”50 The Form S-4 states that “though the parties and
their respective counsel discussed this provision on several occasions, this proposed
condition became inapplicable once the parties determined that the approval of TPB
stockholders was not required for the consummation of the merger.”51 The minutes
of the Special Committee meetings nowhere indicate that the Special Committee
determined that the proposed majority-of-the-minority vote by TPB stockholders
“became inapplicable” after a determination by the parties “that the approval of TPB
stockholders was not required for consummation of the merger.” 52 Plaintiff alleges
that the Special Committee abandoned its demand for a majority-of-the-minority
vote condition because “SDI changed its position and refused to agree to it.” 53
49
Form S-4 at 43. Other term sheets referenced in the Complaint and in the Form S-4 are
attached to Defendants’ briefing, but the Third Term Sheet is not in the record.
50
Id.
51
Id.
52
Id.
53
Compl. ¶ 107.
14
On February 12, 2020, the Special Committee met with its legal advisors and
Duff & Phelps. The minutes of that meeting state that the Special Committee
discussed SDI’s balance sheet and “the proposal of terms delivered to the
Committee’s counsel on January 22, 2019 [sic] (the ‘SDI Proposal’).”54 The minutes
of the February 12 meeting indicate that the Special Committee evaluated the Second
Term Sheet, rather than the Third Term Sheet, which had been delivered to the
Special Committee’s counsel six days prior to the February 12 meeting. 55
Duff & Phelps made a presentation to the Special Committee at the February
12 meeting. The first slide in Duff & Phelps’s February 12 presentation is entitled
“Negotiation Considerations.” 56 Duff & Phelps stated that, “[p]rior to the
announcement of the proposed transaction (November 15, 2019), the market implied
a discount of approximately $78.5 million, or 30%, to the value of TPB shares owned
by SDI.”57 Duff & Phelps ascribed the discount to “economic inefficiencies and
implications associated with realizing the underlying value of the TPB shares.”58
54
Cannataro Aff. Ex. 10.
55
Id. The Form S-4 discloses that, on February 10, 2020, SDI’s special committee sent the
Special Committee a draft merger agreement “reflect[ing] the material terms and
conditions” of the Second Term Sheet. Form S-4 at 43. The minutes of the February 12,
2020 Special Committee meeting do not state that the Special Committee considered the
draft merger agreement.
56
Cannataro Aff. Ex. 11 at TPB-Berteau_000325.
57
Id.
58
Id.
15
Duff & Phelps’s February 12 presentation contains a clear portrait of the
economic effects of the exchange ratio to TPB’s stockholders and to SDI’s
stockholders. Duff & Phelps observed that, “[b]ased on a review of comparable
transactions, the observed discount to a one-for-one exchange ranged from 0.0% to
14.6%, with an average discount of 4.5%.”59 Duff & Phelps provided a table
demonstrating how the economic benefit would be allocated to SDI’s stockholders
versus TPB’s stockholders based on the exchange ratio variable 60:
The Special Committee’s February 12 meeting is not disclosed in the Form S-4.
On the morning of February 18, 2020, the Special Committee met with its
legal advisors. The first order of business was an update regarding communications
between counsel to the Special Committee, Christopher Carlisle, and counsel to
SDI’s special committee, Jim Hughes. According to Carlisle:
Mr. Hughes communicated at this time SDI was unwilling to move
forward with the proposed SDI-Company transaction if the Company
required as a condition thereto the approval of a “majority of the
minority” of its stockholders. Mr. Carlisle stated Mr. Hughes made it
clear in their conversation that under no circumstances would SDI
59
Id.
60
Id.
16
proceed with the SDI-Company transaction conditioned upon a
Company majority of the minority vote.61
In essence, Carlisle notified the Special Committee that SDI’s special committee—
after having delivered the Third Term Sheet containing a majority-of-the-minority
vote—had abruptly reversed course and declared that conditioning the transaction
on a majority-of-the-minority vote was unacceptable.
The minutes of the February 18, 2020 meeting state that the Special
Committee assessed that the “significant benefits” of a possible transaction with SDI
were worth proceeding without pursuing the majority-of-the-minority vote that
SDI’s special committee had proposed 12 days prior.62 According to the minutes:
In light of the foregoing, a discussion ensued regarding whether or not
there were potential benefits to the Company and its stockholders in
considering a transaction with SDI, without such a vote. Possible
benefits to be realized, include the potential accretive value of the
Company’s common stock which would benefit current stockholders,
eliminating the negative market perception of having a greater than
50% controlling stockholder, eliminating administrative and
accounting expenses associated with having an SEC reporting company
as the Company’s majority stockholder and creating a greater public
float in the Company’s common stock. Following the discussion, and
after further considering Delaware law as respects whether a Company
stockholder vote is required given the structure of the transaction, and
given the choice of structure for genuine tax and business purposes, the
Committee determined that there were significant benefits to be derived
by the Company’s stockholders, and that a possible transaction with
SDI should be continued to be pursued, without the condition of
61
Id. Ex. 12.
62
Id.
17
obtaining a majority of the minority vote of the Company’s
stockholders.63
The meeting of the Special Committee on the morning of February 18, 2020 lasted
45 minutes.
The Special Committee met again that evening with its legal and financial
advisors. According to the minutes, “[i]t was reported that SDI’s counsel had stated
emphatically to Mr. Carlisle that SDI would not proceed with the transaction if the
Company required that a majority of the minority of the Company’s stockholders
approve the transaction.”64 The Special Committee and Duff & Phelps “discussed
various financial aspects of comparable transactions” and agreed upon a “counter-
proposal regarding the exchange ratio and other terms” to be sent the following
day. 65
F. The Parties Negotiate the Exchange Ratio and Other Terms.
On February 19, 2020, Lathrop conveyed the Special Committee’s
counterproposal to SDI’s special committee (the “Fourth Term Sheet”). The Special
Committee proposed an exchange ratio of 0.90x, minus a number of shares of TPB
common stock based on SDI’s net liabilities. 66 The counterproposal further required
63
Id.
64
Id. Ex. 13.
65
Id.
66
Compl. ¶ 115; Form S-4 at 43.
18
SDI to divest the Maidstone Insurance and Billboard Business segments, to
indemnify TPB for transaction costs and expenses, to place $15 million in escrow
for a year to fund SDI’s indemnification obligations, and to agree to pay a “market
break-up fee” if SDI accepted a superior proposal.67 The Form S-4 discloses in
passing that, “[o]ver the next several days, counsel and advisors to SDI and TPB
continued to interact regarding aspects of the transaction” and that members of SDI’s
and TPB’s special committees “engaged in numerous conversations and discussions
over this period.”68 On February 28, 2020, the Special Committee sent SDI’s special
committee a revised draft of the merger agreement that incorporated the changes in
the Fourth Term Sheet.69 The Form S-4, again in cursory fashion, stated that,
following this delivery, “[o]ver the next several days,” members of SDI’s and TPB’s
special committees “engaged in numerous conversations and discussions over this
period.”70
SDI rejected the Special Committee’s counterproposal in the Fourth Term
Sheet. On March 3, 2020, SDI’s special committee updated SDI’s full board of
directors on the transaction process and the TPB Special Committee’s proposed
revisions to the merger agreement. The Form S-4 states: “The SDI special
67
Form S-4 at 43.
68
Id.
69
Id. at 44.
70
Id.
19
committee indicated its view, with which the SDI Board concurred, that the revisions
proposed by TPB were not acceptable.” 71
On March 10, 2020, SDI’s special committee responded to TPB, rejecting
almost all of the material terms proposed in the Fourth Term Sheet. SDI’s special
committee demanded a 1:1 exchange ratio, with SDI having no net liabilities at
closing, and it agreed to cover only $250,000 of TPB’s reasonable transaction fees
and expenses.72 Over the next two weeks, the two special committees traded
proposals concerning the exchange ratio, transaction expenses, and the extent of
SDI’s liabilities at closing:
• On March 20, 2020, TPB’s Special Committee proposed an exchange
ratio of 0.925x, $1 million in transaction fees and expenses, and that
SDI would have no more than $25,000 in net liabilities at closing.
• On March 21, 2020, SDI’s special committee counterproposed that the
exchange ratio would be 0.97x and that SDI would have no more than
$100,000 in net liabilities at closing.
• On March 22, 2020, TPB’s Special Committee counterproposed an
exchange ratio of 0.945x and that SDI would have no more than
$25,000 in net liabilities at closing.
71
Id.
72
Id.
20
• On March 23, 2020, SDI’s special committee counterproposed an
exchange ratio of 0.97x, $1 million in transaction fees and expenses,
and that SDI would have no more than $25,000 in net liabilities at
closing.73
The record does not identify any formal meetings of the TPB Special Committee
during this two-week negotiation period.
G. SDI’s Board and TPB’s Board Intervene.
On March 24, 2020, SDI’s special committee updated SDI’s full board of
directors on the status of negotiations. Even though SDI’s special committee had
been engaged in substantive negotiations with TPB’s Special Committee regarding
the exchange ratio, SDI’s board of directors pressured SDI’s special committee to
execute the transaction at a 1:1 exchange ratio. According to the Form S-4, unnamed
“members of the SDI Board asked questions concerning why the terms being
discussed by the two committees did not align more closely with the original 1:1
exchange ratio that had been first proposed by the SDI special committee to TPB’s
special committee.”74 SDI’s board of directors “requested that the SDI special
73
Compl. ¶¶ 118–21; Form S-4 at 44.
74
Form S-4 at 44–45.
21
committee hold further discussions with the TPB special committee regarding this
point.”75 SDI’s special committee complied.
According to the Form S-4, on March 25, 2020, the SDI special committee
“communicated to the TPB special committee that the originally proposed exchange
ratio of 1:1 was one that reflected the best interests of SDI and its stockholders.”76
The Form S-4 also states that, on the same date, TPB’s “special committee met with
its counsel and financial advisors” to discuss the SDI special committee’s reversal
from its prior position. There are no minutes of a March 25, 2020 Special Committee
meeting in the record.
The TPB and SDI special committees met together the next day. The Form
S-4 discloses that the committees discussed “alternative potential terms” providing
for an exchange ratio of 0.99x, SDI paying $500,000 in transaction fees and
expenses, and SDI maintaining a balance sheet with liabilities not exceeding $25,000
at closing. 77
The special committees returned to their respective camps to discuss the prior
day’s efforts. On SDI’s side, its board met with the SDI special committee. The
75
Id. at 45.
76
Id.
77
Id.
22
board communicated to the SDI special committee that SDI would support a
transaction incorporating the terms discussed on March 26, 2020. 78
On TPB’s side, the Form S-4 discloses that, on Friday, March 27, 2020, “[i]t
was determined that a proposal based on such terms would not be acceptable to the
TPB special committee.” 79 The minutes of the March 27 meeting provide no detail
regarding this purported determination. The minutes state that Hebard provided an
update regarding “the outline of the proposed transaction between SDI and the
Company” that was discussed on March 26.80 Thereafter, “[a] discussion ensued
and the Duff & Phelps team advised the Committee on their preliminary views of
the Proposal.”81 The Duff & Phelps team then left the meeting. After Duff & Phelps
departed, “[t]he Committee and counsel discussion [sic] a variety of matters,
including the memorandum email circulated to the Committee by [Blank Rome]
before the Meeting, approach [sic] to the contemplated board meeting of the
Company on March 28 and related matters. A discussion ensued throughout.”82 The
meeting minutes do not explain why Duff & Phelps left the meeting, and they do not
78
Id.
79
Id.
80
Cannataro Aff. Ex. 14.
81
Id.
82
Id. Plaintiff alleges that there was no meeting of TPB’s board of directors on March 28,
2020, Compl. ¶ 133, but it is a reasonable inference that the meeting as anticipated by the
Special Committee took place on the following day, on March 29, 2020.
23
specifically indicate that any party other than Duff & Phelps voiced a view regarding
the merger terms.
According to the Form S-4, on Saturday, March 28, 2020, the Special
Committee informed SDI’s special committee that TPB “could not proceed” on the
terms discussed by the special committees on March 26.83 For some reason not
disclosed in the Form S-4, this communication triggered a flurry of activity that
marked the beginning of the end of the Special Committee process. According to
the Form S-4, that same day, members of the special committees and their advisors
discussed the merger terms “in consultation respectively with members of the full
boards of each company.”84
The negotiations on Saturday culminated in three sequential meetings the
following morning, on Sunday, March 29, 2020. The first meeting was between the
TPB and SDI special committees. The Form S-4 indicates that the special
committees discussed a draft merger agreement contemplating a .97x exchange ratio,
“SDI retaining approximately $1,000,000 of net cash on its balance sheet at closing,”
no termination fee payable to SDI if TPB pursued an alternative transaction, and that
“the SDI termination fee would be 2% of the equity value of SDI.” 85
83
Form S-4 at 45.
84
Id.
85
Id. The Form S-4 does not indicate what conditions would be necessary for payment of
this termination fee.
24
The second meeting was that of SDI’s board of directors, at which the SDI
special committee conveyed the terms discussed with the TPB special committee
that morning. According to the Form S-4, the SDI board of directors “indicated to
the SDI special committee that it could support a transaction consistent with these
terms subject to satisfactory negotiation of definitive documents and continued
discussions between the SDI special committee and its advisors.” 86 The Form S-4
nowhere indicates that Glazek, Zimmerman, and Baxter did not attend the second
meeting of SDI’s board of directors on March 29, 2020. The reasonable inference
is that they did.
The third meeting was a special meeting of TPB’s full board of directors (the
“March 29 TPB Meeting”). The telephonic meeting began at 10:00 a.m.87 All seven
TPB directors dialed into the March 29 meeting. The Special Committee’s legal and
financial advisors were not present. According to the minutes, Glazek stated that
the purpose of the meeting was to provide the Special Committee “the opportunity
to update the full Board regarding the status of a possible merger” with SDI.88
Glazek then asked Hebard to present the update from the Special Committee.
86
Id.
87
Cannataro Aff. Ex. 15. The minutes of this meeting do not specify the time zone. The
record does not reflect when the other two March 29 meetings began or how long they
lasted. Given that it was a Sunday morning and that the world was in the early stages of a
pandemic, the court assumes that all three meetings were telephonic.
88
Id.
25
Hebard “noted that she was not requesting any action by the Board at this meeting,”
and informed TPB’s board that the “current contemplated terms” for the transaction
were a .97x exchange ratio and that SDI’s net liabilities would not exceed $25,000
at closing.89 The minutes state that the Special Committee “chose Lathrop GPM
LLP as legal counsel, along with Blank Rome LLP as its special Delaware law
counsel.” 90 After reviewing the Special Committee’s process, Hebard “discussed
with the Board Delaware law issues related to the process and the potential
transaction.”91
The March 29 TPB Meeting minutes state that TPB’s full Board of Directors
discussed the transaction. Glazek “reviewed reasons for the potential transaction
from both the TPB and the SDI perspective.” 92 The full Board then discussed merger
issues, “including net liabilities at closing, potential representation & warranty
insurance, additional possible terms in the definitive agreement, the timing of a
potential fairness opinion, and the risks and potential costs of litigation.”93 After the
89
Id. These terms are not the same terms that the special committees discussed that
morning according to the Form S-4. Compare id. (stating that, under the current proposal,
SDI’s net liabilities would not exceed $25,000 at closing), with Form S-4 at 45 (disclosing
that, in addition to a 0.97x exchange ratio, SDI would “retain[] approximately $1,000,000
of net cash on its balance sheet at closing”); see also Special Committee Defendants’ Ex.
A at 7 (listing the net liability term and only citing the Form S-4).
90
Cannataro Aff. Ex. 15 at TPB_Berteau_000281.
91
Id.
92
Id.
93
Id.
26
Board discussed these issues, Glazek, Baxter, and Zimmerman “excused themselves
from the meeting.” 94 For the following 15 minutes, the “remaining directors held
additional discussion regarding the terms of a potential transaction with SDI.” 95 The
minutes do not specify the terms that were the subject of the “additional discussion,”
why Glazek, Baxter, and Zimmerman excused themselves, or why Diao and Wexler
remained to discuss the terms of a potential transaction with SDI after Glazek,
Baxter, and Zimmerman excused themselves.
After the Special Committee, Wexler, and Diao concluded their private
transaction discussions, Glazek, Baxter, and Zimmerman rejoined the meeting. The
TPB Board then continued to discuss the merger for nine minutes. According to the
minutes, the Board’s discussion included “a potential timeline towards negotiation
and execution of a definitive agreement . . . issues related to a fairness opinion, the
approval of the Special Committee and the Board, and announcement of a
transaction.”96 The meeting adjourned at 11:34 a.m.
H. Merger Negotiations Cease Regarding the Exchange Ratio.
After the March 29, 2020 meetings, there were no further negotiations over
the exchange ratio. The Form S-4 states that, “[o]ver the next several days,” the
94
Id.
95
Id.
96
Id.
27
special committees’ counsel “exchanged revised drafts of the merger agreement,
focusing primarily on the exchange ratio and net cash and liabilities at SDI, and
moving away from an expense reimbursement provision.” 97 There is no indication,
however, that any price terms materially changed as a result of these exchanged
drafts.98 The record does not indicate that the two special committees directly
discussed any matter again after the March 29 TPB Meeting.
The Special Committee met two additional times. On March 30, 2020, the
Special Committee discussed a draft final fairness opinion from Duff & Phelps at a
0.97x exchange ratio. On April 7, 2020, Duff & Phelps presented its final fairness
opinion concerning the SDI Buyout, Lathrop circulated the final merger agreement,
and the Special Committee approved the SDI Buyout. The Duff & Phelps fairness
analyses presented on March 30 and April 7, 2020 indicated that, based on the 0.97x
exchange ratio, TPB’s stockholders stood to gain 9.9% of the transaction’s economic
benefit, representing $6.9 million, based on the Company’s unaffected stock price
97
Form S-4 at 45–46.
98
Id.; see also Merger Agreement at A-45 (defining “Stock Merger Consideration” as “a
total number of shares of TPB Common Stock equal to 97% of the total number of shares
of TPB Common Stock owned by SDI as of the Effective Time of the Merger.”); id. §§ 1.7
& 7.8 (requiring SDI to provide a Net Liabilities Estimate to TPB that reflects Net
Liabilities “in amount not exceeding $25,000” and that will “be reasonably acceptable to
TPB” as a condition precedent). The Merger Agreement did not require SDI to hold
$1,000,000 in net cash at closing.
28
on November 15, 2019. 99 SDI and its stockholders obtained the remaining economic
benefit of $69 million. 100
According to the minutes of the Special Committee’s April 7, 2020 meeting,
Duff & Phelps determined that “the exchange ratio negotiated in connection with the
proposed transaction was fair to the stockholders of the Company.” 101 At the same
April 7 meeting, the Special Committee resolved that the proposed merger was “fair
to and in the best interests of the stockholders of the Company (excluding SDI and
its affiliates),” even though Duff & Phelps’s fairness opinion did not specifically
address the financial fairness of the transaction to the Company’s minority
stockholders.102 There is no indication in the record that the Special Committee
considered a fairness opinion from the perspective of the TPB stockholders
unaffiliated with SDI.
99
Cannataro Aff. Ex. 19 at TPB_Berteau_000358.
100
This is the result after SDI’s sale of $9.6 million in TPB stock to satisfy $25 million in
debt. Id.
101
Id. Ex. 18; see also id. Ex. 19 (presentation from Duff & Phelps describing its
engagement as “provid[ing] an opinion . . . as to the fairness, from a financial point of view,
to the stockholders of the Company of the Exchange Ratio”).
102
Id. Ex. 18.
29
The parties executed the merger agreement for the SDI Buyout on April 7,
2020 (the “Merger Agreement”) and announced the transaction on the following
day. 103
I. SDI Conducts a Public Offering of TPB Shares.
On June 8, 2020, two months after the parties signed the merger agreement,
SDI sold 1.8 million shares of its TPB stock at $23.50 per share in an underwritten
public offering.104 Standard General-managed funds participated in the public
offering and sold 415,000 shares of TPB stock at the same price. 105 The Complaint
alleges that SDI reportedly received approximately $40 million, with approximately
$24 million to retire its debt and approximately $16 million to repurchase shares of
SDI’s Class B common stock from another Standard General fund. 106 Public filings
indicate that the latter transaction took place on July 13, 2020.107
Plaintiff alleges that the Special Committee did not know that $16 million of
the $40 million earned through the public offering would be used to repurchase
SDI’s stock from Standard General. Plaintiff alleges SDI’s stock purchase unfairly
103
Compl. ¶ 152.
104
Id. ¶ 153. Duff & Phelps’s fairness opinion assumed that SDI would sell 1,201,346
shares, at the then-current market price of $20.81 per share to satisfy $25 million of debt
at SDI. Cannataro Aff. ¶ Ex. 19 at TPB_Berteau_000358.
105
Compl. ¶ 153.
106
Id. ¶ 154.
107
Id. ¶ 155.
30
benefited Standard General at TPB’s expense, because if the cash had remained with
SDI, it would have gone to TPB through the SDI Buyout. Plaintiff further contends
that the repurchase violated Section 4.1(b)(1) of the Merger Agreement, which
provides that, except as set forth in a disclosure letter from SDI, SDI would not
“reacquire any shares of its capital stock or other securities.”108
J. The Merger Closes and Standard General Reduces Its Ownership
Stake in TPB
At a July 9, 2020 special meeting of SDI stockholders, Standard General voted
its shares in favor of the SDI Buyout, and the merger closed pursuant to the Merger
Agreement. 109 After the SDI Buyout closed, Standard General amended its Schedule
13-D to indicate that it had reduced its holdings to 33.5% of TPB’s outstanding
common stock.110
K. Procedural History
Plaintiff filed his three-count Complaint in this action on October 9, 2020.
Count I is a claim against the Standard General Defendants for breach of
fiduciary duty as TPB’s controlling stockholder. Plaintiff alleges that the Standard
108
See Merger Agreement at A-19.
109
Compl. ¶ 159.
110
Id.
31
General Defendants violated their fiduciary duty of loyalty to TPB’s stockholders
and that the SDI Buyout was not entirely fair to TPB or its public stockholders.”111
Count II alleges that the Director Defendants and the Special Committee
Defendants breached their fiduciary duties.
Count III is a direct claim for breach of contract against the Director
Defendants and TPB. It alleges that Article IX of TPB’s bylaws, which require a
two-thirds supermajority vote of the Company’s stockholders to amend the bylaws,
is invalid because the Company’s Certificate of Incorporation provides that the
bylaws could be amended by majority vote of the outstanding shares of stock of
TPB.112 Plaintiff seeks equitable relief in his Complaint, “including rescission,
rescissory damages, disgorgement to the Company,” and a declaration that the
supermajority bylaw was invalid.113
Defendants have moved to dismiss the Complaint pursuant to Court of
Chancery Rules 12(b)(6) and 23.1. The Director Defendants further seek dismissal
of Count III on grounds of mootness pursuant to Court of Chancery Rule 12(b)(1).
In his Answering Brief, Plaintiff agreed that Count III was moot because “TPB
rescinded its Supermajority Bylaw after the filing of the Complaint.” 114 The parties
111
Id. ¶¶ 177–79.
112
Id. ¶¶ 160–166.
113
Id. at 57.
114
Pl.’s Answering Br. 68–69.
32
completed briefing on March 12, 2020, and the court heard oral argument on March
23, 2020.
II. ANALYSIS
A. Defendants’ Motion to Dismiss Pursuant to Rule 12(b)(6)
On a motion to dismiss for failure to state a claim under Court of Chancery
Rule 12(b)(6):
(i) all well-pleaded factual allegations are accepted as true;
(ii) even vague allegations are well-pleaded if they give
the opposing party notice of the claim; (iii) the Court must
draw all reasonable inferences in favor of the non-moving
party; and ([iv]) dismissal is inappropriate unless the
plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible to
proof.
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (internal citations and
quotation marks omitted). The pleading standards are minimal. Central Mortg. Co.
v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011).
Nevertheless, “a trial court is required to accept only those ‘reasonable inferences
that logically flow from the face of the complaint’ and ‘is not required to accept
every strained interpretation of the allegations proposed by the plaintiff.’” In re Gen.
Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting Malpiede
v. Townson, 780 A.2d 1075, 1083 (Del. 2001)). “Moreover, a claim may be
dismissed if allegations in the complaint or in the exhibits incorporated into the
33
complaint effectively negate the claim as a matter of law.” Malpiede, 780 A.2d at
1083.
1. Entire Fairness Applies.
The SDI Buyout is a transaction between TPB and its controlling stockholder.
“When a transaction involving self-dealing by a controlling stockholder is
challenged, the applicable standard of judicial review is entire fairness, with the
defendants having the burden of persuasion.” Americas Mining Corp. v. Theriault,
51 A.3d 1213, 1239 (Del. 2012); Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110,
1115 (Del. 1994) (“A controlling or dominating shareholder standing on both sides
of a transaction, as in a parent-subsidiary context, bears the burden of proving its
entire fairness.”). “Under current law, the entire fairness framework governs any
transaction between a controller and the controlled corporation in which the
controller receives a non-ratable benefit.” In re EZCORP Inc. Consulting Agreement
Deriv. Litig., 2016 WL 301245, at *11 (Del. Ch. Jan. 25, 2016); see also Salladay v.
Lev, 2020 WL 954032, at *8 (Del. Ch. Feb. 27, 2020) (noting that entire fairness
applies where “a controlling stockholder is conflicted or competes for consideration
with fellow stockholders”).
This transaction presents a classic self-dealing transaction involving a
controlling stockholder. SDI, and ultimately the Standard General Defendants,
stood on both sides of the SDI Buyout and extracted a unique benefit from the
34
transaction not ratably shared with TPB’s other common stockholders. As the
owners of a majority of TPB’s common stock, SDI and the Standard General
Defendants were controlling stockholders that owed TPB fiduciary duties at the time
of the SDI Buyout. Of the seven directors on TPB’s board of directors, three
directors served on SDI’s board of directors, and one served as TPB’s CEO. The
Complaint contains well-pleaded allegations that SDI, and ultimately the Standard
General Defendants, received a disproportionate share of the benefit achieved by the
transaction not shared with TPB’s other stockholders, and that they competed with
the minority stockholders for the transaction consideration. 115 The entire fairness
115
Compl. ¶ 7 (“Duff & Phelps’s financial analyses contained in the 220 Production, while
flawed, explain that at a 0.97x ratio, SDI would receive more than 90% of the zero-sum
transaction’s financial benefits, with less than 10% of the financial benefits flowing to the
whole of TPB’s stockholders”); id. ¶ 111 (“At every 1.5% discount, the chart shows, $3.9
million of the deal’s financial benefit is transferred to ‘TPB Shareholders.’ Accordingly, at
a 3% discount, or a 0.97 exchange ratio, the chart shows that $6.8 million of the deal’s
$78.5 million overall financial benefit – or 9.9% – would flow to TPB stockholders”);
Cannataro Aff. Ex. 11 at TPB_Berteau_000325 (Duff & Phelps presentation calculating
benefits to SDI stockholders versus TPB stockholders at a range of exchange ratios). While
it does not affect the outcome of this Opinion, under Plaintiff’s approach, a 3% discount
implies that $7.8 million of the deal’s financial benefit flowed to TPB’s stockholders, not
$6.8 million. This is consistent with Duff & Phelps’s later presentations. See id. at
TPB_Berteau_000342 (noting that the aggregate economic benefit was $7.8 million to
TPB’s stockholders, implying that TPB’s stockholders would receive 9.9% of the of the
economic benefit from the transaction).
35
standard therefore applies.116 Neither the Standard General Defendants nor the
Director Defendants—including Glazek, Zimmerman, and Baxter, who served as
directors on both TPB’s board of directors and SDI’s board of directors—
meaningfully contend otherwise. 117
The Special Committee Defendants advance a novel, but unpersuasive,
argument that the standard of review should be business judgment.118 According to
the Special Committee Defendants, the safe harbor for parent-subsidiary mergers set
forth in Kahn v. M & F Worldwide Corp. (“MFW”) should not require a majority-
of-the-minority vote for the business judgment rule to apply to parent-subsidiary
116
See Sinclair Oil Corp. v. Levien, 280 A.2d 717, 720 (Del. 1971) (holding that entire
fairness applies in self-dealing transactions between a parent and its subsidiary and that
“[s]elf-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes
the subsidiary to act in such a way that the parent receives something from the subsidiary
to the exclusion of, and detriment to, the minority stockholders of the subsidiary”);
Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del. 1983) (“When directors of a Delaware
corporation are on both sides of a transaction, they are required to demonstrate their utmost
good faith and the most scrupulous inherent fairness of the bargain.”); Salladay, 2020 WL
954032, at *1 (“It is axiomatic that transactions in which a majority of the board stands on
both sides of a deal raise questions of whether the directors have acted in their own, and
not the corporate, interest; and that in such situations, the presumption of business
judgement is overcome and the burden shifts to the conflicted fiduciaries to show that the
transaction is entirely fair.”).
117
Defendants do not argue that a majority of the board was disinterested and independent
with respect to the SDI Buyout.
118
Notably, the Director Defendants—including Glazek, Zimmerman, and Baxter, who
served as directors on both TPB’s board of directors and SDI’s board of directors—
refrained from making the same argument in their briefing.
36
mergers that do not statutorily require a stockholder vote. 119 Their argument ignores
the history of the MFW doctrine and what it was intended to address.
MFW was the culmination of years of doctrinal debate over what had been
viewed as a per se inability of a defendant to prevail on a pleadings-stage motion to
dismiss a claim challenging a controlling stockholder transaction. See In re MFW
S’holders Litig., 67 A.3d 496, 504 (Del. Ch. 2013) (noting that one purpose of the
MFW framework was to remedy a doctrinal situation in which “there is no feasible
way for defendants to get [cases] dismissed on the pleadings”), aff’d, Kahn v. M &
F Worldwide Corp., 88 A.3d 635 (Del. 2014); In re Books-a-Million, Inc. S’holders
Litig., 2016 WL 5874974, at *8 n.2 (Del. Ch. Oct. 10, 2016) (same), aff’d, 164 A.3d
56 (Del. 2017); Tornetta v. Musk, 2019 WL 4566943, at *12 n.114 (Del. Ch. Sept.
20, 2019) (same).120 In MFW, the Delaware Supreme Court held that the business
judgment rule applies in a controlling stockholder merger “where the merger is
conditioned ab initio upon both the approval of an independent, adequately
empowered Special Committee that fulfills its duty of care, and the uncoerced,
informed vote of a majority of the minority stockholders.” MFW, 88 A.3d at 644,
119
Special Committee Defs.’ Opening Br. 13 (“[B]ecause no TPB shareholder vote was
required, no [majority of the minority vote] should be required to secure business judgment
deference.”).
120
See In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 614–15 (Del. Ch. 2005)
(discussing the history of the doctrinal debate); id. at 607 (suggesting “giving defendants
the real option to get rid of cases on the pleadings, the integrity of the representative
litigation process would be improved”).
37
overruled on other grounds, Flood v. Synutra Int’l., Inc., 195 A.3d 754, 766 n.81
(Del. 2018).
MFW was a decision on summary judgment and involved a squeeze-out
merger. Subsequent opinions have applied MFW at the motion to dismiss stage.
See, e.g., Books-A-Million, 2016 WL 5874974, at *8; Swomley v. Schlecht, C.A. No.
9355-VCL at 64–79 (Del. Ch. Aug. 27, 2014) (TRANSCRIPT), aff’d, 128 A.3d 992(Del. 2015) (TABLE). The Court of Chancery has held that the MFW safe harbor
requiring a majority-of-the-minority vote and a properly functioning special
committee applies to numerous types of controlling stockholder transactions that do
not statutorily require a stockholder vote. As Chancellor Bouchard summarized, the
Court of Chancery has applied entire fairness review to “(1) security issuances,
purchases, and repurchases; (2) asset leases and acquisitions; (3) compensation
arrangements, consulting agreements, and service agreements; (4) settlements of
derivative actions; and (5) recapitalizations.” IRA Trust FBO Bobbie Ahmed v.
Crane, 2017 WL 7053964, at *7 (Del. Ch. Dec. 11, 2017) (citing EZCORP, 2016
WL 301245, at *11–15). Chancellor Bouchard reasoned that the MFW framework
“should be encouraged to protect the interests of minority stockholders in
transactions involving controllers, whether it be a squeeze-out merger (MFW), a
merger with a third party (Martha Stewart), or one in which the minority
stockholders retain their interests in the corporation (EZCORP).” Id. at *11
38
(collecting cases). Chancellor Bouchard determined that he could identify “no
principled basis on which to conclude that the dual protections in the MFW
framework should apply to squeeze-out mergers but not to other forms of controller
transactions.” Id.As in Crane, I can discern no principled basis to conclude that the MFW
framework is inapplicable in this case. The SDI Buyout was less protective of
minority stockholders’ rights than a typical parent-subsidiary merger because it did
not require any stockholder vote. A special committee is not sufficient protection
for TPB’s minority stockholders because “[a] special committee alone ensures only
that there is a bargaining agent who can negotiate price and address the collective
action problem facing stockholders, but it does not provide stockholders any chance
to protect themselves.” In re MFW S’holders Litig., 67 A.3d at 503; see also In re
John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *12 (Del. Ch.
Oct. 2, 2009) (“The majority of the minority vote . . . provides the stockholders an
important opportunity to approve or disapprove of the work of the special committee
and to stop a transaction they believe is not in their best interests.”). The Special
Committee Defendants have identified no special protection under these
circumstances that would warrant a departure from the rule set forth in MFW. On
the contrary, it would lead to the application of business judgment review where
39
minority stockholders were less protected than in a traditional parent-subsidiary
merger.
The Special Committee Defendants make no attempt to distinguish other
controller transactions in which the court has applied MFW. Instead, they rely on
dicta in a case where the same argument was rejected. In Tornetta, 2019 WL
4566943, at *13, the court assessed a board’s decision to award its controlling
stockholder executive compensation. The court noted the traditional deference
afforded a board in making compensation decisions. It also recognized that
stockholders had voted to approve the compensation arrangement with the
controlling stockholder. The court in Tornetta, nevertheless, declined to apply any
lesser standard than entire fairness. In a footnote, the court remarked that it saw
“nothing in either the Chancery or Supreme Court MFW decisions . . . to suggest
either court intended to hold that the dual protections are required in all controlling
stockholder transactions in order to reduce the degree of judicial scrutiny paid to the
transaction.” Id. at *13 n.125. The court did not opine on which controlling
stockholder transactions might not require the dual protections of MFW to obtain a
lesser degree of scrutiny than entire fairness. Tornetta does not mandate—nor even
imply—that anything short of the dual protections of MFW should be required to
lower the standard of review to the SDI Buyout—a merger—at issue in this case.
40
The Special Committee Defendants’ arguments in favor of application of the
business judgment rule are generally founded on thin factual assumptions that
disregard the allegations of the Complaint. The Special Committee Defendants rely
ostensibly on the fact that the merger was structured as a forward triangular merger
and, thus, a TPB stockholder vote was not statutorily required. That may be so, but
a transaction to remove SDI as a holding company could have been structured to
require a vote of TPB’s stockholders. The Complaint fairly alleges that SDI actively
sought to avoid any transaction structure that would require the approval of TPB’s
stockholders. In particular, SDI’s special committee presented a Third Term Sheet
contemplating that any transaction would be subject approval by both SDI’s
stockholders and TPB’s stockholders, in addition to approval by a majority of TPB’s
minority stockholders. 121 SDI then overrode its special committee and
communicated to TPB’s Special Committee that any majority of the minority vote
condition was a non-starter.122 MFW was designed as a narrow safe harbor for a
controlling stockholder transaction to obtain business judgment review at the
pleadings stage. Its protections apply even if the challenged transaction is not
subject to a statutory vote under the DGCL. To accept business judgment review to
a controlling stockholder transaction merely because it can be structured to avoid a
121
Compl. ¶ 99.
122
Id. ¶ 102.
41
statutory stockholder vote would, in my view, undermine the entire rationale for the
doctrine. The Special Committee Defendants also ignore the Complaint when
arguing that the rights of TPB’s minority stockholders were “unaffected” by the SDI
Buyout.123 The Complaint alleges that TPB’s minority stockholders were largely
excluded from the economic benefit of the transaction, and that they could have
secured a greater benefit than they ultimately received.124 The Special Committee
Defendants’ argument also ignores the Duff & Phelps analysis that found the
economic benefits of the transaction to favor the SDI stockholders over the TPB
stockholders.125
The SDI Buyout was not conditioned on a majority-of-the-minority vote as
contemplated by MFW. In the absence of a majority-of-the-minority vote condition,
the approval of a purportedly independent special committee is not sufficient to
trigger the business judgment rule. In Kahn v. Tremont Corp., the Delaware
Supreme Court observed that entire fairness review is still appropriate “when an
123
Special Committee Defs.’ Opening Br. 16 (arguing that the SDI Buyout was a “forward
triangular merger where TPB minority stockholders’ rights are not affected”) (emphasis in
original); id. at 19 (“[T]he transaction did not alter TPB minority stockholders’ interests.”).
This argument is curious coming from the Special Committee Defendants. If TPB’s
minority stockholders’ rights were so unaffected by the SDI Buyout that the business
judgment rule should apply, what was the purpose of the Special Committee?
124
Compl. ¶ 7.
Cannataro Aff. Ex. 19 at TPB_Berteau_000358 (determining that TPB’s stockholders
125
would receive 9.9% of the transaction’s economic benefit).
42
independent committee is utilized because the underlying factors which raise the
specter of impropriety can never be completely eradicated and still require careful
judicial scrutiny.” Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del. 1997); see also
MFW, 88 A.3d at 643 (noting that the “vital distinction” between that case and
Tremont was that “the controller did not give up its voting power by agreeing to a
non-waivable majority-of-the-minority condition”).
MFW was a narrow and carefully cleared path for defendants to follow to
obtain a pleadings stage dismissal of a controlling stockholder transaction. By
arguing that the MFW framework does not require a majority-of-the-minority vote
condition when the controlled transaction is structured as a forward triangular
merger, the Special Committee Defendants seek to turn that path into a highway.
Delaware law requires the application of entire fairness review to the SDI Buyout.
2. The Complaint States a Claim that Entire Fairness Applies
and that the Standard General Defendants Breached Their
Fiduciary Duties.
“To survive a motion to dismiss in an entire fairness case, the plaintiff must
plead facts that, with all reasonable inferences drawn in their favor, show the
transaction was unfair.” Olenik v. Lodzinski, 208 A.3d 704, 718 n.74 (Del. 2019).
“Even in a self-interested transaction . . . to state a claim, a shareholder must allege
some facts that tend to show the transaction was not fair.” Solomon v. Pathe
43
Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995), aff’d, 672 A.2d
35 (Del. 1996).
The unitary test of entire fairness requires a board of directors to establish “to
the court’s satisfaction that the transaction was the product of both fair dealing and
fair price.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). Fair
dealing and fair price “must be examined as a whole since the question is one of
entire fairness.” Weinberger v. UOP, Inc., 457 A.2d 701, 711 (Del. 1983). Thus,
the court “determines entire fairness based on all aspects of the entire transaction.”
Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 746 (Del. Ch. 2007). Because entire
fairness review requires the court to adjudicate the fact-intensive issue of fair dealing
and fair price, a determination that a transaction is subject to entire fairness review
“normally will preclude dismissal of a complaint on a Rule 12(b)(6) motion to
dismiss.” Orman v. Cullman, 794 A.2d 5, 21 n.36 (Del. 2002). As the court has
more recently expressed, “overcoming entire fairness is typically a Sisyphean task
for defendants at the pleading stage, where the court must accept all of Plaintiffs’
well-pled facts as true and draw every reasonable inference in their favor.” In re
CBS Corp. S’holder Class Action & Deriv. Litig., 2021 WL 268779, at *46 (Del.
Ch. Jan. 27, 2021); see also Salladay, 2020 WL 954032, at *1 (noting that it is
virtually “axiomatic that, where entire fairness is the standard of review, a motion to
44
dismiss is rarely granted, because review under entire fairness requires a record to
be meaningful”).
The question of whether the process was fair “embraces questions of when
the transaction was timed, how it was initiated, structured, negotiated, disclosed to
the directors, and how the approvals of the directors and the stockholders were
obtained.” Weinberger, 457 A.2d at 711. Several key allegations support a
reasonable inference that the SDI Buyout was not the result of an entirely fair
process. In particular, the well-pleaded allegations of the Complaint support a
reasonable inference that SDI and Standard General successfully interfered with the
transaction process.
To establish that a controlling stockholder exercised actual control at the
pleading stage, if “a plaintiff alleges facts from which one can reasonably infer that
a stockholder controlled a corporation’s conduct, I am to draw that inference despite
the fact that the same facts also could support an inference less favorable to the
plaintiff.” O’Reilly v. Transworld Healthcare, Inc., 745 A.2d 902, 913 (Del. Ch.
1999). As a threshold matter, the Standard General Defendants argue that “the only
reasonable inference is that the 1:1 [exchange] ratio” that formed the basis for the
initial proposal considered by TPB “was the SDI special committee’s idea.”126 But
126
Standard General Defs.’ Reply Br. 14.
45
no one stood to gain more than Standard General from a stock-for-stock acquisition
of SDI by TPB at a 1:1 exchange ratio. According to the Complaint, Standard
General owned more than 75% of the outstanding SDI Class A common stock and
more than 80% of SDI outstanding nonvoting Class B common stock.127 The last
annual report filed by SDI before the SDI Buyout disclosed that, as of April 15,
2020, Standard General’s “total beneficial ownership” of SDI was 81.7%,
representing 6,237,143 shares of SDI’s Class A common stock and 7,360,075 Class
B common stock.128 Even a rough approximation based on Duff & Phelps’s analysis
that SDI’s stock traded at approximately 30% discount to TPB’s stock indicates that
executing the SDI Buyout at a 1:1 exchange ratio would have permitted Standard
General itself to reap over $60 million of benefit without sharing any of that benefit
with TPB’s minority stockholders.129 The position that the “only reasonable
inference” is that the Standard General Defendants had no involvement in the initial
1:1 exchange ratio proposal to TPB is not credible.
127
Compl. ¶ 28.
128
SDI Form 10-K/A, at 10 (filed April 22, 2020).
129
Cannataro Aff. Ex. 11 at TPB_Berteau_000325 (Duff & Phelps indicating that the
“market implied a discount of approximately $78.5 million, or 30%, to the value of TPB
shares owned by SDI”); see also id. Ex. 17 at TPB_Berteau_000342 (fairness opinion dated
March 30, 2020, calculating the total economic benefit achieved by the SDI Buyout to be
$78.5 million).
46
It is reasonably inferable that Standard General exercised control over the
transaction process on multiple occasions after the initial proposal. On two
occasions, SDI’s board of directors appears to have reversed the negotiation position
of SDI’s special committee. The first reversal occurred between February 6 and 12,
when SDI’s special committee delivered the Third Term Sheet providing for a
majority-of-the-minority approval by TPB’s stockholders and then reversed course
less than one week later, declaring that such a condition would, “under no
circumstances,” be acceptable to SDI. The second reversal occurred on March 24,
when SDI’s special committee reported the then-current terms of negotiations to the
full SDI board of directors. The day before, SDI’s special committee had
counterproposed an exchange ratio of 0.97x, $1 million in transaction fees and
expenses, and that SDI would have no more than $25,000 in net liabilities at
closing.130 SDI’s directors pressed the SDI special committee as to why the terms
“did not align more closely with the original 1:1 exchange ratio that had first been
proposed by the SDI special committee to TPB’s special committee.” 131 After SDI’s
special committee reported to the full SDI board of directors, the special committees
met and reverted to more favorable terms for Standard General and SDI: an
exchange ratio of 0.99x, the payment of $500,000 in transaction fees and expenses
130
Compl. ¶¶ 118–21; Form S-4 at 44.
131
Compl. ¶ 122 (quoting Form S-4 at 44–45).
47
to TPB, and a limit on SDI’s liabilities of no more than $25,000 at closing. 132 As
Plaintiff alleges, it is a reasonable inference that these reversals were the result of
Standard General’s intervention in the negotiation process. 133
The Standard General Defendants argue that allegations of Standard General’s
alleged interference on the SDI side of the transaction do not support a reasonable
inference that Standard General affected the Special Committee process.134 They
cite no case law in support of this argument, and their position is not tenable.
Standard General’s propensity to interfere on the SDI side creates a pleading stage
inference that it did not respect the barriers created by the creation of the TPB Special
Committee. It also informs the context of the critical events of March 29.
The well-pleaded allegations of the Complaint suggest that Standard General
did not limit its influence to acting through SDI.135 The March 29, 2020 meetings
support a reasonable inference that Standard General decided to end further
bargaining between the special committees and to finalize approval of the SDI
Buyout. The Special Committee process began in November 2019, but it effectively
ended in a single weekend. After the Special Committee conveyed a refusal to a
132
Form S-4 at 45.
133
See Compl. ¶¶ 105 & 125.
134
Standard General Defs.’ Opening Br. 11–14.
See Compl. ¶¶ 134–36 (alleging that “Standard General engineered the Special
135
Committee’s ‘opportunity to update’ the Board to exert pressure on the Special
Committee”).
48
0.99x exchange ratio on a Saturday, the Form S-4 reflects that all parties involved
engaged in negotiations, including “in consultation respectively with members of
the full boards of each company.”136 The Form S-4 does not explain why the Special
Committee was discussing the transaction with other members of TPB’s board of
directors.
The following morning, on Sunday, March 29, 2020, there were three
meetings—first between the special committees, then between the SDI board of
directors and SDI’s special committee, and then between TPB’s board of directors
and TPB’s Special Committee. These meetings have a choreographed and unusually
hurried nature. There is no indication in the Form S-4 or the Special Committee
record as to why the Special Committee would have wanted to urgently conclude
negotiations. In the absence of any other explanation, it is a reasonable inference
that these meetings were conducted at the behest of the common controller of SDI
and TPB: Standard General. See McMullin v. Beran, 762 A.2d 910, 922 (Del. 2000)
(“The imposition of time constraints on a board’s decision-making process may
compromise the integrity of its deliberative process.”).
Defendants protest that the March 29 TPB Meeting minutes state that the
purpose of the meeting was merely for an “update” regarding the transaction. As
136
Form S-4 at 45.
49
Plaintiff observes, there is no indication in the March 29 TPB Meeting minutes or in
any minutes of any Special Committee meetings that the Special Committee had
requested to update TPB’s board of directors. In fact, as the March 29 TPB Meeting
minutes indicate, Hebard “noted that she was not requesting any action by the Board
at this meeting.”137 In that regard, it is hard to comprehend why an “update” would
have been helpful or appropriate for three of the seven TPB directors: SDI’s special
committee had discussed the same proposal earlier the same morning with SDI’s full
board of directors, including Glazek, Baxter, and Zimmerman. Even if the court
could draw inferences in favor of Defendants (which it cannot), the minutes and
circumstances of the March 29 TPB Meeting do not render Defendants’ protestations
that the meeting was a mere update and “nothing sinister” the only credible
inference.138 On the contrary, it is a reasonable inference that the three meetings on
the morning of March 29, 2020 were designed to end further bargaining by the
Special Committee.
The meeting minutes further reinforce the inference that the March 29 TPB
Meeting was an occasion for Standard General to make itself heard. The minutes
reflect that the dual fiduciaries, Glazek, Baxter, and Zimmerman, participated in
substantive discussions regarding the terms of the merger. Glazek is a partner at
137
Cannataro Aff. Ex. 15.
138
Director Defs.’ Opening Br. 20 n.69.
50
Standard General whose responsibilities include “helping companies that Standard
General controls or influences” with “transactional” issues. 139 He was the primary
speaker at the March 29 TPB Meeting other than Hebard, and he “reviewed reasons
for the potential transaction from both the TPB and the SDI perspective.”140 Given
these facts, it is a reasonable inference that Glazek acted on behalf of Standard
General at the March 29 TPB Meeting, and that he did not limit himself to speaking
on behalf of SDI and TPB. After Glazek spoke and the full TPB board discussed
substantive merger issues including “the risks and potential costs of litigation,”
Glazek, Zimmerman, and Baxter excused themselves for fifteen minutes for
unexplained reasons. 141 Wexler and Diao then took up discussing the merger terms
with the Special Committee until Glazek, Zimmerman, and Baxter returned.142
Most significant is that the March 29 TPB Meeting marked the end of price
negotiations between SDI and TPB. There is no indication from the Form S-4 or the
minutes of any meeting of the Special Committee that the Special Committee had
viewed the terms negotiated as early as that morning as final or near-final. There is
no record of a Special Committee meeting discussing the proposed 0.97x exchange
ratio before the Special Committee presented that proposal to the full board at the
139
Form S-4 at 92.
140
Cannataro Aff. Ex. 15 at TPB_Berteau_000281.
141
Id.142
Id.51
March 29 TPB Meeting. And the minutes of the March 29 TPB Meeting indicate
that the Special Committee had not yet received a fairness opinion from Duff &
Phelps. Yet after March 29, 2020, there was no further movement regarding the
price for the SDI Buyout. Under Delaware law, a controlling stockholder has been
analogized to an “800-pound gorilla.”143 Because there were no further negotiations
regarding merger price after Glazek and the other conflicted directors weighed in, it
is a reasonable inference that the purpose of the March 29 TPB Meeting was to
deliver an unmistakable message from the gorilla to stop negotiating and sign the
deal.144
The Complaint contains well-pleaded allegations that the unfair process
resulted in an unfair price. The question of “fair price” concerns “the economic and
143
In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 436 (Del. Ch. 2002) (“In colloquial
terms, the Supreme Court saw the controlling stockholder as the 800–pound gorilla whose
urgent hunger for the rest of the bananas is likely to frighten less powerful primates like
putatively independent directors who might well have been hand-picked by the gorilla (and
who at the very least owed their seats on the board to his support).”).
144
The Standard General Defendants argue that it is not a reasonable inference that
Standard General was responsible for calling the March 29, 2020 meeting because TPB’s
bylaws require its CEO or TPB’s board of directors to call the meeting, and the bylaws do
not empower Glazek alone to call the meeting. Hr’g Tr. 86:24-87:5. The circumstances
of the meeting and the two other meetings that morning—one involving the SDI board and
its special committee—suggest that it was an event designed to end the special committee
process. It is a reasonable inference from the facts alleged that Standard General was
responsible for calling the March 29 TPB Meeting, regardless of whether it occurred
through Wexler alone or through a combination of other conflicted directors. That
inference is reasonably drawn from the well-pleaded allegations of the Complaint, and it is
one that I must credit in Plaintiff’s favor on a motion to dismiss.
52
financial considerations of the proposed merger, including all relevant factors:
assets, market value, earnings, future prospects, and any other elements that affect
the intrinsic or inherent value of a company’s stock.” Weinberger, 457 A.2d at 711.
The Complaint and the Duff & Phelps presentations incorporated therein indicate
that SDI directly competed with TPB’s other stockholders over the economic benefit
to be achieved by the SDI Buyout.145 According to Plaintiff, the SDI Buyout was
unfair with respect to price because the 0.97x exchange ratio transferred
approximately 90% of the economic benefit derived from the transaction to SDI
rather than to TPB’s stockholders.146 The Complaint alleges that the Special
Committee never considered an alternative transaction or an alternative form of
145
Defendants argue that the SDI Buyout was not “zero-sum” because it purportedly
“provided unique and meaningful upside to both parties by eliminating inefficiencies.”
Director Defs.’ Opening Br. 4; see also Special Committee Defs.’ Opening Br. 41–42
(listing inefficiencies purportedly eliminated by the SDI Buyout and arguing that the
transaction was entirely fair because the SDI Buyout benefited TPB stockholders). Even
assuming that the SDI Buyout was not zero-sum in some respects because it eliminated
inefficiencies and thereby benefited both TPB and SDI, the exchange ratio was the central
component of the SDI Buyout and the exchange ratio presented a zero-sum situation: a
more favorable exchange ratio to SDI inured to TPB’s detriment and vice versa. See Zero-
Sum Game, BLACK’S LAW DICTIONARY (11th ed. 2019) (defining zero-sum game as “[a]
situation in which a gain for one side necessarily entails an equal and opposite loss on the
other side”). As described herein, the Complaint adequately pleads that the ultimate 0.97x
exchange ratio enabled SDI to extract benefits from the transaction not shared with TPB’s
stockholders on a pro rata basis.
146
Compl. ¶ 111 (“[A]t a 3% discount, or a 0.97x exchange ratio, the chart shows that $6.8
million of the deal’s $78.5 million overall financial benefit – or 9.9% – would flow to TPB
stockholders.”).
53
merger consideration. 147 With respect to the exchange ratio, it is a reasonable
inference from the Duff & Phelps presentations that the Special Committee could
have obtained more for TPB and its stockholders. 148
The Director Defendants argue that Plaintiff has not pleaded facts sufficient
to warrant application of entire fairness review and argue that Monroe County
Employees’ Retirement System v. Carlson supports dismissal of this action. In
Monroe County Employees’ Retirement System v. Carlson, 2010 WL 2376890, at *2
(Del. Ch. June 7, 2010), the dismissed complaint contained only conclusory
allegations that the transaction resulted in an unfair price. Carlson is distinguishable
because the Complaint contains well-pleaded allegations that TPB and its
stockholders could have secured a greater portion of the economic benefit derived
from the SDI Buyout. Here, the Complaint contains well-pleaded allegations of both
unfair process and unfair price, and Plaintiff has met his burden to plead entire
fairness. Because it is a reasonable inference that the Standard General Defendants
acted to unfairly shut down the Special Committee process, the Standard General
Defendants’ motion to dismiss pursuant to Rule 12(b)(6) is denied.
147
Id. ¶¶ 6, 85.
148
See, e.g., Cannataro Aff. Ex. 11 at TPB_Berteau_000325 (indicating that, at a 15%
discount to a 1:1 exchange, TPB’s stockholders would have obtained a similar benefit to
SDI).
54
3. The Complaint States a Claim that Most of the Director
Defendants and the Special Committee Defendants Breached
Their Fiduciary Duties.
Entire fairness review of the transaction does not ineluctably lead to the denial
of the directors’ motions to dismiss. The Director Defendants and Special
Committee Defendants are protected by an exculpatory charter provision pursuant
to 8 Del. C. § 102(b)(7), 149 and they argue that no non-exculpated claim for breach
of fiduciary duty has been stated against them.
“When the independent directors are protected by an exculpatory charter
provision and the plaintiffs are unable to plead a non-exculpated claim against them,
those directors are entitled to have the claims against them dismissed.” In re
Cornerstone Therapeutics, Inc. S’holder Litig., 115 A.3d 1173, 1176 (Del. 2015).
As the Delaware Supreme Court held in Cornerstone, “each director has a right to
be considered individually when the directors face claims for damages in a suit
challenging board action,” and Delaware law “refuse[s] to presume that an
independent director is not entitled to the protection of the business judgment rule
solely because the controlling stockholder may itself be subject to liability for breach
of the duty of loyalty if the transaction was not entirely fair to the minority
stockholders.” Id. at 1182–83. Thus, to state a claim for breach of fiduciary duty
149
See Cannataro Aff. Ex. 21 Art. X. Plaintiff does not contest that the TPB certificate
contains an exculpatory provision pursuant to 8 Del. C. § 102(b)(7), and the court can take
judicial notice of the charter attached to the Cannataro Affidavit.
55
against a director, a plaintiff must plead “facts supporting a rational inference that
the director harbored self-interest adverse to the stockholders’ interests, acted to
advance the self-interest of an interested party from whom they could not be
presumed to act independently, or acted in bad faith.” Id. at 1179–80. In an entire
fairness case, “a director seeking to rely on the exculpatory provision must show that
any liability . . . is ‘exclusively attributable to a violation of the duty of care.’” Gesoff
v. IIC Indus., Inc., 902 A.2d 1130, 1164 (Del. Ch. 2006) (quoting In re Emerging
Commc’ns S’holders Litig., 2004 WL 1305745, at *40 (Del. Ch. May 3, 2004)).
i. Glazek, Baxter, and Zimmerman
Glazek, Baxter, and Zimmerman are paradigmatic dual fiduciaries. Each
served on the board of directors of SDI as well as the board of directors of TPB.150
Glazek is a partner of Standard General. 151 Baxter was SDI’s CEO before the SDI
Buyout.152 “There is no ‘safe harbor’ for such divided loyalties in Delaware. When
directors of a Delaware corporation are on both sides of a transaction, they are
required to demonstrate their utmost good faith and the most scrupulous inherent
fairness of the bargain.” Weinberger, 457 A.2d at 710.
150
Compl. ¶¶ 18, 20, 24.
151
Id. ¶ 18.
152
Id. ¶ 20.
56
The purpose of the Special Committee, as stated at its formation, was to
insulate the transaction process from the influence of Glazek, Zimmerman, and
Baxter.153 The Complaint pleads facts showing that they did not respect the line in
the sand. At the March 29 TPB Meeting, after Hebard discussed the Special
Committee process, Glazek took center stage and spoke at length regarding “reasons
for the potential transaction from both the TPB and the SDI perspective,” including
substantive deal terms. 154 The minutes suggest Glazek, Zimmerman, and Baxter
acted as a bloc at that meeting as SDI directors because they simultaneously excused
themselves from the meeting for fifteen minutes to permit Wexler and Diao to speak
privately with the Special Committee. 155 The portrayal of the March 29 TPB
Meeting as just an update in the TPB board minutes—and reiterated in Defendants’
briefing—is not the only reasonable inference to be drawn from the facts alleged in
the Complaint. SDI’s board of directors had discussed the latest deal terms with
SDI’s special committee that same morning. 156 It is a reasonable inference that the
153
Cannataro Aff. Ex. 2 at TPB_Berteau_000277.
154
Id. Ex. 15 at TPB_Berteau_000281.
155
Id.
156
Form S-4 at 45 (stating that, prior to the March 29 TPB Meeting, “the SDI Board held
a meeting at which the SDI special committee relayed the terms discussed with the TPB
special committee earlier in the day. The SDI Board indicated to the SDI special committee
that it could support a transaction consistent with these terms subject to satisfactory
negotiation of definitive documents and continued discussions between the SDI special
committee and its advisors.”).
57
intended effect of the March 29 TPB Meeting was to dominate the Special
Committee to benefit Standard General and SDI. The exchange ratio did not change
after that meeting, and the Special Committee only met twice thereafter to conclude
the process. In short, the Complaint contains well-pleaded facts that Glazek, Baxter,
and Zimmerman “harbored self-interest adverse to the stockholders’ interests” and
“acted to advance the self-interest” of SDI and Standard General. Cornerstone, 115
A.3d at 1180. As a result, the Complaint states a non-exculpated claim for breach
of the duty of loyalty against Glazek, Baxter, and Zimmerman.
ii. Wexler
Wexler has been a director and TPB’s President and Chief Executive Officer
since 2009.157 “Under the great weight of Delaware precedent, senior corporate
officers generally lack independence for purposes of evaluating matters that
implicate the interests of a controller.” In re EZCORP Inc. Consulting Agreement
Deriv. Litig., 2016 WL 301245, at *35 (Del. Ch. Jan. 25, 2016) (collecting cases).
SDI controlled Wexler’s compensation: Glazek and Zimmerman served on TPB’s
three-person Compensation Committee.158 Defendants do not contest that Wexler’s
compensation as the Chief Executive Officer of TPB was material to him. It is
therefore a reasonable inference that Wexler “harbored self-interest adverse to the
157
Compl. ¶ 19.
158
Compl. ¶¶ 18, 25.
58
stockholders’ interests,” and that he would act in favor of the controller rather than
TPB. Cornerstone, 115 A.3d at 1180.159
The Complaint and the documents incorporated by reference therein support
a reasonable inference that Wexler acted on behalf of Standard General during the
Special Committee process. In particular, it is a reasonable inference that Wexler
convened 160 and participated in the March 29 TPB Meeting, an event seemingly
designed to provide conflicted fiduciaries a formal opportunity to weigh in and cut
off further negotiations between the special committees regarding the exchange
ratio.
The Director Defendants argue that “Wexler’s status as TPB’s CEO alone is
not enough to defeat exculpation.” Director Defs.’ Opening Br. 62 (citing Hamilton
Partners, L.P. v. Highland Capital Management, L.P., 2014 WL 1813340 (Del. Ch.
May 7, 2014)). Hamilton Partners is distinguishable. In Hamilton Partners, the
court evaluated a transaction in which a plaintiff alleged that a CEO was involved at
two points during a special committee process, first by involving himself in an initial
159
The Director Defendants argue that the Complaint does not allege that Wexler took any
action in his capacity as an officer. Because the Complaint states a non-exculpated claim
for a breach of the fiduciary duty of loyalty against Wexler in his capacity as a director, I
need not address this issue.
160
The record is not entirely clear on this point. The meeting minutes state that the meeting
was called pursuant to the bylaws. The bylaws provide that special meetings of the board
can be called by the CEO or a majority of the board. There is at least a reasonable
pleadings-stage inference that Wexler called the meeting at the request of Glazek, Baxter,
and Zimmerman—the three conflicted SDI directors.
59
counterproposal and then a proposing a self-tender offer. Id. at *3. The court held
that there was no well-pleaded allegation indicating that the CEO acted to “sterilize”
or “compromise” the business judgment of the special committee. Id. at *16. The
allegations that Wexler convened and participated in the March 29 TPB Meeting are
much more significant than the “generalized allegations” made in Hamilton
Partners. The Complaint states a non-exculpated claim for breach of the fiduciary
duty of loyalty against Wexler.
iii. Diao
Directors are “considered individually when the directors face claims for
damages in a suit challenging board action,” and “applying the entire fairness
standard against interested parties does not relieve plaintiffs seeking damages of the
obligation to plead non-exculpated claims against each of the defendant directors.”
Cornerstone, 115 A.3d at 1181–82. This requirement is founded on the presumption
that directors are faithful to their fiduciary duties. Beam v. Stewart, 845 A.2d 1040,
1048 (Del. 2004). The Delaware Supreme Court, however, has indicated that the
court should not “parse elements” relating to independence and conflict as
“categorically distinct.” Delaware County Employees Retirement Fund v. Sanchez,
124 A.3d 1017, 1021 (Del. 2015).
The Complaint’s allegations against Diao do not support a non-exculpated
claim against him. Diao serves as Standard General’s designee on the TPB board of
60
directors. 161 The Complaint alleges that, “[a]ccording to press reports,” Diao and
Kim “have known each other and have been friends and business associates since at
least 2004,” and the founder of Standard General and Diao served together on the
board of a publicly traded company. 162 On November 15, 2019, Diao recused
himself from serving on the Special Committee, citing his “immaterial” holdings of
SDI stock, which amounted to 15,000 shares of SDI’s Class A common stock.163
Diao attended the March 29 TPB Meeting, but the minutes lack any specificity
regarding the nature of his involvement.
These allegations do not demonstrate that Diao was not disinterested and
independent. Diao’s mere status as Standard General’s designee does not mean he
is not independent. Rudd v. Brown, 2020 WL 5494526, at *12 (Del. Ch. 2020)
(“Delaware law is clear that a director’s independence is not compromised by virtue
of his status as a stockholder appointee.”). The allegations of Diao’s relationship
with Kim are minimal. The Complaint alleges that, based on an unidentified press
report, “the 63-year-old Diao and 45-year-old Kim have known each other and have
been friends and business associates since at least 2004,” and that they have served
together on the board of directors for a company named Media General, Inc. “for
161
Compl. ¶ 17.
162
Id. ¶ 21.
163
Cannataro Aff. Ex. 2 at TPB_Berteau_000277.
61
several years.”164 These allegations are analogous to the allegations in Beam, in
which the Delaware Supreme Court determined that allegations that directors
“moved in the same social circles, attended the same weddings, developed business
relationships before joining the board, and described each other as ‘friends,’” were
not sufficient to overcome the presumption that directors are disinterested and
independent. See Beam, 845 A.2d at 1051; see also id. at 1054 (considering facts
including “a Fortune magazine article focusing on . . . close personal relationships”).
Diao’s economic interest in SDI and his recusal from serving on the Special
Committee do not support a claim that he breached his fiduciary duty of loyalty.
Indeed, Plaintiff does not argue that Diao’s economic interest in SDI—15,000 shares
of SDI Class A common stock—supports a reasonable inference that Diao could not
have acted against SDI’s interests.165 In fact, Plaintiff concedes that Diao’s
ownership of shares in 15,000 SDI was “immaterial.” 166 Plaintiff instead argues that,
because Diao’s recusal from serving on the Special Committee was based on
immaterial stock ownership, “it is reasonable to infer that [Diao] would act to protect
his relationship with [Kim] and Standard General over his reputation as a public
164
Compl. ¶ 21.
165
See Pl.’s Answering Br. 50–52.
166
Hr’g Tr. 70:7–9. (“But the bottom line with respect to Mr. Diao is that when he had an
opportunity to negotiate against Standard General, he declined for an immaterial reason.”).
62
company director,” including by participating in the March 29 TPB Meeting.167
These allegations amount to speculation. It is not a reasonable inference that Diao’s
recusal was a pretext because Plaintiff has supplied no allegation indicating that Diao
was otherwise not independent. And because the Complaint lacks any well-pleaded
allegations supporting a reasonable inference that Diao was beholden to Standard
General or SDI, Diao’s mere presence at the March 29 TPB Meeting is not sufficient
to support a non-exculpated claim against him.
Because the Complaint does not contain any well-pleaded allegation
supporting a reasonable inference that Diao had any self-interest adverse to TPB,
acted to advance the interest of SDI, or acted in bad faith, the motion to dismiss must
be granted with respect to Diao. Cornerstone, 115 A.3d at 1180.
iv. The Special Committee Defendants: Frushone and
Hebard
The individualized determinations required under Cornerstone are crucial
when analyzing whether a claim has been stated against independent directors.
“[T]o require independent directors to remain as defendants solely because the
plaintiffs stated a non-exculpated claim against the controller and its affiliates would
be inconsistent with Delaware law and would also increase costs for disinterested
directors, corporations, and stockholders, without providing a corresponding
167
Hr’g Tr. 70:14–17.
63
benefit.” Cornerstone, 115 A.3d at 1182. “[W]hen a complaint pleads facts creating
an inference that seemingly independent directors . . . may have breached their duty
of loyalty,” however, “the pro-plaintiff inferences that must be drawn on a motion
to dismiss” may require “resolution of [any] question of fact only after discovery.”
Id. at 1186–87. To evaluate whether a complaint states a claim against purportedly
independent directors, the court considers whether such directors have been
“dominated in [their] decision-making by a controlling stockholder, resulting in
directors that are more independent in appearance than in substance.” CBS Corp.,
2021 WL 268779, at *41 (internal quotations omitted). In that analysis, the court
will look to whether the special committee members “evidenced [an] inability to
push back against the asserted will of the controller.” Id.According to the well-pleaded facts in the Complaint and drawing all
reasonable inferences in Plaintiff’s favor, the Complaint states a non-exculpated
claim against the Special Committee Defendants. The Complaint pleads facts
creating a reasonable inference that TPB management selected the Special
Committee’s counsel. Plaintiff alleges that Lathrop was invited to the November
15, 2019 board meeting 168 and “advised the Board concerning the formation of a
special committee, before that committee existed” and then began advising the
168
Compl. ¶ 66.
64
Special Committee immediately after its formation. 169 After the Special Committee
process ended, Lathrop reverted to its former role and advised the Company as its
“transactional counsel in the SDI Buyout.”170 Based on these allegations, Plaintiff
alleges that it is a reasonable inference that “TPB management chose Lathrop as the
Special Committee’s counsel,” and that Lathrop’s influence was a potential conflict
of interest. 171 I agree. The minutes are devoid of any reliable indication as to when
or if the Special Committee formally retained Lathrop, or that the Special Committee
considered any potential conflicts held by Lathrop.172 Lathrop was also centrally
involved in the process as the Special Committee’s primary legal advisor and
negotiator with the SDI special committee. 173
The Complaint supports a reasonable inference that the Special Committee
was not prepared to exercise its ability to say “no” to the controller. In particular,
the Special Committee never sought to leverage SDI’s reversal of position regarding
majority-of-the-minority approval by TPB’s stockholders. In CBS Corp., this court
described the failure of a special committee to “attempt to secure” a majority-of-the-
169
Id. ¶¶ 67–70.
170
Id. ¶ 67.
171
Id. ¶ 70.
172
The March 29 TPB Meeting minutes state that the Special Committee “chose Lathrop
. . . as legal counsel along with Blank Rome LLP as its special Delaware counsel” and
“engaged Duff & Phelps.” Cannataro Aff. Ex. 15.
173
See Form S-4 at 42–46.
65
minority vote after a controller “signaled it would not agree to that condition” as
“inexplicable.” CBS Corp., 2021 WL 268779, at *40. A similar situation occurred
here. The SDI special committee’s Third Term Sheet included terms requiring
approval by TPB’s stockholders and SDI’s stockholders, as well as by a majority of
TPB’s minority stockholders.174 SDI’s special committee then reversed course,
stating that “under no circumstances would SDI proceed” if the transaction were
conditioned on approval of a majority of TPB’s minority stockholders.175 The
Special Committee discussed this reversal with its legal advisors at its February 18,
2020 meeting for a total of 45 minutes. Even before meeting with its financial
advisor, the Special Committee determined that the benefits of the transaction
outweighed the benefits of a majority-of-the-minority vote. 176 It is a reasonable
inference that the Special Committee understood this reversal to be a signal from the
controller, as in CBS Corp., and the failure to negotiate in any meaningful way
regarding this key procedural protection is indicative of a Special Committee that
could not “push back against the asserted will of the controller.” CBS Corp., 2021
WL 268779, at *41.177
174
Id. at 43.
175
Cannataro Aff. Ex. 12.
176
Id.
177
See Voigt v. Metcalf, 2020 WL 614999, at *26 (Del. Ch. Feb. 10, 2020) (“The facts
alleged need only support a litigable inference of disloyalty or bad faith. The inference
66
The portrayal of the proposed majority-of-the-minority vote and its rejection
in the Form S-4 does not inspire confidence that the Special Committee was willing
or able to push back on the controller. See Form S-4 at 43 (disclosing that “though
the parties and their respective counsel discussed this provision on several occasions,
this proposed condition became inapplicable once the parties determined that the
approval of TPB stockholders was not required for the consummation of the
merger”). Thus, the Special Committee’s failure to insist on a majority-of-the-
minority vote appears to be inexplicable, and the documentation of that failure seems
to have been deliberately vague.
The March 29 TPB Meeting is critical to the analysis of the Special
Committee Defendants’ conduct. It was a meeting between the Special Committee
and openly conflicted TPB directors that marked the end of negotiations regarding
the exchange ratio after that date. There is no indication that either member of the
Special Committee objected to a meeting with the conflicted directors. There is no
indication that the Special Committee resisted Standard General’s pressure to close
price negotiations over a single weekend. And, as described above, the Special
Committee process effectively ended after the March 29 TPB Meeting. These facts
render this case similar to CBS. In CBS, the court found that members of a special
need not be the only possible inference, nor even the most likely inference. The inference
need only be reasonably conceivable.”) (internal citation omitted).
67
committee faced a substantial likelihood of liability for breach of the duty of loyalty
partly because of what the special committee failed to do after persistent interference
by a controller. Id. at *37–43. Though Standard General’s interference does not
appear to have been as persistent as in CBS, the choreographed March 29 TPB
Meeting was no less consequential, and it renders the conclusion in CBS applicable
here: “By remaining silent under these unique set of facts, it is reasonable to infer
that each of these directors’ ostrich-politik violated their duty of loyalty.” Id. at *42.
In fact, the Complaint pleads that the Special Committee never lifted its head from
the sand: after the March 29 TPB Meeting, the Special Committee never sought to
hold SDI accountable for a public offering that breached the Merger Agreement and
that appears to have profited Standard General-affiliated funds at TPB’s expense.178
The Special Committee Defendants argue that the Complaint does not allege
that they acted with a “conscious disregard” for their fiduciary duties or that they
“intentionally act[ed] with a purpose other than that of advancing the best interests
of the corporation.” In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 755 (Del.
Ch. 2005). In support of this argument, the Special Committee Defendants argue
that their negotiations reflect acts of good faith. According to the Special Committee
178
Compl. ¶ 186; see Merger Agreement at A-19. In their briefing, the Director Defendants
argue that the offering was subject to a waiver agreement that is “not before the Court.”
Director Defs.’ Opening Br. 43 n.137. Because the waiver agreement referenced by the
Director Defendants is concededly not properly before the court, it can have no effect on
this Opinion.
68
Defendants, they engaged legal and financial advisors, met ten times between
November 25, 2019 and April 7, 2020, made presentations to the full TPB Board
about the transaction twice, obtained a fairness opinion, and engaged in negotiations
with SDI that ultimately moved the exchange ratio. The fact that the Special
Committee Defendants engaged in negotiations prior to March 29, 2020 cannot
immunize the Special Committee Defendants from well-pleaded facts supporting a
reasonable inference that they ceased negotiations in conscious disregard of their
fiduciary duties after the March 29 TPB Meeting. See In re Pattern Energy Group
Inc. S’holders Litig., 2021 WL 1812674, at *50 (Del. Ch. May 6, 2021) (holding that
a complaint stated a non-exculpated claim against directors because, even though
“the Special Committee worked to extract value . . . on multiple occasions” for “over
one year,” the complaint alleged that “with each reasonable and measured step
forward . . . the Director Defendants took two steps back.”).
Viewing the facts in their totality, the allegations of the Complaint and the
documents incorporated by reference therein plead a non-exculpated claim against
the Special Committee. Plaintiff’s allegations support a reasonable inference that
negotiations over deal terms were limited to the minimum necessary to confer a
scintilla of legitimacy to the Special Committee process, and that the Special
Committee abdicated their fiduciary duties after the March 29 TPB Meeting. See In
re Viacom Inc. S’holders Litig., 2020 WL 7711128, at *24 (Del. Ch. Dec. 29, 2020)
69
(denying a motion to dismiss because a committee’s “negotiations reflect a desire to
placate the controller, not to land the best transaction possible” for all stockholders);
cf. In re InfoUSA, Inc., 2007 WL 3325921, at *23 (Del. Ch. Aug. 13, 2007) (denying
a motion to dismiss on behalf of all directors, including members of a special
committee who had taken “their mandate seriously” and “bared its teeth” in
negotiations against a controller before the non-committee members voted to
disband the committee). Frushone and Hebard may eventually prove that they acted
loyally to TPB, conducted a fair process, and did not acquiesce to the influence of
Standard General. That conclusion cannot be reached as a matter of law at this
preliminary stage.179 For the foregoing reasons, the Complaint states non-exculpated
179
Defendants raise a number of factual arguments that the court cannot accept at this stage
because doing so would require impermissibly drawing inferences in favor of the
Defendants. When there is more than one reasonable inference to be drawn from the factual
allegations at the pleadings stage, “Plaintiffs get the reasonable inferences, not
Defendants.” In re CBS Corp, 2021 WL 268779, at *31 n.450. As important, careful
scrutiny of the record relied upon by Defendants reveals that it is replete with gaps,
inconsistencies, and the use of passive voice seemingly designed to avoid describing
certain important events and identifying decisionmakers and speakers. See Form S-4 at 43
(representing that “the parties and their respective counsel determined” that a majority-of-
the-minority vote “became inapplicable” after they concluded “the approval of TPB
stockholders was not required for the consummation of the merger”). The Form S-4 and
the minutes of the meetings of the Special Committee do not undermine the inferences that
I draw in Plaintiff’s favor. See Michael A. Pittenger, Janine M. Salomone, Pamela L.
Millard, Ryan T. Costa, & Jacqueline A. Rogers, M&A Deal Counsel’s Role In Creating a
Winning Written Record for Defending Breach of Fiduciary Duty Litigation, 2013 Section
of Business Law Spring Meeting 31 (2013) (“Delaware case law is replete with examples
of situations in which the contemporaneous written record of board or committee
deliberations inspires judicial confidence in the decision-making process, but also many
examples of cases in which a thin, sketchy, or inconsistent written record undermines the
defendants’ litigation posture.”); see also Leo E. Strine, Jr., Documenting the Deal: How
70
claims for breach of fiduciary duty against Wexler, Glazek, Zimmerman, Baxter,
Frushone, and Hebard.
B. Defendants’ Motion to Dismiss Pursuant to Rule 23.1
Section 141(a) of the Delaware General Corporation Law provides that a
corporation “shall be managed by or under the direction” of its board of directors. 8
Del. C. § 141(a). This managerial authority encompasses the ability to determine
whether to “initiate, or refrain from entering, litigation.” Zapata Corp. v.
Maldonado, 430 A.2d 779 A.2d 779, 782 (Del. 1981). Through derivative litigation,
a stockholder may attempt to assert a claim on behalf of a corporation. To do so
without the board of director’s consent, the stockholder must demonstrate that “the
stockholder demanded that the directors pursue the corporate claim and they
wrongfully refused to do so,” or that “demand is excused because the directors are
incapable of making an impartial decision regarding the litigation.” United Food &
Com. Workers Union v. Zuckerberg, 2020 WL 6266162, at *8 (Del. Ch. Oct. 26,
2020).
Quality Control and Candor Can Improve Boardroom Decision-Making and Reduce the
Litigation Target Zone, 70 Bus. Law. 679, 698 (2015) (explaining that an “incoherent
approach to minute-taking,” including “disparities in the amount of space given to various
topics,” can be favorable to a plaintiff). It remains possible that Defendants could prove
that the process leading to the SDI Buyout was entirely fair and free of coercion, but that
record does not exist now.
71
Plaintiff has not made any demand on TPB’s board of directors to institute
litigation against Defendants. 180 Under such circumstances, Court of Chancery Rule
23.1 requires Plaintiff to “plead with particularity facts showing that a demand on
the board would have been futile.” In re Citigroup Inc. S'holder Deriv. Litig., 964
A.2d 106, 120 (Del. Ch. 2009) (citing Ch. Ct. R. 23.1(a)). “To determine whether a
board of directors could properly consider a demand, a court counts heads. If the
board lacks a majority of directors who could exercise independent and disinterested
judgment regarding a demand, then demand is futile.” Zuckerberg, 2020 WL
6266162, at *7 (internal citations omitted). The standard for demand futility is “well
balanced, requiring that the plaintiff plead facts with particularity, but also requiring
that this Court draw all reasonable inferences in the plaintiff’s favor.” Marchand v.
Barnhill, 212 A.3d 805, 818 (Del. 2019).
1. The Demand Futility Test
Under Delaware law, two tests exist to determine whether a plaintiff has
sufficiently pleaded demand futility. The first demand futility test, set forth in
Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984), overruled on other grounds,
Brehm v. Eisner, 746 A.2d 244 (Del. 2000), requires the Court of Chancery, “in the
proper exercise of its discretion” to decide “under the particularized facts alleged”
180
Compl. ¶ 170.
72
whether (1) there is a “reasonable doubt” that either “the directors are disinterested
and independent” or (2) “the challenged transaction was otherwise the product of a
valid exercise of business judgment.” Id.; see also Wood v. Baum, 953 A.2d 136,
140 (Del. 2008). “[T]he entire review is factual in nature,” but “the mere threat of
personal liability for approving a questioned transaction, standing alone, is
insufficient to challenge either the independence or disinterestedness of directors.”
Aronson, 473 A.2d at 815.
The second demand futility test is set forth in Rales v. Blasband, 634 A.2d
927 (Del. 1993). In Rales, the Delaware Supreme Court articulated a broader test
requiring the Court of Chancery to determine “whether or not the particularized
factual allegations of a derivative stockholder complaint create a reasonable doubt
that, as of the time the complaint is filed, the board of directors could have properly
exercised its independent and disinterested business judgment in responding to a
demand.” Id. at 934. In Rales, the Delaware Supreme Court noted that “a court
should not apply the Aronson test for demand futility where the board that would be
considering the demand did not make a business decision which is being challenged
in the derivative suit.” Id. at 927.
The parties differ on whether Aronson or Rales is the proper test to assess
demand futility. Plaintiff, the Director Defendants, and the Special Committee
Defendants apply Aronson, because the same board of directors that approved the
73
SDI Buyout would have considered a litigation demand at the time Plaintiff filed his
Complaint.181 The Standard General Defendants are alone in arguing that Rales
applies, though they acknowledge that Aronson and Rales “‘address the same
question.’”182 The Standard General Defendants argue that the Court of Chancery
must apply the demand futility test on a claim-by-claim basis, and that because
Count I is not a claim against the directors, Rales applies. The Standard General
Defendants therefore urge the court to apply Rales to Count I (alleging breach of
fiduciary duty against the Standard General Defendants) and Aronson to Count II
(alleging breach of fiduciary duty against the other Defendants).
In this case, the board that made the challenged business decision is the same
board that would be evaluating the litigation demand. Even though Aronson would
seem to apply, recent decisions have cautioned against rote application of Aronson,
especially in the entire fairness context. In Zuckerberg, Vice Chancellor Laster
explained that evolutions in Delaware law have in turn required evolutions in
Aronson’s application. In particular, the Delaware Supreme Court’s decision in
Cornerstone “sapped any continuing vitality from Aronson’s use of the standard of
181
See Director Defs.’ Opening Br. 46 (applying the Aronson test but noting that Aronson
and Rales “provide essentially identical inquiries.”); Special Committee Defs.’ Opening
Br. 43–46 (applying Aronson); Plaintiff’s Answering Br. 43–54 (applying Aronson).
182
Standard General Defs.’ Opening Br. 4 (quoting Lenois v. Lawal, 2017 WL 5289611,
at *9 (Del. Ch. Nov. 7, 2017)).
74
review for the challenged decision as a proxy for whether directors face a substantial
likelihood of liability sufficient to render demand futile.” Zuckerberg, 2020 WL
6266162, at *15. Thus, after Cornerstone, Delaware decisions have required both
that “a standard more onerous” than the business judgment rule apply and that a
majority of directors face a “substantial likelihood of liability on a non-exculpated
claim.” Id.; see also id. at *16 (“The foundational premise of [Aronson], 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.”). Those
concerns apply here: straightforward application of Aronson would equate to a
finding of demand futility merely because the SDI Buyout is subject to entire
fairness, which would be inconsistent with the Delaware Supreme Court’s opinion
in Cornerstone. See id. at *14.
The most thorough approach therefore requires analysis under both Aronson
and Rales. Rather than examining each prong of Aronson and then Rales, however,
Zuckerberg distills key questions necessary to resolve demand futility under both
tests. See id. at *19; cf. Gottlieb v. Duskin, 2020 WL 6821613, at *5 (Del. Ch. Nov
20, 2020) (analyzing demand futility by considering “general principles of demand
futility articulated by this Court under Aronson and its progeny, while keeping in
mind Rales’s broader inquiry”). To do so, Vice Chancellor Laster proceeded by
considering three inquiries:
75
Rather than trifurcating the analysis into a first prong of Aronson, a
second prong of Aronson, and Rales, this decision proceeds on a
director-by-director basis, asking for each director
(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.
Zuckerberg, 2020 WL 6266162, at *19 (formatting added). I find the approach in
Zuckerberg appropriate to deploy in this action because answering the three-part
inquiry resolves the tests set forth in Aronson and Rales.
i. Glazek
Standard General received a material benefit from the SDI Buyout. Glazek is
a Partner of Standard General, and it is a reasonable inference he lacks independence
from Standard General.183 His responsibilities at Standard General specifically
include helping “companies that Standard General controls or influences” regarding
“operational, transaction and financing needs.”184 The Complaint pleads facts
183
Compl. ¶ 18.
184
Form S-4 at 92.
76
supporting a reason to doubt that Glazek could exercise disinterested and
independent judgment regarding a demand. Defendants do not argue that Glazek
can exercise his independent business judgment in considering a demand. 185
Beyond lack of independence, Glazek faces a substantial likelihood of
liability. To show that a director faces a substantial likelihood of liability at the
pleadings stage, the plaintiff “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.” Zuckerberg, 2020 WL 6266162, at *15. The standard
requires only that the plaintiff “make a threshold showing, though the allegations of
particularized facts, that their claims have some merit.” Id. at *16 (internal
quotations omitted). Because the Complaint pleads facts supporting a reasonable
inference that he acted in bad faith by intentionally ending price negotiations at the
March 29 TPB Meeting. Id. at *15 (demand excused under the second prong of
Aronson where entire fairness applies and a “majority of the directors face a
substantial likelihood of liability on a non-exculpated claim”).
Demand is excused as to Glazek.
185
See Director Defs.’ Opening Br. 47–55; Standard General Defs.’ Opening Br. 6–8.
77
ii. Zimmerman, Baxter, and Wexler
Before the SDI Buyout, Zimmerman and Baxter were directors of SDI, and
Baxter was SDI’s Chief Executive Officer.186 Wexler is a director on TPB’s board
of directors and is TPB’s CEO and President. 187 According to Defendants,
Zimmerman, Baxter, and Wexler are capable of evaluating a litigation demand in an
independent and disinterested manner because, at the time the Complaint was filed,
SDI had ceased to exist and Standard General only held 33.5% of TPB’s stock.188
Under both Rales and Aronson, this court must determine whether the
particularized allegations of the complaint generate a “reasonable doubt” that a
board of directors can exercise “its independent and disinterested business judgment
in responding to a demand” at the “time the complaint is filed.” Rales, 634 A.2d at
934; see also Aronson, 473 A.2d at 810 (“[F]utility is gauged by the circumstances
existing at the commencement of a derivative suit.”). Under certain circumstances,
it is conceivable that directors who were previously dual fiduciaries could later be
found to be capable of exercising disinterested and independent business judgment
in considering a litigation demand asserting claims against themselves and their
186
Compl. ¶¶ 20, 24.
187
Id. ¶ 19.
188
Id. ¶ 12.
78
former controller. Under these circumstances, such an argument carries only
theoretical force.
Plaintiff pleads facts sufficient to raise a reasonable doubt that Zimmerman,
Baxter, and Wexler were independent of Standard General at the time the Complaint
was filed. To assess control, the court “must holistically evaluate sources of
influences and authority, as ‘different sources of influence that would not support an
inference of control if held in isolation may, in the aggregate, support an inference
of control.’” In re Pattern Energy, 2021 WL 1812674, at *43 (quoting Voigt, 2020
WL 614999, at *13). Standard General retained a firm grip on TPB after the SDI
Buyout because it owned 33.5% of TPB. 189 In TPB’s latest annual report, it
disclosed that, because Standard General funds owned approximately 31.5% of TPB,
“Standard General will continue to be able to exert significant influence over our
operations and business strategy as well as matters requiring stockholder approval.”
See Turning Points Brands, Inc., Form 10-K, filed February 19, 2021; see also
EZCORP, 2016 WL 301245, at *36 (holding that the managing director of an entity
named “Cash Converters” was not independent because “EZCORP owns
approximately 33% of the equity of Cash Converters, giving it substantial influence
over that entity”). Standard General’s stake thus continued to carry weight,
189
Compl. ¶ 159.
79
especially because at the time the Complaint was filed, TPB’s bylaws still purported
to require a 66.6% vote for any amendment to its bylaws. 190 These allegations bear
additional significance because Wexler remained TPB’s CEO and Zimmerman and
Baxter were dual fiduciaries of both SDI and TPB in early July 2020, only four
months before the commencement of this litigation on October 9, 2020. At that time,
Zimmerman and Baxter voted in favor of the transaction as directors of SDI and
separately as directors of TPB. 191
Based on the particularized allegations of the Complaint, I have a “reasonable
doubt” that Zimmerman, Baxter, and Wexler could impartially consider a litigation
demand against Standard General. See Grimes v. Donald, 673 A.2d 1207, 1217
(Del. 1996) (noting that the concept of “reasonable doubt” is “flexible and workable”
and permits a plaintiff to control a derivative action “in an appropriate case where
the claim is not based on mere suspicions or stated solely in conclusory terms.”),
overruled on other grounds, Brehm, 746 A.2d 244; see also Sanchez, 124 A.3d at1023 n.25 (noting that “[a] lack of independence does not turn on whether the
interested party can directly fire a director from his day job,” but rather depends on
190
Compl. ¶ 160. Defendants argue that supermajority provision in the Company’s bylaws
was mooted after the Complaint was filed and was never enforceable in any event. Defs.’
Opening Br. 37. Regardless of whether the supermajority provision was enforceable,
TPB’s directors permitted the supermajority provision to remain in effect until after the
filing of the Complaint.
191
Cannataro Aff. Ex. 20 at TPB_Berteau_000284.
80
if the complaint pleads “facts from which the director's ability to act impartially on
a matter important to the interested party can be doubted because that director may
feel either subject to the interested party’s dominion or beholden to that interested
party.”). At the time the Complaint was filed, Zimmerman, Baxter, and Wexler were
recently subject to control by Standard General, and the four-month period between
the SDI Buyout and filing of the Complaint is not long enough to resolve all doubt
regarding their independence. See Klein v. H.I.G. Capital, L.L.C., 2018 WL
6719717, at *12 (Del. Ch. Dec. 19, 2018) (finding that a director who had served as
the company’s CEO a few months earlier under the company’s previous controller
was not independent with respect to that controller, citing the “three-year cooling-
off period” provided for in stock exchange guidelines).
Even if Zimmerman, Baxter, and Wexler could be deemed independent for
purposes of the demand futility analysis, they face a “substantial likelihood of
liability” from the claims asserted in this action because entire fairness applies and
because the Complaint pleads facts sufficient to state a non-exculpated claim against
them. Zuckerberg, 2020 WL 6266162, at *15. Demand is therefore excused as to
them. 192 See Aronson, 473 A.2d at 814; Rales, 634 A.2d at 930. Because four of
seven directors are not independent for purposes of evaluating a litigation demand
192
See supra sections II.A.3.i & II.A.3.ii.
81
and face a “substantial likelihood of liability,” there is a reasonable doubt under both
Aronson and Rales that TPB’s board of directors could have exercised independent
business judgment in considering a litigation demand.
III. CONCLUSION
For the foregoing reasons, Defendants’ motions to dismiss are denied, except
that the Director Defendants’ motion to dismiss is granted solely as to Diao, and
Count III is dismissed as moot without prejudice to Plaintiff’s ability to seek an
award of attorney’s fees for achieving a corporate benefit.
IT IS SO ORDERED.
82