In re Hansen Medical Inc. Stockholder Litigation ( 2018 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE HANSEN MEDICAL, INC. )
STOCKHOLDERS LITIGATION ) C.A. No. 12316-VCMR
MEMORANDUM OPINION
Date Submitted: March 6, 2018
Date Decided: June 18, 2018
Carmella P. Keener, ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington,
Delaware; Carl L. Stine, Matthew Insley-Pruitt, and Adam J. Blander, WOLF
POPPER LLP, New York, New York; Lead Counsel for Plaintiffs.
C. Barr Flinn, Kathaleen S. McCormick, Richard J. Thomas, and M. Paige Valeski,
YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware;
Tariq Mundiya, Benjamin P. McCallen, and Casey Donnelly, WILLKIE FARR &
GALLAGHER LLP, New York, New York; Attorneys for Defendants Jack W.
Schuler, Jack W. Schuler Living Trust, Renate Schuler, Schuler Family Foundation,
Tino Hans Schuler Trust, Tanya Eve Schuler Trust, Therese Heidi Schuler Trust,
Larry N. Feinberg, Oracle Partners, L.P., Oracle Ten Fund Master, LP, Oracle
Institutional Partners, L.P., the Feinberg Family Foundation, Oracle Investment
Management, Inc. Employees’ Retirement Plan, and Feinberg Family Trust
Stephen C. Norman, Brian C. Ralston, and Jacqueline A. Rogers, POTTER
ANDERSON & CORROON LLP, Wilmington, Delaware; Sara B. Brody, SIDLEY
AUSTIN LLP, San Francisco, California; Matthew J. Dolan, SIDLEY AUSTIN
LLP, Palo Alto, California; Attorneys for Defendants Cary G. Vance and
Christopher P. Lowe
Raymond J. DiCamillo, Sarah A. Clark, and Ryan P. Durkin, RICHARDS,
LAYTON & FINGER, P.A, Wilmington, Delaware; Rocky C. Tsai, ROPES &
GRAY LLP, San Francisco, California; John D. Donovan, Jr., ROPES & GRAY
LLP, Boston, Massachusetts; Martin J. Crisp, ROPES & GRAY LLP, New York,
New York; Timothy R. Farrell, ROPES & GRAY LLP, Chicago, Illinois; Attorneys
for Defendant Auris Surgical Robotics, Inc.
MONTGOMERY-REEVES, Vice Chancellor.
This case arises from a squeeze-out merger. The plaintiffs, representing a
purported class of minority stockholders, allege that a group of significant
stockholders, who together controlled more than fifty percent of the acquired
company, used their control of the company to negotiate a beneficial deal for
themselves at the expense of the minority stockholders. The defendants have moved
to dismiss for failure to state a claim under Court of Chancery Rule 12(b)(6). When
the Court of Chancery reviews whether a complaint has stated a claim for which
relief can be granted, a fairly lenient standard of review applies. The Court must
determine if it is reasonably conceivable, based on the well-pled facts in the
complaint, that the plaintiffs can recover.
Under this somewhat lenient standard, the plaintiffs have pled sufficient facts
to state a reasonably conceivable claim that a group of stockholders acted as a control
group and extracted a different benefit for themselves from the merger transaction.
Thus, the plaintiffs have overcome the Rule 12(b)(6) hurdle, and their claims, other
than the aiding and abetting claim, survive the defendants’ motions to dismiss.
I. BACKGROUND
All facts are drawn from Plaintiffs’ Verified Amended Consolidated Class
Action Complaint (the “Complaint”) and the documents incorporated therein. 1
1
In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 658 n.3 (Del. Ch. 2013).
1
A. Parties and Relevant Non-Parties
Hansen Medical Inc. (“Hansen” or the “Company”) is a Delaware
corporation, with principal executive offices in Mountain View, California.2 It
designs, develops, and markets medical robotics.3
Defendant Cary G. Vance (“Vance”) served as President, Chief Executive
Officer (“CEO”), and a director of the Company beginning on May 23, 2014.4
Defendant Cristopher P. Lowe (“Lowe” together with Vance, the “Director
Defendants”) served as a director and interim Chief Financial Officer (“CFO”) of
the Company. 5 Lowe also served as interim CEO from February to May 2014. 6
Defendant Jack W. Schuler controlled Jack W. Schuler Living Trust, Renate
Schuler, Schuler Family Foundation, Tino Hans Schuler Trust, Tanya Eve Schuler
Trust, and Therese Heidi Schuler Trust (collectively, “Schuler”), each of which
were, at all relevant times, Hansen stockholders. 7 Schuler controlled approximately
2
Compl. ¶ 12. After being identified initially, individuals are referenced herein by
their surnames without regard to formal titles such as “Doctor.” No disrespect is
intended.
3
Id.
4
Id. ¶ 13.
5
Id. ¶ 14.
6
Id.
7
Id. ¶ 16.
2
thirty-four percent of Hansen stock.8 Schuler served as a director of the Company
from 2013 to January 12, 2016.9
Defendant Larry N. Feinberg, a Hansen stockholder, controlled Defendants
Oracle Partners, L.P., Oracle Ten Fund Master, LP, Oracle Institutional Partners,
L.P., Feinberg Family Foundation, Oracle Investment Management, Inc.
Employees’ Retirement Plan, and Feinberg Family Trust (collectively, “Feinberg”
and together with Schuler, the “Controller Defendants”). 10 Feinberg controlled
approximately thirty-one percent of Hansen stock.11
Defendant Auris Surgical Robotics, Inc. (“Auris”) is a Delaware corporation
based in Silicon Valley that designs and develops robotics for medical applications.12
Auris is not publicly traded. 13 Auris’s co-founder and CEO is Hansen founder
8
Id.
9
Id.
10
Id. ¶ 17.
11
Id.
12
Id. ¶ 18.
13
Id.
3
Frederic Moll (“Moll”). 14 Moll has served as Chairman of the Board of Auris since
June 2011. 15
B. Facts
The Complaint incorporates by reference, and relies heavily upon, the
Schedule 14A filed by Hansen on June 20, 2016 (the “Proxy”), which Defendants
provided as an exhibit to one of the motions to dismiss. The Complaint also
incorporates and relies upon the Deposition of Cristopher P. Lowe, taken on July 8,
2016, in a different matter. The parties did not submit the deposition with their
filings. Therefore, I include only the facts available in the Complaint and the Proxy.
As required when considering a motion to dismiss pursuant to Court of Chancery
Rule 12(b)(6), I take all well-pled facts in the Complaint as true. I address only the
facts necessary to decide these Motions to Dismiss.
1. The Controller Defendants’ history
The Controller Defendants have been investing together since at least 1997.
In 1997, the Controller Defendants filed a Schedule 13DA with the SEC “stating
that ‘they may be deemed to be a “group”’ of stockholders in Quidel Corporation.”16
Today, the Controlling Defendants “control almost 25% of the Quidel Corporation’s
14
Id.
15
Id.
16
Id. ¶ 36(a).
4
stock and Schuler is a member of the Board of Directors.” 17 The Controlling
Directors also both invested in Ventana Medical Systems (“Ventana”), and again,
Schuler served on the Board of Directors. 18 When Roche Holdings bought out
Ventana, Feinberg told Forbes.com that his “strategy [had] been to go along with
[Schuler].” 19 The Controller Defendants both currently have substantial investments
in Accelerate Diagnostics, Inc., Contrafact Corporation, and Vermillion, Inc., and
they have in the past simultaneously owned large stakes in Mazor Robotics, Ltd.,
Transition Therapeutics, Inc., and Biolase, Inc.20
The Controller Defendants also have acted in concert when dealing with their
Hansen holdings. In 2011, they both began their investments in Hansen by
participating in a private placement. 21 They were the only participants in the
transaction.22 In August 2013, they again both participated in a private placement
and increased their shares of Hansen. 23 In 2015, they again participated in a private
17
Id.
18
Id. ¶ 36(b).
19
Id.
20
Id. ¶¶ 36(e)-(f).
21
Id. ¶ 32.
22
Id.
23
Id. ¶ 33.
5
placement and increased their shares.24 In both the 2013 and 2015 private
placements, Hansen defined the Controller Defendants “together as ‘Principal
Purchasers,’” and in 2015, the Controller Defendants purchased substantially more
stock than the other participants in the private placements. 25 “As Principal
Purchasers, the Controlling Defendants, acting together, had the right to determine
the closing date, to oversee the press releases and other communications regarding
the transactions, to extend the termination date under certain circumstances, and to
amend the agreement. These rights were not offered to the other investors.” 26
2. Negotiating the Merger
Prior to the consummation of the merger transaction (the “Merger”), Hansen
owed a creditor, White Oak Global Advisors, LLC (“White Oak”), $35.1 million
(the “White Oak Debt”). Hansen’s agreement with White Oak required it “to obtain
an audit opinion from [its] independent certified public accountants on the annual
financial statements that [did] not include a going concern qualification,” and a
going concern qualification was considered an event of default under the
agreement.27 In the event of Hansen’s default, White Oak could accelerate all
24
Id. ¶ 34.
25
Id. ¶ 35.
26
Id.
27
Dir. Defs.’ Opening Br. Ex. A, at 30.
6
outstanding amounts and foreclose on “substantially all” of Hansen’s assets, other
than Hansen’s intellectual property. 28 During the second half of 2015, Hansen
became more and more concerned that it would receive a going concern qualification
on its end of year financials, thus triggering a default of the White Oak Debt. 29
By the end of September 2015, Hansen began discussions with Moll and
“Company B” regarding potential transactions with Hansen. 30 “On September 24, a
call was held between [Moll] and [Vance], during which they discussed potential
collaboration arrangements and other strategic activities between [Auris and
Hansen].” 31 On September 25, the CEO of Company B called Vance “to explore a
potential acquisition of the Company or acquisition or licensing of certain . . .
intellectual property assets.”32 On September 28, Hansen and Company B entered
into a mutual confidentiality agreement. 33 On September 30, Moll “emailed an
expression of interest letter from Auris to [Vance] and requested that the Company
agree to a [60-day] exclusivity period. The letter contemplated a potential
28
Id. at 31.
29
Id.
30
Id. at 36.
31
Id.
32
Id.
33
Id.
7
acquisition of the Company or all or substantially all of its assets by Auris at a price
to be agreed following due diligence.”34
On October 1, Moll and Vance met in person for further discussions. “Moll
requested the ability to communicate with . . . Jack Schuler, . . . Larry Feinberg and
Lawrence Kennedy [(the “Key Stockholders”)], to inquire as to the willingness of
each of them to potentially invest in Auris and/or their willingness to support a
potential transaction between Auris and the Company.” 35 On October 2, Hansen’s
Board of Directors (the “Board”) held a meeting and, in light of the discussions with
Auris and Company B, created a transaction committee (the “Transaction
Committee”) “to assist management with the process of pursuing potential strategic
alternatives for the Company and interviewing potential financial advisors to assist
with such a transaction.” 36
The Board “appointed Marjorie L. Bowen, Michael L. Eagle, Stephen L.
Newman and Jack Schuler to serve as members of the Transaction Committee.”37
“From October 2 through the time the Transaction Committee involved a financial
advisor in the transaction on October 20, [Vance] and other members of the
34
Id.
35
Id.
36
Id.
37
Id.
8
Company’s management regularly had discussions with potential counterparties to
discuss a potential strategic transaction.”38
On October 8, the Transaction Committee met and discussed “the fact that
Auris had informed the Company that any proposal by Auris to acquire the Company
might be conditioned on the Key Stockholders being required to invest in Auris an
amount equal to all or a significant portion of their proceeds from such a
transaction.”39 “On October 12, Auris provided the Company with a draft
nondisclosure agreement among Auris, the Company and each of the Key
Stockholders,” and the Transaction Committee met again to discuss moving forward
with Auris.40 On October 15, Schuler and the Transaction Committee determined
that Schuler “should not continue as a member of the Transaction Committee in light
of the possibility that he might be required to invest in Auris, and he resigned from
the committee.”41 Schuler, however, did not resign from the Board.
Between October 15, 2015 and January 12, 2016, the Transaction Committee,
which became a special committee of independent directors (the “Special
38
Id.
39
Id. at 37.
40
Id.
41
Id.
9
Committee) on December 8, 2015,42 held at least twelve meetings about the possible
transactions that were attended by members of the Board who were not on the
Transaction or Special Committee, including Schuler.43 During this time, the Board,
including Schuler, also held two meetings where they discussed possible
transactions. 44 Schuler informed the Board on January 7, 2016 that he was
considering resigning from the Board and proposing his own transaction with the
Company. 45 He resigned on January 12,46 but on February 4, Schuler informed the
Company he would not be making an offer to Hansen.47
From January 15, 2016 to April 18, 2016, negotiations continued between
Auris, the Company, and the Controller Defendants. 48 On April 19, the Special
42
Id. at 40.
43
Id. at 38-42. The Proxy explicitly notes that Schuler was excluded from two of these
Board meetings, December 23 and January 8. Id. at 40, 41-42. The Proxy also notes
that Schuler left a January 5 meeting after “an update on the discussions with Auris,
Company B, other potential counterparties and the Key Stockholders.” Id. at 41.
These are the only meetings attended by “other members of the Board” where the
Proxy states that Schuler was excluded or left at a certain time. Thus, it is reasonable
to infer that Schuler attended the entirety of the other meetings.
44
Id. at 37, 40.
45
Id. at 41.
46
Compl. ¶ 16.
47
Dir. Defs.’ Opening Br. Ex. A, at 44.
48
Id. at 42-47.
10
Committee voted unanimously to recommend the Merger to the Board. 49 The same
day, the Board unanimously approved the Merger.50 The ultimate terms of the
Merger were as follows: stockholders received $4.00 per share; Auris assumed the
White Oak Debt; and the Key Stockholders, plus any affiliates or entities with family
connections, rolled over their shares into Auris. 51 The Merger was announced on
April 20, 2016.52
3. Management projections in the Proxy
The Company engaged Perella Weinberg Partners LP (“Perella Weinberg”)
as its financial advisor in October 2015. 53 Perella Weinberg performed discounted
cash flow analyses (“DCFs”) to value Hansen.54 Hansen’s management provided
three different projections to be used in the DCFs. 55 These projections were termed
“Management Case 1,” “Management Case 2,” and “Management Case 3.”56 The
49
Id. at 47.
50
Id.
51
Id.
52
Id.
53
Id. at 38.
54
Id. at 58.
55
Id.
56
Id.
11
DCF using Management Case 1 showed a “range of implied present value per share”
of $5.78-$7.68. 57 The DCF using Management Case 2 showed the range as $2.92-
$4.05 per share, and the DCF using Management Case 3 showed $0.76-$1.34 per
share. 58 “Lowe testified under oath that ‘the case we came up with was actually case
one, the 20 percent. That was the long-term growth rater [sic] that we harmonized
in on.’ The ‘20 percent growth was a reasonable assumption for the next five
years.’” 59 When asked “why Hansen ‘decided to do three different cases as opposed
to just come up with one case,’” Lowe responded “that ‘[c]ase two and three is [sic]
the case that keeps the CFO [i.e., himself] from looking stupid.’” 60 The Proxy did
not disclose this information about managements’ beliefs.
II. ANALYSIS
Plaintiffs assert four claims. First, Plaintiffs assert a breach of fiduciary duty
claim against Defendants Lowe, Vance, and Schuler. Second, Plaintiffs assert a
breach of fiduciary duty claim against the Controller Defendants. Third, Plaintiffs
assert a breach of fiduciary duty claim against Defendant Schuler as a “de facto
57
Id.
58
Compl. ¶ 100.
59
Id. ¶ 91.
60
Id. ¶¶ 91, 100 (alterations in original).
12
Controlling Shareholder.” 61 Fourth and finally, Plaintiffs assert an aiding and
abetting breaches of fiduciary duties claim against Auris.
Defendants, in their various Motions to Dismiss, respond in a variety of ways.
First, Defendants disagree with Plaintiffs’ contention that the Merger should be
reviewed under the entire fairness standard because Defendants argue that there was
not a control group or a controller. Second, Defendant Schuler argues that he cannot
be liable for any breaches of fiduciary duty because he resigned from the Board
before the terms of the Merger were approved and because the Merger was approved
by the Board and Hansen’s stockholders. 62 Third, the Director Defendants argue
that Plaintiffs have failed to plead non-exculpated claims, and under Corwin v. KKR
Financial Holdings LLC, 63 the business judgment rule should apply. 64 Fourth and
finally, Auris argues that Plaintiffs have not pled facts that show Auris “knowingly
participated” in an underlying breach of fiduciary duty.
61
Id. at 66.
62
All of Schuler’s arguments other than those based on the fact that he left the Board
before the Merger was approved rest on the premise that there was no controlling
stockholder. As discussed below, I find that Plaintiffs have stated a reasonably
conceivable claim that there was a control group, and thus, I do not consider
Schuler’s arguments premised on the lack of a controlling stockholder.
63
125 A.3d 304 (Del. 2015).
64
As discussed below, I find that Plaintiffs have stated a reasonably conceivable claim
that the entire fairness standard of review should apply, so I do not address the
Corwin argument asserted by the Director Defendants.
13
A. Standard of Review
When considering a motion to dismiss for failure to state a claim under Court
of Chancery Rule 12(b)(6), a court must accept all well-pled factual allegations in
the complaint as true, accept even vague allegations in the complaint as well-pled if
they provide the defendant notice of the claim, draw all reasonable inferences in
favor of the non-moving party, and deny the motion unless the plaintiff could not
recover “under any reasonably conceivable set of circumstances susceptible of
proof.”65 These “pleading standards for purposes of a Rule 12(b)(6) motion ‘are
minimal,’” and the operative test is “one of ‘reasonable conceivability,’” which asks
“whether there is a ‘possibility’ of recovery.” 66
B. Plaintiffs have stated a reasonably conceivable claim that the
Merger should be considered under the entire fairness standard
of review
Plaintiffs have stated a reasonably conceivable claim that the Merger should
be considered under the entire fairness standard of review because it was a conflicted
transaction involving a controlling stockholder. “When a transaction involving self-
dealing by a controlling shareholder is challenged, the applicable standard of judicial
65
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002).
66
In re China Agritech, Inc. S’holder Deriv. Litig., 2013 WL 2181514, at *23-24 (Del.
Ch. May 21, 2013).
14
review is entire fairness, with the defendants having the burden of persuasion.”67
“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.”68 In other words, a transaction falls under the entire fairness
framework when “the controller competes with the common stockholders for
consideration . . . [and] takes a different form of consideration than the minority
stockholders.”69 Plaintiffs argue that this circumstance applies to the Merger
because the Controlling Defendants constituted a control group and received a
different form of consideration than the minority stockholders, which lead to the
minority stockholders being unfairly undercompensated.
There are two ways a stockholder can be considered a controller under
Delaware law: “where the stockholder (1) owns more than 50% of the voting power
of a corporation or (2) owns less than 50% of the voting power of the corporation
67
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1239 (Del. 2012).
68
In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *11 (Del.
Ch. Jan. 25, 2016), recons. granted in part, 2016 WL 727771 (Del. Ch. Feb. 23,
2016) (ORDER).
69
IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *6 (citing In re
Crimson Expl. Inc. S’holder Litig., 2014 WL 5449419, at *12 (Del. Ch. Oct. 24,
2014) and In re John Q. Hammons Hotels Ins. S’holder Litig., 2009 WL 3165613,
at *7-8 (Del. Ch. Oct. 2, 2009)).
15
but ‘exercises control over the business affairs of the corporation.’” 70 A controlling
stockholder need not be a single person or entity. A group of stockholders may be
deemed a “control group” and considered a controlling stockholder such that “its
members owe fiduciary duties to their fellow shareholders. Proving a control group
is . . . a fact-intensive inquiry that requires evidence of more than mere ‘parallel
interests.’” 71 It requires that the group of stockholders be “connected in some legally
significant way—e.g., by contract, common ownership, agreement, or other
arrangement—to work together toward a shared goal.”72 “The law does not require
a formal written agreement, but there must be some indication of an actual
agreement. Plaintiffs must allege more than mere concurrence of self-interest among
certain stockholders to state a claim based on the existence of a control group.”73
Because the analysis for whether a control group exists is fact intensive, it is
particularly difficult to ascertain at the motion to dismiss stage when “dismissal is
70
In re KKR Fin. Hldgs. LLC S’holder Litig., 101 A.3d 980, 991 (Del. Ch. 2014)
(quoting Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994)),
aff’d sub nom, Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).
71
In re Nine Sys. Corp. S’holder Litig., 2014 WL 4383127, at *24 (Del. Ch. Sept. 4,
2014).
72
Dubroff v. Wren Hldgs., LLC, 2011 WL 5137175, at *3 (Del. Ch. Oct. 28, 2011)
(quoting Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22,
2009)).
73
In re Crimson, 2014 WL 5449419, at *15 (citations omitted).
16
inappropriate unless the ‘plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.’” 74 “Although
parallel interests alone are ‘insufficient as a matter of law to support the inference
that the shareholders were part of a control group,’ . . . parallel interests, in addition
to other facts alleged by [plaintiffs],” can support a reasonable, but not necessarily
conclusive, inference that a control group existed. 75
Plaintiffs point to Frank v. Elgamal for support that a control group existed in
the instant case.76 In Frank, this Court found that the plaintiffs had stated a
reasonably conceivable claim that a control group existed when the complaint
alleged “how all of the members of the Control group contemporaneously entered
into the Voting Agreements, the Exchange Agreements, and the Employment
Agreements.”77
Specifically, the Complaint describe[d] that on December
20, 2010, each member of the Control Group (1) agreed to
vote his shares of American Surgical common stock in
favor of the Merger, (2) exchanged some of his American
Surgical common stock for an interest in the post-Merger
entity, and (3) accepted employment with the post-Merger
74
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006) (quoting
Savor, Inc., 812 A.2d at 896-97).
75
Zimmerman v. Crothall, 2012 WL 707238, at *11 (Del. Ch. Mar. 27, 2012) (quoting
Dubroff, 2011 WL 5137175, at *3).
76
2012 WL 1096090 (Del. Ch. Mar. 30, 2012).
77
Id. at *8.
17
entity. It can reasonably be inferred, from that conduct,
that the members of the Control Group were acting as
American Surgical’s controlling stockholder. Therefore,
for purposes of a motion to dismiss, the Control Group was
American Surgical’s controlling stockholder. 78
The Court of Chancery considered all the factors, the Voting Agreement, Exchange
Agreements, and Employment Agreements, together in light of the broader picture.
When all the facts were considered together at the motion to dismiss stage, they were
enough to state a reasonably conceivable claim that a control group existed. 79
78
Id.
79
Id. Defendants point to several cases, decided at the motion to dismiss stage, which
they contend support their argument that no control group existed here. I find that
these cases are all factually distinguishable from the instant case or actually support
a finding that a control group existed here. See, e.g., In re Crimson., 2014 WL
5449419, at *17 (“At this stage, however, all reasonable inferences must be drawn
in favor of Plaintiffs, and they only need to show it is reasonably conceivable that
Oaktree controlled Crimson. Having considered all of the allegations and the
available record, I am hesitant to conclude that Plaintiffs could not conceivably
make that showing. Regardless, as the next section shows, even assuming that
Oaktree did control Crimson, entire fairness still does not apply in this case [because
there was no conflicted transaction].”); DiRienzo v. Lichtenstein, 2013 WL
5503034, at *25 (Del. Ch. Sept. 30, 2013) (finding that “the Complaint does not
contain allegations that support a reasonable inference that Lichtenstein controlled
the General Partner’s independent and disinterested board as a majority unit holder,
as member of a control group, or otherwise” where the complaint did “not allege
that Lichtenstein owned a majority” of the units and only alleged that Lichtenstein
controlled the day-to-day operations but not the majority independent board of
directors who had no material financial interest in the challenged transaction);
Dubroff, 2009 WL 1478697, at *4 (“The Complaint states in conclusory fashion that
the Entity Defendants ‘controlled the NSC board of directors,’ but the Complaint
does not point to any facts that could explain how the Plaintiffs would expect the
Court to arrive at that conclusion.”); Feldman v. Cutaia, 956 A.2d 644, 657-58 (Del.
Ch. 2007) (finding no control group when the complaint only alleged that the board
members and their families controlled 60% of the company’s equity but did not
allege any agreement or “blood pact” between them), aff’d, 951 A.2d 727 (Del.
18
Plaintiffs argue that the facts they have alleged make this case parallel to
Frank and demand the same result.80 Plaintiffs have alleged a long history of
2008). Defendants do not raise van der Fluit v. Yates, 2017 WL 5953514 (Del. Ch.
Nov. 30, 2017), which was issued by this Court after briefing on these motions
concluded. Regardless, van der Fluit also is distinguishable from the instant case.
In van der Fluit, this Court found that the plaintiff had not pled sufficient facts to
make it reasonably conceivable that a control group existed. Id. at *6-7. There the
plaintiff attempted to show a “contract, common ownership, agreement, or other
arrangement—to work together toward a shared goal” by pointing to (1) agreements
with no relation to the actual transaction; (2) agreements entered into by the entirety
of the stockholders instead of just the control group; or (3) agreements entered into
by only a subsect of the control group. Id. at *5. Most importantly, the plaintiff
pled no facts nor offered any explanation for why these agreements show the
purported control group was bound together in a legally significant way rather than
merely evidencing a concurrence of self-interest. Id. at *6. Nor did the plaintiff
allege any other facts to support any connection between the members of the
purported control group. Id.
80
Defendants also cite several other Delaware cases where this Court determined no
control group existed, but in these opinions this Court found that no control group
existed after discovery and in factually different scenarios. See e.g. Frank v.
Elgamal, 2014 WL 957550, at *18-20 (Del. Ch. Mar. 10, 2014) (finding at the
summary judgment stage that no control group existed before the sale of the
company but that there was a dispute of material fact regarding whether a control
group existed during the sale); Zimmerman, 62 A.3d at 676 (finding, after three days
of trial, that no control group existed, but pointing out that this Court concluded at
the summary judgment stage that it was possible to show that a control group did
exist when the plaintiffs identified various communications to the board by the
individual members of the purported control group); In re PNB Hldg. Co. S’holder
Litig., 2006 WL 2403999, at *10 (Del. Ch. Aug. 18, 2006) (finding, in a post-trial
opinion, that no control group existed because the purported control group consisted
of the directors and officers of the company who did not control a majority of the
stock and “[t]o find that this board was a unified controlling stockholder would be
unprincipled and create a negative precedent” because “[g]lomming share-owning
directors together into one undifferentiated mass with a single hypothetical brain
would result in an unprincipled Frankensteinian version of the already debatable
800-pound gorilla theory of the controlling stockholder that animates the Lynch line
of reasoning.”).
19
cooperation and coordination between the Controlling Defendants. This history
began almost a quarter of a century ago when they entered into a voting agreement
and declared themselves to the SEC as a “group” of stockholders in Quidel. 81 The
history continued for another twenty-one years and included coordinating their
investment strategy in at least seven different companies.82 This history culminated,
at least for the purposes of this action, in 2011 when they were the only participants
in a private placement that made them the largest stockholders of Hansen.83 In 2013
and 2015, they were defined together as “Principal Purchasers” in private placements
of Hansen stock, enjoying “the right to determine the closing date, to oversee the
press releases and other communications regarding the transactions, to extend the
termination date under certain circumstances, and to amend the agreement.”84
This history of coordination colors the actions of the Controller Defendants
during the Merger. At a very early stage of the negotiations, the Controller
Defendants were identified by Auris as the Key Stockholders and entered into
agreements that allowed the Key Stockholders, but only the Key Stockholders, to
81
Compl. ¶ 36(a).
82
Id. ¶¶ 31, 36(a-f).
83
Id. ¶ 32.
84
Id. ¶ 35.
20
negotiate directly with Auris. 85 The Proxy also states that “concurrently with
entering into the merger agreement, and as an inducement to Auris . . . entering into
the merger agreement, Auris, . . . and Hansen obtained voting agreements and
irrevocable proxies from each of the [Controller Defendants].” 86 These voting
agreements and proxies required that “all shares beneficially owned by each such
person” be voted “in favor of the adoption of the merger agreement and to otherwise
support the merger.” 87 Finally, concurrently with the merger agreement, and
contemporaneously with each other, the Controller Defendants also entered into
stock purchase agreements with Auris that the minority stockholders did not sign.88
Although each of these factors alone, or perhaps even less than all these factors
together, would be insufficient to allege a control group existed, all of these factors,
when viewed together in light of the Controller Defendants’ twenty-one year
coordinated investing history, make it reasonably conceivable that the Controller
Defendants functioned as a control group during the Merger.
Defendants attempt to distinguish Frank, in part, by saying that the Frank
Court “was not asked to decide whether the complaint in that case sufficiently
85
Id. ¶ 37.
86
Dir. Defs.’ Opening Br. Ex. A, at 30, 87.
87
Id. at 30, 87.
88
Id. at 2.
21
alleged the existence of a control group.”89 This argument does not carry the day
because the Vice Chancellor actually held that the complaint sufficiently alleged that
the members of the control group were connected in a legally significant way and
discussed the specific facts that allowed him to make that finding. 90 I am not
convinced that the decision’s precedential value depends on how vigorously the
parties contested a particular point. Defendants try to distinguish Frank further by
pointing out that in Frank, the Vice Chancellor relied on the fact that the purported
control group had entered into employment contracts with the acquirer and that an
equivalent fact does not exist here. 91 Frank did not set out the sole and conclusive
arrangement of facts necessary to find adequate allegations that a control group
existed. As discussed above, I find that the facts alleged here and the facts in Frank
are sufficiently alike to dictate a similar result.
More broadly, Defendants attempt to negate Plaintiffs’ pleadings by offering
an alternative explanation for each fact pled by Plaintiffs. For example, Defendants
point out that “Companies looking to raise capital routinely offer sophisticated
investors known to invest in those Companies’ sectors the opportunity to participate
89
S’holder Defs.’ Reply Br. 11.
90
Frank, 2012 WL 1096090, at *8.
91
S’holder Defs.’ Reply Br. 2.
22
in private placements.” 92 Defendants argue that because giving sophisticated
investors the opportunity to invest in private placements is commonplace, and
because Hansen allowed stockholders other than the Controller Defendants to
participate, the private placements in 2013 and 2015 do not support a finding that a
control group existed.93 Furthermore, Defendants argue that “Schuler and Feinberg
are both longtime investors in the healthcare sector is irrelevant to whether the
Stockholder Defendants allegedly colluded with respect to Hansen,”94 and the
Quidel Schedule 13D “demonstrates that when . . . Schuler and Feinberg have, in the
past, entered into voting agreements between each other with respect to a
contemporaneous investment, they disclosed such arrangements.” 95 Finally,
Defendants argue that the Voting and Stockholder Agreements were between the
Stockholder Defendants and Auris, not between the Stockholder Defendants
themselves, which means they cannot evidence an agreement between the
Stockholder Defendants. 96 Defendants argue that their explanations for each fact
undercuts Plaintiffs’ alleged facts showing control.
92
S’holder Defs.’ Opening Br. 24.
93
Id.
94
Id. at 25.
95
Id. at 26.
96
Id. at 27. Defendants also argue that “the execution of the Voting Agreements
suggests only that the [Controller] Defendants each approved of the transaction, a
23
Defendants offer reasonable explanations for some of the connections,
parallel investments, and actions of the purported control group. One might even
argue that they offer a more compelling version of events. It may well be that
Defendants’ version prevails at a later stage of litigation. At the motion to dismiss
stage, however, the question is not whether Plaintiffs offer the only, or even the most,
reasonably conceivable version of events. Rather, the question is whether Plaintiffs
have stated a reasonably conceivable claim for which relief can be granted. “A court
should deny a motion to dismiss pursuant to Court of Chancery Rule 12(b)(6) ‘unless
it can be determined with reasonable certainty that the plaintiff could not prevail on
any set of facts reasonably inferable’ from the pleadings.”97
Finally, Plaintiffs have further alleged that the Controller Defendants received
the opportunity to, and did, “rollover” their stock in Hansen into preferred stock in
Auris. 98 The minority stockholders did not receive this benefit. Instead, Plaintiffs
argue, the minority stockholders received an unfairly low price. Because Plaintiffs
have stated a reasonable conceivable claim that the Controller Defendants
fact which, standing alone, cannot support a control group inference.” S’holder
Defs.’ Reply Br. 2. As discussed above, I do not look at a single fact alleged by
Plaintiffs alone, but rather I look at the facts all together to conclude that Plaintiffs
have stated a reasonably conceivable claim.
97
In re Primedia Inc. Deriv. Litig., 910 A.2d 248, 256 (Del. Ch. 2006) (quoting
Superwire.com, Inc. v. Hampton, 805 A.2d 904, 908 (Del. Ch. 2002)).
98
Compl. ¶ 79.
24
constituted a control group and that the control group received a non-ratable benefit,
Plaintiffs have stated a reasonably conceivable claim that the entire fairness standard
of review applies.
Entire fairness is “Delaware’s most onerous standard.”99 “Once entire
fairness applies, the defendants must establish ‘to the court’s satisfaction that the
transaction was the product of both fair dealing and fair price.’” 100 Generally, the
determination that the entire fairness standard of review could reasonably apply will
prevent dismissal of an action at the motion to dismiss stage “because defendants do
not have the luxury of arguing facts that would counter the plaintiffs’ well-pled
allegations that are assumed as true.”101 This is true here,102 and I am precluded from
dismissing the claims against the Controller Defendants at this stage.
99
In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013).
100
Id. (quoting Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995)).
101
In re Ezcorp, 2016 WL 301245, at *30 (citing Orman v. Cullman, 794 A.2d 5, 20
n.36 (Del. Ch. 2002)).
102
Plaintiffs allegations of an unfair process and unfair price are all the more poignant
because a three-fourths majority of the non-rollover shares voted against the
Merger. See Compl. ¶ 8. Plaintiffs argue that the Merger would not have gone
through if it had been conditioned on approval by a majority of non-rollover shares.
Id. ¶ 122.
25
C. Plaintiffs have pled non-exculpated claims against Defendants
Lowe, Vance, and Schuler
Under Cornerstone Therapeutics Inc. Shareholder Litigation, “plaintiffs must
plead a non-exculpated claim for breach of fiduciary duty against an independent
director protected by an exculpatory charter provision [adopted pursuant to 8 Del.
C. § 102(b)(7)], or that director will be entitled to be dismissed from the suit.”103 An
exculpatory charter provision, however, does not apply to claims of breaches of the
duty of loyalty, claims against officers, or claims against controllers. 104 Plaintiffs
concede that Hansen has an exculpatory charter provision.105 But, Plaintiffs argue
that all their claims fall outside the reach of Cornerstone because the claims either
state a claim for breach of the duty of loyalty or are claims against Defendants in
their capacity as an officer or controller. I agree. Plaintiffs have pled non-exculpated
claims against Defendant Schuler in his capacity as a controller, Lowe for a violation
of his duty of loyalty, and Vance in his capacity as an officer.
1. Plaintiffs have stated a reasonably conceivable non-
exculpated claim against Defendant Schuler
Plaintiffs have stated a reasonably conceivable non-exculpated claim against
Schuler for a breach of the duty of loyalty. “Essentially, the duty of loyalty mandates
103
115 A.3d 1173, 1179 (Del. 2015).
104
See Chen v. Howard-Anderson, 87 A.3d 648, 677-76 (Del. Ch. 2014).
105
Pls.’ Opp’n Br. 48.
26
that the best interest of the corporation and its shareholders takes precedence over
any interest possessed by a director, officer or controlling shareholder and not shared
by the stockholders generally.” 106 Moreover, “[w]hen [the entire fairness] standard
is invoked at the pleading stage, the plaintiffs will be able to survive a motion to
dismiss by interested parties regardless of the presence of an exculpatory charter
provision because their conflicts of interest support a pleading-stage inference of
disloyalty.” 107
As discussed above, Plaintiffs have stated a reasonably conceivable claim that
Schuler was part of a control group that competed with Hansen’s minority
stockholders for consideration during the Merger, resulting in a merger price for the
minority stockholders that Plaintiffs argue was unfairly depressed. Thus, Plaintiffs
have stated a reasonably conceivable claim that he violated his duty of loyalty.
Therefore, Plaintiffs have stated a reasonably conceivable non-exculpated claim
against Schuler.
2. Plaintiffs have stated reasonably conceivable non-
exculpated claims against the Director Defendants
Plaintiffs have stated a reasonably conceivable non-exculpated claim for
breach of fiduciary duties against the Director Defendants due to material
106
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
107
In re Cornerstone, 115 A.3d at 1180–81.
27
misstatements and omissions in the Proxy. 108 “[D]irectors of a Delaware corporation
have a fiduciary duty to disclose fully and fairly all material information.”109 “Under
Delaware law, when a board chooses to disclose a course of events or to discuss a
specific subject, it has long been understood that it cannot do so in a materially
misleading way, by disclosing only part of the story, and leaving the reader with a
distorted impression.” 110 Instead, “[d]isclosures must ‘provide a balanced, truthful
account of all matters they disclose.’ Partial disclosure, in which some material facts
are not disclosed or are presented in an ambiguous, incomplete, or misleading
manner, is not sufficient to meet a fiduciary’s disclosure obligations.” 111
“An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote,” 112 or
“[p]ut another way, there must be a substantial likelihood that the disclosure of the
108
Plaintiffs levy a plethora of allegations against Vance and Lowe. Because Plaintiffs
have stated at least one reasonably conceivable claim against Lowe and Vance, I
need not address all the additional allegations at this stage.
109
Appel v. Berkman, 180 A.3d 1055, 1060 (Del. 2018) (alteration in original) (quoting
1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations
and Business Organizations § 17.10[B], at 17–17 (3d ed. 1998)).
110
Id. at 1064.
111
Id. (internal citations omitted).
112
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
28
omitted fact would have been viewed by the reasonable investor as having
significantly altered the ‘total mix’ of information made available.” 113
The Proxy included three valuations ranges calculated using DCFs. The
DCFs used three separate management projections, Management Case 1, 2, and 3,
resulting in three separate valuations. On the one hand, the DCF prepared using
Management Case 1 showed a “range of implied present value per share” of $5.78-
$7.68, which was well above the transaction price of $4.00 per share. 114 On the other
hand, the DCFs prepared using Management Case 2 and 3 showed “range[s] of
implied present value per share” at or below the transaction price. 115
Lowe testified in his deposition that Management Case 1 was considered by
management to be the most likely scenario and that Management Cases 2 and 3,
which lead to DCFs with values lower than the merger price, were included only to
keep the CFO from “looking stupid.” 116 But, the Proxy states that “[i]n the view of
our management, the financial projections were prepared on a reasonable basis
reflecting management’s best available estimates and judgments regarding our
113
Id. (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
114
Dir. Defs.’ Opening Br. Ex. A, at 58.
115
Id.
116
Id.
29
future financial performance.” 117 The actual opinion of management, as expressed
by Lowe under oath, was not included in the Proxy. In fact, the Proxy presents all
three scenarios as equally plausible in management’s opinion. The fact that
management considered one valuation most likely and included the other two
valuations just to keep the CFO from “looking stupid” likely “would catch a
reasonable stockholder’s attention and ‘significantly alter[] the total mix of
information.’” 118 This makes it reasonably conceivable that the Proxy was
materially misleading.
a. Defendant Lowe
Plaintiffs have stated a reasonably conceivable claim that Lowe breached his
duty of loyalty in his capacity as a director. Lowe prepared the management
projections in his capacity as interim CFO. 119 Based on the facts pled by Plaintiffs,
it is reasonably conceivable that Lowe knew the Proxy was materially misleading
and breached his duty of loyalty by allowing the Proxy to go to stockholders. The
exculpatory provision does not protect Lowe from breaches of the duty of loyalty,
and thus, Plaintiffs have stated a non-exculpated claim against him.
117
Id. at 48.
118
Appel, 180 A.3d at 1061 (alteration in original) (quoting Rosenblatt, 493 A.2d at
944.).
119
Compl. ¶ 100.
30
b. Defendant Vance
Plaintiff has stated a reasonably conceivable claim that Vance violated his
fiduciary duty in his capacity as an officer. “The duty of disclosure is, and always
has been, a specific application of the general fiduciary duty owed by directors.”120
“The fiduciary duties of officers are the same as those of directors.” 121 Vance affixed
his signature to the Proxy in his capacity as President and CEO and presented the
information to the stockholders for their consideration. This means he may be liable
for material misstatements in the Proxy in his capacity as an officer in addition to
his capacity as a director. As discussed above, Plaintiffs have stated a reasonably
conceivable violation of the duty of disclosure. The exculpatory provision does not
protect Vance from breaches of his fiduciary duties in his capacity as an officer; thus,
Plaintiffs have pled non-exculpated claims against Vance.
D. Plaintiffs have not stated a reasonably conceivable claim against
Auris for aiding and abetting a breach of fiduciary duty
Plaintiffs have not stated a reasonably conceivable claim for aiding and
abetting of fiduciary duty against Auris because they have not pled facts that show
Defendant Auris knowingly participated in the purported breach by the other
Defendants. There are four elements to state “an aiding and abetting claim: ‘(1) the
120
Malone v. Brincat, 722 A.2d 5, 10 (Del. 1998).
121
Gantler v. Stephens, 965 A.2d 695, 709 (Del. 2009).
31
existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty, . . . (3)
knowing participation in that breach by the defendants,’ and (4) damages
proximately caused by the breach.” 122 “Knowing participation in a board’s fiduciary
breach requires that the third party act with the knowledge that the conduct
advocated or assisted constitutes [a breach of fiduciary duty].” 123 “[T]he
requirement that the aider and abettor act with scienter makes an aiding and abetting
claim among the most difficult to prove.”124 The “long-standing rule [is] that arm’s-
length bargaining is privileged and does not, absent actual collusion and facilitation
of fiduciary wrongdoing, constitute aiding and abetting.”125 “Under this [rule], a
bidder’s attempts to reduce the sale price through arm’s-length negotiations cannot
give rise to liability for aiding and abetting.”126 The rule requires “that the third
party knowingly participate in the alleged breach-whether by buying off the board
in a side deal, or by actively exploiting conflicts in the board to the detriment of the
122
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001) (alteration in original)
(quoting Penn Mart Realty Co. v. Becker, 298 A.2d 349, 351 (Del. Ch. 1972)).
123
Id. at 1097.
124
RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816, 865–66 (Del. 2015).
125
Morgan v. Cash, 2010 WL 2803746, at *8 (Del. Ch. July 16, 2010).
126
Malpiede, 780 A.2d at 1097–98.
32
target’s stockholders.” 127 This “rule protects acquirors, and by extension their
investors, from the high costs of discovery where there is no reasonable factual basis
supporting an inference that the acquiror was involved in any nefarious activity.” 128
Plaintiffs failed to plead facts that make it reasonably conceivable that Auris
knowingly participated in any of the alleged breaches of fiduciary duty. The
Complaint does not include well-pled facts that Auris took part in any “nefarious”
activity. The facts in the Complaint show only that Auris negotiated a not-
uncommon agreement to reduce its cash outlay by having the major investors in
Hansen rollover their stock. Plaintiffs offer the conclusory allegation that “Auris
exploited its existing relationship with the Controller Defendants, and effectuated a
merger in which Hansen’s Control Group (i.e., the Controller Defendants), or
alternatively Defendant Schuler alone, received a benefit not shared with the
minority stockholders, and which was unfair to minority stockholders.” 129 But,
Plaintiffs plead no facts to support that Auris knew of, let alone “exploited,” any
conflicts. Finally, Plaintiffs allege that Auris negotiated directly with the Key
127
Morgan, 2010 WL 2803746, at *8.
128
Id.
129
Compl. ¶ 7.
33
Stockholders. 130 The Proxy supports this, 131 but this fact alone does not support a
reasonable inference that Auris “colluded” with the Controller Defendants. Because
the Complaint does not state well-pled facts that make it reasonably conceivable
Auris partook in more than arm’s length negotiations, Plaintiffs have not stated a
reasonably conceivable claim for aiding and abetting breaches of fiduciary duty
against Auris.
III. CONCLUSION
For the foregoing reasons, the Controller Defendants’ Motion to Dismiss is
DENIED, the Director Defendants’ Motion to Dismiss is DENIED, and Defendant
Auris’s Motion to Dismiss is GRANTED.
IT IS SO ORDERED.
130
Id. ¶ 61; Pls.’ Opp’n Br. 55-56.
131
Dir. Defs.’ Opening Br. Ex. A, at 37.
34