In re Homefed Corporation Stockholder Litigation ( 2020 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE HOMEFED CORPORATION ) CONSOLIDATED
STOCKHOLDER LITIGATION ) C.A. No. 2019-0592-AGB
)
MEMORANDUM OPINION
Date Submitted: April 3, 2020
Date Decided: July 13, 2020
Peter B. Andrews, Craig J. Springer, and David M. Sborz, ANDREWS &
SPRINGER LLC, Wilmington, Delaware; Ned Weinberger, LABATON
SUCHAROW LLP, Wilmington, Delaware; Jeremy S. Friedman and David F.E.
Tejtel, FRIEDMAN OSTER & TEJTEL PLLC, Bedford Hills, New York; John
Vielandi and David MacIsaac, LABATON SUCHAROW LLP, New York, New
York; D. Seamus Kaskela, KASKELA LAW LLC, Newtown Square, Pennsylvania;
Attorneys for Plaintiffs Richard Rose and Dennis E. Murray Sr.
S. Mark Hurd and Alexandra M. Cumings, MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; John P. Stigi III, SHEPPARD, MULLIN,
RICHTER & HAMPTON LLP, Los Angeles, California; Kristin P. Housh,
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP, San Diego, California;
Attorneys for Defendants Patrick Bienvenue and Paul Borden.
Bradley R. Aronstam and S. Michael Sirkin, ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Joseph S. Allerhand, Evert J. Christensen Jr. and Elizabeth
M. Sytsma, WEIL, GOTSHAL & MANGES LLP, New York, New York; Attorneys
for Defendants Brian Friedman, Jimmy Hallac, Joseph Steinberg, and Jefferies
Financial Group Inc.
BOUCHARD, C
This case concerns a transaction in which Jefferies Financial Group Inc., the
70% stockholder of HomeFed Corporation, acquired the rest of the shares of the
company in July 2019 by exchanging two of its shares for each share of HomeFed
held by its minority stockholders. The transaction traces its roots back to 2017, when
a HomeFed director proposed that Jefferies take HomeFed private in a 2:1 share
exchange. In December 2017, a special committee of HomeFed’s board of directors
was put in place to negotiate with Jefferies. The special committee paused its
process in March 2018, when Jefferies told the special committee it was no longer
interested in pursuing the transaction.
Over the next eleven months, despite indicating a lack of interest in a
transaction, Jefferies engaged in direct discussions concerning a potential transaction
with HomeFed’s largest minority stockholder (BMO), whose support was essential
to get a deal done with the approval of the minority stockholders. In early February
2019, BMO indicated to Jefferies that it would support a 2:1 share exchange. Shortly
thereafter, Jefferies formally proposed acquiring the rest of HomeFed’s shares in a
2:1 share exchange conditioned on obtaining the approval of a special committee
and a majority of the minority stockholders. After some back and forth, the
reactivated special committee ultimately approved the 2:1 share exchange that
Jefferies originally proposed.
1
Plaintiffs are former stockholders of HomeFed. Their complaint asserts
claims for breach of fiduciary duty against HomeFed’s directors and Jefferies as its
controlling stockholder. All of the defendants moved to dismiss the complaint under
Court of Chancery Rule 12(b)(6) for failure to state a claim for relief.
The primary issue before the court is whether the transaction complied with
the framework set forth in Kahn v. M & F Worldwide Corp. (“MFW”)1 for subjecting
a squeeze-out merger by a controlling stockholder to business judgment review
rather than the entire fairness standard. Plaintiffs argue there are several reasons it
did not. For the reasons explained below, the court concludes that the complaint
pleads a reasonably conceivable set of facts that the transaction did not satisfy the
requirements of MFW. This is because, according to the complaint, Jefferies did not
commit itself to the dual protections of MFW before engaging in substantive
economic discussions concerning the transaction that anchored later negotiations
and undermined the ability of the special committee to bargain effectively on behalf
of the minority stockholders. The court also concludes that the complaint states non-
exculpated claims against two of the directors who were not affiliated with Jefferies
at the time of the transaction. Accordingly, defendants’ motions to dismiss will be
denied.
1
88 A.3d 635 (Del. 2014).
2
I. BACKGROUND
Unless otherwise noted, the facts recited in this opinion come from the
allegations of the Verified Class Action Complaint (“Complaint”) and documents
incorporated therein.2 Any additional facts are subject to judicial notice.
A. The Parties
Plaintiffs Richard Rose and Dennis E. Murray, Sr. (together, “Plaintiffs”) each
held shares of stock of HomeFed Corporation (“HomeFed” or the “Company”) at all
times relevant to the buyout transaction at issue in this action (the “Transaction”).3
HomeFed is a Delaware corporation engaged in the development and
ownership of residential and mixed-use real estate projects in California, Virginia,
South Carolina, Florida, Maine, and New York.4
The Complaint names as defendants Jefferies Financial Group Inc.
(“Jefferies”) and the seven members of HomeFed’s board of directors (the “Board”)
when the Transaction was approved: Joseph Steinberg, Brian Friedman, Jimmy
Hallac, Patrick Bienvenue, Paul Borden, Timothy Considine, and Michael Lobatz.
Three of these individuals (Steinberg, Friedman, and Hallac) held senior positions
2
Verified Compl. (“Compl.”) (Dkt. 1). See Winshall v. Viacom Int’l, Inc., 76 A.3d 808,
818 (Del. 2013) (“[P]laintiff may not reference certain documents outside the complaint
and at the same time prevent the court from considering those documents’ actual terms” in
connection with a motion to dismiss).
3
Compl. ¶ 16.
4
Id. ¶ 26.
3
at Jefferies and were not “independent” under Nasdaq listing rules.5 Together with
Jefferies, these three individuals are referred to collectively as the “Jefferies
Defendants.”
Jefferies, formerly known as Leucadia National Corporation, is a diversified
holding company with an array of businesses and investments.6 As of the closing of
the Transaction, Jefferies owned an aggregate of 10,853,123 shares of HomeFed
stock, or approximately 70% of the Company’s common stock.7
Steinberg served on the Board since 1998 and as Chairman of the Board since
1999.8 Steinberg is also Chairman of Jefferies’ board of directors, served as
Jefferies’ President from January 1979 until March 2013, and serves as a director of
Jefferies Group LLC, a wholly-owned subsidiary of Jefferies.9
Friedman served on the Board since April 2014.10 Friedman has served on
Jefferies’ board of directors since March 2013 and succeeded Steinberg as President
in March 2013.11 Friedman also has been a director and executive officer of Jefferies
5
Id. ¶¶ 17-19 (citing HomeFed’s definitive proxy statement filed with the Securities and
Exchange Commission on June 28, 2018).
6
Id. ¶ 24.
7
Id. ¶¶ 24, 31.
8
Id. ¶ 17.
9
Id.
10
Id. ¶ 18.
11
Id.
4
Group LLC and served as Chairman of its Executive Committee since 2002, along
with serving on several boards of subsidiaries and investee companies of Jefferies
Group.12
Hallac served on the Board since March 2017.13 Hallac has been employed at
Jefferies since 2002 and currently serves as managing director.14 He also serves on
the boards of various Jefferies’ portfolio entities.15
Considine and Lobatz, who joined the Board in 1992 and 1995, respectively,
served on a special committee tasked to negotiate the terms of the Transaction (the
“Special Committee”).16 The remaining two directors, Bienvenue and Borden, both
joined the Board in May 1998.17
B. The Stockholders Agreement
In 1998, Leucadia spun-off HomeFed to its stockholders.18 In 2014, after
Leucadia merged with Jefferies the year before, Jefferies increased its ownership of
HomeFed from approximately 31% to approximately 65% of HomeFed’s
12
Id.
13
Id. ¶ 19.
14
Id.
15
Id.
16
Id. ¶¶ 22-23, 37.
17
Id. ¶¶ 20-21.
18
Id. ¶ 28.
5
outstanding shares.19 In connection with that transaction, Jefferies and HomeFed
entered into a Stockholders Agreement.20
In the Stockholders Agreement, Jefferies agreed it “shall not directly or
indirectly” acquire “additional securities of the Company” (i) without the prior
approval of a special committee of “Independent Directors” and (ii) “if the proposed
transaction is subject to Rule 13e-3 under the Exchange Act,” without obtaining “the
affirmative vote of a majority of the Outstanding Voting Securities held by the
Disinterested Stockholders.”21
C. The Considine Letter
On September 26, 2017, Considine wrote a letter to Steinberg proposing a
potential merger of HomeFed and Jefferies with a 2:1 exchange ratio (i.e., two
Jefferies shares for each HomeFed share), which implied a price of $50 per each
share of HomeFed (the “Considine Letter”).22 Shortly after receiving the Considine
Letter, Steinberg, acting on behalf of Jefferies, reached out to a portfolio manager at
Beck, Mack and Oliver, LLC (“BMO”) to discuss a potential HomeFed-Jefferies
19
Id. ¶¶ 29-30.
20
Id. ¶ 30. The Stockholders Agreement was entered into under Jefferies’ former name,
Leucadia National Corporation. Transmittal Affidavit of Bradley R. Aronstam (“Aronstam
Aff.”) Ex. E (“Stockholders Agreement”) Preamble (Dkt. 24).
21
Stockholders Agreement § 3.
22
Compl. ¶ 34.
6
merger.23 At the time, BMO was HomeFed’s largest stockholder behind Jefferies,
owning approximately 9% of HomeFed’s common stock, or approximately 36% of
the shares unaffiliated with Jefferies.24 Discussions with BMO did not progress
because its thoughts on an appropriate exchange ratio were very different from those
of Jefferies.25
In December 2017, Considine and Lobatz wrote a letter alerting the Board that
“[a] discussion has taken place concerning the feasibility of having a stock
transaction merging HomeFed into [Jefferies]” and requesting, “as the only
independent directors” on the Board, to be appointed “to investigate a potential stock
transaction acting as an independent Special Committee.”26 On December 11, 2017,
the Board adopted resolutions (the “December 2017 Resolutions”) expanding the
authority of a previously created committee consisting of Considine and Lobatz (as
defined above, the “Special Committee”) to include:
the exclusive power and authority (1) to review, evaluate and propose
the terms and conditions, and determine the advisability of a Potential
Transaction and any other alternative transactions, (2) to communicate
and negotiate (or to direct communications and negotiations) with any
other party that the Special Committee of Independent Directors deems
appropriate with respect to the terms and conditions, or the
23
Id. ¶ 35.
24
Id.; Aronstam Aff. Ex. F (May 20, 2019 Definitive Proxy Statement of HomeFed filed
on Schedule 14A) (“Proxy”), at 106-07; Aronstam Aff. Ex. G (Apr. 12, 2019 Presentation),
at -0238.
25
Compl. ¶ 35.
26
Id. ¶ 37.
7
implementation, of a Potential Transaction and any other alternative
transactions, . . . [and] (7) to communicate with the full Board, the
stockholders and other parties to a Potential Transaction and any further
alternatives.27
The December 2017 Resolutions further provided that “the officers of [HomeFed]
are hereby directed not to have or direct any negotiations or related material
communications with any other party to a Potential Transaction . . . unless a
Chairman of the Special Committee of Independent Directors has approved of or is
present at such communications or negotiations.”28
In January 2018, the Special Committee engaged Sheppard, Mullin, Richter
& Hampton LLP (“Sheppard Mullin”) as “Special Counsel” to the Company for a
potential strategic transaction with Jefferies and engaged Seltzer Caplan McMahon
Vitek and Morris, Nichols, Arsht & Tunnell LLP as its counsel.29 The Special
Committee also selected Houlihan Lokey as its financial advisor but did not formally
engage the firm at that time.30
27
Id. ¶ 38 (quoting Aronstam Aff. Ex. I (“December 2017 Resolutions”)).
28
Id. ¶ 39 (same).
29
Id. ¶ 42.
30
Id.
8
D. Jefferies Pauses Negotiations with the Special Committee While
Continuing to Communicate with HomeFed Stockholders
On March 15, 2018, Hallac emailed Sheppard Mullin on behalf of Jefferies to
communicate that Jefferies no longer wanted to pursue a strategic transaction.31
Around this time, HomeFed’s stock was trading around $55 per share while
Jefferies’ stock was trading at around $24 per share.32 With the proposed 2:1
exchange ratio, this translated to an approximately 13% negative premium for
HomeFed stockholders.
On March 26, 2018, the Special Committee determined to “pause” its process
of exploring a potential transaction.33 Although paused on the Special Committee’s
end, Jefferies “repeatedly” held discussions with BMO from March 2018 through
February 2019 about a potential transaction in which Jefferies would acquire the
remaining shares of HomeFed that it did not already own.34 These discussions did
not progress because “BMO and Jefferies were too far apart with respect to an
appropriate exchange ratio.”35 This changed in early February 2019. As explained
in the Proxy:
31
Id. ¶ 45.
32
Id. ¶ 44.
33
Id. ¶ 46; Aronstam Aff. Ex. O, at 2 (Mar. 26, 2018 Special Committee minutes).
34
Compl. ¶ 47; see also Proxy 19 (referencing discussions between Jefferies and BMO
occurring from “time to time throughout 2018” and in “early February 2019”).
35
Compl. ¶ 47.
9
In early February 2019, Mr. Steinberg and Richard Handler, chief
executive officer of Jefferies, met with a representative of BMO. The
representative of BMO encouraged Jefferies to make a proposal,
subject to the terms of the stockholders’ agreement, whereby Jefferies
would acquire all of the shares of HomeFed common stock that it did
not already own for an exchange ratio of two shares of Jefferies
common stock for each share of HomeFed common stock and indicated
that BMO would support such a transaction. The representative of
BMO also asked Mr. Steinberg if he, in his personal capacity as a
beneficial owner of HomeFed common stock, would also support such
a transaction, and Mr. Steinberg said he would. The representative of
BMO also indicated that he had been in contact with a representative of
an investment adviser firm that advised accounts holding a substantial
number of shares of HomeFed common stock, which we refer to as
Advisor A, and the representative of Advisor A indicated that Advisor
A, too, would support such a transaction.36
On February 13, 2019, the Special Committee first learned about these
discussions between Jefferies and BMO.37 At a meeting of the Special Committee,
Lobatz and Considine “indicated that, to their knowledge, the Board had taken no
action to dissolve the Special Committee or to modify the December 11, 2017
Authorizing Resolutions.”38 The Special Committee then directed Sheppard Mullin
to request more information about Jefferies’ discussions with BMO and to ask
Jefferies’ counsel to “remind all of the members of the Board who are also officers
36
Proxy 19; see also Compl. ¶ 50; Aronstam Aff. Ex. A, at 1.
37
Compl. ¶ 48.
38
Aronstam Aff. Ex. P (Feb. 13, 2019 Special Committee minutes), at 2.
10
or directors of Jefferies that the Special Committee expects they will abide by the
December 11, 2017 Resolutions for so long as they are in effect.”39
On February 15, 2019, Sheppard Mullin informed the Special Committee that
Jefferies had indeed been in discussions with BMO and not only would BMO
support a 2:1 transaction, but also “someone that advises a significant number of
holders of HomeFed shares . . . would be supportive and recommend in favor of such
a transaction.”40 The “someone” was RBC Capital Markets (“RBC”), which is
referred to as “Adviser A” in the Proxy. BMO and RBC together represented
approximately 70% of the shares of HomeFed unaffiliated with Jefferies.41
E. The February 2019 Offer
On February 19, 2019, Jefferies issued a press release announcing its proposal
to acquire all remaining HomeFed common stock in exchange for two shares of
Jefferies stock (the “February 2019 Offer”).42 The next day, on February 20,
Jefferies filed an amendment to its Schedule 13D announcing the February 2019
Offer. The amendment stated that the February 2019 Offer “will include a condition
that the proposed transaction will require the approval of a majority of the
outstanding shares of [HomeFed]’s Common Stock not already owned by Jefferies
39
Compl. ¶ 49 (quoting Feb. 13, 2019 Special Committee minutes).
40
Id. ¶ 50.
41
See id. ¶¶ 96-97; Proxy 25.
42
Compl. ¶ 52.
11
(or its affiliates)” and that “[i]t is anticipated that the proposed transaction will be
considered by a Special Committee of the Company’s Board of Directors, comprised
of Independent Directors of the Company’s Board, whose affirmative
recommendation to the Company’s Board of Directors will be required under
the . . . Stockholders Agreement.”43
On February 20, 2019, the Special Committee held a meeting to discuss the
February 2019 Offer.44 Shepherd Mullin reported that Jefferies “was in favor of
reauthorization [of the Special Committee] but would recommend that the
reauthorization resolutions make clear the ability of Joseph Steinberg (and
potentially other representatives of Jefferies) to speak with HomeFed minority
stockholders.”45 The Special Committee rejected this recommendation and
reiterated that “the Committee desires to control communications with the
Corporation’s minority stockholders.”46
On February 25, 2019, during a Special Committee meeting, Shepherd Mullin
informed the Special Committee members that the Board would “reauthorize” the
Special Committee with the same power and authority as previously adopted in the
43
Aronstam Aff. Ex. B (Feb. 20, 2019 Jefferies Schedule 13D/A), at 3.
44
Aronstam Aff. Ex. R (Feb. 20, 2019 Special Committee minutes), at 2.
45
Compl. ¶ 54 (quoting Feb. 20, 2019 Special Committee minutes).
46
Compl. ¶ 55; Aronstam Aff. Ex. R, at 2.
12
December 2017 Resolutions.47 Shortly after the Special Committee meeting, the
Board met and unanimously approved a resolution that “confirms that the Special
Committee . . . is authorized to take any and all actions, and to exercise all of the
authority, granted to [it] in the resolutions of the Board of Directors dated as of
December 11, 2017.”48
During the February 25 Board meeting, Steinberg provided the Board with an
overview of events occurring since receipt of the Considine Letter, including his
discussions with Lyman Delano of BMO over the past year.49 With respect to his
most recent discussions, the Special Committee minutes state that:
Within the last two weeks, Mr. Delano met with Mr. Steinberg and
Richard Handler, Jefferies’ CEO. Mr. Delano said he would support a
2-for-1 deal and asked Mr. Steinberg if he as a major holder would also.
Mr. Steinberg said yes. Mr. Delano also confirmed that another major
shareholder similarly would be supportive. Given this encouragement,
Jefferies’ officers sought and received approval of its board and made
public its proposal.50
The minutes also reflect that, after Steinberg summarized his discussion with BMO,
both Considine and Lobatz essentially equated Jefferies’ proposal to the one
Considine proposed to Steinberg in September 2017:
Messrs. Considine and Lobatz thanked Mr. Steinberg for persevering
along the lines expressed by Mr. Considine and for leading the effort to
47
Compl. ¶ 56; Aronstam Aff. Ex. II, at 1.
48
Compl. ¶ 58; Aronstam Aff. Ex. A (Feb. 25, 2019 Board minutes), at 2.
49
Compl. ¶ 58.
50
Aronstam Aff. Ex. A, at 1.
13
make a proposal that the Special Committee can consider along with its
counsel and financial advisors. Mr. Lobatz also commended Mr.
Considine for writing the September 26, 2017 letter and initiating the
potential transaction.51
Steinberg then agreed he would “not have substantive communications with
shareholders without clearing such communications with the Special Committee
until definitive agreements are reached or until the potential transaction is
abandoned.”52
F. Negotiations in Response to the February 2019 Offer
In March 2019, the Special Committee formally engaged Houlihan as its
financial advisor and began evaluating the February 2019 Offer.53 In evaluating the
value of Jefferies, the Special Committee exclusively relied on Jefferies’ trading
price.54 Houlihan did not conduct any other analysis of Jefferies’ value or consider
projections of Jefferies’ future performance.55
During a March 15 meeting of the Special Committee, Lobatz reported that a
HomeFed stockholder contacted him to convey that the stockholder did not think the
2:1 ratio was fair.56 On March 18, the Special Committee asked Houlihan to reach
51
Id. at 2.
52
Compl. ¶ 56; Aronstam Aff. Ex. A, at 2.
53
Compl. ¶ 64.
54
Id. ¶ 68.
55
Id.
56
Id. ¶ 67.
14
out to BMO without informing Jefferies.57 BMO later confirmed to Houlihan
Steinberg’s account of their conversations since the Considine Letter and expressed
that although BMO “believed the proposal . . . was ‘inadequate,’” BMO “understood
Jefferies’ position and believed that such proposal was superior to the status quo.”58
Houlihan also reached out to other significant minority stockholders, which
expressed similar concerns. Specifically, Houlihan reported that RBC, which
advised holders of approximately 750,000 HomeFed shares, was “begrudgingly
supportive” and was concerned about Jefferies stock price decreasing.59
On March 25, 2019, the Special Committee decided to propose a $42 fixed
value counteroffer to the February 2019 Offer.60 The next day, Hallac emailed
Considine and Lobatz to see if one of them could speak over the phone regarding a
question about the Special Committee’s counteroffer.61 When Considine called
Hallac, he sought approval for Jefferies’ CEO to contact BMO to discuss the
counteroffer.62 After Considine told Hallac he did not object, Jefferies’ CEO
(Richard Handler) immediately reached out to BMO without any input from
57
Id. ¶ 73; Aronstam Aff. Ex. W, at 3.
58
Compl. ¶ 75.
59
Id. ¶ 76.
60
Id. ¶ 77; Aronstam Aff. Ex. Y, at 2-3.
61
Compl. ¶ 79.
62
Id. ¶ 80.
15
Lobatz.63 In his discussions with BMO, Handler did not tell BMO about the Special
Committee’s proposal of a fixed value structure at $42 per share and instead implied
that the 2:1 fixed exchange ratio was a “take it or leave it” proposition.64 BMO
preferred this proposal to the status quo and thus expressed support.65
When Lobatz learned that Jefferies had spoken with BMO, he immediately
contacted Hallac to make clear that he did not consent to Jefferies speaking directly
to BMO.66 At the next Special Committee meeting on March 26, 2019, which
occurred later in the day after Handler spoke to BMO, the Special Committee
discussed its concerns about its “continued effectiveness” in light of Jefferies’
behavior.67 Specifically, the Special Committee directed Sheppard Mullin to
communicate to Jefferies that “there should be no further contact from anyone
affiliated with Jefferies with any stockholder of the corporation not affiliated with
Jefferies without Committee approval, which would occur only after the Committee
had consulted with its legal and financial advisors.”68
63
Id. ¶¶ 80-81.
64
Id. ¶ 81.
65
Id.
66
Id. ¶ 84.
67
Id. ¶ 85.
68
Id.
16
On March 27, 2019, Jefferies rejected the Special Committee’s $42 fixed
value counteroffer and reiterated its offer at 2:1 fixed exchange ratio.69 Hallac
communicated that Jefferies rejected the counteroffer based on the 2:1 exchange
ratio proposed in the Considine Letter and BMO’s support for the 2:1 exchange
ratio.70
Later on March 27, at a meeting of the Special Committee, Lobatz reiterated
his displeasure with Jefferies’ conversations with BMO, which he considered “so
damaging to the Committee’s negotiating position” that he and Considine “discussed
excluding BMO from the majority of the minority stockholder vote.”71 The Special
Committee ultimately decided against taking this action.72
On April 2, 2019, the Special Committee agreed to Jefferies’ 2:1 exchange
ratio but proposed a collar with a low threshold of $38 and a high threshold of $42
to protect against a decrease in Jefferies’ stock price.73 Jefferies agreed to this
structure, which was documented in a merger agreement HomeFed and Jefferies
entered into on April 12.74
69
Id. ¶ 88; Aronstam Aff. Ex. AA, at 1.
70
Compl. ¶ 88.
71
Id. ¶ 89.
72
Id. ¶ 92.
73
Id. ¶ 91.
74
Id. ¶¶ 92-93. Specifically, the April 12 merger agreement provided that minority
stockholders would receive their choice of either $38 per share in cash or no more than two
shares of Jefferies stock and, if Jefferies stock was worth more than $21 per share when
17
G. Stockholders Renegotiate the Transaction Directly with Jefferies
On April 15, 2019, HomeFed and Jefferies publicly announced the terms of
April 12 merger agreement, to which BMO and RBC promptly expressed their
opposition to the $42 upper collar.75 On April 16, the Special Committee decided to
permit Jefferies to communicate directly with BMO and RBC about their concerns
but only after Houlihan spoke to them first.76
The following week, the Special Committee spoke with RBC, which
expressed concerns about the upper collar and that “any cash option was not
attractive.”77 RBC claimed to speak for BMO as well, which meant it was relaying
the views of more than 70% of the HomeFed shares not affiliated with Jefferies.78
On April 27, 2019, the Special Committee proposed removing the upper
collar.79 Jefferies rejected the proposal unless the $38 cash alternative also was
removed, to which the Special Committee agreed on April 29, 2019.80
the Transaction closed, the exchange ratio would reduce from 2:1 to ensure that the
Jefferies stock the HomeFed minority stockholders received would not be worth more than
$42 in total. Id. ¶ 93.
75
Id. ¶ 94.
76
Id. ¶ 94; Aronstam Aff. Ex. EE, at 2.
77
Compl. ¶ 97.
78
Id.
79
Id. ¶ 98.
80
Id. ¶¶ 98-99; Aronstam Aff. Ex. FF, at 1.
18
On May 2, 2019, the Special Committee and the Board approved an
amendment to the merger agreement to remove the upper collar and cash option.81
The minority stockholders voted to approve the Transaction on June 28, 2019. 82
II. PROCEDURAL HISTORY
On August 1, 2019, Plaintiffs filed this action, which was consolidated with a
related action on September 3, 2019.83 On September 16, 2019, Plaintiffs designated
the Verified Class Action Complaint (as defined above, the “Complaint”) as the
operative complaint.84
The Complaint asserts two claims. Count I asserts a breach of fiduciary duty
claim against the seven individual defendants for agreeing to the Transaction that
provided the minority stockholders “unfairly low consideration for their shares of
HomeFed common stock.”85 Count II asserts a breach of fiduciary duty claim
against Jefferies as HomeFed’s controlling stockholder for devising and
orchestrating “the unfair and self-dealing Transaction.”86
81
Compl. ¶ 100; Aronstam Aff. Ex. GG.
82
Aronstam Aff. Ex. HH (June 28, 2019 HomeFed Form 8-K), at 3. Of the 3,772,780
shares of HomeFed stock held by the Company’s minority stockholders, 2,987,231 shares
voted for the Transaction, 73,974 shares voted against the Transaction, and 1,476 shares
abstained. Id.
83
Dkt. 11.
84
Dkt. 19.
85
Compl. ¶ 135.
86
Id. ¶ 139.
19
In November 2019, each of the Defendants moved to dismiss the Complaint
under Court of Chancery Rule 12(b)(6) for failure to state a claim for relief.87 On
December 17, 2019, the parties stipulated to the dismissal of Considine and Lobatz
without prejudice.88 After briefing, the court held oral argument on April 3, 2020.
III. ANALYSIS
The standards governing a motion to dismiss under Rule 12(b)(6) for failure
to state a claim for relief are well settled:
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and [(iv)] dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.89
The Jefferies Defendants’ sole argument for dismissal of the claims against
them is that the Transaction is subject to business judgment review because the
Transaction complied with the framework set forth in Kahn v. M & F Worldwide
Corp. (“MFW”).90 The remaining two defendants (Borden and Bienvenue) join in
the MFW argument and advance one additional argument, i.e., that the Complaint
fails to plead a non-exculpated claim against them under In re Cornerstone
87
Dkt. 24; Dkt. 25.
88
Dkt. 32.
89
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal quotations and
citations omitted).
90
88 A.3d 635 (Del. 2014).
20
Therapeutics Inc., Shareholder Litigation.91 The court addresses each issue in turn
below.
A. The MFW Defense
In MFW, our Supreme Court held that the business judgment rule is the
appropriate standard of review for a challenge to a squeeze-out merger by a
controlling stockholder if the transaction satisfies certain procedural protections:
We hold that business judgment is the standard of review that should
govern mergers between a controlling stockholder and its corporate
subsidiary, where the merger is conditioned ab initio upon both the
approval of an independent, adequately-empowered Special Committee
that fulfills its duty of care; and the uncoerced, informed vote of a
majority of the minority stockholders.92
The high court reasoned that the “simultaneous deployment of [these] procedural
protections . . . create a countervailing, offsetting influence of equal—if not
greater—force” than the undermining influence of a controller.93 In this way, the
“controller irrevocably and publicly disables itself from using its control to dictate
the outcome of the negotiations.”94
91
115 A.3d 1173 (Del. 2015).
92
88 A.3d at 644.
93
Id.
94
Id.
21
In summarizing its holding, the Supreme Court in MFW identified six
conditions that must be satisfied to invoke business judgment review of a squeeze-
out merger by a controlling stockholder:
[I]n controller buyouts, the business judgment standard of review will
be applied if and only if: (i) the controller conditions the procession of
the transaction on the approval of both a Special Committee and a
majority of the minority stockholders; (ii) the Special Committee is
independent; (iii) the Special Committee is empowered to freely select
its own advisors and to say no definitively; (iv) the Special Committee
meets its duty of care in negotiating a fair price; (v) the vote of the
minority is informed; and (vi) there is no coercion of the minority. 95
“If a plaintiff can plead a reasonably conceivable set of facts showing that any or all
of those enumerated conditions did not exist,” the plaintiff would state a claim for
relief and be entitled to conduct discovery.96 “If, after discovery, triable issues of
fact remain about whether either or both of the dual procedural protections were
established, or if established were effective, the case will proceed to a trial in which
the court will conduct an entire fairness review.”97
Plaintiffs contend that entire fairness review presumptively applies to the
Transaction because the Complaint’s factual allegations support more than a
reasonable inference that three of the six conditions required under MFW were not
95
Id. at 645 (formatting altered), overruled on other grounds by Flood v. Synutra Int’l,
Inc., 195 A.3d 754, 763 (Del. 2018).
96
Id.
97
Id. at 645-46.
22
satisfied. For the reasons discussed next, the court concludes that Plaintiffs have
plead a reasonably conceivable set of facts that Jefferies did not impose the MFW
conditions ab initio based on the Complaint’s allegations concerning Jefferies’
discussions with BMO before Jefferies made the February 2019 Offer.98
Plaintiffs contend that adherence to the MFW framework required imposition
of its dual protective devices in 2017, after Considine sent Steinberg a letter
proposing a potential merger of HomeFed and Jefferies based on a 2:1 exchange
ratio. According to Plaintiffs, the Considine Letter led to a continuous series of
substantive negotiations concerning a potential transaction that Jefferies had before
it committed to the MFW framework, first with the Special Committee from
December 2017 to March 2018 and then directly with BMO from March 2018 to
February 2019.
Relying on this court’s decision in In re Books-A-Million, Inc. Stockholders
Litigation,99 Defendants counter that the process with the Special Committee that
began in December 2017 ended in March 2018, when Jefferies abandoned pursuit of
a transaction, and that the February 2019 Offer began a separate process. As to the
98
Given the court’s conclusion on this issue, it not necessary to address the two other MFW
conditions that Plaintiffs contend were not satisfied, namely that “the Special Committee
was neither well-functioning nor an effective negotiating agent” and that the “Proxy was
materially incomplete and misleading.” Pls.’ Answering Br. 25 (Dkt. 33).
99
2016 WL 5874974, at *8 (Del. Ch. 2016), aff’d, 164 A.3d 56 (Del. 2017) (quoting MFW,
88 A.3d at 644).
23
second process, Defendants contend that Jefferies satisfied the MFW pre-condition
requirement on the theory that the Stockholders Agreement provided the “rules of
the road . . . for any potential going-private transaction with Jefferies.”100 They
further contend this requirement was met because, “within days of Jefferies
informing Lobatz and Considine about BMO’s support for a potential two-for-one
transaction in February 2019, and before Jefferies made the [February 2019 Offer],
Jefferies made clear that it expected any transaction to comply with MFW’s strictures
and the Stockholders Agreement.”101
As an initial matter, Defendants’ reliance on Books-A-Million is misplaced.
There, this court found it was not reasonably conceivable that a proposal from a
controller made “nearly three years after” a special committee rejected an initial
proposal from the controller containing “a different price and different terms” was a
continuation of the first proposal.102 Here, by contrast, the Complaint alleges that:
 The Board never repealed the December 2017 Resolutions or dissolved
the Special Committee;
 As reflected in its minutes and the Proxy, the Special Committee only
“determined to pause its process” in March 2018 when Jefferies
indicated it no longer wanted to pursue a transaction;
 Despite asserting a lack of interest in a transaction in March 2018,
Jefferies “repeatedly” held substantive economic discussions
100
Jefferies Opening Br. 33 (Dkt. 24).
101
Id.
102
Books-A-Million, 2016 WL 5874974, at *9.
24
concerning a potential transaction over the next eleven months with the
Company’s largest minority stockholder (BMO) notwithstanding the
fact that the December 2017 Resolutions gave the Special Committee
the “exclusive power and authority . . . to communicate with . . . the
stockholders;” and
 Those discussions culminated in BMO expressing support for a
transaction with the same structure (i.e., a 2:1 exchange ratio) proposed
in the Considine Letter that triggered the need for the Special
Committee in the first place.103
Given these well-plead allegations, it is reasonably conceivable that the February
2019 Offer was part of the same process that led to the adoption of the December
2017 Resolutions that empowered the Special Committee and caused it to retain
multiple legal advisors shortly thereafter.104 That process failed to comply with the
MFW framework because Jefferies did not condition a transaction ab initio upon the
dual MFW protections before that process began.
103
Compl. ¶¶ 38, 46-48 (emphasis in original); Aronstam Aff. Ex. O (Mar. 26, 2018 Special
Committee minutes); Aronstam Aff. Ex. P (Feb. 13, 2019 Special Committee minutes);
Proxy 19; December 2017 Resolutions at -1381.
104
Defendants ask the court to draw inferences in their favor to find that the Special
Committee process that began in December 2017 ended in March 2018 because Considine
and Lobatz sought “reauthorization” from the Board after receiving the February 2019
Offer and because they declined to engage Houlihan formally until the Board approved the
reauthorization. Jefferies Opening Br. 37, 43. This would be inappropriate. The court
may not weigh evidence on a motion to dismiss to resolve a factual dispute. Rather, the
court’s task is to determine whether plaintiff would be entitled to recover “under any
reasonably conceivable set of circumstances” while drawing “all reasonable inferences in
favor of the non-moving party.” Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs.
LLC, 27 A.3d 531, 535 (Del. 2011).
25
Although it is reasonably conceivable that the February 2019 Offer was part
of the process that began in December 2017, it ultimately makes no difference in my
opinion whether it was or whether the February 2019 Offer triggered a new process.
This is because, in either case, Jefferies did not commit to the MFW protections
before engaging in substantive economic discussions concerning the Transaction.
Rather, Jefferies engaged in a series of discussions with BMO until Jefferies
received an indication of support for a 2:1 share exchange from BMO—whose
support was essential to get a deal done with minority stockholder approval105—as
well as from RBC before Jefferies agreed to the dual MFW protections. To be more
specific, Jefferies received these indications of support in early February 2019 but
did not agree to the MFW protections until, at the earliest, February 20, 2019, when
it amended its Schedule 13D.106 Defendants advance essentially two arguments why
this should not matter. Neither has merit.
105
Mot. to Dismiss Hr’g Tr. 27 (Apr. 3, 2020) (Dkt. 47) (Jefferies Defendants’ counsel:
“the reality is that BMO, owning 9 percent of the stock – which, in fact, translated into 36
percent of the minority – no deal was ever going to get done without BMO’s interest and
support.”).
106
See supra Part I.E. Jefferies appears to argue it agreed to the MFW protections a few
days earlier, on February 18. That is when its counsel confirmed to Shepherd Mullin the
details of Steinberg’s discussions with BMO and “indicated that any transaction would be
subject to the approval of the Special Committee and a majority of the outstanding shares
of the Corporation’s Common Stock not already owned by Jefferies or its affiliates.” See
Jefferies Opening Br. 13-14 (quoting Feb. 18, 2019 Special Committee minutes), 33. But
this was not a public commitment to the MFW protections and, in any event, the key
discussion with BMO occurred before February 18. See MFW, 88 A.2d at 644 (“[W]here
the controller irrevocably and publicly disables itself from using its control to dictate the
outcome of the negotiations and the shareholder vote, the controlled merger then acquires
26
First, Defendants contend the Stockholders Agreement “all but eliminated the
risk of Jefferies pursuing a going-private transaction without the support of
HomeFed’s independent directors and minority stockholders.”107 This is incorrect.
The requirement in the Stockholders Agreement for approval of a majority of the
minority stockholders only applies to transactions subject to Rule 13e-3 of the
Exchange Act.108 The Stockholders Agreement thus did not preordain that any
buyout of HomeFed’s minority stockholders would be subject to a majority of the
minority approval requirement. Indeed, it appears that the Transaction fell within
an exception to Rule 13e-3 because HomeFed stockholders received “only an equity
security” (i.e., Jefferies stock) that carried substantially the same rights as HomeFed
stock.109 Jefferies does not contend otherwise.
Second, Defendants argue that Jefferies’ discussions with BMO before the
February 2019 Offer did not pass the point of no return for invoking MFW’s
protections because those discussions were “preliminary” and only involved “an
the shareholder protective characteristics of third-party, arm’s-length mergers, which are
reviewed under the business judgment standard.”) (emphasis added).
107
Jefferies Reply Br. 20 (Dkt. 36).
108
See supra Part I.B.
109
See Pls.’ Answering Br. 27 n.31 (citing 17 CFR § 240.13e-3(g)(2)).
27
unaffiliated minority stockholder with no ability or authority to bind the corporation
or any other stockholder.”110 The court disagrees.
“The first requirement of [MFW] is that the controller condition the
transaction ‘ab initio upon both the approval of an independent, adequately-
empowered Special Committee that fulfills its duty of care; and the uncoerced,
informed vote of a majority of the minority stockholders.’”111 “[T]he purpose of the
words ‘ab initio,’ and other formulations like it in the MFW decisions, require the
controller to self-disable before the start of substantive economic negotiations, and
to have both the controller and Special Committee bargain under the pressures
exerted on both of them by these protections.”112
As this court recently explained in In re Dell Technologies Inc. Class V
Stockholders Litigation, “MFW’s dual protections contemplate that the Special
Committee will act as the bargaining agent for the minority stockholders, with the
minority stockholders rendering an up-or-down verdict on the committee’s work.”113
A special committee is uniquely qualified to perform this task because directors have
“superior access to internal sources of information,” can deploy “the Board’s
statutory authority under Section 141(a) as delegated to the committee under Section
110
Jefferies Opening Br. 39-40.
111
In re Books-A-Million, 2016 WL 5874974, at *8 (quoting MFW, 88 A.3d at 644).
112
Synutra, 195 A.3d at 763.
113
2020 WL 3096748, at *17 (Del. Ch. June 11, 2020).
28
141(c), and can ‘act as an expert bargaining agent.’”114 Directors also owe fiduciary
duties and do not suffer from the collective action problem of disaggregated
stockholders whereas minority stockholders are unencumbered by fiduciary duties
(absent special circumstances) and “may have divergent interests in a transaction,
whether economic or otherwise.”115
Here, the Complaint sufficiently alleges that, by engaging in substantive
economic discussions with BMO before committing itself to the twin MFW
protections, Jefferies failed to disable and subject itself to the pressures of
negotiating with the Special Committee with those protections in place. Instead,
according to the Complaint, Jefferies anchored the negotiations and undermined the
Special Committee’s ability to bargain effectively as the minority stockholders’
agent. To that end, the Complaint specifically alleges that Jefferies cited BMO’s
support for a 2:1 exchange ratio when it rebuffed the Special Committee’s $42 fixed
value counteroffer.116
114
Id. (quoting In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618 (Del. Ch.
2005); see 8 Del. C. § 141.
115
2020 WL 3096748, at *18 (citations omitted).
116
Compl. ¶ 88 (alleging that “Jefferies only received” the “purported support of BMO for
a 2:1 exchange ratio” that Hallac stated was one of “the bases for Jefferies’ decision to
reject” the Special Committee’s counteroffer by “repeatedly violating the [December 2017]
Resolutions to pressure and deceive BMO into agreeing to an unfair Transaction”). See
also id. ¶ 89 (Lobatz complaining that Jefferies’ March 2019 conversations with BMO
damaged the Special Committee’s “negotiating position” to the point that “the Special
Committee discussed excluding BMO from the majority-of-the-minority stockholder
vote”).
29
Defendants’ contention that Jefferies’ discussions with BMO were simply
“preliminary” is inconsistent with well-plead allegations that those discussions
concerned the key economic term of the Transaction—the price. Although the value
realized from a pure share exchange is inherently subject to the relative prices of the
underlying shares of stock in the exchange, one would be hard-pressed not to view
the exchange ratio as an important substantive economic term. In fact, the 2:1 ratio
to which BMO indicated support just days before Jefferies purported to commit itself
to the MFW protections ultimately dictated the final price HomeFed’s minority
stockholders received for their shares in the Transaction a few months later.
Finally, Defendants’ position implies that substantive economic discussions
preceding invocation of MFW’s twin protections should not preclude a pleading-
stage dismissal under MFW if they occur between the controller and a minority
stockholder with no authority to bind the company as opposed to an authorized
representative of the controlled company. Neither party identified any legal
authority addressing this precise scenario. In Dell, the court held that defendants
were not entitled to receive a pleading-stage dismissal under MFW where the
controller bypassed the special committee in favor of direct negotiations with
stockholders after invoking MFW’s protections.117
117
Dell, 2020 WL 3096748, at *19-20.
30
As previously mentioned, the animating principle of MFW is to require a
controller to disable and negotiate with an independent and adequately empowered
committee of directors under the pressures of the dual protections. If the controller
does so in accordance with the six conditions enumerated in MFW, the controller
effectively will secure a pleading-stage dismissal of a case that otherwise would be
subject to entire fairness review.118 To my mind, it would be imprudent to endorse
a rule that would allow a controller to undermine the effectiveness of a special
committee preemptively through direct negotiations with a stockholder under the
circumstances plead here as much as it would be to do so after the committee has
been authorized formally.
For the reasons explained above, the court denies Defendants’ motion to
dismiss both claims in the Complaint based on their MFW defense. Accordingly,
Plaintiffs are entitled to proceed to take discovery.119
118
See id. at *14 (explaining that the business judgment rule resulting from application of
MFW is essentially “irrebuttable” because “[i]t is ‘logically difficult to conceptualize how
a plaintiff can ultimately prove a waste or gift claim in the face of a decision by fully-
informed, uncoerced, independent stockholders to ratify the transaction’”) (quoting Harbor
Fin. P’rs v. Huizenga, 751 A.2d 879, 889 (Del. Ch. 1999)).
119
MFW, 88 A.3d at 645 (“If a plaintiff that can plead a reasonably conceivable set of facts
showing that any or all of those enumerated conditions did not exist, that complaint would
state a claim for relief that would entitle the plaintiff to proceed and conduct discovery.”).
31
B. The Cornerstone Defense
Defendants Bienvenue and Borden are protected by a Section 102(b)(7)
provision in HomeFed’s certificate of incorporation.120 “When a director is
protected by an exculpatory charter provision, a plaintiff can survive a motion to
dismiss by that director defendant by pleading facts supporting a rational inference
that the director harbored self-interest adverse to the stockholders’ interests, acted to
advance the self-interest of an interested party from whom they could not be
presumed to act independently, or acted in bad faith.”121 For the reasons discussed
next, Plaintiffs have plead facts supporting a rational inference that, by voting to
approve the Transaction, Bienvenue and Borden acted to advance the self-interest of
an interested party (Jefferies) that stood on both sides of the Transaction from which
they could not be presumed to act independently.
120
Transmittal Affidavit of Alexandra Cumings Ex. 1, § 8 (Dkt. 26). “The court may take
judicial notice of an exculpatory charter provision in resolving a motion addressed to the
pleadings.” McMillan v. Intercargo Corp., 768 A.2d 492, 501 n.40 (Del. Ch. 2000).
Plaintiffs assert in a footnote that Borden cannot secure dismissal under Section 102(b)(7)
because he was an officer of the Company in addition to being a director, but Plaintiffs
fails to allege any facts demonstrating that Borden took any action in this capacity relevant
to Count I. See Arnold v. Soc’y for Sav. Bancorp., Inc., 650 A.2d 1270, 1288 (Del. 1994)
(finding that a breach of fiduciary duty claim against a dual director-officer asserted “in his
role as an officer” “lacks merit” where plaintiff “failed to highlight any specific actions
[the officer-director] undertook as an officer (as distinct from actions as a director)” so as
to fall outside of Section 102(b)(7)’s protection).
121
In re Cornerstone, 115 A.3d at 1179-80.
32
With respect to Bienvenue, the Complaint alleges he served in a variety of
executive roles for Jefferies from January 1996 until April 2011, and has served on
the HomeFed Board since 1998.122 In addition to his continued service on the Board,
Bienvenue provided paid consulting services to HomeFed for several years and as
recently as the first quarter of 2019. More specifically, Plaintiffs allege that, aside
from his HomeFed director role, Bienvenue’s consulting role was his “sole
employment” and he received approximately $10,000, $39,000, $155,000, and
$50,000 in consulting fees from HomeFed for 2016, 2017, 2018, and the first quarter
of 2019, respectively.123 Even under the more onerous particularity pleading
standard of Rule 23.1, this court has found that a “consulting agreement suggests a
lack of independence.”124
Turning to Borden, the Complaint alleges he was a Jefferies Vice President
from August 1988 to October 2000, served as HomeFed’s President for twenty years
from May 1998 to February 2018, and was serving as Vice Chairman of the
122
Compl. ¶ 20.
123
Id.; HomeFed 10-Q, filed with the SEC on May 9, 2019, at 16, 28. The court may take
judicial notice of this fact because it is not subject to reasonable dispute between the parties.
In re General Motors (Hughes) S’holder Litig., 897 A.2d 162, 170 (Del. 2006) (“[I]n acting
on a Rule 12(b)(6) motion to dismiss, trial courts may consider hearsay in SEC filings to
ascertain facts appropriate for judicial notice under Delaware Rule of
Evidence 201. . . [however] it [can] only take judicial notice of facts not subject to
reasonable dispute.”) (internal quotation marks, alterations, and citations omitted).
124
Orman v. Cullman, 794 A.2d 5, 30 (Del. Ch. 2002) (finding it “reasonable to infer that
$75,000 would be material” to the director in question and that he would be “beholden to
the controlling shareholders for future renewals of his consulting contract.”).
33
Company—an executive officer position—under an employment agreement when
the Transaction was approved.125 “Under the great weight of Delaware precedent,
senior corporate officers generally lack independence for purposes of evaluating
matters that implicate the interests of a controller.”126 Borden also was not listed as
“independent” under Nasdaq listing rules in HomeFed’s 2018 Proxy.127
The Complaint also alleges that the members of the Special Committee
recognized Bienvenue and Borden’s lack of independence from Jefferies in 2017
when a Jefferies buyout of the minority stockholders was first proposed.
Specifically, Considine and Lobatz wrote a letter to the Board in December 2017
stating that, “as the only independent directors, we would like to request that
you . . . appoint [us] to investigate a potential stock transaction acting as an
independent special committee.”128 When they sent this letter, Considine and Lobatz
had served on the Board together with Bienvenue and Borden for nearly twenty years
125
Compl. ¶ 21; Proxy 42 (“No executive officer is a party to any employment agreement
other than Paul J. Borden.”); HomeFed Schedule 14A, filed with the SEC on June 28, 2018,
at 13 (“As Vice Chairman, Mr. Borden remains an executive officer of the Company and
it is expected that he will continue his service through December 31, 2019.”).
126
In re Ezcorp Inc. Consulting Agreement Deriv. Litig., 2016 WL 301245, at *35 (Del.
Ch. Jan. 25, 2016) (collecting authorities).
127
Compl. ¶ 21.
128
Id. ¶ 37 (emphasis added).
34
and were well-positioned to understand the work Bienvenue and Borden did for
HomeFed and the relationship they had with Jefferies.129
Bienvenue and Borden argue that the December 2017 letter is “immaterial”
because it does not speak to their independence when they approved the Transaction
in May 2019.130 As discussed above, however, Plaintiffs allege that Bienvenue and
Borden continued to serve as a consultant and officer of HomeFed, respectively,
throughout 2018 and into 2019, similar to when their fellow directors (Considine
and Lobatz) did not view them to be independent in December 2017.
Bienvenue and Borden also contend that Plaintiffs’ allegations primarily
concern their ties to HomeFed and have no bearing on their ties to Jefferies. This
argument ignores the indisputable reality that Jefferies controlled HomeFed for
several years leading up to the Transaction. As this court discussed in In re BGC
Partners, Inc., “our law is not blind to the practical realities of serving as a director
of a corporation with a controlling stockholder.”131 Indeed, “Delaware Supreme
Court decisions have recognized the risk that directors laboring in the shadow of a
controlling stockholder face a threat of implicit coercion because of the controller’s
ability to not support the director’s re-nomination or re-election, or take the more
129
Id. ¶¶ 20-23.
130
Bienvenue and Borden Reply Br. 9-10 (Dkt. 37).
131
2019 WL 4745121, at *7 (Del. Ch. Sept. 30, 2019).
35
aggressive step of removing the directors.”132 Although the presence of a controller
does not alone overcome the presumption of director independence, it is relevant
when considering Plaintiffs’ allegations holistically.
Here, when viewed collectively, the Complaint’s allegations show that when
Borden and Bienvenue cast their votes—which were essential to secure approval of
a transaction benefitting the controller (Jefferies)133—(i) Borden was simultaneously
serving as an executive officer of the controlled company (HomeFed); (ii)
Bienvenue had been receiving consulting fees from HomeFed as his sole
employment apart from serving as a HomeFed director for years and as recently as
about one month earlier; and (iii) two of their fellow directors had questioned their
independence. Accepting the well-plead allegations of the Complaint as true and
drawing all reasonable inferences in favor of Plaintiffs as the court must under Rule
12(b)(6), the Complaint supports a rational inference that Bienvenue and Borden
could not be presumed to act independently from Jefferies and acted to support its
self-interest by approving the Transaction.134
132
In re Ezcorp, 2016 WL 301245, at *20 (citing Kahn v. Lynch Commc’n Sys. Inc., 638
A.2d 1110, 1116-17 (Del. 1994); and Kahn v. Tremont Corp., 694 A.2d 422, 428 (Del.
1997)).
133
It is reasonable to infer that the affirmative votes of Bienvenue and/or Borden were
essential to approve the Transaction given that three of the seven members of the Board
(Steinberg, Friedman, and Hallac) “abstained from voting due to their affiliation with
Jefferies.” Proxy 26.
134
Bienvenue and Borden argue that the Complaint fails to state a non-exculpated claim
against them based on the court’s analysis in Klein v. H.I.G. Capital, L.L.C., 2018 WL
36
IV. CONCLUSION
For the reasons explained above, the Defendants’ motions to dismiss are
denied.
IT IS SO ORDERED.
6719717 (Del. Ch. Dec. 19, 2018). Klein involved three inter-related
transactions: (i) HIG’s sale of its 54% interest in Surgery Partners, Inc. to an affiliate of
Bain, (ii) Surgery Partners’ acquisition of another company from a third party, and
(iii) Surgery Partners’ issuance of preferred stock to Bain. Id. at *1. The court found that
the complaint raised a reasonable doubt concerning the independence of one director
(Doyle) for purposes of determining demand futility but that “no facts [were] alleged in the
Complaint specific to Doyle that indicate that he advanced HIG’s self-interest as plaintiff
theorizes” so as to state a non-exculpated claim against him. Id. at * 11-12, 18. Here, the
Complaint not only pleads facts that call into question Bienvenue’s and Borden’s
independence from Jefferies, but alleges that they approved the Transaction in breach of
their fiduciary duties in order to facilitate Jefferies’ purchase of the minority stockholders’
shares for “unfairly low consideration.” See Compl. ¶¶ 133-35.
37