In re Essendant, Inc. Stockholder Litigation ( 2019 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ESSENDANT, INC. ) CONSOLIDATED
STOCKHOLDER LITIGATION ) C.A. No. 2018-0789-JRS
MEMORANDUM OPINION
Date Submitted: October 2, 2019
Date Decided: December 30, 2019
Blake A. Bennett, Esquire of Cooch and Taylor, P.A., Wilmington, Delaware;
Juan E. Monteverde, Esquire and Miles D. Schreiner, Esquire of Monteverde &
Associates PC, New York, New York; and Donald J. Enright, Esquire and
Elizabeth K. Tripodi, Esquire of Levi & Korsinsky, LLP, Washington, DC,
Attorneys for Plaintiffs Joseph Pietras and Michael J. Sultan.
Robert S. Saunders, Esquire, Arthur R. Bookout, Esquire and Lilianna Anh P.
Townsend, Esquire of Skadden, Arps, Slate, Meagher & Flom LLP, Wilmington,
Delaware, Attorneys for Individual Defendants Richard D. Phillips, Charles K.
Crovitz, Dennis J. Martin, Susan J. Riley, Alexander M. Schmelkin, Stuart A.
Taylor, II, Paul S. Williams and Alex D. Zoghlin.
Gregory P. Williams, Esquire, Lisa A. Schmidt, Esquire, Matthew D. Perri, Esquire
and Angela Lam, Esquire of Richards, Layton & Finger, P.A., Wilmington,
Delaware and Matthew Solum, P.C., Ian Spain, Esquire of Kirkland & Ellis LLP,
New York, New York, Attorneys for the Staples Defendants Sycamore Partners,
Staples, Inc., Egg Parent Inc. and Egg Merger Sub Inc.
SLIGHTS, Vice Chancellor
In the spring of 2018, Essendant Inc. (or the “Company”) signed a merger
agreement with Genuine Parts Company (“GPC”) whereby Essendant would
combine with a GPC affiliate. The agreement contemplated a stock-for-stock
transaction that would result in Essendant stockholders owning 49% of the combined
company. According to Essendant’s financial advisors, the transaction would
represent a value range of $13.30–$23.90 per share for Essendant stockholders,
including $8.35–$11.25 per share from anticipated synergies.
Shortly after signing the GPC merger agreement, the Essendant board of
directors (the “Essendant Board”) received an all cash offer to acquire Essendant
from Sycamore Partners (“Sycamore”). As Sycamore was communicating with the
Essendant Board, it was also making a push in the open market to acquire a
substantial (ultimately 11.16%) stake in the Company. The Essendant Board
responded by adopting a poison pill. After calming the waters, the Essendant Board
entertained further discussions with Sycamore and eventually decided to terminate
the GPC merger agreement and accept Sycamore’s $12.80 per share all cash offer,
which represented a 51% premium to Essendant’s unaffected stock price
(the “Sycamore merger”). The transaction closed on January 31, 2019.
1
Essendant now faces litigation on two fronts. First, GPC has sued Essendant
for breaches of the GPC merger agreement. That case is pending in this court.1
Second, in this case, a putative class of Essendant stockholders has sued the
Essendant Board and Sycamore for breaches of fiduciary duty, waste and aiding and
abetting breaches of fiduciary duty. The gravamen of the Complaint is that the
Essendant Board succumbed to pressure from Sycamore and improperly turned GPC
away in favor of an inferior proposal from Sycamore. Defendants have moved to
dismiss under Rule 12(b)(6) for failure to state viable claims.
Essendant’s charter contains an exculpatory provision, as authorized under
8 Del. C. § 102(b)(7), that protects the Essendant Board from monetary liability for
breaches of the duty of care. 2 Accordingly, to state litigable claims against the
Essendant Board, Plaintiffs must well plead that a majority of the members of the
Essendant Board breached the duty of loyalty. As explained below, Plaintiffs have
failed to strike that mark. Specifically, they have failed to well plead either that the
Essendant Board was dominated and controlled by Sycamore or that a majority of
the Essendant Board acted out of self-interest or in bad faith when approving the
1
See Genuine Parts Co. v. Essendant Inc., 2019 WL 4257160 (Del. Ch. Sept. 9, 2019).
2
See Essendant Inc., Solicitation/Recommendation Statement (Schedule 14D-9) 12
(Sept. 24, 2018) (“Essendant 14D-9”); In re Gen. Motors (Hughes) S’holder Litig., 897
A.2d 162, 179 (Del. 2006) (noting the trial court may take judicial notice of facts in SEC
filings that are “not subject to reasonable dispute”) (emphasis in original).
2
Sycamore merger. Plaintiffs likewise have failed to plead viable breach claims
against Essendant’s CEO notwithstanding that the CEO cannot avail himself of
exculpation. This leaves Plaintiffs with only a claim of waste against the Essendant
fiduciaries, and their Complaint does not come close to stating that claim.
As for Sycamore, Plaintiffs do not well plead that Sycamore’s less than 12%
stake in Essendant at the time of the events in question was coupled with the kind of
influence that could justify a finding that Sycamore was Essendant’s controlling
stockholder. Nor have Plaintiffs well pled that Sycamore knowingly participated in
a breach of duty by any Essendant fiduciary in order to sustain an aiding and abetting
claim.
Defendants’ Motions to Dismiss must be granted.
I. FACTUAL BACKGROUND
I draw the facts from the allegations in the Verified Amended Class Action
Complaint (the “Complaint”), 3 documents incorporated by reference or integral to
that pleading and judicially noticeable facts.4 For purposes of these Motions to
3
Verified Am. Class Action Compl. (“Compl.”) (D.I. 9).
4
See Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 860 A.2d 312, 320 (Del. 2004) (quoting
In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 69 (Del. 1995)) (noting that on a
motion to dismiss, the court may consider documents that are “incorporated by reference”
or “integral” to the complaint); D.R.E. 201–02 (codifying Delaware’s judicial notice
doctrine).
3
Dismiss, I accept as true the Complaint’s well-pled factual allegations and draw all
reasonable inferences in Plaintiffs’ favor. 5
A. Parties and Relevant Non-Parties
Plaintiffs, Joseph Pietras and Michael J. Sultan, were Essendant stockholders
during the relevant period.6 They bring this action on behalf of themselves and all
similarly situated former Essendant stockholders. 7
Non-party, Essendant, is a Delaware corporation with its principal offices in
Deerfield, Illinois.8 Prior to the Sycamore merger, Essendant was a national
wholesale distributor of office supplies and equipment. 9
Defendant, Richard D. Phillips, was Essendant’s President, CEO and member
of the Essendant Board during the relevant period.10 Defendant, Charles K. Crovitz,
was the Chairman of the Essendant Board. 11 Defendants, Dennis J. Martin, Susan J.
5
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002).
6
Compl. ¶ 17.
7
Compl. ¶¶ 1, 41.
8
Compl. ¶ 31.
9
Id.
10
Compl. ¶ 18.
11
Compl. ¶ 19.
4
Riley, Alexander M. Schmelkin, Stuart A. Taylor, II, Paul S. Williams and Alex D.
Zoghlin were each members of the Essendant Board.12
Defendant, Sycamore, is a private equity firm specializing in retail and
consumer investments with its principal offices in New York, New York.13
Sycamore owns Defendant, Staples, Inc. (“Staples”), a Delaware corporation that
provides office supplies and technology products and services for business
customers and consumers. 14 Staples is an affiliate of Defendants, Egg Parent Inc.
and Egg Merger Sub Inc.15
Non-party, GPC, is a Georgia corporation engaged in the distribution of
automotive replacement parts, industrial parts and business products. 16 GPC
wholly-owns S.P. Richards Co. (“SPR”), a company engaged in the wholesale
distribution of office supply products in the United States and Canada.17
12
Compl. ¶¶ 18–26.
13
Compl. ¶ 27.
14
Compl. ¶ 28.
15
Id.
16
Compl. ¶ 32.
17
Compl. ¶ 33.
5
B. The Essendant–GPC Merger
Beginning in the fall of 2017, the Essendant Board began discussing a
potential business combination with GPC’s subsidiary, SPR (the “GPC merger”).18
Essendant’s preliminary estimates suggested that the GPC merger would unlock
more than $75 million in net cost synergies, 90% of which Essendant expected to
realize within two years post-closing. 19 Additionally, the Essendant Board expected
the GPC merger to generate more than $100 million in working capital
improvements.20 Essendant’s financial advisor, Citigroup Global Markets Inc.
(“Citi”), conducted a pro forma discounted cash flow analysis (“DCF”) that
calculated “an implied equity value reference range for the pro forma combined
company of $13.30 to $23.90 per share (including a synergies range of
approximately $8.35 to $11.25 per share[)].” 21
While the economics of the GPC merger looked promising on paper, both
parties anticipated that the proposed transaction would confront serious antitrust
compliance issues.22 Given the considerable resources both parties expected to
18
Compl. ¶ 52.
19
Compl. ¶ 53.
20
Id.
21
Compl. ¶ 54.
22
Compl. ¶ 56.
6
expend in pursuing and closing a business combination, including the pursuit of
regulatory approvals, GPC requested assurances from the Essendant Board that it
was committed to consummating the GPC merger before the parties began
negotiating in earnest.23 In response, the Essendant Board assured GPC that it had
no interest in pursuing a transaction with any other party and that no other party had
expressed interest in pursuing a transaction with Essendant. 24
To shore up this understanding, GPC included a “non-solicitation” provision
in the GPC merger agreement whereby Essendant promised (i) not to knowingly
encourage a competing acquisition proposal, (ii) to terminate all existing
negotiations related to a competing transaction and (iii) to notify GPC within
24 hours after receipt of any competing proposal.25 As is customary, the non-
solicitation provision did not prohibit Essendant from considering alternative
proposals. Indeed, in accordance with Delaware law, the Essendant Board was free
to consider unsolicited proposals provided that any new suitor entered into a
confidentiality agreement with terms no more favorable to the suitor than those
extended to GPC in the GPC merger agreement. 26 Additionally, because antitrust
23
Id.
24
Id.
25
Compl. ¶ 57.
26
Id.
7
clearance was a concern shared by both parties, GPC required that Essendant
promise to use its reasonable best efforts to seek antitrust approval of the GPC
merger. 27
On April 12, 2018, Essendant and GPC announced they had entered into the
GPC merger agreement.28 The agreement contemplated that SPR would spin off
from GPC and then merge with Essendant. 29 If the GPC merger had closed, GPC
stockholders would have owned approximately 51% of the combined company and
Essendant stockholders would have owned the remaining 49%.30
C. Sycamore Makes an Offer and the Essendant Board Terminates the
GPC Merger Agreement
On April 9, 2018, three days before Essendant and GPC signed the GPC
merger agreement, representatives of Sycamore called Phillips to express
Sycamore’s interest in acquiring the Company. 31 Sycamore saw in Essendant a
27
Id.
28
Compl. ¶ 48.
29
Id.
30
Compl. ¶ 49.
31
Compl. ¶¶ 2, 12, 57–58, 82. The extent to which Essendant and Sycamore were talking
before the GPC merger agreement was signed is in dispute in the GPC/Essendant litigation.
By extension, that fact is also in dispute in this litigation as many of the allegations in the
Complaint here parrot allegations in GPC’s complaint. Compare Compl. ¶ 33, Genuine
Parts Co., (C.A. No. 2018-0730-JRS), 2019 WL 4257160 (the “GPC Compl.”) (alleging
Essendant “conveyed to Sycamore that it would be open to receiving a revised offer from
8
chance to protect its $6.9 billion investment in Staples and “create a combined entity
that [would] be a powerhouse in the office supply industry.” 32
Essendant did not immediately inform GPC of Sycamore’s overture.33
Indeed, the first time GPC learned of Sycamore’s expression of interest was on
May 31, 2018, seven weeks after Essendant and GPC executed the GPC merger
agreement.34
As GPC remained in the dark, on April 17, 2018, Sycamore communicated its
formal acquisition proposal to acquire Essendant for $11.50 per share in an all cash
transaction (“Proposal 1”). 35 On April 24, the Essendant Board rejected Proposal 1
after determining it was unlikely to lead to a superior proposal when compared with
the GPC merger agreement. 36 In communicating its rejection to Sycamore, the
Essendant Board made clear it would “be open to receiving a revised offer.”37
Sycamore”), with Compl. ¶ 66 (“Essendant informed ‘Sycamore that it would be open to
receiving a revised offer from Sycamore.’”) (quoting GPC Compl. ¶ 33).
32
Compl. ¶ 82.
33
Compl. ¶¶ 12, 59.
34
Compl. ¶ 62.
35
Compl. ¶ 9.
36
Compl. ¶¶ 9, 64.
37
Compl. ¶ 66.
9
Essendant’s 10-Q, dated April 25, did not mention Sycamore’s Proposal 1; instead,
the Essendant Board disclosed that it was committed to closing the GPC merger. 38
On April 29, 2018, Sycamore communicated its “renewed” proposal
(“Proposal 2”) to the Essendant Board at the same $11.50 price per share that
comprised Proposal 1. 39 This time, however, the Essendant Board determined that
Proposal 2 was “reasonably likely to lead to a superior acquisition proposal.” 40 As
a result, on May 31, Essendant notified GPC of its determination that Sycamore’s
Proposal 2 was a superior proposal and invited GPC to exercise its matching rights.41
In response, on May 7, GPC offered additional consideration in the form of a
contingent value right (a cash payment at the end of 2019 of up to $4 per share). 42
In the midst of its negotiations with Essendant, Sycamore began acquiring
Essendant’s stock on the open market.43 On May 16, Sycamore filed a Schedule 13D
38
Compl. ¶ 65.
39
Compl. ¶ 67.
40
Compl. ¶¶ 67–68. As support for its apparent change of heart, the Essendant Board
explained that it had determined, based on recently discovered information, that the GPC
merger was unlikely to be approved by antitrust regulators. Compl. ¶ 79. According to
Plaintiffs, the explanation was pretextual. Id.
41
Compl. ¶ 62.
42
Compl. ¶ 71.
43
Compl. ¶ 74.
10
revealing it had acquired 9.9% of Essendant’s stock.44 For reasons unclear,
Essendant did not negotiate a standstill agreement with Sycamore. 45 Instead, in
response to Sycamore’s Schedule 13D filing, on May 17, the Essendant Board
adopted a rights plan. 46 Sycamore’s open market purchases stopped on May 21,
2018, after Sycamore had acquired 11.16% of Essendant’s outstanding shares.47
Meanwhile, in order to allow more time to negotiate with Sycamore, it is alleged
that the Essendant Board slow-walked its efforts to obtain regulatory approvals of,
and customer support for, the GPC merger notwithstanding its commitment to GPC
to move “promptly” on both fronts.48
D. The Sycamore Merger
After more negotiations and due diligence, on September 10, 2018, Essendant
announced that it had agreed to accept Sycamore’s acquisition proposal of $12.80
per share in cash (the “Final Proposal”). 49 Earlier that morning, Essendant’s stock
44
Id.
45
Compl. ¶ 12.
46
See Essendant 14D-9 at 20; Compl. ¶ 76.
47
Compl. ¶¶ 74–75.
48
Compl. ¶¶ 77–78.
49
Compl. ¶ 80.
11
had been trading at $14.24 per share.50 Thus, Sycamore’s Final Proposal represented
an 11% discount to Essendant’s then-trading stock price.51 But that price was hardly
“unaffected”; the market had reacted favorably to the announcement of the GPC
merger weeks earlier (with a trading high of $16.63 per share), and it was still high
on that transaction when the Sycamore merger was announced.52
Essendant again extended a matching right to GPC. This time, however, GPC
chose not to match, so the GPC merger agreement terminated after the three-day
match period. 53 This triggered Essendant’s obligation to pay a $12 million
termination fee to GPC. 54
Citi served as Essendant’s financial advisor throughout its negotiations with
both GPC and Sycamore. 55 With respect to the GPC merger, Citi calculated a pro
forma combined company equity value range of $13.30 to $23.90 per share,56
50
Id.
51
Id.
52
Compl. ¶ 85.
53
Genuine Parts Company, Current Report (Form 8-K) (Sept. 11, 2018) (“GPC anticipates
that the Merger Agreement will terminate at the end of the three-day match period.”).
54
Compl. ¶ 130.
55
Compl. ¶ 86.
56
Id.
12
including synergy values of $8.35 to $11.25 per share.57 Even though it opined that
the GPC merger presented a value range greater than the all-cash Sycamore merger,
Citi opined that the Sycamore merger was fair from a financial perspective to
Essendant’s stockholders. 58 According to its disclosures to stockholders, the
Essendant Board chose the Sycamore cash offer over the GPC stock-for-stock offer,
in part, due to “risk related to continued secular decline in the Company’s industry”
that threatened the long-term success of the combined company. 59
The Sycamore merger proceeded in two steps.60 On January 31, 2019,
Sycamore and Essendant announced the successful completion of a tender offer in
which 79.7% of Essendant’s stockholders tendered their shares to Sycamore in
exchange for $12.80 per share in cash. 61 The tender offer was followed by a cash-
out merger at the same price. 62
According to Plaintiffs, Essendant’s disclosures regarding the Sycamore
merger omitted the following material information:
57
Id.
58
Essendant 14D-9 at 26.
59
Id. at 27.
60
8 Del. C. § 251(h).
61
Compl. ¶ 90.
62
Essendant 14D-9 at 2.
13
• That the Essendant Board had represented to GPC that it had no interest
in any merger partner other than GPC;63
• That the Essendant Board had indicated to Sycamore—after rejecting
Proposal 1—that Essendant “would be open to receiving a revised
offer” notwithstanding its commitment to GPC not to solicit other
offers; 64
• Whether Essendant “did or did not” contact its customers to build
support for the GPC merger;65
• That Essendant’s financial advisor, Citi, advised the Essendant Board
while laboring under a conflict of interest arising from its anticipated
post-closing work for Staples after the Sycamore merger; 66
• The precise nature of Essendant’s executive officers’ and directors’
negotiations with Sycamore over “possible ongoing roles with
Staples”;67 and
• The precise date that Essendant’s financial projections—used in Citi’s
fairness opinion—were prepared.68
63
Compl. ¶ 94.
64
Compl. ¶ 95.
65
Compl. ¶ 96.
66
Compl. ¶¶ 101–103. While Plaintiffs acknowledge the Essendant 14D-9 disclosed (i)
Citi’s current work for Essendant for which Citi received $2.5 million, (ii) Citi’s previous
work for Staples for which Citi received $5 million and (iii) the fact that Citi anticipated
doing additional work for Sycamore after the Sycamore merger, Plaintiffs allege the
specific “amount of fees Citi expects to receive in the near future” was omitted and material
to Essendant stockholders. See Compl. ¶ 103 (“[W]ithout full and complete quantification
of all expected fees—not just those that have been paid out as of the fairness opinion—
stockholders cannot properly assess the breadth of the conflict.”).
67
Compl. ¶ 104 (internal quotations omitted). While Plaintiffs acknowledge Essendant
disclosed that some of Essendant’s officers and directors expected to have ongoing roles
in the new company, Plaintiffs fault the disclosure for omitting “precisely which”
executives had these negotiations and “when such discussions occurred.” Id.
68
Compl. ¶ 105.
14
Compounding the impact of these omissions, Plaintiffs allege the following
affirmative misstatements were included in Essendant’s 14D-9:
• The disclosure “create[d] the impression that there was some newly-
discovered, significant risk of gaining FTC approval for the GPC
[merger]”; 69 and
• Essendant’s statement that a federal securities action related to the
transaction “was voluntarily dismissed” led stockholders to
“incorrectly believe that all stockholder actions challenging the
[Sycamore merger] had been dismissed.”70
E. Procedural Posture
On October 31, 2018, Plaintiffs filed a class action complaint against the
Essendant Board alleging breaches of fiduciary duties flowing from its failure to
obtain the highest value reasonably available for Essendant by approving and
recommending the Sycamore merger in a decision that amounted to corporate
69
Compl. ¶¶ 97–100. The Complaint alleges the Essendant Recommendation Statement
“painted an inaccurate picture regarding the regulatory approval risk surrounding the GPC
[merger].” Compl. ¶ 100. Specifically, Plaintiffs allege the following statements in the
Essendant 14D-9, taken together, were misleading: (i) that the Essendant Board reviewed
an analysis provided by its legal counsel outlining regulatory approval developments in the
GPC merger; (ii) that Essendant’s counsel updated the Essendant Board on the FTC’s
review of documents related to the GPC merger and counsel’s estimation of how those
documents would affect the FTC’s review; (iii) that Essendant’s advisors compared the
“risks and benefits of a transaction with Staples compared to the [GPC merger], including,
among other things, the financial and regulatory aspects of each”; and (iv) that the
Essendant Board considered the relative “risks of execution” of each business combination.
Compl. ¶¶ 97–98. The net effect of these disclosures, allegedly, is to create “the impression
that there was some newly-discovered, significant risk of gaining FTC approval.”
Compl. ¶ 99.
70
Compl. ¶ 106.
15
waste.71 The initial complaint also alleged Sycamore and Staples aided and abetted
the Essendant Board’s breaches. 72 After Defendants moved to dismiss, Plaintiffs
amended the complaint to add a claim against Sycamore for breaching its fiduciary
duties as a controlling stockholder and against the Essendant Board for aiding and
abetting Sycamore’s alleged breach.73
On March 13, 2019, the court entered a consolidation order as among separate
putative class complaints.74 On April 2, 2019, Defendants moved to dismiss the lead
Complaint under Court of Chancery Rule 12(b)(6).75 Following briefing and oral
argument, Defendants’ Motions to Dismiss were submitted for decision.76
II. ANALYSIS
“The standards governing a motion to dismiss for failure to state a claim are
well settled: (i) all well-pleaded factual allegations are accepted as true; (ii) even
71
Class Action Compl. (D.I. 1) ¶¶ 90–95, 101–06.
72
Class Action Compl. (D.I. 1) ¶¶ 96–100.
73
Compl. ¶¶ 114–17, 123–27.
74
D.I. 12.
75
D.I. 15 (the Essendant Board’s Motion to Dismiss); D.I. 16 (Sycamore’s Motion to
Dismiss).
76
D.I. 38. This Court addressed the separate dispute between GPC and Essendant earlier
this year in a decision on Essendant’s Motion to Dismiss. See Genuine Parts Co., 2019
WL 4257160 (denying the Motion to Dismiss upon concluding that GPC had stated a claim
for breach of the GPC merger agreement).
16
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 recovery under any reasonably conceivable set of circumstances susceptible of
proof.’” 77 Despite this plaintiff-friendly standard, the court need not accept “every
strained interpretation of the allegations proposed by the plaintiff.” 78 Nor must the
court credit “conclusory allegations unsupported by specific facts or . . . [requiring]
unreasonable inferences.”79
The Complaint brings three counts against the Essendant Board, all of which
arise from Essendant’s termination of the GPC merger agreement in favor of the
Sycamore merger. In Count I, Plaintiffs allege the Essendant Board breached its
fiduciary duties by failing to obtain the highest value reasonably available for
Essendant. 80 In Count IV, Plaintiffs allege the Essendant Board aided and abetted
77
Savor, Inc., 812 A.2d at 896–97 (internal citations omitted).
78
In re Gen. Motors, 897 A.2d at 168.
79
Lyons Ins. Agency Inc. v. Wilson, 2018 WL 481641, at *3 (Del. Ch. Jan. 19, 2018)
(internal citation omitted).
80
Compl. ¶¶ 108–13.
17
Sycamore’s breach of fiduciary duties as a controlling stockholder.81 Count V
alleges the Sycamore merger constituted waste. 82
The Complaint also names Sycamore, Staples and various transaction-specific
entities as Defendants. In Count II, Plaintiffs allege Sycamore was Essendant’s
controlling stockholder and that Sycamore “use[d] its control against the interests of
the non-controlling stockholders” by “pressuring . . . the Essendant [Board] to accept
its inadequate [] offer.” 83 In Count III, Plaintiffs allege Sycamore, Staples,
Egg Parent Inc. and Egg Merger Sub Inc. aided and abetted the Essendant Board’s
breaches of fiduciary duties as “active and knowing participants” in the Essendant
Board’s wrongful conduct. 84
My analysis of the claims against the Essendant Board and its CEO begins by
focusing on the viability of the affirmative claims as pled in light of Essendant’s
exculpatory charter provision. Because Plaintiffs have not stated litigable
affirmative claims under Delaware law, I need not reach the validity of the Corwin
81
Compl. ¶¶ 123–27.
82
Compl. ¶¶ 128–33.
83
Compl. ¶¶ 114–17.
84
Compl. ¶¶ 118–22.
18
defense as asserted by all Defendants. 85 As explained below, the affirmative claims
against Sycamore, Staples and their affiliates likewise fail as a matter of law.
A. Counts I, IV and V—Breach of Fiduciary Duties Against the Essendant
Board and CEO
Count I alleges the Essendant Board members (including Phillips as a board
member) 86 breached their fiduciary duties by “caving to the will of Sycamore and
knowingly and willfully allowing the GPC [merger] to be sabotaged by Sycamore
so that [Sycamore] could acquire Essendant at an unfair price.”87 As our Supreme
Court made clear in In re Cornerstone Therapeutics Inc. S’holder Litig., given
Essendant’s exculpatory charter provision, in order to survive the Essendant Board’s
Motion to Dismiss, the Complaint must state valid, non-exculpated claims.88
In other words, “regardless of the underlying standard of review for the board’s
conduct,” the Complaint must “invoke loyalty and bad faith claims.” 89
85
Corwin v. KKR Fin. Hldgs., 125 A.3d 304 (Del. Ch. 2015), aff’d, 125 A.3d 304
(Del. 2015) (holding that a fully informed, uncoerced vote of disinterested stockholders in
favor of a transaction can “cleanse” breaches of fiduciary duty and subject the challenged
transaction to deferential review under the business judgment rule).
86
I address the claims against Phillips as CEO separately below.
87
Compl. ¶ 111.
88
8 Del. C. § 102(b)(7); In re Cornerstone Therapeutics Inc. S’holder Litig., 115 A.3d
1173, 1081 (Del. 2015).
89
Cornerstone, 115 A.3d at 1175, 1179; Malpiede v. Townson, 780 A.2d 1075, 1094
(Del. 2001).
19
In its attempt to overcome its pleading burden under Cornerstone, the
Complaint blurs the lines between (i) loyalty claims against the Essendant Board
members based on their having acceded to the will of Sycamore as a controlling
stockholder at the expense of the other stockholders and (ii) claims that rest on
allegations that these fiduciaries operated under some broader conflict of interest.90
These, of course, are different claims that implicate different factual and legal
predicates. To state a claim that the Essendant Board was dominated and controlled
by Sycamore, the Complaint must well plead that, notwithstanding Sycamore’s
status as a distinctly minority blockholder, it was, nevertheless, Essendant’s
controlling stockholder.91 These allegations, such as they are, must be measured
against Delaware’s well settled law on controlling stockholders. 92 The question of
90
Compl. ¶¶ 12, 111(a) (The Essendant Board “cav[ed] to the will of Sycamore.”), 111(d)
(The Essendant Board “plac[ed] Sycamore’s interests ahead of the interests of the
Company’s non-controlling stockholders.”), 104 (“The Recommendation Statement fails
to provide sufficient information for stockholders to properly assess the conflict of interest
certain executive officers and directors faced [with respect to the Sycamore merger]”).
91
Plaintiffs are also obliged to plead that the controller exercised influence over each of
the board members named as defendants; group pleading is not sufficient to state a claim
of breach of duty against an individual fiduciary. Cornerstone, 115 A.3d at 1182–83
(holding that even if a controller is proven to have breached his duty of loyalty, the court
cannot “presume that an independent director is not entitled to the protection of the
business judgment rule.”); id. (“[T]he mere fact that a director serves on the board of a
corporation with a controlling stockholder does not automatically make that director not
independent.”).
92
See, e.g., In re PNB Hldg. Co. S’holders Litig., 2006 WL 2403999, at *9 (Del. Ch.
Aug. 18, 2006) (analyzing whether a stockholder exercises such formidable voting and
20
whether a majority of the Essendant Board labored under conflicts of interest with
respect to the GPC and Sycamore mergers, on the other hand, involves a counting
of heads among board members to determine whether the Complaint well pleads that
a majority of the Essendant Board was either interested in the transaction(s) or lacked
independence. 93
While Plaintiffs’ theories of breach are at sixes and sevens, I address each
separately in search of clarity. As I consider the claim that Sycamore dominated and
controlled the Essendant Board, I necessarily confront Plaintiffs’ allegation that
Sycamore owes fiduciary duties to Essendant stockholders as Essendant’s
controlling stockholder. 94
1. Plaintiffs Have Not Well Pled That Sycamore Was Essendant’s
Controlling Stockholder
If Plaintiffs had pled facts supporting a reasonable inference that a majority
of the Essendant Board was beholden to an interested party, such as a conflicted
controlling stockholder, then Count I would state a non-exculpated claim of breach
managerial power that, as a practical matter, it is “no differently situated than if [it] had
majority voting control.”).
93
Frederick Hsu Living Trust v. ODN Hldg. Corp., 2017 WL 1437308, at *26 (Del. Ch.
Apr. 14, 2017).
94
Compl. ¶¶ 1, 13, 35, 36–37, 61, 111, 115–16.
21
of fiduciary duty. 95 To be sure, Plaintiffs were mindful of this burden and attempted
to carry it by alleging that Sycamore was Essendant’s controlling stockholder when
the Essendant Board terminated the GPC merger agreement in favor of the Sycamore
merger. 96 According to the Complaint, the Essendant Board “cav[ed] to the will of
Sycamore” and “fail[ed] to ensure that all conflicts of interest between Sycamore
and [Essendant’s] non-controlling stockholders were resolved in the best interests of
the non-controlling stockholders.”97 If this conclusory allegation were supported by
well-pled facts, then the Essendant Board’s Motion to Dismiss would have to be
denied.98 But, as explained below, with no facts to serve as anchor, the conclusory
allegations of domination and control drift over the falls.
Under Delaware law, a stockholder is a “controlling stockholder” only if it
(1) “owns more than 50% of the company’s voting power” or (2) “owns less than
50% of the voting power of the corporation but exercises control over the business
95
See Parnes v. Balley Entm’t Corp., 1997 WL 257435, at *2 (Del. Ch. May 12, 1997)
(stating that a plaintiff may rebut the presumption that a board acted on an informed basis,
in good faith and in the honest belief that the action was taken in the best interest of the
company by showing that “a majority of [the company’s] directors lacked independence”
because they were “dominated and controlled” by an interested party).
96
Compl. ¶ 115.
97
Compl. ¶ 111(a), (e).
98
Cornerstone, 115 A.3d at 1179–80 (“[A] plaintiff can survive a motion to dismiss by [a]
director defendant by pleading facts supporting a rational inference that the
director . . . acted to advance the self-interest of an interested party from whom they could
not be presumed to act independently[.]”).
22
affairs of the corporation.”99 Plaintiffs acknowledge Sycamore owned less than 12%
of Essendant’s common stock. 100 Indeed, Sycamore was only Essendant’s third-
largest stockholder.101 Thus, Plaintiffs are obliged to plead facts that allow a
reasonable inference that Sycamore “exercise[d] such formidable voting and
managerial power that, as a practical matter, it [was] no differently situated than if it
had majority voting control.” 102 In other words, upon reading the Complaint, the
Court must be able to conclude it is reasonably conceivable that Sycamore’s
minority stake was “so potent that independent directors [could not] freely exercise
their judgment, fearing retribution” from Sycamore. 103 For obvious reasons, the test
99
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014) (emphasis
in original).
100
Compl. ¶ 10.
101
See Essendant Inc., Proxy Statement (Schedule 14A) 61 (Apr. 13, 2018) (showing
13.46% and 12.9% blocks held by Pzena Investment Management, LLC and
Blackrock, Inc., respectively, as of the spring of 2018).
102
In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 665 (Del. Ch. 2013)
(internal citations and quotations omitted); In re PNB Hldg., 2006 WL 2403999, at *9.
103
See In re Morton’s, 74 A.3d at 665. See also In re KKR Fin., 101 A.3d at 992–91
(holding that to be deemed a controller, a minority stockholder must have “the ability to
dominate the corporate decision-making process” by controlling the board of directors
generally or with respect to the particular transaction that is being challenged); Basho
Techs. Holdco, B LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *26
(Del. Ch. July 6, 2018) (noting that a plaintiff can show a minority blockholder’s
domination and control in a variety of ways including personal relationships with board
members, contractual rights, commercial relationships, de facto ability to remove directors
or the company’s own characterizations of the minority blockholder’s influence);
Frontfour Capital Gp. LLC v. Taube, 2019 WL 1313408, at *2 (Del. Ch. Mar. 11, 2019)
(involving coercive contractual rights that prevented other bidders from engaging and a
23
for freighting a minority stockholder with the fiduciary obligations of a controlling
stockholder “is not an easy one to satisfy.” 104
Sycamore did not (i) nominate any members of the Essendant Board, (ii) wield
coercive contractual rights, (iii) maintain personal relationships with any of the
Essendant Board members, (iv) maintain any commercial relationships with
Essendant that would afford leverage in its negotiations, (v) threaten removal,
challenge or retaliate against any of the Essendant Board members or (vi) otherwise
exercise “outsized influence” in Essendant’s Board room. 105 Indeed, it would have
been difficult for Sycamore to achieve any of these markers of control because, as
noted, two other entities held larger voting blocks than Sycamore. 106
special committee personally beholden to a minority stockholder); Calesa Assoc. v. Am.
Capital Ltd., 2016 WL 770251, at *10 (Del. Ch. Feb. 29, 2016) (involving, among other
factors, a majority of a board having personal relationships with the minority blockholder);
In re Zhongpin Inc. S’holders Litig., 2014 WL 6735457, at *7 (Del. Ch. Nov. 26, 2014),
rev’d, 115 A.3d 1173 (Del. 2015) (involving a corporation’s own public filings stating that
“Our largest shareholder has significant influence over our management and affairs.”).
104
In re PNB Hldg., 2006 WL 2403999, at *9.
105
See Basho, 2018 WL 3326693, at *26 (collecting examples of actual control factors).
106
See Essendant Inc., Proxy Statement (Schedule 14A) 61 (Apr. 13, 2018) (showing
13.46% and 12.9% blocks held by Pzena Investment Management, LLC and Blackrock,
Inc., respectively, as of the spring of 2018). See also Hokanson v. Petty, 2008 WL
5169633, at *8 (Del. Ch. Dec. 10, 2008) (noting that even the company’s “largest holder”
will not be deemed a controller absent majority ownership or indicia of domination and
control).
24
In support of their controlling stockholder allegations, Plaintiffs make much
of an unpublished decision from the Circuit Court for Montgomery County
Maryland, In re American Capital, which purported to apply Delaware law in a
controlling stockholder analysis. 107 There, the court found a hedge fund with less
than 12% ownership exercised actual control over a board’s decision to pursue an
ill-advised sale of the company. I need not predict how a Delaware court would
have resolved the dispute in In re American Capital to discern that the decision does
not help Plaintiffs here. The case is distinguishable on its facts. The alleged
controller in American Capital was so extensively involved with the board’s
negotiation of the challenged transaction that it was able to extract from the target a
non-pro-rata $3 million “reimbursement” for its negotiation expenses when the deal
closed.108 No such facts have been pled here.
After carefully reviewing the Complaint, I am satisfied Plaintiffs have not
well pled that Sycamore was Essendant’s controlling stockholder. The
consequences of that failure are two-fold. First, the Essendant Board cannot be held
to answer for alleged breaches of fiduciary duty based on allegations that its
members caved to the will of the controller. Second, Sycamore is not a fiduciary
107
In re Am. Capital S’holder Litig., No. 422598-V, 2017 Md. Cir. Ct. LEXIS 4, at *8,
*42–45 (Montgomery Cty. Md. Cir. Ct. July 12, 2017) (unavailable on Westlaw).
108
Id.
25
owing duties to Essendant stockholders and cannot, therefore, be held to answer for
breaches of duties it did not owe.
2. Plaintiffs Have Not Well Pled Board Level Conflicts
Tellingly, the Complaint mentions the individual Essendant Board members
by name only once, and that is when it rotely identifies the party Defendants.109
Beyond this cursory reference, Plaintiffs have made no effort to “count heads,”
meaning they have not undertaken to plead a factual basis upon which the Court
could undertake a “director-by-director analysis” of interestedness or lack of
independence. 110 The best Plaintiffs can muster in opposition to the Motion to
Dismiss are allegedly “unusual facts regarding the discussions and interactions
between Sycamore and [unnamed] Essendant[] representatives” that they claim
evidence Sycamore’s “significant influence over [the Essendant Board].” 111 These
allegations fall well short of rebutting the presumption of independence that each
member of the Essendant Board enjoys. 112
109
Compl. ¶¶ 18–26.
110
Frederick Hsu, 2017 WL 1437308, at *26. Indeed, Plaintiffs acknowledge there is no
basis to contend the Essendant Board was interested in either the GPC or Sycamore
mergers. See Pls.’ Omnibus Br. in Opp’n to all Defs.’ Mots. to Dismiss the Compl.
(“POB”) (D.I. 20) 48 (acknowledging that “Plaintiffs have not alleged that [the Essendant
Board] had personal motivations for favoring Sycamore.”).
111
Compl. ¶ 12.
112
Beam v. Stewart, 845 A.2d 1040, 1051 (Del. 2004).
26
First, the Complaint contains no facts supporting an inference that the
Sycamore merger was “highly unusual” when compared with other transactions.113
There is simply no basis in the Complaint to draw any comparisons—one way or the
other.
Second, Plaintiffs do not allege any improper relationship or tie between
individual members of the Essendant Board and Sycamore. Instead, to support an
inference that the members of the Essendant Board lacked independence, Plaintiffs
point to the Essendant Board’s: (i) decision not to inform GPC of the April 9 phone
call with Phillips, (ii) indication to Sycamore that it would be open to considering a
revised offer, (iii) failure to “require Sycamore” to sign a standstill agreement,114
(iv) slow-walking the GPC merger’s regulatory approval process in order to
facilitate negotiations with Sycamore 115 and (v) ultimate decision that the Sycamore
113
Compl. ¶ 12.
114
It is unclear how the lack of a standstill agreement is relevant given that the Essendant
Board adopted a poison pill on May 17—shortly after Sycamore began acquiring
Essendant’s shares on the open market. See Essendant 14D-9 at 20. Apparently,
Sycamore’s “control” over Essendant and its Board was temporarily disabled when the
Essendant Board decided to adopt this defensive measure in response to the perceived
threat from Sycamore.
115
As I note elsewhere in this opinion, my willingness to draw plaintiff-friendly inferences
at this stage on this record does not mean that I am deciding, for example, that Essendant
did not use its reasonable best efforts to consummate the GPC merger agreement.
See Compl. ¶ 57. The resolution of that question remains for another day in another action.
27
merger was preferable to the GPC merger. 116 At base, none of these “facts” support
an inference that a majority of the Essendant Board was beholden to Sycamore.
Instead, at best, the allegations support an inference that the Essendant Board did
exactly what it said it would do. That is, it chose a cash transaction with Sycamore
rather than a stock deal with GPC—a judgment call well within a board’s prerogative
when pursuing the “highest value reasonably available to the [Essendant]
shareholders.”117
The Essendant Board’s preference for a cash deal does not support an
inference that it was interested in the Sycamore merger or that it somehow lacked
independence. Delaware law empowers directors to consider whether, under the
circumstances, “stock or other non-cash consideration” is preferable to cash when
evaluating a proposal. 118 The Complaint acknowledges that Citi’s pro forma DCF
valuation of the GPC stock deal (i.e., $13.30 to $23.90 per share) included a
synergies range of $8.35 to $11.25. 119 When compared with Sycamore’s initial cash
offer of $11.50 and Final Proposal of $12.80 per share, it is not reasonable to infer
116
Compl. ¶ 12.
117
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1176 (Del. 1995); Essendant
14D-9 at 27 (noting that the GPC merger was less attractive because of, among other risks,
“continued secular decline in the Company’s industry.”).
118
Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del. 1994).
119
Compl. ¶ 70.
28
that the Essendant Board’s preference for the Sycamore deal, even when considering
GPC’s revised offer with a contingent value right,120 was so “unusual” or
“inexplicable” that it reflects a breach of the duty of loyalty. 121
The only factual allegation that possibly relates to Essendant Board members’
interestedness is that “certain executive officers and directors of [Essendant]” had
“possible ongoing roles” with Staples.122 This type of vague allegation cannot
support an inference of disloyalty given our law’s presumption of directorial
independence. 123
In sum, based on the facts alleged, it is not reasonably conceivable that a
majority of the Essendant Board was interested in either the GPC or Sycamore
mergers or lacked independence. Without a factual predicate to question the loyalty
of these fiduciaries, the Complaint fails to support a reasonable inference that a non-
exculpated breach of fiduciary duty has occurred here.
120
Compl. ¶ 71.
121
Compl. ¶¶ 13, 72, 80. Here again, I emphasize that while the Essendant Board’s choice,
as pled, does not support a breach of loyalty claim as a matter of fiduciary duty law, I do
not decide the ultimate superiority (or inferiority) of the Sycamore merger compared with
the GPC merger or whether the Essendant Board’s decision to terminate the GPC merger
agreement breached that agreement. See PWP Xerion Hldgs. III LLC v. Red Leaf Res.,
Inc., 2019 WL 5424778, at *15 (Del. Ch. Oct. 23, 2019) (“The two legal frameworks [for
breach of contract and breach of fiduciary duty] are separate.”).
122
Compl. ¶ 104.
123
See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), rev’d on other grounds, Brehm
v. Eisner, 746 A.2d 244 (Del. 2000).
29
3. Plaintiffs Have Not Well Pled Bad Faith
When, as here, a board decides to sell the corporation it manages, “[it] must
perform its fiduciary duties in the service of a specific objective: maximizing the
sale price of the enterprise.”124 When pursuing this objective, while “there is no
single path,” the board must “act in a neutral manner to encourage the highest
possible price for shareholders.”125 Against the backdrop of Essendant’s 102(b)(7)
provision, and having dispensed with Plaintiffs’ allegations that the Essendant Board
acted in service of Sycamore’s interests at the expense of other Essendant
stockholders, Plaintiffs are left with a claim that Essendant’s fiduciaries “acted in
bad faith” in their pursuit of the best value-maximizing transaction. 126 Here again,
the Complaint falls short.
A director acts in bad faith when she “intentionally fails to act in the face of a
known duty to act, demonstrating a conscious disregard for . . . her duties.”127
Plaintiffs allege the Essendant Board took two actions in bad faith. First, it is alleged
124
In re Answers Corp. S’holders Litig., 2012 WL 1253072, at *6 (Del. Ch. Apr. 11, 2013)
(citing Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 239 (Del. 2009) (internal quotations
omitted)).
125
Barkan v. Amsted Indus. Inc., 567 A.2d 1279, 1286 (Del. 1989); In re Smurfit-Stone
Container Corp. S’holder Litig., 2011 WL 2028076, at *16 (Del. Ch. May 20, 2011).
126
Cornerstone, 115 A.3d at 1179–80.
127
Lyondell, 970 A.2d at 243.
30
the Essendant Board “misled stockholders” by causing “materially incomplete and
misleading” information to be filed with the SEC. 128 Second, Plaintiffs allege the
fact that the Sycamore merger “inadequately compensated Essendant stockholders
for their shares” is somehow indicative of board-level bad faith.129 I address each
allegation in turn.
a. No Bad Faith Disclosures
The fiduciary duty of disclosure is a “subset” of the duties of loyalty and
care. 130 Directors of a Delaware corporation must disclose “fully and fairly all
material information within the board’s control when it seeks shareholder action.”131
In this case, however, to plead a non-exculpated disclosure claim, Plaintiffs are
obliged to do more than allege “erroneous judgment” regarding the “proper scope
and content” of a disclosure.132 Instead, to plead a breach of the duty of loyalty in
128
Compl. ¶¶ 92, 97.
129
Compl. ¶ 89.
130
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 987–88 (Del. Ch. 2000).
131
Malone v. Brincat, 722 A.2d 5, 12 (Del. 1998).
132
Crescent/Mach I, 846 A.2d at 987; McMillan v. Intercargo Corp., 768 A.2d 492, 507
(Del. Ch. 2000) (dismissing a claim for failure to state a non-exculpated claim when the
complaint did not allege facts “from which one can reasonably infer that any [alleged]
omission resulted from more than a mistake about what should have been disclosed”)
(emphasis supplied).
31
this context, Plaintiffs must allege a knowing or intentional misstatement or
omission of a material fact. 133 In my view, they have not come close to this mark.
First, the Complaint fails to plead any facts that would allow an inference that
the alleged omitted facts and misstatements “meet the materiality standard.”134
Second, the conclusory suggestion that the Essendant Board was intentionally
misleading stockholders to tender into the Sycamore merger lacks any factual
narrative that would allow any inferential explanation of why these fiduciaries would
so abandon their duties as to engage in bad faith. 135 Third, the alleged omissions are
merely examples of either the Essendant Board declining to adopt Plaintiffs’
characterization of its behavior (i.e. “self-flagellation”) or making business
decisions, whether right or wrong, in an effort to maximize stockholder value.136
133
Crescent/Mach I, 846 A.2d at 987.
134
In re BioClinica, Inc. S’holder Litig., 2013 WL 5631233, at *8–9 (Del. Ch. Oct. 16,
2013). In their opposition brief, Plaintiffs cite Morrison v. Berry, 191 A.3d 268, 275
(Del. 2018), for the proposition that “troubling facts regarding director behavior” during a
sales process are material to stockholders and must be disclosed. POB 30. The facts in
Morrison, however, bear no resemblance to the pled facts here. In Morrison, a board failed
to tell its stockholders that a major stockholder told the board he would sell all his stock
unless the board consummated a transaction with a specific merger partner. Id. at 286.
Unlike the heavy hand the stockholder in Morrison used to influence the board, the
Complaint pleads no facts that would support an inference that Sycamore engaged in
similar tactics in connection with the Sycamore merger.
135
Aronson, 473 A.2d at 812 (describing the business judgment rule as, among other things,
a “presumption” of good faith).
136
For example, Plaintiffs argue the Essendant Board should have disclosed that it
intentionally slow-walked the GPC merger’s regulatory approval process in order to delay
consummation of that transaction. That sort of self-flagellation is not required in
32
Finally, Plaintiffs’ allegations that the disclosures lacked certain details, like the
exact amount of Citi’s post-closing compensation, the exact date management
projections were calculated or details on Essendant executives’ post-closing
employment, cannot support an inference of bad faith.137
disclosures to stockholders. Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135, 143
(Del. 1997) (“The directors’ duty of disclosure does not oblige them to characterize their
conduct in such a way as to admit wrongdoing. [In other words], a board is not required
to engage in ‘self-flagellation’ . . .”) (citation omitted). Stockholders were apprised of the
regulatory challenges associated with the GPC merger. They could decide for themselves
whether the delays in obtaining regulatory approval justified a vote against the Sycamore
merger. Likewise, the Essendant Board’s alleged invitation to Sycamore to submit a
revised offer reflects, at best, nothing more than a negotiating strategy employed by the
Essendant Board to coax a better offer and is the sort of “blow-by-blow description” that
this court regularly finds immaterial in the disclosure context and certainly lacking as an
indicator of bad faith. See, e.g., Kahn v. Stern, 2017 WL 3701611, at *16 (Del. Ch.
Aug. 28, 2017) (collecting cases). See Compl. ¶¶ 95–96. While not indicative of bad faith,
whether this conduct resulted in a breach of the GPC merger agreement, again, remains to
be seen.
137
See, e.g., In re BioClinica, 2013 WL 5631233, at *9 (holding that Delaware law “does
not require such detailed disclosure” as “why [directors] adjusted their estimates for capital
expenditures” or why “certain inputs” such as selections of EBITDA ranges were used in
a fairness opinion). Instead, directors have a duty to disclose a “fair summary” of the inputs
and procedure used to construct the fairness opinion; In re Rouse Props., Inc., 2018
WL 1226015, at *24 (Del. Ch. Dec. 14, 2018) (holding that a board met its disclosure
obligations about its financial advisor by disclosing that its banker “has provided, currently
is providing and may in the future provide investment banking, commercial banking and
other financial services to [buyer] for which it has received and may receive
compensation”) (internal quotation omitted); Kahn, 2017 WL 3701611, at *16 (finding that
the board’s failure to disclose why it entered into certain “side deals” and the play-by-play
negotiation of the deals fell “well short of implying bad faith”). As for Essendant
executives’ post-closing employment, the Complaint acknowledges that Essendant did
disclose that some executives had “possible ongoing roles” with Staples. Compl. ¶ 104.
Moreover, the Schedule 14D-9 specifically disclosed that there were “no employment,
equity contribution or other agreement[s], arrangement[s] or understanding[s]” between
management and Sycamore. See Essendant 14D-9 at 14. “Directors do not have an
obligation to disclose information about the non-existence of misaligned incentives.”
33
Plaintiffs’ argument that the Essendant Board created a false impression “that
there was some newly-discovered, significant risk of gaining FTC approval for the
GPC [merger]” is unsupported by the facts as alleged.138 The Complaint alleges
Essendant’s Recommendation Statement simply disclosed that one of the factors the
Essendant Board considered in recommending the Sycamore merger was the relative
“risk[] of execution” related to regulatory approval of each transaction under
consideration.139 Even as described in the Complaint, Essendant did not tell
stockholders, directly or indirectly, that there was any specific “new” or increased
regulatory risk associated with the GPC merger as compared to the Sycamore
merger. 140 And even if Essendant’s disclosures could be read to create such an
impression, that is a far cry from implying bad faith. 141
The same can be said of Plaintiffs’ allegations that the Recommendation
Statement “caused Essendant stockholders to incorrectly believe that all stockholder
IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *21 (Del. Ch. Dec. 11,
2017, revised Jan. 26, 2018).
138
Compl. ¶ 99.
139
Compl. ¶ 98.
140
Compl. ¶¶ 99–100.
141
See McMillan, 768 A.2d at 507 (dismissing bad faith disclosure violations where one
cannot “reasonably infer that any [] omission resulted from more than a mistake about what
should have been disclosed”).
34
[legal] actions challenging the [Sycamore merger] had been dismissed.”142 Again,
even as described in the Complaint, the Recommendation Statement merely “stated
that Plaintiff’s federal securities action ‘was voluntarily dismissed[.]’” 143 Even after
drawing inferences in Plaintiffs’ favor, this affirmative statement cannot reasonably
be read to imply anything about the entire universe of actions challenging the
Sycamore merger, even assuming, which I doubt, that such information would have
been important to stockholders in deciding whether to tender into the Sycamore
merger.
b. No Bad Faith Deal Process
Plaintiffs’ process-related allegations of bad faith are likewise deficient. In
the context of a sale of corporate control, bad faith is qualitatively different from “an
inadequate or flawed effort” to obtain the highest value reasonably available for a
corporation.144 Absent direct evidence of an improper intent, a plaintiff must point
to “a decision [that] lacked any rationally conceivable basis” associated with
maximizing stockholder value to survive a motion to dismiss.145
142
Compl. ¶ 106.
143
Id.
144
Lyondell, 970 A.2d at 243.
145
Chen v. Howard-Anderson, 87 A.3d 648, 684 (Del. Ch. 2014).
35
To begin, Plaintiffs’ references to alleged breaches of the GPC merger
agreement do not implicate bad faith, at least not in the fiduciary duty context.
Indeed, “[e]ven with an iron-clad contractual obligation, there remains room for
fiduciary discretion because of the doctrine of efficient breach.” 146 A board may
even have a duty to breach a contract if it determines that the “benefits [of breach]
(broadly conceived) exceed the costs (broadly conceived).” 147 Thus, in the absence
of well-pled allegations that the Essendant Board breached the GPC merger
agreement for no reason, 148 the breach of that contract cannot serve as a factual
predicate to support a non-exculpated breach of fiduciary duty claim. 149
146
Frederick Hsu, 2017 WL 1437308, at *24.
147
Id. (citing Orban v. Field, 1997 WL 153831, at *9 (Del. Ch. Apr. 1, 1997) (“Certainly
in some circumstances a board may elect (subject to the corporation’s answering in contract
for damages) to repudiate a contractual obligation where to do so provides a net benefit to
the corporation.”)).
148
Cf. Essendant 14D-9 at 27 (explaining the Essendant Board’s determination that
Sycamore’s cash deal was preferable because of “continued secular decline in the
Company’s industry”).
149
See PWP, 2019 WL 5424778, at *15 (“The two legal frameworks” for breach of
fiduciary duty and breach of contract “are separate. A board can readily comply with its
fiduciary duties while making a decision that breaches a contract just as a board could opt
to comply with a contract under circumstances where its fiduciary duties would call for
engaging in efficient breach.”); Frederick Hsu, 2017 WL 1437308, at *24 (“[A] board of
directors may choose to breach [a contract] if the benefits (broadly conceived) exceed the
costs (again broadly conceived).”); In re Tyson Foods, Inc., 919 A.2d 563, 601 (Del. Ch.
2007) (“A director might well breach a contract without violating any fiduciary duty.”);
In re Coleman Co. Inc. S’holders Litig., 750 A.2d 1202, 1206 n.9 (Del. Ch. 1999)
(observing that whether or not a merger agreement has a fiduciary out, fiduciaries have
“the practical option of effectuating an efficient breach”).
36
Plaintiffs’ remaining process-related allegations similarly fail to conjure the
“extreme set of facts” necessary to support an inference that the Essendant Board
acted in bad faith. 150 The Complaint claims the $12.80 per share price was “unfair”
because it (i) represented a discount to Essendant’s GPC merger-affected trading
price and (ii) was below the discounted cash flow range Citi calculated for the GPC
merger on a pro forma basis. 151 Even accepting these critiques at face value,
criticizing the price at which a board agrees to sell a company, without more, does
not a bad a faith claim make. 152
150
Lyondell, 970 A.2d at 243 (citation omitted).
151
Compl. ¶¶ 14, 61, 84, 86.
152
See In re CompuCom Sys. Inc. S’holders Litig., 2005 WL 2481325, at *7 (Del. Ch.
Sept. 29, 2005) (dismissing Revlon claims stating, “Nor is the fact that the final price per
share was below the market price on the day of sale enough to rebut the business judgment
presumption.”); In re Comverge, Inc. S’holders Litig., 2014 WL 6686570, at *13 (Del. Ch.
Nov. 25, 2014) (citation omitted) (dismissing bad faith claims under Revlon based on a
board’s agreement to a merger price 7.4% below the unaffected stock price). While the
court in Comverge refused to dismiss a breach of fiduciary duty claim based on an onerous
deal protection creating a combined termination fee of up to 13%, Plaintiffs make no
similar allegations here. Id., at *15–17. And it bears repeating that the Final Offer
represented a 51% premium to Essendant’s unaffected price. See Essendant 14D-9 at 28.
The decision to accept this cash transaction, while perhaps a breach of the GPC merger
agreement, is, nevertheless, imminently explicable as a measured determination that a cash
payment today is superior to uncertain returns derived from remaining in the highly-
competitive office supply business tomorrow. See In re Fort Howard Corp. S’holders
Litig., 1988 WL 83147, at *14 (Del. Ch. Aug. 8, 1988) (“[A] disinterested board might
prefer [an all cash deal] to a deal that may be thought to represent a somewhat higher price,
but is not all cash.”).
37
Plaintiffs also allege the Essendant Board should have negotiated a standstill
agreement or put a poison pill in place to create a more level playing field before
Sycamore acquired its toehold. 153 At oral argument, Plaintiffs’ counsel also made
much ado about the Essendant Board’s determination that Sycamore’s Proposal 2
was reasonably likely to lead to a superior proposal after it had rejected Proposal 1
(at the same price).154 Plaintiffs suggest the Essendant Board should have either
(i) used the Sycamore proposals to negotiate a higher price with GPC or (ii) required
Sycamore to sign a confidentiality agreement before determining Proposal 2 was
reasonably likely to lead to a superior proposal.155
The Essendant Board responds, not surprisingly, by reiterating that the
standard for bad faith is intentional failure or a conscious disregard of the duty to
seek the highest price reasonably available.156 They also point out that, after
rejecting Proposal 1, the Essendant Board had effectively communicated that $11.50
per share (“full stop”) was not going to be enough.157 As a result, the Essendant
Board’s willingness to pursue Proposal 2 came with the understanding that
153
Compl. ¶ 12.
154
Oral Arg. Tr. 62–63 (D.I. 39).
155
Id.
156
Lyondell, 970 A.2d at 243.
157
Oral Arg. Tr. 49.
38
Sycamore would have to improve its offer after diligence. 158 How this fits with
Essendant’s contractual obligations to GPC remains to be seen. From a fiduciary
perspective, however, this negotiating sequence falls well within the many available
“blueprint[s]” a board might choose to employ while negotiating a transaction within
the Revlon paradigm. 159
As for Plaintiffs’ argument that the Essendant Board should have negotiated
a standstill sooner, the Essendant Board’s prompt decision to put a rights plan in
place mitigates any delay in negotiating a standstill. 160 Because of the poison pill,
Sycamore could not become Essendant’s largest (or even second largest)
stockholder. 161 Thus, like Plaintiffs’ other process-related claims, their “uneven
playing field” narrative does not support a well-pled claim of bad faith.
158
Id.
159
In re Rural Metro Corp., 88 A.3d 54, 89 (Del. Ch. 2014) (internal quotation omitted).
160
Essendant Inc., Current Report (Form 8-K) (May 17, 2018) (announcing adoption of
rights plan and amendment to Articles of Incorporation).
161
See Essendant Inc., Proxy Statement (Schedule 14A) 61 (Apr. 13, 2018) (showing
13.46% and 12.9% blocks held by Pzena Investment Management, LLC and Blackrock,
Inc., respectively, as of the spring of 2018). And, again, the adoption of the poison pill in
response to a perceived threat from Sycamore is difficult to square with Plaintiffs’
suggestion that the Essendant Board was so smitten with Sycamore that its members were
willing to engage in bad faith vis-à-vis Essendant’s stockholders.
39
4. Plaintiffs Have Not Well Pled that Phillips Breached His Fiduciary
Duties as CEO (Count I)
Because Section 102(b)(7) does not exculpate a corporate officer’s breach of
fiduciary duty, Plaintiffs’ claims against Phillips as Essendant’s CEO face a different
standard. 162 Plaintiffs need only plead facts supporting a reasonable inference that
Phillips breached his fiduciary duty of care in his official capacity as CEO to state a
viable claim against him. 163 Even so, they must clearly draw the distinction between
exculpated claims (due care claims relating to Phillips’ conduct as Essendant Board
member) and non-exculpated claims (those relating specifically to his role as
CEO). 164 To the extent the Complaint attempts to state a claim against Phillips in
his capacity as a member of the Essendant Board, the Complaint fails for reasons
stated above. That leaves Phillips’ conduct in his capacity as an Essendant officer.
The Complaint mentions only one act taken by Phillips in his official capacity
as CEO: his participation in a telephone call on April 9, 2018, where he allegedly
162
See Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 787 (Del. Ch. 2016)
(“Section 102(b)(7) does not authorize exculpation for officers . . . in [their] capacity as []
officer[s].”); id (holding that even if a complaint fails to state a non-exculpated claim
against an executive director, “[t]here is also the possibility of a claim against [Phillips] in
[his] capacity as an officer [because] Section 102(b)(7) does not authorize exculpation for
officers.”).
163
Id.
164
See Arnold v. Soc’y for Savings Bancorp, Inc., 650 A.2d 1270, 1288 (Del. 1994)
(affirming rejection of plaintiff’s fiduciary duty claims against officer because “plaintiff
has failed to highlight any specific actions [the officer] undertook as officer (as distinct
from actions as a director)”).
40
learned of Sycamore’s interest in acquiring Essendant.165 It is difficult to discern
how fielding a telephone call during which an unsolicited acquisition proposal is
communicated, without more, can support a reasonably conceivable inference of a
breach of the duty of care or loyalty. 166 Even if this conversation somehow breached
the GPC merger agreement as Plaintiffs suggest, 167 that does not ipso facto or ipso
jure amount to a breach of fiduciary duty. 168
165
Compl. ¶¶ 2, 12 (“Sycamore contacted . . . Phillips about acquiring [Essendant.]” But
“Essendant did not inform GPC that Sycamore called [] Phillips prior to the signing of the
GPC Merger Agreement.”).
166
All the Complaint alleges is that Phillips answered his phone, had a conversation with
a Sycamore representative and then reported the substance of the conversation to the
Essendant Board. Compl. ¶¶ 2 (“Sycamore contacted . . . Phillips about acquiring the
Company.”), 12 (“Essendant did not inform GPC that Sycamore called Mr. Phillips.”).
As for his official actions as Essendant’s CEO, that is the sum and substance of the
allegations. Indeed, as Plaintiffs’ counsel has conceded, “that phone call alone, is that
enough [to constitute a breach of fiduciary duty], I would say no, of course not.” Oral Arg.
Tr. 58.
167
Compl. ¶ 6 (“In violation of the GPC Merger Agreement, the [Essendant Board] initially
concealed the Sycamore proposal from GPC[.]”). In this regard, I note the alleged phone
call took place before the Essendant Board signed the GPC merger agreement.
168
PWP, 2019 WL 5424778, at *15 (“A [fiduciary] can readily comply with [his] fiduciary
duties while making a decision that breaches a contract[.]”); Frederick Hsu, 2017
WL 1737308, at *24; In re Tyson, 919 A.2d at 601 (A fiduciary “might well breach a
contract without violating any fiduciary duty.”); In re Coleman, 750 A.2d at 1206 n.9
(Fiduciaries always have “the practical option of effectuating an efficient breach[.]”).
41
5. Plaintiffs Have Not Well Pled that the Essendant Board Aided and
Abetted Sycamore’s Breach of Fiduciary Duty (Count IV)
Because Plaintiffs failed adequately to plead that Sycamore was Essendant’s
controlling stockholder, it is not reasonably conceivable that Sycamore owed
fiduciary duties to the Essendant stockholders. Consequently, the Essendant Board
could not have aided and abetted a breach of Sycamore’s non-existent fiduciary
duties. Plaintiffs’ Count IV must be dismissed.169
6. Plaintiffs Have Not Pled Facts Supporting a Reasonable Inference the
Essendant Board Committed Waste (Count V)
In Count V, Plaintiffs allege the Essendant Board committed waste by
(i) signing the GPC merger agreement “knowing at the time that Sycamore was
interested in acquiring Essendant” and (ii) agreeing to a $12 million termination fee
“knowing that such a termination fee would be triggered in the event they terminated
the GPC merger agreement.”170 In short, Plaintiffs’ waste allegations are that the
Essendant Board was sloppy when it signed the GPC merger agreement
(which included a termination fee) before considering Sycamore’s offer.
169
See In re Volcano Corp. S’holder Litig., 143 A.3d 727, 750 (Del. Ch. 2016) (Absent an
underlying breach, an aiding and abetting claim should be “summarily” dismissed.).
170
Compl. ¶¶ 128–33.
42
To state a claim for waste, Plaintiffs must plead that the Sycamore merger
“cannot be attributed to any rational business purpose.”171 In other words, Plaintiffs
must plead facts that allow a reasonable inference that the Sycamore merger
amounted to “a transfer of corporate assets that serves no corporate purpose[,] or for
which no consideration at all is received.”172 Plaintiffs cannot meet this standard.
First, when Sycamore first expressed interest in acquiring Essendant, the
Essendant Board had no way of knowing the true level of Sycamore’s interest. It is
not waste for a board to sign a merger agreement with one party after another party
makes an overture of hypothetical interest.173 Second, and more broadly, that
Plaintiffs felt some need to tack on a waste claim, given the likely outcome of their
effort to plead non-exculpated breaches of fiduciary duties, does not excuse them
from the burden to state a reasonably conceivable claim. Necessity is not always the
mother of invention. Again, the Sycamore merger offered a 51% premium to
Essendant’s unaffected stock price.174 The Essendant Board made a business
171
Volcano, 143 A.3d at 750 (quoting Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361
(Del. 1993)).
172
Protas v. Cavanagh, 2012 WL 1580969, at *9 (Del. Ch. May 4, 2012) (alteration in
original; citation and quotation omitted).
173
In other words, such a decision is not a choice that “no business person of ordinary,
sound judgment could [make.]” Id.
174
See Essendant 14D-9 at 28.
43
decision that the office supply industry would face challenging headwinds in the
years to come that made the cash transaction, in their eyes, more attractive than
GPC’s stock offer.175 This decision, right or wrong, was not one lacking in any
corporate purpose.176 Thus, it is not fodder for a viable waste claim.
B. Plaintiffs Fail To State a Claim Against Sycamore and Staples
(Counts II and III)
In Count II, Plaintiffs allege Sycamore was Essendant’s controlling
stockholder. 177 As discussed above, based on the pled facts, it is not reasonably
conceivable that Sycamore was a controller. This leaves only Count III against
Sycamore, Staples, Egg Parent Inc. and Egg Merger Sub Inc. (collectively, the
“Sycamore Defendants”) for aiding and abetting the Essendant Board’s breaches of
fiduciary duties.178
To plead a claim for aiding and abetting a breach of fiduciary duty, a plaintiff
must allege “(1) the existence of a fiduciary relationship; (2) the fiduciary breached
its duty; (3) a defendant, who is not a fiduciary, knowingly participated in a breach;
and (4) damages to the plaintiff resulted from the concerted action of the fiduciary
175
Id. at 27–28.
176
Protas, 2012 WL 1580969, at *9.
177
Compl. ¶¶ 114–17.
178
Compl. ¶¶ 118–22.
44
and the nonfiducairy.” 179 “The standard for an aiding and abetting claim is a
stringent one, one that turns on proof of scienter of the alleged abettor.” 180
If a plaintiff cannot plead an underlying breach of fiduciary duty, it likewise
cannot plead a claim for aiding and abetting.181 In this regard, I have already
determined that Plaintiffs have failed to plead viable breach of fiduciary duty claims
against the Essendant Board. But that determination was in the context of, and
informed by, Essendant’s Section 102(b)(7) charter provision; in other words, the
focus was on whether the Complaint contained well-pled allegations of a loyalty
breach.182 There remains a possibility that Plaintiffs have well pled a breach of the
Essendant Board’s Revlon duties flowing from the duty of care—a breach that could
(hypothetically) give rise to aiding and abetting liability on the part of the Sycamore
Defendants notwithstanding exculpation.183 Additionally, while some Delaware
179
Globis P’rs, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, at *15 (Del. Ch.
Nov. 30, 2007).
180
Binks v. DSL.net, Inc., 2010 WL 1713629, at *10 (Del. Ch. Apr. 29, 2010).
181
Chester Cty. Ret. Sys. v. Collins, 2016 WL 7117924, at *3 (Del. Ch. Dec. 6, 2016);
In re Gen. Motors (Hughes) S’holder Litig., 2005 WL 1089021, at *23 (Del. Ch. May. 4,
2005).
182
Malpiede, 780 A.2d at 1094; Cornerstone, 115 A.3d at 1179–80.
183
Lyondell, 970 A.2d at 239 (explaining that a board’s duty to “maximize[] the sale price
of the enterprise” can implicate both the duty of care and the duty of loyalty); Singh v.
Attenborough, 137 A.3d 151, 152 (Del. 2016) (analyzing an advisor’s duties in advising a
board and stating, “To hold that an advisor can only be liable if it aids and abets a non-
exculpated breach of fiduciary duty [] [is] erroneous.”); In re Rural Metro, 88 A.3d at 87–
45
decisions appear to assume that Corwin can cleanse both a board’s breach of
fiduciary duties and related aiding and abetting liability for non-fiduciaries,
Plaintiffs argue that any such extension of Corwin is unjustified. 184
While Plaintiffs pose interesting questions regarding the applicability of
Cornerstone and Corwin in the aiding and abetting context, I need not decide them
here. For purposes of my aiding and abetting analysis, I assume Plaintiffs have pled
non-exculpated and uncleansed breaches of fiduciary by the Essendant Board. Even
so, they have not well pled that Sycamore aided and abetted any such breaches.
Simply stated, there are no well-pled facts that the Sycamore Defendants “knowingly
participated” in the Essendant Board’s hypothetical breach.185 The Complaint lacks
any reference to non-conclusory communications between Sycamore and the
Essendant Board that would support an inference of concerted activity. 186 Nor does
88 (holding that Section 102(b)(7) exculpation does not extend to third-parties who aid and
abet a covered director’s breach of fiduciary duty).
184
Oral Arg. Tr. 73 (“Corwin does not apply to Sycamore and Staples. It doesn’t. Neither
does 102(b)(7).”); but see Volcano, 143 A.3d at 749 (dismissing aiding and abetting claims
after also dismissing fiduciary duty claims against directors under Corwin, stating,
“An aiding and abetting claim . . . may be summarily dismissed based upon the failure of
the breach of fiduciary duty claims against the director defendants.”).
185
McGowan v. Ferro, 2002 WL 77712, at *2 (Del. Ch. Jan. 11, 2002) (“Conclusory
statements that are devoid of factual details to support an allegation of knowing
participation will fall short of the pleading requirement needed to survive a Rule 12(b)(6)
motion to dismiss.”) (internal quotation omitted).
186
See, e.g., Compl. ¶ 12 (alleging that Sycamore “had significant influence over
[Essendant] and the [Essendant Board]” based on “highly unusual facts.”); FrontFour,
2019 WL 1313408, at *31 (internal citation omitted); Volcano, 143 A.3d at 750 (noting
46
the Complaint allege facts that would suggest the Essendant Board breached its
fiduciary duties in such “an inherently wrongful manner” that Sycamore could not
help but know of the breach and then facilitate it by its continued engagement with
the Essendant fiduciaries. 187
Even if the Complaint alleged (which it does not expressly) that Sycamore
knew its proposal was inferior to GPC’s and that the Essendant Board, nevertheless,
was favoring the Sycamore proposal over the GPC proposal, this alone would be
inadequate to state an aiding and abetting claim. 188 The Sycamore Defendants did
not owe Essendant stockholders a duty “to negotiate terms that benefitted
[Essendant] or otherwise [] facilitate a superior transaction [for Essendant].”189
Reading the Complaint in a light most favorable to Plaintiffs, this was a typical,
arm’s-length two-step public company merger negotiation.190 Indeed, after
that “knowing participation” requires a showing of “scienter” and that the standard for
pleading the “requisite scienter” imposes a “high burden”).
187
McGowan, 2002 WL 77712, at *2.
188
Id., at *4 (dismissing an aiding and abetting claim based on a similar factual predicate).
189
Rouse, 2018 WL 1226015, at *25.
190
In re Frederick’s of Hollywood, Inc. S’holders Litig., 1998 WL 398244, at *3 n.8
(Del. Ch. July 9, 1998) (“[E]vidence of arm’s-length negotiation with fiduciaries negates a
claim of aiding and abetting, because such evidence precludes a showing that the
defendants knowingly participated in the breach by the fiduciaries.”).
47
negotiating with the Essendant Board, Sycamore increased its offer. 191 The fact the
Essendant Board preferred Sycamore’s cash offer to a stock offer from GPC cannot
be laid at Sycamore’s feet as supporting an inference that Sycamore somehow aided
and abetted the Essendant fiduciaries in making that determination. 192 Counts II and
III must be dismissed.
III. CONCLUSION
For the foregoing reasons, Defendants’ Motions to Dismiss must be granted.
The Complaint is dismissed with prejudice.
IT IS SO ORDERED.
191
Compl. ¶ 14.
192
Essendant 14D-9 at 27.
48