Jeran Binning v. Naren Gursahaney ( 2016 )

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
TAMIKA R. M ONTGOMERY-REEVES New Castle County Courthouse
VICE CHANCELLOR 500 N. King Street, Suite 11400
Wilmington, Delaware 19801-3734
Date Submitted: February 17, 2016
Date Decided: May 6, 2016
Blake A. Bennett, Esquire Brock E. Czeschin, Esquire
Cooch and Taylor, P.A. A. Jacob Werrett, Esquire
The Brandywine Building Sarah A. Clark, Esquire
1000 West Street, 10th Floor Richards, Layton & Finger, P.A.
P.O. Box 1680 One Rodney Square
Wilmington, DE 19801 920 North King Street
Wilmington, DE 19801
Stephen P. Lamb, Esquire
Daniel A. Mason, Esquire
Paul, Weiss, Rifkind,
Wharton & Garrison LLP
500 Delaware Avenue, Suite 200
P.O. Box 32
Wilmington, DE 19899-0032
RE: Jeran Binning v. Naren Gursahaney, et al.
Civil Action No. 10586-VCMR
Dear Counsel:
This Letter Opinion addresses the defendants’ motions to dismiss the
plaintiff’s Verified First Amended Stockholder Derivative Complaint. For the
reasons stated herein, the defendants’ motions are granted.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 2 of 15
I. BACKGROUND
A. Facts
Plaintiff Jeran Binning, a stockholder of Nominal Defendant The ADT
Corporation (“ADT” or the “Company”)1 since September 2012, challenges a
series of decisions made by the Company’s board of directors (the “Board”) for the
alleged purpose of appeasing an activist investor, Defendant Keith A. Meister, and
avoiding a proxy contest. Soon after ADT’s stock began trading publicly in
October 2012, Meister, through his investment management firm Defendant
Corvex Management LP (“Corvex”), purchased around five percent of the
Company’s outstanding stock.2 Meister immediately began lobbying the Board to
further leverage ADT’s capital structure by issuing debt securities to fund stock
repurchases. According to Binning, the Board capitulated under Meister’s threat of
a proxy contest.
Further, Binning contends that Meister obtained a seat on the Board and
approval of additional debt offerings and stock repurchases by again threatening a
1
ADT is a Delaware corporation that provides electronic security, interactive home
and business automation, and monitoring services to individuals and small
businesses. ADT was a subsidiary of Tyco International until it was spun off as an
independent, publicly traded company in September 2012.
2
Corvex is a Delaware limited partnership controlled by Meister.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 3 of 15
proxy contest if the Board resisted. Then, in November 2013, the Board approved
an allegedly overpriced repurchase of over $450 million in Company stock directly
from Corvex, netting the investment firm around $60 million in profits. In January
2014, the public learned of ADT’s revenue shortfalls, diminishing customer base,
and increased advertising and service costs, each contributing to a single-day,
seventeen percent stock price reduction.
On August 1, 2014, Walter E. Ryan, Jr., another ADT stockholder, filed a
complaint challenging the Board’s decisions enumerated above. On April 28,
2015, in Ryan v. Gursahaney, this Court dismissed Ryan’s complaint under Court
of Chancery Rule 23.1, noting that Ryan had failed to make a pre-suit demand and
holding that pre-suit demand was not excused.3 On January 27, 2015, Binning
filed an initial complaint challenging the same Board decisions and, in response to
Defendants’ motions to dismiss, filed an amended complaint the following June
(the “Complaint”). Binning’s Complaint largely mirrors the operative complaint in
Ryan.4
3
See Ryan v. Gursahaney, 2015 WL 1915911 (Del. Ch. Apr. 28, 2015), aff’d, 128
A.3d 991 (Del. 2015) (TABLE).
4
Id. at 4. I address those alleged differences in Section II.B.3 infra. For a more
fulsome statement of the relevant facts, see Ryan, 2015 WL 1915911, at *2-4.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 4 of 15
B. Additional Parties
Defendant Naren Gursahaney has been ADT’s President and CEO and a
member of the Board since September 2012. Defendant Kathryn Mikells was
ADT’s Senior Vice President and CFO from September 2012 to May 2013.
Defendant Bruce Gordon is the Chairman of the Board, and Defendants Timothy
Donahue, Thomas Colligan, Bridgette Heller, Kathleen Hyle, Robert Dutkowsky,
and Meister are all current or former Board members. Collectively, I refer to
Corvex, Meister, Gursahaney, Mikells, Gordon, Donahue, Colligan, Heller, Hyle,
and Dutkowsky as “Defendants.”
C. Parties’ Contentions
Defendants argue that the Complaint should be dismissed (1) for failure to
make a demand on the Board or to plead adequately that such a demand would be
futile, (2) because stare decisis compels dismissal pursuant to Ryan, (3) because
Ryan collaterally estops Binning from relitigating demand futility, and (4) for
failure to state a claim pursuant to Court of Chancery Rule 12(b)(6). Binning
responds that, notwithstanding Ryan, any pre-suit demand would have been futile
and the Complaint adequately alleges breach of fiduciary duty, aiding and abetting,
and unjust enrichment claims. Binning also contends that stare decisis and
collateral estoppel do not apply under these circumstances. Because I conclude
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 5 of 15
that Defendants’ motions to dismiss under Rule 23.1 should be granted, I need not
consider the parties’ arguments regarding Rule 12(b)(6).
II. ANALYSIS
A. Legal Standard
Rule 23.1 provides that a stockholder may not bring an action derivatively
on behalf of the nominal defendant corporation unless the stockholder (1) made a
demand on the corporation to initiate litigation that the corporation’s board
wrongfully refused or (2) pled particularized facts creating a reasonable doubt that
either “[(a)] the directors are disinterested and independent or [(b)] the challenged
transaction was otherwise the product of a valid exercise of business judgment.”5
The Rule 23.1 demand requirement embodies the principle that a derivative cause
of action belongs to a corporation, which is managed by the corporation’s board,6
and allows the “corporation the opportunity to rectify an alleged wrong without
litigation.”7
5
Del. Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1020 (Del. 2015) (internal
quotation marks omitted) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del.
1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000));
accord Ct. Ch. R. 23.1.
6
White v. Panic, 783 A.2d 543, 546 (Del. 2001).
7
Aronson, 473 A.2d at 809.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 6 of 15
B. Binning Has Failed To Distinguish His Complaint from This
Court’s Decision in Ryan Sufficiently To Avoid Dismissal
1. This Court dismissed the Ryan plaintiff’s complaint under
Rule 23.1
As mentioned above, this Court dismissed another ADT stockholder’s
claims based on the same Board action in Ryan. Ryan, the plaintiff in that case,
did not make a pre-suit demand on the Board, but pled that such demand would
have been futile because “(1) the Board was not disinterested and independent with
respect to the decisions relating to the Standstill Agreement, the Stock Repurchase
Program, and the Corvex Repurchase; and (2) the Complaint’s allegations as to
those transactions are sufficient to rebut the protection of the business judgment
rule.”8 Ryan contended that demand would have been futile on both bases because
the Board’s “sole or primary motivation was entrenchment.”9
The Court rejected Ryan’s entrenchment argument, finding that “the
particularized facts do not support a reasonable inference that the [Board]
8
Ryan, 2015 WL 1915911, at *5.
9
Id. at *6 (citing Grobow v. Perot, 539 A.2d 180, 188 (Del. 1988), overruled on
other grounds by Brehm, 746 A.2d 244).
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 7 of 15
perceived an actual ‘threat’ of removal and [was] motivated to avoid it” 10 and
holding as follows:
Plaintiff’s argument as to the futility of demand [under
the first prong of Aronson v. Lewis] relies heavily on his
contention that the Director Defendants were driven by a
desire to entrench themselves. In that regard, Plaintiff
contends that the Complaint contains particularized
allegations that the Director Defendants believed
themselves to be vulnerable to removal by Corvex, and
that the primary reason they agreed to the Standstill
Agreement, the Stock Repurchase Program, and the
Corvex Repurchase was to avoid this possibility. The
non-conclusory allegations in the Complaint, however,
do not raise a reasonable doubt as to the Director
Defendants’ disinterestedness or independence based on
this entrenchment theory . . . .
....
Under the second prong of the Aronson test, demand may
be excused as futile if the complaint creates a reasonable
doubt that the challenged transaction was otherwise the
product of a valid exercise of business judgment. The
presumption of the business judgment rule can be
rebutted if the particularized facts raise a reasonable
doubt that the informational component of the directors’
decisionmaking process, measured by concepts of gross
negligence, included consideration of all material
reasonably available. A plaintiff seeking to establish
10
Id.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 8 of 15
demand futility under Aronson’s second prong bears a
heavy burden. Here, Plaintiff failed to carry it.11
Thus, the Court concluded that the plaintiff had failed “to plead adequately that
demand was excused,” and “[b]ecause such a failure requires dismissal of the
Complaint in its entirety,” the Court did not address the defendants’ arguments
regarding dismissal under Rule 12(b)(6).12
2. Binning’s Complaint largely repeats the allegations and
arguments that this Court dismissed in Ryan
Binning also did not make a pre-suit demand on the Board. Instead, Binning
contends that his Complaint should not be dismissed because any such demand
would have been futile. To support that position, however, Binning pleads a nearly
identical set of factual allegations and legal arguments as the plaintiff did in Ryan.
Specifically, Binning contends that demand would have been futile because a
majority of the Board (1) was not disinterested because it acted with an
entrenchment motive in acceding to Corvex’s demands and (2) did not validly
exercise its business judgment because it acted with an entrenchment motive,
11
Id. at *6, *8 (footnotes omitted) (internal quotation marks omitted) (citing White,
783 A.2d at 551; Brehm, 746 A.2d at 256 (quoting and citing Aronson, 473 A.2d
at 812, 814)).
12
Id. at *5.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 9 of 15
failed to be reasonably informed in taking the challenged actions, and violated
certain Board resolutions in taking the challenged actions.13
In Ryan, this Court considered and rejected the vast majority of the same
demand futility arguments that Binning makes here. The Delaware Supreme Court
affirmed this Court’s decision in Ryan.14 The principle of stare decisis, therefore,
counsels that Binning’s Complaint should be dismissed absent a sufficient factual
or legal distinction from Ryan.15 And, even if stare decisis did not apply, I have
reviewed Ryan and its cited authority and agree with that decision’s conclusions.
As such, to the extent that Binning’s allegations and arguments overlap with those
addressed by this Court in Ryan, I reject them as bases on which demand would
have been futile. Binning’s Complaint, however, includes certain allegations and
arguments that were not addressed in Ryan. I address those differences infra to
13
See Pl.’s Answering Br. 24-50.
14
See Ryan v. Gursahaney, 128 A.3d 991 (Del. 2015) (TABLE).
15
La. Mun. Police Emps.’ Ret. Sys. v. Pyott, 46 A.3d 313, 335 (Del. Ch. 2012)
(“When any other derivative plaintiff faces a Rule 23.1 motion [after a previous
Rule 23.1 dismissal] involving the same transaction, the plaintiff must distinguish
the new complaint or explain how the prior court erred such that the outcome of
the motion would be different.”), rev’d on other grounds, 74 A.3d 612 (Del.
2013); see also Kohls v. Kenetech Corp., 791 A.2d 763, 770 (Del. Ch. 2000)
(“[B]ecause the Kohls fail to distinguish their claims, either factually or legally,
from those [dismissed in a prior action . . . [n]ormal respect for the principle
of stare decisis . . . require[s] that I dismiss this complaint.”), aff’d, 794 A.2d 1160
(Del. 2002).
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 10 of 15
determine whether Binning has distinguished his Complaint sufficiently to avoid
application of stare decisis or alter this Court’s conclusion in Ryan.16
3. The distinctions between the Complaint and Ryan are
insufficient to avoid dismissal
Binning includes certain factual allegations and legal arguments in his
Complaint that are absent from Ryan. In particular, the Complaint alleges the
following: (1) an additional director served on the Board at the time Binning filed
his Complaint;17 (2) Mikells was named as a defendant in this case;18 (3) the Board,
in December 2012, extended the deadline by which stockholders could nominate
directors for election at the next stockholder meeting;19 (4) the SEC began
investigating the challenged transactions;20 (5) ADT issued a materially misleading
proxy statement;21 (6) the Board’s Nominating and Governance Committee did not
meet separately from the full Board to approve the stock repurchase from Corvex
16
The parties also briefed arguments pertaining to collateral estoppel. ADT Opening
Br. 35-38; Pl.’s Answering Br. 54. Because I find that the Complaint should be
dismissed on principles of stare decisis and based on this Court’s reasoning in
Ryan, I decline to address whether collateral estoppel otherwise applies.
17
Compl. ¶ 137.
18
Id. ¶ 16.
19
Id. ¶¶ 59-60.
20
Id. ¶¶ 128-29.
21
Id. ¶ 141.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 11 of 15
as a related-party transaction;22 and (7) there were discrepancies between ADT’s
responses to various stockholders’ Section 220 demands.23 These distinctions,
however, are insufficient to plead demand futility.
First, the fact that the Board consisted of one additional independent director
when Binning filed his Complaint suggests that the Board had become more
disinterested and independent since Ryan filed his complaint. That indicates that a
pre-suit demand here would have been even less futile than in Ryan and, therefore,
weighs against a finding of demand futility here.
Second, adding Mikells as a defendant has no bearing on the demand futility
analysis. Mikells is a former CFO of ADT and left the Company in May 2013,
well before the buyback of Corvex’s ADT shares. Additionally, the demand
futility inquiry focuses on whether the Board was disinterested or independent, and
Mikells never served on the Board.
Third, Binning argues that the Board’s December 2012 extension of the
deadline by which stockholders could nominate directors for election at the
following stockholder meeting suggests that it perceived an actual threat to their
22
Id. ¶ 144.
23
Id. ¶¶ 34-35.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 12 of 15
positions.24 The Board, therefore, allegedly acted to entrench themselves instead
of in the stockholders’ best interests.25 This Court held in Ryan, however, that the
Board did not perceive an “‘actual threat’ of removal” because the complaint failed
to adequately allege an “actual struggle.”26 The new allegation that the Board
extended the deadline for stockholders to propose a competing slate, without more,
is insufficient to alter the Ryan Court’s conclusion that no actual threat existed.27
Fourth, Binning describes the SEC’s investigation into ADT as a “critical”
fact that was not alleged in Ryan.28 Yet, Binning does not even attempt to explain
how the SEC investigation would support a finding that demand on the Board
24
Compl. ¶¶ 59-60; Pl.’s Answering Br. 58.
25
Oral Arg. Tr. 23.
26
Ryan, 2015 WL 1915911, at *7. In Ryan, the Court found that the complaint did
not allege an “actual threat” because Corvex did not, for example, “initiate[] a
proxy contest or other public campaign to remove one or more ADT directors,” or
even take “any preliminary steps to prepare for such an endeavor.” Id. at *6. As
such, the Court held that any threat Meister or Corvex posed to the Board was
“‘too speculative to raise a reasonable doubt of director disinterest’ under the first
prong of Aronson.” Id. at *6-7 (quoting Grobow, 639 A.2d at 188).
27
Essentially, Binning’s argument is that extending the deadline to nominate a
competing slate of directors for election at the following stockholders meeting
increased the amount of time the Board had to negotiate the standstill. Oral Arg.
Tr. 9. This argument, however, is tenuous at best and does not overcome Ryan’s
“actual (as opposed to possible or theoretical) ‘struggle for corporate control’”
standard. Ryan, 2015 WL 1915911, at *7 (quoting Grobow, 539 A.2d at 188).
28
Pl.’s Answering Br. 57-59.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 13 of 15
would have been futile. I also note that the United States District Court for the
Southern District of Florida dismissed the complaint on which the SEC
investigation was based for failure “to allege any actionable misstatement or
scienter.”29 And, the SEC has since concluded its investigation and “do[es] not
intend to recommend an enforcement action by the Commission against [ADT].”30
Fifth, Binning alleges that the proxy statement ADT issued in connection
with its 2013 annual meeting was materially misleading. Binning presumably
made this allegation to convince the Court that demand would have been futile
because the Board faced a substantial likelihood of personal liability for potential
disclosure violations.31 Interestingly, the Complaint fails to even assert a claim
against the Board concerning that allegedly misleading proxy. Regardless, there is
no basis in the Complaint’s allegations for me to conclude that the Board faced a
29
ADT Opening Br. 32; accord Transmittal Aff. of Daniel A. Mason in Supp. of the
ADT Defs.’ Opening Br. in Supp. of Their Mot. to Dismiss the Am. Compl. Ex. 8
at 35, 38-39, 56-57, 59-62 (order granting defendants’ motion to dismiss the
federal securities complaint).
30
See Feb. 16, 2016 Letter from the SEC to ADT, Docket Item No. 54.
31
Aronson, 473 A.2d at 815 (noting that a board may be found to lack
disinterestedness or independence when it faces a substantial likelihood of liability
for approving a questioned transaction); see Compl. ¶ 141 (including the allegation
regarding the materially misleading proxy in the section of the Complaint titled
“Demand Was Also Excused Because a Majority of ADT’s Board Lacks
Disinterestedness or Independence”).
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 14 of 15
substantial likelihood of liability such that the allegedly misleading proxy had any
bearing on the Board’s disinterestedness or independence as to Binning’s claims.
Sixth, the fact that the Board’s Nominating and Governance Committee did
not meet separately does not “support[] the inference that the Board acted
disloyally in approving the Corvex repurchase.”32 Binning relies on Telxon Corp.
v. Bogomolny to support that argument, but, in that case, the inference of disloyalty
resulted from the allegation that “there were no minutes kept of the meetings of the
Telxon board committees.”33 By contrast, the Complaint quotes the minutes from
the Board meeting during which, “[a]fter consideration and discussion, the
members of the Nominating and Governance Committee of the Board approved the
proposed repurchase as a related party transaction.”34 Hence, no such inference of
disloyalty can be made in this case.
Seventh, and finally, Binning alleges that there were discrepancies between
ADT’s responses to Ryan’s and Binning’s Section 220 demands. Binning
complains that because Ryan received more documents in his Section 220 demand
32
Pl.’s Answering Br. 44.
33
792 A.2d 964, 975 (Del. Ch. 2001).
34
Compl. ¶ 144.
Binning v. Gursahaney
C.A. No. 10586-VCMR
May 6, 2016
Page 15 of 15
than he did, dismissal of his Complaint would be “inequitable.”35 Binning,
however, does not contend that Ryan failed to utilize those additional documents
adequately, or that the Court in Ryan failed to consider those documents. In
addition, the one item Binning alleges he received that Ryan did not receive—i.e.,
the written consent adopting the December 2012 bylaw amendment extending the
time for stockholders to submit a competing slate of directors for election at the
following stockholders meeting—does not affect the Court’s demand futility
analysis, as discussed supra.
III. CONCLUSION
For the reasons stated above, Binning has failed to plead sufficiently that
demand would have been futile. Thus, Defendants’ motions to dismiss are granted,
and the Complaint is dismissed under Rule 23.1.
IT IS SO ORDERED.
Sincerely,
/s/ Tamika Montgomery-Reeves
Vice Chancellor
TMR/jp
35
Pl.’s Answering Br. 59.